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                                 UNITED STATES
                        SECURITIES AND EXCHANGE COMMISSION
                                Washington, DC 20549

                                   Form 10-KSB

(Mark One)

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


For the fiscal year ended December 31, 1998
[   ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
                        For the transition period from __________  to
________
                        Commission file number 0-25678

                   MUSTANG SOFTWARE, INC.
       (Name of small business issuer in its charter)
California                         77-0204718
(State or other jurisdiction of            (IRS employer identification
number)
incorporation or organization)

6200 Lake Ming Road
Bakersfield, California            93306
(Address of principal executive offices)     (Zip Code)


Issuer's telephone number: (661) 873-2500

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, no par value

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

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

State issuer's revenues for its most recent fiscal year:
2,010,721

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

$14,229,000 based on the average of the bid and asked prices
on March 17, 1999 as reported by The Nasdaq SmallCap Market.

State the number of shares outstanding of each of the
issuer's classes of common equity, as of the latest
practicable date:
4,138,845 at March 17, 1999.

DOCUMENTS INCORPORATED BY REFERENCE:
None

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      This Annual Report on Form 10-KSB contains forward-
looking statements. These statements are subject to certain
risks and uncertainties that could cause actual results to
differ materially from those anticipated in the forward-
looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed
in the Section under Item 1 - Description of Business - Risk
Factors.
      
      Readers should not place undue reliance on forward-
looking statements, which reflect management's view only as
of the date of this Report. The Company undertakes no
obligation to revise publicly these forward-looking
statements to reflect subsequent events or circumstances.
Readers should also carefully review the risk factors
described in other documents the Company files from time to
time with the Securities and Exchange Commission.
      
      Mustang(tm), Internet Message Center(tm),
FileCenter(tm), ListCaster(tm) and QmodemPro(tm) are
trademarks of the Company. "Exchange Server," "Microsoft,"
"Outlook," "Windows," "Windows 95," "Windows 98" and "Windows
NT" are trademarks of Microsoft Corporation.  This Report
also contains trademarks of other companies.
      
<PAGE>3
                           Part I
      
Item 1. Description of Business
      
Company Background
      
      Mustang Software ("Mustang" or the "Company") develops,
markets, services and supports Internet Message Center
("IMC"), an e-mail management software solution that offers
companies and other enterprises the ability to manage their
inbound e-mail and Internet-based inquiries timely and
accurately. IMC competes in the emerging e-mail management
market and has received several prestigious awards as best
product in its class from sources devoted to monitoring the
rapidly growing computer telephony, customer management, e-
mail management and call center markets.
      
      Mustang also develops, markets and supports other
software products that offer businesses the capability to
improve customer service, market products, enhance sales and
increase employee productivity. These products include
ListCaster, a powerful e-mail message server that allows easy
mass e-mailings from maintained lists and enables e-mail
recipients to correspond with each other through the
originating site on the World Wide Web of the Internet called
a "Website"; and FileCenter, a high performance application
that permits operators of Websites known as "webmasters" to
provide their users with an organized, searchable library of
files;. The Company's other product line includes the
QmodemPro line of telecommunications software, a proven

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application for connectivity to and from remote computers and
computer systems.
      
      Mustang began operations in 1986 as a sole
proprietorship, became a general partnership in 1987 and
incorporated in California on December 23, 1988.  Its
executive offices and sales, marketing and administration
facilities are located at 6200 Lake Ming Road, Bakersfield,
California, 93306 and its telephone number is (661) 873-2500.
It completed its initial public offering of Common Stock in
April 1995.  The Company maintains a Website on the Web at
"http://www.mustang.com." Information contained on the
Website is not part of this Report.
      
Risk Factors
      
      The Company may from time to time make written or oral
forward-looking statements. Written forward-looking
statements may appear in documents filed with the Securities
and Exchange Commission, in press releases, and in reports to
shareholders. The Private Securities Reform Act of 1995
contains a safe harbor for forward-looking statements on
which the Company relies in making such disclosures. In
connection with this "safe harbor" the Company is hereby
identifying important factors that could cause actual results
to differ materially from those contained in any forward-
looking statements made by or on behalf of the Company. Any
such statement is qualified by reference to the following
cautionary statements:
      
      Decline in Revenue and Recent Losses; No Assurance of
Profitability. During the years ended December 31, 1996, 1997
and 1998, the Company reported revenue of approximately
$3,810,000, $1,898,000 and $2,011,000, respectively, and
incurred net losses of approximately $3,453,000, $1,341,000
and $1,157,000, respectively. The decline in revenues
directly correlates to the decline in sales of the Company's
legacy products QmodemPro and Wildcat! Bulletin Board System
("BBS") software. These communication products predated the
emergence of the Internet and the Web as a widely accepted
and used communication medium. They became antiquated as a
result of the built-in communication functions of Windows 95,
Windows 98 and Windows NT operating systems, the emergence of
internet service providers ("ISPs"), which provided their own
communications software, and Web browsers, and the use of
commercial Websites instead of BBSs. While the Company was
early to release its QmodemPro telecommunications software
and its Wildcat!5 Net Server (the "WinServer") products for
Windows 95, the products did not achieve the market
acceptance that Mustang had expected and did not stem the
decline in Mustang's revenues. Because of this and its
decision to focus on products that are designed to facilitate
interaction on the Internet, Mustang sold its Wildcat!
WinServer, Wildcat! BBS and Off-Line Xpress BBS mail reader
product lines to Santronics Software, Inc. of Homestead,

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Florida in November 1998. The Company publicly announced its
new product strategy in April 1997 and released the initial
versions of ListCaster, IMC and FileCenter from May 1997
through October 1997. While sales of these products have
increased since their introduction the Company has not
derived sufficient revenues from these products to become
profitable and has continued to incur losses. There can be no
assurance that the Company will be able to profitably market
IMC, any of its other products or any products it may develop
in the future. Until the Company is able to generate
sufficient revenues to offset costs and expenses, of which
there can be no assurance, Mustang will continue to sustain
losses.
      
      Variability of Operating Results; Lengthy Sales Cycle.
Mustang's expense levels are based, in part, on its
expectations as to future revenues and are not expected to
decrease, at least in the short term. Further, Mustang may
from time to time be forced by the competitive environment in
which it competes to make tactical or strategic decisions
that disrupt or reduce anticipated revenues. Moreover, during
1998, which was the first year that the Company achieved
material revenues from IMC and its other Internet-directed
products introduced during 1997, the Company observed a trend
that a disproportionate percentage of the Company's net sales
were generated during the last month of a quarter. As a
result, a shortfall in sales in any quarter as compared to
expectations may not be identifiable until the end of a
quarter. Mustang may not be able to adjust its spending plan
in a timely manner to compensate for any future revenue
shortfall. Any significant shortfall in sales in relation to
the Company's revenue expectations would have a material
adverse impact on the Company's business, results of
operations, financial condition and prospects.
      
      The purchase of the Enterprise Edition of IMC, the
Company's core product, involves a significant commitment of
customers' personnel and other resources. Furthermore, the
cost of the software is typically only a small portion of the
related hardware, development, training and integration costs
associated with implementing a complete e-mail management
solution. For these and other reasons, the sales cycle
associated with the purchase of IMC is typically complex,
lengthy and subject to a number of significant risks. Such
risks include changes in customers' budgetary constraints and
approval at senior levels of customers' organizations, over
which the Company has no control. The Company's sales cycle
can range from four to six months or more and varies
substantially from customer to customer. Because of the
lengthy sales cycle and the dependence of the Company's
quarterly revenues upon a relatively small number of orders
that represent large dollar amounts, the loss or delay of a
single order could have a material adverse effect on the
Company's business, financial condition and results of
operations.

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      Uncertainty of Market for E-mail Management Software
and Dependence upon IMC. Prior to 1998, most of the Company's
revenues were derived from its Wildcat! WinServer and BBS
software. Beginning in the second quarter of 1997 and
continuing throughout the year, Mustang changed its focus and
launched new products designed to facilitate interaction on
the Internet's World Wide Web. Mustang released the Business
Edition of IMC in September 1997 and its core product, the
Enterprise Edition, in February 1998. The future of the
Company is dependent upon the acceptance by the market of IMC
and Mustang's ability to market this e-mail management
solution and related services successfully. IMC accounted for
over 50 percent of the Company's net sales during 1998, but
Mustang has only limited operating history with respect to
this product.  As a result, as well as the recent emergence
of the commercial e-mail management market, the Company has
neither internal nor industry-based historical financial data
for a significant period upon which to project revenues or
base planned operating expenses. Future operating results
will depend on a variety of factors, including Mustang's
ability to maintain or increase market demand for IMC and its
other products and services, usage and acceptance of the
Internet the introduction and acceptance of new, enhanced or
alternative products or services by Mustang or its
competitors. Other factors that could affect its operating
results include Mustang's ability to anticipate and
effectively adapt to a developing market and to rapidly
changing technologies, general economic conditions,
competition by existing and emerging competitors, software
defects and other quality control problems and the mix of
products and services sold.
      
      Undeveloped and Rapidly Changing Markets.  The markets
for Mustang's products and services are at a very early stage
of development, are rapidly changing and are characterized by
an increasing number of market entrants that have introduced
or are developing competing products and services for use on
the Internet and the World Wide Web. As is typical for a new
and rapidly evolving industry, demand for and market
acceptance of recently introduced products and services are
subject to a high level of uncertainty and risk. Acceptance
and usage of the IMC is dependent on continued growth in use
of e-mail as a primary means of communications by businesses
and consumers. Businesses that already have invested
substantial resources in traditional or other methods of
conducting business may be reluctant to adopt new commercial
methodologies or strategies that may limit or compete with
their existing businesses. Individuals with established
patterns of purchasing goods and services may be reluctant to
alter those patterns. Accordingly, it is not assured that
sufficient demand for Mustang's products and services will
develop to sustain Mustang's business.
      
      There can be no assurance that use of e-mail as a

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primary method of communication or commerce over the Internet
will become widespread, that a substantial market for
Mustang's products and services will emerge or that the IMC
will be generally adopted. Mustang's business, financial
condition and results of operations will be materially and
adversely affected if the market fails to develop as expected
or develops more slowly than expected. Similarly, Mustang's
business, financial condition and results of operations will
be materially and adversely affected if the Internet
infrastructure is not adequately expanded or managed, or if
Mustang's products and services do not achieve market
acceptance by a significant number of businesses.
      
      Competition. The market for e-mail message management
products and services is intensely competitive, and Mustang
expects competition to increase significantly. There are no
substantial barriers to entry into Mustang's business, and it
expects established and new entities to enter the market for
e-mail message management products and services in the near
future. It is possible that a single supplier will dominate
one or more market segments including e-mail management,
customer service and call center automation. Furthermore,
since there are many potential entrants to the field, it is
extremely difficult to assess which companies are likely to
offer competitive products and services in the future, and in
some cases it is difficult to discern whether an existing
product or service is competitive with the IMC.
      
      Mustang's principal competitors in the e-mail message
management market include Adante, Aptex Software, Brightware,
eGain, General Interactive, Kana Communications, MessageMedia
and Micro Computer Systems, each of which provides software
solutions for e-mail management. Mustang also competes with
other firms that provide e-mail message management services
on an outsourcing basis. The Company competes with a number
of independent software suppliers who offer Web Server or
telecommunications software as or among their product
line(s). Several of Mustang's current and potential
competitors have greater name recognition, larger installed
customer bases, more diversified lines of products and
services and significantly greater financial, technical,
marketing and other resources than Mustang. Such competitors
may be able to undertake more extensive marketing campaigns,
adopt more aggressive pricing policies and make more
attractive offers to businesses to induce them to use their
products or services.
      
      Limited Intellectual Property and Proprietary Rights.
Mustang relies on a combination of trade secret, copyright
and trademark laws, nondisclosure agreements and other
contractual provisions and technical measures to protect its
proprietary rights. Mustang believes that, due to the rapid
pace of technological innovation for Internet products,
Mustang's ability to establish and maintain a position of
technology leadership in the industry depends more on the

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skills of its development personnel than upon the legal
protections afforded its existing technology. There can be no
assurance that trade secret, copyright and trademark
protections will be adequate to safeguard the proprietary
software underlying Mustang's products and services.
Similarly, there can be no assurance that agreements with
employees, consultants and others who participate in the
development of its software will not be breached, that
Mustang will have adequate remedies for any breach or that
Mustang's trade secrets will not otherwise become known.
Mustang also faces the risk that notwithstanding Mustang's
efforts to protect its intellectual property, competitors
will be able to develop functionally equivalent e-mail
message management technologies without infringing any of
Mustang's intellectual property rights. Despite Mustang's
efforts to protect its proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use
products or technology that Mustang considers proprietary,
and third parties may attempt to develop similar technology
independently. In addition, effective protection of
intellectual property rights may be unavailable or limited in
certain countries. Accordingly, there can be no assurance
that Mustang's means of protecting its proprietary rights
will be adequate or that Mustang's competitors will not
independently develop similar technology.
      
      As the use of the Internet for commercial activity
increases, and the number of products and service providers
that support Internet commerce increases, Mustang believes
that Internet commerce technology providers may become
increasingly subject to infringement claims. There can be no
assurance that infringement claims will not be filed by
plaintiffs in the future. Any such claims, with or without
merit, could be time consuming, result in costly litigation,
disrupt or delay the enhancement or shipment of Mustang's
products and services or require Mustang to enter into
royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms
acceptable or favorable to Mustang, which could have a
material adverse effect on Mustang's business, financial
condition and results of operations. In addition, Mustang may
initiate claims or litigation against third parties for
infringement of Mustang's proprietary rights or to establish
the validity of Mustang's proprietary rights.
      
      Dependence of Key Personnel. The Company is dependent
upon James A. Harrer, its President and Chief Executive
Officer and C. Scott Hunter, its Vice President and Chief
Technical Officer. The loss of either of these executives
could have a material adverse effect on the Company. While
the Company has one-year employment agreements with these
executives, such agreements are terminable by each without
any reason upon four months notice. Moreover, unforeseen
circumstances could cause either of them to no longer render
services to the Company.  Mustang has key-man life insurance

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on the life of Mr. Harrer for $1,000,000. There can be no
assurance that the proceeds from this policy will be
sufficient to compensate the Company in the event of Mr.
Harrer's death, and this policy does not cover the Company in
the event that he becomes disabled or is otherwise unable to
render services to the Company.  Mustang's success of the
Company is also dependent upon its ability to attract and
retain highly qualified personnel.  There can be no assurance
that the Company will be able to recruit and retain such
personnel.
      
      Dependence on Increased Usage; Stability of the
Internet. The demand for products used on the Internet such
as those offered by Mustang will depend in significant part
on continued rapid growth in the number of households and
commercial, educational and government institutions with
access to the Internet, in the level of usage by such
entities. Usage of the Internet as a source for information,
products and services is a relatively recent phenomenon.
Accordingly, it is difficult to predict whether the number of
users drawn to the Internet will continue to increase and
whether any significant market for usage of the Internet for
such purposes will continue to develop and expand. There can
be no assurance that Internet usage patterns will not decline
as the novelty of the medium recedes or that the quality of
products and services offered online will improve
significantly to continue to support user interest. In
addition, it is uncertain whether the cost of Internet access
will decline. Failure of the Internet to stimulate user
interest and be accessible to a broad audience at moderate
costs would jeopardize the markets for Mustang's products and
services.
      
