SECURITIES AND EXCHANGE COMMISSION
                              Washington D.C. 20549
                                 FORM 10-KSB/A1

     [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. [ ]

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



<PAGE>


                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                     Part I
                                                                            Page
<S>                                                                         <C>

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............ 11

Item 6. Management's Discussion and Analysis or Plan of Operation........... 11

Item 7. Financial Statements................................................ 20

Item 8. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure.................................................40


                                    Part III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
        With Section 16(a) of the Exchange Act.............................. 40

Item 10.Executive Compensation.............................................. 41

Item 11.Security Ownership of Certain Beneficial Owners and Management...... 42

Item 12.Certain Relationships and Related Transactions...................... 44

Item 13.Exhibits List and Reports on Form 8-K............................... 44


SIGNATURES.................................................................. 47
</TABLE>

<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.

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.

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.

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.

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 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 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. 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.  Directors  continuing in office were Mr.
Robert  Orbach and Mr. J. Larry  Smart,  who's  terms  expire at the next annual
meeting of shareholders and Mr. John Bauer, whose term expires in 2000.

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.




<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.
<TABLE>
<CAPTION>
                                              High                      Low
  <S>                                       <C>                      <C>
         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
</TABLE>
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.

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.

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 partially 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.

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

The  debt  holder  has  the  right  to  purchase  an  additional  $1,000,000  of
convertible  notes in 1999. If the debt 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.

 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.

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.

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  Company  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  notes in
exchange  for  $250,000.  The notes 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 notes  mature in March
2004.


In the last week of April 1999 the Company expects to issue 1% convertible notes
for $200,000.  The notes will be  convertible  into a total of 250,000 shares of
Common Stock and carry  detachable  warrants to purchase an  additional  250,000
shares of Common Stock at $1.75 per share. The notes mature in April 2004.



<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
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                               December 31,
                                                                                          1998              1997
<S>                                                                                  <C>               <C>

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
                                                                                     -----------       -----------
</TABLE>
                 See accompanying notes to financial statements.


<PAGE>


Midisoft Corporation
Statement of Changes in Shareholders' Equity (Deficit)                         
<TABLE>
<CAPTION>
                                                                                                  Additional         Notes
                                          Preferred stock                 Common stock              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)
------------------------------------------------------------------------------------------------------------------------------------
                                                               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>


<TABLE>
<CAPTION>
Midisoft Corporation
Statement of Cash Flows
------------------------------------------------------------------------------------------------------------------------------------
                                                                                         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
                                                                                      ----------        ----------
<FN>
See Note 15 for supplemental information of noncash financing activities.
</FN>
</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 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:
         <TABLE>
         <CAPTION>
                                                    Year ended December 31,
                                                    1998              1997
         <S>                                    <C>               <C>
         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)
                                                -----------       -----------
         </TABLE>

         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>


         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>

         Accounts receivable are summarized as follows:
         <TABLE>
         <CAPTION>
                                                          December 31,
                                                     1998              1997
         <S>                                     <C>              <C>
         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
                                                 ---------         ---------
         </TABLE>

         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:
         <TABLE>
         <CAPTION>
                                                           December 31,
                                                      1998              1997
         <S>                                       <C>               <C>
         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
         </TABLE>

5.       Property and equipment

         Property and equipment are summarized as follows:
         <TABLE>
         <CAPTION>
                                                           December 31,
                                                      1998              1997
         <S>                                     <C>               <C>
         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
                                                  ---------         ---------
         </TABLE>

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:
         <TABLE>
         <CAPTION>
                                                           December 31,
                                                      1998              1997
         <S>                                       <C>               <C>
         Accrued tax liabilities                  $ 133,000         $ 135,000
         Other accrued expenses                     140,000           256,000
                                                  ---------         ---------
                                                  $ 273,000         $ 391,000
                                                  ---------         ---------
         </TABLE>

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
         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.

         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:
         <TABLE>
         <CAPTION>
                                                           December 31,
         <S>                                          1998              1997
         Deferred income tax assets              <C>               <C>
             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)
                                                 ----------        ----------
                                                 $     -           $     -
                                                 ----------        ----------
         </TABLE>

         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
         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.

