================================================================================
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION


                                  FORM 10-KSB/A
                                   AMENDMENT 2


[X]          ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
             EXCHANGE ACT OF 1934
                   For the fiscal year ended    March 31, 1999
                                              ------------------

[ ]          TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
             EXCHANGE ACT OF 1934
                   For the transition period from               to
                                                  --------------  --------------

                        Commission file number     033-23138-D
                                               -------------------

                                 HEARTSOFT, INC.
--------------------------------------------------------------------------------
                 (Name of small business issuer in its charter)

               Delaware                                 87-0456766
-------------------------------------      ------------------------------------
   (State or other jurisdiction of         (I.R.S. Employer Identification No.)
          or organization)

             3101 North Hemlock Circle, Broken Arrow, Oklahoma 74012
--------------------------------------------------------------------------------
                    (Address of principal executive offices)

                                 (918) 362-3600
--------------------------------------------------------------------------------
                           (Issuer's Telephone Number)

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

        Title of each class                          Name of each exchange
                                                      on which registered

               None                                          None
       --------------------                          --------------------

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

                         Common Stock, par value $.0005
--------------------------------------------------------------------------------
                                (Title of class)


================================================================================
<PAGE>

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 there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B 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. [ ]

The Company is amending its 10-KSB for the fiscal year ending March 31, 1999 as
a result of recently discovering two agreements for consulting services, one
dated September 20, 1998, which will have an impact on the Company's financial
statements and a second dated February 1, 1999, which will not affect the
Company's financial statements. Additionally, the Company is amending its 10-KSB
to include sales of unregistered securities.

Part II, items 5, 6 and 7 and Part III, item 13 of the 10-KSB have been amended.

The issuer's revenue for the year ended March 31, 1999 was $ 527,915.

The aggregate market value of the voting stock held by non-affiliates at March
31, 1999 was $12,124,104. This amount was computed using the average bid and ask
price as of March 31, 1999. For purposes of this computation, all officers,
directors and 5% beneficial owners of Registrant are deemed to be affiliates.

As of March 31, 1999, the issuer had outstanding a total of 9,169,214 shares of
its $.0005 par value Common Stock.

Transitional Small Business Disclosure Format (Check one): Yes       No   X
                                                               -----    -----





                                       2
<PAGE>

                                 HEARTSOFT, INC.
                                  FORM 10-KSB/A
                                TABLE OF CONTENTS

ITEM NUMBER AND CAPTION                                            PAGE NUMBER

PART II

   5.    Market for Common Equity and Related Stockholder Matters         4

   6.    Management's Discussion and Analysis or Plan of Operation        5

   7.    Financial Statements                                        F-1 to F-14


PART III

   13.        Exhibits and Reports on Form 8-K                            8




















                                       3
<PAGE>
PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

MARKET INFORMATION:

The Company's Common Stock is traded over the counter (symbol: HTSF). The range
of high and low bid information for the Company's Common Stock during the last
two years, as reported by the NASDAQ Stock Market, Inc., was as follows:

          Quarter Ended                  High Bid            Low Bid
          -------------                  --------            -------
          June 30, 1997                  $0.84375            $0.4375
          September 30, 1997             $0.7500             $0.3750
          December 31, 1997              $0.6875             $0.34375
          March 31, 1998                 $0.5000             $0.34375
          June 30, 1998                  $0.53125            $0.40625
          September 30, 1998             $0.4375             $0.1500
          December 31, 1998              $0.2500             $0.1250
          March 31, 1999                 $5.9375             $0.1700

The above quotes reflect inter-dealer prices without retail mark-up or markdown
or commissions, and may not represent actual transactions.

HOLDERS:

As of March 31, 1999, there were 462 holders of record, and approximately 3,000
beneficial owners, of the Company's Common Stock.

DIVIDENDS:

Since its inception, no cash dividends have been paid on the Company's Common
Stock and the Company does not anticipate paying cash dividends in the
foreseeable future.

RECENT SALES OF UNREGISTERED SECURITIES:

During the three months ended March 31, 1999, the Company has issued the
following securities without registering the securities under the Securities Act
of 1933:

--------------------------------------------------------------------------------
CLASS OF PERSONS                       CONSIDERATION
------------------- ------------------------------------------------------------
Individuals         and Trust A total of 569,000 shares of common stock were
                    issued for cash consideration.
------------------- ------------------------------------------------------------
Individual          A total of 142,743 shares of common stock were
------------------- ------------------------------------------------------------

                             4
<PAGE>
------------------- ------------------------------------------------------------
                    issued for cash consideration received in a prior
                    period.
------------------- ------------------------------------------------------------
Individuals         A total of 75,000 shares of common stock were issued for
                    investor relation services.
------------------- ------------------------------------------------------------
Individual          A total of 24,000 shares of common stock were issued to an
                    individual for payment of debt.
------------------- ------------------------------------------------------------
Individuals         A total of 252,800 shares of common stock were granted for
                    conversion of convertible preferred stock.
------------------- ------------------------------------------------------------
Individuals         A total of 6,007 shares of common stock were issued to
                    individuals in lieu of preferred stock dividends.
------------------- ------------------------------------------------------------
Individual          A total of 444,600 shares of common stock were issued to an
                    individual for warrants.
--------------------------------------------------------------------------------

The Company relied on the exemption set forth in Section 4(2) of the Securities
Act of 1933, as amended, in connection with the issuances of stock set forth
above. All parties listed above are sophisticated persons or entities, performed
services for the Company or had prior or existing relationships with members of
Company's management staff at the time of the transactions listed above.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

YEAR 2000 ISSUES

The Year 2000 issue developed because most computer systems and programs were
designed to record years (e.g. "1998") as two-digit fields (e.g. "98"). When the
year 2000 begins, these systems may interpret "00" as the year 1900 and may stop
processing date-related computations or process them incorrectly. To prevent
this occurrence, Heartsoft has examined its computer systems and programs and
determined that the Company's internal information systems and software
applications will manage dates beyond December 31, 1999. While the Company
believes that it has allocated sufficient time and resources to identify any
potential Year 2000 issues, no absolute assurances can be given that these
efforts have been successful.