      Issues regarding the stability of the Internet's
infrastructure remain unresolved. The rapid rise in the
number of Internet users and increased transmission of audio,
video, graphical and other multimedia content over the
Internet has placed increasing strains on the Internet's
communications and transmission infrastructures. Continuation
of such trends could lead to significant deterioration in
transmission speeds and reliability of the Internet and could
reduce the usage of the Internet by businesses and
individuals. The Internet continues to experience significant
growth in the number of users and level of use. Without
corresponding increases and improvements in the Internet
infrastructure, there can be no assurance that the Internet
will be able to support the demands placed upon it by such
continued growth. Any failure of the Internet to support such
increasing number of users due to inadequate infrastructure,
or otherwise, would seriously limit the development of the
Internet as a viable source of communication or commerce.
This could materially and adversely affect the acceptance of
Mustang's products and services which would, in turn,
materially and adversely affect Mustang's business, results
of operations, financial condition and prospects.

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      Government Regulation and Legal Uncertainties. Mustang
believes it is not currently subject to direct regulation by
any government agency in the U.S., other than regulations
generally applicable to businesses, and there are currently
few laws or regulations directly applicable to access to, or
commerce on, the Internet. However, there can be no assurance
that federal, state or foreign agencies will not attempt in
the near future to begin to regulate the market for Internet
commerce. More generally, due to the increasing popularity
and use of the Internet, it is possible that a number of laws
and regulations will be adopted with respect to the Internet,
covering issues such as user privacy, pricing, taxation and
characteristics and quality of products and services. For
example, the Telecommunications Reform Act of 1996 may
subject certain Internet content providers to criminal
penalties for the transmission of certain information and
could also result in liability to Internet service providers,
World Wide Web hosting sites and transaction facilitators
such as Mustang. Various foreign jurisdictions have also
moved to regulate access to the Internet and to strictly
control World Wide Web content. Even if Mustang's business is
not directly subject to regulation, the adoption of any such
laws or regulations may inhibit the growth of the Internet,
or the businesses of the users of Mustang's products and
services, which could in turn adversely affect Mustang's
business, financial condition and results of operations.
Moreover, the applicability to the Internet of existing laws
governing issues such as property ownership, libel, taxation
and personal privacy is uncertain. Such uncertainty creates
the risk that such laws could be interpreted in a manner that
could generally inhibit commerce on the Internet and
adversely impact Mustang's business.
      
      Due to the growth of Internet commerce, Congress has
considered regulating providers of services and transactions
in this market, and federal or state authorities could enact
laws, rules or regulations affecting Mustang's business or
operations. Government agencies may promulgate rules and
regulations affecting Mustang's activities or those of the
users of its products and services. Any or all of these
potential actions could result in increased operating costs
for Mustang or for the principal users of its products or
services and could also reduce the convenience and
functionality of Mustang's products or services. This could
result in reduced market acceptance which would have a
material adverse effect on Mustang's business, financial
condition and results of operations.
      
      Year 2000 Compliance. Many currently installed computer
systems and software products are coded to accept only two-
digit entries in date code fields. Beginning in the year
2000, these date code fields will need to accept four-digit
entries to distinguish 21st century dates from 20th century
dates. As a result, in less than a year,  computer systems

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and/or software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements.
Mustang designed IMC and its other products to be Year 2000
compliant and has completed a systematic effort to identify
any Year 2000 compliance problems in the various components
of its products. However, significant uncertainty exists
concerning the potential effects associated with compliance.
Although Mustang believes that Mustang's IMC and other
products are Year 2000 compliant, there can be no assurance
that coding errors or other defects will not be discovered in
the future. Moreover, Year 2000 problems affecting other
hardware or software products which Mustang's customers rely
on or intend to use beyond the end of 1999 could adversely
affect the use or functionality of Mustang's products. Any
Year 2000 compliance problem of Mustang, its service
providers, its customers or the Internet infrastructure could
result in a material adverse effect on the Company's
business, operating results and financial conditions.
      
      Nasdaq Maintenance Requirements; Possible Delisting of
Common Stock from Nasdaq Market.  Mustang currently lists its
common stock on The Nasdaq SmallCap Market. Nasdaq moved the
listing from the Nasdaq National Market to The Nasdaq Small
Cap Market on October 15, 1998 because the Company did not
meet the maintenance requirements for the Nasdaq National
Market. Mustang has to maintain certain minimum requirements
for the continued listing of its common stock on The Nasdaq
SmallCap Market. In this regard, it needs: net tangible
assets of at least $2,000,000, or a market capitalization of
at least $35,000,000, or net income in two of the last three
years of at least $500,000; a public float of at least
500,000 shares with a minimum market value of $1,000,000; a
minimum bid price of at least $1.00 per share; and a minimum
of two active market makers and 300 round lot shareholders.
      
      While Mustang met the requirements for continued
listing at December 31, 1998, it reported only $2,049,653 of
net tangible assets at that date. Accordingly, if the Company
reports losses during the quarter ending March 31, 1999 or
future quarters that causes its net tangible assets to drop
below $2,000,000 and if it is unable or unwilling to raise
needed capital to satisfy the net tangible asset requirement,
it could be delisted from The Nasdaq Stock Market. Similarly,
if Mustang is unable to satisfy Nasdaq's other maintenance
requirements, Nasdaq may delist its common stock from The
Nasdaq Stock Market. If Mustang's stock is delisted from The
Nasdaq Stock Market, public trading, if any, in the common
stock would be limited to the over-the-counter markets in the
so-called "pink sheets" or the NASD's OTC Electronic Bulletin
Board. Consequently, the liquidity of its common stock and
Mustang's ability to raise additional equity capital, if
required, could be impaired.
      
      Penny Stock Regulation. If Nasdaq delisted its common
stock from the Nasdaq Stock Market, Mustang could become

<PAGE>12

subject to Rule 15g-9 under the Securities Exchange Act of
1934. This rule imposes additional sales practice
requirements on broker-dealers who sell so-called "penny"
stocks to persons other than established customers and
"accredited investors." Generally, accredited investors are
individuals with a net worth more than $1,000,000 or annual
incomes exceeding $200,000, or $300,000 together with their
spouses. For transactions covered by this rule, a broker-
dealer must make a special suitability determination for the
purchaser and have received the purchaser's written consent
to the transaction before sale. Consequently, the rule may
adversely affect the ability of broker-dealers to sell our
shares in the secondary market.
      
      Subject to some exceptions, the SEC's regulations
define a "penny stock" to be any non-Nasdaq equity security
that has a market price of less than $5.00 per share. Unless
exempt, the rules require delivery, prior to any transaction
in a penny stock, of a disclosure schedule relating to the
penny stock market and the associated risks. The rules also
require disclosure about commissions payable to both the
broker-dealer and the registered representative and current
quotations for the securities. Finally, the rules require
that broker-dealers send monthly statements disclosing recent
price information for the penny stock held in the account and
information on the limited market in penny stocks.
      
      If Mustang's common stock became subject to the rules
applicable to penny stocks, the market liquidity for the
common stock could be severely adversely affected.
      
Industry Overview
      
      The Internet is a worldwide network of private and
public computer networks that link businesses, universities,
government agencies and other users having different computer
systems and networks, by means of a common telecommunications
standard.  Use of the Internet has grown rapidly since its
commercialization in the early 1990s. International Data
Corporation projects the number of Internet users to increase
28% to 147 million in 1999 and to 320 million by 2002.  This
trend, coupled with the introduction and continued growth of
large commercial online services such as the America Online,
CompuServe Information Service and Microsoft Network, have
fed the growth of the communications software industry and
the online services industry.  As a result, an increasing
number of businesses, educational institutions, government
agencies and individuals are making use of communications
technology to connect to a growing number of hosts, Websites,
online services and the Internet. An industry study published
in July 1998 estimated that the number of Internet hosts
increased from 725,000 in January 1990 to 68 million in
January 1998 and will increase to over 436 million by January
2001. This same study indicated that 120 million people had
access to Internet e-mail in January 1999, of which 102

<PAGE>13

million people were consumer Internet users and 68 million
were core users, i.e., people with computers that could
distribute information via the World Wide Web or FTP (file
transfer protocol). Moreover, an industry source reported
market estimates that, because of the ubiquity of e-mail, a
company that receives 500 e-mail inquiries per day in
November 1998 will receive 2,000 per day within the following
two years.
      
      Converging with the growth of the Internet and the use
of e-mail is the growth of telephone call centers. Over the
past ten years, businesses and other organizations have
increasingly used dedicated centers for processing and
managing high volumes of incoming and outgoing telephone
traffic. Call centers have been used extensively in such
fields as credit card and consumer collections, catalog
sales, telemarketing and customer service. In these call
centers, activities such as placing and receiving telephone
calls are linked to the computer functions of database
management to capture, store and report on relevant customer
information.   According to an estimate of the call center
market published in January 1999, which included applications
for call routing, database integration, Web-based push-to-
talk technology, the call center market was estimated at
$1.84 billion in 1997 and was projected to grow to $8.61
billion in 2004.
      
      Moreover, as organizations are discovering the
competitive necessity of delivering superior service and
support to customers who reside outside of the organization
(i.e., their clients), they are also realizing that the same
level of attention must be paid to the technological and
business needs of their customers inside the organization
(i.e., their employees). The increasing complexity of
client/server computing technology has created a demand for
applications that offer internal support for an organization.
This internal support (often referred to as the "Customer
Service and Support" or CSS) industry continues to develop,
with products for asset and change management along with
integration with popular network and systems management
tools.  Market research published in February 1998 by
Dataquest, a market research unit of Gartner Group, Inc.
reported the customer service and support applications market
is thriving as the worldwide market grew 47 percent in 1997,
with revenue reaching $290 million, up from $197 million in
1996.  Dataquest analysts said the CSS application market
will continue to prosper with revenue forecast to surpass
$1.7 billion by 2002.
      
      With a growing number of users coming online and the
increasing level of security, comfort and convenience
associated with online purchasing, the resulting number of e-
mail inquiries sent to business with a Web presence is
expected to grow exponentially. In December 1998 it was
reported by an industry participant that Jupiter

<PAGE>14

Communications had predicted that by 2002 some 465 million
messages will be generated per day by 116 million online
users, that is up from 175 million messages per day at the
time the report was made.  In fact, a survey conducted by
Jupiter Communications in November 1998 found that 42% of the
125 top-ranked Web sites took longer than five days to reply
to their customer e-mail inquiries, never replied or were not
accessible by e-mail. This suggests that as online customer
service becomes an even more import factor affecting repeat
business for online sellers, e-mail management software will
be even more critical as a competitive advantage. As a
result, a market for e-mail collaboration solutions, i.e., e-
mail management applications that provide both categorizing
and filtering options and collaborative interaction and
database functions between the customer and corporate sales
and support departments, began to emerge in 1997. In a study
dated in January 1998 on the market for e-mail collaboration
solutions, Frost & Sullivan estimated that the U.S. market
for products serving these markets, such as IMC, would grow
from total revenues of $5.4 million in 1997 to $995.6 million
in 2004, a compound annual growth rate of 57.1%.1
      
      As the importance of the call centers, customer service
and support, internal support (help desks), electronic
      commerce and the use of e-mail has increased and as more
functions and capabilities have been combined, markets have
emerged to create and support the systems, software and
services that are designed to make these industries
efficient, effective and well matched to the broader
corporate mission of the enterprise. The Company believes
that IMC fits well within these industries and that Mustang's
history and experience in online communication including e-
mail, has positioned the Company to take advantage of the
growth opportunities predicted for these markets.
      
Current Products
      
Internet Message Center.
      
      Mustang's IMC is an intelligent e-mail routing and
tracking system, which provides a company or other enterprise
with tools to manage inbound Internet e-mail. IMC handles
inbound e-mail much like an automated call distributor
handles voice telephone traffic and helps achieve the same
levels of efficiency and customer service through e-mail that
companies strive for in other aspects of its business. IMC
works with all of the popular e-mail software applications
such as Microsoft Exchange, Microsoft Outlook, Lotus Notes,
cc Mail, Eudora Mail and all other Internet e-mail
applications using the industry-standard Post Office Protocol
version 3 ("POP3") server accounts, including those running
on Windows, Macintosh, OS/2 and Unix.
      
      The benefits of using IMC to manage in-bound e-mail
include:

<PAGE>15

      
      Intelligent Routing. IMC automatically routes incoming
e-mail messages to the enterprise personnel or "agents" that
the company predetermines will be best equipped to respond to
them quickly and efficiently. Standard routing is based on
the address in the message and keywords in the message's
subject line, body, sender's address or header to a specific
message pool where it queued for response by the agents.
      
      Tracking - IMC automatically assigns a tracking number
to each incoming message that is addressed to any of a user's
defined IMC e-mail pools. At the same time, IMC notifies the
customer that his message has been received by sending him an
acknowledgment e-mail that includes the assigned tracking
number. The original message and all replies are tracked so
the company has a complete audit trail for incoming and
outgoing corporate e-mail. This provides management with a
quick and easy way to follow up on any complaints or problems
a customer might report.
      
      Measurement -- Using the detailed reports that IMC
creates, businesses can identify which employees, and
employee groups are handling the inbound e-mail, measure
their average response time and monitor overall system and
employee efficiency and effectiveness. This helps with the
decision of when to expand or eliminate staffing, by allowing
analysis of how much time is actually being spent answering e-
mail and evaluating how effective agents are at responding.
      
      Integration -- IMC's open, switch-inspired architecture
and intelligent routing environment provide both client-side
and server side Application Programming Interfaces (APIs)
enabling enterprises to tightly integrate IMC with existing
third-party or custom developed customer management
technologies including but not limited to, Customer
Management, Help Desk, Sales Force Automation, Computer
Telephony integration, workflow applications and telephone
systems. To facilitate this integration by enterprises with
available call center technologies, Mustang also offers IMC
Architect, a development toolkit that enables developers of
enterprise application software to integrate the IMC agent-
client functionality directly into their applications.
      
      Efficiency - Management no longer needs to waste time
tracking down e-mail problems. If customers complain that
they have not received a timely reply, it only takes a few
moments to find the original message and identify its status
through IMC's reporting and monitoring functions. It is
expected that because they know that their performance is
being monitored, employees will be more motivated to answer e-
mail in a timely manner.
      
      Mustang first released the IMC Business Edition  in
September 1997. It targets the small e-commerce business that
receives 150 messages a day or less handled by less than 10

<PAGE>16

agents and that need simple mail management. The Business
Edition uses Microsoft Access databases and supports up to
five agents and has a suggested retail price of $1,500. The
IMC Enterprise Edition was first released in February 1998
and last upgraded to version 2.3 in December 1998. The IMC
Enterprise Edition supports hundreds of agents, stores its
information in a Microsoft SQL server database and has a
suggested retail price of $10,000, including two agents.
Mustang offers functionality for additional agent licenses at
$250 each, which may be added at or after the time of sale.
      
      To facilitate the integration of IMC by enterprises
with available call center technologies, Mustang introduced
IMC Architect in June 1998. IMC Architect is a development
toolkit that enables developers of enterprise application
software to integrate the IMC agent-client functionality
directly into their applications for seamless e-mail
management functionality with existing customer management
and e-mail client applications. IMC Architect is priced at
$7,500 for an enterprise site license.
      
