<PAGE>   1
 
   
     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 26, 1999
    
 
                                                      REGISTRATION NO. 333-75137
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
   
                               AMENDMENT NO. 3 TO
    
 
                                   FORM SB-2
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
                            ------------------------
 
                            PACIFIC SOFTWORKS, INC.
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
 

<TABLE>
<S>                             <C>                                                   <C>
          CALIFORNIA                                    8980                                    77-0390628
 (STATE OR OTHER JURISDICTION               (PRIMARY STANDARD INDUSTRIAL                     (I.R.S. EMPLOYER
      OF INCORPORATION OR                    CLASSIFICATION CODE NUMBER)                    IDENTIFICATION NO.)
         ORGANIZATION)
</TABLE>

 
                          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:
 
                            AARON A. GRUNFELD, ESQ.
                             MARTY B. LORENZO, ESQ.
                       RESCH POLSTER ALPERT & BERGER LLP
                   10390 SANTA MONICA BOULEVARD, FOURTH FLOOR
                         LOS ANGELES, CALIFORNIA 90025
                                 (310) 277-8300
                              GARY A. AGRON, ESQ.
                          LAW OFFICES OF GARY A. AGRON
                          5445 DTC PARKWAY, SUITE 520
                           ENGLEWOOD, COLORADO 80111
                                 (303) 770-7254
 
        APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
 
    As soon as practicable following the date on which this registration
statement becomes effective.
 
    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.  [ ]
 
    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.
 
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<PAGE>   2
 
(Inside front cover)
 
                        CALCULATION OF REGISTRATION FEE
 

<TABLE>
<CAPTION>
 
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
                                                                  PROPOSED MAXIMUM   PROPOSED MAXIMUM
            TITLE OF EACH CLASS OF                AMOUNT TO BE     OFFERING PRICE      AGGREGATE           AMOUNT OF
          SECURITIES TO BE REGISTERED            REGISTERED(1)      PER UNIT(2)      OFFERING PRICE     REGISTRATION FEE
------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>              <C>                <C>                <C>
Units, each comprising one share of common
  stock and one warrant(3)(4)..................     1,092,500          $5.25           $ 5,735,625         $1,594.50
  (a) Common stock                                  1,092,500             --                    --                --
  (b) Warrants to purchase common stock             1,092,500             --                    --                --
  (c) Common Stock                                  1,092,500          $7.50           $ 8,193,750         $2,277.86
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)................................        95,000          $6.30           $   598,500         $  166.38
  (a) Common stock                                     95,000             --                    --                --
  (b) Warrants to purchase common stock                95,000             --                    --                --
  (c) Common stock                                     95,000          $7.50           $   712,500         $  198.08
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..........................................                                        $17,310,475         $4,813.28
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
</TABLE>

 
(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 1,092,500 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.

<PAGE>   3
 
   
                                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 1,092,500 units,
including 142,500 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 by named stockholders of and consultants
to Pacific Softworks of up to:
 
     - 80,000 units issuable upon exercise of their warrants to purchase units,
       and
 
     - 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 59, other than the section entitled "Underwriting," and
       pages F-1 through F-16 of the first prospectus,
    
 
     - pages SS-1 through SS-4,
 
     - 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.

<PAGE>   4
 
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.
 
   
                   SUBJECT TO COMPLETION, DATED JULY   , 1999
    
 
PROSPECTUS
 
                                 950,000 UNITS
                         [PACIFIC SOFTWORKS, INC. LOGO]
 
                  CONSISTING OF 950,000 SHARES OF COMMON STOCK
 
                                      AND
 
                                950,000 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.
    
 
   
     Each warrant allows its holder to purchase for a period of 24 months one
share of common stock for $7.50.
    
 
     We expect to list our 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
will offer for sale up to 80,000 units and 200,000 shares of our common stock.
We will not receive any proceeds from the sale of these securities.
    
 
   
     INVESTING IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK AND IMMEDIATE
AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 6 AND "DILUTION"
ON PAGE 14.
    
 
     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.
 
     We have granted the underwriter a 45-day option to purchase an additional
142,500 units from us at the initial public offering price less the underwriting
discounts.
 
   

<TABLE>
<CAPTION>
                                                                 WITHOUT OVER-    WITH OVER-
                                                     PER UNIT      ALLOTMENT      ALLOTMENT
                                                     --------    -------------    ----------
<S>                                                  <C>         <C>              <C>
Public offering price..............................   $5.250      $4,987,500      $5,735,625
Underwriting discounts.............................   $ .525      $  498,750      $  573,562
Proceeds to Pacific Softworks before expenses......   $4.725      $4,488,750      $5,162,063
</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.
 
                                 JULY   , 1999

<PAGE>   5
 
   
                               TABLE OF CONTENTS
    
 
   

<TABLE>
<CAPTION>
                                      PAGE
                                      ----
<S>                                   <C>
Prospectus summary..................    3
Risk factors........................    6
You should not rely on our forward-
  looking statements................   10
Use of proceeds.....................   11
Dividend policy.....................   12
Capitalization......................   13
Dilution............................   14
Selected consolidated financial
  data..............................   15
Management's discussion and analysis
  of financial condition and results
  of operations.....................   16
Business............................   24
</TABLE>

    
 
   

<TABLE>
<CAPTION>
                                      PAGE
                                      ----
<S>                                   <C>
Management..........................   40
Certain transactions................   46
Principal stockholders..............   48
Description of securities...........   50
Underwriting........................   55
Legal matters.......................   57
Experts.............................   57
Where you can find additional
  information.......................   57
Index to consolidated financial
  statements........................   59
</TABLE>

    
 
   
    
 
                                        2

<PAGE>   6
 
                               PROSPECTUS SUMMARY
 
   
     To understand this offering fully, you should read carefully the entire
prospectus, including the risk factors and the consolidated financial
statements.
    
 
   
OUR BUSINESS
    
 
   
     Pacific Softworks develops and licenses software which enables Internet and
Web-based communications. Our software products are embedded into systems and
"information appliances" developed or manufactured by others. Information
appliances are Internet-connected versions of every products such as telephones,
televisions, fax machines, personal digital assistants and other digitally based
devices.
    
 
   
     We have developed a new proprietary Internet browser for use within
independent, "nonWindows(R)" information appliances. We expect to begin
marketing the initial version of this browser during the fourth 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 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.
    
                                        3

<PAGE>   7
 
   
THE OFFERING
    
 
Units offered:                  950,000, 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
                                right 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.
 
Common stock to be
outstanding after the
offering:                       4,250,000 shares.
 
Use of proceeds:                We estimate that we will receive net proceeds of
                                about $4,140,000. We expect to use net proceeds
                                for:
 
   
                                - research and development of our Web products,
    
 
   
                                - enhancements to existing Internet and
                                  application products,
    
 
   
                                - marketing and sales,
    
 
   
                                - intellectual property protection,
    
 
   
                                - repayment of indebtedness, and
    
 
   
                                - other general corporate purposes including
                                  working capital.
    
 
   
Proposed Nasdaq SmallCap
Market symbols:                 Common stock: PASW
                                Warrants: PASWW
    
 
     In addition to 4,250,000 shares of common stock outstanding after the
offering, Pacific Softworks may issue 950,000 shares of common stock on exercise
of the warrants and 728,000 shares of common stock on exercise of currently
outstanding options and other 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 from the date of
this prospectus 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>   8
 
   
                      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 December
31, 1998 and March 31, 1999. The column labeled "as adjusted" reflects our
receipt of estimated net proceeds from the sale of 950,000 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
                                                  DECEMBER 31,   --------------------
                                                      1998       ACTUAL   AS ADJUSTED
                                                  ------------   ------   -----------
                                                                    (IN THOUSANDS)
<S>                                               <C>            <C>      <C>
Cash and cash equivalents.......................      $224       $  461     $4,601
Working capital.................................       222          546      4,686
Total assets....................................       643        1,331      5,471
Total stockholders' equity......................       207          819      4,959
</TABLE>

    
 
                                        5

<PAGE>   9
 
   
                                  RISK FACTORS
    
 
   
WE HAVE REPORTED LOSSES FOR OUR LAST TWO YEARS AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999, AND IF WE DO NOT BECOME PROFITABLE OUR BUSINESS COULD BE
ADVERSELY AFFECTED AND THE VALUE OF YOUR INVESTMENT COULD DECLINE.
    
