SECURITIES AND EXCHANGE COMMISSION
                              Washington D.C. 20549
                                   FORM 10-KSB

               [X] Annual Report Under Section 13 or 15(d) of the
                        Securities Exchange Act of 1934
                 For the Fiscal Year Ended December 31, 1998 or
          [ ] Transition Report Pursuant to Section 13 or 15(d) of the
                        Securities Exchange Act of 1934

                        Commission File Number: 000-22172

                              MIDISOFT CORPORATION
        (Exact name of small business issuer as specified in its charter)

     Washington                                    91-1345532
     (State or other jurisdiction of               (I.R.S.employer incorporation
     or organization)                              Identification No.)

                       1605 NW Sammamish Road, Suite 205,
                           Issaquah, Washington 98027
                    (Address of principal executive offices)

                                 (425) 391-3610
                           (Issuer's telephone number)

           Securities registered pursuant to Section 12(b) of the Act:

                                                        Name of each exchange
     Title of each class                                on which registered
            None                                                N/A

           Securities registered pursuant to Section 12(g) of the Act:
                           Common Stock, no par value
                                (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.
                                Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-B is not contained  herein,  and will not 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. [X]

Issuer's revenues for its most recent fiscal year were $1,759,954.

Aggregate market value of voting stock held by  non-affiliates of the registrant
as of April 14, 1999 was $13,718,920 (based upon the closing sale price of $2.00
per share on such  date).  Number of shares of Common  Stock  outstanding  as of
April 14, 1999: 7,020,621 shares.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's Proxy Statement relating to its 1999 annual meeting of
shareholders is incorporated by reference into Part III of this Annual Report on
Form 10-KSB.

<PAGE>

                                TABLE OF CONTENTS


                                     Part I


                                                                            Page
                                                                            ----

Item 1.    Description of Business........................................... 3

Item 2.    Description of Property........................................... 8

Item 3.    Legal Proceedings................................................. 8

Item 4.    Submission of Matters to a Vote of Security Holders............... 9


                                     Part II

Item 5.    Market for Common Equity and Related Shareholder Matters.......... 10

Item 6.    Management's Discussion and Analysis or Plan of Operation......... 10

Item 7.    Financial Statements.............................................. 19

Item 8.    Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure.......................................... 39


                                    Part III

Item 9.    Directors, Executive Officers, Promoters and Control Persons;
           Compliance With Section 16(a) of the Exchange Act................. 39

Item 10.   Executive Compensation............................................ 39

Item 11.   Security Ownership of Certain Beneficial Owners and Management.... 39

Item 12.   Certain Relationships and Related Transactions.................... 39

Item 13.   Exhibits List and Reports on Form 8-K............................. 39


SIGNATURES................................................................... 43


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<PAGE>

                                     PART I

Item 1.  DESCRIPTION OF BUSINESS

General

Midisoft  Corporation  was founded in 1986 as an innovator of music  technology.
Over the past 13 years,  the  Company  has  established  itself as a provider of
award-winning  music  software and sound  utilities for the control of audio and
the management of media files.  Midisoft's  product lines include music creation
and  distribution  with  integration  of sound  and media on the PC and over the
Internet.  The Company's music products enable users to enjoy,  explore,  learn,
create and share music.  Midisoft pioneered the development of music technology,
including  the ability to view  (visually  interact  with)  musical  notation of
sounds  while  played  with a  musical  instrument  linked  to a PC.  Midisoft's
Internet products promote the convergence of sound with other  technologies that
enhance the experience of combining and controlling  music, sound and video with
other Internet capabilities.

The  Company  markets  its  products  on a  worldwide  basis in two ways.  Music
products are sold on the Internet and at retail stores and the Internet products
are downloadable and sold to hardware  manufacturers and content aggregators and
providers. In 1998, the Company deployed a strategy of selling music software to
musical  instrument  stores that have a focused  clientele  of  musicians.  This
channel  has  proven  cost-efficient.  Costs of  reaching  this  niche  are more
economical  than  that  of  general  consumer-related   audiences.  The  Company
continues to sell its music  software  directly to customers  through its inside
sales staff and increased visibility of the website.

The second  distribution method is selling audio utilities to original equipment
manufacturers  and  Internet  products  to content  aggregators  and  providers.
Although this distribution  channel is currently in a state of change, there are
revenue  opportunities  for those  companies  willing and agile enough to adjust
their  strategies.  The  Company's  contracts  with  companies  such as  Diamond
Multimedia  enable end users to gain exposure to Midisoft's audio utilities on a
mass market scale.  The Company also has formed  alliances with Internet content
aggregators  and  providers  to download  its  Internet  Media  Player,  opening
exposure to Internet users.

During  the last two years,  the  Company  redesigned  and  developed  its music
products and refocused its strategic  products to meet the increasing demand for
access to new  technologies.  In 1998, the Company released Midisoft Studio 6.0,
the first  notation-based  sequencer that combines digital editing and recording
capabilities  in one  application,  and Desktop  Sheet Music 2.0.  These  latest
editions of the music software  provide  increased  flexibility  and ease-of-use
demanded by  customers.  The Company  also  released  MediaWorks  '98, the media
player for the desktop personal computer,  and Internet Media Player, the add-on
to Microsoft's Windows Media Player that allows access and management of content
sourced from the Internet.

Emergence of the Internet as a medium for distributing sound, voice messages and
music globally has amplified expansion of audio technology.  As new technologies
evolve,  the Company believes it can continue to be a premiere provider of audio
control expertise.

Products

Midisoft Music Product Line consists of Midisoft  Studio 6.0,  Midisoft  Desktop
Sheet Music 2.0,  Midisoft Play Piano,  Midisoft  MidiKit,  and Midisoft  Family
Music  Center.  The Company  creates and markets  these  products to bring music
education,  composition  and  professional  quality  music  creation  to  the PC
desktop.


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<PAGE>

Midisoft  Studio(TM) 6.0 Midisoft Studio 6.0 is a music sequencer  utilizing and
extending  technology that was first introduced by Midisoft in 1986. The product
creates and edits music  digitally,  and publishes  high-quality  music notation
(sheet music). Midisoft Studio 6.0 is differentiated from other music sequencers
because it uses the same notation engine  incorporated in Midisoft Desktop Sheet
Music. This capability currently is not found in competing products .

Midisoft Desktop Sheet Music(TM).  Desktop Sheet Music 2.0,  released at the end
of the third quarter of 1998, includes  significant  functionality  improvements
based on  extensive  beta use  evaluations.  Targeted  at the  estimated  $433.5
million  per year  category  of printed  music  (National  Association  of Music
Merchants,  1998 Statistical Survey),  Desktop Sheet Music creates and publishes
professional  sheet  music.  The  product,   imports  standard  MIDI  files  for
conversion to high-quality music notation (sheet music).

Midisoft MIDIKit(R). Midisoft MIDIKit's universal MIDI connector and MIDI editor
transforms a PC into a music  recording  studio.  Cables  connect the PC's sound
card to a MIDI musical instrument. The product's Recording Session Plus software
provides MIDI recording,  composing and editing  capability,  as well as digital
audio recording.

Midisoft  Play  Piano(TM)  2.0.  Midisoft  Play Piano 2.0 combines core Midisoft
technologies  and new proprietary  technologies for creating  interactive  music
learning experiences based on individual student needs. The product imports MIDI
files and with artificial intelligence creates custom music lessons.

Midisoft Family Music Center(TM). Family Music Center incorporates Midisoft Play
Piano and Midisoft Studio with a keyboard, MIDI connector and a Connect and Play
video, targeting family entertainment.

Midisoft's  Internet  Product Line consists of Midisoft  Internet  Media Player,
Midisoft  MediaWorks '98, Internet Audio Postcard,  Midisoft Internet  SoundBar,
and Midisoft AudioPro. Derivatives of these products are planned for development
for new and existing contracts, including audio and content aggregators, as well
as downloads from Internet destination and portal sites.

Internet  Media  Player(TM) In July 1998,  the Company  released  Internet Media
Player(TM)  v3.0, a streaming  media  player,  with full  support for  Microsoft
Corporation's NetShow v3.0. The player provides Internet users with capabilities
to locate, organize and directly access links to streaming content, such as live
radio and TV broadcasts,  concert  "webcasts,"  on-line news and  entertainment.
This  product  also plays MP3 files,  the  current  file format of choice of the
Internet music enthusiast.

Internet  Media  Player was a  featured  NetShow  (now  Windows  Media)  Partner
third-party  product on  Microsoft's  web site and was included on two Microsoft
Tools CDs,  distributed to more than 50,000  commercial  and corporate  software
developers.  Internet Media Player is sold and  distributed to end-users via the
Company's Web site and targeted ad banner advertising on streaming-specific  web
sites. Of particular interest to third-party customers is the ability to "brand"
Internet Media Player with corporate  logos,  advertising and streaming  content
links, as well as the ability to automatically  refresh  advertising and content
via the Internet.

MediaWorks(TM) `98 In late June 1998, the Company released  MediaWorks `98 v1.0,
a multimedia  playback  application  for Windows  95/98 and NT.  MediaWorks  `98
provides an extensible  audio/video player supporting most popular file formats.
The product  features an  intuitive  user  interface,  as well as an  integrated
database engine, the MediaFinder , which simplifies  locating and managing media
files.


                                                                               4
<PAGE>

The  Company  is  marketing  MediaWorks  `98  to  its  traditional   third-party
customers,    on    its    web    site    (http://www.midisoft.com/html/catalog/
mw98/default.htm)  and on download sites,  such as BuyDirect.com  and ZDNet. New
versions  of  MediaWorks  `98  will  feature  plug-in   architecture  for  rapid
deployment of enhancements and modules supporting enhanced file formats.

Midisoft  AudioPro(TM).  AudioPro  supports  MIDI,  wave  audio and CD audio for
third-party  programs,  providing software sound tools and flexibility to manage
and edit interactive multimedia audio data.

Midisoft  Internet  Audio  Postcard(TM).  Midisoft  Internet Audio Postcard adds
voice to digital  snapshots  or video  files.  It includes a player for Internet
distribution. .

Midisoft  Internet  Sound Bar(R)  Internet  Sound Bar controls sound from the PC
desktop.  With this product users send Audio Mail, create Audio Notes,  annotate
digital  pictures or video with sound,  then  distribute  their creations on the
Internet  The  software  plays CD's and locates and collects all sound and music
files on the PC. This functionality is controlled from a Windows-style task bar,
positioned on the screen edge.

Market Overview

With  proliferation  of the  Internet as an engaging  medium for  communication,
entertainment  and  recreation,  Midisoft  believes the PC will continue to be a
platform for creating and experiencing  music,  sound and video. In the broadest
sense,  the potential  market for the Company's audio and media control software
is every PC that ships into a home or business.  IDC forecasts unit shipments of
PC's to  grow  14.1%  in 1999 to more  than  96  million,  with  the  number  of
households owning a personal  computer,  expected to reach 43% in the U. S. This
obviously presents substantial segments for music and related applications.  The
National  Association of Music Merchants  estimates 62 million amateur musicians
reside  in  the  U.S.  The  Company  expects  that  music  tutorials,  creation,
appreciation and enjoyment with PC's will continue.

The Company also believes that office  computer  users will become  increasingly
aware  and  experienced  in  using  sound  effects,  such  as  background  music
integrated with visual effects in their business presentations

Strategy

Midisoft is deploying a strategy  designed to meet the demands of users of music
as well as makers of music.  For example,  the Company  recently  customized its
Desktop  Sheet  Music  product for sale into the  Christian  music  market.  The
customized version features  functionality tailored to the requirements of music
pastors and  directors.  These users of music  require sheet music each week for
use by soloist  performers  or  choirs.  In  addition,  the  product  contains a
selection  of hymns  that can be  transposed  and  varied to fit the  particular
voices or members of a choir.  The Company is identifying  other music users for
similar customization and product sales.

Midisoft  believes  that the  Internet  will  continue to provide a platform for
promoting,  marketing and selling  music and related  products and services MP3,
the file format for  compression of audio files,  is the second most  frequently
searched  for  term  on  the  leading  Internet  search  engines,  according  to
Searchterms.com.  Jupiter  Communications  estimates  music  downloads and other
music  sales will reach $1.4  billion by 2002.  The Company is  positioning  its
Internet Products to exploit these trends.  Internet Media Player is a candidate
for  private  labeling  on  destination  and portal  websites.  The  Company has
initiated  arrangements with content  aggregators and providers for the download
of the Internet Media Player.


                                                                               5
<PAGE>

Marketing, Sales and Distribution

The Company  markets  its  products to end users  through  retail  distribution,
third-party  manufacturers  and  Internet  destinations  and  portals.  Products
offered  directly to end users include the Company's  flagship  music  products.
Music products also have found a home as a product differentiator for sound card
and personal computer  manufacturers.  The uniqueness of the products allows the
Company to leverage its audio  expertise  onto the Internet with Internet  Media
Player.  The Company markets its products  principally by attending trade shows,
advertising  in  periodicals  oriented  toward  retailers  and  end-users,   Web
advertising and direct mailings.