      In an effort to stimulate awareness and sales of IMC,
as well to generate sales of a separate product that
integrates with Microsoft's Outlook messaging and
collaboration client, Mustang introduced the IMC Agent Add-In
for Microsoft Outlook. Microsoft Outlook 98 is the messaging
and collaboration client that combines leading support for
Internet standards-based messaging systems, including
Microsoft Exchange Server, with integrated calendar, contact,
and task management functionality. With Exchange Server,
Outlook helps users communicate and collaborate with others
through advanced e-mail, comprehensive group scheduling,
public folders, and as a component of customized
collaborative solutions. IMC Agent Add-In for Microsoft
Outlook turns the Outlook messaging and collaboration client
into a powerful call center and help desk tool. It achieves
this by integrating enhanced IMC agent functionality
seamlessly within the Outlook client architecture to manage e-
mail transactions from within their Outlook messaging client.
Mustang's IMC Agent Add-in for Outlook is priced at $7,500
for an enterprise site license.
      
      Other Products
      
      ListCaster. Mustang's ListCaster is a powerful mailing
list server and SMTP/POP3 server for Windows 95, Windows 98
and Windows NT. A mailing list server is a software program
that automates the administration of mailing lists. E-mail
messages are sent to the server which, in turn, sends the
messages to all subscribers of the list. SMTP or Simple Mail
Transfer Protocol is the outgoing mail server, i.e., the
computer contacted to send mail out. POP3 is the incoming
mail server, i.e., the computer to which mail is delivered.
      
      Webmasters using ListCaster can draw customers to their

<PAGE>17

Websites by sending e-mail announcing new Web pages,
products, services or possibilities directly to people whose
names and e-mail addresses have been compiled on a mailing
list. Once the addressee has received the message, e-mail
clients permit the addressee to link automatically to any URL
located in the body of the message. A URL (Uniform Resource
Locator) is a unique identifier for a Web page or other
resource on the Internet that can be embedded into the
message sent by ListCaster. Once the message recipient clicks
on the URL contained in the message, he is immediately taken
to the linked Web page and thereby is available to receive
advertising and promotion of offered products and services.
      
      ListCaster was originally released in May 1997 and
updated by Versions 2.0 and 2.1, which were released in June
and October 1998, respectively. ListCaster 2.1 has a
suggested retail price of $499.
      
      FileCenter. Mustang's FileCenter is a high-performance
software program that automatically manages the process of
submitting, posting, and locating files on Internet and
Intranet sites. FileCenter stores file information, including
file name, description, author, and location, in a Microsoft
Access database for quick searches. Taking full advantage of
Microsoft's Active Server technology, FileCenter indexes all
the words found in the document, enabling users to search for
the files they need by title, author, description, date, even
the number of downloads. FileCenter eliminates the need to
have programmers manage Websites using File Transfer Protocol
("FTP") to download files to a remote computer requesting the
files.
      
      FileCenter enables the creators of files to upload them
to FileCenter's library using a Web browser such as Microsoft
Internet Explorer 3 or 4 or Netscape Navigator 3 or 4 by
simply clicking on an "upload" icon on a Web page. The
system's Wizard prompts the submitter of the file for all
relevant information. FileCenter automatically catalogs the
file and can even optionally scan the file for viruses using
McAfee Virus Scan. FileCenter posts the file, updates the new
submission list, places the file in the proper category and
group, and creates the necessary HTML code to permit viewing
the index with an ordinary browser. System users can then
search on any of FileCenter's database fields including the
name of the person uploading the file and the date of
submission. Because the process is completely automated,
companies can use FileCenter to post files on FTP sites
rather than waste the disk space and bandwidth required to
distribute them as e-mail attachments. By using FileCenter
along with Mustang's ListCaster interested people, such as
those desiring a product upgrade or software patch can be
automatically notified when pertinent files are posted on the
Website. Administrators also have the option of requiring
down-loaders to fill out forms that are automatically e-
mailed to the submitter of the file. This permits authors of

<PAGE>18

financial documents to track their use, and permits shareware
authors to monitor file downloads.
      
      FileCenter was released in October 1997 and upgraded to
the version currently available in February 1998. It has a
suggested retail price of $999.
      
      QmodemPro. The Company's telecommunications line of
products is based on QmodemPro, which includes Windows 95,
Windows 3.1x and DOS versions. QmodemPro for Windows 95 was
the first communications software offered for use with
Windows 95, allowing users to take full advantage of their
modems. The program contains features beyond the Windows 95
and NT4.0 standard terminal program, including a phone book,
a telnet client, programmable toolbar, graphic viewer, OLE
2.0 drag and drop handling, script language, macro keys, host
mode, 35 terminal emulations and 11 file transfer protocols.
The suggested retail prices of the Windows 95/NT4.0 versions
of QmodemPro are $25 with online documentation and $99 with
manual.
      
      QmodemPro for Windows also operates under the Microsoft
Windows 3.1x environment and supports 31 terminal emulations,
ten file transfer protocols, multimedia sound which can be
linked to many program functions and both send and receive
fax capabilities for use with any class 1 or 2 fax modem. The
Company also offers a separate network edition, called
QmodemPro for Windows 3.1x Network 5-Pack, which installs the
sharable system files from the program on a network server
while allowing individual users to have their phone books and
other user-specific files stored on their own workstation.
The suggested retail prices of the Windows 3.1x versions of
QmodemPro are $25 with online documentation and $99 with
manual. The suggested retail price of the QmodemPro for
Windows 3.x Network 5 Pack  version is $399, which includes a
five-user license, five user manuals and one script manual.
      
      QmodemPro for DOS operates under the MS-DOS and
supports 15 terminal emulations, ten file transfer protocols
and send fax capability with any class 1 or 2 fax modem.  The
Company also offers a number of utility and add on products
supporting and adding functionality to QmodemPro. The
suggested retail price of the Dos version of QmodemPro is
$50.
      
BBS/Web Server Software
      
      Furthering its focus on products that are designed to
facilitate interaction on the Internet, Mustang sold its
Wildcat! Interactive Net Server, Wildcat! BBS and Off-Line
Xpress BBS mail reader product lines to Santronics Software,
Inc. of Homestead, Florida in November 1998.
      
Support Services
      

<PAGE>19

      Support services, which include maintenance,
implementation, consulting, installation, training and sales
support, are an important element of Mustang's business. The
Company intends to devote substantial additional resources to
supporting its customers and seeking to provide training to
indirect channels as the Company's e-mail management solution
becomes more widely adopted. There can be no assurance the
Company will be successful in its efforts to provide
sufficient resources to expand its customer support
capabilities or that its services will be widely sought by
customers.
      
Professional Services
      
      Mustang provides consulting and systems integration
services through its Professional Services group. Mustang's
Professional Services team offers a range of services to
assist customers in choosing, deploying and supporting
Mustang's e-mail management solution. These services include
programs: to validate IMC as a correct solution for a
customers business; to review, evaluate and report on
customer installations of IMC; and to provide custom, full
turnkey installations of IMC and on-site training of the
customer's personnel.
      
Technical Support
      
      Mustang provides customer support for all its product
lines. Support options consist of direct real-time technical
product via telephone with its support staff as well as
electronic support available on the Company's Web site, via e-
mail or through user-to-user public discussion forums, which
may or may not involve Mustang's technical personnel. Fee-
based maintenance and support contracts are offered at the
time a product is sold or thereafter and are renewable
periodically. These support agreements are typically priced
at 20 percent of the list price of the related software.
Maintenance and support agreements entitle customers to
software upgrades and fixes, as well as technical support via
the Web, e-mail and telephone on either a toll-free or toll-
call basis.
      
Sales, Marketing and Distribution
      
      . The Company has targeted enterprises with substantial
influx of e-mail as its primary direct customers. It has also
focused particularly on the call center market and to a
lesser extent the help desk market for its IMC, believing
that these markets present practical opportunities for IMC
use and integration with other applications or product suites
of OEMs and VARs.
      
      In 1998, the Company began concentration on building a
direct sales force to sell its IMC directly to businesses. At
December 31, 1998, Mustang's direct sales force consisted of

<PAGE>20

four individuals. This compares to two individuals engaged in
telesales at December 31 1997.
      
      The Company also uses OEM and VAR distribution channels
for IMC and has pursued partnership and integration
opportunities to support the sale and integration of IMC.
The Company views OEM and VAR distribution channels as an
important channel for the continued growth and adoption of
IMC.. These include an OEM arrangement with Siemens Business
Communications, which makes provision for Siemens to
incorporate Mustang's IMC Enterprise Edition into Siemens'
ProCenter MX product line initially in North America, and
later throughout Siemens' worldwide operations and channels.
They also include the recently announced integration of
Mustang's IMC with the TeleCenter System of TCS Management
Group, Inc. ("TCS"), a provider of workforce management
software for call centers. Through this integration,
Mustang's IMC provides e-mail management performance
information to the TCS TeleCenter System, which then analyzes
the data to make staffing and scheduling recommendations.
Customers using the integrated solution are then able to
identify service level adherence, schedule support personnel
and monitor overall service center performance for both e-
mail and voice-based service agents. Management believes that
IMC is presently the only e-mail management platform with
workforce management support and that this integration
permits, for the first time, customer support centers to
forecast e-mail staffing requirements and monitor complete
service level adherence with the same accuracy as they do for
telephone calls.
      
      The Company is implementing it's own certification
program for the IMC for the purpose of enabling third-party
application developers to certify that their products can be
integrated with the IMC platform. Mustang believes the
certification program will add functionality and integration
capabilities to IMC, as well as promote the goal of
establishing the application as the default e-mail response
management platform in the call center, customer management,
help desk and electronic commerce markets.
      
      Mustang markets IMC through media advertising both
independently, in cooperation with Mustang-certified
distributors and VARs, and to OEMs and other companies that
maintain joint market or joint sales agreements with the
Company. The Company uses print media ad campaigns targeted
at industry trade journals designed to invoke direct sales.
The Company also plans to continue to promote IMC at industry
specific trade shows centered around customer management,
call centers, electronic commerce, computer telephony and
other support products and services.
      
      Sales of IMC products and services accounted for 54% of
total revenues during 1998 as compared to 5% of total
revenues in 1997.

<PAGE>21

      
      Mustang distributes its other products domestically
through distributors and resellers, through OEMs who bundle
the Company's products with their own products, and through
direct sales to end users. Direct sales by the Company of
products from these lines are made from the Company's Web
site, by mail order to end users who are solicited through
Web Server notices and mailings to Mustang's installed
customer base, catalogs and media advertising. Sales of
ListCaster and FileCenter software accounted for 4% and 1% ,
respectively, of total revenues during 1998 and 1% and 0%,
respectively, of total revenues during 1997. Sales of
QmodemPro telecommunication software accounted for 5% and 15%
of total revenues during 1998 and 1997, respectively.
      
      International Sales Internationally, the Company sells
directly via in-house telesales operations and through
distributors who purchase, warehouse and sell software. In
1997 and 1998, revenues from international sales (other than
sales of the Wildcat! Line of products, which the Company
discontinued in November 1998) represented approximately 1%
and 9%, respectively, of total revenues.
      
Competition
      
      The market for e-mail message management products and
services is intensely competitive, and Mustang expects
competition to increase significantly. There are no
substantial barriers to entry into Mustang's business, and
its expects established and new entities to enter the market
for e-mail message management products and services in the
near future. It is possible that a single supplier will
dominate one or more market segments. Furthermore, since
there are many potential entrants to the field, it is
extremely difficult to assess which companies are likely to
offer competitive products and services in the future, and in
some cases it is difficult to discern whether an existing
product or service is competitive with the IMC.
      
      Mustang's principal competitors in the e-mail message
management market include Adante, Aptex Software, Brightware,
eGain, General Interactive, Kana Communications, MessageMedia
and Micro Computer Systems, each of which provides software
solutions for e-mail management. Mustang also competes with
other firms that provide e-mail message management services
on an outsourcing basis. The Company competes with a number
of independent software suppliers who offer Web Server or
telecommunications software as or among their product
line(s). Several of Mustang's current and potential
competitors have greater name recognition, larger installed
customer bases, more diversified lines of products and
services and significantly greater financial, technical,
marketing and other resources than Mustang. Such competitors
may be able to undertake more extensive marketing campaigns,
adopt more aggressive pricing policies and make more

<PAGE>22

attractive offers to businesses to induce them to use their
products or services.
      
Product Development
      
      The markets for the Company's products are
characterized by rapidly changing technology and frequent new
product introductions.  Accordingly, the Company believes its
future prospects depend on its ability not only to enhance
and successfully market its existing products, but also to
develop and introduce new products in a timely fashion which
achieve market acceptance.  There can be no assurance that
the Company will be able to identify, design, develop, market
or support such products successfully or that the Company
will be able to respond effectively to technological changes
or product announcements by competitors.  In particular, if
the Company fails to successfully anticipate customer demand
for new products or product enhancements or upgrades or
otherwise makes incorrect product development decisions, the
Company could be adversely affected both by the loss of
anticipated revenue and, possibly, its competitors' increase
in their installed base of customers.  These adverse results
could be particularly significant if the Company were to make
a number of incorrect product development decisions in
succession or within a short period of time.  Mustang has on
a number of occasions experienced delays in the commencement
of commercial shipments of new products and enhancements,
resulting in delay or loss of product revenues.  From time to
time, Mustang and others may announce new products,
capabilities or technologies that have the potential to
replace or shorten the life cycle of Mustang's existing
product offerings.  There can be no assurance that
announcements of currently planned or other new product
offerings will not cause customers to defer purchasing
existing Company products or cause distributors to return
products to Mustang.  In addition, programs as complex as the
software products offered by Mustang may contain undetected
errors or "bugs" when they are first introduced or as new
versions are released.  Delays or difficulties associated
with new product introductions or product enhancements, or
the introduction of unsuccessful products or products
containing undetected "bugs", could have a material adverse
effect on Mustang's business, operating results and financial
condition.
      
      During 1997 and 1998, Mustang spent approximately
$696,000 and $612,000, respectively, for research and
development of new products and enhancements to existing
products.
      
Proprietary Rights
      
      Mustang relies on a combination of trade secret,
copyright and trademark laws, nondisclosure agreements and
other contractual provisions and technical measures to

<PAGE>23

protect its proprietary rights. Mustang believes that, due to
the rapid pace of technological innovation for Internet
products, Mustang's ability to establish and maintain a
position of technology leadership in the industry depends
more on the skills of its development personnel than upon the
legal protections afforded its existing technology. There can
be no assurance that trade secret, copyright and trademark
protections will be adequate to safeguard the proprietary
software underlying Mustang's products and services.
Similarly, there can be no assurance that agreements with
employees, consultants and others who participate in the
development of its software will not be breached, that
Mustang will have adequate remedies for any breach or that
Mustang's trade secrets will not otherwise become known.
Mustang also faces the risk that notwithstanding Mustang's
efforts to protect its intellectual property, competitors
will be able to develop functionally equivalent e-mail
message management technologies without infringing any of
Mustang's intellectual property rights. Despite Mustang's
efforts to protect its proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use
products or technology that Mustang considers proprietary,
and third parties may attempt to develop similar technology
independently. In addition, effective protection of
intellectual property rights may be unavailable or limited in
certain countries. Accordingly, there can be no assurance
that Mustang's means of protecting its proprietary rights
will be adequate or that Mustang's competitors will not
independently develop similar technology.
      
      As the use of the Internet for commercial activity
increases, and the number of products and service providers
that support Internet commerce increases, Mustang believes
that Internet commerce technology providers may become
increasingly subject to infringement claims. There can be no
assurance that infringement claims will not be filed by
plaintiffs in the future. Any such claims, with or without
merit, could be time consuming, result in costly litigation,
disrupt or delay the enhancement or shipment of Mustang's
products and services or require Mustang to enter into
royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms
acceptable or favorable to Mustang, which could have a
material adverse effect on Mustang's business, financial
condition and results of operations. In addition, Mustang may
initiate claims or litigation against third parties for
infringement of Mustang's proprietary rights or to establish
the validity of Mustang's proprietary rights.
      