 
     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 a 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, and have an accumulated deficit of $42,000 as of March 31, 1999. These
losses include $82,000 paid during each of those calendar quarters for the
former officer's consulting and administrative expense. 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 REVENUE WHICH COULD LOWER THE VALUE OF OUR
SHARES.
 
     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.
 
                                        6

<PAGE>   10
 
ANY DECREASE IN THE MARKET ACCEPTANCE OF OUR INTERNET AND WEB PRODUCTS OR LACK
OF ACCEPTANCE OF NEW 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 the fourth quarter of 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 REVENUE 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. We may be unsuccessful in
implementing this change to our product pricing. 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 REVENUE 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,
 
     - access to larger customer bases, or
 
     - substantially greater resources than we have.
 
                                        7

<PAGE>   11
 
     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 DECLINING 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 INCUR SUBSTANTIAL COSTS IN CONNECTION WITH INTELLECTUAL PROPERTY
INFRINGEMENT CLAIMS THAT OTHERS MAY BRING AGAINST US WHICH COULD ADVERSELY
AFFECT OUR PROFITABILITY AND REDUCE THE VALUE OF YOUR INVESTMENT.
    
 
   
     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.
    
 
   
     We may be a party to litigation in the future to protect our intellectual
property or as a result of our 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.
    
 
                                        8

<PAGE>   12
 
   
Any of these events could have a material adverse effect on our business,
financial condition and operating results.
    
 
   
BECAUSE OUR OWNERSHIP IS CONCENTRATED, OUR OFFICERS AND DIRECTORS WILL BE ABLE
TO CONTROL ALL MATTERS REQUIRING STOCKHOLDER APPROVAL INCLUDING DELAYING OR
PREVENTING A CHANGE IN OUR CORPORATE CONTROL OR TAKING OTHER ACTIONS OF WHICH
YOU DISAPPROVE.
    
 
     Our officers and directors will beneficially own about 71.8% of the
outstanding common stock after this offering. If all the warrants are exercised,
our officers and directors will own about 60.8% 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 COULD DISCOURAGE A CHANGE IN CONTROL,
COULD REDUCE THE MARKET PRICE OF OUR COMMON STOCK AND COULD RESULT IN THE
HOLDERS OF PREFERRED STOCK BEING GRANTED VOTING RIGHTS THAT ARE SUPERIOR TO
THOSE OF THE HOLDERS OF COMMON STOCK.
    
 
   
     We are authorized to issue preferred stock without obtaining the consent or
approval of our stockholders. The issuance of preferred stock could have the
effect of delaying, deferring, or preventing a change in control. Management
also has the right to grant superior voting rights to the holders of preferred
stock. Any issuance of preferred stock could 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.
    
 
   
YOU WILL INCUR IMMEDIATE SUBSTANTIAL DILUTION OF $4.15 PER SHARE BY PURCHASING
SECURITIES IN THIS OFFERING.
    
 
     The initial public offering price applicable to the common stock included
in a unit will 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 of $4.15 per share or 79% and our
existing stockholders will receive a material increase of $0.94 in the net
tangible book value per share of their common stock.
 
   
YOU MAY EXPERIENCE ADDITIONAL DILUTION IF WE ARE COMPELLED TO LITIGATE OR
ARBITRATE CLAIMS THAT HAVE BEEN ASSERTED BY GOLENBERG & CO. 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, Golenberg & Co., has
asserted rights under a June 1998 letter agreement to purchase 10% of our then
outstanding common stock for $400,000. In June 1999 counsel for Golenberg
reiterated this demand and advised us that Golenberg's claims were being
evaluated for possible legal
    
 
                                        9

<PAGE>   13
 
action. Investors in this offering will be significantly diluted if Golenberg
successfully brings a lawsuit against us.
 
   
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.
 
   
             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.
    
 
                                       10

<PAGE>   14
 
   
                                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 950,000 units sold in this offering will be
approximately $4,140,000, or $4,791,000 if the underwriter's over-allotment
option is exercised in full.
 
     We intend to use the net proceeds approximately as indicated in the
following table.
 
   

<TABLE>
<CAPTION>
                        APPLICATION                             AMOUNT      %
                        -----------                           ----------   ---
<S>                                                           <C>          <C>
Research and development of Web products....................  $1,900,000    46%
Enhancements to existing Internet and application
  products..................................................     600,000    14%
Marketing and sales.........................................     950,000    23%
Intellectual property protection............................     150,000     4%
Repayment of bank line of credit............................     250,000     6%
Repayment of short-term loan................................     175,000     4%
Other general corporate purposes including working
  capital...................................................     115,000     3%
                                                              ----------   ---
                                                              $4,140,000   100%
                                                              ==========   ===
</TABLE>

    
 
   
     We expect to spend up to $1,900,000 over the next 12 to 18 months for
research and development of our Web products. Most of these funds will be used
to hire and train engineers and programming staff experienced in developing
Internet and Web-based software products. We also expect to spend up to $600,000
during the same period to hire additional staff who will be mainly devoted to
making ongoing refinements and enhancements to our existing products. We have
budgeted $950,000 to expand our marketing and sales efforts by
    
 
     - increasing amounts devoted to advertising within trade and industry
       magazines and other print media, and
 
     - hiring up to 15 additional persons who will engage in business
       development, sales, and customer support.
 
     We expect to spend up to $150,000 for intellectual property protection over
the next 12 to 18 months. We anticipate that most of this amount will be spent
for legal fees and costs in connection with
 
     - domestic and foreign applications for patents on portions of our
       technology which may be patentable,
 
     - trademarks, servicemarks and copyrights.
 
   
     As of July 1, 1999 we had fully utilized our $250,000 bank credit line. The
credit line bears interest at 10% per year, is due August 1, 1999, is guaranteed
by Glenn P. Russell, our president, and is collateralized by our accounts
receivable. We used the proceeds of this credit line for general corporate
purposes and working capital.
    
 
   
     In July 1999 we obtained a commitment for a short-term loan of up to
$200,000 from Spencer Edwards, Inc., our underwriter. As of July 15, 1999 the
underwriter has advanced us $175,000 which we have used for general corporate
purposes and working capital. The loan bears interest at 10% per year and is
payable on the earlier of either October 6, 1999 or our receipt of the proceeds
from this offering.
    
 
     We may acquire or invest in complementary businesses, technologies,
services or products and a portion of the net proceeds currently allocated to
other corporate purposes
 
                                       11

<PAGE>   15
 
including working capital may be used for such 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. The precise allocation of funds among the uses described above will
depend on
 
     - the amount of cash generated by our operations,
 
     - future technological developments,
 
     - the competitive climate in which we operate, and
 
     - the emergence of future opportunities.
 
     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 plan to retain all of our earnings, if any, to finance the expansion of
our business and for general corporate purposes. Other than distributions to
stockholders for tax purposes during the period of time we were operating as a
subchapter S corporation we have not declared or paid any cash dividends on our
common stock or other securities. We do not anticipate paying cash dividends in
the foreseeable future. Our line of credit currently prohibits the payment of
dividends.
    