The Company updates its computer hardware and software on a regular basis. As
updates have occurred, the Company has taken steps to ensure that such updates
are Year 2000 compliant. The Company does not expect to incur any material costs
in the future related to Year 2000 issues. However, this expectation is based,
in part, upon using various assumptions about future events including the third
party modification plans to their operating systems. The Company does not expect
the cost of addressing any Year 2000 issue to be a material event or uncertainty
that would have a material adverse effect on future results of operations or
financial condition.

The Company's operations are also dependent on the Year 2000 readiness of third
parties that do business with Heartsoft. The Company is dependent on third-party
suppliers of such infrastructure elements as, but not limited to, telephone
services, electric power, and water. The Company has identified and initiated
formal communications with key suppliers and service providers to determine the
extent to which it will be vulnerable to such parties' failures to address

                                       5
<PAGE>

and resolve their Year 2000 issues. Although the Company is not aware of any
known third party problem that will not be corrected, it has limited information
concerning the Year 2000 readiness of third parties. If the Company's suppliers'
systems are not modified to become Year 2000 compliant, the Year 2000 issue may
have a material impact on the results of operations and financial condition of
the Company. The Company is presently unable to assess the likelihood that it
will experience significant operational problems due to unresolved Year 2000
problems of third parties.

The Company believes the worst-case scenarios that it may be confronted with
respect to the Year 2000 issues have to do with the possible failure of third
party systems over which it has no control. Some of these third parties include
power and telephone providers, and vendors that supply manufactured products and
services.

The Company also believes that it has created a reasonable contingency plan with
regards to Year 2000 issues under its control, namely the identification of
back-up suppliers for its inventory needs as discussed earlier.

RESULTS OF OPERATIONS

The Company derives revenue from product sales which are published by Heartsoft,
Inc. on a proprietary basis. The Company sells its products in North America
primarily to the education market through and in-house sales team and a network
of educational software resellers, many of whom do large direct mail campaigns
of software catalogs to schools through out the U.S. and Canada.

The Company's top selling products during fiscal 1998, were titles from the
Thinkology series and products in The Heartsoft Bestsellers site license series.
Each of these products are seeing increased unit sales to the education market
as the Company is gaining greater market penetration and expertise in selling to
educators.

The Company's most recent product release, Thinkology which teaches critical
thinking skills to early learning students was introduced by the Company as a
complete solution in mid-1998 and products introduced to the education market
often see at least a six month to 1 year ramp-up period before significant
revenues gains can be realized. An average software title such as Thinkology
will see a 5 year lifespan in the education market:

PRODUCT LIFE SPANS

                    Year 1      Year 2      Year 3      Year 4      Year 5

% of Revenues:        10%         20%         30%         25%         15%

During fiscal 1998, Company conducted numerous maintenance upgrades to its 37
curriculum based titles and introduced Thinkology, a 3 CD-ROM series, which
increased sales opportunities across the board.

                                       6
<PAGE>

Over the last few years, as the company focused a substantial portion of its
operating budgets to new product development, revenue growth rates from sales of
the Company's products have fluctuated substantially.

During the year ended March 31, 1999, total sales decreased 9%, as compared to
1998. Net sales were 6% lower for the year ended March 31, 1999 compared to
March 31, 1998, levels mainly due to small fluctuations in advertising campaigns
and changes in internal sales staff personnel.

OPERATING EXPENSES

Total G&A expenses decreased 13% as compared to the year ended March 31, 1998.
Expenses for consulting advisory services disclosed in Note 10 to the financial
statements totaled approximately $51,000 for the year ended March 31, 1999.
Total payroll expense increased 3% compared with payroll expense for the year
ended March 31, 1998. With the completion of the Company's new critical thinking
skills product, Thinkology, the company began to focus a substantial portion of
its resources to building an inside sales team. This enhanced focus on sales is
reflected in an increase in sales payroll expense which rose 35% in the year
ended March 31, 1999, as compared to the year ended March 31, 1998.

Also, during the year ending March 31, 1999, the Company was able to decrease
administrative payroll expense by 16% when compared to the year earlier figures.
This decrease was attributable to increased efficiencies within the
organization's administrative office and the implementation of job
cross-training which allowed redundant administrative positions to be
eliminated.

GAIN ON SALE OF AN ASSET VS. LICENSING INCOME

During fiscal year ended March 31, 1997, the Company entered into an agreement
with three Canadian Limited Partnerships to sell a 45% minority interest in its
Heartsoft K-8 Library product line. In turn the Canadian Limited Partnerships
licensed back to Heartsoft the exclusive marketing and sales rights to their 45%
interest in the K-8 Library.