Employees
      
      On December 31, 1998 the Company employed 25 persons
(24 of which were employed full-time), of which 11 were
involved in engineering and product support, four in order
processing and shipping/receiving, seven in sales and

<PAGE>24

marketing and three in general administration. The Company's
employees are not covered by a collective bargaining
agreement.  The Company considers its relationship with its
employees to be satisfactory.
      
Item 2. Properties
      
      The Company's executive offices and sales, marketing
and production facilities occupy an approximately 12,000
square foot building located in Bakersfield, California.
This building is leased from two of the Company's principal
shareholders, James A. Harrer and Richard J. Heming.  See
Item 12. Certain Relationships and Related Transactions.
      
Item 3. Legal Proceedings
      
Not applicable.
      
Item 4. Submission of Matters to a Vote of Security Holders
      
Not applicable.
      
<PAGE>25
                           Part II
      
Item 5. Market for Common Equity and Related Stockholder
Matters
      
      Shares of the Company's Common Stock have traded on the
over-the-counter market since the Company's initial public
offering on April 5, 1995 and are included in The Nasdaq
Stock Market under the symbol "MSTG." The following table
sets forth for the quarters indicated the high and low last
reported sale prices as reported on the Nasdaq National
Market through October 14, 1998 and the high and low bid
prices as reported on The Nasdaq SmallCap market from October
15, 1998. Quotations since October 15, 1998 reflect inter-
dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
<TABLE>
<CAPTION>
                                   High         Low
1997
<S>                             <C>             <C>
First Quarter                   $      2.50     $       .63
Second Quarter                         1.63             .63
Third Quarter                          2.13             .56
Fourth Quarter                         1.88             .50
1998
First Quarter                   $      4.06     $      1.25
Second Quarter                         3.25            1.25
Third Quarter                          2.28            1.50
Fourth Quarter                         3.00            1.00

</TABLE>
<PAGE>26
      The 4,138,845 shares of Common Stock of the Company
outstanding as of March 17, 1999 were held of by 129
shareholders of record, who, the Company believes, held for
in excess of 400 beneficial holders.
      
      Prior to its initial public offering, the Company had
paid cash dividends on its Common Stock, but has not done so
since then and anticipates that it will not pay cash
dividends in the foreseeable future.
      
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations
      
      Please read the following discussion in conjunction
with the Financial Statements and Notes thereto appearing
elsewhere in this Form 10KSB.
      
General
      
      Mustang develops, markets, services and supports
Internet Message Center ("IMC"), an e-mail management
software solution that offers companies and other enterprises
the ability to manage their inbound e-mail and Internet-based
inquiries timely and accurately. IMC competes in the emerging
e-mail response management market and has received several
prestigious awards as best product in its class from sources
devoted to monitoring the rapidly growing computer telephony,
customer management, e-mail management and call center
markets.
      
      Mustang also develops, markets and supports other
software products that offer businesses the capability to
improve customer service, market products, enhance sales and
increase employee productivity. These products include
ListCaster, a powerful e-mail message server that allows easy
mass e-mailings from maintained lists and enables e-mail
recipients to correspond with each other through the
originating site on the World Wide Web of the Internet called
a "Website"; and FileCenter, a high performance application
that permits operators of Websites known as "webmasters" to
provide their users with an organized, searchable library of
files;. The Company's other product line includes the
QmodemPro line of telecommunications software.
      
      During the years ended December 31, 1996, 1997 and
1998, the Company reported revenue of approximately
$3,810,000, $1,898,000 and $2,011,000, respectively, and
incurred net losses of approximately $3,453,000, $1,341,000
and $1,157,000, respectively. The decline in revenues
directly correlates to the decline in sales of the Company's
legacy products, QmodemPro and Wildcat! Bulletin Board System
("BBS") software. These communication products predated the
emergence of the Internet and the Web as a widely accepted
and used communication medium. They became antiquated as a
result of the built-in communication functions of Windows 95,
Windows 98 and Windows NT operating systems, the emergence of

<PAGE>27

internet service providers ("ISPs"), which provided their own
communications software, and Web browsers, and the use of
commercial Websites instead of BBSs. While the Company was
early to release its QmodemPro telecommunications software
and its Wildcat!5 Net Server (the "WinServer") products for
Windows 95, the products did not achieve the market
acceptance that Mustang had expected and did not stem the
decline in Mustang's revenues. Because of this and its
decision to focus on products that are designed to facilitate
interaction on the Internet, Mustang sold its Wildcat!
WinServer, Wildcat! BBS and Off-Line Xpress BBS mail reader
product lines to Santronics Software, Inc. of Homestead,
Florida in November 1998. The Company publicly announced its
new product strategy in April 1997 and released the initial
versions of ListCaster, IMC and FileCenter from May 1997
through October 1997. While sales of these products have
increased since their introduction, the Company has not
derived sufficient revenues from these products to become
profitable and has continued to incur losses. There can be no
assurance that the Company will be able to profitably market
IMC, any of its other products or any products it may develop
in the future. Until the Company is able to generate
sufficient revenues to offset costs and expenses, of which
there can be no assurance, Mustang will continue to sustain
losses.
      
      Before 1998, most of the Company's revenues were
derived from its Wildcat! WinServer and BBS software.
Beginning in the second quarter of 1997 and continuing
throughout the year, Mustang changed its focus and launched
new products designed to facilitate interaction on the
Internet's World Wide Web. Mustang released the Business
Edition of IMC in September 1997 and its core product, the
Enterprise Edition, in  February 1998. The future of the
Company is dependent upon the acceptance by the market place
of IMC and Mustang's ability to market this e-mail management
solution successfully. IMC accounted for over 50 percent of
the Company's net sales during 1998, but Mustang has only
limited operating limited operating history with respect to
this product.  As a result of this, as well as the recent
emergence of the commercial e-mail management market, the
Company has neither internal nor industry-based historical
financial data for a significant period upon which to project
revenues or base planned operating expenses. Future operating
results will depend on a variety of factors, including
Mustang's ability to maintain or increase market demand for
IMC and its other products and services, usage and acceptance
of the Internet the introduction and acceptance of new,
enhanced or alternative products or services by Mustang or
its competitors. Other factors that could affect its
operating results include Mustang's ability to anticipate and
effectively adapt to a developing market and to rapidly
changing technologies, general economic conditions,
competition by existing and emerging competitors, software
defects and other quality control problems and the mix of

<PAGE>28

products and services sold.
      
      The purchase of the Enterprise Edition of IMC, the
Company's core product, involves a significant commitment of
customers' personnel and other resources. Furthermore, the
cost of the software is typically only a small portion of the
related hardware, development, training and integration costs
associated with implementing a complete e-mail management
solution. For these and other reasons, the sales cycle
associated with the purchase of IMC is typically complex,
lengthy and subject to a number of significant risks. Such
risks include changes in customers' budgetary constraints and
approval at senior levels of customers' organizations, over
which the Company has no control. The Company's sales cycle
can range from four to six months or more and varies
substantially from customer to customer. Because of the
lengthy sales cycle and the dependence of the Company's
quarterly revenues upon a relatively small number of orders
that represent large dollar amounts, the loss or delay of a
single order could have a material adverse effect on the
Company's business, financial condition and results of
operations.
      
      Mustang's expense levels are based, in part, on its
expectations as to future revenues and are not expected to
decrease, at least in the short term. Further, Mustang may
from time to time be forced by the competitive environment in
which it competes to make tactical or strategic decisions
that disrupt or reduce anticipated revenues. Moreover, during
1998, which was the first year that the Company achieved
material revenues from IMC and its other Internet-directed
products introduced during 1997, the Company observed a trend
that a disproportionate percentage of the Company's net sales
were generated during the last month of a quarter. As a
result, a shortfall in sales in any quarter as compared to
expectations may not be identifiable until the end of a
quarter. Mustang may not be able to adjust its spending plan
in a timely manner to compensate for any future revenue
shortfall. Any significant shortfall in sales in relation to
the Company's revenue expectations would have a material
adverse impact on the Company's business, results of
operations, financial condition and prospects.
      
<PAGE>29
      The following table presents unaudited selected
financial data for each of the eight quarters in the period
ended December 31, 1998.

<TABLE>
<CAPTION>

                                    Year ended December 31,
                            1997                               1998
             First    Second    Third    Fourth   First    Second   Third    Fourth
             Quarter  Quarter   Quarter  Quarter  Quarter  Quarter  Quarter  

Quarter
                              (In thousands, except per share data)
Summary of Operations:
<S>          <C>       <C>      <C>      <C>      <C>      <C>      <C>      <C>
Revenue      $  799    $458     $ 331    $  310   $  398   $  404   $  502   $  706
Gross profit    678     366       273       251      332      371      460      669
Operating
expenses        922     740       535      784       782      677      726      831
Loss from
operations     (244)   (374)     (262)    (533)     (450)    (307)    (266)    (162)
Net Loss       (217)   (357)     (249)    (517)     (444)    (303)    (263)    (147)
Net Loss per
common share   (.06)   (.11)     (.07)    (.15)     (.13)    (.09)    (.06)    (.04)

</TABLE>
=======================================================================

Results of Operations:
      
      The following table sets forth, for the years ended December 31,
1996, 1997 and 1998, income statement data of the Company expressed in
dollars and as a percentage of revenues and the percentage increase or
decrease in the dollar amounts of such data in 1997 from 1996 and 1998
from 1997
<PAGE>30

<TABLE>
<CAPTION>
                             Year ended December 31,
	                                                                 		      Percentage
     		                                                            		      Increase
                	                                                 		      (Decrease) in
     		           1996                     1997                      1998            Dollar Amounts
	           Amount        Percent of  Amount       Percent of  Amount      Percent of  1997      1996
        	                 Revenue                  Revenue                 Revenue     from      from
                   	                                                		      1998	1997
<S>                <C>           <C>         <C>          <C>         <C>         <C>         <C>       <C>
Revenue            $ 3,810,240   100.0%      $1,898,402   100.0%      $2,010,721  100.0%      (50.2%)   5.9%
Cost of 
  Revenue              646,199    17.0%         330,828    17.4%         177,928    8.8%      (48.8%) (46.2%)
Gross profit         3,164,041    83.0%       1,567,574    82.6%       1,832,793   91.2%      (50.5%)  16.9%
- -------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
   Research and
   development         980,413    25.7%         696,819    36.7%         611,990   30.4%      (28.9%) (12.2%)
   Selling and
   marketing         3,583,958    94.1%         930,426    49.0%         974,525   48.5%      (74.0%)   4.7%
   General and
   administrative    2,241,695   58.8%        1,353,486    71.3%       1,430,335   71.1%      (39.6%)   5.7%
- -------------------------------------------------------------------------------------------------------------------------------
   Loss from  
  operations        (3,642,025) (95.6%)      (1,413,157)  (74.4%)     (1,184,057) (58.9%)      61.2%     16.2%
Other income, net      190,000    5.0%           73,284     3.9%          28,342    1.4%      (61.4%) (61.3%)
- -------------------------------------------------------------------------------------------------------------------------------
Loss before
provision for
income taxes        (3,452,025) (90.6%)      (1,339,873)  (70.6%)     (1,155,715) (57.5%)      61.2%     13.7%
Benefit (provision)
for income taxes          (800)   0.0%             (800)    0.0%            (800)   0.0%        0.0%      0.0%
- -------------------------------------------------------------------------------------------------------------------------------
Net Loss           $(3,452,825) (90.6%)     $(1,340,673)  (70.6%)     (1,156,515) (57.5%)      61.2%     13.7%
= =============================================================================================================
</TABLE>
<PAGE>31

Comparison of Years Ended December 31, 1998 and 1997
      
      Revenues for the year ended December 31, 1998 were 
$2,010,721, an increase of  $112,319 or  6%  more than
revenues for the year ended December 31, 1997.  As a
percentage of revenues by product category for the year 1998
versus 1997 showed the QmodemPro line at 5% and 15%, the
Wildcat! line at 23 % and 77 %, the Web Essentials line at
68% and 5 %, and other products at 4% and 3%, respectively.
The increase in revenues from the Web Essentials line was
directly related to market acceptance on the IMC Enterprise
Edition, which was released in February 1998.
      
      Gross profit for the year increased from $1,567,574 in
1997 to $1,832,793 in 1998, an increase as a percentage of
revenues from 82.6 % in 1997 to 91.2 % in 1998.
      
      Research and development expenses decreased $84,829 in
1998 from 1997 and also decreased as a percentage of revenues
from 36.7% in 1997 to 30.4% in 1998. The decrease in actual
dollars spent is attributable to the headcount reduction in
this department from 12 in 1997 to 11 in 1998. The decline in
revenues accounted for the increase as a percentage of
revenues.  In an effort to improve its competitive position,

<PAGE>32

the Company expects to invest a significant amount of its
resources for the development of new products and product
enhancements.
      
      Selling and marketing expenses for 1998 were  $974,525,
an increase of $44,099  over 1997, and decreased as a
percentage of revenues from 49.0%  in 1997 to 48.5%  in 1998.
The items primarily accounting for the increase in dollars
were promotional costs and selling expenses.  The increase in
promotional costs was mainly due to the increase in trade
shows attended in 1998 compared to 1997 and the selling
expenses were larger because the IMC products typical
customer and sales amounts warrants more face to face
meetings to complete a sale.
      
      General and administrative expenses increased for 1998
over the previous year, from $1,353,486 in 1997 to $1,430,335
in 1998, but decreased as a percentage of revenue from 71.3%
in 1997 to 71.1% in 1998. The items primarily accounting for
the increase in dollars were insurance, legal expenses and
travel.  The minimal decrease as a percentage of revenues is
attributable to the increase in revenues.
      
      Other income decreased $44,942 from $73,284 in 1997 to
$28,342 in 1998 due to lower cash balances therefore less
interest income.
      
Comparison of Years Ended December 31, 1997 and 1996
      
      Revenues for the year ended December 31, 1997 were
$1,898,402 a decrease of $1,911,838 or 50.2% less than
revenues for the year ended December 31, 1996.  As a
percentage of revenues by product category for the year 1997
vs. 1996 showed the QmodemPro line at 15% and 3%, the
Wildcat! line at 77% and 95%, Web Essentials at 5% and 0%,
and other products at 3% and 2%, respectively.  The increase
in Web Essentials revenues was directly related to the launch
of Web Essentials product line in the second quarter of 1997.
      
      Gross profit for the year decreased from $3,164,041 in
1996 to $1,567,574 in 1997, a decrease as a percentage of
revenues from 83.0% in 1996 to 82.6% in 1997.
      
      Research and development expenses decreased $283,594 in
1997 from 1996, but increased as a percentage of revenues
from 25.7% in 1996 to 36.7% in 1997.  The decrease in actual
dollars spent is attributable to the headcount reduction in
this department. The decline in revenues accounted for the
increase as a percentage of revenues.  In an effort to
improve its competitive position, the Company expects to
invest a significant amount of its resources for the
development of new products and product enhancements.
      
      Selling and marketing expenses for 1997 were $930,426,
a decrease of $2,653,532 over 1996, and they decreased as a

<PAGE>33

percentage of revenues from 94.1% in 1996 to 49.0% in 1997.
The items primarily accounting for the decrease were
advertising and promotional costs for existing products and
the launch of Wildcat! v.5 for Windows 95/NT in March 1996
were not incurred in 1997, a reduction in trade shows and the
costs associated with them and the decrease in headcount from
an average of 12 in 1996 to 7 in 1997.
      
