<PAGE>

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

[X]  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934
                 For the Fiscal Year Ended December 31, 1996 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)

                                 (206) 391-3610
                           (Issuer's telephone number)

           Securities registered pursuant to Section 12(b) of the Act:
                                                       Name of each exchange
Title of each class                                    on which registered
-------------------                                    -------------------
      None                                                     N/A

           Securities registered pursuant to Section 12(g) of the Act:
                           COMMON STOCK, NO PAR VALUE
                                (Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]

Issuer's revenues for its most recent fiscal year were $3,113,000.

Aggregate market value of voting stock held by non-affiliates of the 
registrant as of March 10, 1997 was $8,868,800  (based upon the closing sale 
price of $1.88 per share on the Nasdaq National Market on such date).  Number 
of shares of Common Stock outstanding as of March 10, 1997:  5,624,951 shares.

                       DOCUMENTS INCORPORATED BY REFERENCE

Part III is incorporated by reference from the definitive proxy statement to be
filed in connection with the Company's 1997 Annual Meeting of Shareholders.

<PAGE>

                              MIDISOFT CORPORATION
                          ANNUAL REPORT ON FORM 10-KSB

                                TABLE OF CONTENTS


                                     PART I

                                                                            Page
                                                                            ----

Item 1.   Business . . . . . . . . . . . . . . . . . . . . . . . . . . .       1

Item 2.   Properties . . . . . . . . . . . . . . . . . . . . . . . . . .      11

Item 3.   Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . .      11

Item 4.   Submission of Matters to a Vote of Security Holders. . . . . .      12


                                     PART II

Item 5.   Market for Registrant's Common Equity and Related
          Shareholder Matters. . . . . . . . . . . . . . . . . . . . . .      13

Item 6.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations. . . . . . . . . . . . . . . . . . .      13

Item 7.   Financial Statements and Supplementary Data. . . . . . . . . .      17

Item 8.   Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosure . . . . . . . . . . . . . . . . . . .      30


                                    PART III

Item 9.   Directors, Executive Officers, Promoters and Control
          Persons; Compliance With Section 16(a) of the
          Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . .      31

Item 10.  Executive Compensation . . . . . . . . . . . . . . . . . . . .      31

Item 11.  Security Ownership of Certain Beneficial Owners and
          Management . . . . . . . . . . . . . . . . . . . . . . . . . .      31

Item 12.  Certain Relationships and Related Transactions . . . . . . . .      32

Item 13.  Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . .      32


SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      36

<PAGE>

                                     PART I

ITEM 1.
BUSINESS

GENERAL

Midisoft is a leading provider of innovative applications and utilities for the
control and use of sound on personal computers.  The Company was founded in 1986
and has developed award-winning audio software products since that time.  Over
the past 11 years the total available market for these types of products has
expanded dramatically from a very small segment of PCs used mainly by computer
hobbyists into virtually each computer that ships from every system
manufacturer. Sound on the PC has changed from a differentiating feature into a
standard component on all hardware platforms and product lines. The emergence of
the Internet has amplified this expansion and created the backbone with which
sounds, voice messages and music can now be sent globally to enhance
communication world-wide. As new technologies evolve, the Company believes it
can continue to be the premiere provider of audio control expertise.

The precise science of managing and manipulating audio within the computing 
environment is a non-trivial engineering endeavor. The Company's eleven year 
development of its technology base in the programming of utilities and 
applications focused on sound, has provided a competitive advantage, enabling 
it to define and create products in an extremely efficient manner. This 
advantage allows the Company's product strategy to closely track with the 
very latest hardware developments which are now incorporating sound 
components at an ever increasing rate.

Working closely with major hardware manufacturers (OEMs) to supply the 
control software necessary to exploit the audio portion of their computers 
and peripherals provides the Company with a "technological heads-up" that is 
as desirable as it is unique.  Strategic alliances with chip manufacturers 
give the Company a view into the future of near and mid-term engineering 
advancements that will eventually appear in desktop and laptop computers. 
Supplying this same control functionality as well as audio software 
applications to system makers provides the Company significant revenue 
opportunities and access to next year's computer designs today.  And finally, 
applying this forward vision to the design of stand-alone software products 
to be sold directly to end-users via traditional retail channels or from a 
web site encompasses the entire spectrum of distribution.

MIDISOFT STRATEGIC PRODUCT LINE currently shipping consists of MIDISOFT 
AUDIOWORKS, MIDISOFT AUDIO POSTCARD, MIDISOFT SOUND BAR, and MIDISOFT 
MEDIAWORKS. Strategic Products in the stage of final development are  
MIDISOFT INTERNET MEDIA PLAYER and  MIDISOFT DVD PLAYER.  The available 
market for these titles alone is estimated to be in excess of 45 million 
computers in 1997. Derivatives and sub-sets of these products are expected to 
account for more than 65% of the Company's revenue in 1997. They will ship 
under new and existing contracts with products from standard PC manufacturers 
and others.  The MIDISOFT DVD PLAYER for the PC will ship with one of the very 
first Digital Versatel Discs ("DVD") equipped PCs to enter the market.

MIDISOFT MUSIC PRODUCT LINE currently consists OF  MIDISOFT STUDIO, MIDISOFT
PLAY PIANO, MIDISOFT MIDIKIT, and FAMILY MUSIC CENTER and MIDISOFT DESKTOP SHEET
MUSIC, the first in a new generation of Midisoft scaleable applications.
Targeted at the $420 million per year category of printed music, MIDISOFT
DESKTOP SHEET MUSIC features state of the art "Plug-in" technology as well as a
feature set that should meet even the most demanding professionals needs. The
Company's new technologies allow it to scale product offerings and feature sets
to the needs of specific market segments or to the needs of individual OEM
customers. Two additional products that will feature Midisoft's technology are:
MIDISOFT STUDIO 5.0, an upgrade to Midisoft's flagship product, and MIDISOFT
TAPEDECK, a product aimed at the 66% of US

<PAGE>

musicians who are not keyboard players. The Company creates and markets these 
products to bring music education, music composition, and professional 
quality music creation to the average users desktop. This goal is 
complemented by the continued development of Midisoft's plug-in technology. 
Because the development cycle for application "Plug-ins" is very short in 
comparison to the development cycle for an application, the Company believes 
that it will have a competitive advantage by having shorter development 
cycles that bring new product offerings and new technologies to market faster 
than its competition. As new categories such as Internet media grow, the 
Company expects to aggressively pursue new music and audio opportunities.