The net cash proceeds from these transactions to the Company were $485,895 in
fiscal 1998, and $153,277 in fiscal 1999. As a part of the sale transactions,
the Company also received Notes Receivable from the Partnerships for
approximately $2,250,000, payable from revenues received by the partnership for
sales of their portion of the K-8 Library.

On or about November 1, 1999, management of the Company became aware of the
possibility that the Company had a potential liability to the Canadian Limited
Partnerships, which could approach $1 million due to certain tax ramifications
for the Partnerships.

However, as a result of management's analysis and discussions with the
Partnership's general manager, management has concluded that there is no
substantial basis for liability in connection with the Canadian Limited
Partnerships. The Company is not contemplating any further sale of its assets as
described above.

                                       7
<PAGE>

In previous public communications of the Company's operating results, the net
proceeds of the Canadian Limited Partnership transactions had been reported as
licensing income, included in operating income. In the accompanying financial
statements, the cash portion of the Canadian Limited Partnership transactions is
being reported as a gain on the sale of an asset, which appears below operating
income.

FINANCIAL CONDITION AND LIQUIDITY

Total assets at March 31, 1999, decreased 22% from the preceding year. The
change can be attributed to reduced accounts receivable. The reduction is due
primarily to better collection efforts associated with sales to the education
market, tighter credit policies, and a stronger emphasis on qualified sales
resulting in less product being sent out for review. The Company did not incur
any major capital expenditures for the year ended March 31, 1999.

The Company's working capital needs are met primarily by its bank revolving
credit facility which is collateralized by accounts receivable and inventory. As
of March 31, 1999, the Company also relied on a short-term bank loan, secured by
the Company's assets and personal guarantees of the Company's Chairman, which
matures in December 1999.

As of March 31, 1999, the Company was in the process of raising additional
capital through certain stock transactions in the form of a private placement.
During the first two quarters of calendar 1999, the company sold 919,000 shares
of common stock, i.e., 569,000 shares for the period ended March 31, 1999 for an
aggregate total of $522,100; 100,000 shares in April 1999 for an aggregate value
of $95,000 which was received in July 1999; and 250,000 in June 1999 for an
aggregate value of $227,250 which was received in September 1999.

ITEM 7. FINANCIAL STATEMENTS.

The Consolidated Financial Statements and supplementary data of the Company are
set forth on pages F-1 through F-14 inclusive, found at the end of this report.

PART III

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

   (a)   Exhibits:

  EXHIBIT NO.                         DESCRIPTION
--------------------------------------------------------------------------------

     3.1         Articles of Incorporation of the Company, incorporated by
                 reference to the Company's Form 10-K for the fiscal year ended
                 March 31, 1989.

     3.2         By-Laws, incorporated by reference to the Company's Form 10-K
                 for the fiscal year ended March 31, 1989.

                                       8
<PAGE>

     4.1         Specimen of Certificate for Heartsoft, Inc. Common Stock.

     10.1        Corporate Note to Dale Hill dated October 21, 1998.

     10.2        Corporate Note to Dale Hill dated February 10, 1998.

     10.4        Promissory Note dated October 16, 1999 to Tulsa National Bank.

     10.5        Promissory Note dated December 16, 1999 to Bank of Oklahoma.

     10.6        Equipment Lease with Auto & Equipment Leasing by Flex, Inc.
                 dated February 12, 1998.

     10.7        Software Agreement dated May 16, 1997 between Heartsoft, inc.
                 and Heartsoft 1997 Limited Partnership.

     10.8        Acquisition Note dated May 16, 1997 from Heartsoft 1997 Limited
                 Partnership.

     10.9        Assumption Agreement dated April 30, 1997 by and among
                 Heartsoft 1997 Limited Partnership, Heartsoft, Inc. and Limited
                 Partners.

     10.10       Joint Venture Agreement dated May 16, 1997 between Heartsoft,
                 Inc. and Heartsoft 1997 Limited Partnership.

     10.11       Software Agreement dated July 30, 1997 between Heartsoft, Inc.
                 and Heartsoft II 1997 Limited Partnership.

     10.12       Acquisition Note dated July 30, 1997 from Heartsoft II 1997
                 Limited Partnership.

     10.13       Assumption Agreement dated July 30, 1997 by and among Heartsoft
                 II Limited Partnership, Heartsoft, inc. and Limited Partners.

     10.14       Joint Venture Agreement dated July 30, 1997 between Heartsoft,
                 Inc. and Heartsoft II 1997 Limited Partnership.

     10.15       Software Agreement dated October 28, 1997 between Heartsoft,
                 Inc. and Heartsoft III 1997 Limited Partnership, incorporated
                 by reference to the Company's Form DEF 14 C as of October 4,
                 1997 (SEC File # 033-23138-D).

                                       9
<PAGE>

     10.16       Acquisition Note dated October 28, 1997 from Heartsoft III 1997
                 Limited Partnership, incorporated by reference to the Company's
                 Form DEF 14 C as of October 4, 1997 (SEC File # 033-23138-D).

     10.17       Assumption Agreement dated July 30, 1997 by and among Heartsoft
                 III 1997 Limited Partnership, Heartsoft, Inc. and Limited
                 Partners.

     10.18       Joint Venture Agreement dated October 28, 1997 between
                 Heartsoft, Inc. and Heartsoft III 1997 Limited Partnership,
                 incorporated by reference to the Company's Form DEF 14 C as of
                 October 4, 1997 (SEC File # 033-23138-D).