      General and administrative expenses decreased for 1997
over the previous year, from $2,241,695 in 1996 to $1,353,486
in 1997, and increased as a percentage of revenue from 58.8%
in 1996 to 71.3% in 1997. The items primarily accounting for
the decrease in absolute dollar were salaries and costs
associated with employee benefits eliminated with the
decrease in headcount.  The general and administrative
headcount decreased 58% from the prior year.  The decline in
revenues during the year accounted for the increase in
general and administrative expenses as a percentage of
revenues.
      
      Other income decreased  $116,716 from $190,000 in 1996
to $73,284 in 1997 due to less interest income from cash
accounts.
      
Liquidity and Capital Resources
      
      The Company has financed its operations from the
proceeds from the sale of its equity securities and cash
flows from operations. Cash and short-term investment
balances at December 31, 1998 were approximately $1,850,000,
an increase of approximately $446,000 from December 31, 1997.
The principal reasons for the increase in cash was the
receipt of net proceeds aggregating approximately $1,700,000
from the sale of the Company's equity securities in a
September 1998 private placement and a December 1998 offering
under Regulation S of the Securities Act of 1933 offset by
cash used in operating activities for 1998 of approximately
$1,162,000.
      
      In the September 1998 private placement, the Company
sold for gross proceeds of $1,500,000 an aggregate of 612,000
shares of its common stock, 5,246 shares of its Series A
Convertible Preferred Stock (the "Series A Preferred Stock")
and Warrants to purchase an aggregate of 180,000 shares of
its common stock (the "Warrants"). In the December 1998
Regulation S transaction, the Company sold for gross proceeds
of $250,000 an aggregate of 2,500 shares of its Series A
Preferred Stock and Warrants to purchase 75,000 shares of
its Common Stock.
      
      Subject to certain conditions and limitations, each
share of Series A Preferred Stock is convertible into that
number of shares of the Company's Common Stock which is
determined by dividing $100 plus 5% per annum thereon from
September 17, 1998 to the date of conversion, by the lower of

<PAGE>34

$1.75 per share or the "market price" per share at the time
of conversion. The "market price" for purposes of conversion
is 90% of the average of the four lowest closing bid prices
of the Common Stock during the 10 day trading period
immediately preceding the conversion date (the "Lookback
Period"). The Lookback Period is increased by two trading
days every month commencing on January 17, 1999 and continue
to increase by two trading days every month thereafter that
the Preferred Stock is outstanding until the Lookback Period
equals a maximum of thirty trading days. If not earlier
converted, the Preferred Stock will automatically convert
into Common Stock on September 17, 2000. Subject to certain
conditions and limitations, the Company has the right to
force conversion by the holders of the Preferred Stock in the
event the closing bid price of the Common Stock is equal to
or greater than $2.8125, $3.28125 or $3.75. In such event,
the Company may force conversion by the holder of up to 15%
of the total number of shares of Series A Preferred Stock, up
to a cumulative aggregate of 75% of the total number of
shares of Series A Preferred Stock issued to the holders.
      
      For its services in the two transactions, the Company
paid to the placement agent fees consisting of $65,000 cash,
29,480 shares of its common stock, 335 shares of its Series A
Preferred Stock and Warrants to purchase an aggregate of
135,000 shares of common stock.
      
      The Company provided approximately $1,641,000 in
financing activities in 1998 and used $50,500 in 1997. The
primary financing activity in 1997 were payments on the
Company's capital lease obligation, while in 1998 the primary
financing activity consisted of the proceeds of the Company's
Private Placement transactions.
      
      Mustang's distributors and direct purchasers are
generally permitted a 30-day right to return to Mustang the
software purchased by them. Although such returns are
generally exchanged for other products or credited against
future orders, Mustang may be required to accept major
product returns for cash or a credit against accounts
receivable. Moreover, the Company may on occasion grant
more liberal rights of return to its distributors,
particularly where new products or major upgrades are
introduced and sales do not meet expectations. Product
returns decreased from approximately $606,000 in 1997 to
approximately $100,000 in 1998. The Company has reserved
approximately $168,000 at December 31, 1998 for future
returns and other collection issues, up from $160,000 so
reserved at December 31, 1997. Although management believes
that Mustang has provided adequate allowances for exchanges
and returns, there can be no assurance that actual returns or
exchanges will not exceed Mustang's allowances, particularly
in connection with the introduction of new products or
enhancements.  Mustang intends to introduce new or enhanced
products in the future. Such future product introductions may

<PAGE>35

result in higher product returns and exchanges due to the
risks inherent in the introduction of such products. Any
product returns or exchanges in excess of recorded allowances
could have a material adverse effect on Mustang's business,
operating results and financial condition.
      
      Longer term cash requirements, other than normal
operating expenses, are anticipated for development of new
software products and enhancements of existing products,
launching new products and enhancements, financing
anticipated growth and the possible acquisition of
businesses, software products or technologies complementary
to the Company's business.
      
      The net proceeds remaining from the Company's September
and December 1998 equity financings, current cash balances
and cash flow from operations, are expected to be sufficient
to meet the Company's working capital and capital expenditure
requirements for at least the next 12 months.
      
Year 2000 Issue.
      
      Many currently installed computer systems and software
products are coded to accept only two-digit entries in date
code fields. Beginning in the year 2000, these date code
fields will need to accept four-digit entries to distinguish
21st century dates from 20th century dates. As a result, in
less than a year, computer systems and/or software used by
many companies may need to be upgraded to comply with such
"Year 2000" requirements. Mustang designed IMC and its other
products to be Year 2000 compliant and has completed a
systematic effort to identify any Year 2000 compliance
problems in the various components of its products. However,
management also believes that it is not possible to determine
with complete certainty that all Year 2000 problems affecting
the Company's software products have been identified or
corrected due to the complexity of these products and the
fact that these products interact with other third party
vendor products and operate on computer systems which are not
under the Company's control.
      
      In addition to computers and related systems, the
operation of office and facilities equipment, such as fax
machines, photocopiers, telephone switches, security systems,
elevators, and other common devices may be affected by the
Year 2000 problem. The Company presently believes that its
computers, office and facilities equipment are Year 2000
compliant, except for its telephone system. The Company has
budgeted approximately $50,000 to upgrade its telephone
system for Year 2000 compliance.
      
      The Company has limited or no control over the actions
of third party suppliers. Thus, while the Company expects
that it will be able to resolve any significant Year 2000
problems with these systems, there can be no assurance that

<PAGE>36

these suppliers will resolve any or all Year 2000 problems
with these systems before the occurrence of a material
disruption to the business of the Company or any of its
customers. Any failure of these third parties to resolve Year
2000 problems with these systems in a timely manner could
have a material adverse effect on the Company's business,
financial condition and results of operation.
      
      The Company expects to identify and resolve all Year
2000 problems that would materially adversely affect its
business operations. However, management believes that it is
not possible to determine with complete certainty that all
Year 2000 problems affecting the Company have been identified
or corrected. The number of devices that could be affected
and the interactions among these devices are simply too
numerous. In addition, one cannot accurately predict how many
Year 2000 problem-related failures will occur or the
severity, duration, or financial consequences of these
perhaps inevitable failures. As a result, management expects
that the Company could likely suffer a significant number of
operational inconveniences and inefficiencies for the Company
and its clients that may divert management's time and
attention and financial and human resources from its ordinary
business activities; and a lesser number of serious system
failures that may require significant efforts by the Company
or its clients to prevent or alleviate material business
disruptions.
      
      The Company has not developed contingency plans. The
Company does not believe that the Year 2000 problem will have
a material adverse effect on the Company's business or
results of operations.
      
<PAGE>37
Item 7. Financial Statements
      
The following financial statements are filed as part of this Report:
                                                         Page
Report of Independent Public Accountants                       39
Balance Sheets as of December 31, 1997 and 1998                40
Statements of Operations for the Years Ended
  December 31, 1996, 1997 and 1998                             41
Statements of Shareholders' Equity for the
  Years Ended December 31, 1996,  1997 and 1998                42
Statements of Cash Flows for the Years Ended
  December 31, 1996,  1997 and 1998                            43
Notes to Financial Statements                                  44
<PAGE>38
Item 8. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure

Not applicable.

<PAGE>39
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of Mustang Software, Inc.:



      We have audited the accompanying balance sheets of
Mustang Software, Inc. (a California corporation) as of
December 31, 1997 and 1998, and the related statements of
operations, shareholders' equity and cash flows for the three
years in the period ended December 31, 1998.  These financial
statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on
these 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 financial statements referred to
above present fairly, in all material respects, the financial
position of Mustang Software, Inc. as of December 31, 1997
and 1998, and the results of its operations and its cash
flows for the three years in the period ended December 31,
1998 in conformity with generally accepted accounting
principles.

ARTHUR ANDERSEN LLP
Los Angeles, California

January 29, 1999
<PAGE>40
<TABLE>
<CAPTION>
      
                   MUSTANG SOFTWARE, INC.
                       BALANCE SHEETS
                           ASSETS
                                                    December 31,
                                              1997           1998
<S>                                           <C>            <C>   
CURRENT ASSETS:
  Cash and cash equivalents                   $  1,403,776   $  1,849,700
  Accounts receivable, 
    net of allowance for
    doubtful accounts of $160,000 and
    $168,200 at December 31, 1997  
    and 1998, respectively                           6,378        409,077
  Income taxes receivable                           97,004             --
  Inventories                                       99,915          9,196
  Prepaid expenses                                  28,215         19,660
- -----------------------------------------------------------------------
     Total current assets                        1,635,288      2,287,633
- ----------------------------------------------------------------------- 
PROPERTY AND EQUIPMENT:
  Property and equipment                         1,238,713      1,239,882
  Accumulated depreciation                        (527,279)      (647,027)
- ----------------------------------------------------------------------- 
     Net property and equipment                    711,434        592,855
- ----------------------------------------------------------------------- 
OTHER ASSETS:
  Capitalized software development
costs, net                                            4,083            --
Other                                                    --        11,183
- ----------------------------------------------------------------------- 
     Total other assets                               4,083        11,183
- ----------------------------------------------------------------------- 
                                               $  2,350,805   $ 2,891,671
= =======================================================================

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                             $    242,451   $   233,854
  Current portion of capital lease                   68,216         8,259
  Accrued payroll                                    55,000        62,000
  Accrued liabilities                                94,102        52,381
  Income taxes payable                                   --        99,776
  Accrued warranty and support                       45,000            --
  Deferred revenue                                   80,000       125,000
- ----------------------------------------------------------------------- 
     Total current liabilities                      584,769       581,270
- ----------------------------------------------------------------------- 
CAPITAL LEASE OBLIGATION, net of current portion    269,005       260,747
- ----------------------------------------------------------------------- 
COMMITMENTS AND CONTINGENCIES (Note 7)                                
SHAREHOLDERS' EQUITY:                                                 
  Preferred stock, no par value:                                       
    Authorized--10,000,000 shares                                      
       7,956 issued and outstanding                                    
       as of December 31, 1998                           --       730,229
  Common stock, no par value:                                         
    Authorized--30,000,000 shares                                     
        Issued and outstanding--
        3,392,728 and 4,098,845 shares       
        at December 31,                                              
        1997 and 1998, respectively               6,640,045     7,618,954
    Accumulated  deficit                         (5,143,014)   (6,299,529)
- ----------------------------------------------------------------------- 
     Total shareholders' equity                   1,497,031     2,049,654
- ----------------------------------------------------------------------- 
                                               $  2,350,805   $ 2,891,671
= =======================================================================     
The  accompanying notes are an integral  part  of  these balance sheets.
</TABLE>
<PAGE>41
                   MUSTANG SOFTWARE, INC.
                  STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>   
                                                    Year Ended December 31,
                                             1996             1997              1998
<S>                                          <C>              <C>               <C>
REVENUE                                      $  3,810,240     $   1,898,402     $  2,010,721
COSTS OF REVENUE                                  646,199           330,828          177,928
- ------------------------------------------------------------------------------------------
     Gross profit                               3,164,041         1,567,574        1,832,793
- ------------------------------------------------------------------------------------------
OPERATING EXPENSES:
  Research and development                        980,413           696,819          611,990
  Selling and marketing                         3,583,958           930,426          974,525
  General and administrative                    2,241,695         1,353,486        1,430,335
- ------------------------------------------------------------------------------------------
     Total operating expenses                   6,806,066         2,980,731        3,016,850
- ------------------------------------------------------------------------------------------
  Loss from operations                        (3,642,025)        (1,413,157)      (1,184,057)
- ------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
  Interest expense                                (42,663)          (36,585)         (30,294)
  Interest income                                 252,620           104,235           61,048
  Other                                           (19,957)            5,634           (2,412)
- -------------------------------------------------------------------------------------------
     Total other income (expense)                 190,000            73,284           28,342
- -------------------------------------------------------------------------------------------
  Loss before provision for income taxes       (3,452,025)       (1,339,873)      (1,155,715)
PROVISION FOR INCOME TAXES                            800               800              800
- -------------------------------------------------------------------------------------------
NET LOSS                                     $ (3,452,825)    $  (1,340,673)    $  (1,156,515)
= ==============================================================================================
NET LOSS PER COMMON SHARE-BASIC AND DILUTED  $         (1.03) $           (.40) $           (.31)
= ==============================================================================================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
  -  BASIC  AND DILUTED                          3,360,245        3,383,771         3,707,334
= ==============================================================================================

The accompanying  notes  are  an  integral  part  of  these financial statements
</TABLE>

<PAGE>42
                   MUSTANG SOFTWARE, INC.
             STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                 Preferred Stock            Common Stock          Accumulated
                                 Shares    Amount         Shares     Amount        Deficit        Total<S>

<S>                              <C>       <C>           <C>        <C>           <C>             <C>  
BALANCE, December 31, 1995          --              --   3,356,300  $ 6,598,632   $    (349,516)  $ 6,249,116
  Exercise of stock options         --              --       2,300        5,750              --         5,750
  Issuance of stock, ESPP           --              --      16,367       24,340              --        24,340
  Net loss                          --              --          --           --      (3,452,825)   (3,452,825)
- -----------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1996          --              --   3,374,967    6,628,722      (3,802,341)    2,826,381
  Exercise of stock options         --              --          --           --              --            --
  Issuance of stock, ESPP           --              --      17,761       11,323              --        11,323
  Net loss                          --              --         --            --      (1,340,673)   (1,340,673)
- -----------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1997          --              --   3,392,728    6,640,045      (5,143,014)    1,497,031
  Exercise of stock options         --              --      57,716       69,424              --        69,424
  Issuance of stock, ESPP           --              --       6,921        7,354              --         7,354
  Issuance of stock,
    net of offering cost
     of approximately $73,000       --              --     641,480      902,131              --       902,131
  Issuance of stock,
    net of offering cost
     of approximately $44,000    7,956         730,229          --           --              --       730,229
  Net loss                          --              --          --           --      (1,156,515)   (1,156,515)
- -----------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1998       7,956     $   730,229    4,098,845  $7,618,954    $ (6,299,529)  $ 2,049,654
= ===========================================================================================================

The   accompanying  notes  are  an  integral  part  of  these
financial statements.
</TABLE>

     
<PAGE>43
                   MUSTANG SOFTWARE, INC.
                  STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                               Year Ended December 31,
                                         1996             1997            1998