MARKET OVERVIEW

Audio capabilities have moved from being a product differentiator to a base line
standard for PC manufacturers. Traditionally the Company provided enabling
software for audio to OEMs and application software to end-users. The Company
has expanded its market vertically to integrate its enabling products back to
the chip and card manufacturers and horizontally to third-party vendors.  But
end-user excitement over new technologies such as DVD, MMX, streaming
audio/video has created pull-through demand for the Company's audio expertise.
The Company does not attempt to create a market for its technology, instead
focuses on trends established by industry leaders to create the direction for
new products.

By establishing sales programs which focus on the chip manufacturer, the 
Company has expanded its market while maintaining its aim to be on all of the 
77 million PCs expected to ship this year. The explosive growth of the 
Internet with seemingly endless content potential further qualifies the 
Company's product strategy, especially as blurring between computer and 
consumer uses as DVD, Digital Cameras and radio over the Internet becomes 
commonplace.

Market trends such as Intel's AC97 chip specification, which moves audio to a 
system requirement level, and the integration of increasingly higher speed 
modems into PCs allows the Company's software to be an economical and 
distinguishing solution.  According to the Audit Bureau of Circulation, 
approximately 33% of US homes have PCs and 75% of those have modems.  A 
recent survey by AT&T showed that nearly 40%of adult consumer expected to 
purchase something online in 1997.  In another finding from AT&T, 70 percent 
of the consumers polled said they had shopped by telephone in the past year, 
averaging 16 purchases in which they gave out their credit card number.  
These statistics indicate the consumer's readiness to shop online.  The 
Company's audio solutions change the dynamics of Internet shopping, making it 
more appealing, more dramatic.  The Company expects that Web sites without 
sound will soon go the way of silent movies.

MARKET SIZE

                                     [GRAPH]

     MILLIONS                      1996      1997      1998      1999      2000
PC Unit Shipments                    69        77        85        94       102
Number E-Mail Users                  60        80       130       180       200
PC's in Use                         222       256       290       324       358
% PC's with Internet Access         14%       25%       40%       56%       68%


                                                                               4

<PAGE>

The Company's potential market includes every new PC shipment. The Company 
can provide the enabling and application software that strengthens the 
chip/card manufacturer's and OEMs' ability to capitalize on the anticipated 
growth of audio functions that incorporate DVD, Internet and e-mail users.  
The Company's products provide product differentiation for chip/card 
manufacturers and OEMs while assisting them in bringing products to market 
faster.  For example, DVD Players have high public awareness and have had a 
strong start in 1997 even without significant content available.  Dataquest 
forecasts 2.1 million DVD Player units to ship this year increasing 500 
percent in 1998 and 200 percent per year through 2001 with revenue exceeding 
$4 billion by 2000.  The Company expects to be among the first to market as 
it ships its user interface with the STB Systems DVD card.

In 1996, music software became one of the top 10 applications of the year for 
the first time.  Demographic studies indicate a correlation between 
PC/Internet users and musicians with a very strong tendency toward being 
upscale, professional and well educated.

PRODUCTS AND PRODUCT DESIGN

The continued growth of the Intel architecture has fueled  the need for 
professional quality applications at the consumer level. With the rise of the 
Pentium and Pentium Pro series of processors with MMX technology, the Company 
expects that the average user will have a "Workstation" caliber machine on 
their desk by 1998. Professional users such as graphic and audio designers 
are also migrating to the Intel platform in greater numbers as the power of  
Intel offerings surpasses that of the Macintosh platform. The market has also 
seen a migration of professional music Studio users, a traditional Macintosh 
stronghold,  to the Intel platform. The Company believes that its products, 
which are designed for the latest Intel technologies and offer ease of use 
which is superior to that of the Macintosh, are positioned to embrace these 
migrating users.

STRATEGY 
The Company's strategy is to develop friendly, easy-to-use software that 
offers integrated access to a broad range of PC features not currently in use 
because end-users are either unaware of their existence or are incapable of 
utilizing them.  The Company's strategy is built around six basic elements:

     EMPHASIZE SOFTWARE, NOT HARDWARE.  The Company concentrates its 
development efforts on modular software to enable core functionality for the 
OEM and products for the end-user that can be quickly enhanced.           
     USE STANDARD OPEN SYSTEMS.  The Company's products use standard, rather 
than proprietary technology.  As a result, the Company can rapidly adopt new 
PC based technologies and thereby leverage the substantial expenditures made 
by third parties who develop new technologies for the general PC environment. 
        MAKE PRODUCTS EASY TO USE AND INSTALL.  The Company strives to 
maximize ease of use for the end-user.  The products are designed to be 
"intuitive" with features that can be readily used without special training 
or manuals.   The Company believes that its reputation and experience with 
audio user interfaces has been instrumental in establishing OEM relationships 
with STB Systems and others.          
     DEVELOP PRODUCTS CONCURRENT WITH MARKET LEADERS.  By beginning the 
product development cycle with design sessions with industry leaders like 
Microsoft, Intel and Kodak, the Company is provided access to the latest in 
trends in technology and can begin creating product interfaces at the 
earliest point in the market adaptation of a new technology.           
     INCREASE MARKET VISIBILITY. The Company has increased the visibility of 
its products by inclusion in chip manufacturers' reference kits. The Company 
achieves broad market coverage for its retail products primarily through the 
use of regional manufacturer's representative firms and large retail 
distributors such as Tech Data.
     MINIMIZE DISTRIBUTION OVERHEAD. The Company licenses its products 
internationally to in-country republishers who translate, manufacturer and 
distribute the products while paying the Company a royalty per unit.  The 
Company has republishing agreements in Japan, Spain, Italy, Germany and 
France.

                                                                               5

<PAGE>

The following table provides the name, a short description, the target markets
and channels of distribution for the Company's 1997 product line.  The date
following the product name indicates the release date. If such date is
ITALICIZED, it refers to the expected release date or upgrade date of the
Product.