 
                                       12

<PAGE>   16
 
                                 CAPITALIZATION
 
     The following table sets forth our capitalization as of December 31, 1998
and our unaudited capitalization as of March 31, 1999:
 
     - on a historical basis, and
 
     - on an as adjusted basis, giving effect to the sale of 950,000 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," consolidated financial
statements and notes to consolidated financial statements appearing elsewhere in
this prospectus.
    
 
   

<TABLE>
<CAPTION>
                                                                   MARCH 31, 1999
                                                DECEMBER 31,    ---------------------
                                                    1998        ACTUAL    AS ADJUSTED
                                                ------------    ------    -----------
                                                                   (IN THOUSANDS)
<S>                                             <C>             <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; 4,250,000 shares, as
     adjusted..................................        3            3            4
  Additional paid-in capital...................      175          875        5,014
  Accumulated earnings (deficit)...............       18          (42)         (42)
  Cumulative adjustment for currency
     translation...............................       11          (17)         (17)
                                                    ----         ----       ------
          Total stockholders' equity...........      207          819        4,959
                                                    ----         ----       ------
Total capitalization...........................     $207         $819       $4,959
                                                    ====         ====       ======
</TABLE>

    
 
     The information provided above excludes:
 
     - 950,000 shares of common stock issuable upon exercise of warrants,
 
     - 728,000 shares of common stock issuable upon exercise of outstanding
       options and warrants,
 
     - 95,000 units issuable on exercise of the underwriter's option to purchase
       units.
 
                                       13

<PAGE>   17
 
                                    DILUTION
 
     At March 31, 1999, our 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 950,000 units and our receipt of an
estimated $4,140,000 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 $1.10 per share. This amount
represents an immediate increase in net tangible book value of $0.94 per share
to existing stockholders and an immediate dilution of $4.15 or 79% 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.................   0.94
                                                         -----
Adjusted net tangible book value after the offering....            1.10
                                                                  -----
Dilution per share to new investors in this offering...           $4.15
                                                                  =====
</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 this 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     77.6%    $  678,000     12.0%        $0.21
New investors.............    950,000     22.4%     4,987,500     88.0%        $5.25
                            ---------    -----     ----------    -----
          Total...........  4,250,000    100.0%    $5,665,500    100.0%
                            =========    =====     ==========    =====
</TABLE>

    
 
     The information for existing stockholders in the table above excludes
shares 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.
 
                                       14

<PAGE>   18
 
   
                      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 to consolidated financial statements 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 statements 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 the audited consolidated
financial statements included elsewhere in this prospectus.
    
 
     The consolidated statements of operations data for the three months ended
March 31, 1998 and 1999 and the consolidated balance sheet data at March 31,
1999 have been derived from our unaudited consolidated financial statements but
have been prepared on the same basis as our audited consolidated financial
statements which are included in this prospectus. In our opinion, these
unaudited consolidated financial statements include all adjustments, consisting
of normally recurring adjustments, considered necessary for a fair presentation
of our consolidated financial position and results of operations for that
period.
 
   
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>
                                                     DECEMBER 31,        UNAUDITED
                                                 --------------------    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.
 
                                       15

<PAGE>   19
 
   

               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
    
   
                      CONDITION AND RESULTS OF OPERATIONS
    
 
   
     You should read the following discussion and analysis in conjunction with
"Selected consolidated 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.
    
 
     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 an initial 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 the majority 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 one-time license fee of our base TCP/IP product has typically been
priced 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 that this decay in pricing and reduced gross profit margins
for our mature TCP/IP product line may be partially offset by:
 
     - increased use and thus increased total licenses of TCP/IP,
 
     - availability of the new FastTrack(TM) solutions, which could increase our
       average license fee by $10,000,
 
                                       16

<PAGE>   20
 
     - availability of our new TCP/IP version 5, which we expect to become
       available within the next 12 to 18 months, and that may increase our
       average license to as much as $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 before the end of the fourth quarter
of 1999.
 
   
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...........................    3.53      3.59      4.02      4.01
                                            ------    ------    ------    ------
Gross profit..............................   96.47     96.41     95.98     95.99
                                            ------    ------    ------    ------
Selling, general and administrative.......   63.75     69.47     55.46     49.35
Research and development..................   25.20     30.55     30.75     41.97
Depreciation and amortization.............    1.94      2.11      2.16      1.68
Former officer consulting and
  administrative expense..................    9.48     11.28     11.78     10.63
                                            ------    ------    ------    ------
Total operating expenses..................  100.37    113.41    100.15    103.63
                                            ------    ------    ------    ------
Net loss from operations..................   (3.90)   (17.00)    (4.17)    (7.64)
Foreign currency translation adjustment...    1.51     (0.34)    (5.74)    (3.70)
                                            ------    ------    ------    ------
Comprehensive loss........................   (2.39)%  (17.34)%   (9.91)%  (11.34)%
                                            ======    ======    ======    ======
</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
                                                                     THREE MONTHS
                                                      YEAR ENDED        ENDED
                                                     DECEMBER 31,     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>

    
 
                                       17

<PAGE>   21
 
   
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% of
total sales is principally due to a decline in domestic sales as a result of
increased competition and related price discounting.
 
   
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 in the three months ended March 31, 1998 to $323,824 or 42% of revenue
for 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 in the three
months ended March 31, 1998 to $13,460 in 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. 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. 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. These agreements expire in September
1999 and are not expected to be renewed.
 
                                       18

<PAGE>   22
 
   
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. Had Pacific
Softworks been subject to taxation as a C corporation in 1998, it would have
received a pro forma income tax benefit of $1,099. For the three months ended
March 31, 1999, Pacific Softworks has no income tax liability.
 
   
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.
 
     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 nonrecurring distribution to the president
and majority stockholder. Pacific
 
                                       19

<PAGE>   23
 
Softworks, then a corporation governed under the provisions of subchapter S of
the Internal Revenue Code, made the nonrecurring 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.
 
   
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 our 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. These agreements expire in
September 1999 and are not expected to be renewed.
 
   
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 or benefit in future periods at the corporate level.
    
 
                                       20

<PAGE>   24
 
   
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,
 
     - other short-term loans, 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.
 
     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. Reduced 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
partially 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 and collateralized by our accounts
receivable, 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 and his spouse who is a former director of Pacific
Softworks. Pacific Softworks repaid this loan after December 31, 1998.
 
   
     During 1999 we hired additional operating personnel and expanded our pace
of operation in anticipation of the proceeds from this offering. As of July 1,
1999 we have fully utilized our $250,000 bank line of credit. In order to meet
our ongoing working capital needs we also obtained in July 1999 a commitment for
a short-term loan from Spencer Edwards, Inc., our underwriter. The loan
commitment provides for advances of up to $200,000 as needed for general
corporate purposes and working capital. The loan bears interest at 10% per year
from the date of the advance and is payable on the earlier of
    
 
                                       21

<PAGE>   25
 
   
October 6, 1999 or our receipt of the proceeds from this offering. As of July
15, 1999 the underwriter has advanced $175,000 to us against this commitment.
    
 
   
PRIVATE PLACEMENT
    
 
     In February 1999 we sold 100,000 units to one investor at a price of $5.00
per share for total proceeds of $500,000. Each unit consisted of one share of
common stock and one common stock purchase warrant entitling the holder to
purchase one share of common stock at $6.00 per share. These warrants expire
March 1, 2001.
 
   
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 noncash 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.
 
     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
effect 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.
 
                                       22

<PAGE>   26
 
   
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 nonowner 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.
 
                                       23

<PAGE>   27
 
 
                                   BUSINESS
 
   
OUR BUSINESS
    
 
   
     We develop and license 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 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           - Engine controls, smart weapons
  aerospace
- Satellite             - Satellite positioning, uplink and downlink of
                          streaming video
</TABLE>

    
 
     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 believe 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.
 
   
OUR STRATEGY
    
 
     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.
 
                                       24

<PAGE>   28
 
     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.
 