Distribution

Retail  distribution is direct through the Company's Retail Channel Sales group.
The Company has a stock balancing  program for its retail  products that,  under
certain  circumstances,  allows for the exchange of products by  resellers.  The
Company  monitors  and  manages  the  volume  of  its  sales  to  retailers  and
distributors   and  their   inventories  as  substantial   overstocking  in  the
distribution can result in high returns or the requirement of substantial  price
protection in subsequent  periods. A price protection program allows resellers a
price  reduction from the Company for unsold  product.  The Company  believes it
provides  adequate  reserves for returns and price protection which are based on
estimated   future  returns  of  products,   taking  into  account   promotional
activities,  the timing of new product  introductions,  distributor and reseller
inventories  and other factors and that its current  reserves will be sufficient
to meet return and price  protection  requirements  for the foreseeable  future.
Internationally, retail products are generally sold through republishers.

The Company expanded its presence into Musical Instrument ("MI") stores in 1998.
The Company currently has shelf space in the two largest MI chains,  Sam Ash and
Guitar Center, as well as prominent regional MI resellers.  The Company believes
that MI  retailers  generate  higher sales per store for these types of products
than computer software retailers do.

Direct Sales.  The Company has an inside sales group that sells product directly
to end users through a toll-free  number listed in  advertising  by the Company.
This group is responsible  for targeted  direct mail marketing and sells product
upgrades and accessories to registered customers.

Web Sales. Web sales are an increasingly  important channel for the Company. The
Company has developed its Internet web site to promote the complete product line
and  conduct  secured  online  transactions.   In  addition,   the  Company  has
sublicensed  certain of its  downloadable  software  products to other  Internet
stores such as Digital River and c|net.

As part of its sales  efforts,  the Company  generates  a marketing  database of
registered  users for direct  mail  opportunities.  Further,  the  surveying  of
current users, collation of user feedback from technical support calls, input by
customers and the Company's sales force is evaluated in determining the features
and function of the next set of product releases in the context of the Company's
own strategic planning.

The Company distributes product direct to third-party  manufacturers through its
internal  sales  force.   The  Company  supplies  one  master  disk,  which  the
manufacturer duplicates.

Customer  Support:  The  Company  provides a high  level of  support  across the
distribution  spectrum.  Support  includes  on-site  training  for  third  party
manufacturers,  as well as on-going  telephone  support.  In turn,  these groups
provide  support for their  customers  directly.  The  Company  also offers free
support to end-users of its retail products.


                                                                               6
<PAGE>

Competition

The  software  market  for audio and music on the PC is highly  competitive  and
rapidly  changing.  The  Company's  competitors,  many  of  which  have  greater
financial,  marketing and technical  resources  than the Company,  offer similar
products  and target the same  customers.  The Company  believes  its ability to
compete depends upon many factors within and outside its control,  including the
ability  to  offer  product  enhancements,  functionality,  performance,  price,
reliability,  customer  support,  sales and marketing  efforts and distribution.
There can be no assurance  that  competition  will not  adversely  affect future
operating results or financial condition.

Manufacturing

The  Company  utilizes  a  third-party  contractor  for  assembly  and  outbound
distribution.   The  Company  uses  in-house   capability   for  customer  order
processing, component inventory procurement,  material requirements planning and
production   scheduling.   The  manufacturing   process  for  software  involves
duplication  of  software  code  onto  floppy  diskettes  or CD's,  printing  of
packaging  and   documentation   and  assembly  of  final   packaged   products.
Manufacturing  output can generally be increased rapidly to respond to increases
in demand.  The Company has experienced  occasional  delays in manufacturing its
products resulting from not consistently remaining within credit terms with some
of its  vendors  The  Company  has not  encountered  unusual  levels of  returns
resulting from product defects.

The  Company  generates  and  responds  to  customer  demand  through  Web-based
distribution  whereby  customers  order  products  and  download  the  Company's
software  directly to their PCs, This eliminates  most of the traditional  order
processing and manufacturing steps. Third-party sales require duplication of the
Company's  software code onto a CD, generally  referred to as a "golden master."
The manufacturer then transfers the software code from golden masters onto their
hardware.

Proprietary Rights

The Company  relies  primarily on trade secret,  trademark  and copyright  laws,
treaties and  contractual  agreements,  to protect its proprietary  rights.  The
Company  attempts  to keep  results of its  research  and  development  programs
proprietary to protect its marketed software  products against  misappropriation
and infringement by third parties.  However,  there can be no assurance that the
Company will in all instances be able to prevent others from misappropriating or
infringing upon the Company's proprietary information and software products.

The Company  intends to maintain the  integrity  of its trade name,  trademarks,
copyrights and other proprietary rights against  unauthorized use and to protect
against infringement and unfair competition where circumstances warrant.

Although the Company believes that its products do not infringe on any copyright
or other proprietary  rights of third parties,  there are currently  significant
legal  uncertainties  relating to the application of copyright and patent law in
the field of software.  The Company has no assurance that third parties will not
obtain, or do not have, patents covering features of the Company's products,  in
which event the Company or its customers might be required to obtain licenses to
use such  features.  If a patent holder refuses to grant a license on reasonable
terms or at all, the Company may be required to alter  certain  products or stop
marketing them.

Employees

The  Company,  as of March 17,  1999,  employed 18  employees.  Of these,  8 are
employed  in  administration,  4 in  product  development  and  6 in  sales  and
marketing.  Employees are covered


                                                                               7
<PAGE>

by confidentiality  agreements, and no employee has an employment contract. None
of the Company's employees are represented by a union or other bargaining group.
The Company believes it maintains good employee relations.

Dividends

The Company has declared no  dividends on its Common Stock since its  inception.
It is the present  policy of the Company to retain  earnings and capital for use
in its business. Any payment of dividends on the Common Stock in the future will
be dependent  upon the  Company's  financial  restrictions,  if any,  under debt
obligations,  as well as other  factors  that the  Board of  Directors  may deem
relevant.

Forward-Looking Statements

This report contains certain  forward-looking  statements  within the meaning of
Section 27A of the  Securities  Act of 1933 and  Section  21E of the  Securities
Exchange  Act of 1934,  and such  statements  are  subject  to the safe  harbors
created  thereby.  These  forward-looking   statements  include  the  plans  and
objectives of management for future  operations,  including plans and objectives
relating to (a) the development of new music,  strategic and Internet  products,
(b)  the  expansion  of  domestic  and   international   marketing,   sales  and
distribution programs, (c) the continued protection of proprietary  technologies
and (d) the  ability  to  fund  continued  operations  out of  existing  working
capital,  additional capital infusion and cash flow from future operations.  The
forward-looking  statements  included  herein are based on current  expectations
that  involve  a  number  of  risks  and  uncertainties.  These  forward-looking
statements  are based on  assumptions  that the Company will continue to develop
and introduce new music, strategic and Internet products on a timely basis, that
rapid changes in technology  will not make the  Company's  products  obsolete or
otherwise reduce their ability to compete in the  marketplace,  that competitive
conditions within the industry will not change materially or adversely, that the
use of multimedia  PC's in homes and small  offices will continue to grow,  that
management's  decision  to focus  the  Company's  resources  on music  and sound
products will reduce certain  expenses from the levels which were experienced in
1997  and  1998,  and that  there  will be no  material  adverse  change  in the
Company's operations or business.  Assumptions relating to the foregoing involve
judgments with respect to, among other things, future economic,  competitive and
market conditions,  and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company.  Although the Company  believes  that the  assumptions  underlying  the
forward-looking  statements are reasonable,  any of the assumptions  could prove
inaccurate and, there can be no assurance that the  forward-looking  information
will prove to be accurate. In light of the significant uncertainties inherent in
the  forward-looking   information   included  herein,  the  inclusion  of  such
information  should not be  regarded as a  representation  by the Company or any
other person that the objectives or plans of the Company will be achieved.

Item 2. DESCRIPTION OF PROPERTY

The Company's principal offices are located in approximately  17,000 square feet
of office space in Issaquah,  Washington, which the Company leases pursuant to a
lease  expiring in April 2000 with an option to extend  through April 2002.  The
Company currently pays $25,725 per month under its lease agreement.  The Company
considers its leased  properties to be in good condition,  well maintained,  and
generally suitable and adequate for its present and foreseeable future needs.

Item 3. LEGAL PROCEEDINGS

In 1997, an entity which sold  substantially all of its assets to the Company in
1995 demanded that the Company  arbitrate  certain claims arising from the sale.
The claims aggregated in excess of $1


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<PAGE>

million.  The parties  reached an agreement in July 1998 outside of arbitration.
In exchange for the mutual release of all claims and counterclaims,  the Company
agreed to provide  consideration of $420,000,  $25,000 in cash and the remainder
comprised  of  forgiveness  of  $112,000 in debt and  issuance of  approximately
630,000  Midisoft  common  shares.  The  Company  agreed to file a  registration
statement  for these  shares  within 30 days after  final  authorization  by the
shareholders  in 1998, but has not filed the  registration  statement as of this
date. Midisoft intends to file a registration statement at the earliest possible
date.  $20,000 of the $25,000 has been paid. The debt of $112,000 has been fully
reserved  and $283,000 for the  additional  common  shares has been booked as of
December 31, 1998.  Midisoft agreed to remove restrictive  legends on 166,667 of
previously  issued shares. It is anticipated that the releases and consideration
will be exchanged in 1999.

In March  1997,  a former  sales  representative  ("Plaintiff")  filed  suite in
Michigan  against  Midisoft  under  a  certain   manufacturer's   representative
agreement  ("Agreement")  entered  into  between the  parties in November  1994.
Plaintiff  claims  that the Company  breached  the  Agreement  by failing to pay
commissions and is seeking damages in excess of $75,000. Midisoft denies that it
failed to pay commissions under the Agreement and is asserting counterclaims for
over  payments and return  credits.  Damages  asserted by the Company  equal the
damages claimed by the Plaintiff.  The parties are awaiting a trial date,  which
is reportedly to occur  sometime in April 1999.  The ultimate  outcome cannot be
determined  at this  time,  but the  Company  believes  that it has  meritorious
defenses and is vigorously defending against the claim.

On April 3, 1997 the  Company  began  arbitration  proceedings  against a former
customer.  On  September  24,  1997,  the Company was awarded a judgement in the
amount of  $194,983.37  against  the  former  customer.  The amount of the award
represents  the sum of 1)  $160,000.00,  the unpaid  portion of the base  annual
license  royalty under the Company's  OEM License  Agreement and 2)  $34,983.37,
representing interest on the unpaid installments from their respective due dates
through the date of the award  computed at 12% per annum.  In November 1998, the
former  customer had  exhausted its appeals when the  Washington  State Court of
Appeals denied the former  customer's  appeal motion,  thereby  terminating  the
appellate  process.  In March 1999,  the Company  amended the  judgement  to add
attorneys' fees and interest  accrued since the original  judgement was entered.
The total  amount of the  amended  judgement  is  $247,925.34.  The  Company has
engaged a California  law firm to enforce  judgement in the state of California,
the headquarters location of the former customer.

As of December 31, 1998, the Company had $345,000 of accounts  payable that were
current,  $37,000 extended to between 31 and 60 days and $799,000  extended over
60 days.  The level of extended  accounts  payable  results  from the  Company's
negative  operating  cash. The Company has entered into plans to extend payments
beyond due dates in the original purchase orders. There is no certainty that the
Company will be able to continue to meet extended payment terms. The Company has
received demand letters from certain  vendors  requesting  immediate  payment of
amounts owing them totaling approximately $401,000. Twelve of these vendors have
initiated  litigation for claims totaling  $131,000 and 8 of these have received
judgments  totaling  approximately  $95,000.  The Company has reached settlement
agreements with some vendors and is negotiating with the remainder. Some vendors
have  stopped  making  sales to the  Company and others  have  required  cash on
delivery terms.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The  annual  meeting  of  shareholders  was held on  October  30,  1998 near the
Company's  headquarters  in  Issaquah,  Washington.  Matters  submitted  to  the
shareholders for a vote were as follows:

Election of Directors - Mr. Larry Foster and Ms. Marsha Murry were  reelected as
directors  of the  Company.  Their  three year terms  expire at the 2001  annual
meeting of shareholders.  Mr.


                                                                               9
<PAGE>

Foster's  nomination  received  5,345,267 votes FOR, 295,824 votes were withheld
and there  were  186,751  broker  non-votes.  Ms.  Murry's  nomination  received
5,337,598  votes FOR,  303,493 votes were withheld and there were 186,751 broker
non-votes.

Selection of Independent  Accountants - The selection of  PricewaterhouseCoopers
LLP as the Company's  independent  accountants was ratified.  The results of the
vote were 5,593,913 FOR and 33,898 AGAINST with 13,280  abstentions  and 186,751
broker non-votes.

Proposal to Amend the  Articles of  Incorporation  to  Increase  the  Authorized
Common  Shares  to 25  Million  - This  increase  of 15  million  shares  in the
authorized  common shares was approved by the  shareholders.  The results of the
vote were 5,196,653 FOR and 410,788 AGAINST with 33,650  abstentions and 186,751
broker non-votes.

Proposal to Reserve an  Additional  500,000  Shares  under the 1989 Stock Option
Plan - This proposal was defeated.  The shareholder votes were 1,470,063 FOR and
529,468 AGAINST with 83,509 abstentions and 3,744,802 broker non-votes. Although
the  measure  received a majority  of the votes  cast,  a majority  of the total
outstanding shares was required for passage.