<TABLE>
<CAPTION>


STRATEGIC
PRODUCTS
------------------------------------------------------------------------------------------------------------------------------------
PRODUCT                 DESCRIPTION                                                           MARKET        INT'L   CHANNELS
                                                                                              CONSUMER              OEM
                                                                                                BUSINESS                RETAIL
                                                                                                                              DIRECT
------------------------------------------------------------------------------------------------------------------------------------
<S>                     <C>                                                                   <C>    <C>    <C>     <C> <C>   <C>
Midisoft                MIDI, wave  audio and  CD audio  are  all supported  in  this         X      X        X      X      X     X
AUDIOWORKS PRO          powerful OEM program. The familiar  stereo rack provides many
                        software sound tools, plus the flexibility to manage and edit
March, 1997             the entire spectrum of interactive multimedia audio data.
------------------------------------------------------------------------------------------------------------------------------------
Midisoft                Audio Postcard  delivers   the ability  to embed  audio notes         X      X        X      X      X     X
AUDIO POSTCARD          into  pictures. Users can  add voice to  digital snapshots or
                        video files.  It includes a  player to send  these files over
March, 1997             the Internet in a simple manner.
------------------------------------------------------------------------------------------------------------------------------------
Midisoft                This product is a player  for the largest base of live  or on         X      X        X      X            X
INTERNET                demand audio  files on  the Internet,  Streamed files.   This
MEDIA PLAYER            player includes enhanced  functionality superior to competing
                        products and allows the user to  organize audio playback over
March, 1997             the Web.
------------------------------------------------------------------------------------------------------------------------------------
Midisoft                This product  provides the ability to control every aspect of         X      X        X      X      X     X
SOUND BAR 2.0           sound  from the desktop.   Users can send  Audio Mail, create
                        Audio Notes, annotate  digital pictures and video  with sound
                        and send  them through the  Internet, play  CDs and  find any
March, 1997             sound or  music file on  their system  instantly, all  from a
------------------------------------------------------------------------------------------------------------------------------------
Midisoft                This DVD player was created to ship with DVD card  makers who         X      X        X      X      X     X
DVD PLAYER              must have a utility to facilitate the complete control of the
                        video files  on  DVD's.  It  will  include a  wide  range  of
                        functions as well as  "heads-up" display capabilities to make
April, 1997             DVD use easy to use and powerful.
------------------------------------------------------------------------------------------------------------------------------------
Midisoft                This product features  tool suites for  audio editing, media          X      X        X      X
MEDIAWORKS 2.0          integration and desktop telephony.  All of these features are
                        accessed  through  a  graphical user  interface  resembling a
                        modern  home  office.  In  addition,  it  provides convenient
                        single  click  access  to many  of  the  Windows  95  utility
March, 1996             applications.
------------------------------------------------------------------------------------------------------------------------------------


                                                                               6

<PAGE>

<CAPTION>

MUSIC
PRODUCTS
------------------------------------------------------------------------------------------------------------------------------------
PRODUCTS               DESCRIPTION                                                           MARKET        INT'L   CHANNELS
                                                                                             CONSUMER              OEM
                                                                                               BUSINESS                RETAIL
                                                                                                                              DIRECT
------------------------------------------------------------------------------------------------------------------------------------
<S>                     <C>                                                                   <C>    <C>    <C>     <C> <C>   <C>
Midisoft                The first  Windows  95  logo'd  music  application.    Studio         X               X      X      X     X
STUDIO 4.0              features real-time notation display of MIDI input, as well as
September, 1995         innovative software and  multi-track digital audio  recording
                        and playback. MIDISOFT  STUDIO includes six  screen views  to
STUDIO 5.0              enhance the  users ability  to fine  tune their music,  and a
JUNE, 1997              professional quality digital audio editor.
------------------------------------------------------------------------------------------------------------------------------------
Midisoft                State  of the  art music  publishing  is the  focus  of SHEET         X      X        X      X      X     X
SHEET MUSIC             MUSIC,  with  a  user  interface  that will  be  friendly  to
                        software   novices.   SHEET    MUSIC   features   exceptional
                        transcription  ability that  takes  Studio's "Realtime  sheet
                        music"  to a whole  new level of  excellence while Midisoft's
                        PERFORMANCE  Sequencer-TM-  technology   turns  Midi playback
                        into an  experience that  is as intimate  and real as  a live
March, 1997             band in your living room.
------------------------------------------------------------------------------------------------------------------------------------
Midisoft                The MIDI Kit's universal MIDI connector and MIDI editor allow         X      X        X             X     X
MIDI KIT 3.0            the  sound card  owner to  transform  a PC  into  a recording
July, 1996              studio.   Cables  connect the  PC's   sound  card to  a  MIDI
                        musical instrument. Recording Session Plus provides immediate
MIDI KIT 4.0            MIDI recording, composing and editing capability, as well  as
September, 1997         digital audio recording.
------------------------------------------------------------------------------------------------------------------------------------
Midisoft                This  product  features  a  mixture  of  both  core  Midisoft         X               X      X      X     X
PLAY PIANO 2.0          technologies  and  new proprietary  technologies to  create a
July, 1996              truly interactive learning experience. Lessons are created in
                        real-time, based on the student's needs. Any MIDI file can be
                        imported and  Play Piano's artificial  intelligence instantly
PLAY PIANO 3.0          turn it  into a  custom lesson  for the student.  The product
September, 1997         ships with 40 songs and over 400 activities.
------------------------------------------------------------------------------------------------------------------------------------
Midisoft                This product  incorporates MIDISOFT  PLAY PIANO  and MIDISOFT         X               X             X     X
FAMILY MUSIC            STUDIO with  a high  quality keyboard, MIDI  connector and  a
CENTER                  Connect  and  Play  video  to  become  an  all-in-one   music
July, 1996              solution.
------------------------------------------------------------------------------------------------------------------------------------
Midisoft                Tapedeck is a multi-track digital audio recorder for  Windows         X      X        X      X            X
TAPE DECK               and will feature multi-track recording of CD quality  digital
                        audio with Real-time EQ and reverberation for a target market
JULY, 1997              of non-MIDI musicians.
------------------------------------------------------------------------------------------------------------------------------------
Midisoft                This MIDI sequencer was originally created to serve the needs         X      X        X      X
RECORDING               of  OEM customers.  Its  many features  allow flexibility  in
SESSION                 editing,  recording  and  playback  using  MIDISOFT  STUDIO'S
                        proprietary auto-notation and  animated note highlighting. It
                        is available translated in other languages including: German,
September, 1995         French, Spanish and Japanese.
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
                                                                               7