   
     As part of our business strategy, we may acquire or make investments in
complementary businesses, technologies, services or products if appropriate
opportunities arise. From time to time we have had discussions and negotiations
with companies regarding our acquiring or investing in their businesses. No
discussions with any of these companies are currently pending. We cannot assure
you that we will be able to identify future suitable acquisitions or investment
candidates. If we do identify suitable candidates and investment opportunities,
we cannot assure you that we will be able to make acquisitions or investments on
commercially acceptable terms or at all.
    
 
   
     If we acquire or invest in another company or business opportunity, we
could have difficulty in assimilating personnel, operations, technology and
software. These difficulties could disrupt our ongoing business, distract our
management and employees, increase our expenses and adversely affect our results
of operations. We may also expend cash, incur indebtedness or issue equity
securities to pay for any future acquisitions or investments.
    
 
   
     The issuance of equity securities could be dilutive to our existing
stockholders. Our liquidity and profitability also may suffer because of
acquisition-related costs or amortization of acquired goodwill and other
intangible assets.
    
 
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 number of Internet Web sites is 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
 
                                       25

<PAGE>   29
 
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 from $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 $2.1
billion in 1998 to $7.1 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 the end of May
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.
 
   
     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. According to The Industry Standard 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.
    
 
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 has been adopted as a
standard and enables 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
    
 
                                       26

<PAGE>   30
 
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 are 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.
 
     - 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 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.
 
     - As embedded applications increase in complexity, the costs associated
       with providing software development, support and training of engineers
       are rising rapidly.
 
                                       27

<PAGE>   31
 
       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.
 
   
OUR PRODUCTS
    
 
     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 protocols products are not dependent on any particular processor.
They have been and are currently being developed and integrated by us and our
customers under the FastTrack(TM) product line for several families of
processors including those of:
 
          - Advanced Micro Devices
 
          - Advanced Risc Machines
 
          - Analog Devices
 
          - ARC
 
          - Hitachi
 
          - Hyperstone
 
          - Intel Corporation
 
          - LSI Logic
 
     - MIPS Technologies
 
     - Motorola Corporation
 
     - NEC
 
     - Philips
 
     - Siemens
 
     - ST Microsystems
 
     - Texas Instruments
 
     Our Internet and Web server 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 optimized for embedded systems,
 
     - mature software code for the Internet products that have been tested and
       used in a wide variety of products by companies including Alcatel Telcom,
       AT&T/Lucent Technologies, Hewlett-Packard, Honeywell, Hughes Aircraft,
       Intel, Cisco and SGS Thomson,
 
                                       28

<PAGE>   32
 
     - 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 major communication
       chip sets, and
 
     - pre-built, ready to add "drop-in solutions" for easy integration of
       customer application software across multiple processor platforms.
 
   
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
readily incorporated in a customer's information appliances and other embedded
products.
 
     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 RIP, Routing Information 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.
Industry standards describe and prescribe the specifications required to
implement RIP. Our FUSION RIP 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.
 
     FUSION OSPF, Open Shortest Path First Protocol. 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. This
product has been designed specifically for use in high performance
multi-protocol routers.
 
     FUSION PPP, Point-to-Point Protocol. This application links one device to
another over telephone lines and cable. This product provides a means for
transmitting packets of data known as datagrams over serial point-to-point
links.
 
     FUSION SNMP, Simple Network Management Protocol. SNMP helps to manage and
control devices over the Internet. SNMP is a set of protocols that interfaces
transparently into FUSION TCP/IP.
 
     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 among diverse systems.
 
     FUSION TFTP, Trivial File Transfer Protocol. This product is a subset of
FTP that allows the efficient transfer of files among diverse host systems
without the extended features and potential overhead or consumption of computing
resources associated with
 
                                       29

<PAGE>   33
 
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 or among servers on a network. 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. 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. BOOTP provides a secure way to allow or
deny access to specific files or directories among diverse systems. This
Internet protocol enables a diskless device to discover its own IP address, the
IP address of a BOOTP server on the network and a file to be loaded into memory
to activate or boot the device. This application software allows the efficient
sharing of files, programs or data among diverse host systems.
 
     FUSION DHCP, Dynamic Host Configuration Protocol. This protocol assigns
dynamic addresses to devices linked to 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 an 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 has been designed to be applicable across diverse
computer systems and environments.
 
     Unlike other browsers based on Windows(R), the FUSION WebPilot Micro
Browser(TM) is designed for applications where space and computing resources are
limited. Unlike other browsers, the FUSION WebPilot Micro Browser(TM) is not a
modified or simplified version of existing PC code. Our browser has also been
designed specifically for embedded applications. We believe that our product is
the only embeddable Web browser that
 
                                       30

<PAGE>   34
 
currently can make this claim. Our product will provide full browsing
capabilities in an embedded environment without needing a full PC-type operating
system such as Microsoft Windows(R) NT. In addition to browsing capabilities,
the FUSION WebPilot Micro Browser(TM) will include email and e-commerce
applications.
 
     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 the FUSION WebPilot Micro
Browser(TM) during the fourth quarter of 1999.
    
 
     FUSION Embedded Web Server.  This application software provides Web servers
with the capability to monitor and manage any Internet connected device through
the Web. Examples of devices which could incorporate this product include:
 
     - video cameras,
 
     - vending machines,
 
     - utility power meters,
 
     - medical equipment, and
 
     - other remote devices.
 
The FUSION Web Server is compatible with the FUSION WebPilot Micro Browser(TM)
and other standard browsers including Netscape, Mosaic and Internet Explorer. We
intend actively to market and deliver the FUSION Web Server version 1.0 during
the fourth quarter of 1999.
 
   
OTHER PRODUCTS WE INTEND TO MARKET
    
 
     Over the next 12 to 18 months we intend to introduce and market the
products described below:
 
     FUSION 5.  This product is our major TCP/IP upgrade. It will contain major
enhancement, significant improvements to our existing version and compliance
with changing industry standards.
 
     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.
 
     FUSION IPsec.  This product is the FUSION IP security protocol suite which
provides privacy and authentication services at the Internet Protocol layer.
IPsec will use advanced encryption technology and is designed to provide secure
financial and e-commerce transactions from information appliances over the
Internet.
 
                                       31

<PAGE>   35
 
     FUSION Satellite IP.  FUSION Satellite IP is being designed to handle
communication over satellite links for uplink and downlink modes and will adapt
to the delays inherent in satellite communications. We expect this product to
add 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 MultiLink PPP.  MultiLink PPP will allow users to broadcast data
simultaneously to multiple devices within different operating environments and
will allow users to transfer more data by combining available links. MultiLink
PPP will extend the features and capabilities of PPP over multiple links or
channels. We expect to design both FUSION PPP and MultiLink PPP modules for use
within any major embedded processor.
 
   
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 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
 
                                       32

<PAGE>   36
 
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 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 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 use the
GreenHills' tools suite. These products provide a robust development environment
that is 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
nonexclusive basis worldwide.
 
     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 information available to us, we believe that
Software Development Systems has over 50% of compiler sales for Motorola
products.
 
     GAIO JAPAN.  GAIO is one of the largest suppliers 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.
 
                                       33

<PAGE>   37
 
   
WIDE AREA NETWORK COLLABORATION
    
 
     NEXT LEVEL.  Next Level 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 Next Level.
The combination of our products with those of Next Level 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. Unisoft also 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 1992, Pacific Softworks has licensed its products to over 400
companies around the world. In the last three fiscal years those customers have
included Alcatel, AT&T/ Lucent Technologies, Cisco Systems, Cocom, General
Instruments, Hewlett Packard, Honeywell, Intel and SGS Thomson Microelectronics.
 