                                                                              10
<PAGE>

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Market  Information.  The  Company's  Common  Stock is traded  under the  symbol
"MIDI".  The  Company's  Common Stock was quoted on the Nasdaq  National  Market
through  September 9, 1997.  Since that time, the Common Stock has traded on the
OTC Bulletin  Board.  The  following  table sets forth the range of high and low
closing bid prices, as reported, from January 1, 1997 through December 31, 1998.
The prices set forth reflect  inter-dealer  quotations,  without retail markups,
markdowns or commissions,  and do not necessarily represent actual transactions.
As of March 17, 1999,  the number of holders of record of the  Company's  Common
Stock was approximately  1,567.  Since certain of the shares of Common Stock are
held in street name, there may be additional beneficial holders of the Company's
Common Stock.

                                            High              Low
                                            ----              ---
     1997
   First quarter                         $ 2.5000        $  1.1250
   Second quarter                          2.0000           1.0625
   Third quarter                           4.6250           3.0313
   Fourth quarter                          1.6250           0.4375

     1998
   First quarter                         $ 1.2500        $  0.6250
   Second quarter                          0.8125           0.3125
   Third quarter                           1.0000           0.3750
   Fourth quarter                          0.7500           0.2300

Dividends.  The Company has  declared no dividends on its Common Stock since its
inception.  It is the  present  policy of the  Company  to retain  earnings  and
capital for use in its business. Any payment of dividends on the Common Stock in
the future will be dependent upon the Company's financial condition,  results of
operations,  current and  anticipated  cash  requirements,  plans for expansion,
restrictions,  if any, under debt obligations, as well as other factors that the
Board of Directors may deem relevant.

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

The  following  discussion  should  be read in  conjunction  with the  Financial
Statements and notes thereto.

General

The Company's  revenues  include sales of software and software  licenses net of
sales  returns.  Cost of  revenues  includes  the  costs  of  manuals,  software
duplication,  packaging materials, assembly, paper goods, shipping, amortization
of software  development costs and royalty fees paid to licensors of third-party
software bundled with the Company's products.

Research and development  expenses consist  primarily of personnel and equipment
costs required to conduct the Company's development effort. Software development
costs are expensed as incurred.


                                                                              11
<PAGE>

Revenue from products  licensed to OEMs consisting of one-time  license fees and
contracts for minimum  advances against future unit licenses are recognized when
the  criteria  for fixed fee revenue  recognition  under  American  Institute of
Certified Public  Accountants'  Statement of Position No. 97-2, Software Revenue
Recognition (SOP 97-2) is satisfied. These criteria include, but are not limited
to,  delivery of the software  master,  the Company's lack of other  significant
obligations to the customer and a determination  that the  collectability of the
amount  due is  probable.  Contracts  that do not meet  the  fixed  fee  revenue
recognition  criteria in SOP 97-2 included in deferred revenue are recognized as
revenue on the  installment  basis as payments from  customers are received,  or
until the Company has no significant obligations. Additional royalty use or unit
copy royalty fees are  recognized  when they are earned  pursuant to the license
agreements and upon  notification of shipment from the OEMs.  Revenue from sales
to  distributors,   other  resellers  and  end-users  net  of  a  provision  for
anticipated  returns, is recognized when the products are shipped. The allowance
for returns is evaluated  each quarter  taking into  consideration,  among other
things,  known return requests from  distributors,  anticipated  return requests
based on the distributor's rate of product sale, returns due to product upgrades
and historical distributor return patterns.

During 1997 and 1998,  the  Company's  research and  development,  marketing and
sales efforts were focused upon the  Company's  core  technologies  in sound and
music.  The Company has continued to reduce its reliance on technology  licensed
from others through  internal  development of superior  technologies  or through
direct acquisition of desirable technologies.

At December 31, 1998, the Company had Federal net operating  loss  carryovers of
approximately   $26.1  million,   which  expire   beginning   2008.  In  certain
circumstances,  as specified in Section 382 of the Internal  Revenue Code, a 50%
or more ownership change by certain  combinations of the Company's  stockholders
during any  three-year  period  would  result in  limitations  on the  Company's
ability to utilize  its net  operating  loss  carryforwards.  An  investor  owns
$3,000,000 in principal amount of convertible debentures and associated warrants
and has the right to purchase an additional $1,000,000 in convertible debentures
by June 1999.  If the  debenture  holder were to exercise  all its  warrants and
convert all the debt it holds, a change in control of the Company would result.

Seasonality

Sales to  distributors  tend to be greater  in the third and  fourth  quarter as
consumers buy software to supplement their holiday computer hardware  purchases.
OEM sales are  concentrated  in a small number of large  customer  contracts and
tend to occur  sporadically.  Direct  sales  generally  increase  when  software
upgrades become available.

Comparison of Years Ended December 31, 1998 and 1997

Sales for 1998 were $1.8  million  compared  to $3.0  million in 1997.  Sales to
software distributors and resellers, together with direct sales, represented 79%
and 70% of sales for the years ended  December 31, 1998 and 1997,  respectively.
OEM sales represented 21% and 30% during the same periods. Sales to distributors
and  resellers  were lower in part from higher  returns and lower units sales in
1998  compared to 1997.  The Company  believes  that the decline in OEM sales is
substantially  related to  significant  industry-wide  reductions  in PC prices,
which began in the fourth  quarter of 1997.  These pricing  pressures  persisted
during 1998.  In this light,  actions by the  Company's  OEM customers to reduce
their costs and number of suppliers  has  adversely  affected the  Company's OEM
sales in 1998 compared to 1997. The Company has responded by  repositioning  its
OEM products to take advantage of enhanced  internet-based  functionality and by
pursuing  partnerships with internet content  aggregators.  International  sales
accounted for 8% of the  Company's  revenues in 1998 compared to 13% of revenues
in 1997 resulting from the Company's continued emphasis on US sales in 1998.


                                                                              12
<PAGE>

Gross profit for 1998 was $1.1 million, a decrease of $0.2 million,  compared to
$1.3 million for the prior year. As a percentage  of net revenues,  gross profit
increased  to 62% in 1998  from 45% in 1997.  Gross  profits,  in  general,  are
affected by the mix of OEM licensing sales versus music product sales as well as
the mix within music  products.  The retail channel and inside sales channel for
music products consist of boxed product. OEM costs of sales generally consist of
one master CD from which OEMs  duplicate  the Company's  software.  Accordingly,
gross profit is higher on OEM sales compared to sales into other channels. Costs
were lower in 1998 compared with the same period in the prior year due primarily
to the absence of software  amortization expense in 1998. Software  amortization
costs for the year ended  December  31, 1997 were  $455,000.  These  assets were
fully amortized in 1997.  Without  amortization  expense,  cost of sales for the
year ended  December  31,  1997 would have been 40% as  compared to 38% in 1998.
Contributing   to  gross  margin   increase  was  the  elimination  of  software
amortization  expenses offset by a higher level of returns and a change in sales
mix, reflecting lower OEM sales, in 1998 compared to 1997. Also,  increased cost
of goods sold in 1998 resulted in part from higher unit production and component
costs resulting from lower volumes and smaller order quantities. The Company has
kept royalty costs low as it has  concentrated on internal  development of sound
and music software.

Research and development expenses for 1998 were $626,000, a decrease of $362,000
compared to $988,000 for 1997.  As a percentage  of net  revenues,  research and
development  expenses  increased to 36% in 1998 from 33% in 1997.  This reflects
the Company's commitment to sustain internal development of its industry leading
software for the  production  and  management of sound and music.  The Company's
continued  investment in product development reflects commitments to continually
introduce new or improved products.

Sales and  marketing  expenses  for 1998 were $1.2  million,  a decrease of $0.6
million,  compared to $1.8 million for 1997. As a percent of net revenues, sales
and marketing expenses increased to 68% in 1998 from 61% in 1997. Principal cost
reductions were in sales and marketing employees,  advertising, and trade shows.
The increase in sales and marketing  expense as a percentage  of sales  resulted
from lower  sales.  The  reduction  in expense  levels  reflects  the  Company's
continuing  emphasis on cost controls and targeting  marketing and sales efforts
into direct sales channels.

General and  administrative  expenses for 1998 were $1.9 million,  a decrease of
$200,000,  compared to $2.2 million for 1997.  As a percentage  of net revenues,
these  expenses  for 1998  increased  to 106% from 72% in 1997.  The increase in
general  and  administrative  expense as a  percentage  of sales is due to lower
sales in 1998.  G&A expense is  comprised  mainly of fixed  obligations  and the
Company is  endeavoring  to reduce these costs by  restructuring  certain  lease
agreements, reducing insurance, legal and other professional services fees.

Interest expense for 1998 was $1.6 million, an increase of $0.6 million compared
to $1 million in 1997.  The increase in interest  expense  results from non-cash
charges  relating to the  intrinsic  value of  in-the-money  conversion  options
related to the  convertible  debentures  and detachable  warrants  issued by the
Company in 1998.

Liquidity and Capital Resources

As of December 31, 1998, the Company's  principal sources of liquidity  included
cash and cash  equivalents of $270,000 and net accounts  receivable of $183,000.
As of December 31, 1998, working capital was negative $1.2 million.

The Company's operating  activities used cash of $1.5 million for the year ended
December 31, 1998 due primarily to operating losses of $2.6 million.


                                                                              13
<PAGE>

Current assets decreased $358,000 to $610,000 at December 31, 1998 from $968,000
at the end of 1997.  The decrease was due to reductions of accounts  receivable,
inventories and prepaid  expenses  totaling  $538,000,  offset by an increase in
cash of $180,000.  Long term assets  decreased  $117,000 to $367,000 at December
31, 1998 from $484,000 at the end of 1997. This decrease  resulted  largely from
depreciation  of fixed  assets.  There were no  significant  additions  to fixed
assets in 1998. The total of current  liabilities and deferred revenue were $1.8
million at December  31,  1998,  an increase of $0.1 million from the balance at
December 31, 1997 of $1.7 million.  An increase in accounts  payable of $200,000
in 1998 was  partially  offset  by a  decrease  of  $100,000  in  other  accrued
expenses.  Shareholders'  equity decreased $2.1 million to negative $3.2 million
at December 31, 1998 from a negative $1.1 million at the end of 1997. The change
in equity  resulted from a net loss recorded in 1998 of $4.2 million,  partially
offset by additions to equity for the issuance of stock in  settlement of claims
and outstanding  accounts  payable of $300,000 and $1.7 million,  reflecting the
fair value of warrants and the intrinsic value of convertible  debentures,  both
associated with the securities  purchase agreement executed October 28, 1997, as
described below.

On October 28, 1997, the Company entered into a Securities  Purchase  Agreement,
which was amended on January 7, 1998, (the  "Agreement") with an unrelated third
party  (the  "Lender").  The  Agreement  provides  for the sale of $2 million of
convertible debentures with the option for an additional $2 million through June
1999.  The Company  sold  $500,000 of  debentures  on each of October 28,  1997,
November 28, 1997, January 9, 1998 and January 28, 1998. The first $1 million in
debentures sold are convertible into a total of 1,666,667 shares of Common Stock
and were issued with warrants to purchase an additional 833,333 shares of Common
Stock at a price of $1.50 per share.  The second $1 million in  debentures  sold
are convertible into a total of 1,923,077 shares of Common Stock and were issued
with  warrants to purchase an  additional  961,538  shares of Common  Stock at a
price of $1.25 per share.  The  debentures  bear  interest at the rate of 1% per
annum  payable in cash or, at the Company's  option,  in shares of Common Stock.
The Company is obligated to pay a finder's fee of 3% of the money raised as that
money is received  by the  Company.  The  Company has the right to redeem  these
debentures at any time prior to conversion for an amount equal to the sum of the
outstanding  principal  amount plus accrued  interest plus a redemption  premium
which increases from 7% of the principal  amount if redeemed within 45 days from
issuance to 25% of the  outstanding  principal  amount if the redemption date is
more than 90 days from the  issuance  date.  For so long as the  debentures  are
outstanding or the Lender owns at least 25% of the Company's  outstanding Common
Stock,  the  Lender  shall  have the  right to (i)  approve  certain  merger  or
acquisition transactions,  (ii) appoint two of the Company's five directors with
the Company's  concurrence and (iii) purchase any equity  securities the Company
may propose to sell. The first of the Lender's board positions was filled by Mr.
J. Larry Smart,  President and Chief  Executive  Officer of  Visioneer,  Inc., a
public  company.  The second  position  has been  filled by Mr.  Robert  Orbach,
President and founder of B. Orbach, Inc.

The Company and the debenture holder amended the Securities  Purchase Agreement,
with respect to the proposed  June 15, 1998 sale of  $1,000,000  of  convertible
debentures,  to provide for the sale of up to $1,000,000  of Senior  Convertible
Secured Notes in 1998.  The first $500,000 of these notes are for five years and
bear  interest  at the rate of one  percent  (1%)  per  annum,  payable  in cash
annually on the anniversary date of the notes.  These notes are convertible into
2,500,000  shares of Common  Stock.  The note  holder  also  received  five year
warrants  to purchase  500,000  shares of Common  Stock at an exercise  price of
$0.75 per  share.  The notes  will be  secured  by  first,  prior and  perfected
interests in all intellectual  property  rights,  fixed assets and contracts for
product  delivery.  The note  holder had the option to  purchase  an  additional
$500,000 of notes with terms and conditions  similar to those referenced  above,
with a conversion price equal to forty-seven  percent (47%) of the value of each
share  of  common  stock  for the ten  trading  days  prior to  exercise  of the
conversion  option.  This option was exercised in two installments.  The Company
sold  $250,000 of these notes in December  1998 and a like amount in March 1999.
Each of these notes are convertible  into 1,000,000  shares of Common Stock. The
note holder also  received  five year


                                                                              14
<PAGE>

warrants  to purchase  500,000  shares of Common  Stock at an exercise  price of
$0.75 per share with each note.