<PAGE>

MARKETING, SALES AND DISTRIBUTION

The principal elements of the Company's marketing, sales and distribution
strategy are as follows:

PRODUCT OFFERINGS:
     CHIP MANUFACTURERS - The Company has developed enabling software to enhance
the unique functionality of chips, for example Opti and Chromatic utilize
MIDISOFT SOUND BAR and MIDISOFT AUDIO WORKS, respectively to highlight their
individual qualities.
     OEMS - The Company is increasing its Strategic Product offerings from two
in 1996 to six in 1997.  The OEM product offerings continue to include the music
products which are gaining in popularity as a product differentiator.  All of
the products are compatible and allow the OEM a virtual menu from which to
enhance their lines of PCs.
     THIRD PARTY MANUFACTURERS - Use of audio to increase product effectiveness
and marketability has allowed the Company to leverage its audio expertise into
digital camera applications with its MIDISOFT AUDIO POSTCARD and into Internet
applications with its MIDISOFT INTERNET MEDIA PLAYER.
     END-USERS - Strategic products offered to end-users will be increased from
one to five and the music products will include a major upgrade to the Company's
flagship music product, MIDISOFT STUDIO and exciting new products including
MIDISOFT DESKTOP SHEET MUSIC and MIDISOFT TAPE DECK.

DISTRIBUTION:
     CHIP MANUFACTURERS, OEMS, THIRD PARTY MANUFACTURERS - Distribution is
direct through the Company's OEM sales force.  The Company customarily supplies
one master disk which the chip manufacturer, OEM or third party manufacturer
duplicates.
     RETAIL CHANNEL - Distribution is direct through the Company's Retail
Channel Sales group which is supplemented by third party Manufacturer's
Representatives and large Distributors/Resellers. 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 channel can result
in high returns or the requirement of substantial price protection in subsequent
periods. There is also a price protection program that allows the reseller a
price reduction from the Company for unsold product.  The Company believes that
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 resellers
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 has an established base within computer software retail
stores which in 1996 approximated 2,400 shelves.  In 1997 the Company has
expanded its presence into the Musical Instrument ("MI") stores.  The Company
currently has shelf space in two of the largest MI chains, Sam Ash and Guitar
Center, as well as prominent regional MI resellers.  Although the total MI
channel approximates only 600 additional shelves.  The Company believes that MI
retailers generate higher sales per store than computer software retailers.
     DIRECT SALES - The Company also 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 also responsible for targeted direct mail
marketing and sells product upgrades and accessories to registered customers.
Web sales are an increasingly important channel for the Company.  It has
developed its Internet web site to promote the complete product line and conduct
secured on-line transactions.  In addition, the Company has sublicensed certain
of its downloadable software products to other Internet stores such as On-line
Interactive and c / net.

CUSTOMER SUPPORT:  The Company provides a high level of support across the
distribution spectrum.  Support includes on-site training for OEMs and 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.


                                                                               8

<PAGE>

STRATEGIC RELATIONSHIPS: The Company has entered into arrangements with third
parties to jointly market their products with the Company's to expand
distribution capabilities while providing a more comprehensive solution to end-
users.  Revenue from these relationships can be expected in the second quarter
of 1997 and beyond.

     AT&T - The Company expects that AT&T will emerge as the nation's largest
Internet service provider through its WorldNet Division.  The Company bundles
the WorldNet Internet access software with the MIDISOFT SOUND BAR product for
marketing and press opportunities.
     KODAK - The Company includes a time-restricted version of SOUND BAR 2.0
that includes the new audio postcard drawer with Kodak's digital video camera.
     STB SYSTEMS - The Company believes that STB is the number one graphics card
manufacturer in the world and the Company has created a strategic partnership to
develop a complete DVD solution for inclusion in all STB's PC DVD shipments.

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
OEM customers and the Company's sales force determines the features and function
of the next set of product releases in the context of the Company's own
strategic planning.

The Company markets its products principally by attending trade shows,
advertising in periodicals oriented toward retailers and end-users, Web
advertising and direct mailings.  Marketing activities also focus on generating
product reviews.  In 1996 SOUND BAR received positive reviews from Newsweek,
Businessweek, CNN Financial News, ABC Talk Radio and the Chicago Tribune. FAMILY
MUSIC CENTER was the top pick or runner-up within the learning software category
in Time Magazine, Parade Magazine and Family PC Magazine.  Consumer exposure is
critical in new product introduction and the Company estimates that these
reviews generated over 50 million "impressions" in just the fourth quarter of
1996. Play Piano and Sound Bar captured two awards as Consumer Product of the
Year and runner-up, respectively, from the Washington Software Association for
1996.

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.
Although the Company believes it now has the products and employees to favorably
compete on the basis of these factors, there can be no assurance that
competition will not adversely affect future operating results or financial
condition

MANUFACTURING

The Company is in the process of implementing a full turn-key manufacturing
system which is expected to  be complete during the second quarter of 1997. The
manufacturing process for software involves the duplication of software code
onto floppy diskettes or CD's, printing of packaging and documentation, and
assembly of the final packaged product.  Manufacturing volume can generally be
increased rapidly to respond to increases in demand.  To date, the Company has
not encountered any material difficulties or delays in the manufacture and
assembly of its products, and has experienced low returns due to product
defects.


                                                                               9

<PAGE>

The Company also pursues Web sales whereby the products are downloaded directly
to the consumer, thereby eliminating manufacturing concerns. OEM sales require
the duplication of the software code onto a CD, generally referred to as a
"golden master", which the OEM duplicates in accordance with its hardware
shipments or loads directly onto the PC or card.

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 the 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 tradename, 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 February 28, 1997, employed 45 employees. Of these, 12 are
employed in administration, 17 in product development and 16 in sales and
marketing. All of the 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 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.