         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  (ISO's) 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 ISO's  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 ISO's  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:
         <TABLE>
         <CAPTION>
                                                                       Weighted-
                                                                       average
                                                                       exercise
                                                     Shares             price
         <S>                                      <C>                   <C>
         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
                                                   --------            ------
         </TABLE>


<PAGE>


         The following table summarizes  information about  fixed-price  options
         outstanding and exercisable at December 31, 1998:
         <TABLE>
         <CAPTION>
                      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
         <S>        <C>            <C>        <C>        <C>           <C>
         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
         </TABLE>

         The Company  follows the  intrinsic-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:

         <TABLE>
         <CAPTION>

                                                   Year ended December 31,
                                                   1998                1997
         <S>                                 <C>                 <C>
         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)
                                             -----------         -----------
         </TABLE>

         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  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.
14.

<PAGE>


         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.
17.

<PAGE>


         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

          DIRECTORS

          Terms expire 1999:

               ROBERT ORBACH (age 46) has served as a director  since July 1998.
          He is the President and founder of B.Orbach Inc.  founded in May 1990.
          The company's  primary  business is to establish and create  strategic
          alliances  for  technology   companies.   Working  with  start-up  and
          established companies, Mr. Orbach has developed business relationships
          and technology licensing as well as funding and marketing  activities.
          The company has been  profitable  since its  inception.  Mr. Orbach is
          currently  on the board of  eSynch  Corporation  (ESYN).  From 1992 to
          1995, Mr. Orbach was a founding board member of Digital Pictures, Inc.
          based in San Mateo,  CA. Six months after Mr. Orbach resigned from its
          board,  Digital  Pictures filed for protection under Chapter 11 of the
          bankruptcy code.

               J. LARRY SMART (age 50) has been a director  since December 1997.
          Since  April  1997,  Mr.  Smart  has  served  as  President  and Chief
          Executive  Officer  of  Visioneer,  Inc.,  a digital  imaging  systems
          company.  Mr. Smart is currently  Chairman of Southwall  Technologies,
          Inc.  and  serves as a director  of  Scansoft,  Inc.(SFST)  and Savoir
          Technology Group,  Inc.(SVGT) Mr. Smart served as Chairman,  President
          and Chief Executive Officer of Micropolis/StreamLogic Corporation from
          April  1995 to  February  1997 and as  President  and Chief  Executive
          Officer of Maxtor Corporation from April 1994 through March 1995.

          Term expires 2000:

               JOHN H. BAUER (age 58) has been a director of the  Company  since
          March  1997.  Since  May  1994,  Mr.  Bauer  has been  Executive  Vice
          President of Nintendo of America Inc., a manufacturer  and distributor
          of video games and products.  From 1979 to 1994, he served as Managing
          Partner of the  Northwest  Group and the  Seattle  office of Coopers &
          Lybrand.   Mr.   Bauer   serves  on  the  board  of   Multiple   Zones
          International, Inc. (MZON).

          Terms expire 2001:

               LARRY D. FOSTER (age 54) has been a director of the Company since
          May 1995. He has served as the Company's President and Chief Operating
          Officer  since  September  1995 and as the Company's  Chief  Executive
          Officer and Chairman of the Board since March 1996. From November 1992
          until July 1995,  Mr. Foster  served as President and Chief  Executive
          Officer of Remote Input Solutions, Inc.

               MARSHA  MURRY (age 51) has been a director of the  Company  since
          July 1993. Ms. Murry is the principal of Accelerated Edge, a privately
          held consulting firm, which she founded in January 1981. From May 1992
          to August 1994, she was Strategic  Product Manager for Autodesk,  Inc.
          Ms.  Murry  served  as  Vice   President  of  Marketing  and  Business
          Development  of the Company from  February  1988 to August  1990.  Ms.
          Murry served as Secretary  of the Company from  February  1989 to July
          1991 and from December 1997 to the present.

<PAGE>

          EXECUTIVE OFFICERS

               The  executive  officers  of the  Company,  and  their  ages  and
          positions as of April 1999 are as follows:

          Name         Age   Position

          Larry Foster  54   President, Chief Executive Officer and Chairman of
                             the Board of Directors

          Gary Cully    48   Vice President, Finance and Chief Financial Officer

          For information regarding Mr. Foster see "--DIRECTORS --."

               GARY  M.  CULLY  (age  48)  Vice  President,  Finance  and  Chief
          Financial  Officer  joined the Company in January 1998.  For two years
          prior to joining Midisoft, Mr. Cully consulted with Mentor Graphics, a
          developer  of  design  automation  software,  in M&A  integration  and
          information technology. Mr. Cully was Chief Financial Officer of Prism
          Group,  Inc.  from 1994 to 1996.  After Mr.  Cully's  departure,  some
          subsidiaries  of Prism  filed for  protection  under  Chapter 7 of the
          bankruptcy code and Prism Group, Inc. ceased all operations. Mr. Cully
          was also Chief  Financial  Officer of Omega  Environmental,  where his
          primary  focus  areas were  financial  controls,  M&A  evaluation  and
          setting up operations in Latin America.