The  debenture  holder has the right to purchase  an  additional  $1,000,000  of
convertible debentures in 1999. If the debenture holder were to exercise all its
warrants and convert all the debt it holds and has a right to acquire,  a change
in control of the Company would result.

Simultaneous with the execution of the original  Agreement,  the Company entered
into a Registration Rights Agreement with the Lender, whereby the Company agreed
to use its reasonable best efforts to file a registration  statement to register
the Common  Stock  which is issuable  upon the  conversion  and  exercise of the
debentures  and  warrants.  The  Company  has agreed that it will bear all costs
associated  with  such  registration,   excluding  underwriting  commissions  or
discounts.

In September 1997, the Company received  $250,000 for which it was to issue a 5%
convertible  note due September 1998 (the Note).  The Note and accrued  interest
were to be  convertible  into common  stock at a  conversion  price of $0.65 per
share,  at the option of the holder,  at any time after October 30, 1997 through
maturity.  A debt  discount of $135,000  was recorded  related to the  intrinsic
value  of  the  in-the-money   conversion  option  at  the  close  of  the  debt
transaction.  The discount was expensed on October 30, 1997.  The note agreement
has not been executed and the lender has  requested  changes to certain terms of
the agreement.  The Company  expects that the final agreement will provide for a
convertible note bearing interest from 5% to 8% with a conversion price of $0.65
per share, maturing in two to three years.

To date,  the  Company  has  financed  its  operations  principally  through net
proceeds from two public  offerings  and private  placements of debt and equity.
Cash  on  hand,  along  with  cash  generated  from  the  sale of  products  and
collections of accounts receivable, is not expected to be sufficient to meet the
Company's  requirements  for the next 3 months.  The  Company's  ability to fund
continued  operations depends on raising additional capital.  Should the Company
be  unable  to  raise  additional  capital,  the  Company  will be  required  to
significantly reduce operations,  reduce expenses,  and may find it necessary to
file for protection  under the bankruptcy  code.  Such steps would likely have a
material  adverse  effect  on the  Company's  ability  to  establish  profitable
operations in the future.  The Company will  continue to pursue other  financing
arrangements  to  increase  its cash  reserves.  There can be no  assurance  the
Company  will be capable of  raising  additional  capital or that the terms upon
which such capital will be available to the Company will be acceptable.

Trade Debt and Other Matters

As of December 31, 1998, the Company had $345,000 of accounts  payable that were
current,  $37,000 extended to between 31 and 60 days and $799,000  extended over
60 days.  The level of extended  accounts  payable  results  from the  Company's
negative  operating  cash. The Company has entered into plans to extend payments
beyond due dates in the original purchase orders. There is no certainty that the
Company will be able to continue to meet extended payment terms. The Company has
received demand letters from certain  vendors  requesting  immediate  payment of
amounts owing them totaling approximately $401,000. Twelve of these vendors have
initiated  litigation for claims totaling  $131,000 and 8 of these have received
judgments  totaling  approximately  $95,000.  The Company has reached settlement
agreements with some vendors and is negotiating with the remainder. Some vendors
have  stopped  making  sales to the  Company and others  have  required  cash on
delivery terms.

Nasdaq

Effective with the close of business  September 9, 1997 the Nasdaq  delisted the
Company's Common Stock from the Nasdaq National  Market.  The Company was unable
to evidence a minimum of $2,000,000 in net tangible  assets and compliance  with
all the  requirements  for  continued  listing  on the Nasdaq  National  Market.
Although the Common Stock trades on the OTC Bulletin Board, the Company believes
that the  delisting  of its stock has  adversely  affected  its ability to raise
capital.


                                                                              15
<PAGE>

YEAR 2000

The  Year  2000 or Y2K  problem  is  somewhat  predictable  in its  timing,  but
unpredictable in its effects. In order to conserve limited computer memory, many
computer systems,  software programs, and other microprocessor dependent devices
were created using only two digit dates,  such that 1998 was  represented as 98.
These  systems  may not  recognize  certain  1999  dates,  and the year 2000 and
beyond,  with the result that  processors  and programs may fail to complete the
processing  of  information  or revert back to the year 1900. As we approach the
year 2000, we expect  computer  systems and software used by many companies in a
wide variety of applications to experience  operating  difficulties  unless they
are  modified  or  upgraded  to process  information  involving,  related to, or
dependent upon the century change. Failures could incapacitate systems essential
to the functioning of commerce, building systems, consumer products,  utilities,
and government  services locally as well as worldwide.  Significant  uncertainty
exists concerning the scope and magnitude of problems associated with Y2K.

State Of Readiness

The Company has  established  a Y2K Task Force to address  these risks.  The Y2K
Task Force, comprised of the CEO, CFO and Director of Information Technology, is
leading  the  Year  2000  risk  management  efforts.   The  Y2K  Task  Force  is
coordinating the  identification  and testing of computer  hardware and software
applications,   with  a  goal  to  ensure  availability  and  integrity  of  the
information  systems and the reliability of the operational  systems utilized by
the Company.

Year 2000 Project Methodology and Approach

The Year 2000  Project at Midisoft  Corporation  uses the  following  five-phase
methodology and approach:

The first two phases are "work in progress"  and are being updated in an ongoing
basis.

Phase I - Inventory.  Collect a  comprehensive  list of  components  that may be
affected by the Year 2000 issues.  Components are categorized  into  facilities,
hardware, software, and services.

Phase II - Assessment. Evaluate the inventory to determine which components will
function  properly  with the turn of the  century and rank  components  based on
their potential  impact to the company.  Each component is assigned  priority as
follows:

Critical ("1"):        Will potentially  impair the company's ability
                       to do business should the component fail.


Important ("2"):       Will adversely affect some productivity should the
                       component fail.

Inconvenient ("3"):    Will cause minor inconvenience should the component fail.

Non-Essential ("4"):   Will have no impact should the component fail.

Based on assigned  priorities from Phase I and II, the following  phases will be
carried out to the critical (priority 1) components first, followed by important
(priority 2) components,  then inconvenient  (priority 3) components and finally
non-essential  (priority 4) components if resources and time are available.  The
Company  is  committed  to  complete  testing  of  all  critical  and  important
components before August 31, 1999.


                                                                              16
<PAGE>

Phase  III  -  Remediation.  Analyze  all  components  affected  by  Year  2000,
identifying problem areas and repairing / replacing non-compliant components.

Phase IV - Testing. Thorough testing of all affected systems,  including present
and future date testing to simulate Year 2000 dates.

Phase V -  Implementation.  Place all  components  that  have been  successfully
tested into production.

Year 2000 Testing Criteria and Tools Utilized

Information  systems  are being  tested  with a  licensed  software  program;  a
diagnostic tools designed for personal  computers and servers that will identify
Y2K issues  related to  computer  hardware,  software  and data.  To date,  this
testing appears to have been successful and has yielded no significant problems.
With  the  constant   introduction  of  new  computer  equipment  and  software,
information systems testing will continue throughout the year.

          The company uses  different test criteria and test dates for different
          computing platforms.

          Hardware:  On PC and  LAN  server  hardware  platforms,  Midisoft  has
          adopted the NSTL's  Ymark2000 test program during the assessment phase
          to identify non compliant  hardware.  NSTL, a division of  McGraw-Hill
          Companies,  is a leading independent testing facility for the computer
          industry.

          Software:  During the  remediation  and testing  phases,  Midisoft has
          adopted GMT's Check2000 PC Deluxe for testing and corrective actions.

Microsoft  products are also being tested using the Microsoft  Product  Analyzer
available from their web site at www.microsoft.com/y2k.  This program checks all
Microsoft  products  installed  against their online  database that contains the
latest results from their internal testing.

Data:  Check2000 PC Deluxe will be used to identify and examine  individual data
in a variety of storage  formats.  Data files with potential date issues will be
identified  and presented to the user for ranking to determine the importance of
each file detected. Based on this ranking, all critical and important files will
be analyzed for non-compliant dates and corrected accordingly.

Year 2000 Supplier and Partner Status

The company does not currently  utilize  Electronic Data Interchange  (EDI) with
any of its partners or vendors but will  thoroughly  test any EDI situation that
may arise between now and March 1, 2000.

Suppliers  and  Partners  have  been  identified  and  ranked  based on the same
criteria as phase II.

Critical ("1"):        Will potentially  impair the company's ability
                       to do business should the supplier / partner fail.

Important ("2"):       Will adversely affect some productivity should
                       the supplier / partner fail.

Inconvenient ("3"):    Will  cause  minor  inconvenience  should the
                       supplier / partner fail.

Non-Essential ("4"):   Will have no impact should the supplier / partner fail.


                                                                              17
<PAGE>

If  critical  suppliers  do not  satisfy  the  companies  Year  2000  compliance
requirements,  alternative suppliers will be identified.  As a contingency plan,
inventory  levels  may be raised  prior to  December  1999 to  assure  continued
delivery of products to customers through March 2000.

Risks

In the event such third parties cannot provide the with products,  services,  or
systems that meet the Year 2000  requirements on a timely basis, or in the event
Year 2000 issues prevent such third parties from timely  delivery of products or
services  required by the Company,  the Company's results of operations could be
materially adversely affected.  To the extent Year 2000 issues cause significant
delays in, or cancellation of, decisions to purchase,  the Company's products or
services, the Company's business,  results of operations, and financial position
would be materially adversely affected. The Company is assessing these risks and
in some cases has initiated formal communications with significant suppliers and
customers to determine  the extent to which the Company is  vulnerable  to these
third parties' failure to remediate their own Year 2000 issues.  There can be no
assurance  the Company will identify and  remediate  all  significant  Year 2000
risks,  or that  such  risks  will not have a  material  adverse  effect  on the
Company's business,  results of operations, or financial position.  Accordingly,
the  Company  will  continue to develop  contingency  plans in  anticipation  of
unexpected Year 2000 events. Based on its assessment of year 2000 risks to date,
the Company  does not  believe any  material  exposure to  significant  business
interruption exists as a result of Year 2000 compliance issues.

Contingency Plans

Since the Year 2000  problem  is  pervasive,  few,  if any,  companies  can make
absolute  assurances  that they  will  identify  and  remediate  all Y2K  risks.
Accordingly, the Company expects the risk assessment and contingency planning to
remain an ongoing  process  leading up to and beyond the year 2000. In addition,
the  potential  Year 2000 problem is being  addressed  as part of the  Company's
overall emergency  preparedness  program that includes  contingency planning for
other potential major catastrophes like earthquakes, fires and floods.

The Companies  approach to Financial  Risk Transfer has two main areas of focus.
Secure the broadest  insurance coverage available at a reasonable cost and avoid
exclusions or  restrictions  of coverage,  if possible.  Explore other Financial
Risk Transfer products and/or Y2K specific insurance coverage to the extent that
it becomes available at economically feasible levels.

Estimated Costs

The Company is continuing to assess the potential  impact of the century  change
on its business,  results of operations,  and financial position. The total cost
of these Year 2000  compliance  activities is not  anticipated to be material to
the  Company's  financial  position  or its results of  operations.  The cost of
internal  resources  dedicated  to the Year 2000 has not been  estimated at this
time.

Subsequent Events

As discussed  above, in March 1999 the Company issued 1% convertible  debentures
in  exchange  for  $250,000.  The  debentures  are  convertible  into a total of
1,000,000  shares of Common Stock and carry  detachable  warrants to purchase an
additional  500,000  shares of Common Stock at $0.75 per share.  The  debentures
mature in March 2004.


                                                                              18
<PAGE>

ITEM 7.  FINANCIAL STATEMENTS


                        Report of Independent Accountants



To the Board of Directors
and Shareholders of
Midisoft Corporation


In our opinion,  the  accompanying  balance sheet and the related  statements of
operations,  of  changes in  shareholders'  equity  (deficit)  and of cash flows
present fairly,  in all material  respects,  the financial  position of Midisoft
Corporation at December 31, 1998 and 1997, and the results of its operations and
its cash flows for the years then ended in conformity  with  generally  accepted
accounting principles.  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 of these
statements  in accordance  with  generally  accepted  auditing  standards  which
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,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for the opinion expressed above.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  described  in  Note 1 to the
financial statements,  the Company has suffered recurring losses from operations
and has a net capital  deficiency that raise substantial doubt about its ability
to continue as a going  concern.  Management's  plans in regard to these matters
are also  described  in Note 1. The  financial  statements  do not  include  any
adjustments that might result from the outcome of this uncertainty.