     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 June 30, 1999, Pacific
Softworks had three domestic salespersons and field application engineers
located in North America, one salesperson and field application engineer in
Europe and two salespersons 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 closely with a number of system integrators
worldwide. We believe 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, 1999. 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,
    
 
                                       34

<PAGE>   38
 
   
     - 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,
    
 
   
     - 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.
    
 
     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
has 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
competition in our markets is based on:
 
     - 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
 
                                       35

<PAGE>   39
 
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.
 
   
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. In the three months ended March 31, 1999,
product development and engineering expenses totaled $323,824. We intend to
increase our commitment to product development and engineering for 1999 from the
proceeds of this offering. To expand our business, we plan to hire additional
product engineering and support 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 at all. Our added operating
expenses from these activities may not result in meaningful revenue increases
and could result in continued operating losses.
    
 
     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.
 
                                       36

<PAGE>   40
 
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. 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 agreements,
 
     - 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.
 
                                       37

<PAGE>   41
 
     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.
 
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 litigation may require us to:
 
     - pay substantial damages,
 
     - discontinue the use and sale of infringing products,
 
   
     - expend significant resources to develop noninfringing technology,
    
 
     - obtain a license to the infringing technology or grant a license of our
       technology to others.
 
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 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 July 7, 1999, Pacific Softworks employed 29 persons full-time,
including six in sales and marketing, 20 in product development, engineering and
support, including seven
 
                                       38

<PAGE>   42
 
consulting engineers, and three in management, operations, finance and
administration. Of these employees, 26 are located in North America, two are
located in Japan and one is located in Europe. None of our employees are
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 monthly rate of approximately $2,000 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
    
 
   
     In June 1999 Glenn Golenberg and Marc Guren notified us in writing through
their legal counsel that they are evaluating for possible legal action a claim
against us for an option to acquire 10% of outstanding, fully diluted shares of
Pacific Softworks as of June 18, 1998 for $400,000. This claim arises out of a
June 1998 letter agreement between Golenberg & Co., merchant bankers, and
Pacific Softworks. In that letter, Golenberg & Co. undertook to create for us a
business plan, to develop a comprehensive financing plan and to perform other
related services. Golenberg & Co. has asserted that it is entitled to the option
based on the services it has allegedly provided to us. We believe that Golenberg
& Co. has not fulfilled the conditions required to vest the option. If we are
compelled to litigate or arbitrate this claim we intend to defend ourselves
vigorously. If however Golenberg & Co. is successful in the pursuit of its
claim, it may be awarded an option to purchase up to 320,000 shares of our
common stock at a price of about $1.25 per share.
    
 
   
     Except for the matter described above, we are not currently a party to any
material legal proceedings.
    
 
                                       39

<PAGE>   43
 
                                   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.................  50    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
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 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 with a degree in business administration 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
 
                                       40

<PAGE>   44
 
bachelor of arts degree from the University 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 from California State University at Fullerton.
He received his juris doctorate from Pepperdine University School of Law and
obtained a masters of law in taxation from the New York University School of
Law. He was admitted to the State Bar of California in 1990.
 
   
BOARD OF DIRECTORS
    
 
     We currently are authorized to have five persons on our board of directors.
We have four persons serving as directors and one vacancy. We have no current
intention to appoint any person to fill that vacancy however we may do so if a
suitable candidate becomes available. 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. We will maintain at least three independent outside directors on
our board who are not officers or employees of Pacific Softworks and who do not
have any material business or professional relationship with us or any of our
affiliates.
 
   
     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 three nonemployee directors received
options to purchase 15,000 shares of common stock following his election to the
board of directors as indicated in the table below.
    
 
   

<TABLE>
<CAPTION>
                                    NUMBER OF SECURITIES
                                     UNDERLYING OPTIONS
               NAME                       GRANTED          EXERCISE PRICE   EXPIRATION DATE
               ----                 --------------------   --------------   ---------------
<S>                                 <C>                    <C>              <C>
Robert G.J. Burg II...............         15,000              $5.00        April 30, 2004
Wayne Grau........................         15,000              $5.00        April 30, 2004
Reuben Sandler....................         15,000              $5.00        April 30, 2004
</TABLE>

    
 
                                       41

<PAGE>   45
 
   
COMMITTEES OF THE BOARD OF DIRECTORS
    
 
     The board of directors maintains a compensation committee and an audit
committee. The compensation committee is composed of Robert Burg, chair, Reuben
Sandler and Wayne Grau. The audit committee is composed of Reuben Sandler chair,
Robert Burg 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,
 
     - 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 summary information concerning the
compensation we paid for services rendered to us during 1998, 1997 and 1996 by
our chief executive officer, vice president of business development and vice
president for sales, 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>
                                                               LONG-TERM
                                                              COMPENSATION
                                                                 AWARDS
                                             ANNUAL          --------------
                              YEAR        COMPENSATION         SECURITIES
                              ENDED    -------------------     UNDERLYING      ALL OTHER
NAME AND PRINCIPAL POSITION  DEC. 31    SALARY     BONUS        OPTIONS       COMPENSATION
---------------------------  -------   --------   --------   --------------   ------------
<S>                          <C>       <C>        <C>        <C>              <C>
Glenn P. Russell..........    1998     $207,692     $--              --         $ 80,637
  Chairman, President and     1997      215,384      --              --          343,757
  Chief Executive Officer     1996      162,502      --              --          111,500
 
Mark Sewell...............    1998      134,823      --          70,000               --
  Vice President -- Business  1997      115,886      --              --               --
  Development                 1996       58,162      --              --               --
 
Sandra J. Garcia..........    1998      120,443      --          70,000               --
  Vice President -- North     1997      154,563      --              --               --
  American Sales              1996      175,750      --              --               --
</TABLE>

    
 
                                       42

<PAGE>   46
 
     Other compensation for Mr. Russell represents distributions which we made
to him in excess of his base salary while we were a subchapter S corporation. In
February 1999 Pacific Softworks terminated the subchapter S election and became
subject to taxation at the corporate level. Mr. Russell currently has an annual
salary of $200,000.
 
   
                       OPTION GRANTS IN LAST FISCAL YEAR
    
 
   
     The following table describes options to acquire shares of common stock of
Pacific Softworks granted to named executive officers during the fiscal year
ended December 31, 1998.
    
   
    
 
   

<TABLE>
<CAPTION>
                                                                                      POTENTIAL REALIZABLE
                                                                                        VALUE AT ASSUMED
                                         PERCENT OF                                      ANNUAL RATES OF
                           NUMBER OF       TOTAL                                           STOCK PRICE
                           SECURITIES     OPTIONS                                       APPRECIATION FOR
                           UNDERLYING    GRANTED TO                                        OPTION TERM
                            OPTIONS     EMPLOYEES IN   EXERCISE      EXPIRATION       ---------------------
          NAME              GRANTED     FISCAL YEAR     PRICE           DATE            5%($)      10%($)
          ----             ----------   ------------   --------   -----------------   ---------   ---------
<S>                        <C>          <C>            <C>        <C>                 <C>         <C>
Mark Sewell..............    70,000          50%        $1.25     December 31, 2003     24,175      53,420
Sandra J. Garcia.........    70,000          50%        $1.25     December 31, 2003     24,175      53,420
</TABLE>

    
 
   
     In the foregoing table potential realizable values are based on assumed
rates of appreciation over the term of the option from the date of grant. These
values are calculated assuming the fair market value of common stock on the date
of grant appreciates at the indicated annual rate compounded annually for the
entire term of the option and that the option is exercised and sold on the last
day of the term for the appreciated stock price. These assumed rates are based
on Securities and Exchange Commission requirements and do not reflect our
projections or estimates of future stock price growth. Actual gains, if any will
depend on the future performance of our common stock.
    
 
   
                             YEAR-END OPTION VALUES
    
 
   
     The following table describes the value of Pacific Softworks options
exercised during the fiscal year ended December 31, 1998 and the value of
unexercised options held by the individuals named above.
    