ITEM 10.  EXECUTIVE COMPENSATION

               The following table sets forth certain  information  with respect
          to compensation paid by the Company for the fiscal year ended December
          31, 1998 and for the prior two fiscal years to (i) the Company's Chief
          Executive  Officer  and (ii) its other  executive  officer  whose cash
          compensation  exceeded  $100,000  for services  performed  during that
          fiscal year.

                           Summary Compensation Table
<TABLE>
<CAPTION>
                                    Annual Compensation            Long-Term Compensation Awards

                                                                    Securities
Name & Principal                                    Other Annual    Underlying     All Other
    Position             Year   Salary($)  Bonus($) Compensation($)  Options(#)  Compensation($)
<S>                     <C>     <C>        <C>      <C>              <C>         <C>
Larry D. Foster,         1998   $133,750   $33,678            --             0               --
   President,  Chief     1997   $120,000        --            --       150,000               --
   Executive Officer     1996   $117,692        --            --        75,000               --
   & Chairman

Gary M. Cully,           1998   $103,372        --            --        50,000               --
   Vice President,
   Finance & Chief
   Financial Officer
</TABLE>

Grants of Stock Options

         The following  table sets forth  certain  information  regarding  stock
options  granted  during the fiscal year ended  December  31, 1998 to  executive
officers of the Company whose compensation in 1998 exceeded $100,000.

<PAGE>

<TABLE>
<CAPTION>
                        Option Grants in Last Fiscal Year
                                Individual Grants
               Number of Securities  Percent of Total Options
                Underlying Options    Granted to Employees in
Name                Granted (#)            Fiscal Year       Exercise Price($/Sh) Expiration Date
<S>                  <C>                     <C>                   <C>             <C>
Larry D. Foster           --                    --                       --
Gary M. Cully (1)     50,000                  14.7 %               $0.8125          01/07/2008
<FN>
(1)  The option vests 25% per year on the option anniversary date.
</FN>
</TABLE>

Exercises of Stock Options and Year-End Values

         The following  table sets forth  certain  information  regarding  stock
options  exercised  during the fiscal year ended  December  31, 1998 and options
held as of  December  31,  1998  by  executive  officers  of the  Company  whose
compensation in 1998 exceeded $100,000.

   Aggregated Option Exercises in Last Fiscal Year and Year-End Option Values
<TABLE>
<CAPTION>
                                        Number of Securities
                                   nderlying Unexercised Options  Value of  Unexercised
                                                  at              In-the-Money Options at
                 Shares                    December 31, 1998         December 31, 1998
               Acquired on    Value
Name           Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
<S>            <C>         <C>         <C>         <C>           <C>         <C>
Larry D. Foster      --          --       143,750       106,250          --            --
Gary M. Cully        --          --            --        50,000          --            --
</TABLE>

Outside  directors of the Company  receive  options for 30,000  shares of Common
Stock upon  election to the board and options for 30,000 shares for each year of
service.  Outside  directors  also  receive a retainer of $1,500 per quarter and
$500  for  attendance  in  person  at each  meeting  of the  board  or $250  for
attendance  by  telephone  and $250 for  participation  in each  meeting  of the
committees. Employee directors receive no additional compensation for service on
the board.

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Securities  Exchange Act of 1934, as amended,  requires the
Company's officers and directors, and persons who own more than ten percent of a
registered  class  of the  Company's  equity  securities,  to  file  reports  of
ownership with the Securities and Exchange Commission ("SEC").  All such persons
who are subject to Section  16(a)  reporting  are required by SEC  regulation to
furnish the Company with copies of all such reports that they file.

Based solely on the Company's  review of the copies of such reports  received by
the Company,  in addition to written  representations  by the Company's officers
and  directors   regarding  their  compliance  with  the  applicable   reporting
requirements  under Section  16(a),  the Company  believes that its officers and
directors,  and all of the  persons  known to own more than ten  percent  of the
Common  Stock,  complied with all filing  requirements  applicable to them under
Section 16(a) during 1998.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  following   table  sets  forth  certain   information   concerning
beneficial  ownership of the Common Stock by (i) persons known by the Company to
beneficially  own 5% or more of the  outstanding  Common  Stock as of April  23,
1999, (ii) each director,  (iii) each executive officer,  and (iv) all executive
officers and directors of the Company as a group.  The Company believes that the
beneficial  owners  of the  Common  Stock  listed  below,  based on  information
furnished by such owners,  have sole voting and investment power with respect to
such shares.