     10.19       Lease dated April 16, 1992, as amended, for commercial office
                 space in Broken Arrow, Oklahoma.

     10.20       Consulting Agreement by and between Heartsoft, Inc. and
                 Intercap Funding LTD dated September 20, 1998. (Incorporated by
                 reference to the Company's Form 10-QSB for the period ended
                 March 31, 2001, which was filed on May 15, 2001.)

     10.21       Non Circumvention and Consulting Agreement by and between
                 Intercap Funding LTD dated February 1, 1999. (Incorporated by
                 reference to the Company's Form 10-QSB for the period ended
                 March 31, 2001, which was filed on May 15, 2001.)

     21.1        Subsidiaries of Heartsoft.

     23.1        Consent of Tullius Taylor Sartain & Sartain LLP.



 (b)  Reports on Form 8-K:  The Company did not file any reports on Form 8-K
      during the period from December 31, 1998 to March 31, 1999.


                                       10
<PAGE>

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                            HEARTSOFT, INC.

                                  (Registrant)

Date:    July 13, 2001             /s/ Benjamin P. Shell
      ------------------        --------------------------------------------
                                  Benjamin P. Shell, Chairman of the Board,
                                  President, and Chief Executive Officer

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

Date:    July 13, 2001             /s/ Benjamin P. Shell
      ------------------        --------------------------------------------
                                  Benjamin P. Shell, Chairman of the Board,
                                  President, and Chief Executive Officer
                                 (Principal Executive Officer)

Date:    July 13, 2001             /s/ Rodger Graham.
      ------------------        --------------------------------------------
                                  Rodger Graham, Chief Financial Officer
                                  (Principal Financial Officer)

















                                       11
<PAGE>

INDEX                                                                      PAGE

Report of Independent Auditors...............................................F-2

Balance Sheets as of March 31, 1999....................................F-3 - F-4

Statements of Operations for the Fiscal Year Ended March 31, 1999 and 1998...F-5

Statements of Changes in Stockholders' Equity for the Years Ended
March 31, 1999 and 1998......................................................F-6

Statements of Cash Flows for the Years Ended
March 31, 1999 and 1998......................................................F-7

Notes to Consolidated Financial Statements............................F-8 - F-14

































                                      F-1
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors
Heartsoft, Inc.

We have audited the accompanying balance sheet of Heartsoft, Inc., as of March
31, 1999, and the related statements of operations, changes in stockholders'
equity, and cash flows for the years ended March 31, 1999 and 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 Heartsoft, Inc. as of March 31,
1999, and the results of its operations and its cash flows for the two years
then ended, in conformity with generally accepted accounting principles.


                                 TULLIUS TAYLOR SARTAIN & SARTAIN LLP

Tulsa, Oklahoma
July 13, 2001

                                      F-2
<PAGE>

                                 HEARTSOFT, INC.

                                  BALANCE SHEET

                                 March 31, 1999


ASSETS
Current assets:
    Cash                                                        $ 41,589

    Accounts receivable, trade, net of allowances
       of $135,256                                                46,598

    Inventories, at cost                                          20,351

    Other                                                         14,599
                                                                --------

Total current assets                                             123,137

Property and equipment, at cost:
    Property and equipment                                       145,228

    Less accumulated depreciation                                 92,290
                                                                --------

Property and equipment, net                                       52,938


Other assets:
   Developed software, net                                       619,546
   Other                                                           2,689
                                                                --------

Total other assets                                               622,235
                                                                --------

Total assets
                                                                $798,310
                                                                ========

                       See notes to financial statements.

                                      F-3
<PAGE>

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable, trade                                          193,740

     Notes payable, current                                           281,376
     Accrued expenses                                                 143,703
                                                                   ----------

Total current liabilities                                             618,819

Notes payable, noncurrent                                             213,146
                                                                   ----------

Total liabilities                                                     831,965

Commitments and contingencies

Stockholders' equity:
  Preferred stock, $0.01 par value, 5,000,000 shares
     authorized, 378,500 shares issued                                  3,785
  Common stock, $0.0005 par value, 30,000,000 shares
     authorized, 9,169,214 shares issued                                4,585
  Additional paid-in capital                                        3,239,486
  Deficit                                                          (3,281,511)
                                                                   ----------


Total stockholders' equity                                            (33,655)
                                                                   ----------

Total liabilities and stockholders' equity                            798,310
                                                                   ==========

                       See notes to financial statements.

                                      F-4
<PAGE>

                                 HEARTSOFT, INC.

                            STATEMENTS OF OPERATIONS

                       Years ended March 31, 1999 and 1998


                                                       1999           1998
                                                   -----------     -----------

Net sales                                          $   527,915     $   560,128

Costs and expenses:
    Costs of production                                102,600         126,885
    Sales and marketing                                239,756         233,704
    General and administrative                         595,554         683,673
    Depreciation and amortization                      181,697         167,600
                                                   -----------     -----------

Total operating expenses                             1,119,607       1,211,862
                                                   -----------     -----------

Operating loss                                        (591,692)       (651,734)

Other income and (expense):
    Gain on sale of interest in software library       153,277         485,895
    Interest expense                                  (121,897)       (162,802)
    Other, net                                         (10,608)        (45,785)
                                                   -----------     -----------


                                                        20,772         277,308
                                                   -----------     -----------

Loss before income taxes and unusual item             (570,920)       (374,426)

Income taxes                                              --              --
                                                   -----------     -----------
Loss before unusual item                              (570,920)       (374,426)

Unusual item - costs associated with closing
    Dallas sales office                                 (6,964)        (89,022)
                                                   -----------     -----------

Net loss                                           $  (577,884)    $  (463,448)
                                                   ===========     ===========

Net loss per common share - basic and diluted      $     (0.08)    $     (0.08)
                                                   ===========     ===========

                       See notes to financial statements.