 
   

<TABLE>
<CAPTION>
                                                               NUMBER OF
                                                              SECURITIES
                                                              UNDERLYING
                                      NUMBER OF               UNEXERCISED
                                       SHARES                 OPTIONS AT    VALUE OF UNEXERCISED
                                     ACQUIRED ON    VALUE     FISCAL YEAR   IN-THE-MONEY OPTIONS
               NAME                   EXERCISE     REALIZED       END        AT FISCAL YEAR-END
               ----                  -----------   --------   -----------   --------------------
<S>                                  <C>           <C>        <C>           <C>
Mark Sewell........................         --        --        70,000            $262,500
Sandra J. Garcia...................         --        --        70,000            $262,500
</TABLE>

    
 
   
     In the foregoing table:
    
 
   
     - all options are currently exercisable, and
    
 
   
     - we have calculated the value of unexercised in-the-money options based on
       the difference between a fair market value per share of common stock of
       $5.00, as determined by our board of directors, and the option exercise
       price per share of $1.25.
    
 
                                       43

<PAGE>   47
 
   
EQUITY INCENTIVE PROGRAM
    
 
     Our 1998 equity incentive program was adopted by the board of directors and
approved by stockholders in April 1998. We have authorized a total of 330,000
shares of common stock for issuance under this plan. As of December 31, 1998, no
options were granted under the equity incentive program. As of May 31, 1999, we
granted options to purchase 328,000 shares of common stock under the program to
employees, officers and directors.
 
     Under the equity incentive program, employees, nonemployee 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 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.
 
                                       44

<PAGE>   48
 
     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 283,000 shares of common stock under our equity
incentive program. These options have a term of five years and vest at the rate
of 2% per month from the date of grant over a period of 36 months, after which
they vest in full. These options may not be exercised until after 30 days from
the date of this offering.
 
                                       45

<PAGE>   49
 
   
          OPTION GRANTS IN MAY 1999 UNDER OUR EQUITY INCENTIVE PROGRAM
    
 
   
     The table below sets forth grants of options in May 1999 under our equity
incentive program to our named officers:
    
 
   

<TABLE>
<CAPTION>
                                                  PERCENT OF
                                                    TOTAL
                                      NUMBER OF    OPTIONS
                                       OPTIONS    GRANTED TO   EXERCISE     EXPIRATION
                NAME                   GRANTED    EMPLOYEES     PRICE          DATE
                ----                  ---------   ----------   --------   --------------
<S>                                   <C>         <C>          <C>        <C>
Glenn P. Russell....................   30,000        10.6%      $5.50     April 30, 2004
William E. Sliney...................   12,000         4.2%      $5.00     April 30, 2004
Chaim Kaltgrad......................   12,000         4.2%      $5.00     April 30, 2004
Mark Sewell.........................   12,000         4.2%      $5.00     April 30, 2004
Sandra J. Garcia....................   12,000         4.2%      $5.00     April 30, 2004
Joseph Lechman......................   12,000         4.2%      $5.00     April 30, 2004
</TABLE>

    
 
CONSULTANTS
 
   
     From April 1998 through January 1999, Georgette W. Pagano served as a
member of the board of directors of Pacific Softworks. Ms. Pagano is the sister
of Laura Russell, the spouse of Glenn P. Russell, our president and chief
executive officer. In January 1998, Ms. Pagano purchased 200,000 shares of
common stock from Mr. Russell for $250,000. The purchase price is evidenced by a
promissory note dated January 25, 1998. The note bears interest at the rate of
10% per annum and is due and payable February 1, 2001. The note permits the
return of the shares in lieu of payment.
    
 
   
     Pacific Softworks retained Ms. Pagano in April 1999 to establish a
shareholder relations program and to prepare and organize due diligence
materials in connection with this offering. We are paying Ms. Pagano $5,000 per
month through July 1999, or a total of $20,000, for these services and we have
granted her warrants to purchase 12,500 units. The terms of her units are
identical to those sold in this offering and 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.
    
 
     In January 1998, Ms. Pagano sold 140,000 of her shares to John P. McGrain
for $175,000. The purchase price is evidenced by a promissory note payable on
February 1, 2001. The terms of this promissory note are substantially the same
as those contained within the promissory note which Ms. Pagano delivered to Mr.
Russell. Since the fall of 1998 Mr. McGrain has provided us with advice on
corporate, financial and administrative matters, including matters related to
this offering. We have not compensated Mr. McGrain for these services.
 
   
                              CERTAIN TRANSACTIONS
    
 
     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. 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
 
                                       46

<PAGE>   50
 
outstanding shares of common stock of Pacific Softworks owned by Glenn P.
Russell and all assets of Pacific Softworks. As of July 1999 Pacific Softworks
is obligated to pay approximately $43,000 to that former officer.
 
     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.
 
     We rent a portion of our premises to Luke Systems International. We believe
the terms of occupancy to be favorable to us. We expect this affiliated company
to relocate to other premises before September 30, 1999.
 
     At July 1, 1999 we owed a bank approximately $250,000 for advances that we
obtained under a line of credit. Glenn P. Russell has provided our bank with his
personal guarantee and we have collateralized our accounts receivable as
security for these advances. This amount will be repaid from proceeds of this
offering.
 
     During 1996, 1997 and 1998 we employed our chief executive's mother, a
resident of the United Kingdom, to perform various administrative and managerial
tasks for us within that country. We paid her $57,885 in 1997 and $105,769 in
1998. She ceased to be our employee in the fall of 1998.
 
     Pacific Softworks believes that the transactions described above, other
than the employment of the mother of Glenn P. Russell, were made on terms no
less favorable to Pacific Softworks than could have been obtained from
unaffiliated third parties.
 
   
     All future material affiliated transactions and loans, and any forgiveness
of loans, must be approved by a majority of the independent and disinterested
outside directors who do not have an interest in the subject transactions and
who have had access, at our expense, to our counsel or other independent legal
counsel. All future material affiliated transactions and loans, and any
forgiveness of loans, will be made or entered into on terms no less favorable to
Pacific Softworks than those that could be obtained from unaffiliated third
parties.
    
 
     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, officer, employees and
agents 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 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.
 
                                       47

<PAGE>   51
 
   
                             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.
 
   

<TABLE>
<CAPTION>
                                                                         PERCENTAGE OF
                                                                            SHARES
                                                        NUMBER OF         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%     70.59%
William E. Sliney....................................           *          *          *
Chaim Kaltgrad.......................................           *          *          *
Mark Sewell..........................................      70,000       2.08       1.62
Sandra J. Garcia.....................................      70,000       2.08       1.62
Robert G.J. Burg II..................................      15,000          *          *
Wayne T. Grau........................................      15,000          *          *
Reuben Sandler, PhD..................................      15,000          *          *
Joseph Lechman.......................................           *          *          *
IAT Resources Corp...................................     200,000       5.88       4.60
All directors and executive officers as a group (9
  persons)...........................................   3,185,000      91.39%     71.82%
</TABLE>

    
 
-------------------------
* Less than 1%.
 
     The address of each officer and director is 703 Rancho Conejo Boulevard,
Newbury Park, California 91320. The address of IAT Resources Corp. is 5757
Wilshire Boulevard, Penthouse, Los Angeles, California 90036.
 
