<PAGE>   1

   
     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 26, 1999.
                                                      REGISTRATION NO. 333-75137
    

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

   
                                AMENDMENT NO. 1
                                       TO
    

                                    FORM SB-2
                             REGISTRATION STATEMENT
                                      UNDER
                           THE SECURITIES ACT OF 1933

                             Pacific Softworks, Inc.

                 (Name of small business issuer in its charter)

   
         California                      8980                    77-0390628
- ----------------------------       -----------------          ----------------
(State or Other Jurisdiction       (Primary Standard          (I.R.S. Employer
      of Incorporation         Industrial Classification     Identification No.)
      or Organization)               Code Number)
    

                           703 Rancho Conejo Boulevard
                         Newbury Park, California 91320
                                 (805) 499-7722

        (Address and Telephone Number of Principal Executive Offices and
Address of Principal Place of Business or Intended Principal Place of Business)

                                Glenn P. Russell
                      President and Chief Executive Officer
                             Pacific Softworks, Inc.
                           703 Rancho Conejo Boulevard
                         Newbury Park, California 91320
                                 (805) 499-7722

            (Name, Address and Telephone Number of Agent For Service)

                                 With Copies To:


<TABLE>
<S>                                           <C>
Aaron A. Grunfeld, Esq.                       Robert W. Walter, Esq.
Resch Polster Alpert & Berger LLP             Berliner Zisser Walter & Gallegos, P.C.
10390 Santa Monica Boulevard, Fourth Floor    1700 Lincoln Street, Suite 4700
Los Angeles, California 90025                 Denver, Colorado 80203
(310) 277-8300                                (303) 830-1700
</TABLE>


   
    Approximate date of commencement of proposed sale to the public: As soon as
practicable following the date on which this registration statement becomes
effective.
    



<PAGE>   2




   
         If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended, check the following box. [X]
    

         If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]

         If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

         If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

         If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. [ ]

                         CALCULATION OF REGISTRATION FEE

   

<TABLE>
<CAPTION>
                                                                                     Proposed
                  Title of Each                                       Proposed        Maximum
                     Class Of                           Amount         Maximum       Aggregate      Amount Of
                 Securities To Be                       To Be       Offering Price    Offering     Registration
                   Registered                       Registered(1)   Per Unit(2)        Price           Fee
                   ----------                       -------------   -----------     -----------    ------------
<S>                                                 <C>             <C>             <C>            <C>

Units, each comprising one share of common              920,000      $    5.25      $ 4,830,000      $1,342.74
stock and one warrant(3)(4)
     (a) Common stock                                   920,000             --               --             --
     (b) Warrants to purchase common stock              920,000             --               --             --
     (c) Common Stock                                   920,000      $    7.50      $ 6,900,000      $1,918.20
Underwriter's option for the purchase of units        1 Warrant                     $       100      $    1.00
Units, underlying underwriter's option each
comprising one share of common stock and one
warrant(4)(5)                                            80,000      $    6.30      $   504,000      $  140.11
     (a) Common stock                                    80,000             --               --             --
     (b) Warrants to purchase common stock               80,000             --               --             --
     (c) Common stock                                    80,000      $    7.50      $   600,000      $  166.80
Units, each comprising one share of common
stock and one warrant(4)(6)                              80,000      $    5.25      $   420,000      $  116.76
     (a) Common stock                                    80,000             --               --             --
     (b) Warrants to purchase common stock               80,000             --               --             --
     (c) Common stock                                    80,000      $    7.50      $   600,000      $  166.80
Common stock(7)                                         200,000      $    5.25      $ 1,050,000      $  291.90
Total                                                                               $14,904,100      $4,144.31
</TABLE>

    



                                      -ii-

<PAGE>   3

   
(1)  Assumes the underwriter's over-allotment option is exercised in full.
    

(2)  Estimated pursuant to Rule 457(o) under the Securities Act solely for the
     purpose of calculation of the registration fee.

(3)  Includes 920,000 shares of common stock issuable upon exercise of the
     warrants.

(4)  Pursuant to Rule 416 promulgated under the Securities Act of 1933, as
     amended, an indeterminate number of additional shares of common stock are
     registered hereunder in the event that provisions preventing dilution are
     triggered, as provided in the warrants. No additional registration fee has
     been paid for these shares of common stock.

   
(5)  Shares of common stock and warrants to purchase common stock included in
     the units issuable on exercise of the underwriter's option for the purchase
     of units.
    

(6)  Shares of common stock and warrants to purchase common stock issuable on
     exercise of warrants to acquire 80,000 units and also includes 80,000
     shares of common stock issuable upon exercise of the warrants.

(7)  Shares of common stock registered on behalf of certain registering
     stockholders.

         The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment that specifically states that this registration
statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to such section 8(a), may determine.


                                     -iii-


<PAGE>   4


                                EXPLANATORY NOTE

         This registration statement contains two prospectuses.

   
         The first prospectus forming a part of this registration statement is
to be used in connection with the underwritten public offering of 920,000 units,
including 120,000 units subject to the underwriter's over-allotment option. Each
unit consists of one share of common stock and one warrant. The first prospectus
immediately follows this explanatory note.
    

   
         The second prospectus forming a part of this registration statement is
to be used in connection with the resale named stockholders and consultants to
Pacific Softworks of:
    

   
         -        up to 80,000 units issuable upon exercise of their warrants
                  to purchase units, and
    

   
         -        up to 200,000 shares of common stock.
    

   
The second prospectus will consist of:
    

   
         -        the cover page and inside cover page immediately following the
                  first prospectus,
    

   
         -        pages 1 through 57, other than the section entitled
                  "Underwriting," and pages F-1 through F-15 of the first
                  prospectus,
    

   
         -        pages SS-1 through SS-3,
    

   
         -        page SS-2 which will appear in place of the section entitled
                  "Underwriting," and
    

   
         -        the back cover page, which immediately follows the inside back
                  cover page of the first prospectus.
    



                                      -iv-


<PAGE>   5


The information in this preliminary prospectus is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission or any applicable state securities
commission becomes effective. This preliminary prospectus is not an offer to
sell these securities and is not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.



   
PROSPECTUS                             Subject to completion, dated May __,1999
    



                                  800,000 UNITS

                         [PACIFIC SOFTWORKS, INC. LOGO]

   
                  CONSISTING OF 800,000 SHARES OF COMMON STOCK
                                      AND
                                800,000 WARRANTS

    

   
         This is our initial public offering of securities. We expect that the
initial public offering price per unit will be between $5.00 and $5.50. Each
unit consists of one share of common stock and one warrant. The common stock and
warrants will trade separately. The public offering price may not reflect the
market price of our securities after the offering.
    

   
         Each warrant allows its holder to purchase for a period of 24 months
one share of common stock at a price of $7.50. We reserve the right to redeem
all outstanding warrants at $0.05 per warrant if the closing bid price of our
common stock equals or exceeds $8.00 per share for 15 consecutive trading days.
    

         We expect to list the common stock and warrants on the Nasdaq SmallCap
Market under the symbols "PASW" and "PASWW."

   
         By a separate prospectus concurrent with this offering security holders
who are not officers or directors will offer for sale up to 80,000 units and
200,000 shares of common stock. We will not receive any proceeds from the sale
of these securities.
    

         INVESTING IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.

         NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

   
         The underwriter has a 45-day option to purchase an additional 120,000
units from Pacific Softworks.
    

   

<TABLE>
<CAPTION>
                                                                    Without              With
                                                Per Unit        Over-Allotment      Over-Allotment
                                                --------        --------------      --------------
<S>                                             <C>             <C>                 <C>

Price to public                                     $                  $                  $
Underwriting discounts                              $                  $                  $
Pacific Softworks' proceeds                         $                  $                  $

</TABLE>

    

   
         The underwriter is offering the units on a firm commitment basis and
expects to deliver the units against payment in Los Angeles, California on
____________, 1999.
    


                              SPENCER EDWARDS, INC.
                                        
                                  May __, 1999



<PAGE>   6


                                TABLE OF CONTENTS


   

<TABLE>
<S>                                                                                       <C>
Prospectus Summary.........................................................................2
Risk Factors...............................................................................6
You Should Not Rely On Our Forward-Looking Statements.....................................15
Use Of Proceeds...........................................................................15
Dividend Policy...........................................................................16
Capitalization............................................................................16
Dilution..................................................................................17
Selected Consolidated Financial Data......................................................18
Management's Discussion And Analysis Of Financial Condition And Results Of Operations.....19
Where You Can Find Additional Information.................................................27
Business..................................................................................27
Management................................................................................42
Certain Transactions......................................................................48
Principal Stockholders....................................................................49
Description Of Securities.................................................................50
Underwriting..............................................................................54
Legal Matters.............................................................................57
Experts...................................................................................57
Index to Consolidated Financial Statements ...............................................58
</TABLE>

    




<PAGE>   7


                               PROSPECTUS SUMMARY

   
         This summary highlights only selected information contained elsewhere
in this prospectus. Before making an investment in the securities of Pacific
Softworks you should read this entire prospectus and the financial statements
and notes, all of which should be consulted when reading this summary.
    

                             PACIFIC SOFTWORKS, INC.

OUR BUSINESS

         Pacific Softworks develops and licenses Internet and Web related
software and software development tools. Our products enable Internet and Web
based communications, based on a set of rules known as protocols, and are
embedded into systems and "information appliances" developed or manufactured by
others. Information appliances are Internet connected versions of everyday
products such as telephones, televisions, fax machines and other digitally based
devices.

   
         Rapid advances are enabling wired and wireless information appliances
to assume many of the tasks now handled by personal computers. We believe that
Web browsing enabled by embedded software in information appliances used by
businesses and individuals will be a major market. International Data Corp.
estimates that 94% of Internet access is now made through PCs. By 2002, that
percentage is expected to decrease to 64% and the number of information
appliances sold is expected to exceed the number of PCs sold.
    

         We intend to evolve and refine our business to track the growth of
embedded software in information appliances that incorporate Internet and Web
communications capabilities. As information appliances proliferate, we
anticipate that our opportunities for long term revenue growth will also
increase.

         Our Internet and Web related software development tools offer
significant benefits to our customers including:

   
         -        Accelerated product development and market entry,
    

   
         -        Portability across multiple hardware and software system
                  environments, and
    

   
         -        Comprehensive embedded solutions that enable information
                  appliances to connect with the Internet and use the Web.
    


                                      -2-

<PAGE>   8




         Information appliance manufacturers and software developers have
included our products within the following applications and information
appliances:

   

<TABLE>
<CAPTION>
Applications                           Information Appliances
- ------------                           ----------------------
<S>                                    <C>

- -   Office automation                  -   Internet fax, copiers, laser printers, scanners

- -   Medical                            -   Patient monitors, imaging systems

- -   Multimedia                         -   DVD players, projectors, digital cameras

- -   Industrial controls                -   Vending machines, traffic controls, scoring systems, security controls

- -   Networking                         -   Routers, switches, network controls, cable modems

- -   Set-top boxes                      -   Set-top boxes, Internet TV

- -   Wireless                           -   Telephones, personal digital assistants, pagers, electronic organizers

- -   Navigation systems                 -   Navigational controls, air traffic controls

- -   Defense and aerospace              -   Engine controls, smart weapons

- -   Satellite                          -   Satellite positioning, uplink and downlink of streaming video
</TABLE>

    

   
         We have developed a new proprietary Internet browser for use within
independent, "non-Windows(R)" information appliances. We expect to begin
marketing this browser, under the "FUSION WebPilot Micro Browser(TM)" name,
during the third quarter of 1999. Our browser may be effectively placed in use
without an operating system and does not require substantial amounts of memory.
We believe that our browser may prove particularly attractive to manufacturers
of information appliances who would rather give their products a proprietary or
subjective "look and feel" than to be restricted by a browser which requires or
depends on the "look and feel" of commercially available operating systems such
as Windows(R).
    

OUR CUSTOMERS

   
         Since incorporation in 1992, we have licensed our products to over 400
companies around the world, including: Alcatel, AT&T, America OnLine, Canon,
Canal+, Cisco, Cocom, Bell Labs, Data General, Concurrent Technologies,
Ericsson, General Instruments, Hughes, Honeywell, Hewlett Packard, Intel,
Motorola, Newbridge, Nortel, Psion, Philips, Samsung, Siemens, ST Microsystems,
Tandberg, Unisys, and VLSI.
    

OUR REVENUE MODEL

   
         We have historically licensed our source code for a one time fee.
Depending on the products and their use, this one-time fee typically ranged from
$10,000 to $40,000. We anticipate that our revenue model for new products will
evolve into one based primarily on royalties measured against our customers'
units of production.
    

GENERAL

"Pacific Softworks," "FUSION," "WebPilot," "FastTrack," "WebWatch," "FusOS,"
"AirMail," "SimpleMail" and "FusionWizard" are all trademarks of Pacific
Softworks. All other trade names, trademarks and service marks appearing in this
prospectus are the property of their respective holders.


   
                                      -3-
    

<PAGE>   9


         Our executive offices are located at 703 Rancho Conejo Boulevard,
Newbury Park, California 91320 and our telephone number is (805) 499-7722. Our
Web site address is www.pacificsw.com. Information contained on our Web site
does not constitute part of this prospectus.

THE OFFERING

   

<TABLE>
<S>                                      <C>
Units offered:                           800,000, each consisting of one share of
                                         common stock and one warrant.

Warrant attributes:                      Each warrant entitles the holder to
                                         purchase one share of common stock for
                                         $7.50 for the 24 months ending
                                         ___________, subject to our rights to
                                         redeem warrants at $0.05 per warrant if
                                         the closing bid price of our common
                                         stock equals or exceeds $8.00 per share
                                         for 15 consecutive trading days.

Risk factors:                            Investing in our securities involves a
                                         high degree of risk. You should read
                                         "Risk Factors" beginning on page 6 as
                                         well as other cautionary statements
                                         throughout this prospectus to insure
                                         you understand the risks associated
                                         with an investment in our securities.

Dividend policy:                         Pacific Softworks does not intend to
                                         pay dividends.

Proposed Nasdaq SmallCap Market          Common stock:     PASW
symbols:                                 Warrants:         PASWW

Use of proceeds:                         We estimate that we will receive net
                                         proceeds of about $3,500,000. We expect
                                         to use net proceeds for research and
                                         development of our Web products,
                                         enhancements to existing Internet and
                                         application products, expansion of
                                         marketing and sales capabilities,
                                         intellectual property protection and
                                         working capital.

Common stock to be outstanding after
the offering:                            4,100,000 shares.
</TABLE>

    


   
         In addition to 4,100,000 shares of common stock outstanding after the
offering, Pacific Softworks may issue 800,000 shares of common stock on exercise
of the warrants and 665,000 shares of common stock on exercise of currently
outstanding options and warrants.
    

   
         Concurrent with this offering we have also prepared a separate
prospectus for security holders who are not officers or directors so that they
may sell up to 80,000 units and 200,000 shares of common stock. We will not
receive any proceeds from the sale of these securities. The security holders
have agreed with the underwriter not to sell their securities for 13 months
without the prior written consent of the underwriter.
    

   
         Except where noted otherwise, all information in this prospectus,
including share and per share information, assumes no exercise of the
underwriter's over-allotment option.
    



                                      -4-

<PAGE>   10



SUMMARY CONSOLIDATED FINANCIAL DATA

CONSOLIDATED STATEMENTS OF OPERATIONS DATA:

   

<TABLE>
<CAPTION>
                                                                                             Unaudited
                                                             Year Ended                  Three Months Ended
                                                             December 31,                      March 31,
                                                       ------------------------          ------------------------
                                                         1997             1998            1998            1999
                                                       -------          -------          -------          -------
                                                                (In thousands except per share data)
<S>                                                    <C>              <C>              <C>              <C>
Net revenue ..................................         $ 3,310          $ 2,787          $   696          $   772
Gross profit .................................           3,193            2,687              668              741
Selling, general and administrative ..........           2,110            1,936              386              381
Research and development .....................             834              852              214              324
Depreciation and amortization ................              64               59               15               13
Former officer's consulting and administrative
expense ......................................             314              314               82               82
Loss from operations .........................            (129)            (474)             (29)             (59)
Net loss .....................................         $  (129)         $  (474)         $   (29)         $   (59)
                                                       =======          =======          =======          =======
Net loss per share, basic and diluted ........         $ (0.04)         $ (0.14)         $ (0.01)         $ (0.02)
                                                       =======          =======          =======          =======
</TABLE>

    

   
The following table indicates a summary of our balance sheet as of March 31,
1999. The column labeled "as adjusted" reflects our receipt of estimated net
proceeds from the sale of 800,000 units at an assumed initial public offering
price of $5.25 per unit, after deducting underwriting discounts and estimated
expenses.
    

CONSOLIDATED BALANCE SHEET DATA:

   

<TABLE>
<CAPTION>
                                          Unaudited
                                      March 31, 1999
                                   ------------------------
                                   Actual       As Adjusted
                                   ------       -----------
                                      (in thousands)
<S>                                <C>            <C>
Cash and cash equivalents          $  461         $3,947
Working capital ..........            546          4,032
Total assets .............          1,331          4,817
Total stockholders' equity            819          4,305

</TABLE>

    



                                      -5-

<PAGE>   11


                                  RISK FACTORS

   
         The risks and uncertainties described below are not the only ones
facing us. Additional risks and uncertainties of which we are unaware or which
we currently deem immaterial also may become important factors that may
adversely affect us.
    

         If any of the following risks actually occur, our business, financial
condition or operating results could be materially and adversely affected. In
this case, the trading price of our securities could decline, and you may lose
all or a part of your investment.

   
WE HAVE REPORTED LOSSES FOR OUR LAST TWO YEARS AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999.
    

   
         We reported losses of $129,000 and $474,000 for the years ending
December 31, 1997 and 1998. These losses include about $314,000 paid during each
of those years for former officer's consulting and administrative expense. We
also reported losses of $29,000 and $59,000 for the three months ended March 31,
1998 and 1999. These losses include $82,000 paid during each of those calendar
quarters for former officer's consulting and administrative expense. As of May
1999 we will pay that former officer approximately $131,000, in equal monthly
installments through September 1999. We can provide no assurance that we will be
profitable in the future.
    

   
BECAUSE WE EXPECT THAT OUR OPERATING RESULTS WILL CONTINUE TO FLUCTUATE, YOU
SHOULD NOT RELY ON THE RESULTS OF ANY PERIOD AS AN INDICATION OF FUTURE
PERFORMANCE.
    

         From time to time we have experienced material period-to-period
fluctuations in revenue and operating results. We anticipate that these periodic
fluctuations in revenue and operating results will occur in the future. We
attribute these fluctuations to a variety of business conditions that include:

   
         -        the volume and timing of orders received during the quarter,
    

   
         -        the timing and acceptance of new products and product
                  enhancements by us and our competitors,
    

   
         -        unanticipated sales and buyouts of run-time licenses,
    

   
         -        stages of product life cycles,
    

   
         -        purchasing patterns of customers and distributors,
    

   
         -        market acceptance of products sold by our customers, and
    

   
         -        competitive conditions in our industry.
    

         As a result of the factors described above we believe that quarterly
revenue and operating results are likely to vary significantly in the future and
that quarter to quarter comparisons of our operating results may not be
meaningful. You should therefore not rely on the results of one quarter as an
indication of future performance.

   
BECAUSE WE DEPEND ON A SMALL NUMBER OF LARGE ORDERS, THE LOSS OR DEFERRAL OF
ORDERS MAY HAVE A NEGATIVE IMPACT ON REVENUES WHICH COULD LOWER THE VALUE OF OUR
SHARES.
    


                                      -6-

<PAGE>   12



   
         Although no customer has accounted for 10% or more of total revenue in
any fiscal year, we derive a significant portion of our software license revenue
in each quarter from a small number of relatively large orders. While we believe
that the loss of any particular customer is not likely to have a material
adverse effect on our business, our operating results could be materially
adversely affected if we were unable to complete one or more substantial license
sales in any future period.
    

   
BECAUSE WE RELY ON A CORE SUITE OF PRODUCTS AND NEW PRODUCTS, ANY DECREASE IN
THE MARKET ACCEPTANCE OF OUR INTERNET AND WEB PRODUCTS WOULD DECREASE OUR
REVENUE AND LOWER THE VALUE OF YOUR INVESTMENT.
    

   
         Our future results depend heavily on continued market acceptance of our
products in existing and new markets. Revenue from licenses of our suite of
Internet and Web products and sales of our services accounted for all of our
revenue in the year ended December 31, 1998. Our research and development
expenditures for 1997 and 1998 resulted in several new products. We introduced
FastTrack(TM) in November 1998 and expect to market our FUSION WebPilot Micro
Browser(TM) by mid 1999. We cannot give any assurances that these products will
be accepted by our customers.
    

   
OUR RECENTLY ADOPTED PRICING STRATEGY FOR NEW WEB PRODUCTS BASED ON FLEXIBLE
UP-FRONT FEES WITH ONGOING ROYALTIES MAY NOT RESULT IN INCREASED REVENUES WHICH
COULD REDUCE THE VALUE OF YOUR INVESTMENT.
    

         Historically we have charged a one-time fee for a source code license
and have occasionally also charged royalties for each copy of our software
embedded in our customers' products. Our recently formulated strategy for new
products is to seek flexible up-front fees with ongoing royalties measured
against our customers' units of production or run times. Any increase in the
portion of revenue attributable to royalties will depend on our successful
negotiation of royalty agreements and on the successful commercialization by our
customers of their underlying products.

   
BECAUSE WE LACK THE NAME RECOGNITION, CUSTOMER BASE AND RESOURCES OF OTHER
COMPANIES IN THE INTERNET SOFTWARE MARKET, WE MAY BE UNABLE TO COMPETE
SUCCESSFULLY WHICH WOULD REDUCE OUR REVENUES AND THE VALUE OF YOUR INVESTMENT.
    

         The markets for our products are intensely competitive, and are likely
to become even more competitive. Increased competition could result in:

   
         -        pricing pressures, resulting in reduced margins,
    

   
         -        decreased volume, resulting in reduced revenue, or
    

   
         -        the failure of our products to achieve or maintain market
                  acceptance.
    

         Any of these occurrences could have a material adverse effect on our
business, financial condition and operating results. Each of our products faces
intense competition from multiple competing vendors. Our principal competitors
include Wind River Systems, Inc., Integrated Systems, Inc., Mentor Graphics,
Inc., Microware Systems Corporation and Microsoft Corporation. Many of our
current and potential competitors have:

   
         -        longer operating histories,
    

   
         -        greater name recognition,
    



                                      -7-

<PAGE>   13

   
         -        access to larger customer bases, or
    

   
         -        substantially greater resources than we have.
    

   
         As a result, our principal competitors may respond more quickly than we
can to new or changing opportunities and technologies. For all of the reasons
stated above, we may be unable to compete successfully against our current and
future competitors.
    

   
IF WE ARE UNABLE TO RAISE MARKET AWARENESS OF OUR FUSION BRAND, WE MAY
EXPERIENCE A MATERIAL ADVERSE EFFECT ON OUR OPERATING RESULTS WHICH WOULD
DIMINISH THE VALUE OF YOUR INVESTMENT.
    

   
         If we fail to promote our brand successfully or if we incur significant
expenses promoting and maintaining our FUSION brand names, we may experience a
material adverse effect on our business, financial condition and operating
results. Due in part to the still emerging nature of the market for Internet and
embedded software products and the substantial resources available to many of
our competitors, we may have a time limited opportunity to achieve and maintain
market share. We believe that developing and maintaining awareness of the FUSION
brand names will be critical to achieving widespread acceptance of our products.
We believe that brand recognition will become increasingly important as
competition in the market for our products increases. Successfully promoting and
positioning our brand will depend largely on the effectiveness of our marketing
efforts and our ability to develop reliable and useful products at competitive
prices. As a result, we may need to expand our financial commitment to creating
and maintaining brand awareness among potential customers.
    

WE MAY NOT BE ABLE TO DEVELOP ACCEPTABLE NEW PRODUCTS OR ENHANCEMENTS TO OUR
EXISTING PRODUCTS AT THE RATE REQUIRED BY OUR RAPIDLY CHANGING MARKET.

   
         Our future success depends upon our ability to address the rapidly
changing needs of our customers by developing and introducing high quality
products, product enhancements and services on a timely basis and by keeping
pace with technological developments and emerging industry standards. The
markets for our products are rapidly evolving. Failure to develop and release
enhanced or new products, or delays or quality problems in doing so, could have
a material adverse effect on our business, financial condition and operating
results.
    

         As is common in new and rapidly evolving industries, demand and market
acceptance for recently introduced products are subject to high levels of
uncertainty and risk. Furthermore, new products can quickly render obsolete
products that were only recently in high demand. The market for our existing
products may not be sustainable at its current level. We launched several new
products in calendar 1998 and January 1999. We have additional new product
launches, as well as upgrades to our existing products, planned for 1999. The
market for our recently introduced and planned products may not develop or grow.
If the market for these products does not develop or grow we will experience a
material adverse effect on our business, financial condition and operating
results.

   
BECAUSE WE PLAN TO DEVOTE SIGNIFICANT FINANCIAL AND MANAGEMENT RESOURCES TO
EXPAND SALES AND MARKETING ACTIVITIES OVER THE NEXT 18 MONTHS WE WILL INCUR
SUBSTANTIAL ADDITIONAL OPERATING EXPENSES WHICH MAY NOT RESULT IN MEANINGFUL
REVENUE INCREASES.
    

   
         To expand our business, we plan to hire additional product engineering,
sales and marketing personnel. Any new hires will require training and may take
six months or more to achieve full productivity. We may not be able to hire
enough qualified individuals when needed, or
    



                                      -8-

<PAGE>   14

   
at all. We can give you no assurance that our added operating expense from these
activities will result in meaningful revenue increases.
    

   
BECAUSE WE RELY ON A SMALL MANAGEMENT TEAM TO OVERSEE OPERATIONS AND GROWTH, THE
LOSS OF OUR PRESIDENT OR OTHER KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS
AND DECREASE THE VALUE OF YOUR INVESTMENT.
    

   
         We depend upon the continued services of a few executive officers and
other key management and development personnel. In particular, we rely on Glenn
P. Russell, president and chief executive officer, Mark Sewell, vice president,
and Sandra J. Garcia, vice president. Glenn P. Russell, Mark Sewell and Sandra
J. Garcia do not have employment agreements with Pacific Softworks and,
therefore, could terminate their employment with us at any time. We do not
maintain key person life insurance policies on any of our employees. The loss of
the services of one or more of our executive officers, engineering personnel, or
other key employees could have a material adverse effect on our business,
financial condition and operating results.
    

   
IF OUR EFFORTS TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS IN OUR INTERNET AND
WEB SOFTWARE PRODUCTS ARE UNSUCCESSFUL WE MAY EXPERIENCE AN ADVERSE MATERIAL
EFFECT ON OUR OPERATIONS WHICH WOULD REDUCE THE VALUE OF YOUR INVESTMENT.
    

         We regard substantial elements of our Internet and embedded software
products as proprietary and attempt to protect them by relying on:

   
         -        copyright,
    

   
         -        trade secret and trademark laws,
    

   
         -        nondisclosure, and
    

   
         -        other contractual restrictions on copying, distribution and
                  technical measures.
    

Any steps we take to protect our intellectual property may be inadequate, time
consuming, and expensive.

   
         Despite our efforts, we may be unable to prevent third parties from
infringing upon or misappropriating our intellectual property. Any infringement
or misappropriation of our intellectual property by third parties could have a
material adverse effect on our business, financial condition and operating
results.
    

   
         We currently have no issued patents. We believe that one or more
features of our software technology are unique and may be patentable. We expect
to devote a portion of the proceeds from this offering to seek patent protection
for these features. We have no patent applications pending. New patent
applications may not result in issued patents and may not provide us with any
competitive advantages, or may be challenged by third parties. Legal standards
relating to the validity and enforceability of intellectual property rights in
Internet-related industries are uncertain and still evolving.
    

         The future viability or value of any of our intellectual property
rights is uncertain. Effective trademark, copyright, and trade secret protection
may not be available in every country in which our products are distributed or
made available through the Internet. Furthermore, our competitors may
independently develop similar technology that adversely affects the value of our
intellectual property.


   
                                      -9-
    

<PAGE>   15




   
WE MAY INCUR SUBSTANTIAL COSTS IN CONNECTION WITH INTELLECTUAL PROPERTY
INFRINGEMENT CLAIMS THAT OTHERS MAY BRING AGAINST US.
    

   
         In addition to the technology we have developed internally, we use code
libraries developed and maintained by third parties and have acquired or
licensed technologies from other companies. Our internally developed technology,
the code libraries, or the technology we acquire or license may infringe on the
intellectual property rights of others. These persons may bring claims against
us alleging infringement of their intellectual property rights. If we infringe
or others bring claims against us alleging infringement, our business, financial
condition and operating results could be materially and adversely affected.
    

         In recent years, there has been significant litigation in the United
States involving patents and other intellectual property rights. We are not
currently involved in any intellectual property or other material litigation. We
may, however, be a party to litigation in the future to protect our intellectual
property or as a result of an alleged infringement of the intellectual property
of others. These claims and any resulting litigation could subject us to
significant liability for damages and invalidation of our proprietary rights.
Litigation, regardless of its success, would likely be time-consuming and
expensive to prosecute or defend and would divert management attention from our
business. Any potential intellectual property litigation could also force us to
do one or more of the following:

   
         -        cease selling, incorporating, or using products or services
                  that incorporate the challenged intellectual property,
    

   
         -        obtain from the holder of the infringed intellectual property
                  right a license to sell or use the relevant technology, which
                  license may not be available on reasonable terms, or at all,
                  and
    

   
         -        redesign those products or services that incorporate the
                  infringed intellectual property.
    

         Any of these events could have a material adverse effect on our
business, financial condition and operating results.

   
IF OUR PRODUCTS ARE DEFECTIVE WE MAY LOSE CUSTOMERS AND ENCOUNTER PRODUCT
LIABILITY CLAIMS THAT WOULD REQUIRE CONSIDERABLE EFFORT AND EXPENSE TO DEFEND.
    

         Our products provide functions that are often critical to the
performance of information appliances. The occurrence of errors or failures in
our products could result in adverse publicity, loss of or delay in market
acceptance, or claims by customers against us, any of which could have a
material adverse effect on our business, financial condition and operating
results.

   
         Our end-user licenses contain provisions that limit our exposure to
product liability claims, but these provisions may not be enforceable in all
jurisdictions. Additionally, we maintain limited product liability insurance. To
the extent our contractual limitations are unenforceable or if claims are not
covered by insurance, a successful product liability claim could have a material
adverse effect on our business, financial condition and operating results.
    

         Although we have not experienced any product liability or economic loss
claims, our products and product enhancements are very complex and may from time
to time contain errors or result in failures that we did not detect or
anticipate. The computer hardware environment is characterized by a wide variety
of non-standard configurations that make pre-release testing for


   
                                      -10-
    

<PAGE>   16

programming or compatibility errors very difficult and time consuming. Despite
our testing, errors may be discovered in new products or enhancements that we
deliver to customers.

   
ALTHOUGH WE BELIEVE THAT ALL OF OUR PRODUCTS ARE YEAR 2000 COMPLIANT, WE MAY BE
ADVERSELY AFFECTED IF OUR CUSTOMERS' PRODUCTS ARE NOT YEAR 2000 COMPLIANT.
    

   
         If our customers have material sales decreases or other disruptions
because their products are not year 2000 compliant, we may experience reduced
license fees and royalty income resulting in a material adverse impact on our
operations.
    

OUR SUCCESS DEPENDS ON CONTINUED USE AND EXPANSION OF THE INTERNET.

         Continued expansion in the sales of our Internet based embedded
software products will depend upon the adoption of the Internet as a widely used
medium for commerce and communication. If the Internet does not continue to
become a widespread communications medium and commercial marketplace, demand for
our products could be significantly reduced, which could have a material adverse
effect on our business, financial condition and operating results.

   
         The Internet may prove not to be a viable commercial marketplace for us
because of inadequate development of the necessary infrastructure or timely
development of complementary products such as high speed modems. The Internet
infrastructure may not be able to support the demands placed on it by continued
rapid growth. The Internet also could lose its viability as a result of delays
in the development or adoption of new standards and protocols to address issues
such as Internet:
    

   
         -        activity,
    

   
         -        security,
    

   
         -        reliability,
    

   
         -        cost,
    

   
         -        ease of use,
    

   
         -        accessibility, and
    

   
         -        quality of service.
    

   
BECAUSE WE DERIVE MORE THAN 50% OF OUR REVENUE FROM SALES OUTSIDE OF NORTH
AMERICA, WE ARE SUBJECT TO MATERIAL RISKS ASSOCIATED WITH INTERNATIONAL MARKETS.
    

   
         Our international operations are subject to various risks, including:
    

   
         -        foreign government regulation,
    

   
         -        foreign currency fluctuations which could reduce our revenue
                  in dollar terms or make our products more expensive,
    

   
         -        more prevalent software piracy,
    

   
         -        longer payment cycles,
    

   
         -        unexpected changes in regulatory requirements, tariffs, import
                  and export restrictions and other barriers and restrictions,
    

   
         -        greater difficulty in accounts receivable collection,
    

   
         -        potentially adverse tax consequences including restrictions on
                  repatriation of earnings,
    


   
                                      -11-
    

<PAGE>   17



   
         -        the burdens of complying with a variety of foreign laws,
    

   
         -        difficulties in staffing and managing foreign operations,
    

   
         -        political and economic instability,
    

   
         -        changes in diplomatic and trade relationships, and
    

   
         -        possible recessionary environments in economies outside the
                  United States.
    

   
         These factors may have a material adverse effect on our international
sales and, consequently, our business, operating results and financial
condition.
    

   
IF WE CHOOSE TO EXPAND THROUGH ACQUISITIONS OF COMPANIES AND TECHNOLOGIES, OUR
FUTURE LIQUIDITY AND PROFITABILITY MAY BE ADVERSELY AFFECTED.
    

   
         Following the offering we may actively consider making acquisitions of,
or investments in, other companies, products, technologies or Internet-related
services. We may have to expend cash and incur debt or issue equity securities
to pay for any future acquisitions. The issuance of equity securities for any
acquisition could be substantially dilutive to our stockholders. Our liquidity
and profitability also may suffer because of acquisition-related costs or
amortization costs for acquired goodwill and other intangible assets.
    

   
         If we make any acquisitions, we will be required to assimilate the
operations, products and personnel of the acquired businesses and train and
retain key personnel from the acquired businesses. We may be unable to maintain
uniform procedures and policies if we fail in these efforts. Similarly,
acquisitions may cause disruptions in our operations and divert management's
attention from day-to-day operations. This could impair our relationships with
our current employees, customers and strategic partners.
    

WE MAY APPLY THE PROCEEDS OF THIS OFFERING AND THE PROCEEDS FROM EXERCISE OF
WARRANTS TO USES THAT DO NOT INCREASE OUR PROFITS OR MARKET VALUE.

   
         The net proceeds from the sale of our securities will be used primarily
for research and development, marketing, sales and general working capital. We
may also obtain up to $6,000,000 from exercise of warrants. The proceeds from
any exercise of warrants will be added to our general working capital. Our
management will have considerable discretion in the application of the net
proceeds added to our general working capital, and you will not have the
opportunity, as part of your investment decision, to assess whether the proceeds
are being used appropriately. The net proceeds may be used for corporate
purposes that do not increase our profitability or market value.
    

WE MAY HAVE FUTURE CAPITAL NEEDS AND IT IS UNCERTAIN IF WE CAN OBTAIN ADDITIONAL
FINANCING.

   
         We expect that the net proceeds from this offering, cash on hand, cash
equivalents and commercial credit facilities will be adequate to meet our
working capital and capital expenditure needs for about the next 18 months.
After that, we may require additional funds for product development, market
support and additional expansion.
    

         We can provide no assurance that the warrants will be exercised. We
cannot be certain that additional financing will be obtained on favorable terms,
if at all. If we cannot raise needed funds on acceptable terms, we may be unable
to:

   
         -        develop or enhance products,
    


   
                                      -12-
    

<PAGE>   18



   
         -        take advantage of future opportunities, or
    

   
         -        respond to competitive pressures or unanticipated capital
                  requirements.
    

   
The occurrence of any of these events could have a material adverse effect on
Pacific Softworks.
    

FUTURE NON-PUBLIC SALES OF OUR SECURITIES MAY BE ON TERMS MORE FAVORABLE THAN
THOSE OF THIS OFFERING.

   
         In order to raise additional working capital, we could sell our common
stock or other securities to qualified investors in transactions that are exempt
from registration under the securities laws. These purchasers may acquire our
securities on terms more favorable than those offered to you in this offering.
    

   
BECAUSE OWNERSHIP IS CONCENTRATED, YOU AND OTHER INVESTORS MAY NOT BE ABLE TO
INFLUENCE STOCKHOLDER DECISIONS.
    

   
         Our officers and directors will beneficially own 74.3% of the
outstanding common stock after this offering. If all the warrants are exercised,
our officers and directors will own 62.6% of the outstanding common stock. Our
officers and directors will be able to exercise control over all matters
requiring stockholder approval, and you and other investors will have minimal
influence over the election of directors or other stockholder actions. As a
result, our officers and directors could approve or cause Pacific Softworks to
take actions of which you disapprove or that are contrary to your interests.
This ability to exercise control over all matters requiring stockholder approval
could prevent or significantly delay another company from acquiring or merging
with us at prices and terms that you might find to be attractive.
    

ISSUANCE OF OUR AUTHORIZED PREFERRED STOCK MAY DISCOURAGE A CHANGE IN CONTROL
AND REDUCE THE MARKET PRICE OF OUR COMMON STOCK.

         The issuance of preferred stock may have the effect of delaying,
deferring, or preventing a change in control. Any such issuance may materially
and adversely affect the market price of the common stock and the voting rights
of the holders of common stock. The issuance of preferred stock may also result
in the loss of the voting control of holders of common stock to the holders of
preferred stock.

   
TRADING IN OUR COMMON STOCK AND WARRANTS MAY BE LIMITED AND COULD NEGATIVELY
AFFECT YOUR ABILITY TO SELL YOUR SECURITIES.
    

   
         A public market for our common stock and our warrants has not existed
before this offering. Although this offering will result in a trading market for
our common stock and warrants, we do not know how liquid that market might be.
The initial public offering price for the units will be determined through
negotiations between the underwriter and us. If you purchase units, you may not
be able to resell these securities at or above the initial public offering
price.
    

THE MARKET PRICES FOR OUR SECURITIES, LIKE THOSE OF OTHER TECHNOLOGY ISSUES, MAY
BE VOLATILE.

         The value of your investment in Pacific Softworks could decline from
the impact of any of the following factors:

   
         -        changes in market valuations of Internet software companies,
    

   
         -        variations in our actual and anticipated operating results,
    


   
                                      -13-
    

<PAGE>   19



   
         -        changes in our earnings estimates by analysts,
    

   
         -        our failure to meet analysts' performance expectations, and
    

   
         -        lack of liquidity.
    

   
         The stock markets have in general, and with respect to Internet
companies in particular, recently experienced stock price and volume volatility
that has affected companies' stock prices. The stock markets may continue to
experience volatility that may adversely affect the market price of our
securities.
    

         Stock prices for many companies in the technology and emerging growth
sector have experienced wide fluctuations that have often been unrelated to the
operating performance of those companies. Fluctuations such as these may affect
the market prices of our common stock and warrants.

YOU WILL INCUR IMMEDIATE SUBSTANTIAL DILUTION BY PURCHASING SECURITIES IN THIS
OFFERING.

         The initial public offering price applicable to the common stock
included in a unit is expected to be substantially higher than the book value
per share of the common stock before the offering. By purchasing securities in
this offering you will incur immediate substantial dilution.

   
YOU MAY INCUR ADDITIONAL DILUTION IF WE ARE COMPELLED TO LITIGATE OR ARBITRATE
CLAIMS THAT MAY BE BROUGHT BY A MERCHANT BANKER FOR THE RIGHT TO PURCHASE 10% OF
PACIFIC SOFTWORKS AT A PRICE WHICH IS SUBSTANTIALLY LOWER THAN THE VALUATION IN
THIS OFFERING.
    

   
         In April 1999 we were notified that a merchant banker claiming rights
under a letter to us dated in June 1998 demanded an option to purchase 10% of
Pacific Softworks for $400,000. Although we believe that there is no merit to
this claim, if we are compelled to litigate or arbitrate this demand and if we
are not successful in our defense, then, in addition to legal fees and expenses
which we may incur, you may experience additional dilution.
    

OUR WARRANTS ARE SUBJECT TO APPLICABLE SECURITIES LAWS AS WELL AS REDEMPTION.

   
         You will own one warrant for each unit that you purchase. You may only
exercise your warrants if a registration statement relating to the common stock
underlying the warrants is then in effect and we have complied with applicable
state securities laws. We may be unsuccessful in maintaining a current
registration statement covering the common stock underlying the warrants. You
may be unable to exercise the warrants for this or other reasons. Your warrants
may also be redeemed by us for a nominal amount if the closing bid price of our
common stock equals or exceeds $8.00 per share for 15 consecutive trading days.
If you do not exercise your warrants prior to the redemption date, you will only
be entitled to receive the redemption price of $0.05 per warrant.
    

OUR STOCK AND WARRANT PRICES MAY BE AFFECTED BY SHARES ELIGIBLE FOR FUTURE SALE.

         The market prices of the common stock and the warrants could decrease
as a result of large numbers of shares of common stock being available for sale
after the offering. These sales could also make it more difficult for us to
raise funds through future offerings. The 3,300,000 shares of common stock
outstanding before the offering are subject to certain resale restrictions


   
                                      -14-
    

<PAGE>   20


   
under federal securities laws. Holders of these shares have agreed that they
will not sell these securities without the consent of the underwriter for 13
months after the date of this prospectus.
    

SIGNIFICANT FLUCTUATION IN THE MARKET PRICE OF OUR COMMON STOCK AND WARRANTS
COULD RESULT IN SECURITIES CLASS ACTION CLAIMS AGAINST US.

         Securities class action claims have been brought against issuing
companies in the past where there has been volatility in the market price of a
company's securities. Litigation could be very costly and divert our
management's attention and resources. Any adverse determination in litigation
could also subject us to significant liabilities. Any or all of these events
could have a material adverse effect on our business, financial condition and
operating results.

             YOU SHOULD NOT RELY ON OUR FORWARD-LOOKING STATEMENTS.

         This prospectus contains forward-looking statements that involve risks
and uncertainties. Discussions containing forward-looking statements may be
found in the material set forth under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business" as well as within this prospectus generally. In
addition, when used in this prospectus, the words "believes," "intends,"
"plans," "anticipates," "expects," and similar expressions are intended to
identify forward-looking statements. Forward-looking statements are subject to a
number of risks and uncertainties. Actual results could differ materially from
those described in the forward-looking statements as a result of the risk
factors set forth in this section and the information provided in this
prospectus generally. We do not intend to update any forward-looking statements.

   
                                 USE OF PROCEEDS
    

   
         Based on an assumed public offering price of $5.25 per unit, we expect
that net proceeds from the sale of the 800,000 units sold in this offering will
be approximately $3,486,000, or $4,034,100 if the underwriter's over-allotment
option is exercised in full.
    

   
         We intend to use net proceeds as indicated in the following table.
    



   

<TABLE>
<CAPTION>
APPLICATION                                                           AMOUNT
- -----------                                                           ------
<S>                                                                <C>
Research and development of Web products                           $1,500,000

Enhancements to existing Internet and application products            450,000

Marketing and sales                                                   700,000

Intellectual property protection                                      100,000

Working capital                                                       736,000
                                                                   ----------
                                                                   $3,486,000
                                                                   ==========
</TABLE>

    

         We may acquire or invest in complimentary businesses, technologies,
services or products and a portion of the net proceeds currently allocated to
working capital may be used for such


   
                                      -15-
    

<PAGE>   21


acquisitions or investments. However, we currently have no understandings,
commitments or agreements for any material acquisition or investment.

   
         The description above represents our best estimate of the uses of the
net proceeds to be received in this offering, based on current planning and
business conditions. However, we reserve the right to change these uses when and
if market conditions or unexpected changes in operating conditions occur.
    

   
         The amounts expended for each use may vary significantly depending upon
a number of factors including, but not limited to, amounts we spend to develop
and introduce new products and the amount of cash generated by our operations.
We believe that our existing capital resources and the net proceeds of this
offering will be sufficient to maintain current and planned operations for a
period of at least 18 months from the date of this prospectus. Net proceeds not
immediately required for the purposes described above will be invested
principally in investment grade, interest-bearing securities.
    

                                 DIVIDEND POLICY

   
         We have never declared or paid any cash dividends on our common stock
or other securities and do not anticipate paying cash dividends in the
foreseeable future. Our line of credit currently prohibits the payment of
dividends. A share purchase agreement with a former stockholder also prohibits
us from paying certain dividends until all obligations owed to him under the
agreement are retired.
    

                                 CAPITALIZATION

   
         The following table sets forth our unaudited capitalization as of March
31, 1999:
    

   
         -        on a historical basis and
    

   
         -        on an as adjusted basis, giving effect to the sale of 800,000
                  units at an assumed initial public offering price of $5.25 per
                  unit, after deducting underwriting discounts and estimated
                  offering expenses.
    

You should read this table together with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the financial statements
and notes thereto appearing elsewhere in this prospectus.

   

<TABLE>
<CAPTION>
                                                                          March 31, 1999
                                                                 ---------------------------------------
                                                                            (in thousands)
                                                                    Actual                 As Adjusted
                                                                 -----------               -------------
<S>                                                              <C>                       <C>
Stockholders' equity:

         Preferred stock, $0.01 par value;
         10,000,000 shares authorized; none issued
         and outstanding .....................................   $        --               $          --

         Common Stock, $0.001 par value;
         50,000,000 shares authorized; 3,300,000 shares
         issued and outstanding; 4,100,000 shares, as
         adjusted ............................................             3                           4
</TABLE>

    



   
                                      -16-
    

<PAGE>   22

   

<TABLE>
<S>                                                              <C>                       <C>
         Additional paid-in capital...........................           875                       4,360
         Accumulated deficit..................................           (42)                        (42)

         Cumulative adjustment for currency translation.......           (17)                        (17)
                                                                 -----------               -------------
         Total stockholders' equity ..........................           819                       4,305
                                                                 -----------               -------------
Total capitalization..........................................   $       819               $       4,305
                                                                 ===========               =============
</TABLE>

    

         The information provided above excludes:

   
         -        800,000 shares of common stock issuable upon exercise of
                  warrants,
    

   
         -        665,000 shares of common stock issuable upon exercise of
                  outstanding options and warrants,
    

   
         -        160,000 shares of common stock issuable upon the exercise of
                  warrants to acquire units and warrants underlying those units,
                  and
    

   
         -        80,000 units issuable on exercise of the underwriter's option.
    

                                    DILUTION

   
         At March 31, 1999, unaudited net tangible book value was $536,710, or
$0.16 per share. Net tangible book value per share represents our net tangible
assets less liabilities divided by the shares of common stock outstanding.
    

   
         After giving effect to our sale of 800,000 units and our receipt of an
estimated $3,486,000 of net proceeds from the offering, based on an assumed
offering price of $5.25 per unit, all of which is attributable to the common
stock and none of which is attributable to the warrants, adjusted net tangible
book value at March 31, 1999 would have been $0.98 per share. This amount
represents an immediate increase in net tangible book value of $0.82 per share
to existing stockholders and an immediate dilution of $4.27 per share of common
stock to new investors purchasing units in the offering. The following table
illustrates per share dilution:
    


   

<TABLE>
<S>                                                               <C>              <C>
Assumed public offering price per share                                            $      5.25
Net tangible book value prior to the offering                     $      0.16
Increase attributable to new investors                                   0.82
                                                                  -----------
Adjusted net tangible book value after the offering                                       0.98
                                                                                   -----------
Dilution per share to new investors in this offering                               $      4.27
                                                                                   ===========
</TABLE>

    

   
         The following table sets forth as of March 31, 1999, the number of
shares of common stock purchased from Pacific Softworks, the total consideration
paid to Pacific Softworks and the average price per share paid by existing
stockholders and new investors purchasing units in the offering, before
deducting underwriting discounts and estimated offering expenses:
    

   

<TABLE>
<CAPTION>
                                   Shares Purchased                Total Consideration
                                -----------------------           -----------------------     Average Price
                                Number          Percent           Amount          Percent       Per Share
                                ------          -------           ------          -------       ---------
<S>                            <C>              <C>             <C>               <C>         <C>

Existing stockholders          3,300,000          80.5%         $  678,000          13.9%         $0.21
New investors                    800,000          19.5%          4,200,000          86.1%         $5.25
                               ---------         -----          ----------         -----
Total                          4,100,000         100.0%         $4,878,000         100.0%
                               =========         =====          ==========         =====
</TABLE>

    



   
                                      -17-
    

<PAGE>   23

   
         The information for existing stockholders in the table above excludes
shares and warrants issuable upon exercise of outstanding options or warrants,
the underwriter's option to purchase units and exercise of the underwriter's
over-allotment option. To the extent that currently outstanding options or
warrants are exercised at prices below $5.25, there will be further dilution to
new investors.
    