                                      F-5
<PAGE>

                                 HEARTSOFT, INC.

                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                       Years ended March 31, 1999 and 1998


<TABLE><CAPTION>
                                  Preferred Stock            Common Stock          Additional
                              ------------------------ -------------------------    Paid-in        Accumulated
                                 Shares      Amount       Shares       Amount       Capital          Deficit           Total
                              ------------- ---------- -------------- ---------- --------------- ----------------- --------------
<S>                           <C>           <C>        <C>            <C>        <C>             <C>               <C>
Balance, March 31, 1997       1,218,500     $12,185      5,396,390      $2,698     $ 2,517,341      $(2,240,179)      $ 292,045

Common stock issued in lieu
  of preferred dividends              -            -        51,900          26             (26)               -               -
Sale of common stock                  -            -       522,033         261         188,141                -         188,402
Stock issued as consideration         -            -       358,834         180         193,081                -         193,261
Net loss                              -            -             -           -               -         (463,448)       (463,448)
                              ------------- ---------- -------------- ---------- --------------- ----------------- --------------

Balance, March 31, 1998       1,218,500       12,185     6,329,157       3,165       2,898,537       (2,703,627)        210,260

Common stock issued in lieu
  of preferred dividends              -            -        10,287           5              (5)               -               -
Convert preferred stock to
  common                       (840,000)      (8,400)      678,000         339           8,061                -               -
Warrant exercise                                           444,600         222               -                -             222
Sale of common stock                  -            -       925,743         463         239,569                -         240,032
Stock issued as consideration         -            -       757,427         379          69,336                -          69,715
Stock issued for repayment
  of debt                             -            -        24,000          12          23,988                -          24,000
Net loss                              -            -             -           -               -         (577,884)       (577,884)
                              ------------- ---------- -------------- ---------- --------------- ----------------- --------------

Balance, March 31,1999          378,500       $3,785     9,169,214      $4,585     $ 3,239,486      $(3,281,511)      $ (33,655)
                              ============= ========== ============== ========== =============== ================= ==============
</TABLE>

                       See notes to financial statements.

                                      F-6
<PAGE>

                                 HEARTSOFT, INC.

                            STATEMENTS OF CASH FLOWS

                       Years ended March 31, 1999 and 1998

                                                        1999           1998
                                                     ---------      ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                             $(577,884)     $(463,448)
Adjustments to reconcile net loss to net cash
   provided by (used in) operating activities:
        Depreciation and amortization                  181,697        167,600
        Issuance of stock for goods and services        69,505        193,079
        Gain on sale of software library              (153,277)      (485,895)
        Changes in:
            Accounts receivable                        221,498       (205,506)
            Prepaid expense                             (3,234)        61,468
            Inventories                                (10,744)        (1,773)
            Accounts payable                            14,559         58,267
            Accrued expenses                           120,681        (54,932)
                                                     ---------      ---------

Net cash (used in) operating activities               (137,199)      (731,140)

CASH FLOWS FROM INVESTING ACTIVITIES
Capitalized software development costs                (136,128)      (205,228)
Payments for the purchase of property                     --          (42,148)
                                                     ---------      ---------

Net cash (used in) investing activities               (136,128)      (247,376)

Cash Flows from Financing Activities
Proceeds from sale of software library                 165,512        498,130
Proceeds from issuance of long-term debt               345,000        289,678
Proceeds from issuance of common stock                 264,465        188,584
Net borrowings (repayments) under line of credit      (152,500)         1,378
Principal payments on notes payable                   (311,972)          --
                                                     ---------      ---------

Net cash provided by financing activities              310,505        977,770
                                                     ---------      ---------

Net increase (decrease) in cash                         37,178           (746)
Cash at beginning of year                                4,411          5,157
                                                     ---------      ---------

Cash at end of year                                  $  41,589      $   4,411
                                                     =========      =========

Supplemental disclosures:
    Cash paid during the year for interest           $  46,676      $  50,264
                                                     =========      =========

                       See notes to financial statements.

                                      F-7
<PAGE>

                                 HEARTSOFT, INC.

                          NOTES TO FINANCIAL STATEMENTS

                             March 31, 1999 and 1998

NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

Heartsoft, Inc., including its subsidiary described below ("Heartsoft" or the
"Company"), a publicly held Delaware corporation, was formed on January 15,
1988. On August 16, 1991, Heartsoft Software, Inc., an Oklahoma corporation, was
organized as a wholly owned subsidiary of Heartsoft, in which the actual
day-to-day operations of the Company are conducted.

The Company is engaged in publishing its own proprietary educational software
and licensing technological products for distribution to the education market.
The Company sells its products to schools and to end-users through telephone
sales and direct response reseller catalogs. The Company's principal market is
in the United States and Canada.