     In the foregoing table, the common stock beneficially owned by
 
     - Glenn P. Russell represents shares owned by the Russell Trust of which
       Glenn Russell and Laura Russell, husband and wife, are principal
       beneficiaries but excludes options for the purchase of 30,000 shares of
       common stock which we granted to him under our equity incentive program
       in May 1999;
 
     - Glenn P. Russell excludes 200,000 shares of common stock which Glenn P.
       Russell sold to Georgette W. Pagano in January 1998. The purchase price
       for these shares is evidenced by a promissory note which is due in
       February 2001 and which may be paid to Glenn P. Russell in cash or by
       return of the shares of Pacific Softworks;
 
                                       48

<PAGE>   52
 
     - IAT Resources Corp. includes currently exercisable warrants to purchase
       100,000 shares of common stock at $6.00 per share;
 
   
     - all of the officers and directors as a group includes 70,000 shares
       underlying presently exercisable options granted to each of Mark Sewell
       and Sandra J. Garcia and also includes 15,000 shares underlying presently
       exercisable options granted to each of Robert G.J. Burg II, Wayne T. Grau
       and Reuben Sandler; and
    
 
     - all of the officers and directors as a group excludes an aggregate of
       90,000 shares of common stock underlying options which we granted to
       officers in May 1999 under our equity incentive program.
 
                                       49

<PAGE>   53
 
   
                           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. Pacific Softworks may issue the preferred stock 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 four
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 we
may issue in the future. Our 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 current
plans to issue any shares of preferred stock.
 
     Our board of directors has ratified and approved the following conditions
which must be satisfied before we issue preferred stock to a promoter:
 
     - any shares of our preferred stock offered and sold to a promoter must be
       made on terms no less favorable than those that unaffiliated third
       parties would be given in connection with an offer and sale of the
       preferred stock; and
 
     - any transaction in which shares of our preferred stock will be offered,
       sold, and issued to a promoter must be approved by a majority of the
       independent outside directors who do not have an interest in that
       transaction and who had access, at our expense, to our attorneys or other
       independent legal counsel.
 
     A promoter includes any person who is:
 
     - a founder, officer, director, or controlling person of Pacific Softworks;
 
     - the beneficial owner of 5% or more of any class of our issued and
       outstanding securities; or
 
     - an affiliate or an associate of any person mentioned above.
 
                                       50

<PAGE>   54
 
   
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. 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 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, Inc. 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
950,000 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 1,092,500 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
 
                                       51

<PAGE>   55
 
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.
 
   
     If we 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.
    
 
   
     If you do not exercise or sell your warrants before the redemption date,
you will only be entitled to receive the redemption price of $0.05 per warrant.
Our redemption of the warrants could force you to:
    
 
   
     - exercise them and pay the exercise price at a time when it may not be
       advantageous for you to do so,
    
 
   
     - sell the warrants at their then current market price when you might
       otherwise wish to hold them, or
    
 
   
     - accept the redemption price which is likely to be substantially less than
       the market value of the warrants.
    
 
   
     We may obtain up to $7,125,000 from exercise of warrants. The proceeds from
any exercise of the warrants will be added to our general working capital. Our
management will have broad discretion in the application of the proceeds 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.
    
 
   
     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 which the warrant
holders reside. We intend to use our best efforts to keep the registration
statement incorporating this prospectus current. We can give no assurance that
the registration statement, or any other registration statement we may file
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. The form of "Election to Purchase" on the
reverse side of the warrant certificate must be 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
    
                                       52

<PAGE>   56
 
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, Inc.,
Lakewood, Colorado 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 4,250,000
shares of common stock outstanding, assuming no warrants are exercised. If the
underwriter's over-allotment option is exercised in full, 4,392,500 shares of
common stock will be outstanding. Of these shares, 950,000 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 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, one of whom is a
consultant and former director, 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. Three million 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, including their transferees, may not
    
 
                                       53

<PAGE>   57
 
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 328,000 shares of common stock are reserved
for issuance upon exercise of options granted to our directors, executive
officers and employees under the equity incentive program an additional 140,000
shares of common stock are reserved for issuance upon exercise of options
granted to two of our officers.
 
     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
    
 
   
     Pacific Softworks 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, one of whom is a former director, 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 written consent of the
underwriter.
    
 
                                       54

<PAGE>   58
 
                                  UNDERWRITING
 
     Subject to the terms and conditions of the underwriting agreement, Spencer
Edwards, Inc. has agreed to purchase 950,000 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 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 142,500 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 $5,735,625,
$573,563 and $5,162,062, 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
 
                                       55

<PAGE>   59
 
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 a registration statement on Form S-8 180 days
after the date of this prospectus registering common stock underlying
outstanding options. 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 who are not 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
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 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 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
 
                                       56

<PAGE>   60
 
stockholders, the general condition of the economy and the securities markets
and the demand for securities of companies considered comparable to Pacific
Softworks.
 
     In connection with this offering, Pacific Softworks and the underwriter
have agreed to indemnify each other against various 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 the Law Offices of Gary A. Agron, Englewood, 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.
 
   
                   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. As permitted by
SEC rules, 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 Public Reference Room, at 450 Fifth
Street, N.W., Room 1024 in Washington, D.C 20549 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. You may call the SEC at
1-800-SEC-0330 for further information on the operation of the SEC's public
reference rooms. The SEC maintains a Web site at http://www.sec.gov that
contains reports, proxy and information
 
                                       57

<PAGE>   61
 
statements and other information regarding companies that file electronically
with the SEC.
 
     We intend to provide our stockholders with annual reports containing
consolidated financial statements audited by an independent public accounting
firm and will make available to stockholders quarterly reports containing
unaudited consolidated financial data for the first three quarters of each year.
As a result of this offering we will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934 and will file
periodic reports, proxy statements and other information with the SEC.
 
                                       58

<PAGE>   62
 
   
                     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
  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 financial statements...............................  F-7

</TABLE>

    
 
                                       59

<PAGE>   63
 
   

                          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 Notes 10, 13(d)
    
and 14 as to which the
   
date is July 15, 1999

    
 
                                       F-1

<PAGE>   64
 
   
                     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>   65
 
   
                     PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
    
 
   
                     CONSOLIDATED STATEMENTS OF OPERATIONS
    
 

<TABLE>
<CAPTION>
                                                                                THREE MONTHS ENDED
                                             YEARS ENDED DECEMBER 31,                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>   66
 
   
                     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>   67
 
   
                     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>   68
 
   
                     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>   69
 
   
                     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
 
                                       F-7

<PAGE>   70
   
                     PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
    
 
   
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
    
                               DECEMBER 31, 1998
 
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
 
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 by
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
 
                                       F-8

<PAGE>   71
   
                     PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
    
 
   
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
    
                               DECEMBER 31, 1998
 
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 SFAS 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.
 
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.
 
                                       F-9

<PAGE>   72
   
                     PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
    
 
   
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
    
                               DECEMBER 31, 1998
 
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
SFAS 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.
 
   
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>

 
                                      F-10

<PAGE>   73
   
                     PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
    
 
   
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
    
                               DECEMBER 31, 1998
 
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 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.
 
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 approved an increase in the number of
shares of common stock it is authorized to issue from 1,000,000 shares to
50,000,000 shares and the restated articles of incorporation were filed on June
5, 1998. 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,
 
                                      F-11

<PAGE>   74
   
                     PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
    
 
   
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
    
                               DECEMBER 31, 1998
 
NOTE 6 -- STOCK PLAN (CONTINUED)
(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.
 
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.
 
                                      F-12

<PAGE>   75
   
                     PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
    
 
   
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
    
                               DECEMBER 31, 1998
 
NOTE 9 -- INCOME TAXES AND S CORPORATION STOCKHOLDER DISTRIBUTIONS (CONTINUED)
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 December 31, 2003.
 
     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
2004.
 
     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                                4 3/4
  options outstanding..........................   --     --     5 years       years
</TABLE>

 
     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 5 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 5
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
 
                                      F-13

<PAGE>   76
   
                     PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
    
 
   
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
    
                               DECEMBER 31, 1998
 
NOTE 10 -- STOCK OPTIONS (CONTINUED)
$0.30 and $1.19, 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.....................................      $(515,360)           $(63,925)
Net Loss Per Share...........................      $   (0.15)           $  (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>
                                                                     THREE MONTHS
                                                 YEARS ENDED            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.
 
