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                       SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D.C. 20549-1004

                                    FORM 10-Q

(Mark One)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

For the quarterly period ended December 31, 1998

                                       or

[ ]  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
     EXCHANGE ACT OF 1934

                       Commission File Number 000 - 19462


                                 ARTISOFT, INC.
                                 --------------
             (Exact name of registrant as specified in its charter)

           DELAWARE                                           86-0446453
           --------                                           ----------
(State or other jurisdiction of                     (IRS employer identification
        incorporation)                                          number

                               5 Cambridge Center
                               Cambridge, MA 02142
                                 (617) 354-0600
                                 --------------
               (Address, including zip code, and telephone number,
                      including area code, of registrant's
                          principal executive offices)

      Indicate by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such  reports),  and (2) has been subject to the
filing requirements for at least the past 90 days.

                                 Yes [X] No [ ]

       Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date (February 10, 1999).

                 Common stock, $.01 par value: 14,769,817 shares

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<PAGE>
                         ARTISOFT INC. AND SUBSIDIARIES

                                      INDEX

                                                                           Page
                                                                           ----

PART I.   FINANCIAL INFORMATION

          Item 1.  Financial Statements

                   Consolidated Balance Sheets-
                   December 31, 1998 and June 30, 1998                       3

                   Consolidated Statements of Operations-
                   Three Months and Six Months Ended
                   December 31, 1998 and 1997                                4

                   Consolidated Statements of Cash Flows-
                   Six Months Ended December 31, 1998
                   and 1997                                                  5

                   Notes to Consolidated Financial Statements              6-9

          Item 2.  Management's Discussion and Analysis of
                     Financial Condition and Results of Operations       10-22

PART II.  OTHER INFORMATION

          Item 1.  Legal Proceedings                                        23

          Item 2.  Changes in Securities                                    23

          Item 3.  Defaults Upon Senior Securities                          23

          Item 4.  Submission of Matters to a Vote by Security Holders      23

          Item 5.  Other Information                                        24

          Item 6.  Exhibits and Reports on Form 8-K                         24

SIGNATURES                                                                  25

EXHIBITS

          11    Computation of Net Income (Loss) Per Share                  26

          27    Financial Data Schedule                                     27

                                       2
<PAGE>
                         ARTISOFT, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                    (in thousands, except per share amounts)


                                                          December 31,  June 30,
                         ASSETS                              1998        1998
                                                           --------    --------
                                                          (unaudited)

Current assets Cash and cash equivalents                   $ 17,491    $ 18,514
 Receivables  Trade accounts, net                             1,897       2,813
 Other receivables                                              179         279
 Inventories                                                    787         917
 Prepaid expenses                                               394         283
                                                           --------    --------
      Total current assets                                   20,748      22,806
                                                           --------    --------

Property and equipment                                        5,866       5,333
 Less accumulated depreciation and
  amortization                                               (4,535)     (4,198)
                                                           --------    --------
 Net property and equipment                                   1,331       1,135
                                                           --------    --------

Other assets                                                  1,326       1,567
                                                           --------    --------
                                                           $ 23,405    $ 25,508
                                                           ========    ========
                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities Accounts payable                       $    923    $  1,598
 Accrued liabilities                                          1,919       1,670
 Accrued restructuring costs                                    434       1,536
 Current portion of capital lease obligations                   510         464
                                                           --------    --------
      Total current liabilities                               3,786       5,268
                                                           --------    --------

Capital lease obligations, net of current portion                --         289

Commitments and contingencies                                    --          --

Shareholders' equity
 Preferred  stock, $1.00 par value
   Authorized  11,433,600 shares; none issued-
 Common stock, $.01 par value. Authorized 50,000,000
   shares issued 28,076,311 shares at December 31, 1998
   and 27,980,602 shares at June 30, 1998                       280         279
 Additional paid-in capital                                  96,715      96,486
 Accumulated deficit                                         (7,592)     (7,030)
 Less treasury stock, at cost, 13,320,500 shares at
   December 31, 1998 and June 30, 1998                      (69,784)    (69,784)
                                                           --------    --------
      Total shareholders' equity                             19,619      19,951
                                                           --------    --------
                                                           $ 23,405    $ 25,508
                                                           ========    ========

          See accompanying notes to consolidated financial statements.

                                       3
<PAGE>
                         ARTISOFT, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                       Three Months Ended     Six Months Ended
                                           December 31,          December 31,
                                        1998        1997      1998        1997
                                      --------    --------  --------    --------
                                     (unaudited)             (unaudited)

Net sales                             $  5,402   $  6,761   $ 10,496   $ 13,486
Cost of sales                            1,608      1,851      2,964      3,305
                                      --------   --------   --------   --------
Gross profit                             3,794      4,910      7,532     10,181
                                      --------   --------   --------   --------
Operating Expenses:

 Sales and marketing                     2,014      2,332      4,144      5,030
 Product development                     1,199      1,823      2,441      3,614
 General and administrative              1,049        861      1,928      1,655
 Restructuring cost                         --       (127)        --       (264)
                                      --------   --------   --------   --------
     Total operating expenses            4,262      4,889      8,513     10,035
                                      --------   --------   --------   --------

Income (loss) from operations             (468)        21       (981)       146

Other income, net                          238      1,386        419      1,499
                                      --------   --------   --------   --------

Income (loss) before
 extraordinary item                       (230)     1,407       (562)     1,645

Extraordinary loss from early
 extinguishment of debt, net
 of $0 income tax benefit                   --       (109)        --       (109)
                                      --------   --------   --------   --------

Net income (loss)                     $   (230)  $  1,298   $   (562)  $  1,536
                                      --------   --------   --------   --------

Net income (loss) per common share--
   basic and diluted                  $   (.02)  $    .09   $   (.04)  $    .11
                                      --------   --------   --------   --------
Weighted average common shares
 outstanding:
   Basic                                14,686     14,529     14,711     14,529
   Diluted                              14,686     14,612     14,711     14,568
                                      --------   --------   --------   --------

          See accompanying notes to consolidated financial statements.

                                       4
<PAGE>
                         ARTISOFT, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

                                                              Six Months Ended
                                                                December 31,
                                                              1998        1997
                                                            --------    --------
                                                           (unaudited)
Cash flows from operating activities:
 Net income (loss):                                        $   (562)   $  1,536
 Adjustments to reconcile net income (loss)
  to net cash provided by operating activities:
   Extraordinary loss                                            --         109
   Depreciation and amortization                                713         952
   Gain from disposition of property, net                         1      (1,492)
   Change in accounts receivable and inventory
    allowances                                                 (327)     (2,241)
 Changes in assets and liabilities:
   Receivables:
     Trade accounts                                           1,097       2,902
     Income taxes                                                --       4,300
     Notes and other                                            100         215
   Inventories                                                  276       1,103
   Prepaid expenses                                            (111)        381
   Accounts payable and accrued liabilities                    (426)     (1,073)
   Accrued restructuring costs                               (1,102)     (4,126)
 Other assets                                                   (43)          7
                                                           --------    --------
        Net cash (used in) provided by
         operating activities                                  (384)      2,573
                                                           --------    --------
Cash flows from investing activities:
 Proceeds from sale of property and equipment                     9       4,201
 Purchases of property and equipment                           (635)       (151)
                                                           --------    --------
        Net cash (used in) provided by
         investing activities                                  (626)      4,050
                                                           --------    --------
Cash flows from financing activities:
 Proceeds from issuance of common stock                         230          18
 Principal payments on long term debt                          (243)     (2,406)
                                                           --------    --------

        Net cash used in financing activities                   (13)     (2,388)
                                                           --------    --------

Net (decrease) increase in cash and cash equivalents         (1,023)      4,235
Cash and cash equivalents at beginning of period             18,514      14,673
                                                           --------    --------
Cash and cash equivalents at end of period                 $ 17,491    $ 18,908
                                                           --------    --------

          See accompanying notes to consolidated financial statements.

                                       5
<PAGE>
                         ARTISOFT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) BASIS OF PRESENTATION

         The consolidated financial statements include the accounts of Artisoft,
Inc.  and  its  three  wholly-owned  subsidiaries:  Triton  Technologies,  Inc.,
Artisoft  "FSC",  Ltd.  (which has  elected  to be  treated  as a foreign  sales
corporation)  and  NodeRunner,  Inc. All significant  intercompany  balances and
transactions have been eliminated in consolidation.