<PAGE>

         <TABLE>
         <CAPTION>

                                                       Shares
                                                   Beneficially      Percent of
         Name and Address                              Owned             Class
         <S>                                         <C>                <C>
         Larry D. Foster (1)                          275,000             3.8%
         Gary M. Cully (2)                             12,500              *
         John H. Bauer (3)                             70,000              *
         Marsha Murry(4)                              102,661             1.5%
         Robert Orbach (5)                             67,500              *
         J. Larry Smart (6)                            60,000              *

         B. P. Software, Ltd. (7)
              15851 Dallas Parkway, St. 1120
              Dallas, Texas  75248                 11,884,615            62.9%

         All directors and executive officers
              as a group (six persons)(8)             587,661             7.9%

         * Less than 1%.

<FN>
(1)      Includes 175,000 shares issuable upon exercise of options that are
         exercisable within 60 days.
(2)      Includes 12,500 shares issuable upon exercise of options that are
         exercisable within 60 days.
(3)      Includes 70,000 shares issuable upon exercise of options that are
         exercisable within 60 days.
(4)      Includes 41,500 shares issuable upon exercise of options that are
         exercisable within 60 days.
(5)      Includes 67,500 shares issuable upon exercise of options that are
         exercisable within 60 days.
(6)      Includes 60,000 shares issuable upon exercise of options that are
         exercisable within 60 days
(7)      Includes 8,339,744 shares issuable upon conversion of debentures and
         notes that are convertible within 60 days and includes 3,544,871 shares
         issuable upon exercise of warrants that are exercisable within 60 days.
(8)      Includes 426,500 shares issuable upon exercise of options that are
         exercisable within 60 days.
</FN>
</TABLE>

     BP  Software,  Ltd.  has the right to  purchase an  additional  $800,000 of
convertible  debentures in 1999.  If BP Software,  Ltd. 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.
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Accelerated Edge, a firm in which director,  Ms. Murry is a principal,  was paid
$46,083.35 in 1998 for services  provided to the Company in 1997 and 1998. Davis
Wright  Tremaine,  a firm in which former  director,  Mr. A. Peter  Parsons is a
partner, provided services to the Company totaling $5,987.80 in 1998.

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 7.

<TABLE>
<CAPTION>
                                                                                          Page
                                                                                          ----

<S>                                                                                       <C>
     Report of PricewaterhouseCoopers LLP..................................................20

     Balance Sheet - At December 31, 1998 and 1997.........................................21

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

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

     and 1997..............................................................................23

     Statement of Cash Flows - For the Years Ended December 31, 1998 and 1997..............24

     Notes to Financial Statements - For the Years Ended December 31, 1998 and1997.........25
</TABLE>


(b)  Reports on 8-K.

     None

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

           Exhibit No.           Description

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

           3.1.2b  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.

           3.1.3b  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.

           3.1.4   Articles of Amendment to Articles of  Incorporation of the
                   Company as filed on November 13, 1998 with the Secretary
                   of State of the State of Washington.

           3.2.1b  By-laws of the Company.

           3.2.2a  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
<PAGE>


           Exhibit No.           Description

           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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

           10.6.6a OEM License Agreement,  dated May 17, 1994, by and between
                   Gateway 2000 and the Company.
<PAGE>


           Exhibit No.           Description

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

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

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

           10.6.10eOEM License Agreement,  dated June 2, 1995, by and between
                      Acer America Corporation and the Company.
           10.6.11eOEM License Agreement, dated June 5, 1995, by and between NEC
                   Technologies, Inc. and the Company.

           10.7.1e 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).
           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 30, 1999                       By:  /S/ LARRY D. 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.

   Signature                       Title                              Date
--------------

/S/ LARRY D. FOSTER              Chairman of the Board,          April 30, 1999
Larry D. Foster                  President and Chief
                                 Executive Officer


/S/ GARY M. CULLY                Vice President, Finance,        April 30, 1999
Gary M. Cully                    Chief Financial Officer and
                                 Principal Accounting Officer


/S/ JOHN H. BAUER                Director                        April 30, 1999
John H. Bauer

/S/ MARSHA MURRY                 Director                        April 30, 1999
Marsha Murry

/S/ ROBERT M. ORBACH             Director                        April 30, 1999
Robert M. Orbach

/S/ J. LARRY SMART               Director                        April 30, 1999
J. Larry Smart