REVENUE RECOGNITION

Revenues from the sale of software products are recognized upon shipment,
provided that no significant obligations remain outstanding and collection of
the receivable is probable. Shipments of software previews to customers include
the right of return for 45 days. Sales on these shipments are not recognized
until expiration of the preview period. Allowances for estimated returns are
provided at the time of sale. The Company evaluates the adequacy of allowances
for returns and doubtful accounts primarily based upon its evaluation of
historical and expected sales experience. The allowances for returns and
doubtful accounts are based upon information available at the reporting date. To
the extent the future market, customer mix, channels of distribution, product
pricing and general economic and competitive conditions change, the estimated
allowances required for returns and doubtful accounts may also change.

INVENTORIES

Inventories consist primarily of raw materials such as CD-ROM, floppy discs and
manuals. They are stated at the lower of cost, determined by using the first-in,
first-out method, or market.

ADVERTISING AND MARKETING COSTS

The Company expenses advertising costs, excluding co-operative advertising, as
incurred. Co-operative advertising programs are initially capitalized and then
expensed over the period of the specific contract for services. Capitalized
advertising costs are not material at March 31, 1999.

                                      F-8
<PAGE>

Advertising costs totaled $125,686 and $130,244 for the years ended March 31,
1999 and 1998, respectively.

DEPRECIATION

The Company's property and equipment is carried at cost and depreciated over the
estimated useful lives of the related assets. Depreciation is computed using the
straight-line method over a seven-year period for both financial reporting and
federal income tax purposes.

DEVELOPED SOFTWARE

Costs for new software products and enhancements to existing software products
are expensed as incurred until technological feasibility has been established.
Once the project reaches technological feasibility, all software development
costs are capitalized until the project is ready for release. Software
development costs are amortized on the straight-line method over a maximum of
seven years or the expected life of the product, whichever is less. Amortization
expense of software development costs was $162,533, and $148,436 for the years
ended March 31, 1999, and 1998, respectively.

INCOME TAXES

Deferred tax liabilities and assets are determined based on the differences
between the financial statement basis and tax basis of assets and liabilities,
using enacted tax rates in effect for the year in which the differences are
expected to reverse. Statement of Financial Accounting Standards ("SFAS") 109,
"Accounting for Income Taxes," also requires a valuation allowance against net
deferred tax assets if, based upon the available evidence, it is more likely
than not that some or all of the deferred tax assets will not be realized.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Cash, accounts receivable, accounts payable and accrued expense amounts reported
in the accompanying balance sheet approximate fair value. Accounts receivable
are unsecured. Based on the borrowing rates currently available to the Company,
the carrying amounts reported in the accompanying balance sheet for notes
payable approximate fair value.

CONCENTRATIONS OF CREDIT RISK

Heartsoft markets to educators nationwide, which is a large, diverse group
governed by unrelated buying decisions. Thus, no single customer represents a
significant portion of the Company's revenues or accounts receivable. The
education market consists of both school systems and individual educators
requiring core curriculum materials as well as supplemental materials.

EMPLOYEE STOCK OPTIONS

When the exercise price of employee stock options equals or exceeds the market
value of the stock at date of grant, the Company recognizes no compensation
expense.

                                      F-9
<PAGE>

EARNINGS PER SHARE

The Company follows SFAS No. 128, "Earnings Per Share," ("SFAS 128"), which
requires the presentation of basic and diluted earnings per share. Basic net
loss per share is computed using the weighted average number of common shares
outstanding during the period. Diluted net loss per share is computed using the
weighted average number of common shares outstanding during the period, plus the
dilutive effect of common stock equivalents. As the Company has no common stock
equivalents at March 31, 1999 and 1998, basic net loss per share equals diluted
net loss per share.

NEW ACCOUNTING STANDARDS

The Company adopted SFAS No. 130, "Reporting Comprehensive Income" and SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information"
during 1998. The Company has no comprehensive income items for the two years in
the period ended March 31, 1999. Therefore, net loss equals comprehensive
income. The Company considers that it operates in only one business segment. The
Company will adopt SFAS No. 133, "Accounting for Derivative Investments and
Hedging Activities" during 2001. Currently, the Company does not engage in
hedging activities or transactions involving derivatives.

MANAGEMENT ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
regarding items such as allowances for sales returns and uncollectible accounts,
and valuation allowances for deferred tax assets that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.

NOTE 2 - CANADIAN LIMITED PARTNERSHIPS

During 1997, the Board of Directors of the Company authorized the sale of an
aggregate undivided 45% interest of the Company's "K-8 Library" (the "Software
Library") pursuant to the terms of a Software Agreement ("Software Agreement")
entered into between the Company and Heartsoft 1997 Limited Partnership,
Heartsoft II 1997 Limited Partnership, and Heartsoft III 1997 Limited
Partnership, all Ontario, Canada limited partnerships (the "Partnerships").

The Partnerships were formed by their general partner to acquire the investment
in the Software Library and to take advantage of certain Canadian tax laws. The
general partner of the Partnerships, which is unrelated to Heartsoft, is
responsible for their operation. The Company has no involvement or association
with the Partnerships other than through the Joint Venture Agreement.

Pursuant to the terms of the Software Agreement, the Company sold 45% interest
in the Software Library for $4,940,000 (Canadian), less related expenses, which
was payable 30% in cash and 70% by promissory notes (the "Acquisition Notes")
bearing interest at 5%, due in 2007.

                                      F-10
<PAGE>

The Acquisition Notes are payable from funds generated by the Partnerships
through a joint venture with the Company (evidenced by a Joint Venture
Agreement).