         The accompanying  unaudited consolidated financial statements have been
prepared  by the  Company  in  accordance  with  generally  accepted  accounting
principles, pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management,  the accompanying financial statements
include all adjustments (of a normal recurring nature) which are necessary for a
fair  presentation of the financial  results for the interim periods  presented.
Certain  information  and footnote  disclosures  normally  included in financial
statements   have  been  condensed  or  omitted   pursuant  to  such  rules  and
regulations.  Although the Company believes that the disclosures are adequate to
make the  information  presented  not  misleading,  it is  suggested  that these
financial  statements be read in  conjunction  with the  consolidated  financial
statements and the notes thereto included in the Company's 1998 Annual Report to
Shareholders and report on Form 10-K. The results of operations for the three or
six month periods ended December 31, 1998 are not necessarily  indicative of the
results to be expected for the full year.

(2) COMPUTATION OF NET INCOME (LOSS) PER SHARE

         Basic earnings per share is computed by dividing income attributable to
common  shareholders by the weighted average number of common shares outstanding
for the period.  Diluted earnings per share reflects the potential dilution that
could  occur  if  securities  or other  contracts  to issue  common  stock  were
exercised or converted into common stock that then shared in the earnings of the
Company.  In  calculating  net loss per common share for the three and six month
periods  ended  December 31,  1998,  85,769 and 46,096  common stock  equivalent
shares  consisting of stock options have been excluded  because their  inclusion
would have been anti-dilutive.

                                       6
<PAGE>
(3) SEGMENTATION OF FINANCIAL RESULTS

         The  financial  results for the three month and six month periods ended
December 31, 1998 are summarized below by product group (in thousands):

                                          Three Months Ended   Six Months Ended
                                          December 31, 1998    December 31, 1998
                                          -----------------    -----------------
COMPUTER TELEPHONY GROUP:
  Net sales                                   $ 1,595              $ 2,952
  Gross profit                                $   849              $ 1,686
  Gross profit margin                              53%                  57%
  Operating (loss)                            $(1,604)             $(3,165)
  Net (loss)                                  $(1,604)             $(3,165)
  Capital expenditures                        $   283              $   500
  Depreciation and amortization expense       $   112              $   195

COMMUNICATIONS SOFTWARE GROUP:
  Net sales                                   $ 3,807              $ 7,544
  Gross profit                                $ 2,945              $ 5,846
  Gross profit margin                              76%                  78%
  Operating income                            $ 1,136              $ 2,184
  Net income                                  $ 1,374              $ 2,602
  Capital expenditures                        $   130              $   135
  Depreciation and amortization expense       $   259              $   518

         The Company's  Computer  Telephony Product Group  principally  includes
revenues from the InfoFast,  TeleVantage  and Visual Voice  product  lines.  The
Company's  Communications  Software  Group  includes  revenues  from the BizFax,
CoSession Remote, i.Share, LANtastic NOS and ModemShare product lines.

(4) RESTRUCTURING COST

         The  accrued  restructuring  costs  in  the  accompanying  consolidated
balance  sheet at December  31, 1998 include the costs of  involuntary  employee
termination benefits for certain Communications Software Group employees,  costs
to close the Company's  United Kingdom and Iselin,  New Jersey sales and support
offices and related costs  associated with the  restructuring  actions  effected
during the fiscal  year ended June 30,  1998.

The accrued  restructuring costs at December 31, 1998 principally consist of the
following (in thousands):

                                                 Total Accrued
                                              Restructuring Costs
                                              -------------------

Balance at June 30, 1998                           $1,536
Cash paid for employee termination benefits         (650)
Cash paid for office closure costs                  (452)
                                                    -----
Unaudited balance at December 31, 1998              $ 434
                                                    -----

                                       7
<PAGE>
(5) INVENTORIES

         Inventories  at  December  31,  1998 and June 30,  1998  consist of the
following (in thousands):

                                                       December 31,     June 30,
                                                          1998           1998
                                                          ----           ----
                                                      (unaudited)

         Raw materials                                  $   746        $   938
         Work-in-process                                     85            109
         Finished goods                                     145            205
                                                        -------        -------
                                                            976          1,252
         Inventory allowances                              (189)          (335)
                                                        -------        -------
                                                        $   787        $   917
                                                        =======        =======

(6) PROPERTY AND EQUIPMENT

         Property  and  equipment at December 31, 1998 and June 30, 1998 consist
of the following (in thousands):

                                                        December 31,   June 30,
                                                           1998          1998
                                                           ----          ----
                                                       (unaudited)

         Furniture and fixtures                          $    29       $     6
         Computers and other equipment                     5,598         5,259
         Leasehold improvements                              239            68
                                                         -------       -------
                                                           5,866         5,333
         Accumulated depreciation and amortization        (4,535)       (4,198)
                                                         -------       -------
                                                         $ 1,331       $ 1,135
                                                         =======       =======
(7) OTHER ASSETS

         Other  assets at December  31,  1998 and June 30,  1998  consist of the
following (in thousands):

                                                          December 31,  June 30,
                                                             1998        1998
                                                             ----        ----
                                                         (unaudited)

         Trademarks and patents, net of
         accumulated amortization of $83 and $70            $   42      $   55
         Purchased technology, net of
         accumulated amortization of $1,586 and $1,323       1,124       1,387
         Recoverable deposits and other                        160         125
                                                            ------      ------
                                                            $1,326      $1,567
                                                            ======      ======
                                       8
<PAGE>
(8) ACCRUED LIABILITIES

         Accrued  liabilities  at December 31, 1998 and June 30, 1998 consist of
the following (in thousands):

                                                  December 31,      June 30,
                                                     1998            1998
                                                     ----            ----
                                                 (unaudited)

         Compensation and benefits                  $1,007          $  799
         Payroll, sales and property taxes              87              88
         Marketing                                     306             349
         Royalties                                     285             227
         Other                                         234             207
                                                    ------          ------
                                                    $1,919          $1,670
                                                    ======          ======


                                       9
<PAGE>
                         ARTISOFT, INC. AND SUBSIDIARIES

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

RESULTS OF OPERATIONS

         NET SALES.  The Company's net sales for the quarter ended  December 31,
1998 were $5.4 million, a decrease of 21% from net sales of $6.8 million for the
corresponding  quarter  of  fiscal  1998 and an  increase  of 6% from the  first
quarter of fiscal 1999 net sales of $5.1 million. For the six-month period ended
December 31, 1998, the Company's net sales were $10.5 million, a decrease of 22%
from net sales of $13.5 million for the corresponding period of fiscal 1998. The
decreases in net sales for the quarter and six-month  period ended  December 31,
1998, as compared to the corresponding  periods in fiscal 1998, were principally
due to the decline in sales of certain of the Company's  Communications Software
Group products.  Lower sales of the Company's LANtastic network operating system
(NOS)  products and to a lesser  extent  i.Share  (especially  in  international
markets) were the major  contributors to the overall  decline in net sales.  The
sequential  increase  in net sales  from the  previous  quarter's  net sales was
principally  the result of increased sales of the Company's  Computer  Telephony
products.  An increase in sales of the  Company's  TeleVantage  products was the
major contributor.

         The Company distributes its products in both the U.S. and international
markets.  U.S.  sales  decreased  10% to $4.3 million (80% of net sales) for the
quarter ended December 31, 1998,  from $4.8 million (71% of net sales),  for the
same quarter a year ago. U.S.  sales  decreased 14% to $ 8.5 million (81% of net
sales) for the six-month  period ended  December 31, 1998 from $9.9 million (73%
of net sales),  for the same period in fiscal  1998.  The  decrease in aggregate
U.S. net sales for both the quarter and the six-month periods ended December 31,
1998,  as  compared  to the  corresponding  periods  in fiscal  1998,  primarily
resulted from the overall  decline in sales of the Company's  LANtastic  network
operating  system  (NOS)  products  and to a  lesser  extent  i.Share  products,
principally in U.S.  retail,  mail order and  distribution  channels,  partially
offset by increases in sales of the Company's Computer Telephony products.

         International  sales  decreased  45% to $1.1 million (20% of net sales)
for the quarter ended December 31, 1998 from $2.0 million (29% of net sales) for
the same quarter a year ago and increased 22% from the first quarter fiscal 1999
sales of $.9 million.  International sales decreased 44% to $2.0 million (19% of
net sales) for the  six-month  period ended  December 31, 1998 from $3.6 million
(27% of net  sales)  for the  same  period  in  fiscal  1998.  The  decrease  in
international  net sales for both the quarter and the  six-month  periods  ended
December  31,  1998,  as compared to the  corresponding  periods in fiscal 1998,
primarily resulted from a decline in worldwide sales of the Company's  LANtastic
NOS products as well as a substantial  decline in net sales of CoSession  Remote
preloads in Asia (especially  Japan).  The increase in  international  net sales
from the previous  quarter's net sales is principally  due to an increase in the
Company's sales of its Computer Telephony products in certain European and Asian
markets.