                      SELECTED CONSOLIDATED FINANCIAL DATA

   
         The following selected consolidated financial data is qualified by
reference to and should be read in conjunction with the consolidated financial
statements and notes thereto and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and other financial information
included elsewhere in this prospectus. The consolidated statement of operations
data for the years ended December 31, 1997 and 1998 and the consolidated balance
sheet data at December 31, 1997 and 1998 are derived from and qualified by
reference to, audited consolidated financial statements included elsewhere in
this prospectus. The consolidated statement of operations data for the three
month period ended March 31, 1998 and 1999 and the consolidated balance sheet
data at March 31, 1999 have been derived from our unaudited financial statements
but have been prepared on the same basis as our audited financial statements
which are included in this prospectus. In our opinion, these unaudited financial
statements include all adjustments, consisting of normally recurring adjustments
considered necessary for a fair presentation of our financial position and
results of operations for that period.
    



   
                                      -18-
    

<PAGE>   24



         CONSOLIDATED STATEMENTS OF OPERATIONS DATA:

   

<TABLE>
<CAPTION>
                                                                                      Unaudited
                                                                                ------------------------
                                                    Year Ended                    Three Months Ended
                                                    December 31,                      March 31,
                                              ------------------------          ------------------------
                                                1997            1998             1998             1999
                                              -------          -------          -------          -------
                                                    (in thousands, except per share data)
<S>                                           <C>              <C>              <C>              <C>
Net revenue .........................         $ 3,310          $ 2,787          $   696          $   772
Cost of revenue .....................             117              100               28               31
                                              -------          -------          -------          -------
Gross profit ........................           3,193            2,687              668              741
                                              -------          -------          -------          -------
Selling, general and administrative .           2,110            1,936              386              381
Research and development ............             834              852              214              324
Depreciation and amortization .......              64               59               15               13
Former officer's consulting and
   administrative expense ...........             314              314               82               82
Total Expense .......................           3,322            3,161              697              800
                                              -------          -------          -------          -------
Net loss ............................         $  (129)         $  (474)         $   (29)         $   (59)
                                              =======          =======          =======          =======

Net loss per share, basic and diluted         $ (0.04)         $ (0.14)         $ (0.01)         $ (0.02)
                                              =======          =======          =======          =======
</TABLE>

    

         CONSOLIDATED BALANCE SHEET DATA:

   

<TABLE>
<CAPTION>
                                                               Unaudited
                                                              -----------
                                        December 31,            March 31,
                                    1997           1998           1999
                                   ------         ------         ------
                                              (in thousands)
<S>                                <C>            <C>            <C>
Cash and cash equivalents          $  625         $  224         $  461
Working capital ..........            761            222            546
Total assets .............          1,071            643          1,331
Total stockholders' equity            691            207            819
</TABLE>

    

         See notes 1 and 12 of notes to consolidated financial statements for a
discussion regarding the computation and presentation of basic and diluted net
loss per share.


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

   
         You should read the following discussion and analysis in conjunction
with "Selected Financial Data" and the consolidated financial statements and
related notes.
    

OVERVIEW

         Pacific Softworks develops and licenses a suite of embedded Internet
and Web software products for business and individual customers that seek to add
Internet-based communication capabilities to their information appliances.

         In distributing our products, we primarily have licensed source code to
our customers for a one time fee. Manufacturers or developers customize their
information appliances containing our licensed software to serve a particular
need or market.


   
                                      -19-
    

<PAGE>   25




         Our traditional focus and expertise has been on one of the principal
building blocks of the Internet, the underlying information transport protocol
known as TCP/IP. We have subsequently developed additional products that provide
other various essential elements of networked data communication and transport.
We have historically derived the majority of our revenue from the licensing of a
small range of relatively independent protocols that our customers integrate
with their own software products. We are in the process of completing
development of a range of embedded products, including an embedded Web browser
and related software accessories. These products will provide customer ready
solutions for the information appliance and embedded systems market.

         Historically, we had no materially significant post sale commitments
following software delivery. As a result we recognized revenue upon product
shipments to customers. We found that many of our older products were becoming
commodity items, with steady price erosion and competition. We could therefore
not support royalty bearing licenses on these products.

   
         With the introduction of our new Internet and Web application products,
we initiated a plan to charge a one-time fee for a development license and a
run-time or per unit production license fee for each copy of these applications
used in the customer's products. We intend to follow this approach for many of
our new products introduced and expected to be sold in 1999. Any increase in the
percentage of revenue attributable to run-time and unit production licenses will
depend on our successful negotiation of run-time and unit production license
agreements and on the successful commercialization by our customers of their
underlying products.
    

         The typical one-time license fee of our base TCP/IP product has been
between $10,000 and $40,000. Due to competitive pressures and the implementation
of upgraded TCP/IP protocols, we expect this average sale amount for our more
mature products to decrease by 20% or more per year over the next few years. We
expect this decay in pricing and reduced gross profit margins for our mature
TCP/IP product line to be partially offset by several factors:

   
         -        increased use and thus increased total licenses of TCP/IP,
    

   
         -        availability of the new FastTrack(TM) solutions, which should
                  increase our average license fee by $10,000,
    

   
         -        availability of our new TCP/IP version 6, which is expected to
                  become available within the next 12 to 18 months, and that may
                  increase our average license to $80,000, and
    

   
         -        availability of our IP security and encryption products before
                  the end of this fiscal year at prices which we believe will
                  exceed $80,000 per license.
    

         We anticipate that the FUSION WebPilot Micro Browser(TM) will be priced
at approximately $100,000 per unit and above for the initial license, plus
royalties measured against run-time or customer's units of production. We expect
to be licensing and delivering this product during the third quarter of 1999.


   
                                      -20-
    

<PAGE>   26


RESULTS OF OPERATIONS

         The following table sets forth, for the periods indicated, the
percentage relationship to net revenue of certain items in our consolidated
statements of operations and comprehensive income:

   

<TABLE>
<CAPTION>
                                                                                          Unaudited
                                                                                          ---------
                                                       Year Ended                        Three Months
                                                      December 31,                       Ended March 31
                                                -------------------------           -------------------------
                                                  1997              1998              1998              1999
                                                -------           -------           -------           -------
<S>                                             <C>               <C>               <C>               <C>
Net revenue ...........................          100.00%           100.00%           100.00%           100.00%
Cost of revenue .......................            3.51              3.61              4.00              3.93
                                                -------           -------           -------           -------
Gross profit ..........................           96.49             96.39             96.00             96.07
                                                -------           -------           -------           -------
Selling, general and administrative ...           63.75             69.45             55.52             49.35
Research and development ..............           25.20             30.55             30.70             41.97
Depreciation and amortization .........            1.94              2.11              2.11              1.74
Former officer consulting and
 administrative expense ...............            9.50             11.28             11.88             10.71
                                                -------           -------           -------           -------
Total operating expenses ..............          100.39            113.39            100.21            103.77
                                                -------           -------           -------           -------
Net loss from operations ..............           (3.90)           (17.00)            (4.21)            (7.70)
Foreign currency translation adjustment            1.51             (0.34)            (5.74)            (3.70)
                                                -------           -------           -------           -------
Comprehensive loss ....................           (2.39%)          (17.34%)           (9.95%)           11.40%
                                                -------           -------           -------           -------
</TABLE>

    

         The following table sets forth, for the periods indicated, the
percentage of net revenue by principal geographic area to total revenue:


   

<TABLE>
<CAPTION>
                                                              Unaudited
                                                           -----------------
                                    Year Ended               Three Months
                                    December 31,            Ended March 31
                                 -----------------         -----------------
                                 1997         1998         1998         1999
                                 ----         ----         ----         ----
<S>                              <C>          <C>          <C>          <C>
United States ...........          48%          42%          58%          43%
United Kingdom and Europe          35           40           38           42
Australia and Asia ......          15           17            3           14
Other ...................           2            1            1            1
                                  ---          ---          ---          ---
Total ...................         100%         100%         100%         100%
                                  ===          ===          ===          ===
</TABLE>

    

   
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
    

   
         NET REVENUE
    

   
         Our net revenue for the three months ended March 31, 1999 increased 11%
to $771,650 from $696,079 for the three months ended March 31, 1998. The
increase in revenue for 1999 was attributable to royalty revenue received from
our operations in Japan. The increase in international sales from 42% to 57% is
principally due to a decline in domestic sales as a result of increased
competition and related price discounting.
    


   
                                      -21-
    

<PAGE>   27




         COST OF REVENUE

   
         Our cost of revenue for the three months ended March 31, 1999 totaled
$30,336 compared to $27,843 for the three months ended March 31, 1998. The cost
of revenue in both periods was 4% of net revenue.
    

   
         SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
    

   
         Selling, general and administrative expense decreased from $386,447 or
56% of revenue in the three months ended March 31, 1998 to $380,815 or 49% of
revenue for the three months ended March 31, 1999. The reduction from period to
period reflects a continuing reduction of sales and operating expenses offset in
part by increases in corporate consulting expenditures related to strategic
planning and marketing and an increase in rent following the relocation of our
principal executive offices to our current location in mid 1998.
    

   
         RESEARCH AND DEVELOPMENT EXPENSE
    

   
         Our research and development expense increased from $213,703 or 31% of
revenue to $323,824 or 42% of revenue for the three months ended March 31, 1998
compared to the three months ended March 31, 1999. The increase in research and
development expense in 1999 was principally attributable to a continuation of
development of the FastTrack product line and the beginning of development of
the FUSION WebPilot Micro Browser(TM) in 1998.
    

   
         DEPRECIATION AND AMORTIZATION EXPENSE
    

   
         Depreciation and amortization expense decreased from $14,713 to $13,460
for the three months ended March 31, 1998 compared to the three months ended
March 31, 1999. This decrease was attributable to capitalized costs of computer
software acquired from third party vendors in 1996 that became fully amortized
in early 1998.
    

   
         FORMER OFFICER'S CONSULTING AND ADMINISTRATIVE EXPENSE
    

   
         Former officer's consulting and administrative expense remained
constant at $82,680 for the three months ended March 31, 1999 and 1998
respectively. We incurred this expense in connection with our buyout of a former
officer's employment agreement in March 1996. At that time the former officer
also entered into a covenant not to compete and into a consulting agreement with
Pacific Softworks. As of March 31, 1999, the total amount payable to this former
officer under these agreements was $180,000. This sum will be paid in equal
monthly installments through September 1999.
    

   
YEARS ENDED DECEMBER 31, 1998 AND 1997
    

   
         NET REVENUE
    

   
         Net revenue decreased approximately 16% from 1997 to 1998. Our revenue
results primarily from fees for licenses of software products, fees for customer
support, training, maintenance and engineering services and royalties. The
decrease in revenue for 1998 was attributable primarily to increased
competition, related discounting on older product categories, delayed
introductions of new products and substantially lower revenue from Japan
stemming from recessionary economic conditions in that country.
    


   
                                      -22-
    

<PAGE>   28



   
         The increase in international sales from 52% to 58% of total sales for
1997 and 1998 is principally due to a decline in domestic sales as a result of
increased competition and related price discounting. We expect international
sales to continue to represent a significant portion of net revenue although the
percentage may fluctuate from period to period.
    

   
         We generally price our foreign licenses in dollars. An increase in the
relative value of the dollar against Japanese and European currencies may reduce
our revenue in dollar terms or could make our products more expensive. As a
result, an increase in the relative value of the dollar against other currencies
may cause our products to be less competitive in foreign markets. To pay
expenses and for other corporate purposes we maintain a small portion of our
funds outside of the United States in local currency. We actively monitor our
foreign currency exchange exposure and to date this exposure has not had a
material impact on the results of operations. To date, we have not utilized
derivative instruments to hedge such exposure.
    

   
         COST OF REVENUE
    

         Cost of revenue includes direct and indirect costs for the production
and duplication of manuals and media for software products, as well as those
relating to packaging, shipping and delivery of the products to our customers.
Cost of revenue also includes license and other direct purchase costs of
third-party software that we distribute or integrate into our products. Cost of
revenue has remained relatively constant for fiscal 1997 and 1998 at
approximately 4% of net revenue. As a result, gross profit margins for products
have also remained constant at about 96%.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

         Selling, general and administrative expense decreased from $2,110,038
to $1,936,117 or 8%, from 1997 to 1998. Because of a 16% decrease in net
revenue, these expenses as a percentage of revenue increased from 64% to 69%.
The higher absolute expense in 1997 reflected a non-recurring distribution to
the president and majority stockholder. Pacific Softworks, then a corporation
governed under the provisions of subchapter S of the Internal Revenue Code, made
the non-recurring distribution to its president and majority stockholder to
permit him to pay corporate income taxes payable for 1996. The decrease in
expenditures for 1998 reflected reductions in sales staff and related operating
costs in 1998. Our decreases in expenditures were partially offset by increases
in corporate consulting expenditures related to strategic planning and marketing
and an increase in rent following the relocation of our principal executive
offices to our current location in mid 1998.

         RESEARCH AND DEVELOPMENT EXPENSE

         Research and development expense increased from $834,049 to $851,568,
or 2%, from 1997 to 1998. Because of a 16% decrease in net revenue, research and
development expense as a percentage of revenue increased from 25% to 31%. The
increase in research and development expense in 1998 was principally
attributable to an increase in the number of employees and consultants we hired
to assist in the development of the FastTrack(TM) product line and the FUSION
WebPilot Micro Browser(TM). These costs were partially offset by a decrease in
cost of third-party software acquired for the development process.



   
                                      -23-
    

<PAGE>   29




         DEPRECIATION AND AMORTIZATION EXPENSE

   
         Depreciation and amortization expense decreased from $64,195 to $58,850
or 8%, from 1997 to 1998 and remained constant as a percentage of net revenue at
2%. This decrease in 1998 was attributable to certain capitalized costs of
computer software acquired from third party vendors in 1996 that became fully
amortized in early 1998.
    

         FORMER OFFICER'S CONSULTING AND ADMINISTRATIVE EXPENSE

   
         Former officer's consulting and administrative expense remained
constant at $314,286 for 1997 and 1998. This expense increased as a percentage
of net revenue from 9% to 11% as a result of the decrease in net revenue. We
incurred this expense in connection with our buyout of a former officer's
employment agreement in March 1996. At that time, the former officer also
entered into a covenant not to compete and into a consulting agreement. Under
the consulting agreement, he agreed to make himself available to provide
financial consulting to Pacific Softworks as requested. To date, we have not
called upon him to render any significant services. As of May 1999, the total
amount payable to this former officer under these agreements was approximately
$131,000. This sum will be paid in equal monthly installments through September
1999.
    

         PROVISION FOR TAXES

         Commencing in 1995 we elected to be treated as a subchapter S
corporation. Through 1998 all federal tax liabilities were recognized at the
individual stockholder level. In February 1999 Pacific Softworks terminated the
subchapter S election and became subject to taxation at the corporate level. Our
historical financial statements do not reflect any income tax provision or
benefit. Had Pacific Softworks been subject to taxation as a C corporation, it
would have received pro forma income tax benefits totaling $48,375 and $177,750
in 1997 and 1998, based on a combined federal and state tax rate of 37.5%. We
will record income tax expense (benefit) in future periods at the corporate
level.

         LIQUIDITY AND CAPITAL RESOURCES

   
         At December 31, 1998 and March 31, 1999, we had working capital of
$222,477 and $546,095 and cash and cash equivalents of $224,031 and $460,907. We
expect that our cash and financing needs in 1999 will continue to be met by:
    

   
         -        cash on hand,
    

   
         -        cash generated by operations,
    

   
         -        proceeds of $500,000 from a private sale of securities in
                  February 1999,
    

   
         -        a bank line of credit, and
    

   
         -        net proceeds of this offering.
    

   
         If these sources of financing are insufficient or unavailable, or if we
experience an increase in operating cash requirements, we would slow the rate at
which we bring additional FastTrack(TM) products and the FUSION WebPilot Micro
Browser(TM) to market. We would also reduce our related marketing and
development activities.
    


   
                                      -24-
    

<PAGE>   30



   
         To date, we have satisfied operating cash requirements principally
through internally generated funds. Our operating activities have generated
(used) net cash of $286,567 and ($419,480) for 1997 and 1998 and ($26,286) for
the three months ended March 31, 1999. Cash generated by or used in operating
activities in each period principally reflected the loss from operations for
each period and the related change in working capital components. Decreased
revenue for 1998 contributed to decreases in accounts receivable, accounts
payable and deferred revenue. Our investing activities during 1998 and the three
months ended March 31, 1999 used net cash of $71,888 and $27,982 for capital
expenditures. Our financing activities during 1998 generated net cash of
$94,500. This net cash primarily resulted from our acquisition of the minority
interest in our Japanese subsidiary for $5,500, that was offset by $150,000 of
short-term borrowings of which $50,000 was repaid during the period. Our
financing activities for the three months ended March 31, 1999 include receipt
of $500,000 from our sale to a single corporate investor of 100,000 shares of
common stock. This amount was offset by $81,541 representing costs incurred
through that date in connection with this offering and by a $100,000 repayment
of borrowings.
    

   
         We have available a $250,000 bank line of credit, personally guaranteed
by our president and majority stockholder, under which no balance was
outstanding at December 31, 1998 and March 31, 1999. In 1998 we borrowed
$100,000, interest free, from a company affiliated with our president. Pacific
Softworks repaid this loan after December 31, 1998.
    

   
PRIVATE PLACEMENT
    

         In February 1999 we sold 100,000 shares of restricted common stock to
one investor at a price of $5.00 per share. We also issued 100,000 warrants,
allowing the investor to acquire 100,000 shares of common stock at $6.00 per
share. These warrants expire March 1, 2001. We received net proceeds of $500,000
from this sale.

YEAR 2000 ISSUES

   
         We are aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The year 2000 problem is
pervasive and complex, as many computer systems will be affected in some way by
the rollover of the two-digit year value to 00. Systems that do not properly
recognize this information could generate erroneous data or cause a system to
fail. The year 2000 issue could create risk for us from unforeseen problems in
our own computer systems and from third parties with whom we deal on
transactions worldwide. Failures of our and/or third parties' computer systems
could have a material impact on our ability to conduct business. Based on our
review and analysis, however, we believe that our computer systems and software
products are year 2000 compliant. We have further concluded that the products we
obtain from our vendors and suppliers for use within our systems and products
are also year 2000 compliant. We have not incurred and do not expect to incur
any material expense in connection with year 2000 matters.
    

INTRODUCTION OF THE EURO

         On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
and a new currency called the "Euro." These countries agreed to adopt the Euro
as their common legal currency on that date. The Euro trades on currency
exchanges and is available for non-cash transactions. The existing sovereign
currencies will remain legal tender in these countries until January 1, 2002. On
that date the Euro is scheduled to replace the sovereign legal currencies of the
member countries.


   
                                      -25-
    

<PAGE>   31





         Our European operations are centered in the United Kingdom, which has
not adopted the Euro. We will evaluate the impact the implementation of the Euro
will have on our business operations. We do not expect the Euro to have a
material effect on our competitive position. We can provide no assurance,
however, that the implementation of the Euro will not have a material adverse
affect on our business, financial condition and operating results. In addition,
we cannot accurately predict the impact the Euro will have on currency exchange
rates or our currency exchange risk. We have historically priced our foreign
licenses in dollars and as a result we have had no material need to hedge our
foreign currency exposure. If competitive conditions require us to license our
products in terms of Euro or other currencies, we may engage in currency hedging
to manage this exposure in the future if we think that it is appropriate for us
to do so.

RECENT ACCOUNTING PRONOUNCEMENTS

   
         In June 1997, the Financial Accounting Standards Board, issued
Statement of Financial Accounting Standards No. 130. FAS 130 establishes
standards for reporting comprehensive income and its components in a financial
statement. Comprehensive income as defined includes all changes in equity (net
assets) during a period from non-owner sources. Examples of items to be included
in comprehensive income, which are excluded from net income, include foreign
currency translation adjustments and unrealized gains/losses on
available-for-sale securities. We adopted the disclosure prescribed by FAS 130
in fiscal 1997.
    

   
         In June 1997 Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
the way companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. We have not
yet determined the impact, if any, of adopting this statement. We will adopt the
disclosures prescribed by FAS 131 in the year ending December 31, 1999.
    

   
         In October 1997 and March 1998 the American Institute of Certified
Public Accountants issued Statements of Position 97-2, "Software Revenue
Recognition," and 98-4, "Deferral of the Effective Date of a Provision of SOP
97-2, Software Revenue Recognition," which we are currently required to adopt
for transactions occurring in the fiscal year beginning January 1, 1998. SOP
97-2 and SOP 98-4 provide guidance on recognizing revenue on software
transactions and supersede SOP 91-1. We believe that the adoption of SOP 97-2
and SOP 98-4 will not have a significant impact on our current licensing or
revenue recognition practices. However, should we adopt new licensing practices
or change our existing licensing practices, our revenue recognition practices
may change to comply with the accounting guidance provided in SOP 97-2 and SOP
98-4.
    

   
         In April 1998 the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance for
determining whether computer software is internal-use software as well as
guidance on accounting for the proceeds of computer software originally
developed or obtained for internal use and then subsequently sold to the public.
It also provides guidance on capitalization of the costs incurred for computer
software developed or obtained for internal use. We have not yet determined the
impact, if any, of adopting this statement. We will adopt the disclosures
prescribed by SOP 98-1 in the year ending December 31, 2000.
    


   
                                      -26-
    

<PAGE>   32


   
                    WHERE YOU CAN FIND ADDITIONAL INFORMATION
    

   
         Pacific Softworks has filed with the Securities and Exchange
Commission, 450 Fifth Street, Washington, D.C. 20549, a registration statement
on Form SB-2 under the Securities Act with respect to the securities offered.
This prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules to the registration
statement. For further information concerning Pacific Softworks and the
securities offered, we refer you to the registration statement and the exhibits
and schedules filed as a part of the registration statement.
    

   
         Statements contained in this prospectus concerning the contents of any
contract or any other document are not necessarily complete. In each instance
where a copy of that contract or document has been filed as an exhibit to the
registration statement, we refer you to the copy of the contract or document
that has been filed. Each statement is qualified in all respects by reference to
that exhibit. The registration statement, including its exhibits and schedules,
may be inspected without charge at the SEC's principal office in Washington, D.C
and at the SEC's regional offices at Northwest Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, New
York, New York 10048. Copies of all or any part of those documents may be
obtained from the SEC's office after payment of the SEC's prescribed fees. The
SEC maintains a Web site that contains reports, proxy and information statements
and other information regarding companies that file electronically with the SEC
at www.sec.gov.
    

   
         We intend to provide our stockholders with annual reports containing
consolidated financial statements audited by an independent public accounting
firm and quarterly reports containing unaudited consolidated financial data for
the first three quarters of each year.
    

 
                                   BUSINESS

OUR BUSINESS

         Pacific Softworks develops and licenses Internet and Web related
software and software development tools. Our products enable Internet and Web
based communications, based on a set of rules known as protocols, and are
embedded into systems and "information appliances" developed or manufactured by
others. Information appliances are Internet connected versions of everyday
products such as telephones, televisions, fax machines and other digitally based
devices.

   
         Rapid advances are enabling wired and wireless information appliances
to assume many of the tasks now handled by personal computers. We believe that
Web browsing enabled by embedded software in information appliances used by
businesses and individuals will be a major market. International Data Corp.
estimates that 94% of Internet access is now made through PCs. By 2002, that
percentage is expected to decrease to 64%. By 2002 the number of information
appliances sold is expected to exceed the number of PCs sold.
    

         We intend to evolve and refine our business to track the growth of
embedded software in information appliances that incorporate Internet and Web
communications capabilities. As information appliances proliferate, we
anticipate that our opportunities for long term revenue growth will also
increase.


   
                                      -27-
    

<PAGE>   33



         Our Internet and Web related software development tools offer
significant benefits to our customers including:

   
         -        accelerated product development and market entry,
    

   
         -        portability across multiple hardware and software system
                  environments, and
    

   
         -        comprehensive embedded solutions that enable information
                  appliances to connect with the Internet and use the Web.
    

         Information appliance manufacturers and software developers have
included our products within the following applications and information
appliances:

   

<TABLE>
<CAPTION>
Applications                           Information Appliances
- ------------                           ----------------------
<S>                                    <C>

- -   Office automation                  -   Internet fax, copiers, laser printers, scanners

- -   Medical                            -   Patient monitors, imaging systems

- -   Multimedia                         -   DVD players, projectors, digital cameras

- -   Industrial controls                -   Vending machines, traffic controls, scoring systems, security controls

- -   Networking                         -   Routers, switches, network controls, cable modems

- -   Set-top boxes                      -   Set-top boxes, Internet TV

- -   Wireless                           -   Telephones, personal digital assistants, pagers, electronic organizers

- -   Navigation systems                 -   Navigational controls, air traffic controls

- -   Defense and aerospace              -   Engine controls, smart weapons

- -   Satellite                          -   Satellite positioning, uplink and downlink of streaming video
</TABLE>

    

   
         We have developed a new proprietary Internet browser for use within
independent, "non-Windows(R)" information appliances. We expect to begin
marketing this browser, under the "FUSION WebPilot Micro Browser(TM)" name,
during the third quarter of 1999. Our browser may be effectively placed in use
without an operating system and does not require substantial amounts of memory.
We believe that our browser may prove particularly attractive to manufacturers
of information appliances who would rather give their products a proprietary or
subjective "look and feel" than to be restricted by a browser which requires or
depends on the "look and feel" of commercially available operating systems such
as Windows(R).
    

   
OUR STRATEGY
    

   
         Our objective is to be a leading provider of embedded software that
enables information appliances and other devices to connect with and communicate
through the Internet and Web. To attain our objective and to increase revenue,
we intend to:
    

   
         -        Increase sales and marketing activities,
    

   
         -        Expand our existing collaborative relationships to capitalize
                  on our new micro-browser and other technologies designed for
                  information appliances,
    

   
         -        Create new collaborative relationships with key information
                  appliance manufacturers,
    

   
         -        Maintain research and development of new Internet-based
                  products that enable reliable and secure communication and
                  transport of data over the Internet, and
    

   
         -        Continue to provide additional functions and features to our
                  existing and upgraded software and communication products.
    


                                      -28-

<PAGE>   34



   
BACKGROUND
    

         INDUSTRY BACKGROUND - SIGNIFICANT GROWTH OF THE INTERNET.

         The Internet has grown in less than a decade from a limited research
tool to a global network consisting of millions of computers and users. The
Internet is expected to continue to grow rapidly. We estimate that the number of
Internet users worldwide will grow from approximately 69 million in 1997 to 320
million in 2002. The U.S. Department of Commerce estimates that Internet traffic
doubles every 100 days. The number of Internet Web sites is also growing
rapidly. The number of Web sites detected by the Netcraft Web Server Survey
increased from approximately 526,000 in November 1996 to approximately 1.6
million in November 1997, and to over 3.5 million in November 1998, reflecting
annual growth exceeding 100%.

         Network Solutions, Inc., which estimates that it holds a 75% worldwide
market share in domain name registrations, registered over 1.9 million new
domains in 1998, nearly double those of the previous year. The growth of the
Internet is primarily attributable to its value as a low-cost, open, and readily
accessible platform for communications and commerce.

         As a result of these attributes, organizations are increasingly
embracing the Internet as a principal platform for communicating with key
constituents and conducting business. Internally, many organizations have
adopted Internet-based systems to facilitate communications among employees and
to automate internal business processes. Many organizations are adding Web-based
applications to increase sales, cut costs, and improve customer service. These
applications range from Web sites offering electronic brochures, to electronic
acquisition of goods and services, and automated customer service and support.

   
         Organizations are making large investments in these applications to
create meaningful and attractively presented content that informs, entertains,
and communicates. Emerging applications now enable organizations to attract
customers and build customer loyalty by offering dynamic, personalized content.
Web-based applications for suppliers and distributors have also significantly
improved business-to-business procurement, payment systems, and logistics
planning. Entirely new businesses have emerged that have been developed
specifically to exploit the unique characteristics of the Internet and
e-commerce. International Data Corporation forecasts the U.S. Internet Economy
to grow for $124 billion in 1998 to $518 billion in 2002.
    

         Advertising revenue has also played an important role in the growth of
the Internet. Attracted by increasing numbers of users, Internet-based
businesses have developed that are supported primarily by advertising revenue.
Traditional businesses have also realized incremental advertising spending from
their Web sites. We estimate that Internet advertising spending will grow from
$1.9 billion in 1998 to $7.7 billion in 2002.

         GROWTH OF INTERNET TECHNOLOGY, CONTENT AND INFRASTRUCTURE.

         Organizations are supporting their Internet-based systems by investing
heavily in technology, content, and infrastructure. Forrester Research estimates
that spending on software and services for e-commerce alone will exceed $5.6
billion in 1998 and $35 billion by 2002. The creation of Internet content
continues to grow rapidly by any measure. For example, as of May 27, 1998, the
AltaVista search engine had indexed more than 140 million Web pages, an increase
of more than 40 million pages in the first five months of 1998.


   
                                      -29-
    

<PAGE>   35


         The Internet uses Web and specialized servers for different tasks and
forms of communications. For example, specialized servers are used for Web
browsing, email, chat, news groups, file transfers, and audio and video
streaming. A measure of the growth of the Internet infrastructure is the number
of Web and other Internet servers that are installed. These servers respond to
requests for information and manage data. We estimate that the number of Web and
other Internet servers installed will grow from approximately 6.3 million in
1998 to nearly 12 million in the year 2002.

OUR SUITE OF PRODUCTS

         TRANSMISSION CONTROL PROTOCOL/INTERNET PROTOCOL.

         Transmission Control Protocol/Internet Protocol, which we refer to
below as "TCP/IP," is a suite of communications protocols that have been adopted
as a standard and enable the communications that take place on the Internet. As
a standard, TCP/IP enables Internet users to adopt or acquire pre-made, "off the
shelf" products, such as those of Pacific Softworks, and eliminates the need by
those users to develop a proprietary communications infrastructure on their own.
The TCP/IP stack is a collection of components consisting of various layers of
protocols and programs that operate together to transfer data over the Internet.
These protocols include the Internet Protocol, various messaging and addressing
protocols, and the Transmission Control Protocol.

         Embedded systems consist of a microprocessor and related software
incorporated into a product and dedicated to performing a specific set of tasks.
The market for embedded Internet applications continues to grow substantially as
customers deploy TCP/IP based networks. TCP/IP and related technologies are
emerging as the building blocks for next-generation wired and wireless networks.
According to Datapro, total industry sales of TCP/IP products is projected to
grow at a compounded annual growth rate of 11.6% with industry sales rising from
$1.6 billion in 1995 to $2.7 billion in 2000.

   
         We believe that key elements defining our market today include the
following:
    

   
         -        TCP/IP is a commodity type product that remains a key
                  component of the Internet. Generic public domain software for
                  TCP/IP is available at low cost.
    

   
         -        The competitive market for TCP/IP products currently focuses
                  on selling value-added applications, such as file transfer
                  protocols designed to send large files over the Internet,
                  email, and management tools that enhance the embedded protocol
                  stack.
    

   
         -        The market is migrating away from proprietary protocols to
                  standard Internet protocols.
    

   
         -        Manufacturers continue to implement Internet and Web embedded
                  software in a growing number of consumer and industrial
                  information appliances.
    

   
         -        International market growth will ultimately outpace market
                  growth in the United States.
    

   
         -        As more powerful microprocessors become available and decrease
                  in price, embedded systems are being used in a wider range of
                  applications and are facilitating the development of a new
                  generation of information appliances. Emerging embedded
                  Internet applications for interactive entertainment, network
                  computers, remote management and other uses may offer
                  significant additional opportunities for embedded systems and
                  information appliances.
    


   
                                      -30-
    

<PAGE>   36


   
         -        Manufacturers of products using embedded technology must bring
                  complex applications for embedded systems to market rapidly
                  and economically. Developing embedded applications has evolved
                  from a relatively modest programming task to a complex
                  engineering effort. As more powerful and affordable 32-bit and
                  64-bit microprocessors have become available, products based
                  on them have become richer in features and functions.
    

   
         -        More sophisticated software solutions are required to develop
                  these more complex applications, frequently including a
                  real-time operating system and Internet and Web products that
                  provide developers with far more features, higher performance
                  and greater productivity than those necessary or feasible for
                  programming prior generations of microprocessors. Our flexible
                  software solutions and powerful development tools allow our
                  customers to create and standardize complex, embedded software
                  applications quickly and efficiently.
    

   
         -        As embedded applications increase in complexity, the costs
                  associated with providing software development, support and
                  training of engineers are rising rapidly. In this environment,
                  time-to-market, conformance to standards and product
                  reliability have become critical issues for companies
                  developing information appliances and other devices which may
                  be connected to the Internet.
    

         We have designed FUSION products with the developer in mind. The FUSION
solution assists system developers by adding compliant Internet protocols and
applications to their products. FUSION products are very flexible and portable.
Our products are not dependent on any particular hardware or software. Our
products are also designed for easy integration.

   
         Our FastTrack(TM) development products provide a pre-built "drop-in
solution" that facilitates quick and easy protocol implementation within the
products of our customers. FUSION FastTrack(TM) solutions provide users with a
complete suite of networking tools to ease the development and porting of new
projects. Our customers do not face the uncertainty of trying to determine what
components will work with FUSION. Our engineers have integrated FastTrack(TM)
with the processor, operating system, compiler, debugger and development board
to assure a simplified and reliable drop-in solution that moves a customer's
project to more rapid completion. A user need only add its application and then
transfer our software to the targeted hardware or device.
    

         FUSION FastTrack(TM) products are not dependent on any particular
processor. They have been and are currently being developed for several families
of processors including those of:

   

<TABLE>
<S>                                                          <C>
  -      Advanced Micro Devices                              -        LSI Logic

  -      Advanced Risc Machines                              -        MIPS Technologies

  -      Analog Devices                                      -        Motorola Corporation

  -      ARC                                                 -        NEC

  -      Hitachi                                             -        Philips

  -      Hyperstone                                          -        Siemens

  -      Intel Corporation                                   -        ST Microsystems

  -      International Business Machines Corporation         -        Texas Instruments
</TABLE>

    


   
                                      -31-
    

<PAGE>   37

   
         Our Internet and Web products provide an integrated suite of critical
functions which feature:
    

   
         -        a small sized, fast, efficient, high performance embedded
                  Internet protocol stack,
    

   
         -        an extensive range of Internet and Web applications,
    

   
         -        custom-built software code, not based on public domain
                  sources,
    

   
         -        mature software code, tested and used in a wide variety of
                  products by companies including Sony, Motorola,
                  Hewlett-Packard, Intel, IBM, Lucent, Cisco and VLSI,
    

   
         -        code developed for embedded systems and information appliances
                  with fine tuning capabilities built into the code to optimize
                  Internet connectivity for specific applications,
    

   
         -        multiple interface software support for most of the popular
                  communication chip sets, and
    

   
         -        pre-built ready to add "drop-in solutions" for easy
                  integration of customer application software across multiple
                  processor platforms.
    

OUR PRODUCTS

         OUR INTERNET AND APPLICATION PRODUCTS

         FUSION TCP/IP. This product enables data to be transported over the
Internet. Our product is not dependent on any particular processor, operating
system or compiler. FUSION is high performance, small, tunable, and can be
easily incorporated in a customer's information appliances.

         FusOS. This product is our FUSION operating system. Customers may
choose to use FusOS or remove it from our Internet product and replace it with
any commercial operating system of their choice.

   
         FUSION IPsec. This product is the FUSION IP security protocol suite
which provides privacy and authentication services at the Internet Protocol
layer. IPsecurity uses advanced encryption algorithm keys and is designed to
provide secure financial and e-commerce transactions from information appliances
over the Internet.
    

   
         FUSION Satellite IP. This product adds the power and scalability
required for Internet protocols to work in a slow-start or delayed environment
such as in satellites and set-top boxes. FUSION Satellite IP is designed to
handle communication over satellite links for uplink and downlink modes, and
adapts to the delays inherent in satellite communications.
    

   
         FUSION RIP, Routing Information Protocol. Widely accepted as a standard
routing protocol, RIP routers send broadcast messages onto a network and contain
routing information about the network. This information is shared among all the
RIP-capable routers in a network thereby allowing each router to understand
where it exists in a network and where its routes lead. RIP specifies how
routers exchange routing table information. Currently, there are industry
standards which describe the specifications required to implement RIP. The
FUSION RIP protocol is a high-performance portable software engine that
implements IP forwarding and route generation consistent with industry
standards. With RIP, routers periodically exchange entire tables of routing
data. Because this is inefficient, RIP is gradually being replaced by a newer
protocol called Open Shortest Path First Protocol, or "OSPF."
    


   
                                      -32-
    

<PAGE>   38


   
         FUSION OSPF, Open Shortest Path First Protocol. This product is a
portable software engine that fully implements the OSPF to provide routing. It
has been designed specifically for use in high performance multi-protocol
routers. OSPF defines how routers share routing information. Unlike RIP, which
transfers entire tables of routing data, OSPF transfers only routing information
which has changed since the previous transfer. As a result, use of this protocol
reduces the amount of data to be transmitted and conserves system resources.
    

   
         FUSION PPP, Point-to-Point Protocol. This product provides a means for
transmitting packets of data known as datagrams over serial point-to-point
links. This application links one device to another over telephone lines and
cable.
    

   
         FUSION MultiLink PPP. Both FUSION PPP and MultiLink PPP modules may be
used in any processor. MultiLink PPP extends PPP over multiple links or
channels. MultiLink PPP allows users to broadcast data simultaneously to
multiple devices within different operating environments and allows users to
transfer more data by combining available links.
    

         FUSION SNMP, Simple Network Management Protocol. SNMP is a set of
protocols that interfaces transparently into FUSION TCP/IP. SNMP helps to manage
and control devices over the Internet.

   
         FUSION FTP, File Transfer Protocol. This application software allows
the efficient sharing of files, programs or data between devices over the
Internet. FTP also provides a secure way to allow or deny access to specific
files or directories between diverse systems.
    

   
         FUSION TFTP, Trivial File Transfer Protocol. This product is a subset
of FTP that allows the efficient transfer of files between diverse host systems
without the extended features and potential overhead associated with FTP. TFTP
is designed with small size and easy implementation in mind for devices with
minimal memory.
    

   
         FUSION Telnet. This product is a general, bi-directional oriented
communications application which allows a standard method of interfacing or
connecting terminal devices and terminal-oriented processes to each other. This
application software can be used for terminal-to-terminal and/or
application-to-application communications.
    

         FUSION SMTP, Simple Mail Transfer Protocol. This product is a protocol
used for sending email messages between servers. SMTP is generally used to send
messages from a mail client to a mail server. SMTP is independent of any
transmission protocol or operating system and only requires a reliable data
stream. We have designed FUSION SMTP to be small, efficient and easy to
implement in virtually any environment.

         FUSION POP3, Post Office Protocol Version 3. This software provides
messaging capability within products or systems that do not have the memory or
other resources to use SMTP or where there is no continuous Internet connection.
POP3 is typically used to access and retrieve email that is being held on a mail
server. Most email applications, sometimes called an email client, use a POP
Protocol. POP3 is independent of any transport protocol or operating system and
is typically implemented over TCP. We have designed FUSION POP3 to be a small,
efficient messaging client that is easy to implement in environments where
memory and system resources are sparse.

         FUSION BOOTP, Bootstrap Protocol. This is an Internet protocol that
enables a diskless device to discover its own IP address, the IP address of a
BOOTP server on the network, and a


   
                                      -33-
    

<PAGE>   39


file to be loaded into memory to activate or boot the device. This application
software allows the efficient sharing of files, programs or data between diverse
host systems. BOOTP also provides a secure way to allow or deny access to
specific files or directories between diverse systems.

         FUSION DHCP, Dynamic Host Configuration Protocol. This is a protocol
for assigning dynamic addresses to devices on the Internet. With dynamic
addressing, a device can have a different address every time it connects to the
Internet. DHCP also supports a mix of fixed and dynamic Internet addresses.
Dynamic addressing simplifies network administration because the software keeps
track of the addresses rather than requiring an administrator to manage the
task. This means that a device can be added to the Internet without the
difficulties associated with manually assigning it a unique address. Many
Internet service providers use dynamic addressing for dial-up users.

         OUR WEB PRODUCTS

   
         FUSION WebPilot Micro Browser(TM). Our FUSION WebPilot Micro
Browser(TM) is a completely embedded browser aimed at applications like set-top
boxes, wired and wireless telephones, other hand-held information appliances,
kiosks, and other remote Internet information appliances. This application has
been designed for limited memory environments and is independent of the
operating system, processor or compiler. It is applicable across multiple
platforms.
    

   
         Unlike other browsers based on Windows(R), the FUSION WebPilot Micro
Browser(TM) is designed for small space applications. Our browser has also been
designed from scratch for embedded applications. Unlike other browsers, the
FUSION WebPilot Micro Broswer(TM) is not a modified or simplified version of
existing PC code. We believe that our product is the only embeddable Web browser
that currently can make this claim. Our product provides full browsing
capabilities in an embedded environment without needing a full PC-type operating
system or Microsoft Windows(R). In addition to browsing capabilities, the FUSION
WebPilot Micro Browser(TM) family of products will include email and e-commerce
applications in the embedded environment.
    

   
         The FUSION WebPilot Micro Browser(TM) has its own embedded windowing
and graphical support. These features allow users to create custom designs and
custom fonts and icons. We believe that these features are particularly
important in addressing foreign languages such as Japanese and in developing
branded presentation screens for customers.
    

   
         We have designed the FUSION WebPilot Micro Browser(TM) to permit
incorporation of various add-on modules. Our browser will have a functionality
and presentation similar to those of the much larger PC-based browsers such as
Internet Explorer and Netscape but will have substantially reduced memory
requirements. We intend actively to market and deliver FUSION WebPilot Micro
Browser(TM) during the third quarter of 1999.
    

         FUSION Embedded Web Server. This application software allows any user
on the Internet easily to manage or monitor any device connected to the
Internet. It provides an easy way to deliver powerful Web-based applications in
generally understood graphical formats. Using FUSION Internet protocols, FUSION
Web Server provides integrated Web services. It provides Web servers with the
capability to look at and manage any Internet connected devices through the Web.
Examples of such uses include:

   
         -        video cameras,
    

   
         -        vending machines,
    


   
                                      -34-
    

<PAGE>   40



   
         -        utility power meters,
    

   
         -        medical equipment, and
    

   
         -        other remote devices.
    

   
The FUSION Web Server is compatible with FUSION WebPilot Micro Browser(TM) and
all other standard browsers including Netscape, Mosaic, and Internet Explorer,
on all platforms. We intend actively to market and deliver FUSION Web Server
during the third quarter of 1999.
    

   
OTHER PRODUCTS WE INTEND TO MARKET
    

   
         FUSION 6. This product is our major TCP/IP upgrade. We are designing
this application to provide greater security and flexibility in connection with
the next generation Internet Protocol. We expect to introduce this product
within the next 12-18 months.
    

   
         FUSION Mobile IP. We are designing this product for use within wireless
and cellular applications. Internet protocols do not currently operate
efficiently in wireless environments. We are designing Mobile IP to handle
information processing delays and interruptions associated with Internet
protocols in wireless applications. We expect to introduce this product within
the next 12-18 months.
    

SERVICES AND SUPPORT

   
         Pacific Softworks seeks to provide comprehensive customer service and
support which help customers realize the value and potential of our products.
    

   
         TRAINING CLASSES
    

         We offer several training courses and workshops for an additional fee.
We provide courses monthly at our executive office in California or in the
United Kingdom. We also provide training courses at customer sites. We tailor
these training courses to meet specific customer needs and schedules.

   
         TECHNICAL SUPPORT
    

         Our technical support staff assists customers with problems and
questions in the installation and use of our products. We bundle technical
support with product updates and maintenance on an annual fee basis.

         ENGINEERING SERVICES.

         We provide a number of services on a fee-for-service basis, including
application-level consulting, customization, and porting to proprietary
semiconductor architectures. We coordinate and perform these services in North
America, Japan and Europe.

INDUSTRY COLLABORATION

   
         Pacific Softworks works with various companies in jointly developing
products for the Internet market for those companies and their customers. The
nature of this work is generally a process of informal collaboration that does
not require written agreements or ongoing legal
    


   
                                      -35-
    

<PAGE>   41


   
obligations. We have described some of our more significant collaborations
below. We plan to continue developing these and other relationships.
    

   
         INTEL. Under a program called "wired for manageability," Intel has
worked with Pacific Softworks and has incorporated FUSION Internet software
products into various Intel products.
    

         MOTOROLA. Pacific Softworks and Motorola have collaborated for a number
of years on providing Internet connectivity for most of the Motorola product
families. Pacific Softworks has provided Internet solutions for Motorola
customers. In return members of the Motorola sales force and application
engineers have recommended Pacific Softworks as a solution partner to their
customers.

   
         ST MICROELECTRONICS. ST Microelectronics has worked with Pacific
Softworks in the United States and Europe on incorporating our products with the
set-top boxes, cable modems and other product designs of ST Microelectronics.
    

   
         ADVANCED RISC MACHINES. Advanced RISC Machines and Pacific Softworks
have worked together to incorporate FUSION products onto the ARM7 development
board, a foundation used for the development of other products. ARM recommends
Pacific Softworks products to its customers.
    

   
         TEXAS INSTRUMENTS. Since late 1998 Texas Instruments has been
evaluating the FUSION Protocols on its set-top box development board. We are
currently discussing joint development for new Texas Instruments products. In
addition, FUSION Internet protocols have been incorporated into digital signal
processors of Texas Instruments.
    

   
         ANALOG DEVICES INC. Analog has licensed both our browser and our email
technology for use in conjunction with its SHARC chip set. The license is
royalty bearing. These digital signal processors are targeted at a variety of
communications applications including digital television and video phones. Our
software will be bundled with the chip set that will also form part of Analog's
SHARC development platform design. We expect to work with Analog to meet the
requirements of its customers worldwide and to work on joint developments for
the next generation of information appliance technology.
    

TOOLS AND OPERATING SYSTEM COLLABORATION

         We currently work or collaborate with the following companies in
developing and expanding our FastTrack(TM) suite of products:

         GREENHILLS SOFTWARE. Several of our FastTrack(TM) developer kits are
based on GreenHills' tools suite. These products provide a strong development
environment and are well accepted in the embedded market.

   
         EXPRESS LOGIC. We have worked with Express Logic for about two years.
We believe that Express Logic has superior real-time operating systems products
for the embedded market. Most of our FastTrack(TM) solutions are built using
this real-time operating system. In addition, with the exception of Germany and
Switzerland, Pacific Softworks distributes Express Logic software code on a
non-exclusive basis worldwide.
    


   
                                      -36-
    

<PAGE>   42




         DIAB DATA CORPORATION. Pacific Softworks has worked with Diab Data for
over three years on Motorola platforms. Diab Data is a leading supplier of
software tools for Motorola based products.

   
         SOFTWARE DEVELOPMENT SYSTEMS. Pacific Softworks has collaborated with
Software Development Systems to use the Software Development Systems compiler
for Motorola platforms. Based on informational available to us, we believe that
Software Development Systems has over 50% of compiler sales for Motorola
products.
    