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 (i) the development of new music and strategic software products,
(ii) the expansion of domestic and international marketing, sales and
distribution programs, (iii) the continued protection of proprietary
technologies and (iv) 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 were based on assumptions that the


                                                                              10

<PAGE>

Company would continue to develop and introduce new music and strategic software
products on a timely basis, that rapid changes in technology would not make the
Company's products obsolete or otherwise reduce their ability to compete in the
marketplace, that competitive conditions within the industry would not change
materially or adversely, that the use of multimedia PCs in homes and small
offices would continue to grow, that management's decision to re-focus the
Company's resources on music and sound products would reduce certain expenses
from the levels which were experienced in 1995 and 1996, and that there would 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 2002.  The Company subleases approximately 5,700 square
feet to short-term tenants for periods of 12 to 18 months.  The Company
currently receives $7,200 per month under sublease agreements.  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

On March 24, 1995 a shareholders' class action was filed against the Company and
three of the Company's former officers.  The complaint, captioned as SMITH, ET
AL. V. MIDISOFT, ET AL., was filed in the United States District Court for the
Western District of Washington. The action was brought on behalf of purchasers
of the Company's Common Stock during the period April 26, 1994 to August 18,
1995, as extended.  Among other things, the complaint alleged that the
defendants made various misrepresentations and/or omissions with respect to the
Company's business.  On February 26, 1996 the parties entered into an agreement
pursuant to which the case was settled subject to final court approval.
Pursuant to the settlement agreement, the Company was required to pay $100,000
cash and to issue 650,000 shares of Common Stock to the plaintiffs; the Company
was also obligated to register the Common Stock under the Securities Exchange
Act of 1933 in order to allow the plaintiffs to sell the stock.  The Company
filed a registration statement covering the Common Stock issued to the
plaintiffs in the fourth quarter, 1996, and is proceeding with such 
registration.

The Securities and Exchange Commission ("SEC") has concluded its investigation
into the restatement of the Company's financial statements for the year ended
December 31, 1994.  In anticipation of an administrative proceeding being
commenced by the SEC alleging violation of certain reporting and accounting
requirements, the Company entered into a settlement agreement with the SEC in
October 1996.  Pursuant to the settlement agreement, the Company, without
admitting or denying any of the SEC's findings, was ordered to cease and desist
from permitting or causing any violation of certain reporting and accounting
requirements contained in the federal securities laws.  The settlement has not
had an adverse effect on the Company's operating results or financial condition.


                                                                              11

<PAGE>

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

No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year covered by this report.


                                                                              12

<PAGE>

                                     PART II

ITEM 5.   MARKET OF COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

MARKET INFORMATION. The Company's Common Stock is quoted on the Nasdaq National
Market under the symbol "MIDI". The following table sets forth the range of high
and low closing bid prices, as reported by Nasdaq, from January 1, 1995 through
December 31, 1996. The prices set forth reflect inter-dealer quotations, without
retail markups, markdowns or commissions, and do not necessarily represent
actual transactions.  As of March 10, 1997, the number of holders of record of
the Company's Common Stock was approximately 246. Since certain of the shares of
Common Stock are held in street name, there may be additional beneficial holders
of the Company's Common Stock.

                                                        High           Low
                                                        ----           ---
               1995
          First quarter                                12  1/4        8
          Second quarter                                9  1/4        7  1/2
          Third quarter                                 8  1/4        4  1/2
          Fourth quarter                                5  1/2        2  1/4

               1996
          First quarter                                 3  1/2        1  5/8
          Second quarter                                9  3/8        2  3/16
          Third quarter                                 5  7/8        3  1/4
          Fourth quarter                                5  1/8        2  1/8


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, diskettes and
duplication, packaging materials, assembly, paper goods, shipping and
amortization of software development costs.

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, until technological feasibility is established,
after which any additional costs are capitalized until the software is available
for release to customers. Capitalized software development costs consist of
salaries and related benefits incurred in developing computer software after
technological feasibility has been established. Amortization of capitalized
software development costs begins when the related product is available for
release to customers. The Company capitalized software development costs of
approximately $331,000 in 1995.  As a result of the highly competitive nature of
the software business and rapid product development life cycles, no additional
software development costs were capitalized in 1996.  Purchased contract
software technology costs represent development costs incurred by contract
software engineers in developing computer software. The Company capitalized
contract software technology costs of approximately


                                                                              13

<PAGE>

$1,069,000 in 1995.  The Company has eliminated contract development, intending
to focus on maintaining development expertise within the Company.  No
development costs were capitalized in 1996.

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.
91-1 "Software Revenue Recognition" 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 91-1 are recognized as revenue on
the installment basis as payments are received. 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 is recognized when products are
shipped.

In September, 1995 the Company reduced its work force to decrease costs as its
initial step in reorganization. During the third and fourth quarters of 1995,
the Company recorded charges of $2.4 million and $1.5 million, respectively, for
restructuring associated with the Company's determination that certain software
assets were not compatible with the reorganized product strategy. In 1995, the
Company took significant steps in an attempt to reduce the negative cash flow
from operations, decreasing total personnel by 40%, subleasing a portion of its
facility, eliminating outside contractors and reducing its product line to allow
maximum effectiveness of sales personnel and marketing expenditures. During 1995
and 1996, the Company's entire research and development, marketing and sales
efforts were refocused upon the Company's core competence in sound and music.

At December 31, 1996, the Company had Federal net operating loss carryovers of
approximately $18.1 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.

COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995

Revenues for 1996 were $3.1 million, a decrease of $2.3 million, compared to
$5.4 million in 1995. The decrease in revenues is attributed to reduced sales
during the restructuring of the Company during the first half of 1996 and weak
fourth quarter retail sales due to overall weakness in the retail channel
market.  Additionally, the Company's OEM sales were focused on the July 1996
release, Sound Bar. The focus of the Company's OEM sales model has shifted to
enabling-type software rather than application software.  The social interface
market weakened faster in early 1996 than anticipated leaving the Company with a
product void until the release of Sound Bar.  Sales to software distributors and
resellers, together with direct sales, represented 67% and 45% of revenues for
the years ended December 31, 1996 and 1995.  OEM sales represented 33% and 55%
during the same periods. International sales accounted for 19% of the Company's
revenues in 1996 compared to 17% of revenues in 1995.