         GROSS  PROFIT.  The  Company's  gross  profit was $3.8 million and $4.9
million for the quarters ended December 31, 1998 and 1997, respectively (70% and
72% of net sales, respectively). Gross profit was $7.5 million and $10.2 million
for the six-month  periods ended December 31, 1998, and 1997,  respectively (71%
and 76% of net sales,  respectively).  The net decrease in gross  profit  margin
percentages  for both the quarter and the six-month  periods ended  December 31,
1998, as compared to the  corresponding  periods in fiscal 1998, was principally
due to the following  factors:  higher software  licensing fees on the Company's
configuration tracking and recovery  utility(ConfigSafe)  and increased sales of
lower margin Computer Telephony hardware products and TeleVantage NFR's (Not For
Resale).  The decline was partially offset by lower software  amortization costs
and lower inventory reserve requirements.  The net decrease in aggregate dollars

                                       10
<PAGE>
of gross profit margin for both the quarter and six-month periods ended December
31, 1998 is the result of the decline in net sales.

         Gross  profit  margins  may  fluctuate  from  quarter to quarter due to
changes in net sales,  product  mix,  pricing  actions  and changes in sales and
inventory allowances.

         OPERATING  EXPENSES.  Operating  expenses  were $4.3  million  and $4.9
million for the quarters ended December 31, 1998 and 1997 respectively, (79% and
72% of net sales, respectively).  Total operating expenses were $8.5 million and
$10.0  million  for the  six-month  periods  ended  December  31, 1998 and 1997,
respectively, (81% and 74% of net sales, respectively). The decrease in absolute
dollars was due to the restructuring  actions  implemented by the Company in its
Communications  Software  Group  during  the fiscal  year  ended June 30,  1998,
partially offset by increased  operating  expenditures in its Computer Telephony
group. The increase in total operating expenses as a percentage of net sales for
both the quarter and six month  periods  ended  December 31, 1998 was due to the
aforementioned  worldwide  decline in the Company's  product sales,  offset to a
minor extent by the reductions in the  Communications  Software group  operating
expenditures effected during the June 30, 1998 restructuring actions.

         SALES AND MARKETING. Sales and marketing expenses were $2.0 million and
$2.3 million for the quarters  ended  December 31, 1998 and 1997,  respectively,
(37% and 34% of net sales, respectively). Sales and marketing expenses were $4.1
million and $5.0 million for the six-month  periods ended  December 31, 1998 and
1997, respectively,  (39% and 37% of net sales,  respectively).  The decrease in
aggregate  dollars  for sales and  marketing  expenses  for the  quarter and the
six-month  periods  ended  December 31, 1998,  as compared to the  corresponding
periods  in  fiscal  1998,  are due  principally  to the  restructuring  actions
undertaken in the Company's Communications Software Group during the fiscal year
ended  June  30,  1998.  These  actions  included  the  termination  of  certain
Communications  Software  Group sales,  marketing and support  personnel and the
elimination of costs associated with the Company's Communications Software Group
Japanese and United  Kingdom sales and support  offices during the quarter ended
June 30,  1998.  These  decreases  were  offset to a minor  extent by  increased
marketing  costs  associated  with the  Company's  Computer  Telephony  products
(especially  TeleVantage).  The  increase in sales and  marketing  expenses as a
percentage  of net sales for both the quarter and the  six-month  periods  ended
December 31, 1998, was principally  attributable to the decline in the Company's
net sales.

         PRODUCT DEVELOPMENT. Product development expenses were $1.2 million and
$1.8 million for the quarters  ended  December 31, 1998 and 1997,  respectively,
(22% and 26% of net sales, respectively). Product development expenses were $2.4
million and $3.6 million for the six-month  periods ended  December 31, 1998 and
1997, respectively,  (23% and 27% of net sales,  respectively).  The decrease in
product  development  expenses in both aggregate  dollars and as a percentage of
net sales for the quarter and six month  period  ended  December  31,  1998,  as
compared  to  the   corresponding   periods  in  fiscal  1998,  is   principally
attributable  to certain  restructuring  actions  taken during the quarter ended
June 30, 1998 which reduced product development staffing levels in the Company's
Communications  Software Group. The decrease in product development  expenses in
the Company's  Communications  Software Group was partially  offset by increased
product development expenses in the Company's Computer Telephony Group.

         GENERAL AND  ADMINISTRATIVE.  General and administrative  expenses were
$1.0 million and $.9 million for the quarters ended December 31, 1998, and 1997,
respectively,   (19%  and  13%  of  net  sales,   respectively).   General   and
administrative  expenses  were $1.9 million and $1.7  million for the  six-month
periods  ended  December  31,  1998 and 1997,  respectively  (18% and 12% of net
sales,  respectively).  The  increase  in  aggregate  dollars  for  general  and
administrative expenses for the quarter and six month periods ended December 31,
1998, as compared to the  corresponding  periods in fiscal 1998, is attributable
to the addition of certain  corporate  administrative  personnel  and  increased
depreciation expense on certain equipment purchases and improvements made to the

                                       11
<PAGE>
Company's corporate offices in Cambridge, Massachusetts. The increase in general
and administrative expenses as a percentage of net sales for the quarter and the
six-month  periods  ended  December 31, 1998,  as compared to the  corresponding
periods in fiscal 1998, is primarily the result of the aforementioned  increased
costs and lower sales of the Company's Communications Software Group products.

         RESTRUCTURING  COST.  For  the  quarter  and  six-month  periods  ended
December  31,  1997,  the  Company  reduced  by $ .1 million  and $ .3  million,
respectively,  its restructuring  accruals due to lower than anticpated costs in
closing  its  Communications  Software  Group  international  sales and  support
offices.  No such reductions were recorded for the quarter and six-month periods
ended December 31, 1998.

         OTHER  INCOME,  NET. For the quarter  ended  December  31, 1998,  other
income, net, decreased to $ .2 million,  from $ 1.4 million in the corresponding
quarter of fiscal 1998. For the six-month  period ended December 31, 1998, other
income, net, decreased to $ .4 million,  from $ 1.5 million in the corresponding
period of fiscal 1998. The decrease in other income,  net, for the quarter ended
December  31,  1998 and the  six-month  period  ended  December  31,  1998,  was
principally  attributable  to the  recognition  of a gain  on  the  sale  of the
Company's  Tucson,  Arizona  headquarters  of $1.3  million  for the quarter and
six-month periods ended December 31, 1997.

         EXTRAORDINARY LOSS FROM EARLY  EXTINGUISHMENT OF DEBT. In October 1997,
the  Company  incurred a $ .1 million  prepayment  penalty  upon the sale of its
Tucson,  Arizona  headquarters  and the  subsequent  repayment of a $2.2 million
mortgage on that facility.  The Company utilized proceeds received from the sale
of its Tucson, Arizona headquarters to prepay the mortgage obligation.  There is
no income tax effect from the transaction. The per share amount of extraordinary
loss net of income tax effects is $(.01) for the quarter and  six-month  periods
ended December 31, 1997.

FUTURE RESULTS

         The  Company  is  currently  focusing  a  substantial  majority  of its
financial  resources on its computer  telephony  products.  Concurrent  with the
expanded investment in computer telephony products,  the Company has reduced its
investment in its communications  software products.  There can be no assurances
that  with the  reduced  sales,  marketing  and  development  investment  in the
communications  software  products,  that revenue levels for these products will
continue at their current levels in the future.

         The  Company  intends to  continue  to  increase  its  investments  and
expenditures in sales,  marketing and development of computer telephony products
(especially  TeleVantage).  There can be no  assurance  that the Company will be
able to market or sell such products successfully or at particular levels within
particular time-frames.  Accordingly, the Company could experience a slower than
anticpated  increase  in computer  telephony  revenues as it attempts to build a
distribution  and reseller  network that may build market awareness for computer
telephony  products.  A  slow  increase  in  the  Company's  computer  telephony
revenues,  particularly  if  combined  with  increased  investment  in  computer
telephony product development and marketing along with declining  communications
software  product  revenues,  may  cause the  Company  to  experience  increased
operating losses in the future.