         GAIO JAPAN. GAIO is the largest supplier of integrated tools in Japan.
We are currently building our Hitachi FastTrack(TM) products with the complete
tools suite from GAIO. In return we believe we have become the Internet software
supplier of choice for GAIO.

   
WIDE AREA NETWORK COLLABORATION
    

          TELENETWORKS. Telenetworks and Pacific Softworks have recently
co-developed a complete router reference platform with Motorola for the small
office/home office market. This router reference platform is being reviewed by
3COM and other companies. The collaboration is continuing for other wide area
network products. Pacific Softworks is a worldwide value added reseller for
Telenetworks. The combination of our products with those of Telenetworks
provides a complete WAN/LAN solution for the products manufactured by our
customers.

          UNISOFT JAPAN. Unisoft is experienced in developing and integrating
Internet and Web protocols for customer applications. In addition it provides
wide area network solutions for the Japanese market. Pacific Softworks and
Unisoft have cooperated on several joint developments involving our FUSION
WebPilot Micro Browser(TM) within automobile navigation systems.

CUSTOMERS

         Since incorporation in 1992, Pacific Softworks has licensed its
products to over 400 companies around the world, including: Alcatel, AT&T,
America OnLine, Canon, Canal+, Cisco, Cocom, Bell Labs, Data General, Concurrent
Technologies, Ericsson, General Instruments, Hughes, Honeywell, Hewlett Packard,
Intel, Motorola, Newbridge, Nortel, Psion, Philips, Samsung, Siemens, ST
Microsystems, Tandberg, Unisys, and VLSI.

         No single customer accounted for more than 10% of our total revenue in
1997 or 1998.

MARKETING, SALES AND DISTRIBUTION

   
         In North America, Europe and Japan, we market our products and services
primarily through our own direct sales organization, which consists of
salespersons and field application engineers. As of December 31, 1998, Pacific
Softworks had four domestic salespersons and field application engineers located
in North America, one salesperson and field application engineer in Europe and
three sales and marketing employees in Japan.
    

   
         We distribute our products in Japan through a wholly owned subsidiary,
Network Research Corporation Japan. We have licensed our products exclusively to
Network Research for distribution in Japan.
    

   
         We have appointed international distributors to serve customers in
regions not serviced by our direct sales force. We also collaborate with
semiconductor and software vendors and work
    


                                      -37-

<PAGE>   43



   
closely with a number of system integrators worldwide. These relationships
enable us further to broaden the geographic and market scope for our products.
    

   
         Revenue from international sales represented approximately 52% and 58%
of our total revenue in fiscal 1997 and 1998. Revenue from international sales
represented approximately 57% of our total revenue for the three months ended
March 31, 1998.
    

   
         Pacific Softworks has experienced, and expects to continue to
experience, significant seasonality of revenue resulting primarily from customer
buying patterns and product development cycles. We have generally experienced
the strongest demand for our products in the fourth quarter of each fiscal year
and the weakest demand in the first quarter of each fiscal year. Quarterly
revenue typically decreased in the first quarter of each fiscal year from the
fourth quarter of the prior fiscal year.
    

COMPETITION

   
         The embedded Internet and Web-based software industry is highly
competitive and is characterized by rapidly advancing technology. We believe
that we compete favorably in our markets on the basis of:
    

   
         -        product capabilities,
    

   
         -        price/performance characteristics,
    

   
         -        product portability,
    

   
         -        ease of use, and
    

   
         -        support services and corporate reputation.
    

         We compete with other independent software vendors, including Wind
River Systems, Inc., Integrated Systems, Inc., Mentor Graphics, Inc. (through
its acquisition of Microtec/Ready Systems), Microware Systems Corporation and
Microsoft Corporation. In addition, hardware or other software vendors could
seek to expand their product offerings by designing and selling products that
directly compete with or adversely affect sales of our products.

         Many of our existing and potential competitors have substantially
greater financial, technical, marketing and sales resources than we have. We are
aware of ongoing efforts by competitors to emulate the performance and features
of our products and we can provide no assurance that competitors will not
develop equivalent or superior technology to that of Pacific Softworks.

   
         Because we have been substantially dependent on our TCP/IP family of
Internet products and services, the effects of competition could be more adverse
on us than would be the case if we had a broader product offering. In addition,
competitive pressures could cause us to reduce the prices of our products, which
would result in reduced profit margins. We cannot assure you that we will be
able to compete effectively against our current and future competitors. If we
are unable to compete successfully, our business, financial condition and
operating results would be materially adversely affected.
    


                                      -38-

<PAGE>   44


   
PRODUCT DEVELOPMENT AND ENGINEERING
    

   
         The embedded software industry faces a fragmented market characterized
by ongoing technological developments, evolving industry standards and rapid
changes in customer requirements. We believe that our success will depend in
large part on our ability to:
    

   
         -        maintain and enhance our current product line,
    

   
         -        develop and introduce in a timely manner new products that
                  take advantage of technological advances,
    

   
         -        identify and implement emerging standards,
    

   
         -        offer products across a spectrum of microprocessor families
                  used in the embedded systems market, and
    

   
         -        support sustained marketing and promotion of brand identity
                  and product lines.
    

   
         During 1997 and 1998 we incurred product development and engineering
expenses of $834,049 and $851,568. We intend to increase our commitment to
product development and engineering for 1999 from the proceeds of this offering.
    

   
         Pacific Softworks has from time to time experienced delays in the
development of new products and the enhancement of existing products. These
delays are commonplace in the software industry. We cannot assure you that we
will be successful in developing and marketing, on a timely basis or at all,
competitive products, product enhancements and new products that respond to
technological change, and changes in customer requirements. We also cannot
assure you that our enhanced or new products will adequately address the
changing needs of the marketplace. The inability of Pacific Softworks, due to
resource constraints or technological or other reasons, to develop and introduce
new products or product enhancements in a timely manner could have a material
adverse effect on our business, financial condition or operating results.
    

   
         From time to time, we or our competitors may announce new products,
capabilities or technologies that have the potential to replace or shorten the
life cycles of our existing products. We cannot assure you that announcements of
currently planned or other new products by us or others will not cause customers
to defer purchasing existing products. Any failure by Pacific Softworks to
anticipate or respond adequately to changing market conditions, or any
significant delays in product development or introduction, could have a material
adverse effect on our business, financial condition and operating results.
    

         As a result of their complexity, software products may contain
undetected errors or compatibility issues, particularly when first introduced or
as new versions are released. Despite testing by us and testing and use by
current and potential customers, it is always possible for errors to be found in
new products after shipments to our customers. The occurrence of these errors
could result in loss of or delay in market acceptance of our products, which
could have a material adverse effect on our business, financial condition and
operating results.

         Our products are increasingly used for applications in systems that
interact directly with the general public, particularly applications in
transportation, medical systems and other markets where the failure of the
embedded system could cause substantial property damage or personal injury. This
failure of our products could expose Pacific Softworks to significant product
liability claims. In addition, our products may be used for applications in
mission-critical business systems where the failure of the embedded system could
be linked to substantial economic loss.


   
                                      -39-
    

<PAGE>   45


          Although Pacific Softworks has not experienced any product liability
or economic loss claims to date, the sale and support of our products entail the
risk of these claims.

PROPRIETARY RIGHTS

   
         Our success is heavily dependent upon our proprietary technology. We
rely on a combination of:
    

   
         -        copyright,
    

   
         -        trade secret and trademark laws,
    

   
         -        nondisclosure,
    

   
         -        other contractual restrictions on copying, or distribution,
                  and
    

   
         -        technical measures to protect our software, documentation and
                  other written materials.
    

   
         As a part of our confidentiality procedures, we generally enter into
nondisclosure agreements with our employees and consultants and limit access to
and distribution of our software, documentation and other proprietary
information. End user licenses of our software are frequently in the form of
source license agreements, which are signed by licensees, and which we believe
may be enforceable under the laws of many jurisdictions.
    

   
         Despite our efforts to protect our proprietary rights, unauthorized
third parties may be able to copy our products or to reverse engineer or obtain
and use information that we regard as proprietary. We can provide you with no
assurance that competitors will not independently develop technologies that are
substantially equivalent or superior to ours. Policing unauthorized use of our
products is difficult. We are unable to determine the extent to which software
piracy of our products exists. Software piracy, however, can be expected to be a
continuing and persistent problem.
    

         We believe that, due to the rapid pace of innovation within our
industry, factors such as the technological and creative skills of our personnel
are more important to establishing and maintaining a technology leadership
position within the industry than are the various legal protections of our
technology.

         As the number of patents, copyrights, trademarks, trade secrets and
other intellectual property rights in our industry increases, products based on
our technology may increasingly become the subject of infringement claims. We
can provide you with no assurance that third parties will not assert
infringement claims against us in the future. Any of these claims with or
without merit could:

   
         -        be time consuming,
    

   
         -        result in costly litigation,
    

   
         -        cause product shipment delays, or
    

   
         -        require us to enter into unwanted royalty or licensing
                  agreements.
    


   
                                      -40-
    

<PAGE>   46




These royalty or licensing agreements, if required, may not be available on
terms acceptable to us, or at all, which could have a material adverse effect on
our business, financial condition and operating results.

   
         In addition, we may initiate claims or litigation against third parties
for infringement of our proprietary rights or to establish the validity of our
proprietary rights. Litigation to determine the validity of any claims, whether
or not such litigation is determined in favor of Pacific Softworks, could result
in significant expense to Pacific Softworks and divert the efforts of our
technical and management personnel from productive tasks. The outcome or
settlement of any such litigation may require us to:
    

   
         -        pay substantial damages,
    

   
         -        discontinue the use and sale of infringing products,
    

   
         -        expend significant resources to develop non-infringing
                  technology, or
    

   
         -        obtain a license to the infringing technology.
    

   
Any of these events could have a material adverse effect on our business
financial condition and operating results.
    

MANUFACTURING AND BACKLOG

         Our manufacturing operation consists of assembling, packaging and
shipping the software products and documentation needed to fulfill each order.
We manufacture our source code for sale and duplicate compact disks in our
California facility. We use outside vendors to print documentation and
manufacture packaging materials. We believe that backlog is not a meaningful
indicator of revenue that can be expected in future periods.

EMPLOYEES

   
         As of May 1, 1999, Pacific Softworks employed 27 persons full-time,
including four in sales and marketing, 20 in product development, engineering
and support and three in management, operations, finance and administration. Of
these employees, 24 are located in North America, two are located in Japan and
one is located in Europe. None of our employees is represented by a labor union
or is subject to a collective bargaining agreement. We have never experienced a
work stoppage. We believe that relations with our employees are good.
    

PROPERTIES

   
         Our executive offices are located in a leased facility in Newbury Park,
California consisting of approximately 11,500 square feet of office space. The
lease for this facility expires in September 2000. Our monthly lease payment is
approximately $8,500. In Japan we have subleased space of approximately 700
square feet at a rate of approximately $1,600 on a month to month basis. We
believe that these facilities are adequate for our current needs and for
expected personnel additions over the next 18 months. In the United Kingdom our
representative operates from facilities that are secured by him and which entail
no material ongoing obligation by Pacific Softworks.
    

LEGAL PROCEEDINGS

         We are not a party to any material legal proceedings.


   
                                      -41-
    

<PAGE>   47



                                   MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

         The directors and executive officers of Pacific Softworks are:

   

<TABLE>
<CAPTION>
Name                          Age     Position
- ----                          ---     --------
<S>                           <C>     <C>
Glenn P. Russell               44     Chairman, President, and Chief Executive Officer
William E. Sliney              60     Chief Financial Officer
Chaim Kaltgrad                 45     Vice President - Program Management
Mark Sewell                    37     Vice President - Business Development
Sandra J. Garcia               37     Vice President - North American Sales
Robert G. J. Burg II           42     Director
Wayne T. Grau                  49     Director
Reuben Sandler, Ph.D.          62     Director
Joseph Lechman                 32     Secretary
</TABLE>

    

   
         Glenn P. Russell. Mr. Russell has been our chairman, president and
chief executive officer since 1992. Before 1992 he had various sales and
marketing positions at IBM, Unisys and Network Research Corporation, a
predecessor of Pacific Softworks. Mr. Russell is also an officer and director of
Luke Systems International, a distributor of electronic components. Luke Systems
International is controlled by Mr. Russell's spouse. Mr. Russell devotes
substantially all of his time to Pacific Softworks. Mr. Russell was educated in
and is a native of the United Kingdom.
    

   
         William E. Sliney. Mr. Sliney has been our chief financial officer
since April 1999. Before joining us, Mr. Sliney was the chief financial officer
for Legacy Software Inc. from 1995 to 1998. From 1993 to 1994, Mr. Sliney was 
chief executive officer for Gumps. Mr. Sliney received his masters in business
administration from the University of California at Los Angeles.
    

   
         Chaim Kaltgrad. Mr. Kaltgrad has been our vice president - program
management since May of 1999. From 1992 to 1999, Mr. Kaltgrad was a consultant
for Lockheed Martin Corporation. From 1997 to 1998 Mr. Kaltgrad was also a
consultant at Demo Systems. He received a masters degree in computer science
from California State University Northridge and a bachelors of mathematics and
computer science from the University of California at Los Angeles.
    

   
         Mark Sewell. Mr. Sewell, a resident of the United Kingdom, has been the
general manager for our European operations since 1996, with responsibility for
European sales and business development. For over two years prior to 1996, he
was the business and support manager for the Asia Pacific region of PictureTel,
Inc. He received his masters degree in electrical and electronic engineering
from the University of Canterbury.
    

   
         Sandra J. Garcia. Ms. Garcia joined us in 1993 as our regional sales
manager and became vice president - North American sales in 1996. Ms. Garcia
graduated from Santa Barbara College.
    

   
         Robert G. J. Burg II. Mr. Burg has been a director of Pacific Softworks
since January 1999. He has been the president of Profile Sports, a corporate
sports and outing entertainment business, since 1998. For more than five years
before that he served as president, senior vice president and in other
managerial positions at Royal Grip, Inc., a manufacturer and distributor of golf
grips and sports headwear. Mr. Burg received a bachelor of arts degree from the
University
    


   
                                      -42-
    

<PAGE>   48


   
of Colorado. He currently serves on the boards of directors of EMD/Empyrean
Diagnostics, Ltd. and Royal Precision, Inc.
    

   
         Wayne T. Grau. Mr. Grau has been a director of Pacific Softworks since
January 1999. He has been the president and chief executive officer of Fielding
Electric, Inc. since 1981. He is currently a member of the Los Angeles Chapter
membership committee of the National Electrical Contractors Association, a
trustee for the Joint Apprenticeship Training Committee and a trustee for the
Los Angeles Electrical Training Trust.
    

   
         Reuben Sandler, Ph.D. Dr. Sandler has been a director of Pacific
Softworks since January 1999. He has been the president and chief information
officer for MediVox, Inc., a medical software development company, since June
1997. From 1989 to 1996, he was an executive vice president for R&D
Laboratories, Inc. Dr. Sandler received a Ph.D. from the University of Chicago
and is the author of four books on mathematics. He currently serves on the
boards of directors of MediVox, Inc. and Alliance Medical Corporation and is an
advisor to the board of directors of R&D Laboratories, Inc.
    

   
         Joseph Lechman. Mr. Lechman has been our secretary since March 1999. He
is a principal in the law firm of Gose & Lechman and has been practicing law in
Ventura County, California since 1991. Mr. Lechman received his bachelor of arts
degree in business administration in 1987 from California State University at
Fullerton. He received his juris doctorate from Pepperdine University School of
Law and was admitted to the State Bar of California in 1990. Mr. Lechman
obtained a master's of law in taxation from the New York University School of
Law.
    

BOARD OF DIRECTORS

   
         Our directors are elected for a one year term. Each director holds
office until the expiration of his term, until his successor has been duly
elected and qualified or until the earlier of his resignation, removal or death.
Each officer serves at the discretion of the board of directors. There are no
family relationships among any of our directors or officers.
    

   
         Our directors receive $200 for attending meetings of the board of
directors. We will also reimburse our directors for actual and reasonable out of
pocket expenses incurred when attending board of directors and committee
meetings. Directors who are not employees are eligible to participate in the
1998 Equity Incentive Program. Each of our non-employee directors received
options to purchase 15,000 shares of common stock upon his election to the board
of directors.
    

COMMITTEES OF THE BOARD OF DIRECTORS

   
         The board of directors maintains a compensation committee and an audit
committee. The compensation committee is composed of Reuben Sandler, chair,
Robert Burg and Wayne Grau. The audit committee is composed of Robert Burg,
chair, Reuben Sandler and Wayne Grau. The compensation committee reviews and
makes recommendations to the board of directors on compensation matters,
including bonuses, of our officers and administers the grants under our equity
incentive program. The audit committee:
    

   
         -        reviews the scope of the audit procedures employed by our
                  independent auditors,
    

   
         -        reviews our accounting practices and policies with our
                  independent auditors,
    

   
         -        recommends to whom reports should be submitted within Pacific
                  Softworks,
    

   
         -        reviews with the independent auditors their final audit
                  reports,
    


                                      -43-

<PAGE>   49


   
         -        reviews our overall accounting and financial controls with our
                  internal and independent auditors,
    

   
         -        has its members available to the independent auditors for
                  consultation,
    

   
         -        approves the audit fee charged by the independent auditors,
    

   
         -        reports to the board of directors with respect to the matters
                  described above, and
    

   
         -        recommends the selection of the independent auditors.
    

EXECUTIVE COMPENSATION

         The following table sets forth the compensation earned by our chief
executive officer, senior vice president, and vice president for services, or
the named executive officers, rendered during the fiscal years ended December
31, 1998, 1997 and 1996. No other executive officer of Pacific Softworks earned
or was paid compensation of more than $100,000 in the year ended December 31,
1998.

                           SUMMARY COMPENSATION TABLE

   

<TABLE>
<CAPTION>
                                                            Year
                                                           ended                Annual Compensation
Name and Principal Position                                Dec. 31       Salary          Bonus          Other
- ---------------------------                                -------       ------          -----          -----
<S>                                                        <C>           <C>           <C>           <C>

Glenn P. Russell                                             1998        $ 207,962     $  --          $   --
      Chairman, President, Chief Executive                   1997          215,384        118,201         --
      Officer  and Chief Financial Officer                   1996          162,501        --              --

Mark Sewell                                                  1998          134,822        --           262,500
      Vice President - Business Development                  1997          115,885        --              --
                                                             1996           58,161        --              --

Sandra J. Garcia                                             1998          120,442        --           262,500
      Vice President - North American Sales                  1997          154,563        --              --
                                                             1996          175,750        --              --
</TABLE>

    

         Pacific Softworks paid Glenn P. Russell $118,201 in 1997 in addition to
his salary to permit Mr. Russell to pay 1996 personal tax obligations arising
from Pacific Softworks' S corporation status. In February 1999 Pacific Softworks
terminated the subchapter S election and became subject to taxation at the
corporate level.

   
         In June 1998 Pacific Softworks granted to each of Mark Sewell and
Sandra J. Garcia options to purchase 70,000 shares of common stock. The
calculations of the value of the unexercised options reflected in the above
table under "Other" are based on the difference between the fair market value
per share of the common stock on December 31, 1998, approximately $5.00, and the
exercise price of each option multiplied by the number of shares covered by the
option.
    


                                      -44-

<PAGE>   50




OPTION GRANTS IN 1998

   
         The following table sets forth each grant of stock options to named
executive officers during the fiscal year ended December 31, 1998.
    

   
              OPTION GRANTS FOR FISCAL YEAR ENDED DECEMBER 31, 1998
    

   

<TABLE>
<CAPTION>
                               Number Of Securities      Percent Of Total
                                    Underlying         Options/SARs Granted
                                   Options/SARs          to Employees in       Exercise        Expiration
Name                                 Granted             Fiscal Year 1998        Price            Date
- ----------------              ----------------------   ------------------      ----------     -------------
<S>                           <C>                      <C>                     <C>            <C>

Mark Sewell                          70,000                    50%               $1.25        June 25, 2008

Sandra J. Garcia                     70,000                    50%               $1.25        June 25, 2008
</TABLE>

    


   
These options were not granted under, and are separate from, our equity
incentive program. The options may be exercised at any time during their term.
There were no options exercised in fiscal year 1998.
    

EQUITY INCENTIVE PROGRAM

         Our 1998 equity incentive program was adopted by the board of directors
and approved by stockholders in April 1998. The number of shares of common stock
reserved for issuance under the equity incentive program is 320,000 shares. As
of December 31, 1998, no options were granted under the equity incentive
program.

   
         Under the equity incentive program, employees, non-employee members of
the board and consultants may be awarded options to purchase shares of common
stock, stock appreciation rights, restricted shares or stock units. Options may
be incentive stock options designed to satisfy the requirements of Section 422
of the Internal Revenue Code of 1986, or nonstatutory stock options designed not
to meet those requirements. If restricted shares or shares issued upon the
exercise of options granted under this plan are forfeited, then these shares
will again become available for awards under the equity incentive program. If
stock units, options or stock appreciation rights granted under the equity
incentive program are forfeited or terminate for any other reason before being
exercised, then the corresponding shares will again become available for awards
under the equity incentive program.
    

         The equity incentive program is administered by the compensation
committee of the board of directors. This committee has complete discretion to:

   
         -        determine who should receive any award,
    

   
         -        determine type, number, vesting requirements and other
                  features and conditions of an award,
    

   
         -        interpret the equity incentive program, and
    

   
         -        make all other decisions relating to the operation of the
                  equity incentive program.
    

   
         The exercise price for statutory and incentive stock options granted
under the equity incentive program may not be less than 85% or 100%,
respectively, of the fair market value of the common stock on the option grant
date and may be paid in cash or in outstanding shares of
    


                                      -45-

<PAGE>   51


   
common stock. Holders may exercise options by using a cashless exercise method,
a pledge of shares to a broker or promissory note. The payment for an award of
newly issued restricted shares will be made in cash, by promissory note or the
rendering of services.
    

         The committee has the authority to modify or extend outstanding options
and stock appreciation rights. The committee may also accept the cancellation of
outstanding options or stock appreciation rights in return for a grant of new
options or stock appreciation rights for the same or a different number of
shares at the same or a different exercise price.

   
         If there is a change in control of Pacific Softworks, an award will
become fully exercisable as to all shares subject to an award if the award is
not assumed by the surviving corporation or its parent and the surviving
corporation or its parent does not substitute such award with another award of
substantially the same terms. In the event of an involuntary termination of
service within 18 months following a change in control, all of the awards then
outstanding and not vested will then be fully vested.
    

   
         A change in control includes:
    

   
         -        a merger or consolidation of Pacific Softworks after which our
                  then current stockholders own less than 50% of the surviving
                  corporation,
    

   
         -        sale of all or substantially all of the assets of Pacific
                  Softworks,
    

   
         -        a proxy contest that results in replacement of more than
                  one-third of the directors over a 24-month period, or
    

   
         -        acquisition of 50% or more of our outstanding stock by a
                  person other than a trustee of our equity incentive program or
                  a corporation owned by the stockholders of Pacific Softworks
                  in substantially the same proportions as their stock ownership
                  in Pacific Softworks.
    

   
In the event of a merger or other reorganization, outstanding options, stock
appreciation rights, restricted shares and stock units will be subject to the
agreement of merger or reorganization, which may provide for:
    

   
         -        the assumption of outstanding awards by the surviving
                  corporation or its parent,
    

   
         -        their continuation by Pacific Softworks (if Pacific Softworks
                  is the surviving corporation),
    

   
         -        accelerated vesting, and
    

   
         -        for settlement in cash followed by cancellation of outstanding
                  awards.
    

         The board of directors may amend or terminate the equity incentive
program at any time. Amendments may be subject to stockholder approval to the
extent required by applicable laws. The equity incentive program will continue
in effect unless otherwise terminated by the board of directors.

   
         In May 1999 the board of directors voted to grant our officers and
other employees options to purchase 320,000 shares of common stock under our
equity incentive plan at an exercise price of $5.00 per share. These options
have a term of 10 years but vest at the rate of 2% per month from the date of
grant over a period of 36 months and may not be exercised until after 30 days
from the date of this offering.

         The table below sets forth grants of options in May 1999 under our
equity incentive plan to our named officers:
    


                                      -46-

<PAGE>   52



   
           OPTION GRANTS IN MAY 1999 UNDER OUR EQUITY INCENTIVE PLAN

<TABLE>
<CAPTION>
                                                                 Percent of Total
                                            Number of           Options Granted to       Exercise           Expiration
             Name                         Options Granted        Employees in 1999         Price               Date
             ----                         ---------------       ------------------       ---------       ----------------
<S>                                       <C>                    <C>                     <C>             <C>

             Glenn P. Russell                  30,000                   9.375%              $5.00          April 30, 2009

             William E. Sliney                 12,000                   3.75%               $5.00          April 30, 2009

             Chaim Kaltgrad                    12,000                   3.75%               $5.00          April 30, 2009

             Mark Sewell                       12,000                   3.75%               $5.00          April 30, 2009

             Sandra J. Garcia                  12,000                   3.75%               $5.00          April 30, 2009

             Joseph Lechman                    12,000                   3.75%               $5.00          April 30, 2009
</TABLE>

    

   
         Following the option grants in May 1999 all shares of common stock
reserved for issuance under our 1998 equity incentive program have been granted.
No additional options will be available under the equity incentive program
except to the extent that currently issued options do not vest or are forfeited.
    



   
                                      -47-
    

<PAGE>   53



                              CERTAIN TRANSACTIONS

   
SHARE PURCHASE AGREEMENT - MINORITY STOCKHOLDER
    

   
         In March 1996, Pacific Softworks agreed with a former officer, director
and principal stockholder to a buyout of his employment agreement and Glenn P.
Russell agreed to purchase all of that former officer's shares of common stock
of Pacific Softworks. Pacific Softworks and that former officer also entered
into a consulting agreement and that former officer agreed not to compete with
Pacific Softworks. Pacific Softworks paid the former officer $314,286 for each
of 1997 and 1998. As of May 1999 the balance of our payments due to this former
officer under these agreements is approximately $131,000. This amount is payable
in equal monthly installments through September 1999. Our agreement with this
former stockholder restricts us from making any distributions to stockholders,
other than those necessary for tax liabilities resulting from corporate earnings
during the time we were an S corporation. Our obligations to the former
stockholder are secured by substantially all of the outstanding shares of common
stock of Pacific Softworks owned by Glenn P. Russell and all assets of Pacific
Softworks.
    

TRANSACTIONS WITH AFFILIATE

         LOAN FROM AFFILIATE

   
         In December 1998, Luke Systems International, a company controlled by
the spouse of Glenn P. Russell, loaned Pacific Softworks $100,000 interest free.
In March 1999, Pacific Softworks repaid the loan.
    

         RENTAL OF PREMISES TO AFFILIATE

   
         We rent a portion of our premises to a company affiliated with our
chief executive officer. We believe the terms of occupancy to be favorable to
us. We expect this affiliated company to relocate to other premises in or around
the middle of 1999.
    

         Pacific Softworks believes that the transactions set forth above were
made on terms no less favorable to Pacific Softworks than could have been
obtained from unaffiliated third parties. All future related party transactions
will be approved by a majority of the board of directors, including a majority
of the independent and disinterested outside directors on the board of
directors, and will be made on terms no less favorable to Pacific Softworks than
could be obtained from unaffiliated third parties.

INDEMNIFICATION

         Our articles of incorporation limit the liability of our directors for
monetary damages arising from a breach of their fiduciary duty as directors,
except to the extent otherwise required by the California General Corporation
Law. This limitation of liability does not affect the availability of equitable
remedies such as injunctive relief or rescission.

   
         Our bylaws require us to indemnify our directors and officers to the
fullest extent permitted by California law, including in circumstances in which
indemnification is otherwise discretionary under California law. We have also
entered into indemnification agreements with our officers and directors
containing provisions that may require us, among other things, to indemnify
these officers and directors against certain liabilities that may arise by
reason of their status or service
    



   
                                      -48-
    

<PAGE>   54

   
as directors or officers (other than liabilities arising from willful misconduct
of a culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to obtain
directors' and officers' insurance if available on reasonable terms.
    

   
         Insofar as indemnification for liabilities arising under the Securities
Act, may be permitted to directors, officers and control persons of Pacific
Softworks under the provisions described above, or otherwise, Pacific Softworks
has been advised that in the opinion of the SEC, this indemnification is against
public policy as expressed in the Securities Act, and is unenforceable.
    

                             PRINCIPAL STOCKHOLDERS

         The following table sets forth certain information regarding beneficial
ownership of our common stock as of the date of this prospectus, and as adjusted
to reflect the sale of the units offered by this prospectus, by:

   
         -        each person who is known by Pacific Softworks to own
                  beneficially more than 5% of our outstanding common stock,
    

   
         -        each of our executive officers and directors, and
    

   
         -        all executive officers and directors as a group.
    

   
         Shares of common stock not outstanding but deemed beneficially owned
because an individual has the right to acquire the shares of common stock within
60 days are treated as outstanding when determining the amount and percentage of
common stock owned by that individual and by all directors and executive
officers as a group. Each person has sole voting and investment power with
respect to the shares of common stock shown. The address of each person is 703
Rancho Conejo Boulevard, Newbury Park, California 91320.
    

   

<TABLE>
<CAPTION>
                                                                 Percentage of
                                             Number of         Shares Outstanding
                                              Shares        -----------------------
Name and Address of                        Beneficially       Before         After
Beneficial Owner                              Owned         Offering       Offering
- ----------------                              -----         --------       --------
<S>                                        <C>              <C>            <C>
Glenn P. Russell ..................         3,000,000         90.91%         73.17%
William E. Sliney .................                 *             *              *
Chaim Kaltgrad ....................                 *             *              *
Mark Sewell .......................            70,000          2.08           1.68
Sandra J. Garcia ..................            70,000          2.08           1.68
Robert G. J. Burg II ..............            15,000             *              *
Wayne T. Grau .....................            15,000             *              *
Reuben Sandler, Ph.D ..............            15,000             *              *
Joseph Lechman ....................                 *             *              *
All directors and executive
  officers as a group (9 persons) .         3,185,000         91.39%         74.33%
</TABLE>

    

   
         The table above includes shares of common stock issuable upon exercise
of options granted to two officers and to each of our three non-employee
directors. The table above does not reflect options for the purchase of 30,000
shares of common stock granted in May 1999 to Glenn P. Russell. The table above
also does not reflect options for the purchase of 12,000 shares of common stock
granted in May 1999 to each of William E. Sliney, Chaim Kaltgrad, Mark Sewell,
Sandra J. Garcia and Joseph Lechman. Asterisks in the above table indicate
beneficial ownership of less than 1%.

    



   
                                      -49-
    

<PAGE>   55


                            DESCRIPTION OF SECURITIES

   
         The authorized capital stock of Pacific Softworks consists of
50,000,000 shares of $0.001 par value common stock and 10,000,000 shares of
$0.01 par value preferred stock, which Pacific Softworks may issue in one or
more series as determined by the board of directors. There currently are
3,300,000 shares of common stock issued and outstanding that are held of record
by three stockholders.
    

UNITS

         Each unit being offered in this prospectus consists of one share of
common stock and one warrant. The common stock and warrants are separately
transferable. There is currently no trading market for the common stock or
warrants of Pacific Softworks, and we can provide no assurance that a trading
market will develop in the future.

PREFERRED STOCK

   
         Our board of directors is authorized to issue from time to time,
without stockholder authorization, in one or more designated series, any or all
of the authorized but unissued shares of preferred stock with such dividend,
redemption, conversion, and exchange provisions as may be provided by the board
of directors with regard to such particular series. Any series of preferred
stock may possess voting, dividend, liquidation, and redemption rights superior
to those of the common stock.
    

         The rights of the holders of common stock will be subject to and may be
adversely affected by the rights of the holders of any preferred stock that may
be issued in the future. Issuance of a new series of preferred stock could make
it more difficult for a third party to acquire, or discourage a third party from
acquiring, the outstanding shares of common stock of Pacific Softworks and make
removal of the board of directors more difficult. No shares of preferred stock
are currently issued and outstanding, and Pacific Softworks has no present plans
to issue any shares of preferred stock.

COMMON STOCK

   
         Each holder of record of common stock is entitled to one vote for each
share held on all matters properly submitted to the stockholders for their vote.
Before election of directors, any stockholder may cumulate votes for any
candidate, if a stockholder has given notice that he intends to cumulate his
votes and if the candidate's name was placed in nomination prior to voting. In
cumulative voting, each stockholder is entitled in the election of directors to
one vote for each voting share held by him multiplied by the number of directors
to be elected. Each stockholder may cast all of those votes for a single nominee
for director or he may distribute those votes among any two or more nominees as
the stockholder deems appropriate.
    

         Holders of outstanding shares of common stock are entitled to those
dividends declared by the board of directors out of legally available funds and,
in the event of liquidation, dissolution or winding up of the affairs of Pacific
Softworks, holders are entitled to receive, pro rata, the net assets of Pacific
Softworks available to the common stockholders. Holders of outstanding



   
                                      -50-
    

<PAGE>   56

common stock have no preemptive, conversion or redemption rights. All of the
issued and outstanding shares of common stock are, and all unissued shares of
common stock, when offered and sold will be, duly authorized, validly issued,
fully paid and nonassessable. To the extent that additional shares of common
stock may be issued in the future, the relative interests of the then existing
stockholders may be diluted.

   
         The shares of common stock outstanding before this offering are
restricted securities as that term is defined in Rule 144 under the Securities
Act. Restricted securities generally cannot be resold without registration or an
exemption from registration.
    

WARRANTS

   
         Each warrant entitles the holder to purchase one share of common stock
at an exercise price of $7.50 for a period of 24 months from the date of this
prospectus, subject to our redemption rights described below. The warrants will
be issued under the terms of a warrant agreement between Pacific Softworks and
American Securities Transfer & Trust, Incorporated as warrant agent. Pacific
Softworks has authorized and reserved for issuance the shares of common stock
issuable on exercise of the warrants. The warrants are exercisable to purchase a
total of 800,000 shares of common stock of Pacific Softworks. If the
underwriter's over-allotment option relating to the warrants is exercised, the
warrants are exercisable to purchase a total of 920,000 shares of common stock.
    

   
         The warrant exercise price and the number of shares of common stock
that may be purchased upon exercise of the warrants are subject to adjustment
should any of the following events occur:
    

   
         -        a stock dividend on the common stock,
    

   
         -        a subdivision of the common stock,
    

   
         -        a recapitalization of the common stock,
    

   
         -        a reorganization of the common stock, or
    

   
         -        a merger or consolidation of Pacific Softworks with or into
                  another corporation or business entity.
    

         Commencing 30 days from the date of this prospectus and until the
expiration of the warrants, Pacific Softworks may redeem outstanding warrants,
in whole but not in part, upon not less than 30 days' notice, at a price of
$0.05 per warrant. This right to redeem outstanding warrants is conditioned upon
the closing bid price of the common stock equaling or exceeding $8.00 per share
for 15 consecutive trading days. We must provide the redemption notice not more
than five business days after conclusion of the 15 consecutive trading days in
which the closing bid price of the common stock equals or exceeds $8.00 per
share.

   
         In the event we exercise our right to redeem the warrants, the warrants
will be exercisable until the close of business on the date fixed for redemption
in our notice. If any warrant called for redemption is not timely exercised,
that warrant will no longer be exercisable and the holder of that warrant will
be entitled to the redemption price.
    

   
         Pacific Softworks must have on file a current registration statement
with the SEC pertaining to the common stock underlying the warrants for a holder
to exercise the warrants or for the warrants to be redeemed by Pacific
Softworks. The shares of common stock underlying the warrants must also be
registered or qualified for sale under the securities laws of the states in
    



   
                                      -51-
    

<PAGE>   57

   
which the warrantholders reside. We intend to use our best efforts to keep the
registration statement incorporating this prospectus current, but we can give no
assurance that the registration statement (or any other registration statement
we filed covering shares of common stock underlying the warrants) can be kept
current. If the registration statement covering the underlying common stock is
not kept current, or if the common stock underlying the warrants is not
registered or qualified for sale in the state in which a warrant holder resides,
the warrants may be deprived of any value.
    

   
         Pacific Softworks is not required to issue any fractional shares of
common stock upon the exercise of warrants or upon the occurrence of adjustments
under anti-dilution provisions. Pacific Softworks will pay to holders of
fractional interests an amount equal to the cash value of their fractional
interests based upon the then-current market price of a share of common stock.
    

   
         Warrants may be exercised upon surrender of the certificate
representing those warrants on or before their expiration date (or earlier
redemption date) at the offices of the warrant agent with the form of "Election
to Purchase" on the reverse side of the warrant certificate completed and
executed as indicated, accompanied by payment of the full exercise price by
check payable to the order of Pacific Softworks for the number of warrants being
exercised. Shares of common stock issued upon exercise of warrants for which
payment has been received in accordance with the terms of the warrants will be
fully paid and nonassessable.
    

         The warrants do not confer upon the warrantholder any voting or other
rights of a stockholder of Pacific Softworks. Upon notice to the warrantholders,
Pacific Softworks has the right to reduce the exercise price or extend the
expiration date of the warrants. Although this right is intended to benefit
warrantholders, to the extent Pacific Softworks exercises this right when the
warrants would otherwise be exercisable at a price higher than the prevailing
market price of the common stock, the likelihood of exercise, and the resultant
increase in the number of shares outstanding, may impede or make more costly a
change in control of Pacific Softworks.

ANTI-TAKEOVER PROVISIONS

   
         Our articles of incorporation and bylaws contain provisions that may
make it more difficult for a third party to acquire, or may discourage
acquisition bids for, Pacific Softworks. The board of directors of Pacific
Softworks is authorized, without action of its stockholders, to issue authorized
but unissued common stock and preferred stock. The existence of undesignated
preferred stock and authorized but unissued common stock enables Pacific
Softworks to discourage or to make it more difficult to obtain control of
Pacific Softworks by means of a merger, tender offer, proxy contest or
otherwise.
    

TRANSFER AGENT, WARRANT AGENT AND REGISTRAR

         Pacific Softworks has retained American Securities Transfer & Trust,
Incorporated to serve as the transfer agent and registrar for the common stock
and warrant agent for the warrants.

SHARES ELIGIBLE FOR FUTURE SALE

   
         On completion of this offering, Pacific Softworks will have 4,100,000
shares of common stock outstanding, assuming no warrants are exercised. If the
underwriter's over-allotment option is exercised in full, 4,220,000 shares of
common stock will be outstanding. Of these shares, 800,000 shares of common
stock sold in this offering and any shares sold by Pacific Softworks upon
exercise of the underwriter's over-allotment option will be freely transferable
by persons
    



                                      -52-

<PAGE>   58

   
other than "affiliates" of Pacific Softworks as that term is defined under the
Securities Act, without restriction or further registration. In addition,
200,000 shares beneficially owned by two persons who are not employees of
Pacific Softworks and up to 160,000 shares issuable upon exercise of warrants to
purchase units, are being registered concurrently with this offering. These
securities may not be sold without the prior written consent of the underwriter
for a period of 13 months from the date of this prospectus. These restrictions
may be waived by the underwriter, although it has no current intention to do so.
    

   
         The remaining 3,100,000 outstanding shares of common stock are
"restricted securities" within the meaning of Rule 144 under the Securities Act
and may not be sold in the absence of registration unless an exemption from
registration is available, including the exemption contained in Rule 144. All of
these shares become eligible for sale under Rule 144 commencing 90 days after
the date of this prospectus. Under the terms of the underwriting agreement, the
underwriter has required that the shares of common stock owned by officers,
directors and the current stockholders may not be sold until at least 13 months
from the date of this prospectus without the underwriter's prior written
consent.
    

   
         In general, under Rule 144, a stockholder who has beneficially owned
shares of common stock for at least one year is entitled to sell, within any
three-month period, a number of "restricted" shares that does not exceed the
greater of 1% of the then outstanding shares of common stock or the average
weekly trading volume during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to sale limitations, notice requirements and the
availability of current public information about Pacific Softworks. Rule 144(k)
provides that a stockholder who is not deemed to be an "affiliate" and who has
beneficially owned shares of common stock for at least two years is entitled to
sell those shares at any time under Rule 144(k) without regard to the
limitations described above. In addition to the shares of common stock that are
currently outstanding, a total of 320,000 shares of common stock have been
reserved for issuance upon exercise of options granted under the equity
incentive program.
    

   
         Pacific Softworks is unable to estimate the number of shares that may
be sold in the future by the existing holders of shares of our common stock or
holders of options or warrants that are outstanding or the effect, if any, that
sales of shares of common stock by these persons will have on the market price
of the common stock prevailing from time to time. Sales of substantial amounts
of common stock by these persons could adversely affect the then prevailing
market prices of the common stock and warrants.
    

   
         Pacific Softworks, its directors, executive officers and other
stockholders have agreed with the underwriter that they will not sell any common
stock without the prior consent of the underwriter for a period of 13 months
from the date of this prospectus, except that Pacific Softworks may, without
this consent, grant options and issue shares under its equity incentive program.
The underwriter has no current intention to waive or shorten the lock-up
arrangements.
    

   
         Pacific Softworks intends to file a registration statement on Form S-8
under the Securities Act to register shares of common stock issued or reserved
for issuance under outstanding options and our equity incentive program within
180 days after the date of this prospectus, thus permitting the resale of these
shares by nonaffiliates in the public market without restriction under the
Securities Act. Pacific Softworks intends to register these shares on Form S-8,
along with common stock underlying options that have not been issued under our
equity incentive program as of the date of this prospectus.
    

   
ADDITIONAL WARRANTS TO PURCHASE UNITS
    


   
                                      -53-
    

<PAGE>   59




   
         Pacific Softworks also has issued warrants to purchase 40,000 units to
members of Resch Polster Alpert & Berger LLP, special counsel to Pacific
Softworks in this offering, and warrants to purchase an additional 40,000 units
to two persons who have provided temporary accounting and administrative
services to Pacific Softworks. Each of these warrants to purchase units may be
exercised at any time over a period of 60 months commencing from the date of
this prospectus at a price of $5.25 per unit. These units are identical to the
units sold in this offering. Pacific Softworks is also registering these units
concurrently with this offering. The underwriter has required all holders of
these units to not sell, transfer or convey any shares of common stock or
warrants issued upon exercise of these warrants for 13 months after the date of
this prospectus except upon consent of the underwriter.
    

   
OPTIONS TO GOLENBERG & CO.
    

   
         In June 1998, Pacific Softworks agreed to issue options to Golenberg &
Co., merchant bankers, if Golenberg & Co. introduces Pacific Softworks to a
merger, acquisition or other transaction which is acceptable to Pacific
Softworks before June 1999. To date, Golenberg & Co. has not introduced Pacific
Softworks to any acceptable merger, acquisition or other transaction. These
options would allow Golenberg & Co. the right to purchase up to 10% of the then
outstanding capital stock of Pacific Softworks. If issued the options will be
exercisable for a period of five years commencing from June 1998 for a total
exercise price of $400,000. In April 1999 Golenberg & Co. notified us that it
was entitled to the options and that Golenberg & Co. would seek arbitration of
the dispute under the rules of the American Arbitration Association. We believe
there is no merit to the claims of Golenberg & Co. for these options.
    

                                  UNDERWRITING

   
         Subject to the terms and conditions of the underwriting agreement,
Spencer Edwards, Inc. has agreed to purchase 800,000 units from Pacific
Softworks. The underwriter will purchase the units at the price to public less
underwriting discounts set forth on the cover page of this prospectus.
    

   
         The underwriting agreement provides that the underwriter is committed
to purchase all units offered in this offering, other than those covered by the
over-allotment option described below, if the underwriter purchases any of these
securities.
    

   
         The underwriter has advised Pacific Softworks that the underwriter
proposes to offer the units directly to the public at the price to public set
forth on the cover page of this prospectus, and that it may allow to certain
dealers that are members of the National Association of Securities Dealers,
Inc., concessions not in excess of $__________. The price to public, concessions
and reallowance will not be charged until after the initial public offering is
completed. After the initial public distribution of the units is completed, the
shares of common stock and warrants will trade separately and their offering
prices may change as a result of market conditions. No change in these terms
will alter the amount of proceeds to be received by Pacific Softworks as set
forth on the cover page of this prospectus. The underwriter has also advised
Pacific Softworks that the underwriter does not intend to confirm sales to any
accounts over which it exercises discretionary authority.
    

   
         Pacific Softworks has agreed to pay the underwriter a nonaccountable
expense allowance of 3% of the aggregate public offering price of the units
offered, including units sold on exercise of the over-allotment option. Pacific
Softworks paid the underwriter $35,000 before the date of this prospectus as an
advance against this nonaccountable expense allowance. Pacific Softworks
    


                                      -54-

<PAGE>   60


   
has also agreed to pay all expenses in connection with qualifying the units for
sale under the laws of various states designated by the underwriter.
    

   
         Pacific Softworks has granted the underwriter an option, exercisable
for 45 days after the date of this prospectus, to purchase up to 120,000
additional units at the same price as the initial units offered. The underwriter
may purchase the units solely to cover over-allotments, if any, in connection
with the sale of the units offered in the offering. If the underwriter fully
exercises its over-allotment option, the total public offering price,
underwriting discounts and proceeds to Pacific Softworks will be $4,830,000,
$483,000 and $4,347,000, respectively.
    

   
         The underwriter may engage in over-allotment, stabilizing transactions
and covering transactions. Over-allotment involves sales in excess of the
offering size, which create a short position. Stabilizing transactions permit
bids to purchase the underlying security so long as the stabilizing bids do not
exceed a specified maximum. Covering transactions involve purchases of the
securities in the open market after the distribution has been completed in order
to cover short positions. These stabilizing transactions and covering
transactions may cause the price of the common stock or warrants to be higher
than they would otherwise be in the absence of these transactions.
    

   
         Neither Pacific Softworks nor the underwriter makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the common stock or
warrants. In addition, neither Pacific Softworks nor the underwriter makes any
representation that the underwriter will engage in these transactions or that
these transactions, once commenced, will not be discontinued without notice.
    

   
         Our officers, directors and stockholders have agreed not to offer, sell
or otherwise dispose of any shares of common stock or derivative securities of
Pacific Softworks for a period of 13 months after the date of this prospectus
without the prior written consent of the underwriter. The underwriter has agreed
that Pacific Softworks may file an S-8 registration statement 180 days after the
date of this prospectus registering common stock underlying outstanding options
and options to be granted under the equity incentive program. However, sales of
common stock so registered:
    

   
         -        may not exceed an aggregate of 25,000 shares until expiration
                  of the 13 month lockup arrangement, and
    

   
         -        may only be made by persons not serving as officers or
                  directors of Pacific Softworks.
    

   
The underwriter has no present intention to waive or shorten the period of the
lock-up arrangements.
    

   
Pacific Softworks will sell to the underwriter on completion of the offering,
for a total purchase price of $100, the underwriter's option for the purchase of
units entitling the underwriter or its assigns to purchase one unit for each 10
units sold to the public (excluding the units sold in the over-allotment
option). The underwriter's option will be exercisable on the date of this
prospectus and will expire five years from that date. For each warrant included
in the units underlying the underwriter's option, the underwriter will be able
to purchase one share of common stock at an exercise price of $7.50 per share
during the exercise period of these warrants. The rights and attributes of these
warrants issuable to the underwriter are identical to the warrants
    


                                      -55-

<PAGE>   61



   
included in the units sold in the offering. The exercise price of the
underwriter's option to purchase units is 120% of the public offering price or
$6.30 per unit.
    

   
         Pacific Softworks will set aside and at all times have available a
sufficient number of securities to be issued upon exercise of the underwriter's
option. The underwriter's option and underlying securities will be restricted
from sale, transfer, assignment or hypothecation for a period of one year after
the date of this prospectus, except to officers of the underwriter, selling
group members, and their officers, employees or partners. Thereafter, the
underwriter's option and underlying units will be transferable provided that
transfers are made in accordance with the provisions of the Securities Act.
Pacific Softworks has agreed, at the request of the underwriter, to register the
common stock included in the units and underlying the warrants included in the
units issuable upon exercise of the underwriter's option.
    