PricewaterhouseCoopers LLP
Seattle, Washington
April 14, 1999

<PAGE>

Midisoft Corporation
Balance Sheet
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                               December 31,
                                                                                                         1998                1997
<S>                                                                                                <C>                 <C>
Assets
Current assets
    Cash and cash equivalents                                                                      $    270,000        $     90,000
    Accounts receivable, net                                                                            183,000             574,000
    Inventories                                                                                         115,000             222,000
    Prepaids and other                                                                                   42,000              82,000
                                                                                                   ------------        ------------
        Total current assets                                                                            610,000             968,000

Long-term receivable                                                                                    195,000             195,000
Property and equipment, net                                                                             116,000             239,000
Debt issuance costs, net of accumulated amortization
    of $23,000 in 1998 and $0 in 1997                                                                    56,000              50,000
                                                                                                   ------------        ------------
                                                                                                   $    977,000        $  1,452,000
                                                                                                   ------------        ------------
Liabilities and Shareholders' Deficit
Current liabilities
    Trade accounts payable                                                                         $  1,181,000        $    969,000
    Current portion of long-term debt                                                                   250,000             250,000
    Accrued wages and payroll taxes                                                                      93,000             100,000
    Other accrued expenses                                                                              273,000             391,000
    Deferred revenue                                                                                      6,000              30,000
                                                                                                   ------------        ------------
        Total current liabilities                                                                     1,803,000           1,740,000
                                                                                                   ------------        ------------
Long-term debt, net of discount                                                                       2,258,000             740,000
                                                                                                   ------------        ------------

Warrant obligations                                                                                      81,000              81,000
                                                                                                   ------------        ------------
Commitments and contingencies (Notes 11, 12 and 13)

Shareholders' deficit
    Preferred  stock,  Series A  convertible,  no par  value;  2,500,000 shares
      authorized, zero issued and outstanding in 1998 and 1997
    Common stock, no par value;  25,000,000 shares authorized,  7,251,000 issued
    and outstanding in 1998 and 6,359,000 issued
    and outstanding in 1997                                                                          20,488,000          20,165,000
    Additional paid-in capital                                                                        3,026,000           1,245,000
    Notes receivable from shareholders                                                                 (191,000)           (191,000)
    Accumulated deficit                                                                             (26,488,000)        (22,328,000)
                                                                                                   ------------        ------------
        Total shareholders' deficit                                                                  (3,165,000)         (1,109,000)
                                                                                                   ------------        ------------
                                                                                                   $    977,000        $  1,452,000
                                                                                                   ------------        ------------
</TABLE>


                 See accompanying notes to financial statements.

<PAGE>

Midisoft Corporation
Statement of Operations
--------------------------------------------------------------------------------

                                                            December 31,
                                                       1998             1997

Revenues                                           $ 1,760,000      $ 3,004,000

Cost of revenues                                       672,000        1,659,000
                                                   -----------      -----------

Gross profit                                         1,088,000        1,345,000
                                                   -----------      -----------

Operating expenses
    Sales and marketing                              1,190,000        1,842,000
    General and administrative                       1,864,000        2,151,000
    Research and development                           626,000          988,000
                                                   -----------      -----------
        Total operating expenses                     3,680,000        4,981,000
                                                   -----------      -----------
Operating loss                                      (2,592,000)      (3,636,000)

Interest expense                                    (1,565,000)      (1,035,000)
Interest income                                         17,000            6,000
Other expense                                          (20,000)         (64,000)
                                                   -----------      -----------
Net loss                                           $(4,160,000)     $(4,729,000)
                                                   -----------      -----------
Basic and diluted net loss per share               $     (0.64)     $     (0.79)
                                                   -----------      -----------
Weighted-average shares outstanding                  6,457,000        6,014,000
                                                   -----------      -----------


                 See accompanying notes to financial statements.

<PAGE>

Midisoft Corporation
Statement of Changes in Shareholders' Equity (Deficit)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                       Preferred stock            Common stock         Additional      Notes
                                    --------------------    -----------------------     paid-in   receivable from
                                    Shares      Amount        Shares        Amount      capital     shareholders
<S>                                 <C>      <C>            <C>         <C>           <C>           <C>
Balance at December 31, 1996         1,100   $ 1,100,000    5,345,000   $18,733,000   $       --    $       --

Stock options exercised in
    exchange for a note receivable                            175,000       191,000                   (191,000)
Preferred stock converted           (1,100)   (1,100,000)     776,000     1,141,000
Common stock issued                                            63,000       100,000
Warrants issued with
    convertible debt                                                                     273,000
In the money conversion option
    on convertible debt                                                                  862,000
Warrants issued for debt
    and services                                                                         110,000
Net loss
                                     -----   -----------    ---------   -----------   ----------    ----------

Balance at December 31, 1997            --            --    6,359,000    20,165,000    1,245,000      (191,000)

Common stock issued                                            91,000
Common stock issued in
    settlement of claims                                      650,000       283,000
Common stock issued in
    settlement of accounts payable                            128,000        38,000
Exercise of stock options                                      23,000         2,000
Warrants issued with
    convertible debt                                                                     416,000
In the money conversion option
    on convertible debt                                                                1,334,000
In the money options granted                                                              31,000
Net loss
                                     -----   -----------    ---------   -----------   ----------    ----------
Balance at December 31, 1998            --   $        --    7,251,000   $20,488,000   $3,026,000    $ (191,000)
                                     -----   -----------    ---------   -----------   ----------    ----------


<CAPTION>
                                                           Total
                                                       shareholders'
                                        Retained          equity
                                         deficit         (deficit)
<S>                                   <C>              <C>
Balance at December 31, 1996          $(17,558,000)    $ 2,275,000

Stock options exercised in
    exchange for a note receivable                              --
Preferred stock converted                  (41,000)             --
Common stock issued                                        100,000
Warrants issued with
    convertible debt                                       273,000
In the money conversion option
    on convertible debt                                    862,000
Warrants issued for debt
    and services                                           110,000
Net loss                                (4,729,000)     (4,729,000)
                                      ------------     -----------

Balance at December 31, 1997           (22,328,000)     (1,109,000)

Common stock issued                                             --
Common stock issued in
    settlement of claims                                   283,000
Common stock issued in
    settlement of accounts payable                          38,000
Exercise of stock options                                    2,000
Warrants issued with
    convertible debt                                       416,000
In the money conversion option
    on convertible debt                                  1,334,000
In the money options granted                                31,000
Net loss                                (4,160,000)     (4,160,000)
                                      ------------     -----------
Balance at December 31, 1998          $(26,488,000)    $(3,165,000)
                                      ------------     -----------
</TABLE>

                 See accompanying notes to financial statements.

<PAGE>

Midisoft Corporation
Statement of Cash Flows
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                          Year ended December 31,
                                                                                                          1998               1997
<S>                                                                                                  <C>                <C>
Cash flows from operating activities
    Net loss                                                                                         $(4,160,000)       $(4,729,000)

    Adjustments to reconcile net loss to net cash used in operating activities:
      Depreciation and amortization                                                                      127,000            657,000
      Amortization of debt discount & debt issuance costs                                              1,541,000            875,000
      Warrants issued for debt and services                                                                                 110,000
      Common stock issued in settlement of claims                                                        283,000
      In the money options granted                                                                        31,000
      Changes in operating assets and liabilities:
        Decrease in accounts receivable, net                                                             391,000            708,000
        Decrease in inventories                                                                          107,000            720,000
        Decrease in prepaids and other                                                                    40,000            200,000
        Increase in long-term receivable                                                                                   (195,000)
        Increase in trade accounts payable                                                               250,000            278,000
        Decrease in accrued wages and payroll taxes                                                       (7,000)           (86,000)
        (Decrease) increase in other accrued expenses                                                   (118,000)           273,000
        Decrease in deferred revenue                                                                     (24,000)          (791,000)
        Increase in warrant obligations                                                                                      81,000
                                                                                                     -----------        -----------
           Net cash used in operating activities                                                      (1,539,000)        (1,899,000)
                                                                                                     -----------        -----------
Cash flows from investing activities
    Additions to property and equipment                                                                   (4,000)           (20,000)
                                                                                                     -----------        -----------
           Net cash used in investing activities                                                          (4,000)           (20,000)
                                                                                                     -----------        -----------
Cash flows from financing activities
    Stock options exercised                                                                                2,000
    Issuance of common stock                                                                                                100,000
    Proceeds from issuance of long-term debt and warrants,
      net of debt issue costs                                                                          1,721,000          1,200,000
                                                                                                     -----------        -----------
           Net cash provided by financing activities                                                   1,723,000          1,300,000
                                                                                                     -----------        -----------
Net increase (decrease) in cash and cash equivalents                                                     180,000           (619,000)

Cash and cash equivalents, beginning of year                                                              90,000            709,000
                                                                                                     -----------        -----------
Cash and cash equivalents, end of year                                                               $   270,000        $    90,000
                                                                                                     ===========        ===========
                       Supplemental cash flow information

Cash paid during year for interest                                                                   $        --        $    58,000
                                                                                                     ===========        ===========
See Note 15 for supplemental information of noncash financing activities.
</TABLE>

                 See accompanying notes to financial statements.

<PAGE>

Midisoft Corporation
Notes to Financial Statements
December 31, 1998 and 1997
--------------------------------------------------------------------------------

1.   Organization and business

     Midisoft Corporation (the Company) is a provider of innovative applications
     for the use of  sound  on the  personal  computer  (PC).  The  Company  was
     incorporated  in  Washington  in 1986 and  introduced  its  first  product,
     Midisoft Studio, in that year. The Company has focused its product lines to
     include music  learning and  creativity  and the  integration  of sound and
     media in today's PC  environment.  The Company  divides these product lines
     into two development categories, music products and strategic products. The
     Company's music products enable users to enjoy, explore,  learn, create and
     share music.  The Company  pioneered the  development  of MIDI  technology,
     including the ability of users to instantly view musical notation of sounds
     played through a piano keyboard, or other MIDI-equipped instrument,  linked
     to a PC.  Midisoft's  strategic  products  promote the convergence of sound
     with other technologies into the personal computer desktop,  allow users to
     enhance their computing  experience,  and communicate more effectively with
     and  through  computers.  The Company  markets its  products on a worldwide
     basis to (i) original equipment manufacturers (OEMs), which "bundle" one or
     more of Midisoft's products with their own products,  (ii) distributors and
     resellers, which directly supply the retail distribution channel, and (iii)
     end users, catalog companies, and businesses.

     Going concern and liquidity

     The Company  has  incurred  substantial  operating  losses  during the past
     several years.  The financial  statements  have been prepared  assuming the
     Company will continue as a going concern and do not include any adjustments
     to  reflect  the  possible  future  effects  on  the   recoverability   and
     classification  of  assets  and  liabilities  that  may  result  from  this
     uncertainty.

     The  Company  has  required   substantial   working  capital  to  fund  its
     operations.  To date, the Company has financed its  operations  principally
     through the net proceeds  from its initial  public  offering and other debt
     and equity  transactions.  The  Company's  ability to  continue  as a going
     concern is dependent upon numerous factors, including its ability to obtain
     additional  financing,  the level of future  revenues  and its  ability  to
     reduce  operating  expenses.  The  Company is  actively  pursuing  possible
     sources of additional  working capital.  There can be no assurance that the
     Company will be able to obtain additional financing.

     If the  Company is unable to obtain  sufficient  funds to satisfy  its cash
     requirements, it may be forced to curtail operations,  dispose of assets or
     seek extended payment terms from its vendors.  Such events would materially
     and adversely  affect the value of the Company's equity  securities.  There
     can be no  assurance  that the Company  will be able to reduce  expenses or
     successfully complete other steps necessary to continue as a going concern.

2.   Significant accounting policies

     Revenue recognition

     Revenue from products  licensed to OEMs consisting of one-time license fees
     and  contracts  for  minimum  advances  against  future unit  licenses  are
     recognized  when the  criteria  for fixed  fee  revenue  recognition  under
     Statement of Position No. 97-2,  Software Revenue  Recognition,  (SOP 97-2)
     are satisfied.  These criteria include, but are not limited to, delivery of
     the software master, the Company's lack of other significant obligations to
     the customer and a determination  that  collectibility of the amount due is
     probable.  Revenues  on  contracts  which do not meet the fixed fee revenue
     recognition  criteria in

<PAGE>

Midisoft Corporation
Notes to Financial Statements
December 31, 1998 and 1997
--------------------------------------------------------------------------------

     SOP 97-2 are included in deferred revenue in the accompanying balance sheet
     and are  recognized  as revenue on the  instalment  basis as  payments  are
     received or until the Company has no  significant  obligations.  Additional
     royalty use or unit copy royalty fees are  recognized  when they are earned
     pursuant to the license  agreements and upon  notification  of shipment and
     payment from the OEMs. Revenue from sales to distributors,  other resellers
     and end users,  net of a provision for anticipated  returns,  is recognized
     when the products are shipped.  The allowance for returns is evaluated each
     quarter  taking  into  consideration,  among  other  things,  known  return
     requests  from  distributors,  anticipated  return  requests  based  on the
     distributor's  rate of product  sale,  returns due to product  upgrades and
     historical distributor return patterns.

     Warranties and returns

     The Company warrants  products against defects and has policies  permitting
     the  return  of  products  under  certain   circumstances.   The  Company's
     distributor   agreements   provide  for  sales  returns,   stock  rotation,
     cooperative  advertising and price protection.  Customers are granted price
     protection  for a period of up to 60 days  after the  Company  reduces  the
     price of a product.  The Company provides for warranties and returns at the
     time of product sale.