         The Company's  future  results of operations  involve a number of risks
and  uncertainties.  Among the factors that could cause future results to differ
materially from historical  results are the following:  business  conditions and
the general economy; competitive pressures, acceptance of new products and price
pressures; availability of third party compatible products at reasonable prices;
risk of  nonpayment  of accounts  receivable;  risk of product line or inventory
obsolescence due to shifts in technologies or market demand;  timing of software
introductions and litigation. These and other risk factors are outlined below.

                                       12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

                  The Company had cash and cash  equivalents of $17.5 million at
December 31, 1998 compared to $18.5 million at June 30, 1998 and working capital
of $17.0  million at  December  31, 1998  compared to $17.5  million at June 30,
1998. The decrease in cash and cash  equivalents  was  principally the result of
employee termination benefit payments to certain  Communications  Software Group
employees  and  payments  associated  with the closure of the  Company's  United
Kingdom sales and support  office.  The payments are the result of the Company's
restructuring  actions  effected  during the quarter  ended June 30,  1998.  The
decrease  in the  Company's  working  capital  was  primarily  the result of the
Company's operating loss and the net increase in property and equipment balances
at December 31, 1998.

         The Company funds its working capital  requirements  primarily  through
cash flows  from  operations  and  existing  cash  balances.  While the  Company
anticipates  that existing cash balances and cash flows from  operations will be
adequate to meet the  Company's  current and expected cash  requirements  for at
least the next year,  additional  investments  by the  Company  to  acquire  new
technologies  and products may necessitate that the Company seek additional debt
or equity capital. There can be no assurance that such additional financing will
be available when needed or, if available,  will be on  satisfactory  terms.  In
order to raise capital,  the Company may issue debt or equity securities and may
incur substantial dilution.

RECENT ACCOUNTING PRONOUNCEMENTS

         In June 1997, the Financial  Accounting  Standards  Board (FASB) issued
Statement of Financial  Accounting  Standards No. 130, "Reporting  Comprehensive
Income" (SFAS No. 130). SFAS No. 130 establishes  requirements for disclosure of
comprehensive  income and becomes  effective for the Company for the year ending
June 30, 1999.  Comprehensive  income  includes  such items as foreign  currency
translation adjustments and unrealized holding gains and losses on available for
sale securities that are currently being presented by the Company as a component
of  shareholders'  equity.  The adoption of this  pronouncement  will not have a
material impact on the Company's financial results.

         In June 1997, the Financial  Accounting  Standards  Board (FASB) issued
Statement of Financial  Accounting Standards No. 131, "Disclosure about Segments
of  an  Enterprise  and  Related   Information"(SFAS  No.  131).  SFAS  No.  131
establishes   standards  for  disclosure  about  operating  segments  in  annual
financial  statements and selected  information in interim financial reports. It
also establishes  standards for related disclosures about products and services,
geographic  areas and major  customers.  This statement  supersedes SFAS No. 14,
"Financial  Reporting for Segments of a Business  Enterprise."  The new standard
becomes  effective  for the  Company  for the year  ending  June 30,  1999,  and
requires that comparative  information from earlier years be restated to conform
to the requirements of this standard.

         In February  1998,  the  Financial  Accounting  Standards  Board (FASB)
issued Statement of Financial  Accounting  Standards (SFAS) No. 132, "Employers'
Disclosures  about Pensions and Other  Postretirement  Benefits (an amendment of
FASB  Statements No. 87, 88, and 106).  This statement  standardizes  employers'
disclosure  requirements about pensions and other  postretirement  benefit plans
and requires  additional  information on changes in the benefit  obligations and
fair  values  of plan  assets  that will  facilitate  financial  analysis.  This
statement  supersedes the disclosure  requirements  in SFAS No. 87,  "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for  Termination  Benefits",  and  SFAS  No.  106,  "Employers'  Accounting  for
Postretirement Benefits Other Than Pensions". The new standard becomes effective
for the Company for the fiscal year ending June 30,  1999.  Management  does not
believe  that the  adoption  of SFAS No. 132 will have a material  impact on the
Company's financial results.

                                       13
<PAGE>
YEAR 2000

         The Company  recognizes the potential  business  impacts related to the
Year 2000 computer system issue and is implementing a plan to assess and improve
the  Company's  state of readiness  with  respect to such issues.  The Year 2000
issue is one where computer  systems may recognize the designation  "00" as 1900
when it means 2000, resulting in system failure or miscalculations.

         Commencing in 1997, the Company initiated a comprehensive review of its
core information technology systems, which the Company is dependent upon for the
conduct of day to day business operations, in order to determine the adequacy of
those systems in light of future business requirements.  Year 2000 readiness was
one of a variety of factors to be considered in the review of core systems.

         In recognition of the Year 2000 issue,  the Company in September  1997,
began a comprehensive  review of its information  technology and non-information
technology systems used by the Company,  computer hardware and software products
sold by the Company,  and computer hardware and software products and components
and other  equipment  supplied  to the  Company by third  parties.  Such  review
includes testing and analysis of Company products and inquiries of third parties
supplying  information   technology  and  non-information   technology  systems,
computer hardware and software  products and components,  and other equipment to
the Company.

         The Company has  divided  its Year 2000 review into three  phases.  The
first addresses the Company's core information  technology  systems and products
currently sold by the Company.  The second phase addresses non-core  information
technology systems and  non-information  technology  systems.  In addition,  the
Company will implement  required Year 2000 upgrades and replacements  during the
second  phase.  The third phase  addresses  third party  suppliers  of products,
supplies and services necessary to the Company's ongoing operations. The Company
substantially  completed  the first phase of its review in September  1998.  The
Company believes it will complete the second and third phases by June 1999.

                  In the first phase of its Year 2000 review, the Company tested
software  products  currently  manufactured  and  shipped  by the  Company,  and
determined  that most such  products  are Year 2000  compliant.  Certain  of the
Company's products that were discontinued prior to fiscal 1998 are not Year 2000
compliant.  In cases where such non-Y2K  compliant  products are still sold on a
replacement  basis only, the Company  requires the customer to sign a release of
liability for all damages potentially caused by such non-Y2K compliant products.
The Company maintains a section on its web site that identifies all products the
Company  sells and ships and lists their Y2K status.  The Company also  responds
via direct mail, e-mail or telephone,  as appropriate,  to customer and supplier
requests for  information  on Y2K  compliancy of its  products.  The Company has
notified its distributors, resellers and end users of cases of non-compliance to
the extent possible and has authorized returns and replacement of these products
where  possible.  The  Company  believes  the cost of these  returns  or product
replacements to be immaterial,  and that the Company's  reserves are adequate to
cover such  returns and  replacements.  The Company  also has made  inquiries of
third parties supplying the Company with computer hardware and software products
and components  currently sold by the Company,  and has received assurances that
such products and  components  are or will be Year 2000  compliant.  The Company
plans to follow up with third party suppliers and vendors who have not responded
to  the  Company's  inquiries  and  the  Company  will  review   supplier/vendor
replacement options as necessary.  With respect to core information  technology,
the Company has made inquires of third parties  supplying  computer hardware and
software  operating  systems to the Company,  and has received  assurances that,
except as discussed  below,  such  hardware and software  systems are or will be
Year 2000 compliant.

         As a result of its review to date,  the  Company  has  determined  that
certain of its  internal  financial  software  systems  are  inadequate  for the
Company's  future  business  needs and need to be  replaced  because  of various

                                       14
<PAGE>
considerations,  including Year 2000 non-compliance. In certain cases the timing
of  replacement  systems  is being  accelerated  because  of Year  2000  issues,
although the Company believes  replacement would have been necessary in the near
future regardless of such issues.  The Company initiated a comprehensive  search
to replace  these Year 2000  non-compliant  systems.  The Company has selected a
replacement software package and is currently in the process of migrating to the
new package.  The  expected  implementation  date is April 1, 1999.  The Company
expects to spend  approximately  $350,000  to  purchase  and  implement  the new
software.  These  costs  will be  capitalized  over  the  life of the  purchased
software  package.  The Company does not expect the amounts to be expensed  over
the life of the  software  package  to have a material  effect on its  financial
position  or  results of  operations.  The  Company  does not  believe  that any
specific information  technology projects have been deferred as a result of Year
2000 issues.