   
         For a period of three years from the date of this prospectus, the
underwriter has a preferential right to purchase for its account or to sell for
the account of Pacific Softworks (or any successors), or any subsidiaries of
Pacific Softworks, any securities with respect to which any of them may seek to
sell, publicly or privately, for cash other than transactions with a lending
institution.
    

   
         Pacific Softworks and the underwriter have entered into a non-exclusive
agreement which provides that, if the underwriter arranges for the purchase or
sale of substantially all of the assets of Pacific Softworks, or for a merger,
consolidation or acquisition accepted by Pacific Softworks during the five-year
period commencing on the date of this prospectus, the underwriter will receive a
fee based on a sliding scale ranging from 5% of the first $1 million of
consideration and decreasing to 3% of consideration in excess of $2 million.
    

   
         Pacific Softworks and the underwriter have entered into an agreement
which provides that for a period of three years from the date of this
prospectus, all public sales of our securities by officers, directors and
principal stockholders of Pacific Softworks at the time of this prospectus shall
be effected through or with the underwriter on an exclusive basis, provided that
the underwriter offers the best price reasonably available. In addition, for a
period of three years starting two years from the date of this prospectus, in
the case of private transactions in our common stock, these selling security
holders must offer the underwriter the exclusive opportunity to purchase or sell
the common stock on terms at least as favorable as the selling security holder
can obtain elsewhere.
    

   
         For a period of five years after the date of this prospectus, the
underwriter has the right to have an observer attend meetings of our board of
directors. This observer will be reimbursed for expenses incurred in attending
any meeting.
    

   
         Before this offering, there was no public market for our securities.
The public offering price of the units and the exercise price of the warrants
were determined by arms-length negotiation between Pacific Softworks and the
underwriter. There is no direct relation between the offering price of the units
and the assets, book value or net worth of Pacific Softworks. Among the factors
considered by Pacific Softworks and the underwriter in pricing the units and in
determining the exercise price of the warrants were the results of operations,
the current financial condition and future prospects of Pacific Softworks, the
experience of management, the amount of ownership to be retained by present
stockholders, the general condition of the economy and the securities markets
and the demand for securities of companies considered comparable to Pacific
Softworks.
    


   
                                      -56-
    

<PAGE>   62




   
         In connection with this offering, Pacific Softworks and the underwriter
have agreed to indemnify each other against certain liabilities, including
liabilities under the Securities Act, and if indemnification is unavailable or
insufficient, Pacific Softworks and the underwriter have agreed to damage
contribution arrangements based upon relative benefits received from this
offering and relative fault resulting in such damage.
    

   
                                  LEGAL MATTERS
    

   
         The validity of the securities offered hereby will be passed on for
Pacific Softworks by Resch Polster Alpert & Berger LLP, Los Angeles, California.
Members of Resch Polster Alpert & Berger LLP own warrants to acquire a total of
40,000 units. Certain legal matters in connection with the offering will be
passed on for the underwriter by Berliner Zisser Walter & Gallegos, P.C.,
Denver, Colorado.
    

                                     EXPERTS

         Merdinger, Fruchter, Rosen & Corso, P.C., independent auditors, have
audited the consolidated financial statements of Pacific Softworks for the years
ended December 31, 1996, 1997 and 1998, as set forth in their report, which is
included in this prospectus. Pacific Softworks consolidated financial statements
are included in this prospectus in reliance on their report, given on their
authority as experts in accounting and auditing.



   
                                      -57-
    

<PAGE>   63



                     PACIFIC SOFTWORKS, INC. AND SUBSIDIARY

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


   

<TABLE>
<CAPTION>
                                                                                     Page
                                                                                     ----
<S>                                                                                  <C>
Report of Merdinger, Fruchter, Rosen & Corso, P.C., Independent Auditors             F-1

Consolidated balance sheets as of December 31, 1997 and 1998 and March 31, 1999
     (Unaudited)                                                                     F-2

Consolidated statements of operations for the years ending December 31, 1996,
1997 and 1998 and the three months period ended March 31, 1998 and 1999
(Unaudited)                                                                          F-3

Consolidated statements of comprehensive income for the years ending
December 31, 1996, 1997 and 1998 and the three months ended March 31, 1998 and
1999 (Unaudited)                                                                     F-4

Consolidated statements of stockholders' equity.                                     F-5

Consolidated statements of cash flows for the years ending December 31, 1996,
1997 and 1998 and the three months ended March 31, 1998 and 1999
(Unaudited)                                                                          F-6

Notes to Consolidated Financial Statements                                           F-7

</TABLE>

    


   
                                      -58-
    


<PAGE>   64

                          INDEPENDENT AUDITORS' REPORT



TO THE BOARD OF DIRECTORS
PACIFIC SOFTWORKS, INC. AND SUBSIDIARY

We have audited the accompanying consolidated balance sheets of PACIFIC
SOFTWORKS, INC. AND SUBSIDIARY as of December 31, 1998 and 1997, and the related
consolidated statements of operations, comprehensive income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. 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 audits.

We conducted our audits 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 audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PACIFIC
SOFTWORKS, INC. AND SUBSIDIARY as of December 31, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.


                               MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
                               Certified Public Accountants



Los Angeles, California
January 29, 1999, except

for Note 14 as to which the
date is March 15, 1999



   
                                      F-1
    


<PAGE>   65

   
                     PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
    



   

<TABLE>
<CAPTION>
                                                                                        December 31,              March 31,
                                                                                      1997          1998            1999
                                                                                  -----------    -----------    -----------
                                                                                                               (Unaudited)
<S>                                                                                  <C>          <C>          <C>
ASSETS
Current assets
      Cash                                                                        $   624,952    $   224,031    $   460,907
      Accounts receivable, net of allowance for doubtful accounts of $36,400,
        $86,400 and $86,400                                                           337,690        268,902        442,091
      Related party receivable                                                             --         43,000             --
      Other receivable                                                                  2,125             --         25,000
      Prepaid expenses                                                                 36,112         15,523         15,523
                                                                                  -----------    -----------    -----------
           Total current assets                                                     1,000,879        551,456        943,521
                                                                                  -----------    -----------    -----------

Fixed assets, net of accumulated depreciation and amortization of $311,204,
   $348,761 and $362,221                                                               69,158         82,196         95,464
                                                                                  -----------    -----------    -----------

Other assets
      Trademark                                                                         1,034          1,188          1,188
      Security deposit                                                                     --          8,486          9,025
      Deferred offering costs                                                              --             --        281,541
                                                                                  -----------    -----------    -----------
                                                                                        1,034          9,674        291,754
                                                                                  -----------    -----------    -----------
           Total assets                                                           $ 1,071,071    $   643,326    $ 1,330,739
                                                                                  ===========    ===========    ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
      Accounts payable and accrued expenses                                       $   219,027    $   180,469    $   388,069
      Related party payable                                                                --        103,705             --
      Accrued taxes payable                                                            20,601         21,705          9,357
      Customer deposits                                                                    --         23,100             --
                                                                                  -----------    -----------    -----------
           Total current liabilities                                                  239,628        328,979        397,426
                                                                                  -----------    -----------    -----------

Deferred revenue                                                                      140,811        106,874        113,874
                                                                                  -----------    -----------    -----------

Commitments and contingencies                                                              --             --             --

Minority interest

Stockholders' equity
      Preferred stock, $.01 par value; 10,000,000 shares authorized, no shares
        issued and outstanding                                                             --             --             --
      Common stock, $.001 par value; 50,000,000 shares authorized, 3,200,000,
        3,200,000 and 3,300,000 shares issued and outstanding                           3,200          3,200          3,300
      Additional paid-in capital                                                      174,658        174,658        874,558
      Retained earnings (deficit)                                                     492,212         18,452        (41,013)
      Cumulative adjustment for currency translation                                   20,562         11,163        (17,406)
                                                                                  -----------    -----------    -----------
           Total stockholders' equity                                                 690,632        207,473        819,439
                                                                                  -----------    -----------    -----------

           Total liabilities and stockholders' equity                             $ 1,071,071    $   643,326    $ 1,330,739
                                                                                  ===========    ===========    ===========
</TABLE>

    



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


   
                                      F-2
    

<PAGE>   66

   
                     PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF OPERATIONS
    




   

<TABLE>
<CAPTION>
                                                           Years Ended December 31,               Three Months Ended March 31,
                                                      1996            1997           1998            1998            1999
                                                   -----------    -----------     -----------     -----------     -----------
                                                                                                          (Unaudited)
<S>                                                <C>            <C>             <C>             <C>             <C>
Net revenue:
      Sales                                        $ 3,123,893    $ 2,929,536     $ 2,479,589     $   679,092     $   713,059
      Royalties and other                              564,217        380,248         307,808          16,987          58,591
                                                   -----------    -----------     -----------     -----------     -----------
           Total                                     3,688,110      3,309,784       2,787,397         696,079         771,650
Cost of revenue -
      Purchases and royalty fees                        96,576        116,311         100,336          27,843          30,336
                                                   -----------    -----------     -----------     -----------     -----------
Gross profit                                         3,591,534      3,193,473       2,687,061         668,236         741,314
                                                   -----------    -----------     -----------     -----------     -----------

Expenses:
      Selling, general and administrative            2,257,560      2,110,038       1,936,117         386,447         380,815
      Research and development                         632,811        834,049         851,568         213,703         323,824
      Depreciation and amortization                     72,415         64,195          58,850          14,713          13,460
      Former officer's consulting and
        administrative expense                         235,714        314,286         314,286          82,680          82,680
                                                   -----------    -----------     -----------     -----------     -----------
           Total expenses                            3,198,500      3,322,568       3,160,821         697,543         800,779
                                                   -----------    -----------     -----------     -----------     -----------
Income (loss) before income taxes                      393,034       (129,095)       (473,760)        (29,307)        (59,465)
Income tax expense                                          --             --              --              --              --
                                                   -----------    -----------     -----------     -----------     -----------
Net income (loss)                                  $   393,034    $  (129,095)    $  (473,760)    $   (29,307)    $   (59,465)
                                                   ===========    ===========     ===========     ===========     ===========
Net income (loss) per share - Basic and diluted    $      0.12    $     (0.04)    $     (0.14)    $     (0.01)    $     (0.02)
                                                   ===========    ===========     ===========     ===========     ===========
Weighted average number of shares outstanding        3,340,000      3,340,000       3,340,000       3,340,000       3,378,888
                                                   ===========    ===========     ===========     ===========     ===========
</TABLE>

    



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




   
                                       F-3
    



<PAGE>   67

   
                     PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
    



   

<TABLE>
<CAPTION>
                                                                                            Three Months Ended
                                                  For the Years Ended December 31,              March 31,
                                                  1996          1997         1998           1998          1999
                                                ---------    ---------     ---------     ---------     ---------
                                                                                               (Unaudited)
<S>                                             <C>          <C>           <C>           <C>           <C>
Net income (loss)                               $ 393,034    $(129,095)    $(473,760)    $ (29,307)    $ (59,465)
Other comprehensive income (loss)
     Foreign currency translation adjustment       19,219       49,946        (9,399)      (39,979)      (28,569)
                                                ---------    ---------     ---------     ---------     ---------
Comprehensive income (loss)                     $ 412,253    $ (79,149)    $(483,159)    $ (69,286)    $ (88,034)
                                                =========    =========     =========     =========     =========
</TABLE>

    








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



   
                                      F-4
    

<PAGE>   68

                     PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY



   

<TABLE>
<CAPTION>
                                                                                                   Cumulative
                                                                                                     Foreign
                                            Common Stock             Additional                      Currency         Total
                                       -----------------------       Paid - in       Retained      Translation     Stockholders'
                                         Shares         Amount        Capital        Earnings       Adjustment        Equity
                                       ---------      ---------      ---------      ---------       ----------      -----------
<S>                                    <C>            <C>            <C>            <C>             <C>             <C>
Balance, January 1, 1996               3,200,000      $   3,200      $ 174,658      $ 228,273       $ (48,603)      $ 357,528
Foreign currency translation
 adjustment                                   --             --             --             --          19,219          19,219
Net income                                    --             --             --        393,034              --         393,034
                                       ---------      ---------      ---------      ---------       ---------       ---------
Balance, December 31, 1996             3,200,000          3,200        174,658        621,307         (29,384)        769,781
Foreign currency translation
  adjustment                                  --             --             --             --          49,946          49,946
Net loss                                      --             --             --       (129,095)             --        (129,095)
                                       ---------      ---------      ---------      ---------       ---------       ---------
Balance, December 31, 1997             3,200,000          3,200        174,658        492,212          20,562         690,632
Foreign currency translation
  adjustment                                  --             --             --             --          (9,399)         (9,399)
Net loss                                      --             --             --       (473,760)             --        (473,760)
                                       ---------      ---------      ---------      ---------       ---------       ---------
Balance, December 31, 1998             3,200,000          3,200        174,658         18,452          11,163         207,473
Private placement of common stock        100,000            100        499,900                                        500,000
Warrants issued in connection
  with offering                               --             --        200,000             --              --         200,000
Foreign currency translation
  adjustment                                  --             --             --             --         (28,569)        (28,569)
Net loss                                      --             --             --        (59,465)             --         (59,465)
                                       ---------      ---------      ---------      ---------       ---------       ---------
Balance, March 31, 1999                3,300,000      $   3,300      $ 874,558      $ (41,013)      $ (17,406)      $ 819,439
                                       =========      =========      =========      =========       =========       =========
</TABLE>

    



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






   
                                      F-5
    

<PAGE>   69

   
                     PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
    



   

<TABLE>
<CAPTION>
                                                                                                           Three Months Ended
                                                                  For the Years Ended December 31,             March 31,
                                                                 1996          1997          1998         1998          1999
                                                              ---------     ---------     ---------     ---------     ---------
                                                                                                              (Unaudited)
<S>                                                           <C>           <C>           <C>           <C>           <C>
Cash flows from operating activities:
      Net income (loss)                                       $ 393,034     $(129,095)    $(473,760)    $ (29,307)    $ (59,465)
      Adjustments to reconcile net income
      (loss) to net cash provided by operating activities:
           Depreciation and amortization                         72,415        64,195        58,850        14,713        13,460
           Bad debts                                                 --            --        50,000            --            --
      (Increase) decrease in assets:
           Accounts receivable                                 (247,081)      305,048        18,788      (148,758)     (173,189)
           Related party receivable                                  --            --       (43,000)           --        43,000
           Other receivables                                    (23,216)       22,152         2,125         2,125       (25,000)
           Prepaid expenses                                     (16,600)       10,990        20,589         5,512            --
           Deposits and trademark                                   458           392        (8,486)          (91)         (539)
      Increase (decrease) in liabilities:
           Accounts payable and accrued expenses                 87,710       (44,532)      (38,558)       32,014      (207,600)
           Related party payable                                     --            --         3,705            --        (3,705)
           Accrued taxes payable                                  1,867        13,771         1,104       (12,796)      (12,348)
           Customer deposits                                         --            --        23,100            --       (23,100)
           Deferred revenue                                      63,898        43,646       (33,937)           --         7,000
                                                              ---------     ---------     ---------     ---------     ---------
      Net cash provided by (used in) operating activities       332,485       286,567      (419,480)     (136,588)      (26,286)
                                                              ---------     ---------     ---------     ---------     ---------
Cash flows used for investing activities:
      Acquisition of fixed assets                               (14,493)      (19,903)      (71,888)       (6,421)      (27,982)
                                                              ---------     ---------     ---------     ---------     ---------
Cash flows from financing activities:
      Private placement of common stock                              --            --            --            --       500,000
      Acquisition of stock in subsidiary                         (5,743)       (5,555)       (5,500)       (5,500)           --
      Proceeds of borrowings                                         --            --       150,000            --            --
      Repayment of borrowings                                  (200,000)           --       (50,000)           --      (100,000)
      Deferred offering costs                                        --            --            --            --       (81,541)
                                                              ---------     ---------     ---------     ---------     ---------
      Net cash (used) provided by financing activities         (205,743)       (5,555)       94,500        (5,500)      318,459
                                                              ---------     ---------     ---------     ---------     ---------
Effect of exchange rate changes on cash                          25,114        55,501        (4,053)      (13,917)      (27,315)
                                                              ---------     ---------     ---------     ---------     ---------
Net increase (decrease) in cash                                 137,363       316,610      (400,921)     (162,426)      236,876
Cash - Beginning                                                170,979       308,342       624,952       624,952       224,031
                                                              ---------     ---------     ---------     ---------     ---------
Cash - Ending                                                 $ 308,342     $ 624,952     $ 224,031     $ 462,526     $ 460,907
                                                              =========     =========     =========     =========     =========
Supplemental cash flow information:
      Cash paid during the year for -
      Interest                                                $      42     $      --     $     482     $      --     $      --
                                                              =========     =========     =========     =========     =========
Supplemental non-cash financing activities:
       During the period ended March 31, 1999, warrants
       valued at $200,000 were issued in connection with the
       public offering.
</TABLE>

    



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



   
                                      F-6
    

<PAGE>   70

                     PACIFIC SOFTWORKS, INC. AND SUBSIDIARY

                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1998



NOTE 1 -        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



                Nature of Operations

                Pacific Softworks, Inc., incorporated in California in November
                1992, develops and licenses Internet and Web related software
                and software development tools. Its products enable Internet and
                Web based communications, based on a set of rules known as
                protocols, and are embedded into systems and "information
                appliances" developed or manufactured by others. Information
                appliances are Internet connected versions of everyday products
                such as telephones, televisions, fax machines and other
                digitally based devices. Its operations are conducted
                principally from its offices in Southern California, and it
                maintains sales offices in England and Japan.


                Basis of Consolidation

                The consolidated financial statements include the accounts of
                Pacific Softworks, Inc. ("PSI") and its wholly owned subsidiary,
                Network Research Corp. Japan, Ltd. ("NRC"). Accordingly, all
                references herein to PSI or the "Company" include the
                consolidated results of its subsidiary. All significant
                intercompany accounts and transactions have been eliminated in
                consolidation.

   
                In January of 1998, PSI purchased the remaining 21% of NRC stock
                held by a third party, to increase its holdings to 100%. The
                purchase price was $5,000. The acquisition has been accounted
                for as a purchase.
    

                All of NRC's operations and assets are located in the country of
                Japan.


                Cash and Cash Equivalents

                The Company considers all highly liquid investments purchased
                with original maturities of three months or less to be cash
                equivalents.


                Revenue Recognition

   
                The Company is engaged primarily as a developer and licensor of
                software and generates revenue primarily from the one-time sales
                of licensed software. Generally, revenue is recognized upon
                shipment of the licensed software. For multiple element license
                arrangements, the license fee is allocated to the various
                elements based on fair value. When a multiple element
                arrangement includes rights to a post-contract customer support,
                the portion of the license fee allocated to each function is
                recognized ratably over the term of the arrangement.
    


                Use of Estimates

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




   
                                      F-7
    

<PAGE>   71

                     PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1998



NOTE 1 -        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


                Depreciation and Amortization

                Furniture, fixtures and equipment are stated at cost and
                depreciated using both the straight-line and double declining
                balance methods over their estimated useful lives, generally
                five to seven years. Purchased computer software costs have been
                amortized over five years.

                The costs of maintenance and repairs are charged to expense when
                incurred; costs of renewals and betterments are capitalized.
                Upon the sales or retirement of property and equipment, the cost
                and related accumulated depreciation are eliminated from the
                respective accounts and the resulting gain or loss is included
                in operations.


                Fair Value of Financial Instruments

                The Company's financial instruments consist of cash, accounts
                receivable, accounts payable and short-term debt. The carrying
                amounts of cash, accounts receivable, accounts payable and
                short-term debt approximate fair value due to highly liquid
                nature of these short-term instruments.


                Long-Lived Assets

                Long-lived assets to be held and used are reviewed for
                impairment whenever events or changes in circumstances indicate
                that the related carrying amount may not be recoverable. When
                required, impairment losses on assets to be held and used are
                recognized based on the fair value of the assets and long-lived
                assets to be disposed of are reported at the lower of carrying
                amount of fair value less cost to sell.


                Income Taxes

                The Company has been a subchapter S corporation. Income is
                passed through to the stockholders who pay personally their
                share of the applicable taxes. Therefore, no provision for
                income taxes is made at December 31, 1996, 1997 and 1998. (See
                Note 14).

   
                Subsequent to the termination of the Company's S Corporation
                election, provisions for income taxes are based on taxes payable
                or refundable for the current year and deferred taxes on
                temporary differences between the amount of taxable income and
                pretax financial income and between the tax bases of assets and
                liabilities and their reported amounts in the financial
                statements. Deferred tax assets and liabilities are included in
                the financial statements at currently enacted income tax rates
                applicable to the period in which the deferred tax assets and
                liabilities are expected to be realized or settled as prescribed
                SFAS No. 109, "Accounting for Income Taxes." As changes in tax
                laws or rates are enacted, deferred tax assets and liabilities
                are adjusted through the provision for income taxes.
    


                Translation of Foreign Currency

                The Company translates the foreign currency financial statements
                of its foreign subsidiary in accordance with the requirements of
                Statement of Financial Accounting Standards No. 52, "Foreign
                Currency Translation". Assets and liabilities are translated at
                current exchange rates and related revenues and expenses are
                translated at average exchange rates in effect during the
                period. Resulting translation adjustments are recorded as a
                separate component in stockholders' equity. Foreign currency
                transaction gains and losses are included in determining net
                income.


                Concentration of Credit Risk

                The Company places its cash in what it believes to be
                credit-worthy financial institutions. However, cash balances may
                exceed FDIC insured levels at various times during the year.





   
                                      F-8
    

<PAGE>   72

   
                     PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
                          NOTES TO FINANCIAL STATEMENTS
    



NOTE 1 -          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


                Advertising Costs

                Advertising costs, except for costs associated with
                direct-response advertising, are charged to operations when
                incurred. The costs of direct-response advertising, if any, are
                capitalized and amortized over the period during which future
                benefits are expected to be received.


                Per Share of Common Stock

                In February 1997, the Financial Accounting Standards Board
                issued a new statement titled "Earnings Per Share" (SFAS No.
                128). This statement is effective for both interim and annual
                periods ending after December 15, 1997 and specifies the
                computation, presentation, and disclosure requirements for
                earnings per share for entities with publicly held common stock
                or potential common stock. All prior-period earnings per share
                data presented has been restated to conform with the provisions
                for SFAS No. 128.

                Per share amounts have been computed based on the average number
                of shares of common stock outstanding during each period. In
                connection with the Company's proposed initial public offering
                ("IPO"), stock options issued for consideration below the IPO
                per share price during the twelve months before the filing of
                the registration statement are considered to be similar to a
                stock dividend or stock split and have been included in the
                calculation of shares of common stock outstanding for all
                periods presented.


                Stock Based Compensation

                The Company uses the intrinsic value method of accounting for
                stock-based compensation in accordance with Accounting
                Principles Board Opinion No. 25. See Note 10 for proforma
                disclosure of net income and earnings per share under the fair
                value method of accounting for stock-based compensation as
                proscribed by Financial Accounting Standards Board Statement of
                Financial Accounting Standards No. 123.


                Comprehensive Income

                In June 1997, the Financial Accounting Standards Board issued a
                new statement titled "Reporting Comprehensive Income" (SFAS No.
                130). This statement is effective for both interim and annual
                periods beginning after December 15, 1997. This statement uses
                the term "comprehensive income" to describe the total of all
                components of comprehensive income, including net income. This
                statement uses the term "other comprehensive net income" to
                refer to revenues, expenses, gains or losses that under
                generally accepted accounting principles are included in
                comprehensive income, but excluded from net income.


   
                Interim Financial Information
    

   
                The unaudited financial information furnished herein reflects
                all adjustments, consisting only of normal recurring
                adjustments, which, in the opinion of management, are necessary
                to fairly state the Company's financial position, the results of
                its operations and cash flows for the periods presented. The
                results of operations for the three months ended March 31, 1999
                are not necessarily indicative of results for the entire fiscal
                year ending December 31, 1999.
    





                                      F-9

<PAGE>   73

   
                     PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
                          NOTES TO FINANCIAL STATEMENTS
    



NOTE 2 -        FIXED ASSETS

   
                Fixed assets consist of the following:
    



   

<TABLE>
<CAPTION>
                                                             December 31,                             March 31,
                                               ----------------------------------------        ------------------------
                                                 1996            1997            1998            1998            1999
                                               --------        --------        --------        --------        --------
<S>                                            <C>             <C>             <C>              <C>             <C>
Furniture, fixtures and equipment              $124,764        $144,533        $216,421         150,954         243,149
Computer software                               235,829         235,829         214,536         235,829         214,536
                                               --------        --------        --------        --------        --------
                                                360,593         380,362         430,957         386,783         457,685

Less: accumulated depreciation and
 amortization                                   247,143         311,204         348,761         325,917         362,221
                                               --------        --------        --------        --------        --------

Fixed assets - net                             $113,450        $ 69,158        $ 82,196          60,866          95,464
                                               ========        ========        ========        ========        ========

Depreciation expense recorded in
 the statement of operations                   $ 25,647        $ 19,348        $ 30,243        $  7,563        $ 13,460
                                               ========        ========        ========        ========        ========

Unamortized computer software costs            $ 71,514        $ 28,607        $     --        $ 21,457        $     --
                                               ========        ========        ========        ========        ========

Amortization of computer software costs        $ 46,768        $ 42,907        $ 28,607        $  7,150        $     --
                                               ========        ========        ========        ========        ========
</TABLE>

    


NOTE 3 -        DEFERRED REVENUE

                The Company provides technical support for its products, usually
                over a twelve-month term. Revenue is recognized as earned on a
                straight-line basis

NOTE 4 -        RELATED PARTY TRANSACTIONS

                a) As of December 31, 1998, the Company has advanced funds to
                its principal stockholder in the amount of $43,000. The advances
                bear no interest and are repayable upon demand. (See Note 14).

                b) As of December 31, 1998, the Company has received advances
                from a company controlled by the spouse of the principal
                stockholder of PSI. The advances totaled $103,705. The advances
                bear no interest and are repayable upon demand. (See Note 14).

                c) The company mentioned in item (b) above also occupies space
                in premises leased by PSI. The Company believes that the terms
                of occupancy are no less favorable than those that could be
                obtained from unaffiliated third parties. This party is expected
                to relocate during the first half of 1999.

                d) The principal stockholder of the Company has personally
                guaranteed any advances made to the Company pursuant to a line
                of credit provided by Bank of America. Total availability under
                the line is $250,000. No advances were outstanding as of
                December 31, 1998.





   
                                      F-10
    

<PAGE>   74

                     PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1998



NOTE 5 -        CAPITAL STOCK

        a)      The Company is authorized to issue 10,000,000 shares of
                Preferred Stock, par value $.01. Preferred shares may be issued
                from time to time in one or more series. The number of shares in
                each series and the designation of each series to be issued
                shall be determined from time to time by the board of directors
                of the Company.

        b)      On January 30, 1998, the Company increased the number of shares
                of common stock it is authorized to issue from 1,000,000 shares
                to 50,000,000 shares. In June of 1998, the Company effected a
                stock split and subsequently effected a reverse stock split. The
                net result of these two stock transactions was an effective
                6.27205 shares for one stock split, increasing the outstanding
                shares from 510,200 to 3,200,000.

   
                All references in the accompanying financial statements to the
                number of shares of common stock and per-share amounts for 1996,
                1997,1998 and 1999 have been restated to reflect the effective
                stock split.
    

NOTE 6 -        STOCK PLAN

                On April 17, 1998, the Company adopted the 1998 Equity Incentive
                Program (the "Plan"). The Plan provides for the granting of the
                following Stock Awards: (i) Incentive Stock Options, (ii)
                Non-Statutory Stock Options, (iii) Stock Appreciation Rights,
                (iv) Stock Bonuses, and (v) Rights to acquire Restricted Stock.
                Persons eligible to receive Stock Awards are the employees,
                directors and consultants of the Company and its Affiliates, as
                defined. Incentive Stock Options may be granted only to
                employees. Stock awards other than Incentive Stock Options may
                be granted to all eligible persons.

                The maximum term of any options granted is ten years. Vesting
                requirements may vary, and will be determined by the board of
                directors.

                The number of shares reserved for issuance under the Plan is
                320,000 shares. (See Note 10).

NOTE 7 -        ADVERTISING COSTS

   
                Advertising costs incurred and recorded as expense in the
                statement of operations were $222,051, $263,912 and $213,670 for
                the years ended December 31, 1996, 1997 and 1998, respectively,
                and were $59,259 and $43,999 for the three months ended March
                31, 1998 and 1999, respectively.
    

NOTE 8 -        INTEREST COSTS

                Interest costs incurred were $42, ($43) and $6,004 in 1996, 1997
                and 1998, respectively, all of which were charged to operations.





   
                                      F-11
    

<PAGE>   75

                     PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1998



NOTE 9 -        INCOME TAXES AND S CORPORATION STOCKHOLDER DISTRIBUTIONS


        a)      S Corporation Election

   
                Effective January 1, 1995, the Company, with the consent of its
                stockholders, elected under the Internal Revenue Code to be an S
                corporation. For 1996, 1997 and 1998, the stockholders of the
                Company were taxed on their proportional share of the
                corporation's taxable income, or deducted personally any
                corporate losses. Therefore, no provision or liability or
                carry-forward loss for federal income taxes has been included in
                these financial statements.
    


        b)      Distributions

                The Company has paid no distributions to its stockholders.


        c)      Tax Provision

                As a result of the Company's tax status as an S Corporation,
                operating results as presented in the accompanying consolidated
                financial statements do not include a provision for income taxes
                for the years ended December 31, 1996, 1997 and 1998.


        d)      Proforma Income Taxes

                Proforma income taxes (benefit), assuming that the Company had
                not been an S Corporation in each of the periods presented, are
                as follows:

   

<TABLE>
<CAPTION>
                                  1996             1997              1998
                               ---------        ---------         ---------
<S>                            <C>              <C>               <C>
                Federal        $  90,410        $   3,100         $ (93,510)
                State             28,174            2,500           (30,674)
                               ---------        ---------         ---------
                               $ 118,584        $   5,600         $(124,184)
                               =========        =========         =========
</TABLE>

    


NOTE 10 -       STOCK OPTIONS

        a)      The Company has granted certain non-statutory options to
                purchase shares of Common Stock to two employees. Each option is
                for 70,000 shares at an exercise price of $1.25 per share. The
                options vest on January 1, 1999 and expire June 25, 2008.

   
        b)      In 1999, the company granted certain non-statutory option to
                purchase shares of Common Stock to three directors. Each option
                is for 15,000 shares at an exercise price of $5.00 per share.
                The options vest immediately and expire in 2008.
    

   
        c)      Plan and non-plan stock option activity is summarized as
                follows:
    


   

<TABLE>
<CAPTION>
                                                                                   December 31,                          March 31,
                                                               -------------------------------------------------        -----------
                                                                   1996               1997              1998               1999
                                                               -----------        -----------        -----------        -----------
<S>                                                           <C>                 <C>                <C>                <C>
                Outstanding at beginning of period                      --                 --                 --            140,000
                Options granted at an exercise price of
                 $5.00 per share                                        --                 --                 --             45,000
                Options granted at an exercise price of
                 $1.25 per share                                        --                 --            140,000                 --
                                                               -----------        -----------        -----------        -----------
                Outstanding at end of period                            --                 --            140,000            185,000
                                                               ===========        ===========        ===========        ===========
                Exercisable at end of period                            --                 --                 --            185,000
                                                               ===========        ===========        ===========        ===========
                Weighted average exercise price of
                 options outstanding                           $        --        $        --        $      1.25        $      2.16
                                                               ===========        ===========        ===========        ===========
                Weighted average remaining contractual
                 life of options outstanding                            --                 --        9 1/2 years        9 1/2 years
</TABLE>

    






   
                                      F-12
    

<PAGE>   76

                     PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1998



NOTE 10 -       STOCK OPTIONS (continued)

   
                The Company accounts for its stock option transactions under the
                provisions of APB No. 25. The following proforma information is
                based on estimating the fair value of grants based upon the
                provisions of SFAS No. 123. The fair value of each option
                granted during the period ended December 31, 1998 has been
                estimated as of the date of grant using the Black-Scholes option
                pricing model with the following assumptions: risk free interest
                rate of 5.5%, life of options of 10 years, and expected dividend
                yield of 0%. The fair value of each option granted during the
                period ended March 31, 1999 has been estimated with the
                following assumptions: risk free interest rate of 5.5%, life of
                options of 10 years and expected dividend yield of 0%. Under
                these assumptions, the weighted average fair value of options
                granted during the periods ending December 31, 1998 and March
                31, 1999 was $0.52 and $2.09, respectively. Accordingly, the
                Company's proforma net loss and net loss per share assuming
                compensation cost was determined under SFAS No. 123 would have
                been the following:
    


   

<TABLE>
<CAPTION>
                                                 Year Ended             Three Months Ended
                                              December 31, 1998           March  31, 1999
                                              -----------------         ------------------
<S>                                              <C>                        <C>
                Net Loss                         $  (546,560)               $   (67,298)
                Net Loss Per Share               $     (0.16)               $     (0.02)
</TABLE>

    


NOTE 11 -       SEGMENTED INFORMATION

                The Company's assets are located principally in the United
                States. Product sales are to the following geographic areas:


   

<TABLE>
<CAPTION>
                                                                      Years Ended                     Three Months Ended
                                                                      December 31,                         March 31,
                                                            --------------------------------          ------------------
                                                            1996          1997          1998          1998          1999
                                                            ----          ----          ----          ----          ----
<S>                                                         <C>           <C>           <C>           <C>           <C>
                    United States and the Americas           50%           50%           43%           59%           44%
                    Europe and the United Kingdom            17%           35%           40%           38%           42%
                    Asia and Australia                       27%           15%           17%            3%           14%
</TABLE>

    

NOTE 12 -       EARNINGS PER SHARE

                Stock options issued with an exercise price below the IPO
                purchase price during the twelve months before the filing of the
                registration statement have been included in the calculation of
                shares of common stock outstanding as if they had been
                outstanding for all periods presented. The amount of such shares
                included in earnings per share calculations totals 140,000.


NOTE 13 -       COMMITMENTS AND CONTINGENCIES

   
        a)      The Company occupies facilities under terms of an operating
                lease expiring September 15, 2000. Rent expense included in the
                statement of operations totaled $30,000, $56,100 and $106,592 in
                1996, 1997 and 1998, respectively and $823 and $27,676 for the
                three months ended March 31, 1998 and 1999, respectively. The
                Company leases an auto under term of an operating lease expiring
                August 31, 1999. Auto lease expense included in the statement of
                operations totaled $0, $5,171 and $15,513 in 1996, 1997 and
                1998, respectively and $0 and $3,878 for the three months ended
                March 31, 1998 and 1999, respectively.
    





   
                                      F-13
    

<PAGE>   77

                     PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1998



NOTE 13 -       COMMITMENTS AND CONTINGENCIES

                Future minimum lease payments are as follows:



<TABLE>
<S>                               <C>
                    1999           $114,894
                    2000             76,608
</TABLE>



        b)      The Company maintains a revolving line of credit arrangement
                with Bank of America. The credit limit under the arrangement is
                $250,000. Advances, when drawn upon, bear interest at the Bank's
                Reference Rate plus two percent (9.75% at December 31, 1998).
                Advances are collateralized by the Company's accounts receivable
                and inventory and are secured by the personal guaranty of the
                Company's principal stockholder.

                No advances were outstanding under the line at December 31,
                1998.

        c)      The Company is obligated to a former officer and 49% stockholder
                for a consulting agreement, covenant not to compete and buy-out
                of an employment agreement (collectively, the "Agreement"). The
                obligation provides for a monthly payment of $26,190.49 over a
                42 month period. At December 31, 1998, nine payments remain. In
                addition to these payments, the Agreement requires that so long
                as the Company has not paid in full all obligations under the
                Agreement, it is restricted from making any distributions to
                stockholders, other than necessary for any tax liability
                resulting from corporate earnings; is prohibited from issuing
                securities; is prohibited from paying executive compensation in
                excess of certain levels; and accelerates payment of obligations
                under the Agreement if certain corporate income levels are not
                met. The obligations under the Agreement are secured by
                substantially all of the outstanding shares of common stock of
                the Company and all assets of the Company.

                The former officer and stockholder has given his consent to the
                sale of common stock described in Note 14(c).

        d)      In June 1998, the Company agreed, subject to the conditions
                described below, to issue options to a consultant equal in
                number to 10% of the Company's then outstanding capital stock.
                These options will be issued if the consultant introduces the
                Company to a merger, acquisition or other transaction which is
                acceptable to the Company before June 1999. To date, the
                consultant has not introduced any such transaction to the
                Company. If issued, the options will be exercisable for a period
                of five years commencing from June 1998 at an exercise price of
                $1.20 per share.



   
                                      F-14
    

<PAGE>   78

                     PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1998



NOTE 14 -       SUBSEQUENT EVENTS

        a)      Subsequent to December 31, 1998, the Company paid in full the
                liability to the related party described in Note 4(b).

        b)      Subsequent to December 31, 1998, the related party receivable
                described in Note 4(a) was repaid.

        c)      In February 1999 the Company sold 100,000 units to a single
                accredited investor at a price of $5.00 per unit for total
                proceeds of $500,000. Each unit consisted of one share of common
                stock and one common stock purchase warrant entitling the holder
                thereof to purchase one share of common stock for two years at
                an exercise price of $6.00 per share.

        d)      As a result of the sale of common stock described in item (c)
                above, the Company's S Corporation election has been terminated
                as of February 14, 1999.

        e)      In February 1999, the Company entered into a letter of intent
                with an underwriter in connection with a proposed initial public
                offering of the Company's securities. The letter of intent
                relates to the proposed sale by the Company of 800,000 units.
                Each unit will consist of one share of common stock and one
                warrant. Each warrant will entitle the holder to purchase one
                share of common stock at an exercise price of $7.50 for a period
                of two years commencing from the initial issuance. Under the
                letter of intent, the underwriters will also be granted the
                right to purchase up to an additional 120,000 units for the sole
                purpose of covering over-allotments. It is expected that the
                units will be offered to the public at an offering price of
                $5.25 per unit.

   
        f)      Warrants to purchase 80,000 units have been issued to certain
                professionals who have rendered legal, temporary accounting and
                administrative services to the Company. Each of these warrants
                to purchase units may be exercised at any time over a period of
                60 months commencing from the date of the Company's prospectus
                at a price of $5.25 per unit. These units are identical to the
                units to be sold by the Company in the proposed IPO. The
                warrants have been valued at $200,000.
    

        g)      Upon completion of the IPO, the Company will issue to the
                representative of the underwriters options to purchase one unit
                for each 10 units sold to the public. The options will be
                exercisable commencing one year from the effective date of the
                registration statement and for a period of four years
                thereafter. The exercise price of the option is $6.30 per unit.







   
                                      F-15
    

<PAGE>   79

                                  800,000 Units


                             Pacific Softworks, Inc.


                                 [Company Logo]


   
                                 Consisting of


                         800,000 shares of common stock


                                      and
    
   
                               800,000 warrants.
    


                              Spencer Edwards, Inc.


                                  May  , 1999


   
- --------------------------------------------------------------------------------
                                   PROSPECTUS
- --------------------------------------------------------------------------------
    


   
Until _____, 1999 (25 days after the date of this prospectus), all dealers
effecting transactions in the units, common stock and warrants, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the obligations of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
    






<PAGE>   80

The information in this preliminary prospectus is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission or any applicable state securities
commission becomes effective. This preliminary prospectus is not an offer to
sell these securities and is not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.


   
PROSPECTUS                             Subject to Completion, Dated May __,1999
    


                         [PACIFIC SOFTWORKS, INC. LOGO]


                                  80,000 UNITS
                 CONSISTING OF 80,000 SHARES OF COMMON STOCK AND
                                 80,000 WARRANTS
                                       AND
                                 200,000 SHARES


   
           The security holders named in this prospectus may sell for their
accounts up to 80,000 units and 200,000 shares of common stock of Pacific
Softworks. Each unit consists of one share of common stock and one warrant. The
common stock and warrants will trade separately.
    

   
           Each warrant allows its holder to purchase for a period of 24 months
one share of common stock at a price of $7.50. Pacific Softworks reserves the
right to redeem all outstanding warrants at $0.05 per warrant if the closing bid
price of our common stock equals or exceeds $8.00 per share for 15 consecutive
trading days.
    

   
           The securities described in this prospectus are not being sold by any
underwriter. Pacific Softworks will not receive any proceeds from the sale of
these securities.
    

   
           Pacific Softworks expects to list the common stock and warrants on
the Nasdaq SmallCap Market under the symbols "PASW" and "PASWW."
    

   
           INVESTING IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" BEGINNING ON PAGE 6
    

           NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED
UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.



   
                  The date of this prospectus is May ___, 1999
    







   
                                      SS-1
    

<PAGE>   81

                SALE OF SECURITIES DESCRIBED IN THIS PROSPECTUS.



   
           The sale of the securities described in this prospectus may be made
from time to time in transactions, which may include block transactions by or
for the account of the holders, in the over-the-counter market or in negotiated
transactions through a combination of these methods of sale or otherwise. Sales
may be made at fixed prices which may be changed, at market prices prevailing at
the time of sale, or at negotiated prices.
    

   
           A post-effective amendment to the registration statement that
includes this prospectus must be filed and declared effective by the Securities
and Exchange Commission before a holder may:
    

   
           -     sell any securities described in this prospectus according to
                 the terms of this prospectus either at a fixed price or a
                 negotiated price, either of which is not the prevailing market
                 price,
    

   
           -     sell securities described in this prospectus in a block
                 transaction to a purchaser who resells,
    

   
           -     pays compensation to a broker-dealer that is other than the
                 usual and customary discounts, concessions or commissions, or
    

   
           -     makes any arrangements, either individually or in the
                 aggregate, that would constitute a distribution of the
                 securities described in this prospectus.
    

   
           Information contained in this prospectus, except for the cover page,
the back cover page and the information under the heading "Selling Security
Holders", is a part of that separate prospectus relating to a concurrent initial
public offering by Pacific Softworks. This prospectus contains information,
including all information relating to the concurrent underwritten offering and
the underwriter, that may not be pertinent to the sale of the securities offered
in this prospectus by the holders.
    

   
           The securities described in this prospectus may be sold by the
holders or their transferees starting on the date of this prospectus. The
holders have agreed with Spencer Edwards, Inc. not to sell any of their
securities for a period of 13 months from the date of this prospectus without
the prior written consent of the underwriter. Sales of these securities may
depress the price of the common stock and the warrants in any market that may
develop for these securities.
    





   
                                      SS-2
    

<PAGE>   82

                            SELLING SECURITY HOLDERS



   
           This prospectus relates to the sale of 80,000 units and 200,000
shares of common stock of Pacific Softworks by the security holders names below.
Each unit consists of one share of common stock and one warrant. Each warrant
entitles the holder to buy one share of common stock at a price of $7.50 per
share for a period of 24 months starting from the date of this prospectus.
Pacific Softworks will not receive any of the proceeds of the sale of the
securities by the selling security holders. Pacific Softworks will receive
$420,000 upon exercise of all the warrants to purchase units.
    

   
           The following tables set forth information regarding the units and
shares of common stock owned beneficially as of May ___, 1999 by each selling
security holder. The selling security holders are not required, and may choose
not, to sell any of their units or shares of common stock. The selling security
holders have agreed with Spencer Edwards, Inc. not to sell any of their
securities for a period of 13 months from the date of this prospectus without
the prior written consent of the underwriter. None of the selling security
holders is an officer, director or other affiliate of Pacific Softworks.
    



   

<TABLE>
<CAPTION>
                                                         UNITS OWNED PRIOR TO      UNITS BEING          UNITS AFTER
                    NAME OF SELLING UNIT HOLDER               OFFERING               OFFERED              OFFERING
                    ---------------------------          --------------------      -----------          -----------
<S>                                                          <C>                      <C>                   <C>
                    Randall M. Gates                           27,500                  27,500                 --
                    Georgette W. Pagano                        12,500                  12,500                 --
                    Aaron A. Grunfeld                          25,000                  25,000                 --
                    Ronald M. Resch                             2,500                   2,500                 --
                    Lee M. Polster                              2,500                   2,500                 --
                    Peter H. Alpert                             2,500                   2,500                 --
                    Sheldon P. Berger                           2,500                   2,500                 --
                    David Gitman                                2,500                   2,500                 --
                    Nicolas Ramniceanu                          2,500                   2,500                 --
                                                               ------                  ------
                                 Total                         80,000                  80,000                 --
                                                               ======                  ======
</TABLE>

    



   

<TABLE>
<CAPTION>
                                                         SHARES OWNED PRIOR TO         SHARES BEING          SHARES AFTER
                    NAME OF SELLING STOCKHOLDER                OFFERING                   OFFERED              OFFERING
                    ----------------------------         ---------------------         ------------          ------------
<S>                                                            <C>                        <C>
                    John P. McGrain                            140,000                    140,000                  --
                    Georgette W. Pagano                         60,000                     60,000                  --
                                                               -------                    -------
                               Total                           200,000                    200,000                  --
                                                               =======                    =======
</TABLE>

    



   
                              PLAN OF DISTRIBUTION
    

   
           No underwriting arrangements exist as of the date of this prospectus
for the selling security holders to sell their securities. Upon being advised of
any underwriting arrangements that may be entered into by a selling security
holder after the date of this prospectus, Pacific Softworks will prepare a
supplement to this prospectus to disclose those arrangements. We anticipate that
the selling price for the common stock and warrants will be at or between the
"bid" and "asked" prices for these securities, as quoted in the over-the-counter
market immediately preceding the sale.
    

   
           To the extent that the selling security holders intend to sell their
securities directly, through agents, dealers, or Spencer Edwards, Inc., in the
over-the-counter market or otherwise, on terms and conditions that they
determine at the time of sale or that they determine in private negotiations
    




   
                                      SS-3
    



<PAGE>   83

   
between buyer and seller, their sales of the shares of common stock and warrants
may be made in accordance with this prospectus and under the provisions of Rule
144 adopted under the Securities Act.
    
















   
                                      SS-4
    

<PAGE>   84

 
                                    PART II
                     INFORMATION NOT REQUIRED IN PROSPECTUS



ITEM 24.  INDEMNIFICATION OF DIRECTORS AND OFFICERS

   
           Section 316 of the California General Corporation Law authorizes a
court to award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933.
Article III Section 16 of the registrant's Bylaws provides for mandatory
indemnification of its directors and officers and permissible indemnification of
employees and other agents to the maximum extent permitted by the California
General Corporation Law. The registrant's articles of incorporation provides
that, pursuant to California law, its directors shall not be liable for monetary
damages for breach of the directors' fiduciary duty as directors to the company
and its stockholders. This provision in the articles of incorporation does not
eliminate the directors' fiduciary duty, and in appropriate circumstances
equitable remedies such as injunctive or other forms of non-monetary relief will
remain available under California law. In addition, each director will continue
to be subject to liability for breach of the director's duty of loyalty to
Pacific Softworks for acts or omissions not in good faith or involving
intentional misconduct, for knowing violations of law, for actions leading to
improper personal benefit to the director, and for payment of dividends or
approval of stock repurchases or redemptions that are unlawful under California
law. The provision also does not affect a director's responsibilities under any
other law, such as the federal securities laws or state or federal environmental
laws. Pacific Softworks has entered into Indemnification Agreements with its
officers and directors, a form of which is attached as Exhibit 10.1 hereto and
incorporated herein by reference. The Indemnification Agreements provide the
registrant's officers and directors with further indemnification to the maximum
extent permitted by the California General Corporation Law. Reference is made to
the Underwriting Agreement contained in Exhibit 1.1 hereto, which contains
provisions indemnifying officers and directors of the registrant against certain
liabilities.
    

ITEM 25.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

   
           The following table sets forth the costs and expenses, other than
underwriting discounts, payable by Pacific Softworks in connection with the sale
of units being registered. All amounts are estimates except the SEC registration
fee, the NASD filing fee and the Nasdaq SmallCap Market listing fee.
    