Gross profit for 1996 was $1.1 million, a decrease of $1.8 million, compared to
$2.9 million for the prior year. As a percentage of revenues, gross profit
decreased to 37% in 1996 from 54% in 1995. The reduced  gross profit percentage
is primarily a result of the decline in revenues which could not be offset by a
reduction in  fixed costs.  Further, the Company's product mix was more heavily
weighted toward the retail channel which commands lower margins due to the cost
of goods.  The retail channel and the inside sales consist of boxed product that
carries a cost of goods ranging from 3% to 48% of the sales price.  The cost of
OEM sales generally consists of only one master CD from which the OEM makes
replications.

Research and development expenses for 1996 were $.9 million, a decrease of $.9
million, or 47%, compared to $1.8 million for 1995.  As a percentage of
revenues, research and development expenses decreased to 30% in 1996 from 33% in
1995.  This decrease reflects a more narrowly defined product line, but has not
affected the ability of the Company to introduce new products.


                                                                              14

<PAGE>

Sales and marketing expenses for 1996 were $3.6 million, a decrease of $484,000,
compared to $4.1 million for 1995. As a percent of revenues, sales and marketing
expenses increased to 116% in 1996 from 76% in 1995, primarily due to the
decline in revenues as well as sales and marketing efforts related to the
release of four new products in late July, 1996.  The Company increased its
marketing efforts for the new products in the fourth quarter, targeting families
and other sectors of the audio market.

General and administrative expenses for 1996 were $2.4 million, a decrease of
$1.6 million, compared to $4.0 million for 1995.  As a percentage of revenues,
these expenses for 1996 increased to 78% in 1996 from 74% in 1995.  The decrease
is the result of reduced staffing, reduced legal costs with the settlement of
the class action suit and reduced rent  due to the sublease of 30% of the
Company's office facility.  The current expense represents the base levels for
the Company's general and administrative expenses.

Interest income for 1996 was $118,000, compared to $379,000 in 1995. The
decrease in interest income in 1996 reflects a decrease in the amount of cash
available for investments in 1996 due to use of cash in operations.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 1996, the Company's principal sources of liquidity included
cash and cash equivalents of $709,000 and net accounts receivable of $1.3
million. The Company has had no long-term debt since inception, and the Company
has no present commitments or agreements that could require any long-term debt
to be incurred.  As of December 31, 1996, working capital totaled $1.4 million.

The Company's operating activities used cash of $4.1 million for the year ended
December 31, 1996 due primarily to operating losses of $5.7 million.

Current assets decreased $3.6 million to $3.2 million at December 31, 1996 
from $6.8 million at the end of 1995.  The decrease was due to the 
utilization of cash in operations and the reduction of accounts receivable 
due to a reduction of the days sales outstanding and the decrease in overall 
sales.  Long term assets decreased $0.9 million to $0.9 million at December 
31, 1996 from $1.8 million at the end of 1995.  This decrease was due to the 
amortization of capitalized software costs.  Current liabilities decreased 
$1.5 million to $1.8 million at December 31, 1996 from $3.3 million at the 
end of 1995.  The decrease was due to the settlement of the class action law 
suit for which $100,000 in cash and $1.5 million in common stock were 
distributed during 1996.  Shareholders' equity decreased $3.0 million to $2.3 
million at December 31, 1996 from $5.3 million at the end of 1995.  The 
change in equity had three components, an increase of $1.1 million from the 
issuance of Preferred stock, a $1.5 million increase in Common stock to 
settle the class action lawsuit, and a decrease of $5.7 million from the net 
loss generated in 1996.

Cash from investing activities totaled $1.5 million in 1996, mainly as the
result of redemption of short term investments. The Company 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 offshore private placement completed in October, 1996.

The Company expects to complete a private offering in the second quarter, 
1997 and that the funds received from this offering, if completed, along with 
cash generated from the sale of products and collections of accounts 
receivable, will be sufficient to meet the Company's capital requirements for 
at least the next 12 months. The Company will continue to pursue other 
financing arrangements as needed, to increase its cash reserves in 1997. 
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.

                                                                              15

<PAGE>

ITEM 7.   FINANCIAL STATEMENTS

             REPORT OF PRICE WATERHOUSE LLP, INDEPENDENT ACCOUNTANTS

To the Board of  Directors
and Shareholders of Midisoft Corporation

In our opinion, the accompanying balance sheets and the related statements of 
operations and shareholders' equity and of cash flows present fairly, in all 
material respects, the financial position of Midisoft at December 31, 1995 
and the results of their operations and their cash flows for the year 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 audit 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 misstatements.  An audit includes examining, 
on a test basis, evidence supporting the amounts and disclosures in the 
financial statements, accessing the accounting principles used and 
significant estimates made by management, and evaluating the overall 
financial statement presentation.  We believe that our audit provide a 
reasonable basis for the opinion expressed above.

Price Waterhouse, LLP
Seattle, Washington
March 27, 1996


                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Shareholders of Midisoft Corporation

We have audited the accompanying balance sheet of Midisoft Corporation as of
December 31, 1996 and the related statement of operation, shareholders' equity,
and cash flow for the year then ended.  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 audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 1996 financial statements referred to above present fairly,
in all material respects, the financial position of Midisoft Corporation at
December 31, 1996 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the 
Company will continue as a going concern. As more fully described in Note 1, 
the Company has incurred recurring losses from operations and has negative 
operating cash flows. These conditions raise substantial doubt about the 
Company's 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 to reflect the possible future 
effects on the recoverability and classification of assets or the amounts and 
classifications of liabilities that may result from the outcome of this 
uncertainty.