         At this time,  the  Company  has not  developed  Year 2000  contingency
plans,  other than the review and remedial actions described above, and does not
intend to do so unless  the  Company  believes  such  plans are  merited  by the
results of its continuing  Year 2000 review.  The Company  maintains and deploys
contingency   plans  designed  to  address  various  other  potential   business
interruptions.  These plans may be  applicable  to address the  interruption  of
support  provided by third parties  resulting from their failure to be Year 2000
ready.

         If the  Company or the third  parties  with which it has  relationships
were to cease or not  successfully  complete its or their Year 2000  remediation
efforts, the Company could encounter disruptions to its business that could have
a material  adverse  effect on its business,  financial  position and results of
operations. The Company could be materially and adversely impacted by widespread
economic or financial market disruption or by Year 2000 computer system failures
at third parties with which it has relationships.

"SAFE HARBOR"  STATEMENT UNDER THE PRIVATE  SECURITIES  LITIGATION REFORM ACT OF
1995

         This Form 10-Q may  contain  forward-looking  statements  that  involve
risks  and  uncertainties,   including,  but  not  limited  to,  the  impact  of
competitive  products and pricing,  product demand and market  acceptance risks,
the  presence  of  competitors  with  greater   financial   resources,   product
development and  commercialization  risks, costs associated with the integration
and  administration of acquired  operations,  capacity and supply constraints or
difficulties, the results of financing efforts, Year 2000 issues and other risks
detailed from time to time in the Company's  Securities and Exchange  Commission
filings. The Company filed its 1998 Form 10-K on September 25, 1998 and its 1999
First Quarter Form 10-Q on November 9, 1998. Please refer to these documents for
a more detailed  discussion of the risks and  uncertainties  associated with the
Company's future operations.

RISK FACTORS

GENERAL

         COMPETITION.   The  communications   software  and  computer  telephony
industries are highly  competitive  and are  characterized  by rapidly  changing
technology  and evolving  industry  standards.  The Company  competes with other
software  companies,  many  of  which  have  substantially   greater  financial,
technological,  production,  sales and marketing and other resources, as well as
greater name  recognition  and larger  customer  bases,  than the Company.  As a
result, these competitors may be able to respond more quickly and effectively to
new or emerging  technologies and changes in customer  requirements or to devote

                                       15
<PAGE>
greater  resources  to the  development,  promotion,  sales and support of their
products  than the Company.  Competition  in the software  industry is likely to
intensify as current  competitors  expand their product lines, more features are
included in operating  systems  (e.g.,  Windows NT 5.0),  new  applications  are
developed,  and as new  companies  enter the  markets or  segments  in which the
Company currently  competes.  The software  industry is also  characterized by a
high degree of consolidation  which favors companies with greater resources than
those  of the  Company.  Consequently,  the  Company  expects  its  products  to
experience  increased  competition  which  could  result  in  significant  price
reductions,  loss of market share and lack of acceptance of new products, any of
which could have a material adverse effect on the Company's business,  financial
condition and results of operations. The Company's new product introductions can
be subject to severe price and other  competitive  pressures.  While the Company
endeavors to introduce its products to the  marketplace in a timely manner there
can be no  assurances  that  due  to  the  greater  financial  resources  of the
Company's  competitors  that these products will be successful or even accepted.
There can be no assurance  that the  Company's  products will be able to compete
successfully  with other  products  offered  presently or in the future by other
vendors.

         CONNECTIVITY AND DEPENDENCE. The Company's ability to successfully sell
certain of its products is to a significant degree dependent on operating system
connectivity,   principally  with  Microsoft's  operating  systems.  Should  the
Company's  products become  non-compatible  with the dominant  operating systems
currently in use in the PC industry,  the Company's  revenues from such products
could be materially adversely impacted. In addition, the Company's revenues will
be adversely  affected if software  solutions similar to the Company's  products
are  bundled  with or  incorporated  into  dominant  operating  systems,  as has
occurred  and can be  expected  to  occur  in the  future  with  respect  to the
Company's products.

         RETURNS  AND PRICE  PROTECTION.  The  Company is exposed to the risk of
product returns and rotations from its distributors and other volume purchasers,
which are  estimated  and  recorded  by the  Company  as a  reduction  in sales.
Although  the Company  attempts to monitor and if  necessary  adjust its channel
inventories  to be consistent  with current  levels of sell  through,  localized
overstocking  may occur with  certain  products due to rapidly  evolving  market
conditions.  In addition, the risk of product returns and rotations may increase
if the demand for its existing  products  should rapidly decline due to regional
economic troubles or increased  competition.  Although the Company believes that
it provides adequate allowances for product returns and rotations,  there can be
no  assurance  that actual  product  returns and  rotations  will not exceed the
Company's  allowances.  Any product  returns and rotations in excess of recorded
allowances  could result in a material adverse effect on net sales and operating
results.  As the Company  introduces more new products,  the  predictability and
timing of sales to end users and the  management  of returns  to the  Company of
unsold products by distributors and volume  purchasers  becomes more complex and
could result in material fluctuations in quarterly sales and operating results.

         The Company is also occasionally  exposed to its distributors and other
volume  purchasers for price protection for list price reductions by the Company
on its products held in such customers'  inventories.  The Company  provides its
distributors  with price  protection  in the event that the Company  reduces the
list  price  of  its  products  due  to  uncontrollable  competitive  pressures.
Distributors  and other volume  purchasers  are usually  offered  credit for the
impact of a list price  reduction  on the expected  revenue  from the  Company's
products in the  distributors'  inventories at the time of the price  reduction.
Although  the  Company  maintains  allowances  against the effects of such price
protections,  and believes that it has provided  adequate  allowances  for price
protection,  there can be no  assurance  that the  impact of actual  list  price
reductions  by the Company will not exceed the  Company's  allowance.  Any price
protection  in excess  of the  recorded  allowance  could  result in a  material
adverse effect on sales and operating results.

         FACTORS AFFECTING  PRICING.  Substantially all of the Company's revenue
in each fiscal quarter results from orders booked in that quarter. A significant
percentage of the Company's  bookings and sales to distributors and other volume

                                       16
<PAGE>
purchasers  historically  have occurred during the last month of the quarter and
are  concentrated  in the  latter  half of that  month.  Orders  placed by major
customers are typically based upon customers'  recent  historical and forecasted
sales  levels for Company  products  and  inventory  levels of Company  products
desired to be  maintained  by those major  customers  at the time of the orders.
Moreover,  orders may also be based upon financial  practices by major customers
designed  to  increase  the  return on  investment  or yield on the sales of the
Company's  products to value  added  resellers  ("VAR's")  or  end-users.  Major
distribution  customers  occasionally  receive market development funds from the
Company for purchasing Company products and from time to time extended terms, in
accordance with industry practice,  depending upon competitive  conditions.  The
Company  currently  does not offer  any cash  rebates  to its U.S.  distribution
partners.  Changes in purchasing  patterns by one or more of the Company's major
customers,  changes in customer policies  pertaining to desired inventory levels
of Company products, negotiations of market development funds and changes in the
Company's  ability to anticipate  in advance the product mix of customer  orders
could result in material fluctuations in quarterly operating results.

         PRODUCT CONCENTRATION.  The Company has in the past derived, and may in
the future derive, a significant portion of its revenues from a relatively small
number of  products.  Declines in the  revenues  from these  software  products,
whether as a result of  competition,  technological  change,  price pressures or
other factors,  would have a material adverse effect on the Company's  business,
results of  operations  and  financial  condition.  Further,  life cycles of the
Company's products are difficult to estimate due in part to the recent emergence
of certain of the  Company's  products,  the effect of new  products  or product
enhancements,  technological  changes  in the  software  industry  in which  the
Company  operates and future  competition.  There can be no  assurance  that the
Company will be  successful  in  maintaining  market  acceptance  of its current
products or any new products or product enhancements.

         DEPENDENCE ON NEW PRODUCT OFFERINGS.  The Company's future success will
depend,  in  significant  part,  on its  ability  to  successfully  develop  and
introduce  new  software  products and  improved  versions of existing  software
products  on a timely  basis and in a manner  that will allow such  products  to
achieve broad customer  acceptance.  There can be no assurance that new products
will be introduced on a timely basis,  if at all. If new products are delayed or
do not achieve market acceptance,  the Company's business, results of operations
and financial condition will be materially adversely affected.  In the past, the
Company has also  experienced  delays in  purchases of its products by customers
anticipating  the  launch  of new  products  by  the  Company  or the  Company's
customers.   There  can  be  no  assurance  that  material  order  deferrals  in
anticipation of new product  introductions  will not occur. There can also be no
assurance  that the Company will be successful in  developing,  introducing on a
timely  basis and  marketing  such  software or that any such  software  will be
accepted in the market.