   

<TABLE>
<S>                                                            <C>
         SEC Registration fee ...............................  $  4,144
         NASD fee ...........................................     1,991
         Nasdaq SmallCap Market listing fee..................    10,000
         Printing and engraving expenses* ...................    30,000
         Legal fees and expenses* ...........................    60,000
         Accounting fees and expenses* ......................    40,000
         Blue sky fees and expenses* ........................    20,000
         Transfer agent fees ................................     1,825
         Miscellaneous fees and expenses* ...................     8,500
                                                               --------
         Total ..............................................  $176,460
                                                               ========
</TABLE>

    

         *Estimated



                                      II-1

<PAGE>   85


ITEM 26.  RECENT SALES OF UNREGISTERED SECURITIES

   
           The following information relates to all securities sold within the
past three years which were not registered under the Securities Act of 1933.
    

   
           In February 1999 Pacific Softworks sold 100,000 units to a single
accredited investor at a price of $5.00 per unit for total proceeds of $500,000.
Each unit consisted of one share of common stock and one common stock purchase
warrant entitling the holder of the warrant to purchase one share of common
stock for two years at an exercise price of $6.00 per share.
    

   
           In February 1999 Pacific Softworks also sold and issued warrants to
purchase 40,000 units to members of Resch Polster Alpert & Berger LLP, special
counsel to Pacific Softworks in this offering, and warrants to purchase an
additional 40,000 units to two persons who have provided temporary accounting
and administrative services to Pacific Softworks. Each of these warrants to
purchase units may be exercised at any time over a period of 60 months
commencing from the date of this prospectus at a price of $5.25. The units
issuable upon exercise of these warrants are identical to the units sold in this
offering.
    

           Pacific Softworks issued these securities in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act. The
recipients of securities in these transactions represented their intention to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof. The certificates evidencing the shares
and warrants bear restrictive legends indicating that the shares and warrants
were not registered under the Securities Act. No underwriter was involved in any
of these transactions.

ITEM 27.  EXHIBITS

(a) Exhibits


   

<TABLE>
<CAPTION>
Exhibit No.                                 Description
- -----------                                 -----------
<S>             <C>
   1.1           Form of Underwriting Agreement

   1.3           Form of Selected Dealers Agreement

   3.1           Articles of Incorporation of the Registrant, as amended to date

   3.2           Bylaws of the Registrant

   4.2           Specimen Warrant

   4.3           Form of Warrant Agreement

   4.4           Specimen common stock certificate

   4.5           Form of Lock Up Agreement

   4.6           Form of Underwriter's Option for Purchase of Units

   5.1           Opinion of Resch Polster Alpert & Berger LLP**

   10.1          Form of Indemnification Agreements

   10.2          1998 Equity Incentive Program

   10.3          Security and Loan Agreement, dated September 15, 1998 between
                 Bank of America National Trust and Savings Association and
                 Pacific Softworks*

   10.4          Form of Invention Assignment and Proprietary Information
                 Agreement

   10.5          Sublease, dated April 7, 1998 between SHR Perceptual Management
                 and Pacific Softworks for the premises at 703 Rancho Conejo
                 Blvd., Newbury Park, California*

   10.6          Consulting Agreement dated March 8, 1996 between Kenneth
                 Woodgrift and Pacific Softworks*

   10.7          Letter from Pacific Softworks to Glenn Golenberg dated January
                 27, 1999 and Letter from Golenberg & Co, merchant bankers, to
                 Glenn Russell dated June 18, 1998*

   21.1          Subsidiary of the Registrant

   23.1          Consent of Merdinger, Fruchter, Rosen & Corso, P.C.,

                 Independent Auditors

   23.3          Consent of Counsel (contained within Exhibit 5.1)**

   24.1          Power of Attorney (see page II-5)

   27.1          Financial Data Schedule
</TABLE>

    


   *     Filed herewith.
   **    To be filed by amendment.



                                      II-2

<PAGE>   86


(b) Financial Statement Schedules

           All schedules have been omitted because the information required to
be set forth therein is not applicable or is shown in the consolidated financial
statements or notes thereto.

ITEM 28.  UNDERTAKINGS

           The undersigned small business issuer will:

           (1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:

   
               (i) Include any prospectus required by section 10(a)(3) of the
Securities Act of 1933, as amended,
    

               (ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement, and

               (iii) Include any additional or changed material information on
the plan of distribution.

           (2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.

           (3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.

           The small business issuer will provide to the underwriter at the
closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.

   
           Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the small business issuer of expenses incurred or paid by a director,
officer or controlling person of the small business issuer in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
small business issuer will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
    




                                      II-3

<PAGE>   87

           The undersigned small business issuer will:

           (1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer under Rule 424(b)(1), or (4) or
497(h) under the Securities Act as part of this registration statement as of the
time the SEC declared it effective.

           (2) For determining any liability under the Securities Act, treat
each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.


                                   SIGNATURES

   
           In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, in the
city of Newbury Park, State of California, on this ____ day of May, 1999.
    



                                     Pacific Softworks, Inc.


   
                                     By /s/ Glenn P. Russell

                                        -------------------------------------
                                        Glenn P. Russell
                                        President and Chief Executive Officer
    



                                      II-4


<PAGE>   88


   
           In accordance with the requirements of the Securities Act of 1933, as
amended, this registration statement was signed by the following persons in the
capacities and on the dates stated:
    



   

<TABLE>
<CAPTION>
            Signature                                            Title                                   Date
            ---------                                            -----                                   ----
<S>                                           <C>                                                   <C>
/s/ Glenn P. Russell                          President, Chief Executive Officer and Chairman        May 17, 1999
- --------------------------------------        (Principal Executive Officer)
Glenn P. Russell

/s/ William E. Sliney                         Chief Financial Officer                                May 17, 1999
- --------------------------------------        (Principal Financial   Officer)
William E. Sliney

/s/ Chaim Kaltgrad                            Vice President                                         May 17, 1999
- --------------------------------------
Chaim Kaltgrad

/s/ Mark Sewell*                              Vice President                                         May 17, 1999
- --------------------------------------
Mark Sewell

/s/ Sandra J. Garcia*                         Vice President                                         May 17, 1999
- --------------------------------------
Sandra J. Garcia

/s/ Robert G. J. Burg*                        Director                                               May 17, 1999
- --------------------------------------
Robert G. J.  Burg II

/s/ Wayne T. Grau*                            Director                                               May 17, 1999
- --------------------------------------
Wayne T. Grau

/s/ Reuben Sandler*                           Director                                               May 17, 1999
- --------------------------------------
Reuben Sandler, Ph.D.
</TABLE>

    


   
* By Power of Attorney
    



                                      II-5

<PAGE>   89


                                 EXHIBIT INDEX



<TABLE>
<CAPTION>
Exhibit No.               Description and Method of Filing
- -----------               --------------------------------
<S>             <C>
   1.1           Form of Underwriting Agreement

   1.3           Form of Selected Dealers Agreement

   3.1           Articles of Incorporation of the Registrant, as amended to date

   3.2           Bylaws of the Registrant

   4.2           Specimen Warrant

   4.3           Form of Warrant Agreement

   4.4           Specimen common stock certificate

   4.5           Form of Lock Up Agreement

   4.6           Form of Underwriter's Option for Purchase of Units

   5.1           Opinion of Resch Polster Alpert & Berger LLP**

   10.1          Form of Indemnification Agreements

   10.2          1998 Equity Incentive Program

   10.3          Security and Loan Agreement, dated September 15, 1998 between
                 Bank of America National Trust and Savings Association and
                 Pacific Softworks*

   10.4          Form of Invention Assignment and Proprietary Information
                 Agreement

   10.5          Sublease dated April 7, 1998 between SHR Perceptual Management
                 and Pacific Softworks for the premises at 703 Rancho Conejo
                 Blvd., Newbury Park, California*

   10.6          Consulting Agreement dated March 8, 1996 between Kenneth
                 Woodgrift and Pacific Softworks*

   10.7          Letter from Pacific Softworks to Glenn Golenberg dated January
                 27, 1999 and Letter from Golenberg & Co, merchant bankers, to
                 Glenn Russell dated June 18, 1998*

   21.1          Subsidiary of the Registrant

   23.1          Consent of Merdinger, Fruchter, Rosen & Corso, P.C.,
                 Independent Auditors

   23.3          Consent of Counsel (contained within Exhibit 5.1)**

   24.1          Power of Attorney (see page II-5)

   27.1          Financial Data Schedule
</TABLE>



   *      Filed herewith.
   **     To be filed by amendment.







<PAGE>   1

                                                                   EXHIBIT 10.3 

[BANK OF AMERICA LOGO]
- -------------------------------------------------------------------------------
TO: Bank of America National Trust                                BUSINESS LINE
    and Savings Association                           AGREEMENT - VARIABLE RATE
UNIT NO. 1737                                      SECURED BY PERSONAL PROPERTY
141 MISSION FALLS LN
FREMONT, CA 94539


<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S>                <C>                       <C>                   <C> 
CUSTOMER NAME                                LINE OF CREDIT NO.    CREDIT LIMIT
                   PACIFIC SOFTWORKS, INC.      1718394-7002        $250,000.00

BANKING OFFICE NO. CHECKING ACCOUNT NO. ("ACCOUNT")
       0174             01748-10498
</TABLE>


INTRODUCTION. This Agreement dated as of September 15, 1998 between PACIFIC
SOFTWORKS, INC. herein collectively and individually called "Borrower") and Bank
of America National Trust and Savings Association (herein called "Bank") governs
Borrower's Bank of America National Trust and Savings Association Business Line
("Line of Credit"). The words Borrower, "you" or "your" mean Borrower. The words
"we,", "us," or Bank, mean Bank. In consideration of, and to induce the Bank to
make available to the Borrower the credit facility described herein, the
Borrower agrees and warrants as follows:
 

I. THE LINE OF CREDIT

A. NATURE OF YOUR LINE OF CREDIT. Your Line of Credit is a revolving line of
   credit. This means that you, or any person provided for in I.C below, may
   request an advance of all or a part of your Line of Credit at any time prior
   to the Termination
 Date. By repaying any amount advanced, that amount becomes
   available to you as you need it unless (1) an Event of Default has occurred;
   (2) you exercise your right to cancel your Line of Credit; or (3) the
   Termination Date has occurred.

B. ADVANCES AND PAYMENTS. Advances under the Line of Credit may be in any
   amount not to exceed the credit limit remaining available.

C. TELEPHONE AUTHORIZATION. The Bank may honor telephone instructions for
   advances or repayments given by the individual signer(s) of this Agreement or
   a person or persons authorized by the signer(s) of this Agreement. Advances
   will be deposited in and repayments will be withdrawn from the Borrower's
   Account or such other accounts with the Bank as designated in writing by the
   Borrower. The Borrower indemnifies and excuses the Bank (including its
   officers, employees, and agents) from all liability, loss, and costs in
   connection with any act resulting from telephone instructions it reasonably
   believes are made by a signer of this Agreement or a person authorized by a
   signer. This indemnity and excuse will survive this Agreement's termination.

D. TERMINATION DATE. The term of the Line of Credit will expire on June 01, 1999
   (the "Termination Date"), unless sooner terminated by the Bank pursuant to
   Section V herein, or canceled by you pursuant to Section I.M. On such date,
   no further advances will be available to Borrower and the entire outstanding
   principal balance of the Line or Credit, together with all accrued and unpaid
   interest thereon, and fees and charges owing in connection therewith, shall
   be due and payable in full.

E. INTEREST RATE.

   1. Unless modified in accordance with Section I.E.3, the outstanding
   principal amount of the Line of Credit shall bear interest at a fluctuating
   Interest Rate per annum equal to the Bank's Reference Rate plus 2.000
   percentage points, as said Reference Rate may change from time to time.

   The Reference Rate is the rate of interest publicly announced from time to
   time by the Bank in San Francisco, California as its Reference Rate. The
   Reference Rate is set by the Bank based on various factors, including the
   Bank's costs and desired return, general economic conditions and other
   factors, and is used as a reference point for pricing some loans. The Bank
   may price loans to its customers at, above, or below the Reference Rate. Any
   change in the Reference Rate shall take effect at the opening of business on
   the day specified in the public announcement of a change in the Bank's
   Reference Rate.

   2. Computation of Interest and Fees. All computations of interest and fees
   made or called for hereunder shall be calculated on the basis of a 360 day
   year and the actual number of days elapsed. This results in more interest or
   a higher fee than if a 365 day year is used.

   3. If, for any reason during the term of the line, the Automatic Repayment
   service mentioned in I.J.2. is terminated by the Borrower or the Bank, the
   Interest Rate on the line will increase by 1% (one percent), the amount of
   each payment will be increased accordingly, and the borrower agrees to pay a
   documentation fee of $75.

     4. At the Bank's sole option in each instance, any amount not paid when
   due under this Agreement (including interest) shall bear interest from the
   due date at the interest rate shown above in paragraph (1). This may result
   in compounding of interest.

F. SECURITY. As security for payment of this Line of Credit and all obligations
   provided for herein, you grant to us a security interest in the property
   described below. You also grant to us a security interest in all renewals of
   this property, other property substituted for it, and proceeds.

   (1) ACCOUNTS REC & INVENTORY; (2) 0 VIN., MISC. EQUIP.

G. CREDIT LIMIT. A Credit Limit has been set on your Line of Credit and is shown
   above. As you use the Line of Credit, all advances will be deducted from
   your credit limit. You agree not to allow the  principal amount which you
   owe us at any one time to exceed your credit limit. We do not have to honor
   any request for an advance which, when added to your unpaid principal
   balance, would exceed your credit limit.

H. PROMISE TO PAY. For value received, you promise to pay interest according to
   the terms of this Agreement, all advances outstanding including reasonable
   attorneys' fees, court costs, and collection costs.

I. FEES. Upon execution of this Agreement you will pay a nonrefundable Loan Fee
   of ________. You may pay by check, charge to your checking account or you
   may obtain an advance on your Line of Credit to pay these charges, and the
   advance will be subject to all the terms of this Agreement.

J. PAYMENTS.

   1. The minimum payment due each month shall be interest, and shall be due
   and payable in full on the 10TH day of each month, or on the next business
   day if said date falls on a Saturday, Sunday, or Holiday for which the Bank
   is closed.

   2. Borrower hereby chooses to have the interest payments made pursuant to
   the Bank's Automatic Repayment service, and authorizes Bank to collect all
   sums due hereunder by charging the Account the full amount thereof. Should
   there be insufficient funds in the Account to pay when due all or any
   portion of the interest due, the full amount of such deficiency shall be
   immediately due and payable by Borrower. All sums received from Borrower for
   application to the Line of Credit shall be applied first, to interest then
   due, second, to the outstanding principal balance and third, to any fees and
   charges outstanding. This applies to payments initiated by Borrower and to
   any sums collected by Bank by charges to the Account.

   3. You can pay the outstanding balance on your Line of Credit in full or in
   part at any time without premium or penalty. We may accept partial payments,
   whether or not marked "paid in full" without losing our rights under this
   Agreement.

   Principal and/or interest payments should be made to:

   Bank of America National Trust and Savings Association
   Unit No. 1738
   PO BOX 6012
   PASADENA, CA 91102-6012

   If we receive your payment by 9:00 a.m. on any banking day, we will credit
   your Line of Credit as of that day. You may make your payment at any of our
   banking offices.

K. CHANGE OF ADDRESS. You agree to notify us promptly in writing of a change in
   your mailing address.

L. LINES SECURED BY STOCKS/BONDS.

   1. Margin Call. If at any time the credit limit to collateral value ratio
   exceeds 60% for lines secured partially or completely by stock, or 65% for
   lines secured only by bonds, we may send you notice requesting additional
   collateral. If the additional collateral is not received within the time
   given in the notice, you will be in default and we may terminate your Line
   of Credit as provided below.

   2. Restrictions on Use of Funds. You agree not to use your Account to
   finance the purchase of margin stock (as defined by Regulation U) or to pay
   obligations incurred in the purchase of such securities.

M. CANCELLATION BY YOU. You may cancel this Agreement by written notice to the
   Bank. At the time of cancellation, the outstanding balance will be
   immediately due and payable.

N. CONDITIONS.

   The Bank must receive the following items in form and content acceptable to
   the Bank before it is required to extend any credit to the Borrower under
   this Agreement.

A. AUTHORIZATIONS. Evidence that the execution, delivery and performance by the
   Borrower of this agreement and any instrument or agreement required under
   this agreement have been duly authorized.

B. GUARANTIES. Guaranties signed by those persons and in the amounts as
   required.

C. SECURITY AGREEMENTS. Signed original security agreements, deeds of

                                  PAGE 1 OF 3

<PAGE>   2
        trust, financing statements and fixture filings (together with
        collateral in which the Bank requires a possessory security interest),
        which the Bank requires.

   D.   Evidence of Priority. Evidence that security interests and liens in
        favor of the Bank are valid, enforceable, and prior to all others'
        rights and interests, except those the Bank consents to in writing.

III.    FINANCIAL STATEMENTS

   A.   Borrower represents and warrants that Statements and data submitted in
        writing by Borrower to Bank in connection with this request for credit
        are true and correct, and said statements truly present the financial
        condition of Borrower as on the date thereof and the results of the
        operation of Borrower for the period covered thereby, and have been
        prepared in accordance with generally accepted accounting principles on
        a basis consistently maintained. Since such date, there have been no
        material adverse changes in the ordinary course of business. Borrower
        has no knowledge of any liabilities, contingent or otherwise, at such
        date not reflected in said statements, and Borrower has not entered
        into any special commitments or substantial contracts which are not
        reflected in said statements, other than in the ordinary and normal
        course of its business, which may have materially adverse effect upon
        its financial condition, operations or business as now conducted.

   B.   The representation and warranty contained in Section A above shall
        apply to each financial statement submitted pursuant to Section IV.B
        herein and shall be continuous and shall be automatically restated for
        each such financial statement as of the date of such statement.

IV.     COVENANTS

        Borrower agrees that so long as Bank may have any commitment to land or
        it is indebted to Bank, it will, unless Bank shall otherwise consent in
        writing:

   A.   INSURANCE. Maintain public liability, property damage and worker's
        compensation insurance and insurance on all its insurable property
        against fire and other hazards with responsible insurance carriers to
        the extent usually maintained by similar businesses. If the Borrower
        fails to maintain insurance on the security described in Section I.F.
        herein, the Bank may, in its sole discretion, obtain such insurance and
        the cost of premiums shall be payable on demand with interest at the
        interest rate herein.

        To maintain all risk property damage insurance policies covering the
        tangible property comprising the collateral. Each insurance policy must
        be in an amount acceptable to the Bank. The insurance must be issued by
        an insurance company acceptable to the Bank and must include a lender's
        loss payable endorsement in favor of the Bank in a form acceptable to
        the bank.

   B.   RECORDS AND REPORTS. Maintain a standard and modern system of
        accounting in accordance with generally accepted accounting principles
        on a basis consistently maintained; permit Bank's representative to
        have access to and to examine its properties, books and records at all
        reasonable times; and furnish Bank: (1) promptly, a notice in writing
        of the occurrence of any event of default hereunder or of any event
        which would become an event of default hereunder upon giving of notice,
        lapse of time, or both, and (2) the following financial information and
        statements and such additional information as requested by the Bank
        from time to time; (a) by one year from the note date and annually
        thereafter, the Borrower's annual financial statements must be compiled
        by a Certified Public Accountant ("CPA") acceptable to the Bank; (b) by
        one year from the note date and annually thereafter, the Borrower's
        federal income tax return (with all forms K-1 attached), together with
        a statement of any contributions made by the Borrower to any subchapter
        S corporation or trust, and copies of any extensions of the filing
        date; (c) each guarantor's annual financial statements in form
        satisfactory to the Bank by one year from the note date and annually
        thereafter; and (d) copies of each guarantor's federal income tax
        return (with all forms K-1 attached) by one year from the note date and
        annually thereafter, together with a statement of any contributions
        made by the guarantor to any subchapter S corporation or trust, and
        copies of any extensions of the filing date.

   C.   TYPE OF BUSINESS. Not make any substantial change in the character of
        its business.

   D.   PURPOSE. Use the proceeds of this loan solely for business purposes.

   E.   LOANS, SECONDARY LIABILITIES. Not make any loans or advances to any
        person or other entity other than in the ordinary and normal course of
        its business as now conducted; or guarantee or otherwise become liable
        upon the obligation of any person or other entity, except by
        endorsement of negotiable instruments for deposit or collection in the
        ordinary and normal course of its business.

   F.   ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Not purchase
        or otherwise acquire the assets or business of any person or other
        entity, or liquidate, dissolve, merge or consolidate, or commence any
        proceedings therefor, or sell any assets except in the ordinary and
        normal course of its business as now conducted, or sell, lease, assign,
        or transfer any substantial part of its business or fixed assets or any
        property or other assets necessary for the continuance of its business
        as now conducted, including without limitation the selling of any
        property or other asset accompanied by the leasing back of the same.

   G.   OUTSIDE INDEBTEDNESS. Not create, incur, assume or permit to exist any
        indebtedness for borrowed moneys other than loans from Bank except
        obligations now existing as shown in financial statements submitted
        pursuant to Section III.A herein; or sell or transfer, either with or
        without recourse, any accounts or notes receivable or any moneys due or
        to become due.

   H.   COMPLIANCE WITH LAWS. Comply with the laws regulations and orders of
        any government body with authority over the Borrower's business.


V.      EVENTS OF DEFAULT

        The occurrence of any of the following events of default shall, at
        Bank's option, make all sums of principal and interest immediately due
        and payable, all without demand, presentment or notice, all of which
        are hereby expressly waived and the Bank may exercise all its rights
        against the Borrower, any guarantor and any collateral as provided by
        law.

   A.   FAILURE TO PAY INDEBTEDNESS. Failure to pay any installment of interest
        on any indebtedness of Borrower to Bank.

   B.   OTHER DEFAULTS. The occurrence of any event of default whether or not
        waived by the obligee under any other indebtedness extended by an
        institution or individual shall constitute an event of default
        hereunder.

   C.   BREACH OF COVENANT. Failure of Borrower to perform any other term or
        condition of this agreement binding upon Borrower.

   D.   BREACH OF WARRANTY. Any of Borrower's representations or warranties
        made herein or any statement or certificate at any time given in
        writing pursuant hereto or in connection herewith shall be false or
        misleading in any material respect.

   E.   INSOLVENCY; RECEIVER OR TRUSTEE. Borrower, any guarantor of the
        indebtedness of Borrower to the Bank or general partner of Borrower
        shall become insolvent; or admit its inability to pay its debts as they
        mature; or make an assignment for the benefit of creditors; or apply
        for or consent to the appointment of a receiver or trustee for it or
        for a substantial part of its property of business.

   F.   JUDGMENTS, ATTACHMENTS. Any money judgment, writ, or warrant of
        attachment, or similar process shall be entered or filed against
        Borrower or any of its assets and shall remain unvacated, unbonded or
        unstayed for a period of 10 days or in any event later than five days
        prior to the date of any proposed sale thereunder.

   G.   BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation
        proceedings, or other proceedings for relief under any bankruptcy law
        or any law for the relief of debtors shall be instituted by or against
        Borrower, any guarantor of the indebtedness of Borrower to the Bank or
        general partner of Borrower, and, if instituted against it, shall be
        consented to.

   H.   DEFAULT IN SECURITY DOCUMENTS. A default shall occur in any document or
        instrument provided by the Borrower to the Bank in connection with the
        security provided the Bank pursuant to Paragraph I.F. herein.

   I.   MATERIAL ADVERSE CHANGE. Should a material adverse change occur in
        Borrower's financial condition or the financial condition of any
        guarantor of the Borrower's obligations to Bank, which, in the opinion
        of the Bank, would affect the ability of the Borrower to repay the
        Borrower's obligations hereunder, or of such guarantor to perform under
        its guaranty.

   J.   LOAN BALANCE. If the loan to collateral value reaches 100%.

   K.   GUARANTY. Any guaranty of the indebtedness of the Borrower to the Bank,
        at any time after the execution and delivery of such guaranty and for
        any reason other than satisfaction in full of all indebtedness incurred
        hereunder, ceases to be in full force and effect or is declared to be
        null and void; or the validity or enforceability thereof is contested
        in a judicial proceeding; or any guarantor denies that it has any
        further liability under such guaranty, or should any guarantor default
        in any provision of any guaranty.

   L.   LIEN PRIORITY. The Bank fails to have an enforceable first lien (except
        for any prior liens to which the Bank has consented in writing) on or
        security interest in any property given as security for this loan.

   M.   DEATH. The Borrower or any guarantor dies (if the Borrower is a sole
        proprietorship, any owner dies; if the Borrower is a trust, a trustor
        dies; if the Borrower is a partnership, any general partner dies; or if
        the Borrower is a corporation, any principal officer or majority
        stockholder dies).

   N.   GOVERNMENT ACTION. Any government authority takes action that the Bank
        believes materially adversely affects the Borrower's or any guarantor's
        financial condition or ability to repay.

If the Borrower is in default the Bank may also without prior notice, do any
one or more of the following: (a) exercise any remedies available to a secured
party under the Uniform Commercial Code or any other applicable law; (b)
proceed in the foreclosure of its security interest in the property described
in the paragraph entitled "Security"; (c) sell or otherwise dispose of the
property at public or private sale, upon terms and in such manner as it may
determine and it may purchase same at such sale; (d) refrain from disposing of
the property and continue to maintain possession of the property for such time
as it deems appropriate, and Borrower takes the risk of any depreciation in the
value of the property pending disposition; or (e) transfer any of the property
into the name of Bank or Bank's nominee.

                                  Page 2 of 3

                     

<PAGE>   3
VI. MISCELLANEOUS PROVISIONS

 A. FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of Bank,
    in the exercise of any power, right or privilege hereunder shall operate as
    a waiver thereof, nor shall any single or partial exercise of any such
    power, right or privilege preclude other or further exercise thereof or of
    any other right, power or privilege. All rights and remedies existing under
    this Agreement are cumulative to, and not exclusive of, any rights or
    remedies otherwise available.

 B. OTHER AGREEMENTS. Nothing herein shall in any way limit the effect of the
    conditions set forth in any security or other agreement executed by the
    Borrower, but each and every condition hereof shall be in addition thereto.

 C. GOVERNING LAW. This Agreement will be governed by the interpreted in
    accordance with the laws of the State of California.

 D. SEVERABILITY. If any provision of this Agreement is held to be
    unenforceable, such determination shall not affect the validity of the
    remaining provisions of the Agreement.

 E. SUCCESSORS AND ASSIGNS. This Agreement is binding on the Borrower's and the
    Bank's successors and assignees. The Borrower agrees that it may not assign
    this agreement without the Bank's prior consent.

 F. ARBITRATION.

    1. This paragraph concerns the resolution of any controversies or claims
    between the Borrower and the Bank, including but not limited to those that
    arise from: (a) This Agreement (including any renewals, extensions or
    modifications of this Agreement); (b) Any document, agreement or procedure
    related to or delivered in connection with this Agreement; (c) Any violation
    of this Agreement; or (d) Any claims for, damages resulting from any
    business conducted between the Borrower and the Bank, including claims for
    injury to persons, property or business interests (torts).

    2. At the request of the Borrower or the Bank, any such controversies or
    claims will be settled by arbitration in accordance with the United States
    Arbitration Act. The United States Arbitration Act will apply even though
    this agreement provides that it is governed by California law.

    3. Arbitration proceedings will be administered by the American Arbitration
    Association and will be subject to its commercial rules of arbitration.

    4. For purposes of the application of the statute of limitations, the filing
    of an arbitration pursuant to this paragraph is the equivalent of the filing
    of a lawsuit, and any claim or controversy which may be arbitrated under
    this paragraph is subject to any applicable statute of limitations. The
    arbitrators will have the authority to decide whether any such claim or
    controversy is barred by the statute of limitations.

    5. If there is a dispute as to whether an issue is arbitrable, the
    arbitrators will have the authority to resolve any such dispute.

    6. The decision that results from an arbitration proceeding may be submitted
    to any authorized court of law to be confirmed and enforced.

    7. The procedure described above will not apply if the controversy or claim,
    at the time of the proposed submission to arbitration, arises from or
    relates to an obligation to the Bank secured by real property located in
    California. In this case, both the Borrower and the Bank must consent to
    submission of the claim or controversy to arbitration. If both parties do
    not consent to arbitration, the controversy or claim will be settled as
    follows: (a) The Borrower and the Bank will designate a referee (or panel of
    referees) selected under the auspices of the American Arbitration
    Association in the same manner as arbitrators are selected in
    Association-sponsored proceedings; (b) The designated referee (or panel of
    referees) will be appointed by a court as provided in California Code of
    Civil Procedures Section 638 and the following related sections; (c) The
    referee (or the presiding referee of the panel) will be an active attorney
    or a retired judge; and (d) The award that entered as a judgment in the
    court that appointed the referee, in accordance with the provisions of
    California Code of Civil Procedure Sections 644 and 645.

    8. This provision does not limit the right of the Borrower or the Bank to:
    (a) exercise self-help remedies such as setoff; (b) foreclose against or
    sell any real or personal property collateral or (c) act in a court of law,
    before, during or after the arbitrator proceeding to obtain (i) an interim
    remedy; and/or (ii) additional or supplementary remedies.

    9. The pursuit of or a successful action for interim, additional or
    supplementary remedies, or the filing of a court action, does not constitute
    a waiver of the right of the Borrower or the Bank, including the suing
    party, to submit the controversy or claim to arbitration if the other party
    contests the lawsuit. However, if the controversy or claim arises from or
    relates to an obligation to the Bank which is secured by real property
    located in California at the time of the proposed submission to arbitration,
    this right is limited according to the provision above requiring the consent
    of both the Borrower and the Bank to seek resolution through arbitration.

    10. If the Bank forecloses against any real property securing this
    Agreement, the Bank has the option to exercise the power of sale under the
    deed of trust or mortgage, or to proceed by judicial foreclosure.

 G. HAZARDOUS WASTE INDEMNIFICATION. The Borrower will indemnify and hold
    harmless the Bank from any loss or liability directly or indirectly arising
    out of the use, generation, manufacture, production, storage, release,
    threatened release, discharge, disposal or presence of a hazardous
    substance. This Indemnity will apply whether the hazardous substance is on,
    under or about the Borrower's property or operations or property leased to
    the Borrower. The Indemnity includes but is not limited to attorney's fees
    (including the reasonable estimate of the allocated cost of in-house counsel
    and staff). The Indemnity extends to the Bank, its parent, subsidiaries and
    all of their directors, officers, employees, agents, successors, attorneys
    and assigns. For these purposes, the term "hazardous substances" means any
    substance which is or becomes designated as "hazardous" or "toxic" under any
    federal, state or local law. This Indemnity will survive repayment of the
    Borrower's obligations to the Bank.

 H. MULTIPLE BORROWERS. If two or more borrowers sign this agreement, each will
    be individually obligated to repay the Bank in full, and all will be
    obligated together.

 I. ONE AGREEMENT. This agreement and any related security or other agreements
    required by this Agreements, collectively: (1) represent the sum of the
    understandings and agreements between the Bank and the Borrower concerning
    this credit; and (2) replace any prior oral or written agreements between
    the Bank and the Borrower concerning this Agreement and any other agreements
    required by this Agreement, this Agreement and any other agreements required
    by this Agreement, this Agreement will prevail.

 J. NOTICE. As required herein, notice to the Bank shall be sent to the address
    shown on your latest billing statement, to be effective when received.

    Notice to you shall be sent to you at your address in our records, to be
    effective when deposited in the U.S. mail, postage prepaid, unless otherwise
    stated in the notice.

    This Agreement is executed as of the date stated at the top of the first
    page.

    This Agreement is subject to a document entitled Addendum to Business Line
    Agreement dated September 15, 1998 attached and made a party thereof by this
    reference.

    PACIFIC SOFTWORKS, INC.

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

    BY:
        ---------------------------------- 
        GLENN RUSSELL, PRESIDENT

    By:
       ----------------------------------
       LAURA RUSSELL, SECRETARY


                                  Page 3 of 3  

<PAGE>   4
[LOGO] BANK OF AMERICA
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
                                               BUSINESS LOAN CONTINUING GUARANTY

in this guaranty, the guarantor refers to each business organization or person
who signs below. The Bank refers to Bank of America National Trust and Savings
Association.

- --------------------------------------------------------------------------------
- -------------------------------
1. GUARANTY
- -------------------------------
In consideration of the financial arrangements between the Bank and the
borrowers listed below, the guarantor guarantees payment of, and agrees to pay
to the order of the Bank, the debts to the Bank of:

PACIFIC SOFTWORKS, INC.

- -------------------------------
BORROWER'S NAME

If there are two or more borrowers, the guarantor guarantees payment of any debt
they incur together as well as debt each one incurs alone. The debt includes
all obligations to the Bank the borrower incurs:
- - at any time, past, present, or future;
- - voluntarily or involuntarily;
- - directly or indirectly; or
- - individually or together with others.

The debt includes obligations;
- - absolute or contingent;
- - liquidated or unliquidated; or
- - for a determined or undetermined amount.

This guaranty is continuous. Until revoked, it covers debts the borrower incurs
even after fully repaying any previous debts. Each guarantor's obligations
remain and will not be affected in the event of revocation by any other
guarantor.

This guaranty is unconditional. The Bank may require the guarantor to pay even
if the Bank does not:
- - proceed against any borrower, guarantor, or other party;
- - perfect any security interest;
- - proceed against any security; or
- - pursue any other remedy.

The Bank may release or add guarantors without releasing any other guarantor.
The Bank may require the guarantor to pay even if a statute of limitations or
disability bars recovery from the borrower, or the debt is or becomes otherwise
unenforceable.

The guarantor waives the benefit of any statute of limitations that would apply
to this guaranty.

The guarantor's obligations are independent of the borrower's obligations, and
the Bank may sue the guarantor without suing the borrower.

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

- -------------------------------
2. LIMITS OF THE GUARANTY
- -------------------------------

At any one time, this guaranty is limited to:
- - the principal amount of $250,000.00; plus
- - any interest, fees, and other expenses arising out of the debt, or the part
  of the debt covered by the limit of the principal amount.

The guarantor is not obligated for any amount over this limit, although the
Bank may allow the borrower's debt to go above it.

The guarantor has the right to make a payment to the Bank on the debt and
reduce the guaranty by that amount, but only if the Bank receives a written
request to reduce the guaranty before or at the same time as the payment.

This guaranty is in addition to any other guaranty given by the guarantor.

If any borrower is a partnership and any guarantor is a general partner of that
partnership, then such guarantor will not be liable under this guaranty for any
debt of such borrower which is secured by real property; provided, however,
that such guarantor will remain liable under partnership law for all debt of
such borrower.

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

- -------------------------------
3. RIGHTS OF THE BANK
- -------------------------------

The Bank may from time to time, without notice to or demand on the guarantor:
- - change the interest rate on or renew the debt;
- - accelerate, extend, compromise, or otherwise change the repayment period of
  the debt;
- - receive, substitute, or release collateral for the debt;
- - sell, otherwise dispose of, or apply collateral in any order;
- - apply amounts received from anyone other than the guarantor to any 
  unguaranteed part of the debt;
- - assign or sell the whole or a portion of the debt and this guaranty; or
- - foreclose any deed of trust securing the debt, either by judicial foreclosure
  or power of sale. The guarantor understands and acknowledges that if the Bank
  forecloses, either by judicial foreclosure or by exercise of power of sale,
  any deed of trust securing the debt, that foreclosure could impair or destroy
  any ability that the guarantor may have to seek reimbursement, contribution or
  indemnification from the borrower or others based on any right the guarantor
  may have of subrogation, reimbursement, contribution or indemnification for
  any amounts paid by the guarantor under this guaranty. The guarantor further
  understands and acknowledges that in the absence of this paragraph, such
  potential impairment or destruction of the guarantor's rights, if any, may
  entitle the guarantor to assert a defense to this guaranty based on Section
  580d of the California Code of Civil Procedure as interpreted in Union Bank v.
  Gradsky, 265 Cal.App.2d.40 (1968). By executing this guaranty, the guarantor
  freely, irrevocably and unconditionally: (i) waives and relinquishes that
  defense and agrees that the guarantor will be fully liable under this guaranty
  even though the Bank may foreclose, either by judicial foreclosure or by
  exercise of power of sale, any deed of trust securing the debt; (ii) agrees
  that the guarantor will not assert that defense in any action or proceeding
  which the Bank may commence to enforce this guaranty; (iii) acknowledges and
  agrees that the rights and defenses waived by the guarantor in this guaranty
  include any right or defense that the guarantor may have or be entitled to
  assert based upon or arising out of any one or more of Sections 580a, 580b,
  580d, or 726 of the California Code of Civil Procedure or Section 2848 of the
  California Civil Code; and (iv) acknowledges and agrees that the Bank is
  relying on this waiver in creating the debt, and that this waiver is a
  material part of the consideration which the Bank is receiving for creating
  the debt.

The Bank may, at its option, request periodic financial statements from the 
guarantor. The guarantor agrees to supply these statements promptly,
whenever they are requested.

The Bank may exercise these rights either before or after the guarantor 
revokes this guaranty, and without affecting any obligation under this guaranty.

The Bank may assign this guaranty, in whole or part, without notice, and
the Bank and any assignee or purchaser, or any prospective assignee or
purchaser of the debt, may exchange financial information about the 
guarantor with each other in connection with any assignment or purchase
transaction.

If a borrower is a corporation or partnership, the Bank is not required to
investigate the powers of anyone acting on the borrower's behalf.

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

- ----------------------------------
4. PROTECTING THE BANK'S INTEREST
- ----------------------------------

The guarantor agrees that any amounts the borrower owes the guarantor now or in
the future are subordinated to the borrower's debt to the Bank. If the Bank
requires, the guarantor, as a trustee for the Bank, will collect amounts the
borrower owes the guarantor and pay them to the Bank in reduction of the debt to
the Bank, without affecting or reducing any obligations under this guaranty.

The guarantor agrees that the guarantor does not have any:
- - right of subrogation, reimbursement, indemnification or contribution arising
  from the existence or performance of this guaranty. This includes any such
  rights arising from contract, statutory law or otherwise, and includes any
  claim of subrogation under the Bankruptcy Code (Title 11 of the U.S. Code) or
  any successor statute;
- - right to enforce a remedy which the Bank now has or may later have against
  the borrower;
- - right to participate in security now or later held by the Bank; or
- - right to any defense based on a claim that the obligations under this guaranty
  are more burdensome or are in excess of the borrower's debt to the Bank.

The guarantor is solely responsible for obtaining any financial information
from the borrower the guarantor may require. The Bank is not required to
give the guarantor any information about the borrower's business
operations or financial condition, or any other notices or demands of any
kind, including notices of new debts that may be incurred by the borrower,
notices of default or notice of acceptance of this guaranty.

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

                                  Page 1 of 3


<PAGE>   5
- --------------------------------------------------------------------------------
- ------------------------------------
5. SECURITY AND RIGHT OF SETOFF
- ------------------------------------
To secure all the debts covered by this guaranty, the guarantor assigns and
grants to the Bank a security interest in all of the guarantor's:
- - money;
- - securities;
- - deposit accounts and their proceeds; and
- - any other property maintained in the possession of the Bank.

If the borrower defaults, or if any of the guarantor's obligations to the Bank
are not fulfilled, the Bank may immediately use any money or proceeds of the
guarantor's deposit accounts, securities, or other property in the Bank's
possession to reduce the debt.

The Bank may also foreclose on any other collateral as provided in the Uniform
Commercial Code and in any security agreements between the Bank and the
guarantor.

- --------------------------------------------------------------------------------
- ------------------------------------
6. ARBITRATION
- ------------------------------------
This paragraph concerns the resolution of any controversies or claims between
the guarantor and the Bank, including but not limited to those that arise from:
 (a) This guaranty (including any renewals, extensions or modifications of this
     guaranty);
 (b) Any document, agreement or procedure related to or delivered in connection
     with this guaranty;
 (c) Any violation of this guaranty; or
 (d) Any claims for damages resulting from any business conducted between the
     guarantor and the Bank, including claims for injury to persons, property or
     business interests (torts).

At the request of the guarantor or the Bank, any such controversies or claims
will be settled by arbitration in accordance with the United States Arbitration
Act. The United States Arbitration Act will apply even though this guaranty
provides that it is governed by California law.

Arbitration proceedings will be administered by the American Arbitration
Association and will be subject to its commercial rules of arbitration.

For purposes of the application of the statute of limitations, the filing of an
arbitration pursuant to this paragraph is the equivalent of the filing of a
lawsuit, and any claim or controversy which may be arbitrated under this
paragraph is subject to any applicable statute of limitations. The arbitrators
will have the authority to decide whether any such claim or controversy is
barred by the statute of limitations and, if so, to dismiss the arbitration on
that basis.

If there is a dispute as to whether an issue is arbitrable, the arbitrators
will have the authority to resolve any such dispute.

The decision that results from an arbitration proceeding may be submitted to
any authorized court of law to be confirmed and enforced.

The procedure described above will not apply if the controversy or claim, at
the time of the proposed submission to arbitration, arises from or relates to
an obligation to the Bank secured by real property located in California. In
this case, both the guarantor and the Bank must consent to submission of the
claim or controversy to arbitration. If both parties do not consent to
arbitration, the controversy or claim will be settled as follows:
 (a) The guarantor and the Bank will designate a referee (or a panel of
     referees) selected under the auspices of the American Arbitration
     Association in the same manner as arbitrators are selected in
     Association-sponsored proceedings;
 (b) The designated referee (or the panel of referees) will be appointed by a
     court as provided in California Code of Civil Procedure Section 638 and the
     following related sections;
 (c) The referee (or the presiding referee of the panel) will be an active
     attorney or a retired judge; and
 (d) The award that results from the decision of the referee (or the panel) will
     be entered as a judgment in the court that appointed the referee, in
     accordance with the provisions of California Code of Civil Procedures
     Sections 644 and 645.

This provision does not limit the right of the guarantor or the Bank to:
 (a) exercise self-help remedies such as setoff;
 (b) foreclose against or sell any real or personal property collateral; or
 (c) act in a court of law, before, during or after the arbitration proceeding
     to obtain an interim remedy and/or additional or supplementary remedies.

The pursuit of or a successful action for interim, additional or supplementary
remedies, or the filing of a court action, does not constitute a waiver of the
right of the guarantor or the Bank, including the suing party, to submit the
controversy or claim to arbitration if the other party contests the lawsuit.
However, if the controversy or claim arises from or relates to an obligation to
the Bank which is secured by real property located in California at the time of
the proposed submission to arbitration, this right is limited according to the
provision above requiring the consent of both the guarantor and the Bank to
seek resolution through arbitration.

If the Bank forecloses against any real property securing this guaranty, the
Bank has the option to exercise the power of sale under the deed of trust or
mortgage, or to proceed by judicial foreclosure.

- --------------------------------------------------------------------------------
- ------------------------------------
7. EXPENSES
- ------------------------------------
The guarantor agrees to pay all reasonable attorneys' fees, including allocated
costs of the Bank's in-house counsel, court costs and all other expenses the
Bank incurs in enforcing this guaranty. The expenses covered by this provision
include attorneys' fees and costs of any arbitration proceeding related to this
guaranty.

- --------------------------------------------------------------------------------
- ------------------------------------
8. REVOKING THIS GUARANTY
- ------------------------------------
The guarantor may revoke this guaranty as to future transactions at any time,
provided the guarantor renounces any consideration given in return for the
guaranty of such transactions. The guarantor is obligated on all credit
extended by the Bank to the borrower until the Bank receives a written notice
at the address shown below revoking the guaranty.

Any revocation will not affect the guarantor's obligation for any transactions
that preceded receipt of the written notice, and the guarantor will remain
obligated on all debts related to these transactions, even if those debts,
before or after the revocation, have been renewed or modified or any of their
terms have been changed in any way.

If this guaranty is revoked, cancelled or returned, and the Bank later must
refund or rescind a payment, or transfer an interest in property back to the
borrower, this guaranty will be reinstated as to that payment or interest.

- --------------------------------------------------------------------------------
- ------------------------------------
9. ENFORCING THIS GUARANTY
- ------------------------------------
This guaranty is governed by California law, and the Bank may sue the guarantor
in courts in California.

The Bank may delay or waive exercising or enforcing any of its rights,
including its rights of setoff and lien, without losing them. These rights
continue until the Bank waives them in writing.

If the guarantor is an individual and is married, or if an individual signing
on behalf of a sole proprietorship or partnership is married, the Bank may
proceed against his or her separate property for any obligations under this
guaranty.

- --------------------------------------------------------------------------------
                                  Page 2 of 3


<PAGE>   6
- --------------------------------------------------------------------------------
- ------------------------------------
10. SIGNATURES/DATE
- ------------------------------------
All guarantors who sign are obligated individually and together under this
guaranty. All guarantor signatures must be notarized if this guaranty is not
signed in the presence of a Bank officer.

This document was prepared on September 15, 1998.

ADDRESS FOR NOTICES TO THE BANK:

Bank of America National Trust and Savings Association
Unit No. 1737                                                
             ---------------------------------------------

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

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

THE RUSSELL TRUST DATED JUNE 23, 1997
- -------------------------------------

____________________________ 09/15/98
GLENN P. RUSSELL, TRUSTEE

____________________________ 09/15/98
LAURA J. RUSSELL, TRUSTEE



- --------------------------------------------------------------------------------
                                  Page 3 of 3


<PAGE>   7
[LOGO] Bank of America
================================================================================
                                                  CORPORATE RESOLUTION TO BORROW

Resolved that PACIFIC SOFTWORKS, INC., a CALIFORNIA corporation, borrow from
Bank of America National Trust and Savings Association.

- --------------------------
1. BORROWING LIMIT
- --------------------------

Resolved that at any one time the total borrowing authorized by this resolution
is limited to the principal amount of $250,000 plus any interest and fees.

The amount authorized by this resolution is in addition to any amounts
authorized by any other resolution that has not been revoked.

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

- --------------------------
2. AUTHORIZATION
- --------------------------

Resolved that ANY ONE ACTING ALONE of the following officers (and their 
successors in office) may act for the corporation, including deciding how much
and when to borrow.

1.      GLENN RUSSELL                           PRESIDENT
- -------------------------------------------------------------------------------
        Name                                    Title

2.      LAURA RUSSELL                           SECRETARY
- -------------------------------------------------------------------------------
        Name                                    Title

3.
- -------------------------------------------------------------------------------
        Name                                    Title

4.
- -------------------------------------------------------------------------------
        Name                                    Title


- --------------------------------------------------------------------------------
These officers are also authorized to:

o  sign and deliver to the Bank any documents evidencing the corporation's debt
   or any other agreements or documents the Bank may require and the officers
   approve;

o  request and agree to renewals or extensions;

o  grant a security interest in any property owned or controlled by the
   corporation as security for any borrowing under this resolution or other
   amounts the corporation owes the Bank;

o  apply for and obtain letters of credit; and

o  discount or sell security agreements, leases, bailment agreements,
   acceptances, drafts, receivables, notes and other evidences of debt to the
   Bank. These officers may endorse these documents in the corporation's name
   and guarantee payment.

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

- --------------------------
3. REVOCATION
- --------------------------

Resolved that the Bank is authorized to act on this resolution until notified
in writing of its revocation.

- --------------------------------------------------------------------------------
- ----------------------------
4. SECRETARY'S CERTIFICATION
- ----------------------------

I, LAURA RUSSELL, the corporate secretary of the corporation named above,
certify that this is an accurate copy of a resolution of its board of
directors. The board adopted it as required by state law and the corporation's
by-laws. It was adopted by a quorum of the board at a legal meeting of said
Board duly and regularly held.

I also certify that this resolution is still in effect and has not been amended
or revoked. The signatures below are those of the officers authorized to sign
for this corporation by this resolution.

This certification was prepared on September 15, 1998.

- --------------------------
5. SIGNATURES
- --------------------------

Authorized Signatures:


                                                GLENN RUSSELL
- --------------------------------------------------------------------------------
Signature                                       Print name


                                                LAURA RUSSELL
- --------------------------------------------------------------------------------
Signature                                       Print name



- --------------------------------------------------------------------------------
Signature                                       Print name



- --------------------------------------------------------------------------------
Signature                                       Print name


- --------------------------------------------------------------------------------
Affix corporate seal here



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



- -------------------------------------    ---------------------------------------
                                                LAURA RUSSELL, SECRETARY


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

                        

<PAGE>   8
[B of A Logo]
================================================================================
                                           CORPORATE RESOLUTION TO SIGN GUARANTY

Resolved that LUKE SYSTEMS INTERNATIONAL a CALIFORNIA corporation, guarantee 
payment of the debt of PACIFIC SOFTWORKS, INC. (the borrower) to  Bank of 
America National Trust and Savings Association (the bank). Resolved that this 
corporation will receive a business benefit from the borrower's financial 
arrangements with the Bank and therefore will benefit from guaranteeing the 
debt.