Seattle, Washington                                           Ernst & Young LLP
March 13, 1997


                                                                              16

<PAGE>

                              MIDISOFT CORPORATION
                                 BALANCE SHEETS

<TABLE>
<CAPTION>

                                                               ASSETS
                                                                                            Year ended December 31,
                                                                                       -----------------------------------
                                                                                            1996               1995
                                                                                       ---------------     ---------------
Current assets:
<S>                                                                                    <C>                 <C>
           Cash and cash equivalents                                                    $    709,000        $  2,143,000
           Short term investments                                                                              1,540,000
           Accounts receivable - net of allowances of
            $1,052,000 in 1996 and $1,550,000 in 1995                                      1,282,000           2,329,000
           Inventories                                                                       942,000             494,000
           Prepaid expenses and other receivable                                             282,000             266,000
                                                                                       ---------------     ---------------
             Total current assets                                                          3,215,000           6,772,000
Property & equipment, net                                                                    421,000             562,000
Capitalized software and other costs, net                                                    455,000           1,230,000
                                                                                       ---------------     ---------------
             Total assets                                                               $  4,091,000        $  8,564,000
                                                                                       ---------------     ---------------
                                                                                       ---------------     ---------------

                                                 LIABILITIES & SHAREHOLDERS' EQUITY

Current liabilities:
           Trade accounts payable                                                       $    691,000        $    429,000
           Accrued wages & payroll taxes                                                     186,000             260,000
           Other accrued expenses                                                            118,000           1,804,000
           Deferred revenue                                                                  821,000             807,000
                                                                                       ---------------     ---------------
             Total current liabilities                                                     1,816,000           3,300,000
                                                                                       ---------------     ---------------
Commitments & contingencies (Note 14)
Shareholders' equity
           Preferred stock, Series A Convertible, no par value; 2,500,000 shares
             authorized, 1,100 shares issued and outstanding in 1996 and
             none in 1995                                                                  1,100,000
           Common stock, no par value; 10,000,000 shares authorized,
             5,345,425 issued and outstanding in 1996 and
             4,662,441 issued and outstanding in 1995                                     18,733,000          17,106,000
           Retained deficit                                                              (17,558,000)        (11,842,000)
                                                                                       ---------------     ---------------
             Total shareholders' equity                                                    2,275,000           5,264,000
                                                                                       ---------------     ---------------
             Total liabilities and shareholders' equity                                 $  4,091,000        $  8,564,000
                                                                                       ---------------     ---------------
                                                                                       ---------------     ---------------
</TABLE>




See accompanying notes to financial statements.


                                                                              17

<PAGE>

                              MIDISOFT CORPORATION
                            STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

                                                                                            Year ended December 31,
                                                                                       -----------------------------------
                                                                                            1996               1995
                                                                                       ---------------     ---------------
<S>                                                                                    <C>                 <C>
Revenues                                                                                $  3,113,000        $  5,420,000
Cost of revenues                                                                           1,971,000           2,490,000
                                                                                       ---------------     ---------------

Gross profit                                                                               1,142,000           2,930,000
Operating expenses:
    Sales and marketing                                                                    3,613,000           4,097,000
    General and administrative                                                             2,421,000           4,015,000
    Research and development                                                                 942,000           1,787,000
    Restructuring charge                                                                                       3,898,000
    Settlement of shareholder litigation                                                                       1,644,000
                                                                                       ---------------     ---------------
         Total operating expenses                                                          6,976,000          15,441,000
                                                                                       ---------------     ---------------
Operating loss                                                                            (5,834,000)        (12,511,000)
Interest and other income                                                                    118,000             379,000
                                                                                       ---------------     ---------------
Net loss                                                                               $  (5,716,000)     $  (12,132,000)
                                                                                       ---------------     ---------------
                                                                                       ---------------     ---------------
Net loss per share                                                                          $  (1.22)           $  (2.60)
                                                                                       ---------------     ---------------
                                                                                       ---------------     ---------------
Weighted average shares outstanding                                                        4,687,000          4,665,000
                                                                                       ---------------     ---------------
                                                                                       ---------------     ---------------
</TABLE>






                 See accompanying notes to financial statements.


                                                                              18

<PAGE>

                              MIDISOFT CORPORATION
                              STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                            Year ended December 31,
                                                                                       -----------------------------------
                                                                                            1996               1995
                                                                                       ---------------     ---------------
<S>                                                                                    <C>                 <C>
CASH FLOWS FROM OPERATIONS:
    Net loss                                                                           $  (5,716,000)      $ (12,132,000)
    Adjustments to reconcile net loss to net cash
     provided by operating activities:
       Depreciation                                                                          222,000             204,000
       Amortization                                                                          780,000             948,000
       Loss on disposal of leasehold                                                                              16,000
       Deferred rent provision                                                                                    65,000
       Writedown of capitalized software                                                                       3,898,000
       Settlement of litigation                                                                                  150,000
       (INCREASE) DECREASE IN ASSETS:
        Accounts receivable, net                                                           1,047,000           1,515,000
        Inventories                                                                         (448,000)            185,000
        Prepaid expenses                                                                     (16,000)             15,000
        Deferred income taxes                                                                                    283,000
       INCREASE (DECREASE) IN LIABILITIES:
        Trade accounts payable                                                               262,000             (38,000)
        Accrued wages & payroll taxes                                                        (74,000)            120,000
        Other accrued expenses                                                              (142,000)          1,624,000
        Deferred income taxes                                                                      -            (291,000)
        Deferred revenue                                                                      14,000              22,000
                                                                                       ---------------     ---------------
              Total adjustments                                                            1,645,000           8,716,000
                                                                                       ---------------     ---------------
              Net cash used for operations                                                (4,071,000)         (3,416,000)
                                                                                       ---------------     ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Redemption of short term investments                                                   1,540,000
    Purchases of short term investments                                                                       (1,540,000)
    Purchases of property & equipment                                                        (86,000)           (407,000)
    Capitalized software                                                                           -          (2,384,000)
                                                                                       ---------------     ---------------
              Net cash provided by/(used in) investing activities                          1,454,000          (4,331,000)
                                                                                       ---------------     ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from common stock option exercises                                               83,000             306,000
    Proceeds from sale of preferred stock                                                  1,100,000
    Stock repurchased                                                                                            (17,000)
                                                                                       ---------------     ---------------
              Net cash provided by financing activities                                    1,183,000             289,000
                                                                                       ---------------     ---------------
Net decrease in cash and cash equivalents                                                 (1,434,000)         (7,458,000)
Cash and cash equivalents, beginning of year                                               2,143,000           9,601,000
                                                                                       ---------------     ---------------
Cash and cash equivalents, end of period                                               $     709,000       $   2,143,000
                                                                                       ---------------     ---------------
                                                                                       ---------------     ---------------
SUPPLEMENTAL CASH FLOW INFORMATION:
    Common stock issued for purchase of other assets                                   $           -       $   1,991,000
    Common stock and stock options issued in settlement of claims                          1,544,000             150,000
    Income taxes paid                                                                              -               2,000

</TABLE>





                 See accompanying notes to financial statements.