         TECHNOLOGICAL CHANGE. The markets for computer software applications is
characterized by rapid technological  change,  changing customer needs, frequent
product  introductions  and evolving  industry  standards.  The  introduction of
products  incorporating  new  technologies  and the  emergence  of new  industry
standards   could  render  the   Company's   existing   products   obsolete  and
unmarketable.  The  Company's  future  success  will  depend upon its ability to
develop  and  introduce  new  software  products  (including  new  releases  and
enhancements) on a timely basis that keep pace with  technological  developments
and emerging industry standards and address the increasingly sophisticated needs
of its customers.  There can be no assurance that the Company will be successful
in developing and marketing new products that respond to  technological  changes
or  evolving   industry   standards,   that  the  Company  will  not  experience
difficulties   that  could   delay  or  prevent  the   successful   development,
introduction and marketing of these new products,  or that its new products will
adequately  meet  the   requirements  of  the  marketplace  and  achieve  market
acceptance.  If the Company is unable,  for  technological or other reasons,  to
develop and  introduce  new products in a timely  manner in response to changing
market conditions or customer requirements,  the Company's business,  results of
operations and financial condition could be adversely affected.

                                       17
<PAGE>
         POTENTIAL FOR UNDETECTED ERRORS.  Software products as complex as those
offered by the Company may contain undetected errors.  There can be no assurance
that,  despite  testing by the Company and by current and  potential  customers,
errors  will not be found in new or  existing  products  after  commencement  of
commercial shipments,  resulting in loss of or delay in market acceptance or the
recall of such  products,  which could have a material  adverse  effect upon the
Company's business,  results of operations and financial condition.  The Company
provides  customer  support for most of its  products.  The Company  will in the
future offer new products.  If these products are flawed,  or are more difficult
to use than traditional Company products,  customer support costs could rise and
customer satisfaction levels could fall.

         DUPLICATION  OF  SOFTWARE.  The  Company  duplicates  nearly all of its
software at its Tucson, Arizona facility. The Company believes that its internal
duplication  capability is economically  advantageous  because it eliminates the
profit margin required by outside  duplication sources and enables a high degree
of scheduling and other control. This concentration of production does, however,
expose the Company to the risk that  production  could be  disrupted  by natural
disaster  or other  events,  such as the  presence  of a virus in the  Company's
duplicators.  The Company  believes  that it could  retain  outside  duplication
alternatives  quickly, but there is no assurance that it could do so or, if such
arrangements  could be made, that duplication  could take place in an economical
or timely manner.

         PRE-LOAD  SOFTWARE  MARKET;CD  ROM'S.  The Company  primarily sells its
communications  software  in a form that  includes a disk or disks and a manual.
Currently,  the Company has the capability to produce its products in-house only
on 3 1/2  -inch  diskettes.  However,  with  the  expansion  of the size of most
software programs,  CD-ROM has surpassed diskettes as the most prominent medium.
Many of the Company's  customers  "pre-load" the Company's  software onto a hard
disk.  These  arrangements  eliminate  the need for a disk and may eliminate the
need for a manual. The pre-load  arrangements  produce smaller unit revenues for
the Company and eliminate the  Company's  ability to generate  revenues from its
production  facilities.  The Company does not currently  have the  capability to
produce  CD-ROMs  and the cost to  develop  such  production  capability  may be
prohibitive.  The Company  currently  contracts CD-ROM production to specialized
CD-ROM facilities. In the likely event that growth continues in the pre-load and
CD-ROM usage mediums, more of the Company's  relationships would involve product
pre-loads  and  CD-ROM  production  and  the  Company's  business,   results  of
operations and financial condition could be adversely affected.

         INTELLECTUAL  PROPERTY RIGHTS.  The Company's success is dependent upon
its software code base, its  programming  methodologies  and other  intellectual
properties. To protect its proprietary technology,  the Company relies primarily
on a combination of trade secret laws and  nondisclosure,  confidentiality,  and
other agreements and procedures,  as well as copyright and trademark laws. These
laws and actions may afford only limited  protection.  There can be no assurance
that the steps taken by the Company  will be adequate to deter  misappropriation
of its  proprietary  information,  or to prevent the successful  assertion of an
adverse claim to software  utilized by the Company,  or that the Company will be
able to  detect  unauthorized  use and  take  effective  steps  to  enforce  its
intellectual   property  rights.   The  Company  owns  United  States  trademark
registrations  for  certain of its  trademarks.  In  addition,  the  Company has
applied for  trademark  protection  on a number of its recently  introduced  new
technologies.  Certain of the Company's trademark applications are still pending
and no assurances can be made that the trademark  applications  will be accepted
by the U.S.  Trademark  and Patent  Office.  A rejection of one or more of these
trademark  applications  could have a material  adverse  affect on the Company's
ability to  successfully  sell and market  these new  products.  In selling  its
products,  the Company  relies  primarily on "shrink wrap" licenses that are not
signed by  licensees  and,  therefore,  may be  unenforceable  under the laws of
certain  jurisdictions.  In addition, the laws of some foreign countries provide
substantially  less protection to the Company's  proprietary  rights than do the
laws of the  United  States.  Trademark  or patent  challenges  in such  foreign

                                       18
<PAGE>
countries could if successful materially disrupt or even terminate the Company's
ability to sell its products in such markets. There can be no assurance that the
Company's  means of protecting its  proprietary  rights will be adequate or that
the Company's  competitors will not  independently  develop similar  technology.
Further,  although  the Company  believes  that its services and products do not
infringe on the intellectual property rights of others such claims have been and
in the future may be asserted against the Company. The failure of the Company to
protect  its  proprietary   property,  or  the  infringement  of  the  Company's
proprietary  property  on the  rights of others,  could have a material  adverse
effect on the Company's business, results of operations and financial condition.

         From time to time,  the  Company  has  received  and may in the  future
receive  communications  from third parties  asserting that the Company's  trade
names or that  features,  content,  or  trademarks  of certain of the  Company's
products infringe upon intellectual  property rights held by such third parties.
As the number of trademarks, patents, copyrights and other intellectual property
rights in the Company's industry increases, and as the coverage of these patents
and rights and the functionality of products in the market further overlap,  the
Company believes that products based on its technology may  increasingly  become
the subject of  infringement  claims.  Such claims  could  materially  adversely
affect  the  Company,  and may also  require  the  Company to obtain one or more
licenses from third parties. There can be no assurance that the Company would be
able to obtain any such required  licenses upon reasonable terms, if at all, and
the failure by the Company to obtain such licenses could have a material adverse
effect on its  business,  results of  operations  and  financial  condition.  In
addition,  the Company licenses technology on a non-exclusive basis from several
companies for inclusion in its products and anticipates that it will continue to
do so in the future.  The  inability of the Company to continue to license these
technologies  or to license other  necessary  technologies  for inclusion in its
products,  or substantial  increases in royalty payments under these third party
licenses,  could  have a material  adverse  effect on its  business,  results of
operations and financial condition.

         Litigation  or  threatened   litigation  in  the  software  development
industry has increasingly been used as a competitive  tactic both by established
companies  seeking  to  protect  their  existing  position  in the market and by
emerging  companies  attempting to gain access to the market.  If the Company is
required  to defend  itself  against a claim,  whether or not  meritorious,  the
Company could be forced to incur substantial expense and diversion of management
attention,  and may encounter  market  confusion and  reluctance of customers to
purchase the Company's software products. Such claims have been asserted against
certain of the Company's technologies.  Such litigation, if determined adversely
to the  Company,  could  have  a  substantial  material  adverse  effect  on its
business, results of operations and financial condition.

         DEPENDENCE UPON KEY PERSONNEL. The Company's future performance depends
in  significant  part upon key technical and senior  management  personnel.  The
Company  is  dependent  on its  ability to  identify,  hire,  train,  retain and
motivate high quality personnel, especially highly skilled engineers involved in
the  ongoing  research  and  development  required  to develop  and  enhance the
Company's software products and introduce enhanced future products. The industry
is characterized by a high level of employee mobility and aggressive  recruiting
of skilled  personnel.  There can be no  assurance  that the  Company's  current
employees  will  continue  to work  for the  Company.  Loss of  services  of key
employees  could  have a  material  adverse  effect on the  Company's  business,
results of operations and financial condition. In addition, the Company may need
to grant additional options and provide other forms of incentive compensation to
attract and retain key personnel.