Pursuant to the Joint Venture Agreement between the Company and the
Partnerships, Heartsoft retained the sole marketing rights, while Heartsoft and
the Partnerships jointly share in the revenues attributable to the future sales
of product utilizing the Software Library. The Partnerships are entitled to 100%
of all "gross sales" each year until all interest owed to the Company under the
Acquisition Notes is paid in full. After all interest has been paid, and until
all principal and interest has been paid, the Partnerships and the Company each
are entitled to 50% of the "gross margin" from sales attributable to the
interest in the Software Library. The "gross margin" is all gross revenues
generated from the interest in the Software Library, less returns, discounts and
cost of goods sold. After the Acquisition Notes have been paid in full
(including all accrued interest), the Company is entitled to 75% of the gross
margin, and the Partnerships the remaining 25%.

As of January 1, 1999, the Company has the option to terminate the Joint Venture
and reacquire the interest in the Software Library at a price to be negotiated
in good faith.

After sales commissions and other expenses, the Company realized U.S.$ 663,444.
After deducting the allocable cost of the Software Library, the Company reported
gain on sale of $485,895 in fiscal 1998 and $153,277 in fiscal 1999. The gain
associated with the Acquisition Notes has been deferred because its realization
depends on the Company's success in marketing the Software Library, resulting in
no net carrying value for the Acquisition Notes. Such gain will be recognized as
the Acquisition Notes are collected. In fiscal 1999, interest on the Acquisition
Notes amounted to $112,313, and the principal balances were reduced by $26,800.
Since these amounts are realized through software sales, they are reported in
the statements of operations as such. The principal balance of the Acquisition
Notes at March 31, 1999, is approximately $2,250,000.

NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment consist of the following at March 31, 1999:

           Office furniture, fixtures and equipment         $     71,326
           Production and development equipment                   64,671
           Leasehold improvements                                  9,231
                                                            --------------

                                                            $    145,228
                                                            ==============

Depreciation expense was $19,164 for each of the years ended March 31, 1999 and
1998.

                                      F-11
<PAGE>


NOTE 4 - NOTES PAYABLE

Notes payable consist of the following at March 31, 1999:

    Notes payable to individuals at rates ranging
        from 5% to 20%, due on demand                              $  165,000

    Revolving line of credit due April 1999 with
        with interest due monthly at National Prime
         + 1.00% (8.75% at March 31, 1999)                             97,500

    Revolving line of credit due December 1999
        with interest due monthly at National Prime
        + 1.50% (9.25% at March 31, 1999)                              95,530

    Notepayable to a bank, due $481 monthly including interest
        at 9.5%, with remaining unpaid principal due October
        1999, secured by a vehicle                                      4,613

    Note payable to a bank, due $1,050 monthly
        including interest at National Prime + 2%
        (9.75% at March 31, 1999), due
        November 1999                                                  18,012

    Notepayable to a finance company, $4,575 monthly including
        interest at 14.82%, due February 2001, secured by
        property and equipment                                        113,867
                                                                   ------------

    Total                                                             494,522

    Current portion                                                   281,376
                                                                   ------------

    Noncurrent portion                                             $  213,146
                                                                   ============

The notes payable to individuals are collateralized by the Company's common
stock. Subsequent to March 31, 1999, several individuals exchanged notes having
a principal balance of $140,000 for shares of common stock. As a result, such
notes are classified as noncurrent. The remaining balance of the noncurrent
portion of $73,146 is due in fiscal 2001.

The revolving line of credit due April 1999 is secured by inventory, accounts
and general intangibles of the Company and is guaranteed by officers of the
Company. The note contains certain restrictive covenants limiting the Company's
ability to incur additional debt or merge with or acquire another company.

                                      F-12
<PAGE>

The revolving line of credit due December 1999, provides for maximum borrowings
of $100,000 and is secured by stock, inventory, property and equipment.

NOTE 5 - COMMITMENTS AND CONTINGENCIES

The Company leases office facilities under an operating lease for $4,805 per
month plus adjustments over the life of the lease. Rental expense was $56,382
and $53,757 for the years ended March 31, 1999 and 1998, respectively. Future
annual payments under operating leases are $57,660 for fiscal 2000 and $19,220
for fiscal 2001.

The Company's management is concerned about reported operating losses and cash
flow deficits for the year ended March 31, 1999. In order to reverse the trend
of losses, the Company is planning to introduce significant new products during
fiscal 2000. In addition, management intends to add significant strength to the
Company's marketing staff and capabilities. In order to finance continuing
operations while these new business initiatives are being implemented,
management intends to raise capital through private placements of common stock.
In September 1999, the Company sold 1,000,000 shares of common stock for net
proceeds of $828,000 after commissions and placement expenses.

NOTE 6 - STOCKHOLDERS' EQUITY

PREFERRED STOCK

As of March 31, 1997 and 1998, the Company had outstanding 1,218,500 shares of
preferred stock, $0.01 par value. The preferred stock is convertible into common
stock at the rate of .8 shares of common stock per share of preferred stock.
During fiscal 1999, 838,625 preferred shares were converted into 670,900 shares
of common stock. Subsequent to March 31, 1999, virtually all preferred shares
have been converted to common.

COMMON STOCK

During the years ended March 31, 1999 and 1998, the Company entered into various
agreements with vendors under which the vendors received shares of Company
common stock in exchange for their services. The Company issued 338,827 and
268,834 shares of its common stock during the years ended March 31, 1999 and
1998, respectively, under these agreements and recognized, general and
administrative expenses of $69,505 and $143,104. The transactions were valued
based on the underlying price of the Company's common stock on the dates of
issuance.