     Advertising costs

     The Company generally  provides for cooperative  advertising at agreed-upon
     rates.  Advertising costs,  included in sales and marketing  expenses,  are
     expensed as incurred  and were  $330,000  and  $449,000 for the years ended
     December 31, 1998 and 1997, respectively.

     Research and development

     Research  and  development  expenses  consist  principally  of payroll  and
     related  expenses for design and  development  of the  Company's  products.
     Research and  development  costs related to these  activities  are expensed
     as incurred.

     Income taxes

     The Company follows the asset and liability method of accounting for income
     taxes.  Deferred tax assets and  liabilities  are recognized for the future
     tax consequences attributable to difference between the financial statement
     carrying  amounts of existing assets and  liabilities and their  respective
     tax bases.  If it is more likely  than not that some  portion of a deferred
     tax asset will not be realized, a valuation allowance is recorded.

     Net loss per share

     In February 1997, the Financial Accounting Standards Board issued Statement
     of Financial  Accounting  Standards No. 128 (FAS 128),  Earnings per Share.
     FAS 128 replaced the previously reported primary and fully diluted earnings
     per share with basic and diluted  earnings  per share.  Basic  earnings per
     share excludes any dilutive  effects of options,  warrants and  convertible
     securities.  The adoption of FAS 128 did not have a material  impact on the
     Company's  earnings per share. Net loss per share assuming dilution for the
     years ended December 31, 1998 and 1997 is equal to basic net loss per share
     due to the fact that the  effect of common  stock  equivalents  outstanding
     during the periods is anti-dilutive.

     The  following  table sets forth the  computation  of basic and diluted net
     loss per share:

<PAGE>

Midisoft Corporation
Notes to Financial Statements
December 31, 1998 and 1997
--------------------------------------------------------------------------------

                                                  Year ended December 31,
                                                     1998           1997

     Numerator:

     Net loss                                   $(4,160,000)   $(4,729,000)
     Less:  Preferred stock dividends                              (41,000)
                                                -----------    -----------
                                                $(4,160,000)   $(4,770,000)
                                                -----------    -----------

     Denominator:

     Weighted-average shares                      6,457,000      6,014,000
                                                -----------    -----------

     Basic and diluted net loss per share       $     (0.64)   $     (0.79)
                                                -----------    -----------


     Common  stock  equivalents,  consisting  of  warrants,  stock  options  and
     convertible securities, are anti-dilutive, and are detailed in Note 10.

     Cash and cash equivalents

     The Company  considers  all highly  liquid  investments  with a maturity of
     three  months  or less  at the  date of  purchase  to be cash  equivalents.
     Short-term  investments  classified as cash  equivalents  are stated at the
     lower of cost or market, which approximates fair value.

     Inventories

     Inventories  are valued at the lower of cost or market using the  first-in,
     first-out  method.  The Company  continuously  reviews its  inventories for
     obsolete,  slow-moving  and nonsalable  items and establishes a reserve for
     such items.

     Property and equipment

     Property and equipment are recorded at cost less  accumulated  depreciation
     and amortization,  and are depreciated using the straight-line  method over
     the estimated useful lives of the related assets, which range from three to
     seven  years.  Leasehold  improvements  are  amortized  over shorter of the
     economic useful lives or the term of the lease.


<PAGE>

Midisoft Corporation
Notes to Financial Statements
December 31, 1998 and 1997
--------------------------------------------------------------------------------

     Concentration of credit risk/financial instruments

     Financial   instruments   that   potentially   subject   the   Company   to
     concentrations of credit risk consist primarily of accounts receivable, for
     which collateral is generally not required. The Company's trade receivables
     include  amounts  due from  U.S.  and  foreign  customers  in the  computer
     software and hardware industry and are derived from sales of products,  OEM
     licensing fees and unit royalties  (Note 3). The Company  performs  ongoing
     credit  evaluations  of its customers'  financial  condition and limits its
     exposure  to losses by  limiting  the  amount of credit  extended  whenever
     deemed necessary.

     The  carrying  values of cash and cash  equivalents  and other  assets  and
     liabilities  (such as accounts  receivable  and payable)  approximate  fair
     value at December 31, 1998 and 1997.

     Use of estimates

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

     Stock compensation

     The  Company  accounts  for  stock-based  employee  compensation  under the
     provisions of FAS 123,  Accounting for Stock-Based  Compensation (FAS 123).
     FAS 123  establishes  financial  accounting  and  reporting  standards  for
     stock-based  employee  compensation  plans and for the  issuance  of equity
     instruments to acquire goods and services from nonemployees.

     The Company has elected to apply the disclosure-only provisions of FAS 123.
     Accordingly, the Company accounts for stock-based compensation to employees
     using the intrinsic-value  method prescribed in Accounting Principles Board
     Opinion  No. 25,  Accounting  for Stock  Issued to  Employees,  and related
     interpretations.  Compensation  cost for stock  options is  measured as the
     excess,  if any, of the fair market value of the Company's  common stock at
     the date of grant over the  exercise  price.  The Company  records the fair
     value of equity  securities  issued to  nonemployees in accordance with the
     provisions of FAS 123.

3.   Accounts receivable and major customer information

     The Company operates a single business  segment.  During 1998 and 1997, the
     Company had revenue  from  foreign  customers  of  $147,000  and  $391,000,
     respectively.  Foreign sales as a percentage of the Company's total revenue
     in 1998 and 1997 were 8% and 13%, respectively.  In 1998 and 1997, separate
     domestic  reseller  customers  accounted  for  revenues of  $1,079,000  and
     $1,835,000,  respectively,  equal to 61% of the Company's  total revenue in
     the periods. During 1998, one customer accounted for 46% of total revenue.


<PAGE>

Midisoft Corporation
Notes to Financial Statements
December 31, 1998 and 1997
--------------------------------------------------------------------------------

     Accounts receivable are summarized as follows:

                                                         December 31,
                                                      1998           1997

     OEM's                                       $    17,000    $   137,000
     Resellers and other                             411,000        930,000
                                                 -----------    -----------
                                                     428,000      1,067,000

     Less:  Allowance for doubtful accounts          (72,000)      (260,000)
     Less:  Allowance for warranty and returns      (173,000)      (233,000)
                                                 -----------    -----------
                                                 $   183,000    $   574,000
                                                 ===========    ===========


     Accounts  receivable  consist  principally  of  amounts  due from  OEMs and
     reseller  customers  for  licensing  fees,  royalties  and direct  sales of
     products. OEM customer payment terms typically are one year in duration and
     require payments to be made in quarterly instalments.  At December 31, 1998
     and 1997,  OEM  accounts  receivable  amounts  not yet due were  $1,000 and
     $16,000,  equal to 6% and 12%, respectively,  of total OEM receivables.  At
     December 31, 1998 and 1997,  reseller accounts  receivable  amounts not yet
     due were $257,000 and $425,000 equal to 60% and 46%, respectively, of total
     reseller receivables.

     The Company's  primary credit  concentrations  involve domestic and foreign
     OEM and reseller  customers.  Foreign  customers are  primarily  located in
     Western Europe,  Taiwan,  Singapore,  Korea and Japan.  Domestic  customers
     comprised  $415,000 and  $1,054,000 of accounts  receivable at December 31,
     1998  and  1997,  respectively.  Foreign  customers  comprised  $13,000  of
     accounts receivable at December 31, 1998 and 1997. At December 31, 1998 and
     1997,  four  customers  accounted for an aggregate  balance of $359,000 and
     $807,000 of accounts receivable, respectively.

4.   Inventories

     Inventories are summarized as follows:

                                                         December 31,
                                                     1998           1997

     Raw materials and work-in-process            $ 106,000      $ 212,000
     Finished goods                                  29,000         75,000
     Less:  Allowance for obsolescence              (20,000)       (65,000)
                                                  ---------      ---------
                                                  $ 115,000      $ 222,000
                                                  ---------      ---------

<PAGE>

Midisoft Corporation
Notes to Financial Statements
December 31, 1998 and 1997
--------------------------------------------------------------------------------

5.   Property and equipment

     Property and equipment are summarized as follows:

                                                       December 31,
                                                   1998              1997

     Equipment                                $   925,000      $   925,000
     Furniture                                     91,000           93,000
     Leasehold improvements                        30,000           30,000
                                              -----------      -----------

     Property and equipment, at cost            1,046,000        1,048,000

     Less:  Accumulated depreciation             (930,000)        (809,000)
                                              -----------      -----------
                                              $   116,000      $   239,000
                                              -----------      -----------

6.   Bank credit line facility

     The Company's bank line-of-credit matured May 18, 1998 and was not renewed.

7.   Other accrued expenses

     The  following  table  summarizes  the  components  of  the  other  current
     liabilities:

                                                          December 31,
                                                      1998           1997

     Accrued tax liabilities                       $133,000        $135,000
     Other accrued expenses                         140,000         256,000
                                                   --------        --------
                                                   $273,000        $391,000
                                                   --------        --------

8.   Convertible debt

     In September 1997, the Company received  $250,000 for which it was to issue
     a 5% convertible  note due September 1998 (the Note).  The Note and accrued
     interest were to be convertible  into common stock at a conversion price of
     $0.65 per share, at the option of the holder, at any time after October 30,
     1997 through maturity.  A debt discount of $135,000 was recorded related to
     the intrinsic value of the in-the-money  conversion  option at the close of
     the debt  transaction.  The discount was expensed on October 30, 1997.  The
     note  agreement has not been executed and the lender has requested  changes
     to certain  terms of the  agreement.  The  Company  expects  that the final
     agreement will

<PAGE>

Midisoft Corporation
Notes to Financial Statements
December 31, 1998 and 1997
--------------------------------------------------------------------------------

     provide  for a  convertible  note  bearing  interest  from  5% to 8% with a
     conversion price of $0.65 per share, maturing in two to three years.

     In October and November 1997, the Company issued $500,000 of 1% convertible
     debentures (the  Debentures)  due October and November 2000,  respectively,
     for a total of $1,000,000. The Debentures are collateralized by a perfected
     security  interest in all assets of the Company  and are  convertible  into
     common stock at a  conversion  price of $0.60 per share at any time through
     maturity,  unless  previously  redeemed or  repurchased.  At any time,  the
     entire  amount of the  outstanding  notes is  redeemable  at the  Company's
     option at prices ranging from 107% to 125% of the principal amount thereof,
     depending on the date of redemption, together with accrued interest through
     the date the redemption  price is paid to the holder.  The Debentures  were
     issued  with  detachable  warrants  that  entitle  the  holders to purchase
     833,333 shares of the Company's common stock at a price of $1.50 per share,
     and expire in October and November  2002.  A debt  discount of $273,000 has
     been recorded  related to the fair value of the  warrants.  The discount is
     amortized using the effective interest method over the term of the debt. In
     addition, a debt discount of $727,000 was recorded related to the intrinsic
     value of the  in-the-money  conversion  option.  This discount was expensed
     immediately  as the  Debentures  may be converted  at any time.  Debt issue
     costs of $50,000  related to the Debenture sale have been  capitalized  and
     will be amortized over the life of the debt.

     In January  1998,  an  additional  1% debenture  was issued in exchange for
     proceeds totaling  $1,000,000.  The Debenture is convertible into 1,923,077
     shares of common  stock and  carries  detachable  warrants  to  purchase an
     additional  961,538  shares of common  stock at a price of $1.25 per share.
     The debenture matures in January 2001. A debt discount of $278,000 has been
     recorded related to the fair value of the warrant,  which will be amortized
     to interest  expense over the term of the debt. An  additional  discount of
     $722,000 was recorded  related to the intrinsic  value of the  in-the-money
     conversion  option.  The  discount  related  to the  conversion  option was
     expensed on the issue date.

     In June  and  December  1998,  the  Company  issued  another  $500,000  and
     $250,000,  respectively,  of 1%  convertible  debentures  due June 2003 and
     December  2003.  The  Debentures  are  convertible  into common  stock at a
     conversion price of $0.20 per share and $0.25 per share,  respectively,  at
     any time through maturity,  unless previously redeemed or repurchased.  The
     Debentures were issued with detachable warrants that entitle the holders to
     purchase 1,000,000 shares of the Company's common stock at a price of $0.75
     per share,  and expire  between June and December  2003. A debt discount of
     $138,000 has been recorded  related to the fair value of the warrants.  The
     discount is amortized using the effective  interest method over the term of
     the debt. In addition,  a debt discount of $612,000 was recorded related to
     the intrinsic value of the in-the-money  conversion  option.  This discount
     was expensed immediately as the Debentures may be converted at any time. At
     any time, the entire amount of the  outstanding  notes is redeemable at the
     Company's  option at  prices  ranging  from  107% to 125% of the  principal
     amount thereof, depending on the date of redemption,  together with accrued
     interest through the date the redemption is paid to the holder.

<PAGE>

Midisoft Corporation
Notes to Financial Statements
December 31, 1998 and 1997
--------------------------------------------------------------------------------

     Among other restrictions, the Debentures restrict the Company's other third
     party  borrowings  to  $400,000.  The  Company  is in  compliance  with all
     operating and financial covenants of the debentures at December 31, 1998.