         FLUCTUATIONS IN QUARTERLY  OPERATING RESULTS.  The Company's  operating
results  have in the past  fluctuated,  and may in the  future  fluctuate,  from
quarter  to  quarter,  as a result of a number  of  factors  including,  but not
limited to,  changes in pricing  policies or price  reductions by the Company or
its  competitors;  variations  in the  Company's  sales  channels  or the mix of

                                       19
<PAGE>
product sales; the timing of new product  announcements and introductions by the
Company or its competitors; the availability and cost of supplies; the financial
stability  of major  customers;  market  acceptance  of new products and product
enhancements;  the  Company's  ability  to  develop,  introduce  and  market new
products,  applications  and  product  enhancements;  the  Company's  ability to
control costs;  possible  delays in the shipment of new products;  the Company's
success in expanding  its sales and  marketing  programs;  deferrals of customer
orders in  anticipation  of new  products,  product  enhancements  or  operating
systems;  changes in Company strategy;  personnel changes;  and general economic
factors.  The Company's  software  products are generally  shipped as orders are
received and  accordingly,  the Company has  historically  operated  with little
backlog.  As a result,  sales in any quarter are  dependent  primarily on orders
booked and shipped in that  quarter and are not  predictable  with any degree of
certainty.  In addition, the Company's expense levels are based, in part, on its
expectations as to future  revenues.  If revenue levels are below  expectations,
operating results are likely to be adversely affected.  The Company's net income
may be  disproportionately  affected by a reduction in revenues because of fixed
costs related to generating its revenues. Quarterly results in the future may be
influenced by these or other factors and, accordingly,  there may be significant
variations in the Company's quarterly operating results.  Further, the Company's
historical   operating   results  are  not  necessarily   indicative  of  future
performance for any particular period.  Due to all of the foregoing factors,  it
is possible that in some future quarter the Company's  operating  results may be
below the  expectations of public market analysts and investors.  In such event,
the price of the Company's Common Stock could be adversely affected.

         POSSIBLE  VOLATILITY OF STOCK PRICE. The trading price of the Company's
Common Stock is likely to be subject to significant  fluctuations in response to
variations in quarterly operating results, changes in management,  announcements
of  technological  innovations or new products by the Company,  its customers or
its  competitors,  legislative  or  regulatory  changes,  general  trends in the
industry  and other  events or  factors.  In  addition,  the  stock  market  has
experienced  extreme  price and  volume  fluctuations  which  have  particularly
affected  the market  price for many high  technology  companies  similar to the
Company,  and which have often been  unrelated to the operating  performance  of
these companies. These broad market fluctuations may adversely affect the market
price of the Company's Common Stock.  Further,  factors such as announcements of
new contracts or product  offerings by the Company or its competitors and market
conditions  for stocks  similar to that of the  Company  could have  significant
impact on the market price of the Common Stock.

         POSSIBLE  ACQUISITIONS OR DIVESTITURES.  From time to time, the Company
may  consider  acquisitions  of or  alliances  with other  companies  that could
complement  the  Company's   existing   business,   including   acquisitions  of
complementary  product lines.  The Company may also consider the  divestiture of
certain of its product segments should conditions warrant.  Although the Company
may periodically discuss such potential transactions with a number of companies,
there can be no assurance that suitable  acquisition or joint venture candidates
can be  identified,  or that, if identified,  adequate and acceptable  financing
sources will be available to the Company that would enable it to consummate such
transactions.  Even if an acquisition or joint venture is consummated, there can
be no assurance  that the Company will be able to  integrate  successfully  such
acquired  companies or product lines into its existing  operations,  which could
increase the Company's  operating  expenses in the short-term and materially and
adversely affect the Company's results of operations.  Moreover, any acquisition
by  the  Company  may  result  in  potentially   dilutive  issuances  of  equity
securities,  the  incurrence of additional  debt, and  amortization  of expenses
related to goodwill and intangible  assets,  all of which could adversely affect
the Company's  profitability.  Acquisitions  involve numerous risks, such as the
diversion  of the  attention of the  Company's  management  from other  business
concerns,  the  entrance of the Company  into  markets in which it has had no or
only limited experience, and the potential loss of key employees of the acquired
company,  all of which  could have a material  adverse  effect on the  Company's
business, financial condition and results of operations.

                                       20
<PAGE>
COMPUTER TELEPHONY

         COMPUTER TELEPHONY PRODUCT MARKET. The market for open, standards-based
computer telephony tools,  applications and system-level  products is relatively
new and is characterized by the rapid evolution of computer  telephony  hardware
and  software   standards,   emerging   technologies   and   changing   customer
requirements.  These characteristics may render the Company's computer telephony
products unmarketable or may make the expansion, timing and direction of product
development  unpredictable.  As a  result  of  these  factors,  there  can be no
assurance that computer  telephony  markets will  continue to expand or that the
Company's products will achieve market acceptance.

         The Company believes that the principal  competitive  factors affecting
the computer telephony markets it serves include vendor and product  reputation,
product  architecture,  functionality  and features,  scalability,  ease of use,
quality of product and support,  performance,  price, brand name recognition and
effectiveness of sales and marketing efforts. There can be no assurance that the
Company can maintain and grow its market position  against current and potential
competitors,  especially those with significantly greater financial,  marketing,
service, support,  technical and other competitive resources. Any failure by the
Company to  maintain  and grow its  competitive  position  could have a material
adverse effect upon the Company's  revenues from its computer  telephony product
line.

         TeleVantage  is a phone  system  designed  for small and  medium  sized
businesses  and  branch  offices.  The  Company  believes  this  product  offers
functionality  superior to that of a traditional standalone PBX. However, due to
the complexity of this software and the mission  critical systems it is designed
to operate,  there can be no assurances  that the software will be  successfully
marketed or sold. Additionally, there can be no assurances that competitors with
substantially  greater  financial  resources  than that of the Company  will not
develop their own PC-based PBX solutions and  subsequently  adversely affect the
Company's ability to market or sell its PC-based PBX solution, TeleVantage.

         The  Company's  PC-based  PBX  solution  (TeleVantage)  could also face
direct  competition  from  companies  with   significantly   greater  financial,
marketing,  service,  support  and  technical  resources.  In  addition  to  the
possibility that these companies may release a PC-based PBX solution,  they have
signaled   their   intentions  to  develop  "IP"   (Internet   Protocol)   based
applications.  These PC-based PBX and IP-based telephony solutions could put the
Company at a competitive disadvantage and adversely affect the Company's ability
to sell and market its own PC-based PBX solution, TeleVantage.

         COMPUTER  TELEPHONY  CUSTOMERS  AND MARKET  ACCEPTANCE.  The Company is
currently and will continue to invest significant  resources in the development,
marketing  and  selling  of new  computer  telephony  products.  There can be no
assurance  that the Company will achieve  market  acceptance of these  products.
Additionally,  these new computer telephony products are principally targeted at
small to medium sized  businesses.  The Company's  existing network of qualified
VAR's  has  historically  sold  the  Company's   networking  and  communications
products. Therefore, the Company anticipates the need to recruit and train a new
network of qualified VAR's to sell its computer telephony products. There can be
no assurance that the Company will be successful in establishing a critical mass
of qualified  computer  telephony  resellers.  The Company's  success in selling
these  products  will likely be  influenced by its ability to attract and inform
qualified VAR's and  interconnects  on the features and  functionality  of these
emerging technologies.

                                       21
<PAGE>
         The  Company's  computer  telephony  products  compete in a  relatively
immature industry with as yet unproven  technologies.  The Company believes that
there will be a gradual  evolution toward open  server-based  telephony  enabled
applications from the traditonal proprietary PBX environment and that in such an
environment  PC-based  PBX systems  will be widely  accepted.  The Company  also
believes  that there may be an eventual  gravitation  toward  Internet  Protocol
architectures  and/or  voice over wire  applications.  However,  there can be no
assurance that the current  technological  innovations in the computer telephony
industry  will be widely  adopted by small to medium  sized  businesses  or that
telephony  standards  will  evolve  in a  manner  that  is  advantageous  to  or
anticipated by the Company.