At March 31, 1997 and 1998, the Company had outstanding warrants to purchase
444,600 shares of common stock at par value. Such warrants were exercised in
fiscal 1999.

EMPLOYEE BENEFIT AND STOCK OPTION PLAN

The Heartsoft, Inc. Employee Benefit and Stock Option Plan ("Plan") was
effective June 15, 1997, and terminates June 30, 2005. Awards under the Plan may
be granted by the Heartsoft Board of Directors in the form of stock issuance,
incentive stock options, or nonqualified stock

                                      F-13
<PAGE>

options. The total number of shares of common stock as to which stock issuances
or options may be granted under the Plan shall be 2,000,000. The option price of
incentive stock options shall not be less than 100% of the fair market value of
the stock on the date of grant. The option price of nonqualified stock options
shall not be less than 25% of the fair market value of the stock on the date of
grant. The duration of each option granted shall not exceed 10 years.

During the years ended March 31, 1999 and 1998, no stock options were issued
under the Plan. However, employees were granted 90,000 shares of stock in 1998
for which general and administrative expenses were charged $49,975.

The weighted-average grant date fair value of shares issued to vendors and
employees during the years ended March 31, 1999 and 1998, was $.21 and $.54,
respectively.

NOTE 7 - INCOME TAXES

At March 31, 1999, the Company had approximately $3,250,000 in net operating
loss carryforwards ("NOL's") expiring in 2009 through 2014. Management believes
that the Company does not meet the criteria for recognizing the tax benefit of
net operating loss carryforwards as a deferred tax asset and has established a
valuation allowance for the entire balance of the NOL's.

There are no material temporary differences between the bases of assets and
liabilities for income tax and financial reporting purposes that would give rise
to deferred tax assets and liabilities. Therefore, no provision for income taxes
has been reflected in the Company's statements of operations.

NOTE 8 - UNUSUAL ITEM

In January 1997, the Company's board of directors, by unanimous consent, agreed
to discontinue the Company's Advanced Technologies Division in Dallas, Texas.
Although the division had been in existence for only 18 months, it was unable to
reach profitability, and the Company's board of directors unanimously agree that
continued investment in the division would not cause a turn-around in the
immediate future. In connection with closing the Advanced Technologies Division,
the Company incurred $6,964 and $89,022 in expenses during the years ended March
31, 1999 and 1998, respectively, and is reflected as an unusual item in the
statements of operations.

NOTE 9 -- EARNINGS PER SHARE

Basic and diluted EPS for the years ended March 31, 1999 and 1998, were computed
as follows:

                                             1999               1998
                                       ----------------   ----------------
Basic EPS computation:

Net loss                                  $(577,884)         $(463,448)
                                       ================   ================

                                      F-14
<PAGE>

Weighted average shares outstanding        7,310,970          6,017,327
                                       ----------------   ----------------


Basic and diluted net loss per share       $ (0.08)           $ (0.08)
                                       ================   ================

NOTE 10 - RESTATEMENT OF  FINANCIAL STATEMENTS

On September 20, 1998, Heartsoft and Intercap Funding LTD ("Intercap") entered
into an agreement whereby Intercap agreed to provide consulting advisory
services over a three year period, primarily related to capital formation, in
exchange for 1.2 million shares of Heartsoft's Convertible Preferred Stock. On
March 16, 2001, Heartsoft issued 1.2 million shares of its common stock to
satisfy the Company's obligation under the agreement.

Upon issuance of the common stock, it was determined that the Company had not
previously given accounting recognition to the agreement. The value of the
agreement, based on the September 20, 1998, trading price of the common stock
into which the preferred stock was to have been convertible, was $240,000. This
value has been allocated to general and administrative expenses over the term of
the agreement. The Company's legal counsel has advised that the preferred stock
called for in the agreement could not have been validly issued prior to the time
the services were rendered. As a result, the obligation will be reported as an
accrued liability as it is accrued over the period October 1998 through March
2001. For the fiscal years ended March 31, 1999 and March 31, 1998, a total of
$50,803 and $0, respectively, were recognized as general and administrative
expense for these consulting advisory services.


On February 1, 1999 the Company also entered into a Non Circumvention and
Consulting Agreement with Intercap Funding LTD. Under the agreement, Intercap
was to provide Heartsoft with various services for a period of 180 days and it
automatically renewed on the first day of each month thereafter for nine months.
Intercap was to receive a finder's fee in cash equal to a certain percentage of
all amounts invested in the Company. In addition, the Company was to issue
warrants equal to a specified percentage of the number of shares purchased by
any introduced parties. In connection with this agreement the Company must issue
178,763 warrants to Intercap. The warrants are exercisable over five years at
values ranging from $1.3437 to $3.4375 per warrant. The warrants are a cost of
the capital that was raised and their issuance will not affect the Company's
financial statements.

On June 1, 2001, the Company and Intercap Funding LTD entered into a new
Consulting Agreement. The new agreement cancelled the Non Circumvention and
Consulting Agreement, dated February 1, 1999. Pursuant to the new agreement, the
Consultant also agreed to surrendered any and all rights that the Consultant had
to any warrants to purchase shares of common stock of the Company to which the
Consultant was entitled under the Non Circumvention and Consulting Agreement.

                                      F-15