     Future minimum lease payments are as follows:
 

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

 
                                      F-14

<PAGE>   77
   
                     PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
    
 
   
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
    
                               DECEMBER 31, 1998
 
NOTE 13 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
     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 to purchase shares equal in number to
10% of the Company's then outstanding capital stock for $400,000. 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. In April 1999 the
consultant demanded that the options be issued pursuant to the agreement.
Counsel for the consultant has advised the Company that the claim was being
evaluated for possible legal action. The Company believes that the consultant
has not fulfilled the conditions required to vest the option. If compelled to
litigate or arbitrate this claim, the Company intends to defend itself
vigorously.
    
 
   
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.
 
                                      F-15

<PAGE>   78
   
                     PACIFIC SOFTWORKS, INC. AND SUBSIDIARY
    
 
   
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
    
                               DECEMBER 31, 1998
 
NOTE 14 -- SUBSEQUENT EVENTS (CONTINUED)
     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, as amended in May 1999, relates to
the proposed sale by the Company of 950,000 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
142,500 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 underwriter
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.
 
     h) The Company has been advanced the full $250,000 pursuant to its line of
credit arrangement with Bank of America. The advances are due August 1, 1999.
 
   
     i) The Company executed a promissory note with its underwriter in the
amount of $200,000. As of July 15, 1999, $175,000 has been advanced to the
Company pursuant to the note. Advances bear interest at the rate of 10% per year
and are due at the earlier of October 6, 1999 or the Company's receipt of funds
from the planned IPO.
    
 
     j) On May 1, 1999 the Company granted stock options to certain employees,
covering 283,000 shares. The options are exercisable for five years at an
exercise price of $5.00 per share for 253,000 shares and $5.50 per share for
30,000 shares. The options vest at the rate of 2% of the shares covered per
month up to 36 months at which time they will be fully vested.
 
                                      F-16

<PAGE>   79
 
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
                                 950,000 UNITS
 
   
                         [PACIFIC SOFTWORKS, INC. LOGO]
    
 
                                 CONSISTING OF
                         950,000 SHARES OF COMMON STOCK
                                      AND
                                950,000 WARRANTS
 
                             SPENCER EDWARDS, INC.
 
                                 JULY   , 1999
 
                           -------------------------
 
                                   PROSPECTUS
                           -------------------------
 
   
     YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN
THIS PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF UNITS MEANS
THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF THIS
PROSPECTUS. THIS PROSPECTUS IN NOT AN OFFER TO SELL OR SOLICITATION OF AN OFFER
TO BUY THESE SECURITIES IN ANY CIRCUMSTANCES UNDER WHICH THE OFFER OR
SOLICITATION IS UNLAWFUL.
    
 
     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.
 
                   SUBJECT TO COMPLETION, DATED JULY   , 1999
 
PROSPECTUS
 
                         [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.
    
 
   
     Each warrant allows its holder to purchase for a period of 24 months one
share of common stock at a price of $7.50.
    
 
     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 AND IMMEDIATE
AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 6 AND "DILUTION"
ON PAGE 14.
    
 
     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 July   , 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 named holders.
    
 
     Except as noted below, the securities described in this prospectus may be
sold by the named holders or their transferees starting on the date of this
prospectus. The named 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 named 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 July 7, 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. Georgette Pagano is the sister
of Laura Russell, the spouse of Glenn P. Russell, chief executive officer and
principal stockholder of Pacific Softworks. Both Georgette Pagano and Laura
Russell were directors of Pacific Softworks from April 1998 to January 1999.
 
   

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

    
 
                                      SS-3

<PAGE>   83
 
   
                              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 through 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
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 nonmonetary 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.
 
                                      II-1

<PAGE>   85
 
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........................................  $  4,813
NASD fee....................................................     2,231
Nasdaq SmallCap Market listing fee..........................    10,000
Printing and engraving expenses*............................    35,000
Legal fees and expenses*....................................    65,000
Accounting fees and expenses*...............................    40,000
Blue sky fees and expenses*.................................    38,500
Transfer agent fees.........................................     1,825
Miscellaneous fees and expenses*............................     1,631
                                                              --------
          Total.............................................  $199,000
                                                              ========
</TABLE>

 
-------------------------
* Estimated
 
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 for a nominal consideration
and issued warrants to purchase 40,000 units to members of Resch Polster Alpert
& Berger LLP, special counsel to Pacific Softworks in this offering. In February
1999 Pacific Softworks also sold for a nominal consideration and issued warrants
to purchase an additional 27,500 units to Randall M. Gates and 12,500 units to
Georgette W. Pagano. Mr. Gates and Ms. Pagano have provided temporary accounting
and administrative services to Pacific Softworks. Mr. Gates is an "accredited
investor" within the meaning of Rule 501 of Regulation D as promulgated by the
Securities and Exchange Commission. Ms. Pagano is the sister of Laura Russell,
the wife of Glenn P. Russell. Ms. Pagano was a director of Pacific Softworks
from April 1998 to January 1999. 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 and are being
registered in connection with 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.
 
                                      II-2

<PAGE>   86
 
ITEM 27. EXHIBITS
 
(a) Exhibits
 
   

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                             DESCRIPTION
    -------                            -----------
    <C>        <S>
      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 P. 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.
 
  All other exhibits previously filed.
 
(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.
 
                                      II-3

<PAGE>   87
 
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.
 
     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.
 
                                      II-4

<PAGE>   88
 

                                   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 23rd day of July, 1999.
    
 
                                          PACIFIC SOFTWORKS, INC.
 
                                          By      /s/ GLENN P. RUSSELL
                                            ------------------------------------
                                                      Glenn P. Russell
                                               President and Chief Executive
                                                           Officer
 
     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
                   ---------                                -----                 ----
<C>                                               <S>                         <C>
              /s/ GLENN P. RUSSELL                President, Chief Executive  July 23, 1999
------------------------------------------------  Officer and Chairman
                Glenn P. Russell                  (Principal Executive
                                                  Officer)
 
             /s/ WILLIAM E. SLINEY                Chief Financial Officer     July 26, 1999
------------------------------------------------  (Principal Financial and
               William E. Sliney                  Accounting Officer)
 
               /s/ CHAIM KALTGRAD                 Vice President              July 26, 1999
------------------------------------------------
                 Chaim Kaltgrad
 
                /s/ MARK SEWELL*                  Vice President              July 23, 1999
------------------------------------------------
                  Mark Sewell
 
             /s/ SANDRA J. GARCIA*                Vice President              July 23, 1999
------------------------------------------------
                Sandra J. Garcia
 
           /s/ ROBERT G. J. BURG II*              Director                    July 23, 1999
------------------------------------------------
              Robert G. J. Burg II
 
               /s/ WAYNE T. GRAU*                 Director                    July 23, 1999
------------------------------------------------
                 Wayne T. Grau
 
           /s/ REUBEN SANDLER, PH.D.*             Director                    July 23, 1999
------------------------------------------------
             Reuben Sandler, Ph.D.
 
                                                  Secretary                   July   , 1999
------------------------------------------------
                 Joseph Lechman
</TABLE>

    
 
* By Power of Attorney
 
                                      II-5

<PAGE>   89
 

                                 EXHIBIT INDEX
 
   

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                   DESCRIPTION AND METHOD OF FILING
-------                  --------------------------------
<C>        <S>
  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 Golenberg & Co, merchant bankers, to Glenn
           Russell dated June 18, 1998 and Letter from Pacific
           Softworks to Glenn Golenberg dated January 27, 1999
 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.
  All other exhibits previously filed.





<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 (except for
Notes 10, 13(d), and 14 as to which the date is July 15, 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 caption "Experts" in such Prospectus.



                              /s/  MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.

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




Los Angeles, California
July 26, 1999