COMMUNICATIONS AND NETWORKING SOFTWARE

         NETWORKING AND COMMUNICATIONS SOFTWARE CUSTOMERS. The Company relies on
a  network  of  distributors  and VAR's for a  significant  portion  of both its
domestic  and  international  networking  and  communications  software  product
revenues.  In  addition,  a  majority  of the  sales of  CoSession  Remote,  the
Company's remote  communications  software product, are to PC original equipment
manufacturers ("OEM's").  Generally,  there are no minimum purchase requirements
for  the  Company's  distributors,  VARs  or  OEMs  and  many  of the  Company's
distributors and VAR's sell competitive products. There can be no assurance that
these  customers  will give priority to the marketing of the Company's  products
compared to competing  products or alternative  solutions or that such customers
will continue to offer the Company's  products.  In the event of the termination
of the Company's  relationship with one or more major distributors,  the Company
would have to find suitable alternative channels of distribution. The absence of
such  alternatives  could  have a  material  adverse  affect  on  the  Company's
business, financial condition and results of operation. Certain of the Company's
OEM  relationships  require the scheduled  delivery of product revisions and new
products.  Some of the Company's OEM product  offerings  involve the bundling of
licensed  technologies  with its own  technologies.  The  failure of the Company
and/or one of its licensors to adhere to agreed-upon  product delivery schedules
could  result  in  the   termination   of  key   relationships   with  major  PC
manufacturers,  which  could have a  significant  adverse  impact on current and
future  revenues in the OEM  channel.  The  Company's  OEM  revenue  streams are
dependent  upon  the  maintenance  of one or  more  key OEM  relationships.  The
termination of any one of these relationships may have a material adverse affect
on the Company's current and future revenues.

         NETWORKING AND COMMUNICATIONS SOFTWARE COMPETITORS. The Company's major
competitors in the small business  networking  market are Microsoft  Corporation
and Novell,  Inc. Both of these companies have substantially  greater financial,
technological,  production  and sales and marketing  resources than those of the
Company.

         Management  believes  that the  inclusion  of  networking  capabilities
(printer,  file and application  sharing) in Microsoft's Windows 95/98 operating
system  (released in August 1995 and June 1998,  respectively)  has had and will
continue  to have a  significant  detrimental  impact on sales of the  Company's
LANtastic  NOS  products.  Windows  95/98 is pre-loaded on virtually all Pentium
processor-based  personal  computers  currently  sold  worldwide.  The impact of
Windows 95/98 on the Company's business has been compounded by the dominance and
visibility  of Microsoft in the PC  marketplace  and the rapid  upgrade by small
businesses to Pentium PC's. In August 1996, Microsoft released Windows NT 4.0, a
client-server  network  version  of the  Windows  operating  system.  Management
believes that Windows NT 4.0, which, like Windows 95/98,  includes  peer-to-peer
networking capabilities in the workstation version, and is pre-loaded on certain
Pentium PC's,  has provided  additional  significant  direct  competition to the
LANtastic NOS both as a  peer-to-peer  and  client-server  networking  solution.
Management believes that Microsoft will release Windows NT 5.0 (Windows 2000) in
mid 1999.  Windows NT 5.0 will likely combine the enhanced  security features of
Windows NT 4.0 with the  functionality  of Windows 98. This  release may further
erode the market share of the Company's  LANtastic NOS product line.  Microsoft,
because of its  dominant  position  in the PC  operating  systems  and  business

                                       22
<PAGE>
applications  markets,   frequently  offers  value-added  functionality  to  its
products in the form of enhancements to its Windows operating systems, which are
pre-loaded  on new PC's or by offering free products for download from its World
Wide Web site.  The Company  believes that Windows NT 5.0 (Windows  2000) server
may include both modem sharing and internet sharing capabilities.  The inclusion
of modem sharing and internet sharing capabilities in Windows NT could result in
substantially  increased  competition  for the Company's  ModemShare and i.Share
products  which  could  have a  significant  impact on the  Company's  sales and
operating results.

         Finally,  the movement of the networking  industry  towards the uniform
use of internet  technologies  in the  construction  of local area  networks (so
called intranets)  constitutes a risk that demand for more proprietary networks,
such as LANtastic, will decline further, and that competition will emerge from a
new set of companies,  such as Netscape  Communications,  Sun  Microsystems  and
others.

         In December  1998,  the Company  released its network  faxing  software
solution,  BizFax. BizFax supports the Windows NT 40 and Windows 95/98 operating
systems.  As the Company's major  competitors also offer network faxing software
that has  previously  been  introduced  to the small  business  faxing  software
market, there can be no assurances that the Company will successfully introduce,
launch, market or sell BizFax.

         REMOTE  COMMUNICATIONS AND OTHER OEM SOFTWARE CUSTOMERS.  The principal
distribution  channel for the  Company's  remote  computing  product,  CoSession
Remote 32 version 8, is  through  OEM  arrangements  with PC  manufacturers.  In
December 1997,  the Company  released a 32-bit version of the product to support
the Windows 95/98 and Windows NT 4.0 operating  systems.  As the Company's major
competitors also offer 32-bit remote computing products, it is critical, for the
continuance of the OEM  relationships,  that the Company continue  expanding the
market for the 32-bit  product and meet major OEM customer  e-commerce and other
promotional  requirements.  The Company's  ability to grow its remote  computing
software  revenues will likely depend on its success in leveraging  existing OEM
relationships to develop new sources of revenue such as e-commerce.  The loss of
one or more of these OEM  relationships  could have a significant  impact on the
Company's net sales and operating results.

         The  Company  currently  is in  negotiations  with a  company  which it
obtains a licensed  product.  The  failure to extend the  licensing  arrangement
could have a material adverse impact on the Company's future operating results.

         REMOTE COMMUNICATIONS AND OTHER OEM SOFTWARE COMPETITORS. Microsoft has
included a remote computing component in its Windows 98 OS released in June 1998
and  currently  distributes  Net  Meeting  at  no  charge  from  its  Web  site.
Additionally,  Symantec's  PC Anywhere  remote  computing  software  may provide
additional  competition  to the  Company's  CoSession  Remote 32  software  with
respect to certain of the  Company's  major OEM  customers.  These  actions will
likely lead to diminished  demand for the  Company's  CoSession  remote  control
product, and consequently decreased net sales and operating results.

                                       23
<PAGE>
                         ARTISOFT, INC. AND SUBSIDIARIES
                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

         The  Company is subject to  lawsuits  and other  claims  arising in the
ordinary  course of its  operations.  In the  opinion  of  management,  based on
consultation  with legal  counsel,  the effects of such  matters will not have a
materially adverse effect on the Company's financial position.

ITEM 2. CHANGES IN SECURITIES

         None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

         None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE BY SECURITY HOLDERS

        (a) The Company's Annual Shareholders' Meeting was held on November 10,
            1998.

        (b) At the Annual Shareholders'  Meeting,  proposals were considered for
            (i) the election of Michael P. Downey as a Class I director to serve
            until  the  annual  meeting  of  shareholders  in 2001  and (ii) the
            ratification of the selection of KPMG LLP as the independent  public
            accountants of the Company for the 1999 fiscal year.

            The  director--nominee  was elected and the ratification of KPMG LLP
            was approved with the voting results as follows:

<TABLE>
<CAPTION>
Proposal                        Votes For   Votes Against   Votes Withheld   Abstained   Not Voted
--------                       -------------------------------------------------------------------
<S>                            <C>                             <C>                       <C>
Election of
Michael P. Downey
as a Class I Director          12,824,029         --           170,583           --      1,665,490

Ratification of selection of
KPMG LLP as independent
public accountants of the
Company for fiscal year 1999   12,867,747       72,460          54,405           --      1,665,490
</TABLE>

ITEM 5. OTHER INFORMATION

         None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8--K

        (a) Exhibits
            No. 11 -- Computation of Net Income (Loss) Per Share
            No.  27 --  Financial  Data  Schedule  for  Form  10--Q  dated
            February 10, 1999

        (b) Reports on Form 8--K
            There  were no  reports  filed on Form 8--K  during  the three
            months ended December 31, 1998

                                       24
<PAGE>
                                   SIGNATURES

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
the  registrant  has duly  caused  this report to be signed on its behalf by the
undersigned hereunto duly authorized.

                                 ARTISOFT, INC.

Date: February 10, 1999          By /s/  T. Paul Thomas
                                    --------------------------------------------
                                         T. Paul Thomas
                                         President and Chief Executive Officer

                                 By /s/  Sheldon M. Schenkler
                                    --------------------------------------------
                                         Sheldon M. Schenkler
                                         Vice President and Chief Financial
                                         Officer

                                       25