<S>                                      <C>              <C>             <C>   
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                               $  (3,452,825)  $  (1,340,673)   $ (1,156,515)
  Adjustments to reconcile net
    loss to net cash provided (used) by
    operating activities:
    Depreciation and amortization              196,176         150,485         141,732
    Loss (gain)0 on sale of property 
     and equipment                              19,958          (5,635)          2,412
    Provision for losses on accounts 
     receivable                                (25,000)             --           8,200
    Changes in assets and liabilities:
     Accounts receivable                       313,645          57,152        (410,899)
     Inventories                                 2,350         128,220          90,719
     Prepaid expenses                          (26,555)         27,285           8,555
     Other assets                               19,182           1,300            (100)
     Accounts payable                          115,667        (554,600)         (8,597)
     Accrued payroll                            (3,929)        (40,000)          7,000
     Accrued liabilities                         9,390         (35,717)        (41,721)
     Income taxes receivable/payable           230,800         138,136         196,780
     Accrued warranty and support                   --              --         (45,000)
     Deferred revenue                           (8,500)             --          45,000
- ------------------------------------------------------------------------------------
     Net cash used by operating activities  (2,609,641)      (1,474,047)    (1,162,434)
- ------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Proceeds from sale of property
     and equipment                               9,400            8,107             --
    Purchases of property and
     equipment                                 (68,965)             --         (32,565)
    Net change in investments                1,000,000              --              --
- ------------------------------------------------------------------------------------
    Net cash provided (used)
      by investing activities                  940,435            8,107        (32,565)
- ------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Net proceeds from issuance of stock         30,090           11,323      1,709,138
      Payments on capital lease obligation     (56,057)         (61,838)       (68,215)
- ------------------------------------------------------------------------------------
     Net cash provided (used)
     by financing activities                   (25,967)         (50,515)     1,640,923
- ------------------------------------------------------------------------------------

NET INCREASE (DECREASE) IN
   CASH AND CASH EQUIVALENTS                (1,695,173)      (1,516,455)       445,924
CASH AND CASH EQUIVALENTS,
   beginning of year                         4,615,404        2,920,231      1,403,776
- ------------------------------------------------------------------------------------

CASH AND CASH EQUIVALENTS,
   end of year                           $   2,920,231   $    1,403,776   $  1,849,700
= ====================================================================================

SUPPLEMENTAL DISCLOSURES:
  Interest paid                          $      42,663   $       36,585   $     30,294
  Taxes paid                             $         800   $          800   $        800

The   accompanying  notes  are  an  integral  part  of  these
financial statements.
</TABLE>    
<PAGE>44
                   MUSTANG SOFTWARE, INC.
                NOTES TO FINANCIAL STATEMENTS

1.  Line of Business

      Mustang Software, Inc. ("MSI" or the "Company") is an
internet software company that designs, develops, markets and
supports software for the personal computer.  Similar to most
companies in this line of business, the Company's products
are subject to rapid technological change.  Because of
technological changes, the Company continuously needs to
expend resources to develop new software.  In September and
December 1998, the Company completed a private placement
resulting in net proceeds of approximately $1,600,000.  The
Company has incurred loss from operations and, for the last 4
years, operations have not generated cash.  The Company has
taken measures to reduce costs and believe its newer products
will increase revenue.  There is no assurance that these
efforts will produce results to provide the Company with
needed liquidity.

2.  Summary of Significant Accounting Policies

a.  Revenue Recognition

      In October 1997, the American Institute of Certified
Public Accountants issued Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2"),which supersedes
Statement of Position 91-1, "Software Revenue Recognition.
"SOP 97-2, and amendments thereto, provides guidance on
applying generally accepted accounting principles in
recognizing revenue on software transactions and is effective

<PAGE>45

for transactions entered into in years beginning after
December15, 1997. The Company adopted SOP 97-2 for all
transactions on or after January 1, 1998.
      
      In accordance with SOP 97-2, the Company recognizes
development license revenue from the licensing of source code
for the Company's standard products upon shipment and
customer acceptance of the source code if no significant
modification or customization of the software is required and
collection of the resulting receivable is probable. If
modification or customization is essential to the
functionality of the software, revenue is recognized over the
course of the modification work or deferred until the
modification is complete. Recurring licensing revenues are
recognized when due from the Company's OEM customers based on
the number of products shipped incorporating the Company's
technology.  In certain cases, the fixed or determinable
portion of the recurring licensing fee is recognized as
revenue upon delivery and customer acceptance of the
underlying technology.
      
      The Company also enters into engineering services
contracts with OEMs to adapt the Company's software and
supporting electronics to specific OEM requirements. Revenue
on such contracts is recognized over the course of the
development work on a percentage-of-completion basis. The
Company provides for any anticipated losses on such contracts
in the period in which such losses are first determinable.
Maintenance revenues are recognized ratably over the term of
the maintenance contract.
      
b. Cash and cash equivalents
      
      Cash consists of demand deposits with financial
institutions. The Company considers all highly liquid short-
term investments with original maturities of three months or
less to be cash equivalents for the purposes of the balance
sheet and statement of cash flows.
      
c.  Inventories
      
      Inventories are stated at the lower of cost (first-in,
first-out) or market and consist primarily of manuals,
computer disks, and shipping containers.
      
d.  Software Development Costs
      
      Under the provisions of Statement of Financial
Accounting Standards No.  86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed,"
the Company is required to capitalize software development
costs when "technological feasibility" of the product has
been established and anticipated future revenues assure
recovery of the capitalized amounts.  Because of the
relatively short time period between "technological

<PAGE>46

feasibility" and product release, relatively small amounts of
software development costs have been capitalized.
      
      The ongoing assessment of recoverability of capitalized
software development costs requires considerable judgment by
management with respect to certain external factors,
including, but not limited to, technological obsolescence,
anticipated future revenues, estimated economic life, changes
in software and hardware technology, and patent and trademark
law and litigation.
      
      Amortization of capitalized software development costs
is provided over an economic life of 36-60 months.
Amortization expense was $17,000, $1,400 and $1,300 for the
years ended December 31, 1996, 1997 and 1998, respectively.
      
e.  Warranties
      
      The Company provides a warranty of 30 days.  A
provision for warranty expense is recorded at the time of
shipment.  To date, the Company has not experienced any
significant warranty claims.
      
f.  Property and Equipment

<TABLE>
<CAPTION>

      Property and equipment consists of the following:
                                             December 31,
                                          1997        1998
<S>                                   <C>          <C>
Building                              $ 552,000    $552,000
Vehicles                                 11,149      11,149
Office Equipment                        118,191     121,174
Show Displays                            99,585      99,585
Leasehold Improvements                   18,945      18,945
Computer Equipment                      438,843     437,029
- - -------------------------------------------------------
                                      1,238,713   1,239,882

Less--Accumulated depreciation         (527,279)   (647,027)
- - -------------------------------------------------------
Net Property and Equipment           $  711,434  $  592,855
= = =======================================================

</TABLE>


<PAGE>47

      Depreciation of property and equipment is computed
using the straight-line method over the following estimated
useful lives:
      
Building                                20 years
Vehicles                                5 years
Office Equipment                        5 to 7 years
Show Displays                           5 to 7 years
Leasehold Improvements                  7 years
Computer Equipment                      3 to 5 years

g.  Statement of Cash Flows
      
      The Company prepares its statement of cash flows using
the indirect method as defined under Statement of Financial
Accounting Standards (SFAS) No.  95, "Statement of Cash
Flows."
      
h.  Net Loss Per Common Share
      
      For all periods presented per share information was
computed pursuant to the provisions of SFAS No. 128.  Net
loss per common share - basic for the years ended
December 31, 1996, 1997 and 1998 is based on the weighted
average number of common shares outstanding.    Net loss per
common shares - dilutive also include the effect of common
shares contingently issueable from options and warrants (in
periods which they have a dilutive effect) using the Treasury
Stock method.  Stock options are common stock equivalents,
but they are excluded in the computation of loss per share -
dilutive in fiscal year 1996, 1997 and 1998 because they are
anti-dilutive.
      
i.  Income Taxes
      
      The Company accounts for income taxes in accordance
with Statement of Financial Accounting Standards No.  109,
"Accounting for Income Taxes" (SFAS 109), under which
deferred assets and liabilities are provided on differences
between financial reporting and taxable income using enacted
tax rates.
      
j. Reclassifications
      
      Certain reclassifications have been made to prior
year's amounts to conform to the current year's presentation.
      
k. Use of Estimates in the Preparation of Financial
Statements
      
      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, liabilities and disclosure of
contingencies at the date of the financial statements as well
as the reported amounts of revenues and expenses during the
reporting period.  Actual results could differ from those
estimates.
      
3.  Related Party Transactions
      
      In December 1993, the Company entered into a five-year

<PAGE>48

lease agreement with its two principal shareholders for its
facility, currently requiring monthly rental payments of
$13,458.
      
      The shareholders incurred debt of approximately
$822,000 to purchase the facility.  The Company has
guaranteed all of this debt.  In the event of default by the
shareholders under the loan agreement covering $372,000 of
this debt, the lender thereunder may exercise an assignment
of the shareholders' interest as landlord in a contingent
20-year lease previously signed by the Company as tenant for
the facility.  This contingent lease provides for a monthly
rent of $6,200 and supersedes the current lease in the event
of any such assignment.  The lease has been accounted for as
a capital lease (see Note 8).
      
4.  Income Taxes
      
      Under SFAS 109, deferred tax assets or liabilities are
computed based on the temporary differences between financial
statement and income tax bases of assets and liabilities
using the enacted marginal income tax rate in effect for the
year in which the differences are expected to reverse.
Deferred income tax expenses or credits are based on the
changes in the deferred income tax assets or liabilities from
period to period.  The income tax expense for 1996, 1997 and
1998, is limited to minimum tax amounts due for each year due
to the Company's operating losses.  At December 31, 1998, the
Company has net operating loss carryforwards available of
approximately $5,000,000 and $3,000,000 of Federal and State,
respectively, which will expire through the fiscal year 2013.
The use of net operating loss carryforward would be
restricted if Company has significant change in ownership as
defined by the Internal Revenue Code.
      
      The provision  for income taxes is comprised of the
following components:

<TABLE>
<CAPTION>
                                       Year Ended December 31,
                                        1996       1997     1998
<S>                                     <C>        <C>      <C> 
Current:
  Federal                               $  --      $  --    $  --
  State                                   800        800      800
Deferred:
  Federal                                  --         --       --
  State                                    --         --       --
- ----------------------------------------------------------------
Provision  for income taxes             $ 800      $ 800    $ 800
= ================================================================
</TABLE>

The  approximate  tax effect of temporary  differences  which
gave  rise to significant deferred tax liabilities and assets
are as follows:

<PAGE>49


<TABLE>
<CAPTION>
                                      Year Ended December 31,
                                1996           1997           1998
<S>                             <C>            <C>            <C>  
Depreciation and amortization   $    (63,500)  $    (21,500)  $  (42,700)
Research and development credits     305,000        351,000      351,000
Reserves                             271,000        113,500       71,500
Accrued liabilities                   73,000         61,200       62,600
NOL carryforward                   1,122,000      1,350,000    1,900,000
Other                                116,500         (6,200)       2,600
- ----------------------------------------------------------------------
Deferred tax asset                 1,824,000      1,848,000    2,345,000
Valuation allowance               (1,824,000)    (1,848,000)  (2,345,000)
- ----------------------------------------------------------------------
Net deferred tax asset          $        --    $         -- $         --
= ======================================================================

Due to a limited history of earnings, a valuation reserve was
recorded in 1996, 1997 and 1998.

</TABLE>

5.Common and Preferred Stock Private Placements
      
         During 1997, the FASB issued SFAS No. 129,
"Disclosures of Information about Capital Structure," which
requires the Company to disclose the pertinent rights and
privileges of its securities outstanding.  The following is
disclosed pursuant to the requirements of SFAS No. 129.
      
      During 1998, the Company consummated private placements
of common stock and Series A Preferred Stock. In the
September 1998 private placement, the Company sold for gross
proceeds of $1,500,000 an aggregate of 612,000 shares of its
common stock, 5,246 shares of its Series A Convertible
Preferred Stock (the "Series A Preferred Stock") and Warrants
to purchase an aggregate of 180,000 shares of its common
stock (the "Warrants"). In the December 1998 Regulation S
transaction, the Company sold for gross proceeds of $250,000
an aggregate of 2,500 shares of its Series A Preferred Stock
and Warrants to purchase of 75,000 shares of its Common
Stock.
      Subject to certain conditions and limitations, each
share of Series A Preferred Stock is convertible into that
number of shares of the Company's Common Stock which is
determined by dividing $100 plus 5% per annum thereon from
September 17, 1998 to the date of conversion, by the lower of
$1.75 per share or the "market price" per share at the time
of conversion. The "market price" for purposes of conversion
is 90% of the average of the four lowest closing bid prices
of the Common Stock during the 10 day trading period
immediately preceding the conversion date (the "Lookback
Period"). The Lookback Period is increased by two trading

<PAGE>50

days every month commencing on January 17, 1999 and continue
to increase by two trading days every month thereafter that
the Preferred Stock is outstanding until the Lookback Period
equals a maximum of thirty trading days. If not earlier
converted, the Preferred Stock will automatically convert
into Common Stock on September 17, 2000. Subject to certain
conditions and limitations, the Company has the right to
force conversion by the holders of the Preferred Stock in the
event the closing bid price of the Common Stock is equal to
or greater than $2.8125, $3.28125 or $3.75. In such event,
the Company may force conversion by the holder of up to 15%
of the total number of shares of Series A Preferred Stock, up
to a cumulative aggregate of 75% of the total number of
shares of Series A Preferred Stock issued to the holders.
      For its services in the two transactions, the Company
paid to the placement agent fees consisting of $65,000 cash,
29,480 shares of its common stock, 335 shares of its Series A
Preferred Stock and Warrants to purchase an aggregate of
135,000 shares of common stock.
      
6.  Stock Warrants and Stock Options
      
      In 1995, the Company sold to the representatives of the
underwriters warrants to purchase 125,000 shares of common
stock for $125.  The warrants are exercisable for a period of
four years commencing April 5, 1996 at an exercise price of
$7.80.
      
         The Company adopted a stock option plan in 1994
(the 1994 Stock Option Plan).  Incentive and nonqualified
options under this plan may be granted to employees, officers
and consultants of the Company.  There are 850,000 shares of
common stock reserved for issuance under this plan.  The
exercise prices of the options are determined by the Board of
Directors, but may not be less than 100% of the fair market
value on the date of grant.  Options generally become
exercisable over three years.
      
      In October 1995, the FASB issued Statement No. 123
"Accounting for Stock-Based Compensation."   Had the company
applied the fair-value based method of accounting which is
not required, under statement 123, compensation expense from
its plans would have had the effects of increasing the 1996,
1997 and 1998 net loss to the proforma amounts of $3,684,381,
$1,682,414 and 1,500,541 respectively, with corresponding
proforma loss per share of 1.10, .50 and .40 respectively.
These proforma amounts were determined by estimating the fair
value of each option on its grant date using the Black-
Scholes option-pricing model.  Assumptions of no dividend
yield, 5.40% - 6.50% for risk free interest rate, 5 to 6
years expected life and expected rate of volatility of
69.79%, 100% and 100% in 1996, 1997 and 1998, respectively,
were applied to all grants for each year presented.  The
weighted average fair value at grant date for the options
granted during 1996, 1997, and 1998 was $1.99, $.64 and $1.35

<PAGE>51

per option, respectively.
      