- -------------------------------------
   1. BORROWING LIMIT
- -------------------------------------
   Resolved that at any one time the total   This amount is in addition to any
   borrowing authorized by this resolution   other debt of the same borrower
   is limited to the principal amount of     guaranteed under the authorization
   $250,000.00 plus any interest and fees.   of separate resolutions.

- -------------------------------------
   2. AUTHORIZATION  
- -------------------------------------
   Resolved that any ANY ONE ACTING ALONE of the officers named below (and their
   successors in office) are authorized to:

   * sign the guaranty for the corporation;   * sign and deliver to the Bank any
                                                additional documents the Bank 
   * grant a security interest in any           may require and the officers 
     property owned or controlled by the        approve.
     corporation as security for the 
     guaranty; and

   1.  GLENN RUSSELL                                   PRESIDENT
     ---------------------------------------------------------------------------
     Name                                                 Title

   2.  GLENN RUSSELL                                   SECRETARY
     ---------------------------------------------------------------------------
     Name                                                 Title

   3.
     ---------------------------------------------------------------------------
     Name                                                 Title

   4.
     ---------------------------------------------------------------------------
     Name                                                 Title

- -------------------------------------
   3. REVOCATION  
- -------------------------------------

   Resolved that the Bank is authorized to act on this resolution until notified
   in writing of its revocation.

- -------------------------------------
   4. SECRETARY'S CERTIFICATION
- -------------------------------------

   I, GLENN RUSSELL, the corporate           I also certify that this resolution
   secretary of the corporation named        is still in effect and has not been
   above, certify that this is an            amended or revoked. The signatures
   accurate copy of a resolution of its      below are those of the officers
   board of directors. The board adopted     authorized to sign for this
   it as required by state law and the       corporation by this resolution.
   corporation's by-laws. It was adopted 
   by a quorum of the board at a legal       This certification was prepared on
   meeting of said Board duly and            September 15, 1998.
   regularly held.
- -------------------------------------
   5. SIGNATURES  
- -------------------------------------
   Authorized Signatures:

                                                  GLENN RUSSELL
      -------------------------------------------------------------------------
      Signature                              Print name

                                                  GLENN RUSSELL
      -------------------------------------------------------------------------
      Signature                              Print name


      -------------------------------------------------------------------------
      Signature                              Print name


      -------------------------------------------------------------------------
      Signature                              Print name

- -------------------------------------------------------------------------------
 Affix corporate seal here


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



   --------------------------------------     ---------------------------------
                                                  GLENN RUSSELL, SECRETARY

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

<PAGE>   9
                             TRUST AUTHORITY LETTER

TO: Bank of America National Savings Association (the "Bank")

In accordance with California Probate Code Section 18100.5, the undersigned
declare:

1. The undersigned, GLENN P. RUSSELL  and LAURA J. RUSSELL (the "Trustees") are
   all of the duly appointed and acting trustees of the RUSSELL TRUST DATED JUNE
   23, 1997 Trust (the "Trust").

2. The Trust is evidenced by that certain DECLARATION OF TRUST (the "Trust
   Agreement") executed on JUNE 23, 1997. The Trust Agreement is still in full
   force and effect and
           [ ] has not been amended, altered, revoked or terminated in any way.
           [ ] has been amended on the following dates: _____________________.

3. The trust is currently REVOCABLE.

4. [ ] (a) The Trustees have requested a _________________ (the "Credit") from
           the Bank to the Trustees. This Credit will be secured by a security
           interest or deed of trust on ___________________________ owned by 
           the Trust.

   [ ] (b) _____________________________________________________, trustor(s) of
           the Trust, have requested in their personal capacity a _____________
           (the "Credit") from the Bank. The Credit will be
           [ ] secured by a security interest or deed of trust on _____________
               owned by the Trust.
           [X] guaranteed by the Trust.

5. The Trustees are duly authorized under the terms of the Trust Agreement to
   enter into the transactions described above. The transactions are being
   entered into for a proper trust purpose.
   [ ] The documentation for the transaction may be signed by any one of the
       Trustees, acting alone.

   [X] (c) PACIFIC SOFTWORKS, INC. has/have requested a Business Line (the
           "Credit") from the Bank. The Credit will be
           [ ] secured by a security interest or deed of trust on
               ________________________________________________________________
               ________________________________________________________________
               owned by the Trust.
           [X] guaranteed by the Trust.

6. Attached to this certificate are
   [X] true and correct copies of the Trust Agreement and any amendments to
       the Trust Agreement.
   [ ] true and correct copies of each portion of the Trust Agreement, and any
       amendments to the Trust Agreement, which designate the undersigned as
       trustees of the Trust and confer upon the Trustees the power to enter 
       into the transactions described above.

7. We agree to immediately notify the Bank if:
   (a) the Trust is revoked or terminated;
   (b) the Trust is amended, in which case we agree to also provide the Bank
       with correct copies of the amendment(s);
   (c) one or more trustee(s) change, in which case we also provide the Bank
       with signature exemplars of any new trustee(s);
   (d) [X] or the Trust becomes irrevocable.

   We understand that the occurrence of any of the events described in this
   paragraph may affect the right of the trustees of the Trust to incur further
   obligations or to further encumber the property. The Bank shall be authorized
   to continue to rely on this certificate until it receives notice as provided 
   above. This agreement shall bind the Trustors, the current and successor
   trustees, and the current and successor beneficiaries.

Executed on September 15, 1998

Trustees: GLENN P. RUSSELL and LAURA J. RUSSELL

By                                     By
  ---------------------------------      ----------------------------------
  GLENN P. RUSSELL, TRUSTEE              LAURA J. RUSSELL, TRUSTEE

By                                     By
  ---------------------------------      ----------------------------------


<PAGE>   10
[BANK OF AMERICA LOGO]

- --------------------------------------------------------------------------------
                                                             SECURITY AGREEMENT:
                                            RECEIVABLES, INVENTORY AND EQUIPMENT

TO: Bank of America National Trust and Savings Association

Unit No. 1737
- ---------------------------------------
141 MISSION FALLS LN
- ---------------------------------------
FREMONT, CA 94539
- ---------------------------------------

- --------------------------------------------------------------------------------
1.    THE SECURITY
- --------------------------------------------

            The undersigned PACIFIC SOFTWORKS, INC. ("Borrower") hereby assigns
and grants to Bank of America National Trust and Savings Association ("Bank") a
security interest in the following described property ("Collateral"):

(a)   The Collateral includes all of the following, whether now owned or
      hereafter acquired by Borrower: accounts, contract rights, chattel paper,
      instruments, deposit accounts, and general intangibles; and all returned
      or repossessed goods which, on sale or lease, resulted in an account or
      chattel paper.

(b)   The Collateral includes all inventory now owned or hereafter acquired by
      Borrower.

(c)   The Collateral includes all machinery, furniture, fixtures and other
      equipment of every type now owned or hereafter acquired by Borrower
      (including, but not limited to, the equipment described in the attached
      Equipment Description, if any).

(d)   All negotiable and nonnegotiable documents of title now owned or
      hereafter acquired by Borrower covering any of the above-described
      property.

(e)   All rights under contracts of insurance now owned or hereafter acquired
      by Borrower covering any of the above-described property.

(f)   All proceeds, product, rents and profits now owned or hereafter acquired
      by Borrower of any of the above-described property.

(g)   All books and records now owned or hereafter acquired by Borrower
      pertaining to any of the above-described property, including but not
      limited to any computer-readable memory and any computer hardware or
      software necessary to process such memory ("Books and Records").

- --------------------------------------------------------------------------------
2.    THE INDEBTEDNESS 
- --------------------------------------------

      The Collateral secures and will secure all indebtedness of Borrower to 
Bank. For the purposes of this Agreement, "Indebtedness" means all loans and
advances made by Bank to Borrower and all other obligations and liabilities of
Borrower to Bank, whether now existing or hereafter incurred or created, whether
voluntary or involuntary, whether due or not due, whether absolute or
contingent, or whether incurred directly or acquired by Bank by assignment or
otherwise. Unless Borrower shall have otherwise agreed in writing, indebtedness,
for the purposes of this Agreement, shall not include "consumer credit" subject
to the disclosure requirements of the Federal Truth in Lending Act or any
regulations promulgated thereunder.

- --------------------------------------------------------------------------------
3.    BORROWER'S COVENANTS
- --------------------------------------------

      Borrower covenants and warrants that unless compliance is waived by Bank
      in writing:

      (a)   Borrower will properly preserve the Collateral; defend the
      Collateral against any adverse claims and demands; and keep accurate
      Books and Records.

      (b)   Borrower has notified Bank in writing of, and will notify Bank in
      writing prior to any change in, the locations of (i) Borrower's place of
      business or Borrower's chief executive office if Borrower has more than
      one place of business, and (ii) any Collateral, including the Books and
      Records.

      (c)   Borrower will notify Bank in writing prior to any change in
      Borrower's name, identity or business structure.

      (d)   Borrower will maintain and keep in force insurance covering
      Collateral designated by Bank against fire and extended coverages. Such
      insurance shall require losses to be paid on a replacement cost basis, be
      issued by insurance companies acceptable to Bank in a form acceptable to
      Bank.

      (e)   Borrower has not granted and will not grant any security interest
      in any of the Collateral except to Bank, and will keep the Collateral
      free of all liens, claims, security interests and encumbrances of any
      kind or nature except the security interest of Bank.

      (f)   Borrower will not sell, lease, agree to sell or lease, or otherwise
      dispose of, or remove from Borrower's place of business (i) any inventory
      except in the ordinary course of business as heretofore conducted by
      Borrower, or (ii) any other Collateral except with the prior written
      consent of Bank.

      (g)   Borrower will promptly notify Bank in writing of any event which
      affects the value of the Collateral, the ability of Borrower or Bank to
      dispose of the Collateral, or the rights and remedies of Bank in relation
      thereto, including, but not limited to, the levy of any legal process
      against any Collateral and the adoption of any marketing order,
      arrangement or procedure affecting the Collateral, whether governmental
      or otherwise.

- --------------------------------------------------------------------------------
                                  Page 1 of 3

<PAGE>   11
- --------------------------------------------------------------------------------
(h) If any Collateral is or becomes the subject of any registration certificate
or negotiable document of title, including any warehouse receipt or bill of
lading, Borrower shall immediately deliver such document to Bank.

(i) Borrower will not attach any Collateral to any real property or fixture in
a manner which might cause such Collateral to become a part thereof unless
Borrower first obtains the written consent of any owner, holder of any lien on
the real property or fixture, or other person having an interest in such
property to the removal by Bank of the Collateral from such real property or
fixture. Such written consent shall be in form and substance acceptable to Bank
and shall provide that Bank has no liability to such owner, holder of any lien,
or any other person.

(j) Until Bank exercises its rights to make collection, Borrower will
diligently collect all Collateral.

- ------------------------------------
4. ADDITIONAL OPTIONAL REQUIREMENTS
- ------------------------------------
Borrower agrees that Bank may at its option at any time, whether or not
Borrower is in default:

(a) Require Borrower to segregate all collections and proceeds of the
Collateral so that they are capable of identification and deliver daily such
collections and proceeds to Bank in kind.

(b) Require Borrower to deliver to Bank (i) copies of or extracts from the
Books and Records, and (ii) information on any contracts or other matters
affecting the Collateral.

(c) Examine the Collateral, including the Books and Records, and make copies of
or extracts from the Books and Records, and for such purposes enter at any
reasonable time upon the property where any Collateral or any Books and Records
are located.

(d) Require Borrower to deliver to Bank any instruments or chattel paper.

(e) Require Borrower to obtain Bank's prior written consent to any sale, lease,
agreement to sell or lease, or other disposition of any inventory.

(f) Notify any account debtors, any buyers of the Collateral, or any other
persons of Bank's interest in the Collateral.

(g) Require Borrower to direct all account debtors to forward all payments and
proceeds of the Collateral to a post office box under Bank's exclusive control.

(h) Demand and collect any payments and proceeds of the Collateral. In
connection therewith Borrower irrevocably authorizes Bank to endorse or sign
Borrower's name on all checks, drafts, collections, receipts and other
documents, and to take possession of and open the mail addressed to Borrower
and remove therefrom any payments and proceeds of the Collateral.

- --------------------------------------------------------------------------------
- ------------------------------------
5. DEFAULTS
- ------------------------------------
Any one or more of the following shall be a default hereunder:

(a) Borrower fails to pay any indebtedness when due.

(b) Borrower breaches any term, provision, warranty or representation under
this Agreement, or under any other obligation of Borrower to Bank.

(c) Any custodian, receiver or trustee is appointed to take possession, custody
or control of all or a substantial portion of the property of Borrower or of
any guarantor of any indebtedness.

(d) Borrower or any guarantor of any indebtedness becomes insolvent, or is
generally not paying or admits in writing its inability to pay its debts as
they become due, fails in business, makes a general assignment for the benefit
of creditors, dies or commences any case, proceeding or other action under any
bankruptcy or other law for the relief of, or relating to, debtors.

(e) Any case, proceeding or other action is commenced against Borrower or any
guarantor of any indebtedness under any bankruptcy or other law for the relief
of, or relating to, debtors.

(f) Any involuntary lien of any kind or character attaches to any Collateral.

(g) Any financial statements, certificates, schedules or other information now
or hereafter furnished by Borrower to Bank proves false or incorrect in any
material respect.

- --------------------------------------------------------------------------------
- ------------------------------------
6. BANK'S REMEDIES AFTER DEFAULT
- ------------------------------------
In the event of any default Bank may do any one or more of the following:

(a) Declare any indebtedness immediately due and payable, without notice or
demand.

(b) Enforce the security interest given hereunder pursuant to the Uniform
Commercial Code and any other applicable law.

(c) Enforce the security interest of Bank in any deposit account of Borrower
maintained with Bank by applying such account to the indebtedness.

(d) Require Borrower to assemble the Collateral, including the Books and
Records, and make them available to Bank at a place designated by Bank.

- --------------------------------------------------------------------------------
                                  Page 2 of 3


<PAGE>   12
     (e) Enter upon the property where any Collateral, including any books and
     Records, are located and take possession of such Collateral and such Books
     and Records, and use such property (including any buildings and facilities)
     and any of Borrower's equipment, if Bank deems such use necessary or
     advisable in order to take possession of, hold, preserve, process,
     assemble, prepare for sale or lease, market for sale or lease, sell or
     lease, or otherwise dispose of, any Collateral.

     (f) Grant extensions and compromise or settle claims with respect to the
     Collateral for less than face value, all without prior notice to Borrower.

     (g) Use or transfer any of Borrower's rights and interests in any
     Intellectual Property now owned or hereafter acquired by Borrower, if Bank
     deems such use necessary or advisable in order to take possession of, hold,
     preserve, process, assemble, prepare for sale or lease, market for sale or
     lease, sell or lease, or otherwise dispose of, any Collateral. Borrower
     agrees that any such use or transfer shall be without any additional
     consideration to Borrower. As used in this paragraph, "Intellectual
     Property" includes, but is not limited to, all trade secrets, computer
     software, service marks, trademarks, trade names, trade styles, copyrights,
     patents, applications for any of the foregoing, customer lists, working
     drawings, instructional manuals, and rights in processes for technical
     manufacturing, packaging and labelling, in which Borrower has any right or
     interest, whether by ownership, license, contract or otherwise.

     (h) Have a receiver appointed by any court of competent jurisdiction to
     take possession of the Collateral.

     (i) Take such measures as Bank may deem necessary or advisable to take
     possession of, hold, preserve, process, or lease, sell or lease, or
     otherwise dispose of, any Collateral, and Borrower hereby irrevocably
     constitutes and appoints Bank as Borrower's attorney-in-fact to perform all
     acts and execute all documents in connection therewith.
________________________________________________________________________________
- ---------------------------------------
7. MISCELLANEOUS
- ---------------------------------------

     (a) Any waiver, express or implied, of any provision hereunder and any
     delay or failure by Bank to enforce any provision shall not preclude Bank
     from enforcing any such provision thereafter.

     (b) Borrower shall, at the request of Bank, execute such other agreements,
     documents, instruments, or financing statements in connection with this
     Agreement as Bank may reasonably deem necessary.

     (c) All notes, security agreements, subordination agreements and other
     documents executed by Borrower or furnished to Bank in connection with this
     Agreement must be in form and substance satisfactory to Bank.

     (d) This Agreement shall be governed by and construed according to the laws
     of the State of California, to the jurisdiction of which the parties hereto
     submit.

     (e) All rights and remedies herein provided are cumulative and not
     exclusive of any rights or remedies otherwise provided by law. Any single
     or partial exercise of any right or remedy shall not preclude the further
     exercise thereof or the exercise of any other right or remedy.

     (f) All terms not defined herein are used as set forth in the Uniform
     Commercial Code.

     (g) In the event of any action by Bank to enforce this Agreement or to
     protect the security interest of Bank in the Collateral, or to take
     possession of, hold, preserve, process, assemble, prepare for sale or
     lease, market for sale or lease, sell or lease, or otherwise dispose of,
     any Collateral, Borrower agrees to pay immediately the costs and expenses
     thereof, together with reasonable attorney's fees and allocated costs for
     in-house legal services.

     (h) Any Borrower who is married agrees that such Borrower's separate
     property shall be liable for payment of the Indebtedness if such Borrower
     is personally liable for the Indebtedness.
________________________________________________________________________________
- ---------------------------------------
8. SIGNATURES/DATE
- ---------------------------------------

     This document was prepared on September 15, 1998.


PACIFIC SOFTWORKS, INC.
- --------------------------------------------------

By
   -----------------------------------------------
 GLENN RUSSELL, PRESIDENT

By
   -----------------------------------------------
LAURA RUSSELL, SECRETARY
________________________________________________________________________________
                                  Page 3 of 3

<PAGE>   13
[LOGO] BANK OF AMERICA
================================================================================
                                 AUTHORIZATION FOR DISBURSEMENT OF LOAN PROCEEDS

BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
               BUSINESS LENDING SERVICES                 Date September 15, 1998


The BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION BUSINESS LENDING
SERVICES is authorized to disburse the proceeds of that certain note dated
September 15, 1998 in the amount of $250,000.00 executed by the undersigned, as
follows:


<TABLE>
<S>                                                   <C>            <C>
Pay by cashiers check to                              No.                     $0.00
                         ---------------------------      ---------  ----------------
Pay by cashiers check to                              No.                     $0.00
                         ---------------------------      ---------  ----------------
Pay by purchase draft to                              No.                     $0.00
                         ---------------------------      ---------  ----------------
Credit Account                                        No.                     $0.00
               -------------------------------------      ---------  ----------------
Credit Account                                        No.                     $0.00
               -------------------------------------      ---------  ----------------
Renew Loan No. 7002            Remainder Undisbursed                    $250,000.00
               -------------
Payoff Loan No.                 As of:                                        $0.00
               -------------           -------------------------     ----------------
Undisbursed                                                                   $0.00
               --------------------------------------------          ----------------
Other                                                                         $0.00
               --------------------------------------------          ----------------
Fees           Financed Fees                                                  $0.00
               -------------------------------------                 ----------------
                                                      TOTAL:            $250,000.00
                                                                     ----------------
</TABLE>


Collect interest in the amount of __________________ to _____________

Borrower hereby authorizes the Bank to deduct from loan proceeds any uncollected
fees and any uncollected interest due from the Borrower to the Bank.

                                        1718394-7002
                                      ------------------------------------------
                                        PACIFIC SOFTWORKS, INC.
                                      ------------------------------------------
Breakdown of fees are as follows:       By
                                           -------------------------------------
                                         GLENN RUSSELL, PRESIDENT
                                        By
                                           -------------------------------------
                                         LAURA RUSSELL, SECRETARY
Loan fee:
                    --------------
Doc fee:
                    --------------
Setup fee:
                    --------------

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

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

Inspection fee:
                    --------------
Appraisal fee:
                    --------------
Escrow fee:
                    --------------
Title fee:
                    --------------
Lot book fee:
                    --------------
Recording fee:
                    --------------
Extension fee:
                    --------------
Credit report fee:
                    --------------
UCC filings fee:
                    --------------
    service fee:
                    --------------
Credit Life Ins fee:
                    --------------
TOTAL FEES:                  $0.00
                    --------------

                                  Page 1 of 1  

<PAGE>   14

[BANK OF AMERICA LOGO]
- --------------------------------------------------------------------------------
                                             ADDENDUM TO BUSINESS LINE AGREEMENT
                                                               FEES/DEFAULT RATE

This Addendum dated September 15, 1998 is part of the Business Line Agreement
between PACIFIC SOFTWORKS, INC. ("Borrower") and BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION ("Bank") dated September 15, 1998 (the "Agreement").

The Borrower agrees, so long as credit is available under the Agreement, and
until the Bank is repaid in full:

[X] I.   FEES

    (a) STATEMENT COPY FEE. A fee may be charged for each statement copy
    requested, plus an hourly charge for any necessary research time.

    (b) LATE FEE. If payment is not received within 15 days after the date the
    payment is due, a late charge of 6% of the unpaid portion of the payment
    amount, with a minimum of $5 and a maximum of $15 may be assessed. 
    This fee may be changed by the Bank at its option.

    (c) OVERLIMIT FEE. An overlimit fee of $15 may be assessed each time the
    Borrower exceeds the Credit Limit, regardless of whether the Bank permits
    the Borrower to exceed the Credit Limit.

    (d) RETURNED ITEM FEE. The Borrower may be charged a returned item fee of
    $10 each time a payment is returned or if there are insufficient funds in
    the Checking Account when a payment is attempted through Automatic Payment
    Service.

[ ] II.  DEFAULT RATE.

    Upon the occurrence and during the continuation of any default under the
    Agreement, amounts outstanding under the Agreement will at the option of the
    Bank bear interest at a rate per annum which is _______________ (________)
    percentage points higher than the rate of interest otherwise provided under
    the Agreement. This will not constitute a waiver of any default.

[ ] III. OTHER.
    ----------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

PACIFIC SOFTWORKS, INC.


By                                      By 
  ----------------------------------       -------------------------------------
  GLENN RUSSELL, PRESIDENT                 LAURA RUSSELL, SECRETARY

By                                      By 
  ----------------------------------       -------------------------------------

                                  PAGE 1 OF 1       Classification: Confidential




<PAGE>   15
GLENN P. RUSSELL and LAURA J. RUSSELL, Trustor(s) of the RUSSELL TRUST DATED
JUNE 23, 1997 (the "Trust"), established pursuant to that certain Declaration of
Trust/Trust Agreement dated JUNE 23, 1997 and amended on ______________________
(the "Trust Agreement") hereby declare that:

     1.   They are the Trustor(s) of the Trust;

     2.   They have retained the power to amend or revoke the Trust pursuant to
          the terms of the Trust Agreement;

     3.   They have the power pursuant to Section 16001 of the California
          Probate Code to direct the Trustee(s) of the Trust to take such
          actions as the Trustor(s) shall desire;

     4.   They hereby direct the Trustee(s) of the Trust to:

          [ ] encumber the following trust assets to secure the indebtedness of

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

              to Bank of America National Trust and Savings Association:

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

          [X] execute a continuing guaranty in favor of Bank of America National
              Trust and Savings Association in the principal amount of
              $250,000.00 guaranteeing the indebtedness of PACIFIC SOFTWORKS, 
              INC.

     5.   The Trustee(s) shall incur no liability to any person having a vested
          or contingent interest in the Trust as a result of following the
          directions contained herein.

The undersigned acknowledge that a copy of this letter will be delivered to
Bank as evidence of the Trustee(s)' authority to enter in the transaction
described above.

Date:  September 15, 1998
      ----------------------


- ------------------------------------       -------------------------------------
GLENN P. RUSSELL, TRUSTOR OF THE             LAURA J. RUSSELL, TRUSTOR OF THE
RUSSELL TRUST DATED JUNE 23, 1997            RUSSELL TRUST DATED JUNE 23, 1997



<PAGE>   1

                                                                  EXHIBIT 10.5

               [AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION LOGO]

                               STANDARD SUBLEASE
                (LONG-FORM TO BE USED WITH PRE-1996 AIR LEASES)

     1.   PARTIES. This Sublease, dated, for reference purposes only, April 7,
1998, is made by and between SHR Perceptual Management, an Arizona Corporation
("SUBLESSOR") and Pacific Softworks, Inc., a California Corporation
("SUBLESSEE").

     2.   PREMISES. Sublessor hereby subleases to Sublessee and Sublessee
hereby subleases from Sublessor for the term, at the rental, and upon all of
the conditions set forth herein, that certain real property, including all
improvements therein, and commonly known by the street address of 703 Rancho
Conejo Blvd., Newbury Park, California located in the County of Ventura, State
of California and generally described as (describe briefly the nature of the
property) an approximate 11,468 square foot concrete tilt-up industrial
building situated on approximately 31,588 square feet of land zoned M1 and to
include thirty (30) reserved car parking spaces. See Exhibit A attached.
("PREMISES").

     3.   TERM.

          3.1  TERM. The term of this Sublease shall be for twenty-nine and
one-half (29-1/2) months commencing on May 1, 1998 and ending on September 15,
2000 unless sooner terminated pursuant
 to any provision hereof.

          3.2  DELAY IN COMMENCEMENT. Sublessor agrees to use its best
commercially reasonable efforts to deliver possession of the Premises by the
commencement date. If, despite said efforts, Sublessor is unable to deliver
possession as agreed, Sublessor shall not be subject to any liability therefor,
nor shall such failure affect the validity of this Sublease. Sublessee shall
not, however, be obligated to pay Rent or perform its other obligations until
it receives possession of the Premises. If possession is not delivered within
sixty days after the commencement date, Sublessee may, at its option, by notice
in writing within ten days after the end of such sixty day period, cancel this
Sublease, in which event the Parties shall be discharged from all obligations
hereunder. If such written notice is not received by Sublessor within said ten
day period, Sublessee's right to cancel shall terminate. Except as otherwise
provided, if possession is not tendered to Sublessee when required and
Sublessee does not terminate this Sublease, as aforesaid, any period of rent
abatement that Sublessee would otherwise have enjoyed shall run from the date
of delivery of possession and continue for a period equal to what Sublessee
would otherwise have enjoyed under the terms hereof, but minus any days of
delay caused by the acts or omissions of Sublessee. If possession is not
delivered within 120 days after the commencement date, this Sublease shall
automatically terminate unless the Parties agree, in writing, to the contrary.

     4.   RENT.

          4.1  BASE RENT. Sublessee shall pay to Sublessor as Base Rent for the
Premises equal monthly payments of $8,486.32 in advance, on the first day of
each month of the term hereof. Sublessee shall pay Sublessor upon the execution
hereof $8,486.32 as Base Rent for month of May 1998. Base Rent for any period
during the term hereof which is for less than one month shall be a pro rata
portion of the monthly installment.

          4.2  RENT DEFINED. All monetary obligations of Sublessee to Sublessor
under the terms of this Sublease (except for the Security Deposit) are deemed
to be rent ("Rent"). Rent shall be payable in lawful money of the United States
to Sublessor at the address stated herein or to such other persons or at such
other places as Sublessor may designate in writing.

     5.   SECURITY DEPOSIT. Sublessee shall deposit with Sublessor upon
execution hereof $8,486.32 as security for Sublessee's faithful performance of
Sublessee's obligations hereunder. If Sublessee fails to pay Rent or other
charges due hereunder, or otherwise defaults with respect to any provision of
this Sublease, Sublessor may use, apply or retain all or any portion of said
deposit for the payment of any Rent or other charge in default or for the
payment of any other sum to which Sublessor may become obligated by reason of
Sublessee's default, or to compensate Sublessor for any loss or damage which
Sublessor may suffer thereby. If Sublessor so uses or applies all or any
portion of said deposit, Sublessee shall within ten days after written demand
therefore forward to Sublessor an amount sufficient to restore said Deposit to
the full amount provided for herein and Sublessee's failure to do so shall be a
material breach of this Sublease. Sublessor shall not be required to keep said
Deposit separate from its general accounts. If Sublessee performs all of
Sublessee's obligations hereunder, said Deposit, or so much thereof as has not
therefore been applied by Sublessor, shall be returned, without payment of
interest to Sublessee (or at Sublessor's option, to the last assignee, if any,
of Sublessee's interest hereunder) at the expiration of the term hereof, and
after Sublessee has vacated the Premises. No trust relationship is created
herein between Sublessor and Sublessee with respect to said Security Deposit.

     6.   USE.

          6.1  AGREED USE. The Premises shall be used and occupied only for
software development, general office and other lawful related uses, and for no
other purpose.

          6.2  COMPLIANCE. Sublessor warrants that the improvements on the
Premises comply with all applicable covenants or restrictions of record and
applicable building codes, regulations and ordinances ("APPLICABLE
REQUIREMENTS") in effect on the commencement date. Said warranty does not apply
to the use to which Sublessee will put the Premises or to any alterations or
utility installations made or to be made by Sublessee. NOTE: Sublessee is
responsible for determining whether or not the zoning is appropriate for its
intended use, and acknowledges that past uses of the Premises may no longer be
allowed. If the Premises do not comply with said warranty, Sublessor shall,
except as otherwise provided, promptly after receipt of written notice from
Sublessee setting forth with specificity the nature and extent of such
non-compliance, rectify the same at Sublessor's expense. If Sublessee does not
give Sublessor written notice of a non-compliance with this warranty within six
months following the commencement date, correction of that non-compliance shall
be the obligation of Sublessee at its sole cost and expense. If the Applicable
Requirements are hereafter changed so as to require during the term of this
Sublease the construction of an addition to or an alteration of the Building,
the remediation of any Hazardous Substance, or the reinforcement or other
physical modification of the Building ("CAPITAL EXPENDITURE"). Sublessor and
Sublessee shall allocate the cost of such work as follows:


                                  Page 1 of 4

<PAGE>   2
          (a)  If such Capital Expenditures are required as a result of the
specific and unique use of the Premises by Sublessee as compared with uses by
tenants in general, Sublessee shall be fully responsible for the cost thereof
provided, however, that if such Capital Expenditure is required during the last
two years of this Sublease and the cost thereof exceeds six months' Base
Rent,Sublessee may instead terminate this Sublease unless Sublessor notifies
Sublessee in writing, within ten days after receipt of Sublessee's termination
notice that Sublessor has elected to pay the difference between the actual cost
thereof and the amount equal to six months' Base Rent. If the Parties elect
termination, Sublessee shall immediately cease the use of the Premises which
requires such Capital Expenditure and deliver to Sublessor written notice
specifying a termination date at least ninety days thereafter. Such termination
date shall, however, in no event be earlier than the last day that Sublessee
could legally utilize the Premises without commencing such Capital Expenditure.

          (b)  If such Capital Expenditure is not the result of the specific and
unique use of the Premises by Sublessee (such as governmentally mandated seismic
modifications, then Sublessor shall pay for said Capital Expenditure and the
cost thereof shall be prorated between the Sublessor and Sublessee and Sublessee
shall only be obligated to pay, each month during the remainder of the term of
this Sublease, on the date on which Rent is due, an amount equal to the product
of multiplying the cost of such Capital Expenditure by a fraction, the numerator
of which is one, and the denominator of which is the number of months of the
useful life of such Capital Expenditure as such useful life is specified
pursuant to Federal income tax regulations or guidelines for depreciation
thereof (including interest on the unamortized balance as is then commercially
reasonable in the judgment of Sublessor's accountant), with Sublessee reserving
the right to prepay its obligation at any time. Provided,however, that if such
Capital Expenditure is required during the last two years of this Sublease or if
Sublessor reasonably determines that it is not economically feasible to pay its
share thereof, Sublessor shall have the option to terminate this Sublease upon
ninety days prior written notice to Sublessee unless Sublessee notifies
Sublessor, in writing, within ten days after receipt of Sublessor's termination
notice that Sublessee will pay for such Capital Expenditure. If Sublessor does
not elect to terminate, and fails to tender its share of any such Capital
Expenditure, Sublessee may advance such funds and deduct same, with interest,
from Rent until Sublessor's share of such costs have been fully paid. If
Sublessee is unable to finance Sublessor's share, or if the balance of the Rent
due and payable for the remainder of this Sublease is not sufficient to fully
reimburse Sublessee on an offset basis, Sublessee shall have the right to
terminate this Sublease upon ten days written notice to Sublessor.

          (c)   Notwithstanding the above, the provisions concerning Capital
Expenditures are intended to apply only to non-voluntary, unexpected, and new
Applicable Requirements. If the Capital Expenditures are instead triggered by
Sublessee as a result of an actual or proposed change in use, change in
intensity of use, or modification to the Premises then, and in that event,
Sublessee shall be fully responsible for the cost thereof, and Sublessee shall
not have any right to terminate this Sublease.

     6.3  ACCEPTANCE OF PREMISES AND LESSEE. Sublessee acknowledges that:

          (a)  it has been advised by Brokers to satisfy itself with respect to
the condition of the Premises (including but not limited to the electrical, HVAC
and fire sprinkler systems, security, environmental aspects, and compliance with
Applicable Requirements), and their suitability for Sublessee's intended use,

          (b)  Sublessee has made such investigation as it deems necessary with
reference to such matters and assumes all responsibility therefor as the same
relate to its occupancy of the Premises, and

          (c)  neither Sublessor, Sublessor's agents, nor any Broker has made
any oral or written representations or warranties with respect to said matters
other than as set forth in this Sublease.

In addition, Sublessor acknowledges that:

          (a)  Broker has made no representations, promises or warranties
concerning Sublessee's ability to honor the Sublease or suitability to occupy
the Premises, and

          (b)  it is Sublessor's sole responsibility to investigate the
financial capability and/or suitability of all proposed tenants.

     7.   MASTER LEASE

          7.1  Sublessor is the lessee of the Premises by virtue of a lease,
hereinafter the "MASTER LEASE", a copy of which is attached hereto marked
Exhibit 1, wherein Frank D. McDonald, dba Rancho Conejo Properties is the
lessor, hereinafter the "MASTER LESSOR".

          7.2  This Sublease is and shall be at all times subject and
subordinate to the Master Lease.

          7.3  The terms, conditions and respective obligations of Sublessor
and Sublessee to each other under this Sublease shall be the terms and
conditions of the Master Lease except for those provisions of the Master Lease
which are directly contradicted by this Sublease in which event the terms of
this Sublease document shall control over the Master Lease. Therefore, for the
purposes of this Sublease, wherever in the Master Lease the word "Lessor" is
used it shall be deemed to mean the Sublessor herein and wherever in the Master
Lease the word "Lessee" is used it shall be deemed to mean the Sublessee herein.

          7.4  During the term of this Sublease and for all periods subsequent
for obligations which have arisen prior to the termination of this Sublease,
Sublessee does hereby expressly assume and agree to perform and comply with, for
the benefit of Sublessor and Master Lessor, each and every obligation of
Sublessor under the Master Lease except for the following paragraphs which are
excluded therefrom:_____________________________________________________________
________________________________________________________________________________
          
          7.5  The obligations that Sublessee has assumed under paragraph 7.4
hereof are hereinafter referred to as the "SUBLESSEE'S ASSUMED OBLIGATIONS".
The obligations that sublessee has not assumed under paragraph 7.4 hereof are
hereinafter referred to as the "SUBLESSOR'S REMAINING OBLIGATIONS".

          7.6  Sublessee shall hold Sublessor free and harmless from all
liability, judgments, costs, damages, claims or demands, including reasonable
attorneys fees, arising out of Sublessee's failure to comply with or perform
Sublessee's Assumed Obligations.

          7.7  Sublessor agrees to maintain the Master Lease during the entire
term of this Sublease, subject, however, to any earlier termination of the
Master Lease without the fault of the Sublessor, and to comply with or perform
Sublessor's Remaining Obligations and to hold Sublessee free and harmless from
all liability, judgments, costs, damages, claims or demands arising out of
Sublessor's failure to comply with or perform Sublessor's Remaining Obligations.

          7.8  Sublessor represents to Sublessee that the Master Lease is in
full force and effect and that no default exists on the part of any Party to
the Master Lease.

     8.   ASSIGNMENT OF SUBLEASE AND DEFAULT.

          8.1  Sublessor hereby assigns and transfers to Master Lessor the
Sublessor's interest in this Sublease, subject however to the provisions of
Paragraph 8.2 hereof.

          8.2  Master Lessor, by executing this document, agrees that until a
Default shall occur in the performance of Sublessor's Obligations under the
Master Lease, that Sublessor may receive, collect and enjoy the Rent accruing
under this Sublease. However, if Sublessor shall Default in the performance of
its obligations to Master Lessor then Master Lessor may, at its option, receive
and collect, directly from Sublessee, all Rent owing and to be owed under this
Sublease. Master Lessor shall not, by reason of this assignment of the Sublease
nor by reason of the collection of the Rent from the Sublessee, be deemed
liable to Sublessee for any failure of the Sublessor to perform and comply with
Sublessor's Remaining Obligations.


                                  Page 2 of 4


<PAGE>   3
          8.3  Sublessor hereby irrevocably authorizes and directs Sublessee
upon receipt of any written notice from the Master Lessor stating that a Default
exists in the performance of Sublessor's obligations under the Master Lease, to
pay to Master Lessor the Rent due and to become due under the Sublease.
Sublessor agrees that Sublessee shall have the right to rely upon any such
statement and request from Master Lessor, and that Sublessee shall pay such Rent
to Master Lessor without any obligation or right to inquire as to whether such
Default exists and notwithstanding any notice from or claim from Sublessor to
the contrary and Sublessor shall have no right or claim against Sublessee for
any such Rent so paid by Sublessee.

          8.4  No charges or modifications shall be made in this Sublease
without the consent of Master Lessor.

     9.   CONSENT OF MASTER LESSOR.

          9.1  In the event that the Master Lease requires that Sublessor
obtain the consent of Master Lessor to any subletting by Sublessor then, this
Sublease shall not be effective unless, within ten days of the date hereof,
Master Lessor signs this Sublease thereby giving its consent to this Subletting.

          9.2  In the event that the obligations of the Sublessor under the
Master Lease have been guaranteed by third parties then neither this Sublease,
nor the Master Lessor's consent, shall be effective unless, within 10 days of
the date hereof, said guarantors sign this Sublease thereby giving their
consent to this Sublease.

          9.3  In the event that Master Lessor does give such consent then:

               (a)  Such consent shall not release Sublessor of its obligations
or alter the primary liability of Sublessor to pay the Rent and perform and
comply with all of the obligations of Sublessor to be performed under the Master
Lease.

               (b)  The acceptance of Rent by Master Lessor from Sublessee or
anyone else liable under the Master Lease shall not be deemed a waiver by
Master Lessor of any provisions of the Master Lease.

               (c)  The consent to this Sublease shall not constitute a consent
to any subsequent subletting or assignment.

               (d)  In the event of any Default of Sublessor under the Master
Lease, Master Lessor may proceed directly against Sublessor, any guarantors or
anyone else liable under the Master Lease or this Sublease without first
exhausting Master Lessor's remedies against any other person or entity liable
thereon to Master Lessor.

               (e)  Master Lessor may consent to subsequent sublettings and
assignments of the Master Lease or this Sublease or any amendments or
modifications thereto without notifying Sublessor or anyone else liable under
the Master Lease and without obtaining their consent and such action shall not
relieve such persons from liability.

               (f)  In the event that Sublessor shall Default in its
obligations under the Master Lease, then Master Lessor, at its option and
without being obligated to do so, may require Sublessee to attorn to Master
Lessor in which event Master Lessor shall undertake the obligations of
Sublessor under this Sublease from the time of the exercise of said option to
termination of this Sublease but Master Lessor shall not be liable for any
prepaid Rent nor any Security Deposit paid by Sublessee, nor shall Master
Lessor be liable for any other Defaults of the Sublessor under the Sublease.

          9.4  The signature of the Master Lessor and any Guarantors of
Sublessor at the end of this document shall constitute their consent to the
terms of this Sublease.

          9.5  Master Lessor acknowledges that, to the best of Master Lessor's
knowledge, no Default presently exists under the Master Lease of obligations to
be performed by Sublessor and that the Master Lease is in full force and effect.

          9.6  In the event that Sublessor Defaults under its obligations to be
performed under the Master Lease by Sublessor, Master Lessor agrees to deliver
to Sublessee a copy of any such notice of default. Sublessee shall have the
right to cure any Default of Sublessor described in any notice of default
within ten days after service of such notice of default on Sublessee. If such
Default is cured by Sublessee then Sublessee shall have the right of
reimbursement and offset from and against Sublessor.

     10.  BROKERS FEE.

          10.1 Upon execution hereof by all parties, Sublessor shall pay to CB
Commercial Real Estate Group, Inc. a licensed real estate broker, ("BROKER"), a
fee as set forth in a separate agreement between Sublessor and Broker, for
brokerage services rendered by Broker to Sublessor in this transaction.

          10.2 Sublessor agrees that if Sublessee exercises any option or right
of first refusal as granted by Sublessor herein, or any option or right
substantially similar thereto, either to extend the terms of this Sublease, to
renew this Sublease, to purchase the Premises, or to lease or purchase
adjacent property which Sublessor may own or in which Sublessor has an
interest, then Sublessor shall pay to Broker a fee in accordance with the
schedule of Broker in effect at the time of the execution of this Sublease.
Notwithstanding the foregoing, Sublessor's obligation under this Paragraph 10.2
is limited to a transaction in which Sublessor is acting as a Sublessor, lessor
or seller.

          10.3 Master Lessor agrees that if Sublessee shall exercise any option
or right of first refusal granted to Sublessee by Master Lessor in connection
with this Sublease, or any option or right substantially similar thereto,
either to extend or renew the Master Lease, to purchase the Premises or any
part thereof, or to lease or purchase adjacent property which Master Lessor may
own or in which Master Lessor has an interest, or if Broker is the procuring
cause of any other lease or sale entered into between Sublessee and Master
Lessor pertaining to the Premises, any part thereof, or any adjacent property
which Master Lessor owns or in which it has an interest, then as to any of said
transactions, Master Lessor shall pay to Broker a fee, in cash, in accordance
with the schedule of Broker in effect at the time of the execution of this
Sublease.

          10.4 Any fee due from Sublessor or Master Lessor hereunder shall
be due and payable upon the exercise of any option to extend or renew, upon the
execution of any new lease, or in the event of a purchase, at the close of
escrow.

          10.5 Any transferee of Sublessor's interest in this Sublease, or of
Master Lessor's interest in the Master Lease, by accepting an assignment
thereof, shall be deemed to have assumed the respective obligations of
Sublessor or Master Lessor under this Paragraph 10. Broker shall be deemed to
be a third-party beneficiary of this paragraph 10.

     11.  ATTORNEY'S FEES. If any party or the Broker named herein brings an
action to enforce the terms hereof or to declare rights hereunder, the
prevailing party in any such action, on trial and appeal, shall be entitled to
his reasonable attorney's fees to be paid by the losing party as fixed by the
Court. 

     12.  ADDITIONAL PROVISIONS. (If there are not additional provisions, draw
a line from this point to the next printed word after the space left here. If
there are additional provisions place the same here.) *Addendum paragraph 13
through 17, Exhibit "A" Parking Plan, and Exhibit 1 (Master Lease)

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

                                  Page 3 of 4


<PAGE>   4
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY REAL ESTATE BROKER AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS SUBLEASE OR THE
TRANSACTION TO WHICH IT RELATES. THE PARTIES AND URGED TO:

1.   SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THE
     SUBLEASE.

     RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF
THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE
POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PROPERTY, THE
STRUCTURAL INTEGRITY, THE CONDITION OF THE PROOF AND OPERATING SYSTEMS, AND THE
SUITABILITY OF THE PREMISES FOR SUBLESSEE'S INTENDED USE.

WARNING: IF THE SUBJECT PROPERTY AS LOCATED IN A STATE OTHER THAN CALIFORNIA,
CERTAIN PROVISIONS OF THE SUBLEASE MAY NEED TO BE REVISED TO COMPLY WITH THE
LAWS OF THE STATE IN WHICH THE PROPERTY IS LOCATED.

Executed at:  Scottsdale, Arizona         SHR Perceptual Management, an Arizona
            --------------------------        Corporation
on: April 1998                                 ---------------------------------
   -----------------------------------    By  /s/ CHARLES P. STANFORD, JR.
                                             -----------------------------------
Address: 8802 E. Doubletree Ranch Rd.,    By  Charles P. Stanford, Jr.
         Suite 200                           -----------------------------------
         Scottsdale, AZ 85258                Senior Vice President & C.F.O.
         -----------------------------    (Sublessor) (Corporate Seal) 



Executed at:  Camarillo, California       Pacific Softworks, Inc., a California
            --------------------------      Corporation
on: April 19998                           -------------------------------------
   -----------------------------------    By  /s/ JULIE WHITE
Address: 4000 Via Pescador                   ----------------------------------
         Camarillo, CA 93012                      Julie White, V.P.
         -----------------------------    By /s/ JOSEPH LECHMAN
                                             -----------------------------------
                                             Joseph Lechman, Secretary President
                                          "Sublessee" (Corporate Seal)


Executed at:                              Frank D. McDonald dba Rancho Conejo
            --------------------------      Properties
on: April 1998                             -------------------------------------
   -----------------------------------    By
Address:                                     -----------------------------------
        ------------------------------    By Frank D. McDonald
                                             -----------------------------------
                                          "Master Lessor" (Corporate Seal)

NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are utilizing the
most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So. Flower
St., Suite 500, Los Angeles, CA 90017. (213) 687-8777.




                                  Page 4 of 4
   

<PAGE>   5
ADDENDUM TO THAT STANDARD SUBLEASE DATED APRIL 7, 1998 FOR THAT CERTAIN
PROPERTY COMMONLY KNOWN AS 703 RANCHO CONEJO BLVD., NEWBURY PARK, CALIFORNIA IN
WHICH SHR PERCEPTUAL MANAGEMENT, AN ARIZONA CORPORATION IS THE SUBLESSOR AND
PACIFIC SOFTWORKS, INC., A CALIFORNIA CORPORATION IS THE SUBLESSEE.

13.  IMPROVEMENTS 
     BY SUBLESSOR:       Prior to the commencement of the sublease term, the
                         Sublessor shall, at its sole cost and expense, make the
                         following alterations to the premises:

                         A.   Remove film coating from windows returning
                              perimeter windows to clear glass.
     
                         B.   Repaint interior of subject premises. Sublessee to
                              have choice of color.

                         C.   Remove surface plate in center of warehouse and
                              match VCT tile.

                         D.   Repaint exterior tilt-up wall other than that
                              which is exposed aggregate.

                         E.   Clean and polish tile and hardwood floor.

                         F.   Black background dividers to be left in premises
                              for Sublessee's use.

                         G.   Replace any damaged or stained ceiling tiles.
          
                         H.   Service roof, repairing any leaks.

                         I.   Replace fluorescent light bulbs where necessary.

                         Sublessor agrees to provide Sublessee with a work
                         schedule as soon as it receives it.

14.  EARLY ACCESS:       Sublessor shall grant Sublessee fifteen (15) days early
                         access to the premises for the purpose of installing
                         telephone and computer lines, furniture, fixtures and 
                         equipment. Any such access by Sublessee shall be 
                         subject to all of the terms, covenants and conditions
                         of the Sublease other than the payment of rent during
                         the period thereof. Sublessee agrees not to interfere,
                         as the result of such access, with the work of
                         Sublessor or its agents and employees in the completion
                         of the modifications required of Sublessor hereunder.
                         Sublessor shall have no liability to Sublessee for any
                         such equipment or merchandise of Sublessee situated
                         within the premises during the period of such access.