     The scheduled  maturities  of long-term  debt  outstanding  at December 31,
     1998, are summarized as follows:  $0 in 1999, $500,000 in 2000,
     $1,000,000 in 2001, $0 in 2002 and $750,000 in 2003, and $0 thereafter.

9.   Income taxes

     There is no  provision  for income  taxes for the years ended  December 31,
     1998 and 1997 due to the net losses  incurred.  A valuation  allowance  has
     been  recorded  for deferred tax assets  because  realization  is primarily
     dependent on generating  sufficient  taxable income prior to the expiration
     of net operating loss carry-forwards.

     The components of deferred income taxes are summarized as follows:

                                                         December 31,
                                                     1998           1997

     Deferred income tax assets
         Net operating losses                   $ 8,887,000    $ 7,710,000
         Accrued liabilities and allowances          76,000        197,000
         Capitalized software                                      121,000
         Equity instruments                          72,000         65,000
         Other                                      227,000        236,000
                                                -----------    -----------

                                                  9,262,000      8,329,000
     Deferred income tax liabilities
         Other                                       (9,000)       (12,000)
     Valuation allowance                         (9,253,000)    (8,317,000)
                                                -----------    -----------

                                                $        --    $        --
                                                ===========    ===========

     At December  31,  1998,  the Company  had federal net  operating  losses of
     approximately  $26,137,000  that  expire  beginning  in  2008.  In  certain
     circumstances,  as specified in the  Internal  Revenue  Code, a 50% or more
     ownership  change by  certain  combination  of the  Company's  stockholders
     during any  three-year  period would result in limitations on the Company's
     ability to utilize its net operating loss  carry-forward.  The value of the
     Company's  stock at the time of the ownership  change is the primary factor
     in  determining  the limit on the  Company's  ability  to  utilize  its net
     operating loss carry-forward.

     Certain net operating losses arise from the  deductibility for tax purposes
     of compensation  under  nonqualified  stock options equal to the difference
     between  the fair  value  of the  stock  on the  date of  exercise  and the
     exercise price of the options.  For financial reporting

<PAGE>

Midisoft Corporation
Notes to Financial Statements
December 31, 1998 and 1997
--------------------------------------------------------------------------------

     purposes,  the  tax  effect  of  this  deduction  when  recognized  will be
     accounted for as a credit to shareholders' deficit.

10.  Shareholders' deficit

     Preferred Stock

     In 1996,  the  Company's  Board of  Directors  designated  1,100  shares of
     preferred  stock as Series A  convertible  preferred  stock  (the  Series A
     Preferred  Stock).  All 1,100  shares  were issued at a price of $1,000 per
     share in an off-shore  private  placement  completed in October  1996.  The
     Series A Preferred Stock was convertible at the holder's option into shares
     of common stock at a price equal to the lesser of 85% of the closing bid as
     of the date of  conversion  or 100% of the  closing bid price of the common
     stock as of the date of issuance of the Series A Preferred  Stock.  Holders
     of the Series A Preferred Stock were entitled to an 8% cumulative  dividend
     payable in cash or common  stock,  at the holder's  option,  at the time of
     conversion.  All 1,100 shares,  plus accrued  dividends,  were converted to
     common  stock over the  six-month  period from  January 16 through July 17,
     1997.  The  principal  value of  $1,100,000  and the accrued  dividends  of
     $41,000  were  converted  to  747,797  and 28,408  shares of common  stock,
     respectively, at an average price of $1.56 per share.

     Common Stock

     During the year ended December 31, 1998, the Company finalized the terms of
     the sale of common stock which was  recorded in fiscal 1997.  Under the new
     terms, the Company issued 91,000  additional  shares of common stock to the
     investors.

     As further  described  in Note 13, the  Company  issued  650,000  shares of
     common stock in settlement of claims. The Company recorded expense totaling
     $283,000  based  on the  fair  market  value  of the  common  stock  on the
     settlement date.

     Additionally,  during the year ended  December 31, 1998, the Company issued
     128,000  shares of  common  stock in  settlement  of  outstanding  accounts
     payable totaling $38,000.

     At December 31, 1998,  the Company has  reserved  the  following  shares of
     common stock:

     Warrants                                                     3,073,042
     Stock options                                                1,068,881
     Convertible debentures                                       7,474,359


     Warrants

     In  connection  with the July 26, 1994 and the July 19,  1993 public  stock
     offerings, the Company has agreed to issue the Underwriter Representatives,
     for nominal consideration,  warrants to purchase an aggregate of 38,000 and
     100,000   shares  of  common   stock  at  a  price  of  $12.90  and  $4.20,
     respectively.  The  warrants to  purchase  100,000  shares of common  stock
     expired in 1998 without exercise.

<PAGE>

Midisoft Corporation
Notes to Financial Statements
December 31, 1998 and 1997
--------------------------------------------------------------------------------

     In  connection  with the  conversion of the Series A Preferred  Stock,  the
     Company  issued  warrants  to purchase an  aggregate  of 747,797  shares of
     common stock at a price equal to $8.50 per share.  The warrants  expired in
     1998  without  exercise.  Additionally,  the  Company  agreed  to issue the
     Placement  Agent  warrants to purchase  25,000  shares of common stock at a
     price of $6.00 per share.

     Additionally,  a warrant to purchase 40,171 shares of the Company's  common
     stock at an exercise price of $1.17 was issued to a bank in connection with
     the short-term bank borrowings  described in Note 6. The warrant expires in
     September  2002 and carries a right to require the Company to purchase  the
     warrant  for  $63,000 or the fair  value of the  warrant,  at the  holder's
     option,  at any time after  December  31,  1997.  The warrant is subject to
     certain anti-dilution provisions.  The fair value of the warrant of $81,000
     was expensed during 1997.

     In  connection  with an attempt to  arrange a private  placement  of equity
     financing,   the   Company   agreed  to  sell  to  the  agent  for  nominal
     consideration,  a warrant to purchase  10,000  shares of common  stock at a
     price of $1.25 per share. The warrant expired in 1998 without exercise. The
     fair value of the warrant of $10,000 was expensed during 1997.

     In connection with the sale of common stock, the Company issued warrants in
     August 1997 to purchase  100,000 shares of common stock at a price of $1.25
     per share. These are two-year warrants expiring in 1999.

     In  connection  with an  unsecured  loan of $40,000  from an  officer,  the
     Company  issued a warrant to purchase  75,000  shares of common  stock at a
     price of $.75 per share. The warrant will expire in 2002.  Interest expense
     of $100,000 was recognized based on the fair value of the warrant. The loan
     was repaid during 1997.

     As described in Note 8, during 1998 and 1997 the Company issued warrants to
     purchase 1,961,538 and 833,333 shares,  respectively of common stock to the
     holder of convertible debentures.

     Stock option plan

     The  Company has  adopted  the 1989 Stock  Option Plan (the 1989 Plan),  as
     amended  September 28, 1994, to provide for the granting of both  Incentive
     Stock  Options  (ISOs)  and  Nonqualified   Stock  Options  for  employees,
     directors  and  consultants  of the  Company  to acquire  ownership  in the
     Company and provide them with incentives for their service.

     Under the terms of the 1989 Plan,  1,350,000  shares of common stock may be
     issued.  The 1989 Plan is currently  administered by the  Compensation  and
     Option  Committee of the Board of Directors which  determines the terms and
     conditions of the options granted under the 1989 Plan,  including  exercise
     price,  number of option  shares  granted  and the  vesting  period of such
     options.  Upon  termination  of a  participant's  employment  or consulting
     relationship  with the  Company,  unvested  options  terminate  and  vested
     options  remain  exercisable  for a period not to exceed three months.  The
     exercise  price of all ISOs  granted  under  the 1989 Plan must be at least
     equal to the fair  market  value of the common  stock of the Company on the
     date of grant. The exercise price of all ISOs

<PAGE>

Midisoft Corporation
Notes to Financial Statements
December 31, 1998 and 1997
--------------------------------------------------------------------------------

     granted under the 1989 Plan are determined by the  Compensation  and Option
     Committee and the term may not exceed ten years.

     On February  10, 1998 the Company  adopted the 1998 Stock  Option Plan (the
     1998 Plan) to provide for the granting of options to independent  directors
     and outside  consultants.  Under the terms of the 1998 Plan, 500,000 shares
     of common stock may be issued.  The 1998 Plan is currently  administered by
     the Board of Directors  which  determines  the terms and  conditions of the
     options granted and the vesting of such options.

     On April 9, 1998, the Company's board of directors authorized the repricing
     of all options outstanding at September 17, 1997 to $0.75 per share.

     At  December  31, 1998 and 1997,  options  for 361,436 and 215,000  shares,
     respectively,  of common stock were exercisable and options for 507,375 and
     160,000  shares,  respectively,  of common stock were  available for future
     grants  under the two  plans.  Activity  with  respect  to both plans is as
     follows:

                                                                       Weighted-
                                                                       average
                                                                       exercise
                                                          Shares        price

     Options outstanding, December 31, 1996              701,936      $   2.64

     Granted                                             468,000          1.33
     Exercised                                          (175,000)         1.09
     Canceled                                           (433,014)         2.65
                                                        --------      --------

     Options outstanding, December 31, 1997              561,922          2.02

     Granted                                             941,922          0.81
     Exercised                                           (22,875)         0.10
     Canceled                                           (789,297)         1.72
                                                        --------      --------

     Options outstanding, December 31, 1998              691,672      $   0.78
                                                        --------      --------


<PAGE>

Midisoft Corporation
Notes to Financial Statements
December 31, 1998 and 1997
--------------------------------------------------------------------------------

     The  following  table  summarizes  information  about  fixed-price  options
     outstanding and exercisable at December 31, 1998:

                    Options outstanding                    Options excercisable
     ---------------------------------------------------  ----------------------
                                Weighted-
                                 average       Weighted-               Weighted-
     Range of                   remaining       average                 average
     exercise      Options     contractual     exercise    Options      exercise
      prices     outstanding       life          price   exercisable     price

     0.10-0.94     649,672         8.14         $ 0.76     351,436      $ 0.76
     1.13-1.19      42,000         8.89         $ 1.19      10,000      $ 1.19


     The Company follows the intrinisic-value method in accounting for its stock
     options.  Under this method, the Company recognized no compensation expense
     on stock  options  issued to employees if the exercise  price of the option
     equals or exceeds the fair market  value of the  Company's  common stock on
     the date of grant.  For options  granted  with an exercise  price less than
     fair market  value the Company  recognized  $31,000 and $0 of  compensation
     expense for the years ended December 31, 1998 and 1997,  respectively.  Had
     compensation cost been recognized based on the fair value at the grant date
     for options  awarded under the Plan, the pro forma amounts of the Company's
     net loss and net loss per share for the years ended  December  31, 1998 and
     1997 would have been as follows:

                                                Year ended December 31,
                                               1998                1997

     Net loss as reported                 $  (4,160,000)     $  (4,729,000)
                                          -------------      -------------

     Net loss pro forma                   $  (4,465,000)     $  (5,030,000)
                                          -------------      -------------

     Loss per share as reported           $       (0.64)     $       (0.79)
                                          -------------      -------------

     Loss per share pro forma             $       (0.69)     $       (0.84)
                                          -------------      -------------


     The fair  value of each  option  grant was  estimated  on the date of grant
     using the Black-Scholes option-pricing model with the following assumptions
     for the years ended  December  31, 1998 and 1997,  respectively:  risk-free
     interest  rates of 5.512% to 5.673% and 4.934% to 6.748%;  expected  option
     life of five to ten years;  expected  volatilities of 124% and 84% to 125%;
     and no  expected  dividends.  The  weighted-average  fair  value of options
     granted during 1998 and 1997 was $0.79 and $0.83, respectively, for options
     with an exercise price equal to market. The weighted-average  fair value of
     options  granted during 1998 and 1997 at a price above market was $0.59 and
     $0.87, respectively.  The

<PAGE>

Midisoft Corporation
Notes to Financial Statements
December 31, 1998 and 1997
--------------------------------------------------------------------------------

     weighted-average  fair  value of options  granted in 1998 at a price  below
     market was $0.88.

11.  License agreements

     The Company has license agreements with various developers and producers of
     computer  software which require the Company to pay  royalties.  During the
     years ended December 31, 1998 and 1997,  total royalty  expense was $13,000
     and $5,000, respectively.

12.  Lease commitments

     The Company leases office facilities for its operations. The lease contains
     renewal and  expansion  provisions,  exercisable  at the  discretion of the
     Company.  The Company's lease includes scheduled increases over the term of
     the lease.  The total  payment  amount is being  recognized as expense on a
     straight-line  basis  over  the term of the  lease.  Future  minimum  lease
     commitments  for all  noncancelable  operating  leases  are  summarized  as
     follows:

     Year ending December 31,
             1999                                     $ 273,000
             2000                                        68,000
                                                      ---------
                                                      $ 341,000
                                                      =========


     Rent expense for 1998 and 1997 was $256,000 and $281,000, respectively. The
     Company  received  $86,000 and $98,000 from  sublease  income for the years
     ended December 31, 1998 and 1997, respectively.