      Information with respect to the stock option plan is
summarized below:
<TABLE>
<CAPTION>
                                                Outstanding Stock Options
                                       Number of  Weighted Avg.    Price Per      Aggregate
                                         Shares   Exercise Price   Share          Price

<S>                                    <C>        <C>              <C>         <C>       
Balance, December 31, 1995             218,850    4.45             2.50 - 7.75    974,500

  Options granted                      222,380    3.49             1.25 - 5.50    775,750
  Options canceled                     (79,500)   5.02             2.13 - 4.75   (398,813)
  Options exercised                     (2,300)   2.50                    2.50     (5,750)
- ---------------------------------------------------------------------------------------
Balance, December 31, 1996             359,430    3.74             1.25 - 7.75  1,345,687

  Options revalued - canceled         (300,550)   4.06             2.13 - 7.75 (1,221,688)
  Options revalued - granted           300,550    1.31                    1.31    394,472
  Options granted                      235,900    1.34              .75 - 1.50    316,488
  Options canceled                     (65,300)   1.32             1.31 - 1.50    (86,106)
  Options exercised                         --      --                      --         --
- ---------------------------------------------------------------------------------------
Balance, December 31, 1997             530,030    1.41              .75 - 7.75    748,853

  Options granted                      264,000    1.75                    1.75    462,000
  Options canceled                    (113,950)   1.40              .75 - 1.88   (159,331)
  Options exercised                    (57,716)   1.20              .75 - 1.31    (69,424)
- ---------------------------------------------------------------------------------------
Balance, December 31, 1998             622,364    1.58              .75 - 1.88   $982,098
= =======================================================================================


<PAGE>52


At December 31, 1998, 294,907 options were exercisable.
</TABLE>
The  following  table  summarizes information  about  options
outstanding at December 31, 1998:

<TABLE>
<CAPTION>
              Options Outstanding                 Options Exercisable
              Number       Weighted    Weighted   Number      Weighted
Range of      Outstanding  Avg.        Avg.       Exercisable Avg.
Exercise      at           Remaining   Exercise   at          Exercise
Price         12/31/98     Contractual Price      12/31/98    Price
                           Life
<S>           <C>          <C>         <C>        <C>         <C>
$1.13 - 1.50  340,184      7.9 years   $ 1.33     233,954     1.32
$1.75 - 1.75  255,300      9.5 years   $ 1.75      34,073     1.75
$3.13 - 3.13   26,880      7.6 years   $ 3.13      26,880     3.13
- -----------------------------------------------------------------
$1.13 - 3.13  622,364      8.5 years   $ 1.58     294,907     1.53
= =================================================================
</TABLE>
     
     
7.  Employee Stock Purchase Plan
      
         On July 10, 1995, the Board of Directors approved
50,000 shares of the Company's Common Stock to be included in
the Employee Stock Purchase Plan (ESPP).  On April 18, 1998
the Board of Directors added 50,000 shares of the Company's
Common Stock to the ESPP.  As of December 31, 1998, the
Company has issued 41,049 shares of common stock.
      
8.  Commitments and Contingencies
      
      The Company leases an office facility under a capital
lease from its principal shareholders (see Note 3) and
certain equipment under operating leases.  The shareholders
purchased the facility primarily through the issuance of debt
that the Company guaranteed.  In addition (as discussed in
Note 3), one of the lenders obtained, as additional security,
an assignment of the shareholders' interest as landlord in a
contingent 20-year lease previously signed by the Company.
This contingent lease provides for a monthly rent of $6,200
and supersedes the current lease in the event of a default.
The lease has been accounted for as a capital lease, because
the Company guarantee was required to obtain the debt, the
Company has guaranteed all of the debt related to the
facility and over ninety percent of the purchase price was
financed.  The Company's future minimum rental commitments
under these leases and the discounted present value of the
capital lease obligation (at 10 percent) at December 31, 1998
are summarized as follows:


<PAGE>53


<TABLE>
<CAPTION>
Office Facility (see Note 3)
                                   Building   Land
<S>                                <C>        <C>
1999                                  34,000     40,000
2000                                  34,000     40,000
2001                                  34,000     40,000
2002                                  34,000     40,000
2003                                  34,000     40,000
Thereafter                           351,000    400,000
- -----------------------------------------------------
                                     521,000  $ 600,000
                                              =========
Less--Portion representing interest  252,000
- ------------------------------------------
                                     269,000
Less--Current portion                  8,300
- ------------------------------------------
                                   $ 260,700
= ==========================================
</TABLE>

      In calculating the discounted present value of the
capital lease obligation, the following assumptions were
used:
  -  Monthly payments of $11,535 from December 1993 to 
     November 1998, as adjusted (see Note 3),
  -  Monthly payments of $6,200 from December 1998 to
     2013,
  -  $3,333 of each monthly payment relates to land.
      
      From time to time, the Company is involved in various
legal actions which arise in the ordinary course of business.
The Company does not believe that losses, if any, incurred
will have a significant impact on the Company's financial
position or results of operations.

9.  Profit-Sharing Plan
      
      The Company has a Profit-Sharing Plan (the "Plan")
which covers most full-time employees.  Contributions to the
Plan are made at the discretion of the Board of Directors.
The Company did not make any contributions for the years
ended December 31, 1996, 1997 and 1998.
      
      In 1998, the Financial Accounting Standards Board
issued SFAS No. 132 "Employers' Disclosure about Pensions and
Other Postretirement Benefits."  SFAS No. 132 revises
employers' disclosures about pension and other postretirement
benefit plans.  It does not change the measurement or
recognition of these plans, but it does standardize the
disclosure requirements for pensions and other postretirement
benefits to the extent practicable.  The Company adopted SFAS
No. 132 in 1998 and its adoption did not have a material
impact on the Company's disclosures.

10. Sale of Product Lines
      In November 1998, the Company sold its Wildcat!
Interactive Net Server, Wildcat!  BBS and off-line Xpress BBS
mail reader product lines (the product lines) and any
associated inventory and intangible assets (the assets) to
Santronics Software, Inc. (Santronics).

<PAGE>54

      Under the terms of the agreement, Santronics has
assumed ownership and responsibility for the sale and support
of the product lines.

<PAGE>55

Part III
      
Item 9.   Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a) of the
Exchange Act
      
Executive Officers and Directors. The directors and executive
officers of the Company are as follows:

     Executive  Officers  and Directors.  The  directors  and
executive officers of the Company are as follows:

<TABLE>
<CAPTION>
                                                           
Name                         Age  Position                  Director Since
<S>                          <C>  <C>                       <C>
James A. Harrer              40   President, Chief          1988
                                  Executive Officer and
                                  Chairman of the Board

Christopher B. Rechtsteiner  28   Executive Vice President 

Scott Hunter                 31   Vice President            1995
                                  Engineering, Chief
                                  Technical Officer and
                                  Director

Donald M. Leonard            36   Vice President Finance,   1997
                                  Chief Financial Officer
                                  and Director
Stanley  A. Hirschman (1)    52   Director                  1995

Michael S. Noling     (1)    60   Director                  1995

</TABLE>
___________

(1)  Member of Audit Committee.

      James A. Harrer founded the Company's business in
January 1986 and has served the Company in various positions
and currently serves as its President and Chief Executive
Officer.  He was the primary visionary in developing
Mustang's Internet Message Center, FileCenter and ListCaster.
In addition to his duties, he oversees the Customer Advisory
Board and Professional Services division of the company.  Mr.
Harrer has over 15 years of experience in product
development, user interface design and software sales and
marketing.
      
      Christopher B. Rechtsteiner, joined the Company in

<PAGE>56

November 1997 as Vice President, Business Development &
Strategic Planning.  He was promoted to Executive Vice
President in October 1998. Mr. Rechtsteiner is responsible
for strategic planning and development of the Internet
Message Center product line in the Customer Management and
Electronic Commerce markets. In November 1998, Mr.
Rechtsteiner was promoted to Executive Vice President of the
Company, responsible for overseeing the sales and marketing
efforts of the Company. From January 1997 to October 1997,
Mr. Rechtsteiner served as Senior Manager, Market Research &
Business Development for the Electronic Commerce Division of
Rockwell International.  From October 1993 to January 1997,
Mr. Rechtsteiner served as Manager, Market Research and
Manager, Business Analysis for  Network Services and Product
Management Business Units, respectively, of Ameritech.
      
      C. Scott Hunter joined the Company in June 1988 and has
served as the Company's Vice President Engineering since
August 1991 and became Chief Technical Officer in April,
1996.  Mr. Hunter became a director of the Company upon
completion of the Company's initial public offering in April
1995. He is responsible for the coordination of new products
under development as well as normal software maintenance.
Mr. Hunter became the lead programmer on Wildcat! after the
release of Wildcat! 3 and is also the lead programmer on
QmodemPro for Windows.  Mr. Hunter obtained a BS in Computer
Science and a minor in economics from California State
University - Bakersfield in 1996.
      
      Donald M. Leonard has served as the Company's Vice
President Finance and Chief Financial Officer since June
1993.  Mr. Leonard is responsible for the Company's financial
matters and tax strategies, and supervises the development of
Mustang's custom internal accounting and customer database
system.  From January 1991 to June 1993, Mr. Leonard served
as a manager in audit and tax at Kenneth E. Rhodes & Co., a
Bakersfield accounting firm, where he was responsible for a
portion of the client base and supervised the firm's computer
operations.  From April 1988 to January 1991, he was employed
by Rohmiller, Brown, Rhodes & Co., and from January 1985 to
April 1988, he was employed by Brown, Waits and Armstrong,
both Bakersfield accounting firms. Mr. Leonard obtained a BS
in Accounting at California State University in Bakersfield
in 1987 and is a Certified Public Accountant. Mr. Leonard
became a director of the Company in April of 1997.
      
      Stanley A. Hirschman became a director of the Company
upon completion of the Company's initial public offering in
April 1995.  Mr. Hirschman is currently President of Cpointe
Associates, Inc., a management consulting firm specializing
in solutions for emerging companies with technology based
products.  His clients have included ICG Netcom (now
Mindspring Enterprises), SBC Wireless, Northern Telecom
(Nortel) and Babbage's Etc. Previously, Mr. Hirschman was
Vice President-Store Operations, of Software Etc., Inc. from

<PAGE>57

1989 until 1996, responsible for 390 retail locations.  Prior
to that he held senior management positions with T.J.Maxx,
The Gap and Banana Republic.  He has served on various
industry committees and the advisory boards for the Salvation
Army.  Mr. Herschman is an active board member, utilizing his
extensive management background helping Mustang Software
management focus on the re-positioning efforts into the
internet sector.  He is a significant participant in the
Company's strategic planning efforts and serves on the
Compensation and Audit Committees.
      
      Michael S. Noling, director of the Company since May
1995, is the Chairman of the Audit Committee and became the
Company's Secretary in November 1996. In October 1998, Mr.
Noling joined the Board and was elected Board Chair of Motion
Engineering, Inc., a privately held Santa Barbara company.
MEI is a leading supplier of PC-based motion control software
and circuit boards that control electric motors in precision
machinery.  Noling also chairs the Motion Engineering
Compensation and Audit Committees.  Since December 1996, Mr.
Noling has served on the board of directors of Transoft
Technologies Corporation, a privately held Santa Barbara
company and leading supplier of Fibre Channel Storage Area
Network (SAN) software and systems for the visual computing
and enterprise networking markets.  Noling chairs the Audit
Committee and is Secretary of the company.  Mr. Noling has
served as Chair of the Board of Centric Software, Inc., a
privately held Los Gatos company since December 1995.  CSI
designs and markets Virtual Product Development Management
software for driving product innovation.  He also chairs the
Centric Compensation and Audit Committees.  Mr. Noling joined
Wavefront Technologies as President and Chief Executive
Officer in September 1993 and was a member of the Board of
Directors.  During the next two years Wavefront acquired a
French software company, TDI, and completed an IPO and
subsequent secondary stock offering, trading on the Nasdaq as
WAVE.  In June 1995, Silicon Graphics completed the
acquisition of Wavefront Technologies and Alias Research to
form a combined software company, Alias/Wavefront.  Mr.
Noling served as a consultant to the new company until
December, 1996, when he retired.  Previously, Mr. Noling was
Executive Vice President and Chief Financial Officer for
Applied Magnetics Corporation, a global high technology
computer component supplier listed on the New York Stock
Exchange. Prior to joining Applied Magnetics Corporation in
March 1991, Mr. Noling was a managing partner with Andersen
Consulting, where he had extensive experience in key
operating and financial positions.  Andersen Consulting is
one of the world's leading systems integration and software
firms, and is a business unit of Arthur Andersen & Co., S.C.
Mr. Noling served as a White House Fellow for one year in the
U.S. Office of Management and Budget (OMB).  He received a BS
in Engineering and a MBA from the University of Wisconsin -
Madison.  Mr. Noling holds a CPA certificate.  Mike is a
founding member and past President of the Santa Barbara

<PAGE>58

Region Economic Community Project.  The ECP is focused on
increasing the economic vitality and quality of life in Santa
Barbara through retention and growth of core high technology
businesses.  Noling is President of the Santa Barbara Region
Chamber of Commerce Board and a member of the United Way
Board.
      
      No family relationships exist between any of the
executive officers or directors of the Company.
      
      Key Employee. In addition to its executive officers,
the Company also considers Greg Hewgill key to its
operations.  Mr. Hewgill has served as a Senior Engineer of
the Company since June 1992.  Mr. Hewgill is a member of
Mustang's product development team and leads the Company's
development team for Internet products.  From January 1990 to
January 1992, Mr. Hewgill was employed by Technique Computer
Systems, a software development company, and was a principal
force in the co-development of many of the Company's early
products. Mr. Hewgill obtained a BS in Mathematics and
Computer Science in 1992 from the University of Victoria in
British Columbia, Canada.
      
      Compliance with Section 16(a) of the Securities
Exchange Act of 1934. Section 16(a) of the Securities
Exchange Act of 1934 requires the Company's directors and
executive officers and persons who own more than 10% of a
registered class of the Company's equity securities, to file
with the Securities and Exchange Commission ("SEC") initial
reports of ownership and reports of changes in ownership of
Common Stock and other equity securities of the Company.
Directors, executive officers and 10% or greater shareholders
are required by the SEC regulations to furnish the Company
with copies of all Section 16(a) forms they file.
      
      The Company believes, based solely on a review of the
copies of such reports furnished to the Company, that each
report required of the Company's executive officers,
directors and 10% or greater shareholders was duly and timely
filed during the year ended December 31, 1998, except for the
Report on Form 3 of Christopher B. Rechtsteiner which was
filed late.
      
Item 10. Executive Compensation
      
      The following table sets forth all compensation paid by
the Company during 1996, 1997 and 1998 to its Chief Executive
Officer and its other executive officers whose annual salary
and bonus were in excess of $100,000 during 1998 (the "Named
Executives"):
<PAGE>59
<TABLE>
<CAPTION>
                         Annual Compensation                  Long term Compensation
Name and Principal       Year   Salary    Bonus(1)  Other(2)  Securities    All 
Other
Positions                                                     Underlying    Compensation(4)
                                                              Options(#)(3)     
<S>                      <C>    <C>       <C>       <C>       <C>           <C>                                                
James A. Harrer          1998   $158,100  $0        $0        100,000       $ 8,388
President and CEO        1997   $144,550  $0        $0              0       $ 9,416
                         1996   $151,050  $0        $0              0       $10,254
                                                                  
C. Scott Hunter          1998   $112,500  $0        $0         40,000       $ 1,612
Vice  President   of     1997   $108,450  $0        $0         66,500(5)    $ 1,630
                         1996   $106,200  $0        $0          7,500       $ 1,658
_________
</TABLE>

      (1)Includes a cash contribution by the Company to a
401(k) profit sharing plan paid in 1996, 1997 and 1998 on
behalf of such officer for 1995, 1996 and 1997, respectively.
      