15.  RENT ADJUSTMENTS:   The Base Rent shall be increased to the following
                         amounts on the dates set forth below:

                         May 1, 1999       $8,825.77 per month
                         May 1, 2000       $9,178.80 per month

16.  HAZARDOUS 
     MATERIALS:          As in any real estate transaction, it is recommended
                         that you consult with a professional such as a civil
                         engineer, industrial hygienist or other person, with
                         experience in evaluating the condition of the property
                         including the possible presence of asbestos, hazardous
                         materials and underground storage tanks. Owner agrees
                         to disclose to Broker and to prospective purchasers
                         and tenants any and all information which Owner has
                         regarding present and future zoning and environmental
                         matters affecting the Property and regarding the
                         condition of

 

<PAGE>   6
          the Property including, but not limited to, structural, mechanical and
          soils conditions, the presence and location of asbestos, PCB
          transformers, other toxic, hazardous or contaminated substances, and
          underground storage tanks, in, on, or about the Property. Broker is
          authorized to disclose any such information to prospective purchasers
          or tenants.

17. ADA:   Please be advised that an owner or tenant of real property may be
           subject to the Americans With Disabilities Act (the ADA), a Federal
           law codified at 42 USC Section 12101 et seq. Among other requirements
           of the ADA that could apply to your property, Title III of the ADA
           requires owners and tenants of "public accommodations" to remove
           barriers to access by disabled persons and provide auxiliary aids and
           services for hearing, vision or speech impaired persons by January
           26, 1992. The regulations under Title III of the ADA are codified at
           28 CFR Part 36. We recommend you review the ADA and regulations, as
           CB Commercial cannot give you legal advice on these issues.

<PAGE>   7
                                   EXHIBIT A

                                  PARKING PLAN


                              [SITE PLAN GRAPHIC]

<PAGE>   8
               [LOGO] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION

            STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE--NET
                (Do not use this form for Multi-Tenant Property)


1.   BASIC PROVISIONS ("BASIC PROVISIONS")

     1.1  PARTIES: This Lease ("Lease"), dated for reference purposes only,
March 31, 1995, is made by and between Frank D. McDonald, dba Rancho Conejo
Properties ("Lessor") and SHR Perceptual Management, an Arizona Corporation
("Lessee"), (collectively the "PARTIES," or individually a "PARTY").
     1.2  PREMISES: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known by the street address of 703 Rancho Conejo Boulevard located in the
County of Ventura, State of California 91320 and generally described as
(describe briefly the nature of the property) a concrete tilt-up industrial
building consisting of approximately 11,468 square feet situated on
approximately 31,588 square feet of M-1 zoned land. ("PREMISES"), (See
Paragraph 2 for further provisions.)
     1.3  TERM: five (5) years and four (4) months ("ORIGINAL TERM") commencing
May 15, 1995 ("COMMENCEMENT DATE") and ending September 15, 2000 ("EXPIRATION
DATE"), (See Paragraph 3 for further provisions.) 
     1.4  EARLY POSSESSION: May 1, 1995 ("EARLY POSSESSION DATE"). (See
Paragraph 3.2 and 3.3 for further provisions.)
     1.5  BASE RENT: $7,224.84 per month ("BASE RENT"), payable on the first
day of each month commencing May 1, 1995 (See Paragraph 4 for further
provisions.)
/X/ If this box is checked, there are provisions in this LEASE for the BASE
    RENT to be adjusted.
     1.6  BASE RENT PAID UPON EXECUTION: $7,224.84 as Base Rent for the period
May 15-31, 1995 and September 1-15, 2000.
     1.7  SECURITY DEPOSIT: $7,224.84 ("SECURITY DEPOSIT"). (See Paragraph 5
for further provisions.)
     1.8  PERMITTED USE: Industrial design and fabrication of prototypes for
the automotive industry. (See Paragraph 6 for further provisions.)
     1.9  INSURING PARTY: Lessee is the "INSURING PARTY" unless otherwise
stated herein. (See Paragraph 8 for further provisions.)
     1.10 REAL ESTATE BROKERS: The following real estate brokers (collectively,
the "BROKERS") and brokerage relationships exist in this transaction and are
consented to by the Parties (check applicable boxes):
CB Commercial Real Estate Group, Inc. represents 
/X/ Lessor exclusively ("LESSOR'S BROKER"); / / both Lessor and Lessee, and 
    Capital Commercial Real Estate represents 
/X/ Lessee exclusively ("LESSEE'S BROKER"); / / both Lessee and Lessor. (See
    Paragraph 15 for further provisions.)
     1.11 Guarantor. The obligations of the Lessee under this Lease are to be
guaranteed by N/A ("GUARANTOR"). (See Paragraph 37 for further provisions.)
     1.12 ADDENDA. Attached hereto is an Addendum or Addenda consisting of 
Paragraphs 49 through 53 and Exhibit "A" Parking Area and Exhibit "B" Tenant
Improvement Plan all of which constitute a part of this Lease.
2.  PREMISES.
     2.1  LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, the Premises, for the term, at the rental, and upon all of the terms,
covenants and conditions set forth in this Lease. Unless otherwise provided
herein, any statement of square footage set forth in this Lease, or that may
have been used in calculating rental, is an approximation which Lessor and
Lessee agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual square footage is more or less.
     2.2  CONDITION. Lessor shall deliver the Premises to Lessee clean and free
of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, fire sprinkler system, lighting, air conditioning, hasting, and
loading doors, if any, in the Premises, other than those constructed by Lessee,
shall be in good operating condition on the Commencement Date. If a
non-compliance with said warranty exists as of the Commencement Date. Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify same at Lessor's expense. If Lessee does not
give Lessor written notice of a non-compliance with this warranty within thirty
(30) days after the Commencement Date, correction of that non-compliance shall
be the obligation of Lessee at Lessee's sole cost and expense.
     2.3  COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor
warrants to Lessee that the improvements on the Premises comply with all
applicable covenants or restrictions of record and applicable building codes,
regulations and ordinances in effect on the Commencement Date. Said warranty
does not apply to the use to which Lessee will put the Premises or to any
Alterations or Utility installations (as defined in Paragraph 7.3(a)) made or
to be made by Lessee. If the Premises do not comply with said warranty, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify the same at Lessor's expense. If Lessee does not
give Lessor written notice of a non-compliance with this warranty within six (6)
months following the Commencement Date, correction of that non-compliance shall
be the obligation of Lessee at Lessee's sole cost and expense. See Addendum.
     2.4  ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has
been advised by the Brokers to satisfy itself with respect to the condition of
the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, compliance with Applicable Law as
defined in Paragraph 6.3) and the present and future suitability of the
Premises for Lessee's intended use, (b) that Lessee has made such investigation
as it deems necessary with reference to such matters and assumes all
responsibility therefor as the same relate to Lessee's occupancy of the
Premises and/or the term of this Lease, and (c) that neither Lessor, nor any of
Lessor's agents, has made any oral or written representations or warranties with
respect to the said matters other than as set forth in this Lease.
     2.5  LESSEE PRIOR OWNER/OCCUPANT. The warranties made by Lessor in this
Paragraph 2 shall be of no force or effect if immediately prior to the date set
forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises, in
such event, Lessee shall, at Lessee's sole cost and expense, correct any
non-compliance of the Premises with said warranties.
3.  TERM.
     3.1  TERM. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
     3.2  EARLY POSSESSION. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent shall
be abated for the period of such early possession. All other terms of this
Lease, however, (including but not limited to the obligations to pay Real
Property and insurance premiums and to maintain the Premises) shall be in
effect during such period. Any such early possession shall not affect nor
advance the Expiration Date of the Original Term.

                                     PAGE 1


                                                                       Exhibit 1
     



<PAGE>   9
     3.3  DELAY IN POSSESSION. If for any reason Lessor cannot deliver
possession of the Premises to Lessee as agreed herein by the Early Possession
Date. If one is specified in Paragraph 1.4, or, if no Early Possession Date is
specified, by the Commencement Date, Lessor shall not be subject to any
liability therefor, nor shall such failure affect the validity of this Lease, or
the obligations of Lessee hereunder, or extend the term hereof, but in such
case, Lessee shall not, except as otherwise provided herein, be obligated to pay
rent or perform any other obligation of Lessee under the terms of this Lease
until Lessor delivers possession of the Premises to Lessee. If possession of the
Premises is not delivered to Lessee within sixty (60) days after the
Commencement Date, Lessee may, at its option, by notice in writing to Lessor
within ten (10) days thereafter, cancel this Lease, in which event the Parties
shall be discharged from all obligations hereunder; provided, however, that if
such written notice by Lessee is not received by Lessor within said ten (10) day
period, Lessee's right to cancel this Lease shall terminate and be of no further
force or effect. Except as may be otherwise provided, and regardless of when the
term actually commences, if possession is not tendered to Lessee when required
by this Lease and Lessee does not terminate this Lease, as aforesaid, the period
free of the obligation to pay Base Rent, if any, that Lessee would otherwise
have enjoyed shall run from the date of delivery of possession and continue for
a period equal to what Lessee would otherwise have enjoyed under the terms
hereof, but minus any days of delay caused by the acts, changes or omissions of
Lessee.

4.   RENT.

     4.1  BASE RENT. Lessee shall cause payment of Base Rent and other rent or
charges, as the same may be adjusted from time to time, to be received by
Lessor in lawful money of the United States, without offset or deduction, on or
before the day on which it is due under the terms of this Lease. Base Rent and
all other rent and charges for any period during the term hereof which is for
less than one (1) full calendar month shall be prorated based upon the actual
number of days of the calendar month involved. Payment of Base Rent and other
charges shall be made to Lessor at its address stated herein or to such other
persons or at such other addresses as Lessor may from time to tome designate in
writing to Lessee.

5.   SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof
the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or
retain all or any portion of said Security Deposit for the payment of any
amount due Lessor or to reimburse or compensate Lessor for any liability, cost,
expense, loss or damage (including attorneys' fees) which Lessor may suffer or
incur by reason thereof. If Lessor uses or applies all or any portion of said
Security Deposit, Lessee shall within ten (10) days after written request
therefor deposit moneys with Lessor sufficient to restore said Security Deposit
to the full amount required by this Lease. Any time the Base Rent increases
during the term of this Lease. Lessee shall, upon written request from Lessor,
deposit additional moneys with Lessor sufficient to maintain the same ratio
between the Security Deposit and the Base Rent as those amounts are specified
in the Basic Provisions. Lessor shall not be required to keep all or any part
of the Security Deposit separate from its general accounts. Lessor shall, at
the expiration or earlier termination of the term hereof and after Lessee has
vacated the Premises, return to Lessee (or, at Lessor's option, to the last
assignee, if any, of Lessee's interest herein), that portion of the
Security Deposit not used or applied by Lessor. Unless otherwise expressly
agreed in writing by Lessor, no part of the Security Deposit shall be
considered to be held in trust, to bear interest or other increment for its
use, or to be prepayment for any moneys to be paid by Lessee under this Lease.

6.   USE.

     6.1  USE. Lessee shall use and occupy the Premises only for the purposes
set forth in Paragraph 1.8, or any other use which is comparable thereto, and
for no other purpose. Lessee shall not use or permit the use of the Premises in
a manner that creates waste or a nuisance, or that disturbs owners and/or
occupants of, or causes damage to, neighboring premises or properties. Lessor
hereby agrees to not unreasonably withhold or delay its consent to any written
request by Lessee, Lessees assignees or subtenants, and by prospective
assignees and subtenants of the Lessee, its assignees and subtenants, for a
modification of said permitted purpose for which the premises may be used or
occupied, so long as the same will not impair the structural integrity of the
improvements on the Premises, the mechanical or electrical systems therein, is
not significantly more burdensome to the Premises and the improvements thereon,
and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to
withhold such consent, Lessor shall within five (5) business days give a
written notification of same, which notice shall include an explanation of
Lessor's reasonable objections to the change in use.

     6.2  HAZARDOUS SUBSTANCES.

          (a)  REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE"
as used in this Lease shall mean any product, substance, chemical, material or
waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for liability of Lessor to any governmental agency
or third party under any applicable statute or common law theory. Hazardous
Substance shall include, but not be limited to, hydrocarbons, petroleum,
gasoline, crude oil or any products, by-products or fractions thereof. Lessee
shall not engage in any activity in, on or about the Premises which constitutes
a Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph
6.3). "REPORTABLE USE" shall mean (i) the installation or use of any above or
below ground storage tank, (ii) the generation, possession, storage, use,
transportation, or disposal of a Hazardous Substance that requires a permit
from, or with respect to which a report, notice, registration or business plan
is required to be filed with, any governmental authority. Reportable Use shall
also include Lessee's being responsible for the presence in, on or about the
Premises of a Hazardous Substance with respect to which any Applicable Law
requires that a notice be given to persons entering or occupying the Premises or
neighboring properties. Notwithstanding the foregoing, Lessee may, without
Lessor's prior consent, but in compliance with all Applicable Law, use any
ordinary and customary materials reasonably required to be used by Lessee in the
normal course of Lessee's business permitted on the Premises, so long as such
use is not a Reportable Use and does not expose the Premises or neighboring
properties to any meaningful risk of contamination or damage or expose Lessor to
any liability therefor. In addition, Lessor may (but without any obligation to
do so) condition its consent to the use or presence of any Hazardous Substance,
activity or storage tank by Lessee upon Lessee's giving Lessor such additional
assurances as Lessor, in its reasonable discretion, deems necessary to protect
itself, the public, the Premises and the environment against damage,
contamination or injury and/or liability therefrom or therefor, including, but
not limited to, the installation (and removal on or before Lease expiration or
earlier termination) of reasonably necessary protective modifications to the
Premises (such as concrete encasements) and/or the deposit of an additional
Security Deposit under Paragraph 5 hereof. See Addendum.

          (b)  DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause
to believe, that a Hazardous Substance, or a condition involving or resulting
from same, has come to be located in, on, under or about the Premises, other
than as previously consented to by Lessor, Lessee shall immediately give
written notice of such fact to Lessor. Lessee shall also immediately give
Lessor a copy of any statement, report, notice, registration, application,
permit, business plan, license, claim, action or proceeding given to, or
received from, any governmental authority or private party, or persons entering
or occupying the Premises, concerning the presence, spill, release, discharge
of, or exposure to, any Hazardous Substance or contamination in, on, or about
the Premises, including but not limited to all such documents as may be
involved in any Reportable Uses involving the Premises.

          (c)  INDEMNIFICATION. Lessee shall indemnify, protect, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all loss of rents and/or damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, permits and
attorney's and consultant's fees arising out of or involving any Hazardous
Substance or storage tank brought onto the Premises by or for Lessee or under
Lessee's control. Lessee's obligations under this Paragraph 6 shall include, but
not be limited to, the effects of any contamination or injury to person,
property or the environment created or suffered by Lessee, and the cost of
investigation (including consultant's and attorney's fees and testing), removal
remediation, restoration and/or abatement thereof, or of any contamination
therein involved, and shall survive the expiration or earlier termination of
this ??? Lease. No termination, cancellation or release agreement entered into
by Lessor and Lessee shall release Lessee from its obligations under this Lease
???? respect to Hazardous Substances or storage tanks, unless specifically so
agreed by Lessor in writing at the time of such agreement.

     6.3  LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this
Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and
in a timely manner, comply with all "APPLICABLE LAW," which term is used in this
Lease to include all laws, rules, regulations, ordinances, directives,
covenants, easements and restrictions of record, permits, the requirements of
any applicable fire insurance underwriter or rating bureau, and the
recommendations of Lessor's engineers and/or consultants, relating in any manner
to the Premises (including but not limited to matters pertaining to (i)
industrial hygiene, (ii) environmental conditions on, in, under or about the
Premises, including soil and groundwater conditions, and (iii) the use,
generation, manufacture, production, installation, maintenance, removal,
transportation, storage, spill or release of any Hazardous Substance or storage
tank), now in effect or which may hereafter come into effect and whether or not
reflecting a change in policy from any previously existing policy. Lessee shall,
within five (5) days after receipt of Lessor's written request, provide Lessor
with copies of all documents and information, including, but not limited to,
permits, registrations, manifests, applications, reports and certificates,
evidencing Lessee's compliance with any Applicable Law specified by Lessor, and
shall immediately upon receipt, notify Lessor in writing (with copies of any
documents involved) of any threatened or actual claim, notice, citation,
warning, complaint or report pertaining to or involving failure by Lessee or the
Premises to comply with any Applicable Law.

     6.4  INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) (as defined in
Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in
the case of an emergency, and otherwise at reasonable times, for the purpose of
inspecting the condition of the Premises and for verifying compliance by Lessee
with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to
employ experts and/or consultants in connection therewith and/or to advise
Lessor with respect to Lessee's activities, including but not limited to the
installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance or storage tank on or from the Premises. The costs and
expenses of any such inspections shall be paid by the party requesting same,
unless a Default or Breach of this Lease, violation of Applicable Law, or a
contamination, caused or materially contributed to by Lessee is found to exist
or be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In any such case, Lessee shall upon request reimburse Lessor
or Lessor's Lender, as the case may be, for the costs and expenses of such
inspections. See Addendum.

??? MAINTENANCE; REPAIRS; Utility Installations; Trade Fixtures and
Alterations.

     7.1  LESSEE'S OBLIGATIONS.

          (a)  Subject to the provisions of Paragraphs 2.2 (Lessor's warranty
as to condition), 2.3 (Lessor's warranty as to compliance with covenants, etc),



                                     PAGE 2

<PAGE>   10
any funds contributed by Lessee to repair any such damage or destruction.
Premises Partial Damage due to flood or earthquake shall be subject to
Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be some
insurance coverage, but the net proceeds of any such insurance shall be made
available for the repairs if made by either Party.

     9.3  PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage that
is not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13). Lessor may at Lessor's option, either: (i) repair
such damage as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) give written notice
to Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such damage of Lessor's desire to terminate this Lease as of the
date sixty (60) days following the giving of such notice. In the event Lessor
elects to give such notice of Lessor's intention to terminate this Lease,
Lessee shall have the right within ten (10) days after the receipt of such
notice to give written notice to Lessor of Lessee's commitment to pay for the
repair of such damage totally at Lessee's expense and without reimbursement
from Lessor. Lessee shall provide Lessor with the required funds or
satisfactory assurance thereof within thirty (30) days following Lessee's said
commitment. In such event this Lease shall continue in full force and effect,
and Lessor shall proceed to make such repairs as soon as reasonably possible
and the required funds are available. If Lessee does not give such notice and
provide the funds or assurance thereof within the times specified above, this
Lease shall terminate as of the date specified in Lessor's notice of
termination.

     9.4  TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lessee shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the
damage or destruction is an Insured Loss or was caused by a negligent or
willful act of Lessee. In the event, however, that the damage or destruction
was caused by Lessee, Lessor shall have the right to recover Lessor's damages
from Lessee except as released and waived in Paragraph 8.6.

     9.5  DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one (1) month's Base rent, whether or not an insured Loss, Lessor may,
at Lessor's option, terminate this Lease effective sixty (60) days following
the date of occurrence of such damage by giving written notice to Lessee of
Lessor's election to do so within thirty (30) days after the date of occurrence
of such damage. Provided, however, if Lessee at that time has an exercisable
option to extend this Lease or to purchase the Premises, then Lessee may
preserve this Lease by within twenty (20) days following the occurrence of the
damage, or before the expiration of the time provided in such option for its
exercise, whichever is earlier ("EXERCISE PERIOD"), (i) exercising such option
and (ii) providing Lessor with any shortage in insurance proceeds (or adequate
assurance thereof) needed to make the repairs. If Lessee duly exercises such
option during said Exercise Period and provides Lessor with funds (or adequate
assurance thereof) to cover any shortage in insurance proceeds, Lessor shall,
at Lessor's expense repair such damage as soon as reasonably possible and this
Lease shall continue in full force and effect. If Lessee fails to exercise such
option and provide such funds or assurance during said Exercise Period, then
Lessor may at Lessor's option terminate this Lease as of the expiration of said
sixty (60) day period following the occurrence of such damage by giving written
notice to Lessee of Lessor's election to do so within ten (10) days after the
expiration of the Exercise Period, notwithstanding any term or provision in the
grant of option to the contrary.

9.6  ABATEMENT OF RENT; LESSEE'S REMEDIES.

          (a) In the event of damage described in Paragraph 9.2 (Partial Damage
- - Insured), whether or not Lessor or Lessee repairs or restores the Premises,
the Base rent, Real Property Taxes, insurance premiums, and other charges, if
any, payable by Lessee hereunder for the period during which such damage, its
repair or the restoration continues (not to exceed the period for which rental
value insurance is required under Paragraph 8.3(b)), shall be abated in
proportion to the degree to which Lessee's use of the Premises is impaired.
Except for abatement of Base Rent, Real Property Taxes, insurance premiums, and
other charges, if any, as aforesaid, all other obligations of Lessee hereunder
shall be performed by Lessee, and Lessee shall have no claim against Lessor for
any damage suffered by reason of any such repair or restoration.

          (b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety (90) days after such obligation shall accrue, Lessee may, at any time
prior to the commencement of such repair or restoration, give written notice to
Lessor and to any Lenders of which Lessee has actual notice of Lessee's
election to terminate this Lease on a date not less than sixty (60) days
following the giving of such notice. If Lessee gives such notice to Lessor and
such Lenders and such repair or restoration is not commenced within thirty (30)
days after receipt of such notice, this Lease shall terminate as of the date
specified in said notice. If Lessor or a Lender commences the repair or
restoration of the Premises within thirty (30) days after receipt of such
notice, this Lease shall continue in full force and effect. "COMMENCE" as used
in this Paragraph shall mean either the unconditional authorization of the
preparation of the required plans, or the beginning of the actual work on the
Premises, whichever first occurs.

     9.7  HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable Law
and this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option either (i)
investigate and remediate such Hazardous Substance Condition, if required, as
soon as reasonably possible at Lessor's expense, in which event this Lease
shall continue in full force and effect, or (ii) if the estimated cost to
investigate and remediate such condition exceeds twelve (12) times the then
monthly Base Rent or $100,000, whichever is greater, give written notice to
Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such Hazardous Substance Condition of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the giving of
such notice. In the event Lessor elects to give such notice of Lessor's
intention to terminate this Lease. Lessee shall have the right within ten (10)
days after the receipt of such notice to give written notice to Lessor of
Lessee's commitment to pay for the investigation and remediation of such
Hazardous Substance Condition totally at Lessee's expense and without
reimbursement from Lessor except to the extent of an amount equal to twelve
(12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee
shall provide Lessor with the funds required of Lessee or satisfactory
assurance thereof within thirty (30) days following Lessee's said commitment,
in such event this Lease shall continue in full force and effect, and Lessor
shall proceed to make such investigation and remediation as soon as reasonably
possible and the required funds are available. If Lessee does not give such
notice and provide the required funds or assurance thereof within the times
specified above, this Lease shall terminate as of the date specified in
Lessor's notice of termination. If a Hazardous Substance Condition occurs for
which Lessee is not legally responsible, there shall be abatement of Lessee's
obligations under this Lease to the same extent as provided in Paragraph 9.6(a)
for a period of not to exceed twelve (12) months.

     9.8  TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance Base Rent and any other advance payments made by Lessee to Lessor.
Lessor shall, in addition, return to Lessee so much of Lessee's Security
Deposit as has not been, or is not then required to be, used by Lessor under
the terms of this Lease.

     9.9  WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.

10. REAL PROPERTY TAXES.

     10.1 (a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes, as
defined in Paragraph 10.2, applicable to the Premises during the term of this
Lease. Subject to Paragraph 10.1(b), all such payments shall be made at least
ten (10) days prior to the delinquency date of the applicable installment.
Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes
have been paid. If any such taxes to be paid by Lessee shall cover any period
of time prior to or after the expiration or earlier termination of the term
hereof, Lessee's share of such taxes shall be equitably prorated to cover only
the period of time within the tax fiscal year this Lease is in effect, and
Lessor shall reimburse Lessee for any overpayment after such proration. If
Lessee shall fail to pay any Real Property Taxes required by this Lease to be
paid by Lessee, Lessor shall have the right to pay the same, and Lessee shall
reimburse Lessor therefor upon demand. See Addendum. (1/2 DEC 10; 1/2 APR 10)

          (b) ADVANCE PAYMENT. In order to insure payment when due and before
delinquency of any or all Real Property Taxes, Lessor reserves the right, in the
event of Lessee's breach of the Lease, to estimate the current Real Property
Taxes applicable to the Premises, and to require such current year's Real
Property Taxes to be paid in advance to Lessor by Lessee, either: (i) in a lump
sum amount equal to the installment due, at least twenty (20) days prior to the
applicable delinquency date, or (ii) monthly in advance with the payment of the
Base Rent. If Lessor elects to require payment monthly in advance, the monthly
payment shall be that equal monthly amount which, over the number of months
remaining before the month in which the applicable tax installment would become
delinquent (and without interest thereon), would provide a fund large enough to
fully discharge before delinquency the estimated installment of taxes to be
paid. When the actual amount of the applicable tax bill is known, the amount of
such equal monthly advance payment shall be adjusted as required to provide the
funds needed to pay the applicable taxes before delinquency. If the amounts paid
to Lessor by Lessee under the provisions of this Paragraph are insufficient to
discharge the obligations of Lessee to pay such Real Property Taxes as the same
become due. Lessee shall pay to Lessor, upon Lessor's demand, such additional
sums as are necessary to pay such obligations. All moneys paid to Lessor under
this Paragraph may be intermingled with other moneys of Lessor and shall not
bear interest. In the event of a Breach by Lessee in the performance of the
obligations of Lessee under this Lease, then any balance of funds paid to
Lessor under the provisions of this Paragraph may, subject to proration as
provided in Paragraph 10.1(a), at the option of Lessor, be treated as an
additional Security deposit under Paragraph 5.

     10.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "Real
Property Taxes" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Premises by any authority
having the direct or indirect power to tax, including any city, state or
federal government, or any school, agricultural, sanitary, fire, street,
drainage or other improvement district thereof, levied against any legal or
equitable interest of Lessor in the Premises or in the real property of which
the Premises are a part, Lessor's right to rent or other income therefrom,
and/or Lessor's business of leasing the Premises. The term "REAL PROPERTY
TAXES" shall also include any tax, fee, levy, assessment or charge, or any
increase therein, imposed by reason of events occurring, or changes in
applicable law taking effect, during the term of this Lease, including but not
limited to a change in the ownership of the Premises or in the improvements
thereon, the execution of this Lease, or any modification, amendment or
transfer thereof, and whether or not contemplated by the Parties.

     10.3 JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax percent assessed,
such proportion to be determined by Lessor from the respective valuations 


                                     PAGE 5

<PAGE>   11
signed in the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in good faith
shall be conclusive.

10.4 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all taxes
assessed against and levied upon Lessee Owned Alterations, Utility
installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or elsewhere. When possible, Lessee shall
cause its Trade Fixtures, furnishings, equipment and all other personal property
to be assessed and billed separately from the real property of Lessor if any of
Lessee's said personal property shall be assessed with Lessor's real property.
Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days
after receipt of a written statement setting forth the taxes applicable to
Lessee's property or, at Lessor's option, as provided in Paragraph 10.1(b).

11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash, disposal and other utilities and services supplied to the
Premises together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion to be
determined by Lessor, of all charges jointly metered with other premises.

12. ASSIGNMENT AND SUBLETTING.

    12.1 LESSOR'S CONSENT REQUIRED.

         (a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage, mortgage or otherwise transfer or encumber (collectively,
"ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or
in the Premises without Lessor's prior written consent given under and subject
to the terms of Paragraph 36.

         (b) A change in the control of Lessee shall constitute an assignment
requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five
percent (25%) or more of the voting control of Lessee shall constitute a change
in control for this purpose.

         (c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lessee or Lessee's assets occurs, which
results or will result in a reduction of the Net Worth of Lessee, as
hereinafter defined, by an amount equal to or greater than twenty-five percent
(25%) of such Net Worth of Lessee as it was represented to Lessor at the time
of the execution by Lessor of this Lease or at the time of the most recent
assignment to which Lessor has consented, or as it exists immediately prior to
said transaction or transactions constituting such reduction, at whichever time
said Net Worth of Lessee was or is greater, shall be considered an assignment
of this Lease by Lessee to which Lessor may reasonably withhold its consent.
"Net Worth of Lessee" for purposes of this Lease shall be the net worth of
Lessee (excluding any guarantors) established under generally accepted
accounting principles consistently applied.
    
         (d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's option, be a
Default curable after notice per Paragraph 13.1(c), or a noncurable Breach
without the necessity of any notice and grace period. If Lessor elects to treat
such unconsented to assignment or subletting as a noncurable Breach, Lessor
shall have the right to either: (1) terminate this Lease, or (ii) upon thirty
(30) days written notice ("Lessor's Notice"), increase the monthly Base Rent
to fair market rental value or one hundred ten percent (110%) of the Base Rent
then in effect, whichever is greater. Pending determination of the new fair
market rental value, if disputed by Lessee, Lessee shall pay the amount set
forth in Lessor's Notice with any overpayment credited against the next
installment(s) of Base Rent coming due, and any underpayment for the period
retroactively to the effective date of the adjustment being due and payable
immediately upon the determination thereof. Further, in the event of such
Breach and market value adjustment, (1) the purchase price of any option to
purchase the Premises held by Lessee shall be subject to similar adjustment to
the then fair market value (without the Lessee being considered an encumbrance
or any deduction for depreciation or obsolescence, and considering the Premises
at its highest and best use and in good condition), or one hundred ten percent
(110%) of the price previously in effect, whichever is greater, (ii) any
index-oriented rental or price adjustment formulas contained in this Lease
shall be adjusted to require that the base index be determined with reference
to the index applicable to the time of such adjustment, and (iii) any fixed
rental adjustments scheduled during the remainder of the Lease term shall be
increased in the same ratio as the new market rental bears to the Base Rent in
effect immediately prior to the market value adjustment.

         (e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor
shall be limited to compensatory damages and injunctive relief.

    12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.

         (a) Regardless of Lessor's consent, any assignment or subletting shall
not: (i) be effective without the express written assumption by such assignee
or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee
of any obligations hereunder, or (iii) after the primary liability of Lessee
for the payment of Base Rent and other sums due Lessor hereunder or for the
performance of any other obligations to be performed by Lessee under this Lease.

         (b) Lessor may accept any rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of an
assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent or performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach
by Lessee of any of the terms, covenants or conditions of this Lease.

         (c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the sublessee.
However, Lessor may consent to subsequent sublettings and assignments of the
sublease or any amendments or modifications thereto without notifying Lease or
anyone else liable on the Lease or sublease and without obtaining their
consent, and such action shall not relieve such persons from liability under
this Lease or sublease.

         (d) In the event of any Default or Breach of Lessee's obligations
under this Lease, Lessor may proceed directly against Lessee, any Guarantors or
any one else responsible for the performance of the Lessee's obligations under
this Lease, including the sublesse, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor or Lessee.

         (e) Each request for consent to an assignment or subletting shall be in
writing, accompanied by information relevant to Lessor's determination as to the
financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, including but not limited to the intended use and/or
required modification of the Premises, if any, together with a non-refundable
deposit of $1,000 or ten percent (10%%) of the current monthly Base Rent,
whichever is greater, as reasonable consideration for Lessor's considering and
processing the request for consent. Lessee agrees to provide Lessor with such
other or additional information and/or documentation as may be reasonable
requested by Lessor.

         (f) Any assignee of, or sublessee under, this Lease shall, by reason of
accepting such assignment or entering into such sublease, be deemed, for the
benefit of Lessor, to have assumed and agreed to conform and comply with each
and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.

         (g) The occurrence of a transaction described in Paragraph 12.1(c)
shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased to an amount equal to six (6) times the then
monthly Base Rent, and Lessor may make the actual receipt by Lessor of the
amount required to establish such Security Deposit a condition to Lessor's
consent to such transaction.

         (h) Lessor, as a condition to giving its consent to any assignment or
subletting, may require that the amount and adjustment structure of the rent
payable under this Lease be adjusted to what is then the market value and/or
adjustment structure for property similar to the Premises as then constituted.

    12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all
or any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
         
        (a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a
portion of the Premises heretofore or hereafter made by Lessee, and Lessor may
collect such rent and income and apply same toward Lessee's obligations under
this Lease; provided, however, that until a Breach (as defined in Paragraph
13.1) shall occur in the performance of Lessee's obligations under this Lease. 
Lessee may, except as otherwise provided in this Lease, receive, collect and
enjoy the rents accruing under such sublease. Lessor shall not, by reason of
this or any other assignment of such sublease to Lessor, nor by reason of the
collection of the rents from a sublessee, be deemed liable to the sublessee for
any failure of Lessee to perform and comply with any of Lessee's obligations to
such sublessee under such sublessee. Lessee hereby irrovocably authorizes and
directs any such sublessee upon receipt of a written notice from Lessor stating
that a Breach exists in the performance of Lessee's obligations under this
Lease, to pay to Lessor the rents and other charges due and to become due under
the sublease. Sublessee shall rely upon any such statement and request from
Lessor and shall pay such rents and other charges to Lessor without any
obligation or right to inquire as to whether such Breach exists and
notwithstanding any notice from or claim from Lessee to the contrary. Lessee
shall have no right or claim against said sublessee or, until the Breach has
been cured, against Lessor, for any such rents and other charges so paid by said
sublessee to Lessor.

         (b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublease to attorn to Lessor, in which event Lessor
shall undertake the obligations of the sublessor under such sublease from the
time of the exercise of said option to the expiration of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to such sublessor or for any other prior
Defaults or Breaches of such sublessor under such sublease.

         (c) Any matter or thing requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor herein.

         (d) No sublessee shall further assign or sublet all or any part of the
Premises without Lessor's prior written consent.

         (e) Lessor shall deliver a copy of any notice of Default or Breach by
Lessee to the sublessee, who shall have the right to cure the Default of
Lessee within the grace period, if any, specified in such notice. The sublessee
shall have a right of reimbursement and offset from and against Lessee for any
such Defaults cured by the sublessee.

13. DEFAULT; BREACH; REMEDIES

   13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said Default. A "DEFAULT" is defined as
a failure by the Lessee to observe, comply with or perform any of the terms,
covenants, conditions or rules applicable to Lessee under this Lease. A "BREACH"



                                     PAGE 6
 

<PAGE>   12
is defined as the occurrence of any one or more of the following Defaults, and,
where a grace period for cure after notice is specified herein, the failure by
Lessee to cure such Default prior to the expiration of the applicable grace
period, shall entitle Lessor to pursue the remedies set forth in Paragraphs
13.2 and/or 13.3:

          (a)  The vacating of the Premises without the intention to reoccupy
same, or the abandonment of the Premises. 

          (b)  Except as expressly otherwise provided in this Lease, the failure
by Lessee to make any payment of Base Rent or any other monetary payment
required to be made by Lessee hereunder, whether to Lessor or to a third party,
as and when due, the failure by Lessee to provide Lessor with reasonable
evidence of insurance or surety bond required under this Lease, or the failure
of Lessee to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of three
(3) days following written notice thereof by or on behalf of Lessor to Lessee.

          (c)  Except as expressly otherwise provided in this Lease, the failure
by Lessee to provide Lessor with reasonable written evidence (in duly executed
original form, if applicable) of (i) compliance with Applicable Law per
Paragraph 6.3, (ii) the inspection, maintenance and service contracts required
under Paragraph 7.1(b), (iii) the recission of an unauthorized assignment or
subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or
37, (v) the subordination or non-subordination of this Lease per Paragraph 30,
(vi) the guaranty of the performance of Lessee's obligations under this Lease if
required under Paragraphs 1.11 and 37, (vii) the execution of any document
requested under Paragraph 42 (easements), or (viii) any other documentation or
information which Lessor may reasonably require of Lessee under the terms of
this Lease, where any such failure continues for a period of ten (10) days
following written notice by or on behalf of Lessor to Lessee.

          (d)  A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
that are to be observed, complied with or performed by Lessee, other than those
described in subparagraphs (a), (b) or (c), above, where such Default continues
for a period of thirty (30) days after written notice thereof by or on behalf
of Lessor to Lessee; provided, however, that if the nature of Lessee's Default
is such that more than thirty (30) days are reasonably required for its cure,
then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee
commences such cure within said thirty (30) day period and thereafter
diligently prosecutes such cure to completion.

          (e)  The occurrence of any of the following events: (i) The making by
lessee of any general arrangement or assignment for the benefit of creditors;
(ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. Section 101 or any
successor statute thereto (unless, in the case of a petition filed against
Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of
a trustee or receiver to take possession of substantially all of Lessee's
assets located at the Premises or of Lessee's interest in this Lease, where
possession is not restored to Lessee within thirty (30) days; or (iv) the
attachment, execution or other judicial seizure of substantially all of
Lessee's assets located at the Premises or of Lessee's interest in this Lease,
where such seizure is not discharged within thirty (30) days; provided,
however, in the event that any provision of this subparagraph (e) is contrary
to any applicable law, such provision shall be of no force or effect, and not
affect the validity of the remaining provisions.

          (f)  The discovery by Lessor that any financial statement given to
Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was
materially false.

          (g)  If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a guarantor, (ii) the termination of a guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a guarantor's refusal to honor the guaranty, or (v) a
guarantor's breach of its guaranty obligation on an anticipatory breach basis,
and Lessee's failure, within sixty (60) days following written notice by or on
behalf of Lessor to Lessee of any such event, to provide Lessor with written
alternative assurance or security, which, when coupled with the then existing
resources of Lessee, equals or exceeds the combined financial resources of
Lessee and the guarantors that existed at the time of execution of this Lease.

     13.2  REMEDIES.  If Lessee  fails to perform any affirmative duty or
obligation of Lessee under this Lease, within (10) days after written notice to
Lessee (or in case of emergency, without notice), Lessor may at its option (but
without obligation to do so), perform such duty or obligation on Lessee's
behalf, including but not limited to the obtaining of reasonably required
bonds, insurance policies, or governmental licenses, permits or approvals. The
costs and expenses of any such performance by Lessor shall be due and payable
by Lessee to Lessor upon invoice therefor. If any check given to Lessor by
Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its
option, may require all future payments to be made under this Lease by Lessee
to be made only by cashier's check. In the event of a Breach of this Lease by
Lessee, as defined in Paragraph 13.1, with or without further notice or demand,
and without limiting Lessor in the exercise of any right or remedy which Lessor
may have by reason of such Breach, Lessor may:

          (a)  Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In
such event Lessor shall be entitled to recover from Lessee: (i) the worth at
the time of the award of the unpaid rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor
for all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of the leasing commission paid by Lessor applicable to the unexpired
term of this Lease. The worth at the time of award of the amount referred to in
provision (iii) of the prior sentence shall be computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus one percent (1%). Efforts by Lessor to mitigate damages
caused by Lessee's Default or Breach of this Lease shall not waive Lessor's
right to recover damages under this Paragraph. If termination of this Lease is
obtained through the provisional remedy of unlawful detainer, Lessor shall have
the right to recover in such proceeding the unpaid rent and damages as are
recoverable therein, or Lessor may reserve therein the right to recover all or
any part thereof in a separate suit for such rent and/or damages. If a notice
and grace period required under subparagraphs 13.1(b), (c) or (d) was not
previously given, a notice to pay rent or quit, or to perform or quit, as the
case may be, given to Lessee under any statute authorizing the forfeiture of
leases for unlawful detainer shall also constitute the applicable notice for
grace period purposes required by subparagraphs 13.1(b), (c) or (d). In such
case, the applicable grace period under subparagraphs 13.1(b), (c) or (d) and
under the unlawful detainer statute shall run concurrently after the one such
statutory notice, and the failure of Lessee to cure the Default within the
greater of the two such grace periods shall constitute both an unlawful
detainer and a Breach of this Lessee entitling Lessor to the remedies provided
for in this Lease and/or by said statute.

          (b)  Continue the Lease and Lessee's right to possession in effect
(in California under California Civil Code Section 1951.4) after Lessee's
Breach and abandonment and recover the rent as it becomes due, provided Lessee
has the right to sublet or assign, subject only to reasonable limitations. See
Paragraphs 12 and 36 for the limitations on assignment and subletting which
limitations Lessee and Lessor agree are reasonable. Acts of maintenance or
preservation, efforts to relet the Premises, or the appointment of a receiver
to protect the Lessor's interest under the Lease, shall not constitute a
termination of the Lessee's right to possession.

          (c)  Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.

          (d)  The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.

     13.3  INDUCEMENT RECAPTURE IN EVENT OF BREACH.  Any agreement by Lessor
for free or abated rent or other changes applicable to the Premises, or for the
giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of which
concessions are hereinafter referred to as "INDUCEMENT PROVISIONS," shall be
deemed conditioned upon Lessee's full and faithful performance of all of the
terms, covenants and conditions of this Lease to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Default of this Lease by Lessee, as defined in Paragraph 13.1, any such
inducement Provision shall automatically be deemed deleted from this Lease and
of no further force or effect, and any rent, other charge, bonus, inducement or
consideration theretofore abated, given or paid by Lessor under such an
inducement Provision shall be immediately due and payable by Lessee to Lessor,
and recoverable by Lessor as additional rent due under this Lease,
notwithstanding any subsequent cure of said Default by Lessee. The acceptance
by Lessor of rent or the cure of the Default which initiated the operation of
this Paragraph shall not be deemed a waiver by Lessor of the provisions of this
Paragraph unless specifically so stated in writing by Lessor at the time of
such acceptance.

     13.4  LATE CHARGES.  Lessee hereby acknowledges that late payment by
Lessee to Lessor or rent and other sums due hereunder will cause Lessor to
incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to:
processing and accounting charges, and late charges which may be imposed upon
Lessor by the terms of any ground lease, mortgage or trust deed covering the
Premises. Accordingly, if any installment of rent or any other sums due from
Lessee shall not be received by Lessor or Lessor's designee within five (5)
days after such amount shall be due, then, without any requirement for notice to
Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) of
such overdue amount. The parties hereby agree that such late charge represents a
fair and reasonable estimate of the costs Lessor will incur by reason of late
payment by Lessee. Acceptance of such late charge by Lessor shall in no event
constitute a waiver of Lessee's Default or Breach with respect to such overdue
amount, nor prevent Lessor from exercising any of the other rights and remedies
granted hereunder. In the event that a late charge is payable hereunder,
whether or not collected, for three (3) consecutive installments of Base Rent,
then notwithstanding Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable quarterly
in advance.

     13.5  BREACH BY LESSOR.  Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt by
Lessor, and by the holders of any ground lease, mortgage or deed of trust
covering the Premises whose name and address shall have been furnished Lessee
in writing for such purpose of written notice specifying wherein such
obligation of Lessor has not been performed; provided, however, that if the
nature of Lessor's obligation is such that more than thirty (30) days after
such notice are reasonably required for its performance, then Lessor shall not
be in breach of this Lease if performance is commenced within such thirty (30)
day period and thereafter diligently pursued to completion.

14.  CONDEMNATION.  If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes

                                                                 
                                     PAGE 7

<PAGE>   13
control or possession, whichever first occurs. If more than ten percent (10%) of
the floor area of the Premises, or more than twenty-five percent (25%) of the
land area not occupied by any building, is taken by condemnation, and the
Premises are not habitable for Lessee's use. Lessee may, at Lessee's option, to
be exercised in writing within ten (10) days after Lessor shall have given
Lessee written notice of such taking (or in the absence of such notice, within
fifteen (15) days after the condemning authority shall have taken possession)
terminate this Lease as of the date the condemning authority takes such
possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in the same
proportion as the rentable floor area of the Premises taken bears to the total
rentable floor area of the building located on the Premises. No reduction of
Base Rent shall occur if the only portion of the Premises taken is land on which
there is no building. Any award for the taking of all or any part of the
Premises under the power of eminent domain or any payment made under threat of
the exercise of such power shall be the property of Lessor, whether, such award
shall be made as compensation for diminution in value of the leasehold or for
the taking of the fee, or as severance damages; provided, however, that Lessee
shall be entitled to any compensation separately awarded to Lessee for Lessee's
relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that
this Lease is not terminated by reason of such condemnation, Lessor shall to the
extent of its net severance damages received, over and above the legal and other
expenses incurred by Lessor in the condemnation matter, repair any damage to the
Premises caused by such condemnation, except to the extent that Lessee has been
reimbursed therefor by the condemning authority. Lessee shall be responsible for
the payment of any amount in excess of such net severance damages required to
complete such repair.

15.  BROKER'S FEE.

     15.1 The Brokers named in Paragraph 1.10 are the procuring causes of this
Lease.

     15.2 Upon execution of this Lease by both Parties, Lessor shall pay to
said Brokers jointly, or in such separate shares as they may mutually designate
in writing, a fee as set forth in a separate written agreement between Lessor
and said Brokers (or in the event there is no separate written agreement between
Lessor and said Brokers, the sum of $______ as per agreement) for brokerage
services rendered by said Brokers to Lessor in this transaction.

     15.3 Unless Lessor and Brokers have otherwise agreed in writing, Lessor
further agrees that: (a) if Lessee exercises any Option (as defined in Paragraph
39.1) or any Option subsequently granted which is substantially similar to an
Option granted to Lessee in this Lease, or (b) if Lessee acquires any rights to
the Premises or other premises described in this Lease which are substantially
similar to what Lessee would have acquired had an Option herein granted to
Lessee been exercised, or (c) if Lessee remains in possession of the Premises,
with the consent of Lessor, after the expiration of the term of this Lease after
having failed to exercise an Option, or (d) if said Brokers are the procuring
cause of any other lease or sale entered into between the Parties pertaining to
the Premises and/or any adjacent property in which Lessor has an interest, or
(e) if Base Rent is increased, whether by agreement or operation of an
escalation clause herein, then as to any of said transactions. Lessor shall pay
said Brokers a fee in accordance with the schedule of said Brokers in effect at
the time of the execution of this Lease.

     15.4 Any buyer or transferee of Lessor's interest in this Lease, whether
such transfer is by agreement or by operation of law, shall be deemed to have
assumed Lessor's obligation under this Paragraph 15. Each Broker shall be a
third party beneficiary of the provisions of this Paragraph 15 to the extent of
its interest in any commission arising from this Lease and may enforce that
right directly against Lessor and its successors.

     15.5 Lessee and Lessor each represent and warrant to the other that it has
had no dealings with any person, firm, broker or finder (other than the
Brokers, if any named in Paragraph 1.10) in connection with the negotiation of
this Lease and/or the consummation of the transaction contemplated hereby, and
that no broker or other person, firm or entity other than said named Brokers is
entitled to any commission or finder's fee in connection with said transaction.
Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold
the other harmless from and against liability for compensation or charges which
may be claimed by any such unnamed broker, finder or other similar party by
reason of any dealings or actions of the indemnifying Party, including any
costs, expenses, attorneys' fees reasonably incurred with respect thereto.

     15.6 Lessor and Lessee hereby consent to and approve all agency
relationships, including any dual agencies, indicated in Paragraph 1.10.

16.  TENANCY STATEMENT.

     16.1 Each Party (as "Responding Party") shall within ten (10) days after
written notice from the other Party (the "Requesting Party") execute,
acknowledge and deliver to the Requesting Party, a statement in writing in form
similar to the then most current "Tenancy Statement" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.

     16.2 If Lessor desires to finance, refinance, or sell the Premises, any
part thereof, or the building of which the Premises are a part, Lessee and all
Guarantors of Lessee's performance hereunder shall deliver to any potential
lender or purchaser designated by Lessor such financial statements of Lessee
and such Guarantors as may be reasonably required by such lender or purchaser,
including but not limited to Lessee's financial statements for the past three
(3) years. All such financial statements shall be received by Lessor and such
lender or purchaser in confidence and shall be used only for the purposes
herein set forth.

17.  LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises, or, if this
is a sublease, of the Lessee's interest in the prior lease. In the event of a
transfer of Lessor's title or interest in the Premises or in this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor at the time of such transfer or assignment.
Except as provided in Paragraph 15, upon such transfer or assignment and
delivery of the Security Deposit, as aforesaid, the prior Lessor shall be
relieved of all liability with respect to the obligations and/or covenants under
this Lease thereafter to be performed by the Lessor. Subject to the foregoing,
the obligations and/or covenants in this Lease to be performed by the Lessor
shall be binding only upon the Lessor as hereinabove defined.

18.  SEVERABILITY. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of
any other provision hereof.

19.  INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within thirty (30)
days following the date on which it was due, shall bear interest from the
thirty-first (31st) day after it was due at the rate of 12% per annum, but not
exceeding the maximum rate allowed by law, in addition to the late charge
provided for in paragraph 13.4.