13.  Contingencies

     In 1997,  an  entity  which  sold  substantially  all of its  assets to the
     Company in 1995 demanded that the Company  arbitrate certain claims arising
     from the sale.  The claims  aggregate in excess of $1 million.  The parties
     reached an agreement in July 1998 outside of  arbitration.  In exchange for
     the mutual release of all claims and  counterclaims,  the Company agreed to
     provide  consideration  of  $420,000,  $25,000  of  which  is cash  and the
     remainder  comprised  of  forgiveness  of $112,000 in debt and  issuance of
     approximately 630,000 shares of the Company's common stock. At December 31,
     1998,  Midisoft has paid  $20,000 of the  $25,000,  the debt has been fully
     reserved  and  $283,000  of  expense  has been  recognized  related  to the
     issuance of common stock.

     The  Company  is subject to various  claims and  lawsuits  in the  ordinary
     course of business.  In the opinion of management,  the ultimate resolution
     of these matters will not have a material  adverse  effect on the Company's
     financial condition, results of operations or cash flows.

<PAGE>

Midisoft Corporation
Notes to Financial Statements
December 31, 1998 and 1997
--------------------------------------------------------------------------------

14.  Notes receivable from stockholders

     The Company has made advances and loans to employees in connection with the
     purchase of common stock under the Employee  Stock Option Plan.  Promissory
     notes  totaling  $191,000 are held by the Company from the Company's  Chief
     Executive  Officer and former Chief  Financial  Officer.  Interest on these
     loans is set at 8% per annum.  The officers have pledged the 175,000 shares
     of common stock as collateral  for these loans.  The full unpaid  principal
     and accrued interest amounts are due and payable on August 1, 2000, but can
     be  prepaid  at any time.  The terms of these  notes  receivable  cause the
     underlying  shares to be considered  variable stock  options.  For variable
     stock  options,  compensation  cost is  measured as the amount by which the
     quoted market value of the shares exceeds the option price. At December 31,
     1998,  the quoted market price of the Company's  common stock was less than
     the option price. Accordingly, no compensation expense was recorded.

15.  Supplemental cash flow information

     The  following  items are  supplemental  information  of noncash  financing
     activities:

<TABLE>
<CAPTION>
                                                                Year ended December 31,
                                                                   1998         1997
<S>                                                            <C>          <C>
     Common stock issued in settlement of claims               $  283,000   $       --
                                                               ----------   ----------

     Common stock issued in settlement of accounts payable     $   38,000   $       --
                                                               ----------   ----------

     Warrants issued with convertible debt                     $  416,000   $  273,000
                                                               ----------   ----------

     Preferred stock converted                                 $       --   $1,100,000
                                                               ----------   ----------

     Stock options exercised in exchange for note receivable   $       --   $  191,000
                                                               ----------   ----------

     In the money options granted                              $   31,000   $       --
                                                               ----------   ----------

     In the money conversion option on convertible debt        $1,334,000   $  862,000
                                                               ----------   ----------
</TABLE>

16.  Employee benefit plans

     In June 1996, the Company adopted a qualified profit-sharing plan under the
     provisions  of Internal  Revenue Code 401(k).  The plan is available to all
     employees  meeting  the  eligibility  requirements.  Contributions  by  the
     Company are based on a matching formula as defined in the plan. The Company
     made no contributions to the plan in 1998 or 1997.

<PAGE>

Midisoft Corporation
Notes to Financial Statements
December 31, 1998 and 1997
--------------------------------------------------------------------------------

17.  Subsequent events

     In connection  with the Debentures as described in Note 8, during the first
     quarter of 1999 the Company issued additional 1% convertible  debentures in
     exchange for proceeds  totaling  $250,000.  The debentures are  convertible
     into a total of  1,000,000  shares of common  stock and carries  detachable
     warrants to  purchase an  additional  500,000  shares of common  stock at a
     price of $0.75 per  share.  The  debentures  mature in March  2004.  A debt
     discount  of  $76,000  has been  recorded  related to the fair value of the
     warrant,  which will be amortized to interest  expense over the term of the
     debt.  An  additional  discount of  $174,000  was  recorded  related to the
     intrinsic  value of the  conversion  option.  The  discount  related to the
     conversion option was expensed on the issue date.

<PAGE>

ITEM 8.   CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
          FINANCIAL DISCLOSURE

          None

                                    PART III

ITEM 9.   DIRECTORS,   EXECUTIVE   OFFICERS,   PROMOTERS  AND  CONTROL  PERSONS;
          COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

          Item 9 is hereby  incorporated  by reference to the information in the
          Company's  Proxy  Statement  relating  to its 1999  annual  meeting of
          Shareholders   prepared  in  accordance  with  Section  14(a)  of  the
          Securities   and  Exchange  Act  of  1934,   as  amended  (the  "Proxy
          Statement").

ITEM 10.  EXECUTIVE COMPENSATION

          Item 10 is hereby  incorporated by reference to the information in the
          Proxy Statement.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

          Item 11 is hereby  incorporated by reference to the information in the
          Proxy Statement.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

          Item 12 is hereby  incorporated by reference to the information in the
          Proxy Statement.

ITEM 13.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     (a)  Financial Statements: The following are filed as a part of this report
          under ITEM 5.
<TABLE>
<CAPTION>
                                                                                                     Page
<S>                                                                                                  <C>
          Report of PricewaterhouseCoopers LLP........................................................18

          Balance Sheet - At December 31, 1998 and 1997...............................................19

          Statement of Operations - For the Years Ended December 31, 1998 and 1997....................20

          Statement of Shareholders' Equity (Deficit) - For the Years Ended December 31, 1998
          and 1997....................................................................................21

          Statement of Cash Flows - For the Years Ended December 31, 1998 and 1997....................22

          Notes to Financial Statements - For the Years Ended December 31, 1998 and1997...............23
</TABLE>

     (b)  Reports on 8-K.

          None

     (c)  Exhibits. The following exhibits are filed as part of this report:

          Exhibit No.         Description
          -----------         -----------

          3.1.1(a)  Articles  of  Incorporation  of  the  Company  as  filed  on
                    September  23, 1986 with the Secretary of State of the State
                    of Washington.

<PAGE>

          Exhibit No.         Description
          -----------         -----------

          3.1.2(b)  Articles of  Amendment to Articles of  Incorporation  of the
                    Company as filed on February 22, 1989 with the  Secretary of
                    State of the State of Washington.

          3.1.3(b)  Articles of  Amendment to Articles of  Incorporation  of the
                    Company  as filed on July 13,  1994  with the  Secretary  of
                    State of the State of Washington.

          3.2.1(b)  By-laws of the Company.

          3.2.2(a)  Amended and Restated By-laws of the Company.

          4.1(b)    Form  of  specimen  certificate  for  Common  Stock  of  the
                    Company.

          4.2(f)    Designation   of  Rights   and   Preferences   of  Series  A
                    Convertible Preferred Stock.

          4.3(h)    Form of Securities Purchase Agreement dated October 28, 1997

          4.4(h)    Form of Registration Rights Agreement dated October 28, 1997

          4.5(k)    Form of Debenture dated October 28, 1997

          4.6(l)    Form of amendment to the Securities Purchase Agreement dated
                    June 15, 1998

          10.1(b)   Combined  Incentive  and  Nonstatutory  Stock  Option  Plan,
                    adopted February 22, 1989, and as amended April 30, 1994 and
                    September 28, 1994,  authorizing  1,200,000 shares of Common
                    Stock for issuance pursuant to the combined Plan.

          10.2.1(d) Industrial  Lease,  dated March 9, 1995, by and between I-90
                    Lake  Place II Limited  Partnership,  as  landlord,  and the
                    Company, as tenant.

          10.3.1(b) Software  License  Agreement,  dated  June 4,  1994,  by and
                    between Music Technology Associates and the Company.

          10.3.2(b) Software  Rights Purchase  Agreement,  dated May 5, 1994, by
                    and between Music Technology Associates and the Company.

          10.3.3(c) Software  License  Agreement,  dated  August  6, 1994 by and
                    between Dennis McMahon d/b/a Asystem, and the Company.

          10.3.4(a) Software  Purchase  Agreement,  dated  April 15, 1994 by and
                    between Dennis McMahon d/b/a Asystem, and the Company.

          10.3.5(d) Software Purchase Agreement,  dated November 10, 1994 by and
                    between Dennis McMahon d/b/a Asystem, and the Company.

          10.3.6(d) Software Purchase Agreement,  dated December 22, 1994 by and
                    between Dennis McMahon d/b/a Asystem, and the Company.

          10.4.1(b) Reseller  Agreement,  dated  January 3, 1992, by and between
                    WestPoint Creative Ltd. and the Company.

          10.4.2(b) Reseller Agreement,  dated December 31, 1991, by and between
                    CPS Computer Distribution GmbH and the Company.

          10.4.3(b) Reseller Agreement,  dated February 13, 1992, by and between
                    Walop Electronics B.V. and the Company.

<PAGE>

          Exhibit No.         Description
          -----------         -----------

          10.5.1(b) Distribution  Agreement,  dated  August  26,  1992,  by  and
                    between Merisel, Inc. and the Company.

          10.5.2(b) Distribution Agreement,  dated July 14, 1992, by and between
                    Ingram Micro Inc. and the Company.

          10.6.1(b) OEM License Agreement, dated August 26, 1992, by and between
                    MPC (Distribution) Ltd. and the Company.

          10.6.2(b) OEM License Agreement, dated January 8, 1994, by and between
                    Ad Lib Multimedia Inc. and the Company.

          10.6.3(b) OEM License Agreement, dated October 26, 1994 by and between
                    Media  Vision   Corporation  10.6.4  bForm  of  OEM  License
                    Agreement between various OEM licensees and the Company.

          10.6.5(a) OEM License  Agreement,  dated May 10, 1994,  by and between
                    International Business Machines and the Company.

          10.6.6(a) OEM License  Agreement,  dated May 17, 1994,  by and between
                    Gateway 2000 and the Company.

          10.6.7(a) OEM License  Agreement,  dated May 20, 1994,  by and between
                    ASCII Corporation and the Company.

          10.6.8(a) OEM License  Agreement,  dated May 20, 1994,  by and between
                    I-O Data Devices and the Company.

          10.6.9(e) OEM License  Agreement,  dated March 6, 1995, by and between
                    Genoa Systems Corporation and the Company.

          10.6.10(e)OEM License  Agreement,  dated June 2, 1995,  by and between
                    Acer  America  Corporation  and the  Company. 

          10.6.11(e)OEM  License  Agreement, dated  June 5, 1995, by and between
                    NEC Technologies, Inc. and the Company.

          10.7.1(e) Asset  Purchase  and Sale  Agreement  by and among  Midisoft
                    Corporation,  Ask Me Multimedia,  Inc. and Michael O'Donnell
                    dated April 14, 1995.

          ----------
          (a)  Incorporated   by  reference  from  the  Company's   Registration
               Statement on Form SB-2
               (S.E.C. File No. 33-80064).

          (b)  Incorporated   by  reference  from  the  Company's   Registration
               Statement on Form SB-2
               (S.E.C. File No. 33-62468-5).

          (c)  Incorporated  by reference  from the Company's  Form 10-KSB filed
               March 30, 1994
               (S.E.C. File No. 000-22172).

          (d)  Incorporated  by reference  from the Company's  Form 10-KSB filed
               April 13, 1995
               (S.E.C. File No. 000-22172).

          (e)  Incorporated  by reference from the Company's Form 10-KSB/A filed
               August 4, 1995
               (S.E.C. File No. 000-22172).

          (f)  Incorporated  by reference  from the Company's  Form 10-KSB filed
               April 15, 1997.
               (S.E.C. File No. 000-22172).

          (g)  Incorporated  by reference from the Company's Form 10-KSB/A filed
               June 20, 1997
               (S.E.C. File No. 000-22172).

          (h)  Incorporated  by reference  from the Company's  Form 10-QSB filed
               November 12, 1997
               (S.E.C. File No. 000-22172).

<PAGE>

          (i)  Incorporated  by  reference  from the  Company's  Form 8-K  filed
               January 9, 1997
               (S.E.C. File No. 000-22172).

          (j)  Incorporated  by  reference  from the  Company's  Form 8-K  filed
               November 3, 1997
               (S.E.C. File No. 000-22172).

          (k)  Incorporated  by reference  from the Company's  Form 10-KSB filed
               April 15, 1998
               (S.E.C. File No. 000-22172).

          (l)  Incorporated  by reference  from the Company's  Form 10-QSB filed
               August 14, 1998
               (S.E.C. File No. 000-22172).


<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.


                                       MIDISOFT CORPORATION
                                           (Registrant)


Date: April 14, 1999                   By: /S/Larry Foster
                                           ------------------------------------
                                           Larry Foster, 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.

<TABLE>
<CAPTION>
      Signature                     Title                                   Date
      ---------                     -----                                   ----
<S>                         <C>                                       <C>
/s/Larry Foster             Chairman of the Board,                    April 14, 1999
------------------------    President and Chief Executive Officer
Larry Foster

/s/Gary M. Cully            Vice President, Finance and               April 14, 1999
------------------------    and Chief Financial Officer
Gary M. Cully               (Principal Accounting Officer)

/s/John Bauer               Director                                  April 14, 1999
------------------------
John Bauer

/s/Marsha Murry             Director                                  April 14, 1999
------------------------
Marsha Murry

/s/Robert Orbach            Director                                  April 14, 1999
------------------------
Robert Orbach

/s/J. Larry Smart           Director                                  April 14, 1999
------------------------
J. Larry Smart
</TABLE>