      (2)Consists of an automobile allowance paid by the
Company.
      
      (3)Consists of shares of Common Stock issuable upon
exercise of options granted under Mustang's 1994 Incentive
and Nonstatutory Stock Option Plan (the "Stock Option Plan").
Options vest over 36 months, commencing from the date of
grant.
      
      (4)Consists of life and health insurance premiums paid by
the Company.
      
      (5)Consists of repriced options granted under Mustang's
Stock Option Plan that were issued in replacement of all
earlier options granted to Mr. Hunter under the Stock Option
Plan. The Options vest at their original vesting schedules,
except that no options (including vested options) were
exercisable earlier than one year from the date of the grant
of the repriced options.
      
      Effective February 8, 1996, the Company entered into
employment agreements with Messrs. Harrer, Hunter and
Leonard. Each of the agreements is for a one-year term and
automatically renews for succeeding one year terms unless
either the Company or the employee provides the other with a
notice of non-renewal at least 30 days prior to the
expiration of the then current term. The agreements are
terminable by either party with or without cause upon the
expiration of 30 days' notice of termination. Upon a
termination by the Company without cause or by the Employee

<PAGE>60

for good reason (which includes because of a change of
control of the Company), the employee is entitled to
compensation equal to nine months' salary and continued
health benefits for nine months. Upon a termination by the
employee without good reason or by the Company with cause,
the employee is entitled to compensation equal to four
months' salary and continued health benefits for four months.
      
      The following table provides certain information
regarding stock option grants made the Named Executives
during 1998:
<TABLE>
<CAPTION>
              OPTION GRANTS IN LAST FISCAL YEAR
                 Number of    Percent of                
                 Securities   Total Options                 
                 Underlying   Granted to     Exercise  Expiration
                 Options      Employees      Price     Date
Name             Granted (#)  in 1998        ($/Sh)
<S>              <C>          <C>            <C>       <C>                 
James A. Harrer  100,000      37.9%          $1.75     7/24/08
                                                   
C. Scott Hunter   40,000      15.2%          $1.75     7/24/08
                                                   
     
__________
</TABLE>
      The following table provides certain information
concerning options exercised by the Named Executives during,
and the Named Executives' unexercised options at, December
31, 1998:
      
<PAGE>61
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
     
                                              Number of Shares            Value of
                                              Underlying                  Unexercised In-
                                              Unexercised                 the-Money Options
                                              Options at                  at December 31,
                                              December 31, 1998           1998(1)

                 Shares          Value        Exercisable  Unexercisable  Exercisable  Unexercisable
Name             acquired        realized(2)   
                 on exercise (#)
<S>              <C>             <C>          <C>          <C>            <C>          <C>                      
James A. Harrer        0                0     13,889       86,111         $ 

13,889     $ 86,111
C. Scott Hunter   10,433         $  9,781     59,123       36,943         $  82,559    $ 38,037
__________
</TABLE>

      (1) Based on the difference between $2.75 (the closing bid
price of the Common Stock on December 31, 1998 as reported on
The Nasdaq SmallCap Market) and the applicable exercise
prices.
      
      (2) Based on the difference between the closing bid price
of the Common Stock on the date of exercises as reported on
The Nasdaq SmallCap Market) and the applicable exercise
prices.

Compensation of Directors
      
      The Company pays its outside directors $1,000 for each
board meeting attended and reimburses them for reasonable
expenses incurred in attending meetings. Upon becoming a
director each of the Company's outside directors was granted
stock options to purchase 5,000 shares of Common Stock from
the Company 1994 Incentive Stock Option Plan and Nonstatutory
Stock Option Plan (the "Stock Option Plan"), exercisable at
the fair market value per share on the date of grant. These
options originally vested in three equal annual installments,
commencing one year from the date of grant. In January 1997,
each outside director received, in lieu of an equivalent
number of options theretofore held by such director, repriced
options exercisable at $0.25 per share above the closing
price on the date the repriced options were granted.  These
repriced options were granted subject to a new vesting period
beginning on the date of the grant of the repriced options.
In January 1998, the option vesting was modified as to
unvested options to permit such options to vest quarterly
over a two-year period, commencing in January 1998.
      
      In January 1998 and 1999, each outside director was
granted options to purchase 15,000 shares of Common Stock.
These options are exercisable from date of the respective
director's anniversary of becoming a director next following
the date the options were granted at the lower of the fair
market value on the date grant or such anniversary date.
      
Item 11.  Security Ownership of Certain Beneficial Owners and
Management.
      
      The following table sets forth as of March 17, 1999
information regarding the beneficial ownership of the
Company's Common Stock by (i) each person known by the
Company to be the beneficial owner of more than five percent
of the outstanding shares of Common Stock, (ii) each of the
directors of the Company beneficially owning Common Stock,
(iii) each of the Named Executives listed in the Summary

<PAGE>62

Compensation Table in Item 10, and (iv) the executive
officers and directors of the Company as a group.

<TABLE>
<CAPTION>
                                     Common Stock     
                                  Beneficially owned
Name of beneficial owner or       Number     Percent  
identity of group                             
<S>                               <C>        <C>
  James A. Harrer                 707,450    17.0%  
  C. Scott Hunter                  23,979      .6%  
  Richard J. Heming               260,000     6.3%  
  The Cuttyhunk Fund Limited      274,728     6.5%  
  Canal Ltd                       274,841     6.5%  
                                                      
  All executive officers and                       
  directors as a group            850,351    19.8%
   (6) persons
__________
</TABLE>

      (1) Includes any shares purchasable upon exercise of
options exercisable within 60 days of March 17, 1999 and any
shares of Common Stock issuable upon conversion of the
Company's Series A Preferred Stock assuming such preferred
Stock was fully converted at March 17, 1999.
      
Item 12.  Relationships and  Related Transactions
      
      The Company leased its executive offices and sales,
marketing and production facilities from Messrs. Harrer and
Heming pursuant to a lease that commenced on December 1, 1993
and expired on November 30, 1998.  The Company continues to
occupy the premise pursuant to the terms of that lease , but
on a month to month basis.  The Company pays a monthly base
rent of $13,458.  The Company believes that this lease was on
terms no less favorable than those that could have been
obtained from an unaffiliated third party are, and that the
rent is comparable to that for similar facilities in the
area.  Messrs. Harrer and Heming incurred debt in the
aggregate amount of $822,000, following two loans in the
respective original principal amounts of $450,000 and
$372,000, to purchase said facilities.  Monthly payments of
Messrs. Harrer and Heming under these two loans equal
approximately $4,500 and $2,900, respectively.  The Company
has guaranteed all of this debt and has subordinated its
leasehold interest in the facilities to the lenders.  In
addition, in the event of a default by Messrs. Harrer and
Heming under the loan agreement covering $372,000 of this
debt, the lender thereunder may exercise an assignment from
Messrs. Harrer and Heming of their interest as landlord in a
contingent 20-year lease, previously signed by the Company as
tenant, for such facilities.  In that event, this contingent
lease provides for a monthly rent of $6,200, would supersede

<PAGE>63

the current lease, and would obligate the Company to pay such
rent through November 2013.
      
<PAGE>64
Item 13.  Exhibits, List and Reports on Form 8-K

(a) Exhibits
Exhibit No. Description
3 .1.1      Amended and Restated Articles of Incorporation of
            the Company (incorporated by reference to Exhibit
            2.1 of the Company's Registration Statement on
            Form SB-2 (file no. 89900-LA)).

3.1.2       Certificate of Determination of Mustang Software,
            Inc. relating to the authorization and
            determination of the Series A Convertible
            Preferred Stock (incorporated by reference to
            Exhibit 4.3 of the Company's Registration
            Statement of Form S-3 (file no. 333-66663) filed
            November 2, 1998).

3 .2        Amended and Restated Bylaws of the Company
            (incorporated by reference to Exhibit 2.2 of the
            Company's Registration Statement on Form SB-2
            (file no. 89900-LA)).

4.1         Form of Common Stock Certificate (incorporated by
            reference to Exhibit 4 .1 of the Company's
            Registration Statement on Form SB-2 (file no.
            89900-LA)).

10.2        Form of Indemnification Agreement  (incorporated
            by reference to corresponding Exhibit of the
            Company's Registration Statement on Form SB-2
            (file no. 89900-LA).

10.3        Office Lease, dated December 1, 1993, regarding
            the Company's offices in Bakersfield, California,
            between the Company and James A. Harrer and
            Richard J. Heming (incorporated by reference to
            corresponding Exhibit of the Company's
            Registration Statement on Form SB-2 (file no.
            89900-LA).

10.4        Commercial Guaranty, dated October 29, 1993, by
            and between the Company and Zions First National
            Bank (incorporated by reference to Exhibit 10.9
            of the Company's Registration Statement on Form
            SB-2 (file no. 89900-LA).

10.5        Loan Agreement, dated October 29, 1993, by and
            among Zions First National Bank, James A. Harrer
            and Richard J. Heming (incorporated by reference
            to Exhibit 10.10 of the Company's Registration
            Statement on Form SB-2 (file no. 89900-LA).


<PAGE>65

10.6        Promissory Note dated October 29, 1993, by
            Messrs. Harrer and Heming in favor of Zions First
            National Bank (incorporated by reference to
            Exhibit 10.11 of the Company's Registration
            Statement on Form SB-2 (file no. 89900-LA).

10.7        "504" Note, dated October 6, 1993, by
            Messrs. Harrer and Heming in favor of Mid State
            Development Corporation (incorporated by
            reference to Exhibit 10.12 of the Company's
            Registration Statement on Form SB-2 (file no.
            89900-LA).

10.8        Small Business Administration Guaranty dated
            October 6, 1993, by the Company in favor of Mid
            State Development Corporation (incorporated by
            reference to Exhibit 10.13 of the Company's
            Registration Statement on Form SB-2 (file no.
            89900-LA).

10.9        Lease Agreement, dated October 6, 1993, by and
            between the Company and Messrs.  Harrer and
            Heming (incorporated by reference to Exhibit
            10.14 of the Company's Registration Statement on
            Form SB-2 (file no. 89900-LA).

10.10       Assignment of Lessor's Interest in Lease to CDC,
            dated October 6, 1993, by Messrs.  Harrer and
            Heming in favor of Mid State Development
            Corporation (incorporated by reference to Exhibit
            10.15 of the Company's Registration Statement on
            Form SB-2 (file no. 89900-LA).

10.11       Underwriting Agreement dated April 5, 1995 by and
            between the Company and Cruttenden Roth
            Incorporated, as Representative of the several
            Underwriters (incorporated by reference to
            Exhibit 10.18 of the Company's Form 10-KSB for
            the year ended December 31, 1995).

10.12       Representative's Warrant Agreement dated April
            12, 1995 by and between the Company and
            Cruttenden Roth Incorporated (incorporated by
            reference to Exhibit 10.19 of the Company's Form
            10-KSB for the year ended December 31, 1995).

10.13       Representative's Warrant (see Exhibit A to
            Exhibit 10.15)

10.14       Securities Purchase Agreement dated as of
            September 14, 1998 between the Company and
            Settondown Capital International Limited  and the
            other investors named therein (incorporated by
            reference to Exhibit 4.2 of the Company's
            Registration Statement of Form S-3 (file no. 333-
            66663) filed November 2, 1998).

<PAGE>66


10.15       Escrow Agreement dated as of September 14, 1998
            between the Company and Settondown Capital
            International Limited  and the other investors
            named therein (incorporated by reference to
            Exhibit 4.4 of the Company's Registration
            Statement of Form S-3 (file no. 333-66663) filed
            November 2, 1998).

10.16       Registration Rights Agreement dated as of
            September 14, 1998 between the Company and
            Settondown Capital International Limited  and the
            other investors named therein (incorporated by
            reference to Exhibit 4.5 of the Company's
            Registration Statement of Form S-3 (file no. 333-
            66663) filed November 2, 1998).

10.17       Form of Stock Purchase Warrant A(incorporated by
            reference to Exhibit 4.6 of the Company's
            Registration Statement of Form S-3 (file no. 333-
            66663) filed November 2, 1998).

10.18       Form of Stock Purchase Warrant B (incorporated by
            reference to Exhibit 4.7 of the Company's
            Registration Statement of Form S-3 (file no. 333-
            66663) filed November 2, 1998).

10.19       Securities Purchase Agreement dated as of
            December 31, 1998 between the Company and
            Settondown Capital International Limited and the
            other investors named therein (incorporated by
            reference to Exhibit 99.1 of the Company's
            Current Report on Form  8-K filed January 15,
            1999).

10.20       Escrow Agreement dated as of December 31, 1998
            between the Company and Settondown Capital
            International Limited and the other investors
            named therein (incorporated by reference to
            Exhibit 99.3 of the Company's Current Report on
            Form  8-K filed January 15, 1999).

10.21       Registration Rights Agreement dated as of
            December 31, 1998 between the Company and
            Settondown Capital International Limited and the
            other investors named therein (incorporated by
            reference to Exhibit 99.4 of the Company's
            Current Report on Form  8-K filed January 15,
            1999).

10.22       Form of Warrants issued on December 31, 1998 to
            Investors and Placement Agent (incorporated by
            reference to Exhibit 99.5 of the Company's
            Current Report on Form  8-K filed January 15,
            1999).

<PAGE>67


11.         Computation of Earnings Per Share

22.1        Consent of Arthur Andersen to incorporation by
            reference of their report on 1998 Financial
            Statements into the Company's Registration
            Statements.

24.1        Power of Attorney (contained on Signature Page)

27.         Financial Data Schedule
      
      
      (b) Reports on Form 8-K. Two reports on Form 8-K were
filed during the last quarter of the period covered by this
Report. Each of these reports, reporting events occurring on
October 14, 1998 and November 19, 1998, respectively,
reported matters under Item 5.
      
SIGNATURES
      
      In accordance with Section 13 or 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"), the
Registrant caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of
Bakersfield, State of California, on March 30, 1999.

                              MUSTANG SOFTWARE, INC.
                              By        /s/ James A. Harrer
                              James A. Harrer, President and
                              Chief Executive Officer

POWER OF ATTORNEY
      
      KNOW ALL PERSONS BY THESE PRESENTS, that each person
whose signature appears below hereby constitutes and appoints
James A. Harrer and Donald M. Leonard, acting individually,
as his attorney-in-fact, each with full power of
substitution, for him in any and all capacities, to sign any
and all amendments to this Report and to file the same, with
exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying
and confirming our signatures as they may be signed by said
attorney to any and all amendments to said Report.
      
      In accordance with the Exchange Act, this Report has
been signed by the following persons on behalf on the
Registrant in the capacities and on the dates stated.

<TABLE>
<CAPTION>

Signature                   Title                      Date


<PAGE>68

<S>                         <C>                        <C>                                                       
   /s/ James A. Harrer      President and Chief        March 30, 1999
       James A. Harrer      Executive
                            Officer (Principal
                            Executive Officer)
                            and a Director
                                                        
  /s/ Donald M. Leonard     Vice President             March 30, 1999
      Donald M. Leonard     Finance,
                            Chief Financial
                            Officer (Principal
                            Financial and
                            Accounting Officer)
                            and a Director
                                                        
  /s/  C. Scott Hunter      Director                   March 30, 1999
       C. Scott Hunter
                                                        
  /s/  Stanley A. Hirschman Director                   March 30, 1999
       Stanley A. Hirschman

                                                        
  /s/  Michael S. Noling    Director                   March 30, 1999
       Michael S. Noling
</TABLE>