20.  TIME OF ESSENCE. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.

21.  RENT DEFINED. All monetary obligations of Lessee to Lessor under the
terms of this Lease are deemed to be rent.

22.  NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be
effective. Lessor and Lessee each represents and warrants to the Brokers that
it has made, and is relying solely upon its own investigation as to the nature,
quality, character and financial responsibility of the other Party to this Lease
and as to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party.

23.  NOTICES.

     23.1 All notices required or permitted by this Lease shall be in writing
and may be delivered in person (by hand or by messenger or courier service) or
may be sent by regular, certified or registered mail or U.S. Postal Service
Express Mail, with postage prepaid, or by facsimile transmission, and shall be
deemed sufficiently given if served in a manner specified in this Paragraph
23. The addresses noted adjacent to a Party's signature on this Lease shall be
that Party's address for delivery or mailing of notice purposes. Either Party
may by written notice to the other specify a different address for notice
purposes, except that upon Lessee's taking  possession of the Premises, the
Premises shall constitute Lessee's address for the purpose of mailing or
delivering notices to Lessee. A copy of all notices required or permitted to be
given to Lessor hereunder shall be concurrently transmitted to such party or
parties at such addresses as Lessor may from time to time hereafter designate
by written notice to Lessee.

     23.2 Any notice sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown on the receipt
card, or if no delivery date is shown, the postmark thereon. If sent by regular
mail the notice shall be deemed given forty-eight (48) hours after the same is
addressed as required herein and mailed with postage prepaid. Notices delivered
by United States Express Mail or overnight courier that guarantees next day
delivery shall be deemed given twenty-four (24) hours after delivery of the
same to the United States Postal Service or courier. If any notice is
transmitted by facsimile transmission or similar means, the same shall be deemed
served or delivered upon telephone confirmation or receipt of the transmission
thereof, provided a copy is also delivered via delivery or mail. If notice is
received on a Sunday or legal holiday, it shall be deemed received on the next
business day.

24.  WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any act shall not be deemed to render unnecessary
the obtaining of Lessor's consent to, or approval of, any subsequent or similar
act by Lessee, or be construed as the basis of an estoppel to enforce the
provision or provisions of this Lease requiring such consent. Regardless of
Lessor's knowledge of a Default or Breach at the time of accepting rent, the
acceptance of rent by Lessor shall not be a waiver of any preceding Default or
Breach by Lessee of any provision hereof, other than the failure of Lessee to
pay the particular rent so accepted. Any payment given Lessor by Lessee may be
accepted by Lessor on account of moneys or damages due Lessor, notwithstanding
any qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.

25.  RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.

26.  NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease.

                                     PAGE 8


  

<PAGE>   14

27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
at law or in equity.

28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.

29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.

30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.

     30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "SECURITY DEVICE"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all
renewals, modifications, consolidations, replacements and extensions thereof.
Lessee agrees that the Lenders holding any such Security Device shall have no
duty, liability or obligation to perform any of the obligations of Lessor under
this Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default and
allow such Lender thirty (30) days following receipt of such notice for the cure
of said default before invoking any remedies Lessee may have by reason thereof,
if any Lender shall elect to have this Lease and/or any Option granted hereby
superior to the lien of its Security Device and shall give written notice
thereof to Lessee, this Lease and such Options shall be deemed prior to such
Security Device, notwithstanding the relative dates of the documentation or
recordation thereof.

     30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one (1) month's rent.

     30.3 NON-DISTURBANCE. With respect to all Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "NON-DISTURBANCE AGREEMENT") from
the Lender that Lessee's possession and this Lease, including any options to
extend the term hereof, will not be disturbed so long as Lessee is not in
Breach hereof and attorns to the record owner of the Premises.

     30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall
be effective without the execution of any further documents, provided, however,
that, upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of the Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided herein.

31.  ATTORNEY'S FEES. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
herein defined) or Broker in any such proceeding, action, or appeal thereon,
shall be entitled to reasonable attorney's fees. Such fees may be awarded in
the same suit or recovered in a separate suit, whether or not such action or
proceeding is pursued to decision or judgment. The term, "Prevailing Party"
shall include, without limitation, a Party or Broker who substantially obtains
or defeats the relief sought, as the case may be, whether by compromise,
settlement, judgment, or the abandonment by the other party or Broker of its
claim or defense. The attorney's fees award shall not be computed in accordance
with any court fee schedule, but shall be such as to fully reimburse all
attorney's fees reasonably incurred. Lessor shall be entitled to attorney's
fees, costs and expenses incurred in the preparation and service of notices of
Default and consultations in connection therewith, whether or not a legal action
is subsequently commenced in connection with such Default or resulting Breach.

32.  LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the
same to prospective purchasers, lenders, and making such alterations, repairs,
improvements or additions to the Premises or to the building of which they are
a part, as Lessor may reasonably deem necessary. Lessor may at any time, place
on or about the Premises or building any ordinary "For Sale" signs and Lessor
may at any time during the last one hundred twenty (120) days of the term
hereof place on or about the Premises any ordinary "For Lease" signs. All such
activities of Lessor shall be without abatement of rent or liability to Lessee.

33.  AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first
having obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.

34.  SIGNS. Lessee shall not place any sign upon the Premises, except that
Lessee may, with Lessor's prior written consent, install (but not on the roof)
such signs as are reasonably required to advertise Lessee's own business. The
installation of any sign on the Premises by or for Lessee shall be subject to
the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations,
Trade Fixtures and Alterations). Unless otherwise expressly agreed herein,
Lessor reserves all rights to the use of the roof and the right to install, and
all revenues from the installation of, such advertising signs on the Premises,
including the roof, as do not unreasonably interfere with the conduct of
Lessee's business.

35   TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for
Breach by Lessee, shall automatically terminate any sublease or lesser
estate in the Premises; provided, however, Lessor shall, in the event of any
such surrender, termination or cancellation, have the option to continue any
one or all of any existing subtenancies. Lessors failure within ten (10) days
following any such event to make a written election to the contrary by written
notice to the holder of any such lesser interest, shall constitute Lessor's
election to have such event to make a written election to the contrary by
written notice to the holder of any such lesser interest, shall constitute
Lessor's election to have such event constitute the termination of such
interest.

36.  CONSENTS.

          (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided
herein, wherever in this Lease the consent of a Party is required to an act by
or for the other Party, such consent shall not be unreasonably withheld or
delayed. Lessor's actual reasonably costs and expenses (including but not
limited to architects', attorneys' engineers' or other consultant's fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment, a subletting or the presence or use of a
Hazardous Substance, practice or storage tank, shall be paid by Lessee to
Lessor upon receipt of an invoice and supporting documentation therefor.
Subject to Paragraph 12.2(e) (applicable to assignment or subletting), Lessor
may, as a condition to considering any such request by Lessee, require that
Lessee deposit with Lessor an amount of money (in addition to the Security
Deposit held under Paragraph 5) reasonably calculated by Lessor to represent
the cost Lessor will incur in considering and responding to Lessee's request.
Except as otherwise provided, any unused portion of said deposit shall be
refunded to Lessee without interest. Lessor's consent to any act, assignment of
this Lease or subletting of the Premises by Lessee shall not constitute an
acknowledgement that no Default or Breach by Lessee of this Lease exists, nor
shall such consent be deemed a waiver of any then existing Default or Breach,
except as may be otherwise specifically stated in writing by Lessor at the time
of such consent.

          (b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the imposition by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.

37.  GUARANTOR.

     37.1 If there are to be any Guarantors of this Lease per Paragraph 1.11,
the form of the guaranty to be executed by each such Guarantor shall be in the
form most recently published by the American Industrial Real Estate
Association, and each said Guarantor shall have the same obligations as Lessee
under this Lease, including but not limited to the obligation to provide the
Tenancy Statement and information called for by Paragraph 16.

     37.2 It shall constitute a Default of the Lessee under this Lease if any
such Guarantor fails or refuses, upon reasonable request by Lessor to give: (a)
evidence of the due execution of the guaranty called for by this Lease,
including the authority of the Guarantor (and of the party signing on
Guarantor's behalf) to obligate such Guarantor on said guaranty, together with
a certificate of incumbency showing the signature of the persons authorized to
sign on its behalf, (b) current financial statements of Guarantor as may from
time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written
confirmation that the guaranty is still in effect.

38.  QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and
the observance and performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this Lease.
Lessee shall have quiet possession of the Premises for the entire term hereof
subject to all of the provisions of this Lease.

39.  OPTIONS.

     39.1 DEFINITION. AS used in this Paragraph 39 the word "Option" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease or to extend or renew any lease that Lessee has on other property of
Lessor; (b) the right of first refusal to lease the Premises or the right of
first offer to lease the Premises or the right of first refusal to lease other
property of Lessor or the right of first offer to lease other property Lessor;
(c) the right to purchase the Premises, or the right of first refusal to
purchase the Premises, or the right of first offer to purchase the Premises, or
the right to purchase other property of Lessor, or the right of first refusal
to purchase other property of Lessor, or the right of first offer to purchase
other property of Lessor.

     39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee in
this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and
cannot be voluntarily or involuntarily assigned or exercised by any person or
entity other than said original Lessee while the original Lessee is in full and
actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Lessee are not
assignable, either as a part of an assignment of this Lease or separately or
apart therefrom, and no Option may be separated from this Lease in any manner,
by reservation or otherwise.


                                   PAGE 9                  

<PAGE>   15
     39.3 MULTIPLE OPTIONS. In the event that Lessee has any Multiple Options
to extend or renew this Lease, a later Option cannot be exercised unless the
prior Options to extend or renew this Lease have been validly exercised.

     39.4 EFFECT OF DEFAULT ON OPTIONS.

          (a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary: (i) during the period
commencing with the giving of any notice of Default under Paragraph 13.1 and
continuing until the noticed Default is cured, or (ii) during the period of
time any monetary obligation due Lessor from Lessee is unpaid (without regard
to whether notice thereof is given Lessee), or (iii) during the time Lessee is
in Breach of this Lease, or (iv) in the event that Lessor has given to Lessee
three (3) or more notices of Default under Paragraph 13.1. whether or not the
Defaults are cured, during the twelve (12) month period immediately preceding
the exercise of the Option.

          (b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).

          (c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due
and timely exercise of the Option. If, after such exercise and during the term
of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of
Lessee for a period of thirty (30) days after such obligation becomes due
(without any necessity of Lessor to give notice thereof to Lessee), or (ii)
Lessor gives to Lessee three (3) or more notices of Default under Paragraph
13.1 during any twelve (12) month period, whether or not the Defaults are
cured, or (iii) if Lessee commits a Breach of this Lease.

40.  MULTIPLE BUILDINGS. If the Premises are part of a group of buildings
controlled by Lessor, Lessee agrees that it will abide by, keep and observe all
reasonable rules and regulations which Lessor may make from time to time for
the management, safety, care, and cleanliness of the grounds, the parking and
unloading of vehicles and the preservation of good order, as well as for the
convenience of other occupants or tenants of such other buildings and their
invitees, and that Lessee will pay its fair share of common expenses incurred
in connection therewith.

41.  SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.

42.  RESERVATIONS. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.

43.  PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment and there shall survive the right
on the part of said Party to institute suit for recovery of such sum if it
shall be adjudged that there was no legal obligation on the part of said Party
to pay such sum or any part thereof, said Party shall be entitled to recover
such sum or so much thereof as it was not legally required to pay under the
provisions of this Lease.

44.  AUTHORITY. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.

45.  CONFLICT. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.

46.  OFFER. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to lease to Lessee.
This Lease is not intended to be binding until executed by all Parties hereto.

47.  AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. The parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder. Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional, insurance company, or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the
property of which the Premises are a part.

48.  MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such Multiple Parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.


LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY
REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH
RESPECT TO THE PREMISES.

     IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO
     YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO
     EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF
     ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR
     RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
     OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE
     LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE
     TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE
     ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS
     LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA,
     AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE
     CONSULTED.

The parties hereto have executed this Lease at the place on the dates specified
above to their respective signatures.


<TABLE>
<S>                                                           <C>
Executed at Durango, Colorado                                 Executed at Scottsdale, Arizona
           ---------------------------------------                       ----------------------------------------
on May       , 1995                                           on May       , 1995
  ------------------------------------------------              -------------------------------------------------
by LESSOR:                                                    by LESSEE:
            Frank D. McDonald                                           SHR Perceptual Management,
- --------------------------------------------------            ---------------------------------------------------
                                                                        an Arizona Corporation
- --------------------------------------------------            ---------------------------------------------------
By /s/ FRANK D. McDONALD                                      By /s/ BARRY SHEPARD
  ------------------------------------------------              -------------------------------------------------
Name Printed:                                                 Name Printed: Barry Shepard
             -------------------------------------                         --------------------------------------
Title:                                                        Title:  President
      --------------------------------------------                  ---------------------------------------------

By                                                            By
  ------------------------------------------------              -------------------------------------------------
Name Printed:                                                 Name Printed:
             -------------------------------------                         --------------------------------------
Title:                                                        Title:
      --------------------------------------------                  ---------------------------------------------
Address:                                                      Address:
        ------------------------------------------                    -------------------------------------------

- --------------------------------------------------            ---------------------------------------------------
Tel. No. (   )        Fax No. (   )                           Tel. No. (   )        Fax No. (   )
          ------------         -------------------                      ------------         --------------------
</TABLE>


NET                                 PAGE 10

NOTICE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the most
current form: American Industrial Real Estate Association, 345 South Figueroa
Street, Suite M-1, Los Angeles, CA 90071. (213) 687-8777. Fax. No. (213)
687-8616

(C)Copyright 1990 - By American Industrial Real Estate Association. All rights
reserved. No part of these works may be reproduced in any form without
permission in writing.
                                                               FORM 204N-R-12/91


<PAGE>   16

ADDENDUM TO THAT CERTAIN STANDARD INDUSTRIAL/COMMERCIAL LEASE DATED APRIL 14,
1995, BETWEEN SHR PERCEPTUAL MANAGEMENT, AN ARIZONA CORPORATION, AS LESSEE AND
FRANK D. MCDONALD dba RANCHO CONEJO PROPERTIES AS LESSOR FOR THE PREMISES
LOCATED AT 703 RANCHO CONEJO BOULEVARD, NEWBURY PARK, CALIFORNIA.
- --------------------------------------------------------------------------------

2.3     COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE -- CONTINUED:
        Lessee shall not be responsible to modify the Premises to comply with
        such American with Disabilities act ("ADA") unless the specific use of
        the Lessee requires said compliance.

6.2     HAZARDOUS SUBSTANCES -- CONTINUED: Lessee shall not be liable to or
        required by Lessor to remedy any toxic or hazardous condition which
        existed on the Premises prior to Lessees occupying the Premises.

        If a Hazardous Substance condition occurs during or after the Term of
        the lease, Lessee shall not be responsible for remediation unless
        caused by its officers, employees, agents, contractors,
        subcontractors, affiliates, lessees, assignees, invitees, or licensees.

6.4     INSPECTION: COMPLIANCE -- CONTINUED:
        Notwithstanding this paragraph, Lessor may require Lessee to provide a
        Phase I Environmental Report on the Premises, at Lessee's sole cost
        and expense thirty (30) days prior to the expiration of the Lease.
        Said Environmental Report shall be provided by a licensed
        Environmental Company acceptable by Lessor.


10.1(a) PAYMENT OF TAXES -- CONTINUED:
        Notwithstanding anything contained in this paragraph, Lessee shall have
        the right to contest the payment of Real Property Taxes with the
        Ventura County Tax Assessor, provided such taxes are paid in accordance
        as stated in this lease and Lessor is indemnified from any costs or
        expenses related to such contest or litigation by Lessee.

49.     RENT ADJUSTMENTS:
        See separate addendum attached.

50.     OPTION TO EXTEND:
        See separate addendum attached.

51.     LANDSCAPED AREAS:
        (a)  The term "Landscaped  Areas" means all areas within the exterior
        boundaries of the Premises or adjacent thereto, including the areas
        within the Premises that are provided and designated by Lessor from
        time to time to be landscaped. The term landscape shall include without
        limitation preparation of the soil, hydroseeding, planting of grass sod,
        shrubs, trees, plants, etc. and the installation of irrigation
        sprinkler systems, control devices, etc.
        (b)  The initial cost of landscaping the Landscaped Areas shall be
             borne by the Lessor. 
        (c)  The maintenance of all landscaping in the Landscaped Areas shall
             be subject to the exclusive control and management of Lessor, or
             such other persons or nominees as Lessor may designate or assign
             to exercise such management or control. Lessor shall have the
             right to:
             (i)   Establish and enforce reasonable rules and regulations
                   applicable to all tenants adjacent to the Premises
                   concerning the Landscaped Areas and the maintenance,
                   management and use of the Landscaped Areas.
             (ii)  Close temporarily any of the landscaped areas for
                   maintenance purposes.
             (iii) From time to time enter into contract(s) with a landscape
                   maintenance firm or person(s) on such terms and conditions
                   and for such period of time as Lessor deems reasonable and
                   proper both as to service and as to cost.
        (d)  Lessor and all persons designated by it will have full and
             unimpaired access at all times to the Premises for all purposes
             relating to landscaping or maintaining the landscaping thereon.

52.     LESSEE'S SHARE OF LANDSCAPE MAINTENANCE COSTS:
        Lessee shall pay to Lessor as additional rent an amount estimated by
        Lessor to be Lessee's share of Landscape Maintenance Costs (as defined
        in this paragraph), on the first day of each month, commencing on the
        date the term commences, or on the first day of the month following the
        month the term commences if the term commences on a day other than the
        first day of a month, as the case may be, and continuing during the 

<PAGE>   17
ADDENDUM TO THAT CERTAIN STANDARD INDUSTRIAL/COMMERCIAL LEASE DATED APRIL 14,
1995, BETWEEN SHR PERCEPTUAL MANAGEMENT, AN ARIZONA CORPORATION, AS LESSEE AND
FRANK D. MCDONALD dba RANCHO CONEJO PROPERTIES AS LESSOR FOR THE PREMISES
LOCATED AT 703 RANCHO CONEJO BOULEVARD, NEWBURY PARK, CALIFORNIA.
- --------------------------------------------------------------------------------

     term. Lessee's proportionate share of Landscape Maintenance Costs shall be
     determined by dividing the total number of square feet of the building on
     the Premises by the sum of leasable square feet in all building located at
     667,703 and 711 Rancho Conejo Boulevard, Newbury Park multiplied by the
     total monthly Landscape Maintenance Costs. The term "Leasable Square Feet"
     as used herein shall be deemed to mean the ground floor of all of the three
     (3) buildings with measurements from outside of exterior walls to center
     line of demising partitions and including all areas under entrance soffits.
     For the purpose of this clause, the building on the Premises is deemed to
     comprise an area of 11,468 square feet. Landscape Maintenance costs that
     cover a period not within the term of this Lease shall be pro-rated. Lessor
     can adjust the monthly Landscape Maintenance charge at the end of each
     accounting period on the basis of Lessor's reasonably anticipated costs for
     the following accounting period. An accounting period is a period
     commencing January 1st and ending on December 31st, except that the first
     accounting period shall commence on the date the term commences and the
     last accounting period shall end on the date the term expires or
     terminates. Lessor shall furnish to Lessee a statement showing the total
     Landscape Maintenance Costs for the accounting period, and the payment made
     by Lessee with respect to each accounting period, within sixty (60) days
     after the end of each accounting period. Each statement shall be prepared,
     signed and certified to be correct by Lessor. If Lessee's share of
     Landscape Maintenance Costs for the accounting period exceeds the payments
     made by Lessee, Lessee shall pay to Lessor the deficiency within ten (10)
     days after receipt of the statement. If Lessee's payments made during the
     accounting period exceed Lessee's share of Landscape Maintenance Costs,
     Lessor shall pay Lessee the excess at the time Lessor furnishes the
     statement to Lessee.

     Landscape Maintenance Costs means all sums expended by Lessor for
     maintenance of the landscaping in the Landscaped Areas and the sweeping of
     the paved areas and an allowance to Lessor for supervision and
     administration of and relating to the maintenance of the landscaping in the
     Landscaped Areas and the sweeping of the parking areas in an amount equal
     to ten (10%) percent of the total Landscaped Maintenance Costs. Costs for
     maintenance of landscaping in Landscaped Areas shall include, without
     limitation, costs of maintenance firms, contractors and persons from
     maintaining landscaping in Landscaped Areas, of cleaning, sweeping and
     other janitorial services of the Landscaped Areas and Paved Areas,
     fertilizing, gardening, planting and re-landscaping, repairing and/or
     replacing irrigation sprinkler systems, including valves, sprinkler heads,
     pipes, control devices, all costs of utilities used in connection with the
     landscaping of Landscaped Areas, reasonable depreciation on machinery and
     equipment used in connection with landscaping of Landscaped Areas, premiums
     on public liability and property damage insurance and all other costs
     necessary in Lessor's judgment for the maintenance of landscaping in
     Landscaped Areas.

     Lessee's percentage of landscape maintenance costs and driveways and
     parking areas are 31.6%.

53.  FREE RENT:
     Lessee shall be relieved of its obligation to pay Base Rent for the months
     of June 1995, July 1995, August 1995 and September 1995.


<PAGE>   18
ADDENDUM TO THAT CERTAIN STANDARD INDUSTRIAL/COMMERCIAL LEASE DATED APRIL 14,
1995, BETWEEN SHR PERCEPTUAL MANAGEMENT, AN ARIZONA CORPORATION, AS LESSEE AND
FRANK D. MCDONALD dba RANCHO CONEJO PROPERTIES AS LESSOR FOR THE PREMISES
LOCATED AT 703 RANCHO CONEJO BOULEVARD, NEWBURY PARK, CALIFORNIA.
- --------------------------------------------------------------------------------


AMERICAN WITH DISABILITIES ACT ("ADA"). "The parties hereto agree to comply
with all applicable federal, state and local laws, regulations, codes,
ordinances and administrative orders having jurisdiction over the parties,
property of the subject matter of this agreement, including, but not limited to
the 1964 Civil Rights Act and all amendments thereto, the Foreign Investment
In Real Property Tax Act, the Comprehensive Environmental Response Compensation
and Liability Act and The Americans With Disabilities Act."

CONSULT YOUR ATTORNEY/ADVISORS - This document has been prepared for approval
by your attorney. No representation or recommendation is made by CB Commercial
Real Estate Group, Inc. or the Southern California Chapter of the Society of
Industrial and Office Realtors (S.I.O.R.), Inc., or the agents or employees of
either of them as to the legal sufficiency, legal effect, or tax consequences
of this document or the transaction to which it relates. These are questions
for your attorney.

In any real estate transaction, it is recommended that you consult with a
professional, such as a civil engineer, industrial hygienist or other person,
with experience in evaluating the condition of the property, including the
possible presence of asbestos, hazardous materials and underground storage
tanks.



/s/ FRANK D. MCDONALD                                       5/23/95
- ---------------------------                      ---------------------------
LESSOR'S SIGNATURE                                            DATE
                                                           

/s/ BARRY SHEPARD                                           5/17/95
- ---------------------------                      ---------------------------
LESSEE'S SIGNATURE                                            DATE

<PAGE>   19

                                   EXHIBIT A


                                  PARKING PLAN



<PAGE>   20

                                   EXHIBIT B



















                            TENANT IMPROVEMENT PLAN


<PAGE>   21

                                     [LOGO]
                              OPTION(S) TO EXTEND
                                  ADDENDUM TO
                                 STANDARD LEASE


       DATED April 14, 1995
             -------------------------------------------------------------------

       BY AND BETWEEN (LESSOR) Frank D. McDonald, dba Rancho Conejo Properties
                               -------------------------------------------------

                      (LESSEE) SHR Perceptual Management, an Arizona Corporation
                               -------------------------------------------------

       PROPERTY ADDRESS: 703 Rancho Conejo Blvd., Newbury Park, CA
                         -------------------------------------------------------

Paragraph 50

A.      OPTION(S) TO EXTEND:

        Lessor hereby grants to Lessee the option to extend the term of this
Lease for  1  additional  60  month period(s) commencing when the prior term
expires upon each and all of the following terms and conditions:

        (i)     Lessee gives to Lessor, and Lessor actually receives on a date
which is prior to the date that the option period would commence (if exercised)
by at least  6  and not more than  9  months, a written notice of the exercise 
of the option(s) to extend this Lease for said additional term(s), time being of
essence. If said notification of the exercise of said option(s) is (are) not so
given and received, the option(s) shall automatically expire; said option(s)
may (if more than one) only be exercised consecutively;

        (ii)    The provisions of paragraph 39, including the provision
relating to default of Lessee set forth in paragraph 39.4 of this Lease are
conditions of this Option;

        (iii)   All of the terms and conditions of this Lease except where
specifically modified by this option shall apply;

        (iv)    The monthly rent for each month of the option period shall be
calculated as follows, using the method(s) indicated below:

(Check Method(s) to be Used and Fill in Appropriately)

[x]     1.      COST OF LIVING ADJUSTMENT(S) (COL)

                (a)     On (Fill in COL Adjustment Date(s): May 1, 2000, May 1,
2001, May 1, 2002, May 1, 2003, May 1, 2004, and May 1, 2005 the monthly
rent payable under paragraph 1.5 ("Base Rent") of the attached Lease shall be
adjusted by the change, if any, from the Base Month specified below, in the
Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of
Labor for (select one): [ ] CPI W (Urban Wage Earners and Clerical Workers) or
[x] CPI U (All Urban Consumers), for (Fill in Urban Area): Los Angeles --
Anaheim -- Riverside. All items (1982-1984 = 100), herein referred to 
as "C.P.I."

                (b)     The monthly rent payable in accordance with paragraph
A1(a) shall be calculated as follows: the Base Rent set forth in paragraph 1.5
of the attached Lease, shall be multiplied by a fraction the numerator of which
shall be the C.P.I. of the calendar month 2 (two) months prior to the month(s)
specified in paragraph A1(a) above during which the adjustment is to take
effect, and the denominator of which shall be the C.P.I. of the calendar month
which is two (2) months prior to (select one): [x] the first month of the term
of this Lease as set forth in paragraph 1.3 ("Base Month") or [ ] (Fill in 
Other "Base Month") _________________________.  The sum so calculated shall
constitute the new monthly rent hereunder, but in no event, shall any such new
monthly rent be less than the rent payable for the month immediately preceding
the date for rent adjustment and shall increase a minimum of three (3%) percent
and a maximum of seven (7%) percent per annum.

                (c)     In the event the compilation and/or publication of the
C.P.I. shall be transferred to any other governmental department or bureau or
agency or shall be discontinued, then the index most nearly the same as the
C.P.I. shall be used to make such calculation. In the event that Lessor and
Lessee cannot agree on such alternative index, then the matter shall be
submitted for decision to the American Arbitration Association in accordance
with the then rules of said association and the decision of the arbitrators
shall be binding upon the parties. The cost of said Arbitrators shall be paid
equally by Lessor and Lessee.


                              OPTION(S) TO EXTEND
                                  PAGE 1 OF 2


NOTICE:  These forms are often modified to meet changing requirements of law
         and industry needs. Always write or call to make sure you are utilizing
         the most current form. American Industrial Real Estate Association, 345
         South Figueroa Street, Suite M-1, Los Angeles, CA 90071, (213)
         687-8777, Fax No. (213) 687-8616.


<PAGE>   22

C.   BROKER'S FEE

The Real Estate Brokers specified in paragraph 1.10 of the attached Lease shall
be paid a Brokerage Fee for each adjustment specified above in accordance with
paragraph 15 of the attached Lease.



                              OPTION(S) TO EXTEND
                                  Page 2 of 2






NOTICE:  These forms are often modified to meet changing requirements of law
         and industry needs. Always write or call to make sure you are utilizing
         the most current form. American Industrial Real Estate Association, 345
         South Figueroa Street, Suite M-1, Los Angeles, CA 90071, (213)
         687-8777, Fax No. (213) 687-8616.


<PAGE>   23

                                     [LOGO]


                               RENT ADJUSTMENT(S)

                                  ADDENDUM TO
                                 STANDARD LEASE

Dated    April 14, 1995
      --------------------

By and Between (Lessor)  Frank D. McDonald, dba Rancho Conejo Properties
                        -------------------------------------------------------

               (Lessee)  SHR Perceptual Management, an Arizona Corporation
                        -------------------------------------------------------

Property Address:  703 Rancho Conejo Boulevard, Newbury Park, CA
                  ----------------------------------------------------    
Paragraph   49
          ------

A.   RENT ADJUSTMENTS:

     The monthly rent for each month of the adjustment period(s) specified
below shall be increased using the method(s) indicated below:

(Check Methods) to be Used and Fill in Appropriately)

[X]  I.   COST OF LIVING ADJUSTMENT(S) (COL)

     (a) On (Fill in COL Adjustment Date(s): May 1, 1996, May 1, 1997, May 1,
1998, May 1, 1999, May 1, 2000, the monthly rent payable under paragraph 1.5
("Base Rent") of the attached Lease shall be adjusted by the change, if any,
from the Base Month specified below in the Consumer Price Index of the Bureau of
Labor Statistics of the U.S. Department of Labor for (select one): [ ] CPIW
(Urban Wage Earners and Clerical Workers) or [X] CPIU (All Urban Consumers), 
for (Fill in Urban Area): Los Angeles - Anaheim - Riverside. All items 
(1982-1984 = 100), herein referred to as "C.P.I."

     (b) The monthly rent payable in accordance with paragraph A1(a) of this
Addendum shall be calculated as follows: the Base Rent set forth in paragraph
1.5 of the attached Lease, shall be multiplied by a fraction the numerator of
which shall be the C.P.I. of the calendar month 2 (two) months period to the
month(s) specified in paragraph A1(a) above during which the adjustment is to
take effect, and the denominator of which shall be the C.P.I. of the calendar
month which is two (2) months prior to (select one): [X] the first month of the
term of this Lease as set forth in paragraph 1.3 ("Base Month") or [ ] (Fill in
Other "Base Month"): _____________. The sum so calculated shall constitute of 
the new monthly rent hereunder, but in no event, shall any such new monthly 
rent be less than the rent payable for the month immediately preceding the date 
for rent adjustment and shall increase a minimum of four (4%) percent and 
maximum of seven (7%) percent per annum.

     (c) In the event the compilation and/or publication of the C.P.I. shall be
transferred to any other governmental department or bureau or agency or shall be
discontinued, then the index most nearly the same as the C.P.I. shall be used to
make such calculation. In the event that Lessor and Lessee cannot agree on such
alternative index, then the matter shall be submitted for decision to the
American Arbitration Association in accordance with the then rules of said
association and the decision of the arbitrators shall be binding upon the
parties. The cost of said Arbitrators shall be paid equally by Lessor and
Lessee.



                               RENT ADJUSTMENT(S)
                                  Page 1 of 2



NOTICE:  These forms are often modified to meet changing requirements of law
         and industry needs. Always write or call to make sure you are utilizing
         the most current form. American Industrial Real Estate Association, 345
         South Figueroa Street, Suite M-1, Los Angeles, CA 90071, (213)
         687-8777, Fax No. (213) 687-8616.







<PAGE>   24
C.   BROKER'S FEE:

     The Real Estate Brokers specified in paragraph 1.10 of the attached Lease
shall be paid a Brokerage Fee for each adjustment specified above in accordance
with paragraph 15 of the attached Lease.




                               RENT ADJUSTMENT(S)
                                  Page 2 of 2


NOTICE:  These forms are often modified to meet changing requirements of law
         and industry needs. Always write or call to make sure you are utilizing
         the most current form. American Industrial Real Estate Association, 345
         South Figueroa Street, Suite M-1, Los Angeles, CA 90071, (213)
         687-8777, Fax No. (213) 687-8616.



<PAGE>   1

                                                                    EXHIBIT 10.6

                              CONSULTING AGREEMENT

          THIS CONSULTING AGREEMENT (this "Agreement") is executed as of the 8th
day of March, 1996, by and between PACIFIC SOFTWORKS, INC., a California
corporation (the "Company") and KENNETH WOODGRIFT ("Consultant") and is made
with respect to the following facts:

          A.    Consultant is knowledgeable regarding the business of the
Company. 

          B.   The Company desires to obtain the consulting services of
Consultant relating to the location of inventory sources, pricing strategies of
the Company's products and advertising and promotion strategies using
Consultant's extensive expertise and experience with similar products (the
"Consulting Services"), and Consultant desires to provide these services to the
Company.

          C.   Consultant and the Company believe it is in their mutual best
interests to enter into this Agreement pursuant to the terms hereinafter set
forth.

          NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, THE PARTIES HERETO AGREE AS FOLLOWS:

          1.   Term of Agreement. The term of this agreement shall commence as
of March 8, 1996 and shall remain in full force and effect, unless terminated as
provided in Section 7 of this Agreement, until August 31, 1999.


          2.   Services of Consultant. The Company hereby engages Consultant and
Consultant hereby agrees to perform the Consulting Services as described in
Section 3 of this Agreement.

          3.   Time and Efforts. Consultant agrees that she shall be available
to the Company for up to a maximum of fifteen (15) hours per month during the
term of this Agreement. The Consulting Services may be performed at any location
within or outside Ventura County, California, as Consultant in his sole
discretion shall determine. The exact date and time of the Consulting Services
shall be as requested by the Company, but subject to the availability of
Consultant as determined by Consultant within his sole discretion. If the
Company does not request the performance of fifteen (15) hours of Consulting
Services for any month during the term of this Agreement, the unused time shall
lapse and not be carried forward to the next month.

 


    

<PAGE>   2
        4. Compensation. During the term of this Agreement, the Company shall
pay, in full payment for the Consulting Services hereunder, Six Hundred Thousand
Dollars ($600,000), payable in forty-two [42] equal installments on the first
day of each month, commencing March 8, 1996. Consultant shall be entitled to the
entire consideration provided hereunder, notwithstanding any early termination
of this Agreement. Consultant may, if the Company fails to make any payment when
due within five (5) days of when notice of defaults is given to the Company,
accelerate payment of all sums due hereunder if the Company fails to pay any
installment when due.

        5. Expenses. Consultant shall not be obligated to perform any services
which would require the incurrence of any expense unless the Company agrees in
writing to reimburse the Company for such expenses.

        6. Interest. Any sum accruing to Consultant under this Agreement which
is not paid when due shall bear interest at the rate of ten percent (10%) per
annum from the date due until paid.

        7. Termination. This Agreement may only be terminated by the mutual
written agreement of Consultant and the Company to terminate. This Agreement
shall not be terminated by the death or disability of any employee, officer,
director or shareholder of Consultant or by the occurrence of any other event.

        8. Independent Contractor. The relationship of Consultant to the Company
hereunder shall be that of an independent contractor. The Company shall pay
Consultant directly, without payroll deductions of any kind whatsoever.
Consultant shall have the responsibility to discharge all of the obligations of
an independent contractor under federal, state and local law, including those
obligations relating to taxes, unemployment compensation and insurance, Social
Security, worker's compensation, disability, pensions and tax withholdings.
Nothing contained herein shall be construed to create the relationship between
the Company and Consultant of employer and employee.

        9. Notices. Unless applicable law requires a different method of giving
notice, any and all notices, demands or other communications required or desired
to be given hereunder by any party shall be in writing and shall be validly
given or made to another party if served personally or if deposited in the
United States mail, certified or registered, postage prepaid or if transmitted
by telegraph, telecopy or other electronic written transmission device. If such
notice, demand or other communication is served personally, service shall be
conclusively deemed made at the time of such personal service. If such notice,
demand or other communication is given by mail, such shall be 

<PAGE>   3
conclusively deemed given seventy-two (72) hours after the deposit thereof in
the United States mail, or if by telegraph or if by other carrier service, upon
confirmation of delivery by the carrier, addressed to the party to whom such
notice, demand or other communication is to be given as follows:

        To Company:             Pacific Softworks, Inc.
                                400 Via Pescador
                                Camarillo, California 93012

        To Consultant:          Kenneth Woodgrift
                                4205 Romany Drive
                                Oxnard, California 93035

        With a copy to:         Jeffer, Mangels, Butler &
                                Marmaro LLP
                                2121 Avenue of the Stars
                                10th Floor
                                Los Angeles, California 90067
                                ATTN: Robert E. Braun, Esq.

Any party hereto may change its address for the purpose of receiving notices,
demands and other communications as herein provided by a written notice given
in the manner aforesaid to the other party or parties hereto.

        10.     Indemnification. Company hereby agrees to indemnify, defend and
hold Consultant harmless from and against any and all claims, actions, demands,
lawsuits, causes of action, expenses (including attorneys' fees and court
costs), liabilities, interest, taxes, penalties and any and all other damages
(collectively, the "Claims") which Consultant may suffer and which result from
or arise out of, or are in connection with, any of the acts of Company.

        11.     Attorneys' Fees. Should any party hereto engage an attorney or
institute any action or proceeding at law or in equity, or in connection with an
arbitration, to enforce any provision of this Agreement, including an action for
declaratory relief, or for damages by reason of an alleged breach of any
provision of this Agreement, or otherwise in connection with this Agreement, or
any provision thereof, the prevailing party shall be entitled to recover from
the losing party or parties actual attorneys' fees and costs for services
rendered to the prevailing party in such action or proceeding.

        12.     Arbitration. Any controversy or claim arising out of, or
relating to, this Agreement, or the making, performance or interpretation
thereof, shall be settled by arbitration in Ventura County, California in
accordance with the rules of the American Arbitration Association then
existing, and judgment on

                                       3

<PAGE>   4
the arbitration award may be entered in any court having jurisdiction over the
subject matter of the controversy. The parties further agree that a restraining
order, injunction, writ of possession and/or writ of attachment may be applied
for from a court of competent jurisdiction by any party pending resolution of
the dispute. The arbitrators selected shall be persons experienced in
negotiating, making and consummating agreements of the type of this Agreement.

        13.     Full Authority. Each of the parties and signatories to this
Agreement represents and warrants that he or she has the full right, power,
legal capacity and authority to enter into and perform the parties' respective
obligations hereunder and that such obligations shall be binding upon such
party without the requirement of the approval or consent of any other person or
entity in connection herewith. Each person signing this Agreement on behalf of
an entity represents and warrants that he or she has the full right, power,
legal capacity and authority to sign this Agreement on behalf of such entity.

        14.     Time of the Essence. Time is of the essence of this Agreement,
and in all the terms, provisions, covenants and conditions hereof.

        15.     Applicable Law. This Agreement shall, in all respects, be
governed by the laws of the State of California applicable to agreements
executed and to be wholly performed within California.

        16.     Severability. Nothing contained herein shall be construed so as
to require the commission of any act contrary to law, and wherever there is any
conflict between any provisions contained herein and any present or future
statute, law, ordinance or regulation, the latter shall prevail; but the
provision of this Agreement which is affected shall be curtailed and limited
only to the extent necessary to bring it within the requirements of the law.

        17.     Further Assurances. Each of the parties hereto shall execute
and deliver any and all additional papers, documents and other assurances, and
shall do any and all acts and things reasonably necessary in connection with
the performance of their obligations hereunder to carry out the intent of the
parties hereto.

        18.     Modifications or Amendments. No amendment, change or
modification of this Agreement shall be valid, unless in writing and signed by
all of the parties hereto.

        19.     Successors and Assigns. All of the terms and provisions
contained herein shall inure to the benefit of and

                                      -4-

<PAGE>   5

shall be binding upon the parties hereto and their respective heirs, legal
representatives, successors and assigns.

          20. Entire Agreement. This Agreement constitutes the entire
understanding and agreement of the parties with respect to its subject matter
and any and all prior agreements, understandings or representations with
respect to its subject matter are hereby terminated and cancelled in their
entirety and are of no further force or effect.

          21. Non-Waiver. No waiver by any party hereto of a breach of any
provision of this Agreement shall constitute a waiver of any preceding or
succeeding breach of the same or any other provision hereof.

          22. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

          23. Number and Gender. In this Agreement, the masculine, feminine or
neuter gender, and the singular or plural number, shall each be deemed to
include the others whenever the context so requires.

          24. Captions. The captions appearing at the commencement of the
sections hereof are descriptive only and for convenience in reference. Should
there be any conflict between any such caption and the section at the head of
which it appears, the section and not such caption shall control and govern in
the construction of this Agreement.

          25. Expenses. Each of the parties shall pay all of their own costs,
legal fees, accounting fees, and any other expenses incurred or to be incurred
by it or them in negotiating and preparing this Agreement, and closing and
carrying out the transactions contemplated by this Agreement.

          26. Parties in Interest. Nothing in this Agreement, whether express
or implied, is intended to confer any rights or remedies under or by reason of
this Agreement on any persons other than the parties and their respective
successors and assigns, nor is anything in this Agreement intended to relieve
or discharge the obligation or liability of any third persons to any party to
this Agreement, nor shall any provision give any third person any right of
subrogation or action over or against any party to this Agreement.

                                      -5-

<PAGE>   6
          IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.

"COMPANY"                               Pacific Softworks, Inc.
                                        a California corporation

                                        /s/ GLENN RUSSELL  
                                        ----------------------------------------
                                        Glenn Russell, Secretary


"CONSULTANT"       
                                        ----------------------------------------
                                        Kenneth Woodgrift 

                                      -6-


<PAGE>   7
     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.

"COMPANY"                               Pacific Softworks, Inc.
                                        a California corporation


                                        ------------------------------------
                                        Glenn Russell,
                                        Secretary


"CONSULTANT"                            /s/ KENNETH WOODGRIFT
                                        ------------------------------------
                                        Kenneth Woodgrift





<PAGE>   1

                                                                    EXHIBIT 10.7

                             PACIFIC SOFTWORKS INC.
                             703 Rancho Conejo Blvd
                             Newbury Park, CA 91320

January 27, 1999

Mr. Glenn Golenberg
Golenberg & Co.
11100 Santa Monica Boulevard
Suite 990
Los Angeles, Ca. 90025

Dear Glenn,

This letter is to document the terms of the services performed and to be
performed on a nonexclusive basis by Golenberg & Co. for the benefit of Pacific
Softworks. Pursuant to a letter between Pacific Softworks Inc., (the "Company")
on the one hand, and Golenberg & Co. and Marc Guren (collectively
"Golenberg"), on the other hand dated June 18, 1998 (the "Letter"). Golenberg
has previously provided certain services to Pacific Softworks. Pacific
Softworks has paid Golenberg $30,000. These payments are hereby accepted by
Golenberg as payment in full for the cash obligations due under the Letter. In
addition, the Letter between the parties provides that Golenberg would receive
options on 10% of Pacific Softworks' stock with a strike price based on a
$4,000,000 Company value as of June 18, 1998.

This agreement is to clarify and supersede the prior Letter as provided herein
as it relates to the options. If, at any time prior to June 18, 1999, Golenberg
procures and presents to Pacific Softworks a purchaser or financing offer(s)
for Pacific
 Softworks, subject to costs, terms, and conditions reasonable and
customary in such a proposal, which offer is acceptable by Pacific Softworks,
then Pacific Softworks will thereupon issue to Golenberg as compensation for
such services a five year option to purchase shares of Company stock in Pacific
Softworks that represents 10% of the outstanding shares of the Company as of
June 18, 1998, with a strike price based on a total Company value of
$4,000,000. Except for the $30,000 previously paid by Pacific Softworks to
Golenberg, or as to out-of-pocket expenses incurred by Golenberg and approved
by Pacific Softworks, each party will pay their own costs incurred in connection
with any purchaser or financing transactions, and neither party shall be
responsible for the other party's costs.

Except as otherwise mutually agreed upon in the future, if Golenberg does not
produce a purchaser or financing offer as set forth above, then Golenberg shall
be entitled to retain as sole compensation the $30,000 previously paid by
Pacific Softworks to Golenberg and nothing more.

This agreement supersedes any and all previous understanding and/or agreements,
whether written or verbal, and shall not be modified or changed except in
writing executed by both parties. It shall bind, obligate and inure to the
benefit of the legal successors, transferees, grantees and heirs of each party
hereto. Except as set forth in this agreement, both parties agree to release the
other from any obligation from previous transactions, understandings, or
agreements (including but not



<PAGE>   2
Glenn Golenberg                                                           Page 2
January 27, 1999

limited to the Letter) and from any and all other claims or liabilities, whether
known or unknown, against the other (including against Marc D. Guren).

The parties further agree that any disputes under or relating to this
agreement, or performance or nonperformance hereunder, shall exclusively be
subject to arbitration pursuant to the Commercial Arbitration Rules of the
American Arbitration Association, that the arbitrator shall grant to the
prevailing party any and all attorneys' fees and costs and expenses, as well as
interest, and that the award shall be enforceable in the courts.

Each party agrees that in any dispute regarding the interpretation or
construction of this agreement, no presumption shall operate in favor of or
against any party by virtue of its or his role in drafting or not drafting the
terms and conditions set forth herein.

Sincerely,

/s/  GLENN RUSSELL             03/02/99
- ---------------------------------------
Glenn Russell

Accepted on 3-2-99 by:

/s/  GLENN GOLENBERG
- ---------------------------------------
Golenberg & Co.



<PAGE>   3

                          [GOLENBERG & CO. LETTERHEAD]



VIA TELEFAX: (805) 484-3929


June 18, 1998


Mr. Glenn Russell
Pacific Softworks
703 Rancho Conejo Boulevard
Neubury Park, California 91320

Dear Glenn,

Just a note to thank you for the time you spent with Marc Guren and me last
week. We enjoyed our visit very much, and believe that there are some distinct
opportunities for Pacific Softworks. In that regard, we believe that the
company must undertake a thorough examination of its current business, as well
as strategic direction in the future. This will encompass creating a well
thought out business plan and model. Once the model is complete, we will need
to examine and evaluate the various options available to achieve these plans.
This will include developing a comprehensive financing plan, or exit strategy,
which is in the best interest of the current Pacific Softworks shareholders. On
our visit, we spent a good amount of time describing to you the actual process,
and assuring you that it will take considerable amounts of time and focus.

Because we wish to align ourselves with your interest, we have structured our
fee arrangement consistent with creating value on your behalf. In that regard,
we would require an option on 10 percent of the currently outstanding, fully
diluted shares. This includes all options and warrants outstanding. This option
would have an exercise price which would value the company at $4,000,000. For
example, if the company had one million shares outstanding, and had a value of
$4.00 per share, we would get options granted to us for 100,000 shares at $4.00
per share. This requires our assignment to create values far in excess of
$4,000,000, to make our efforts at all worthwhile.

In addition, for our time spent, and to help defray our overhead costs, we
would require a $10,000 per month retainer for a three-month period. Once the
business plan and evaluation are complete, and we have agreed upon a financing
plan, we would be involved as your Financial Advisor, in whatever capacity was
deemed appropriate. This would largely depend on the nature of the transaction
as to whether the company needed to raise money, or was looking to a joint
venture partner. These activities might include additional fees, but would be
agreed upon at the time such activities took place.



<PAGE>   4

It's important for you to understand that, at all times, you will be in control
of the process. We will have input and suggestions, but are keenly aware that
this is your company.

We look forward to a long and profitable relationship, and feel quite confident
that, after we know all the facts, we can create significant value. 

Very truly yours,

/s/ GLENN GOLENBERG
- ---------------------------
    Glenn Golenberg

GG:gc

cc: Marc Guren

Our assignment will include reimbursement of all out-of-packet expenses to be
reasonably approved by you. We will begin the cash portion of our arrangement
July 1, 1998 and the option portion will begin effective as the date of the
signing.

/s/ GLENN RUSSELL  06-22-98
- ---------------------------
    Glenn Russell

Approved




<PAGE>   1

                                                                    EXHIBIT 23.1

                          INDEPENDENT AUDITORS' CONSENT


We hereby consent to the use in this Registration Statement of Pacific
Softworks, Inc. on Form SB-2 of our report dated January 29, 1999, appearing in
the Prospectus, which is a part of such Registration Statement relating to the
consolidated financial statements of Pacific Softworks, Inc. and Subsidiary, and
to the reference to our Firm under the caption "Experts" in such Prospectus.



                              /s/  MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.

                                   MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
                                   Certified Public Accountants




Los Angeles, California
May 12, 1999