                                                                              19

<PAGE>

                              MIDISOFT CORPORATION
                       STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>

                                                                                                       Retained        Total
                                            Common Stock                       Preferred Stock         (Deficit)    Shareholders'
                                       Shares          Amount                Shares      Amount        Earnings        Equity
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994          4,262,000     $  14,676,000               -             -   $     290,000     $ 14,966,000
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>           <C>                      <C>         <C>      <C>               <C>
Common stock repurchased                (53,000)          (17,000)                                                       (17,000)
Common stock issued                     195,000         1,991,000                                                      1,991,000
Stock options exercised                 258,000           456,000                                                        456,000
Net loss for 1995                                                                                   (12,132,000)     (12,132,000)
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995          4,662,000        17,106,000               -             -     (11,842,000)       5,264,000
-----------------------------------------------------------------------------------------------------------------------------------
Stock options exercised                  33,000            83,000                                                         83,000
Common stock issued in settlement
   of litigation                        650,000         1,544,000                                                      1,544,000
Preferred stock issued                                                      1,100   $ 1,100,000                        1,100,000
Net loss for 1996                                                                                    (5,716,000)      (5,716,000)
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996          5,345,000     $  18,733,000           1,100   $ 1,100,000   $ (17,558,000)    $  2,275,000
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>









                 See accompanying notes to financial statements.


                                                                              20

<PAGE>

                              MIDISOFT CORPORATION

                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1996

1.   THE BUSINESS

     Midisoft is a leading provider of innovative applications and utilities for
     the control and use of sound on personal computers.  The Company was
     founded in 1986 and has pioneered award-winning audio software products
     since that time.  Over the past 11 years the total available market for
     these types of products has expanded dramatically from a very small segment
     of PCs used mainly by computer hobbyists into virtually each computer that
     ships from every system manufacturer. Sound on the PC has changed from a
     differentiating feature into a standard component on all hardware platforms
     and product lines. The emergence of the Internet has amplified this
     expansion and created the backbone with which sounds, voice messages and
     music can now be sent globally to enhance communication world-wide. As new
     technologies evolve, the Company believes it can continue to be the
     premiere provider of audio control expertise. The Company markets its
     products on a worldwide basis to (i) chip makers and 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 (ii) end-users, catalog
     companies, businesses and (iv) on-line Internet sales.

     GOING CONCERN AND LIQUIDITY
     The Company incurred substantial operating losses during each of the two 
     years ended December 31, 1996. 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 
     equity transactions. The Company's ability to continue as a going concern 
     is dependent upon numerous factors, including its ability to obtain 
     additional equity financing, the level of future revenues and its ability 
     to reduce operating expenses. The Company is actively pursuing possible 
     sources of additional working capital through the issuance of equity 
     securities. The Company has received proposals from investors which would 
     provide additional working capital, although each of these proposals is 
     subject to a number of conditions. There can be no assurance that the 
     Company would be able to obtain additional equity financing on terms the 
     Company finds acceptable. Any additional equity may involve substantial 
     dilution to the interests of holders of the Company's equity securities.

     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. There can be no assurance 
     that the Company would be able to reduce expenses or successfully complete
     other steps necessary to continue as a going concern. Such events would 
     materially and adversely affect the value of the Company's equity 
     securities.

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. 91-1, SOFTWARE REVENUE RECOGNITION, 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 collectability of the amount due is
     probable.  Revenues on contracts which do not meet the fixed fee revenue
     recognition criteria in SOP 91-1 are included in deferred revenue in the
     accompanying balance sheet and are recognized as revenue on the installment
     basis as payments are received.  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 considers all of the above factors in
     determining the adequate allowance against these sales.

     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 $783,000 and $906,000 for the year ended
     December 31, 1996 and 1995, respectively.

     RESEARCH AND DEVELOPMENT
     Software development costs incurred in conjunction with new software
     product development and product enhancements are charged to research and
     development expense.  Prior to 1996, certain costs, consisting of salaries
     and related benefits, incurred internally in developing computer software
     were


                                                                              21

<PAGE>

     capitalized until the software was available for general release.
     Amortization of capitalized software development costs began when the
     related product was available for general release to customers.  The
     amortized amount for each software product was based on the greater of (i)
     the ratio of current gross revenues to total current and anticipated future
     gross revenues for the related software or (ii) the straight-line method
     over the product's estimated economic life of 18 to 24 months.

     INCOME TAXES
     The Company provides for income taxes under the principles of Statement of
     Financial Accounting Standards No. 109 (SFAS 109) which requires that
     income taxes be provided for taxes currently due and for the expected
     future tax effects of the temporary differences between the book and tax
     bases of assets and liabilities.

     NET LOSS PER SHARE
     Net loss per share is computed on the basis of the weighted average number
     of shares of common stock outstanding during the period.  Common stock
     equivalents are antidilutive.

     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.

     SHORT-TERM INVESTMENTS
     There were no realized or unrealized gains or losses on short-term
     investments for the years ended December 31, 1996 and 1995.  All short-term
     investments are debt instruments that mature within one year, and are
     stated at cost, 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 it inventories for
     obsolete, slow moving and non-salable 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 the term of the
     lease.

     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.  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 equivalents and short-term investments and
     other assets and liabilities (such as accounts receivable and payable)
     approximate fair value at December 31, 1996 and December 31, 1995.

     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.


                                                                              22

<PAGE>

     STOCK COMPENSATION
     The Company has elected to apply the disclosure-only provisions of
     Statement of Financial Accounting Standards No. 123, "Accounting for stock
     Based Compensation."  Accordingly, the Company accounts for stock-based
     compensation 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.

3.   RECLASSIFICATIONS

     Certain prior year balances have been reclassified to conform to the
     current year presentation.

4.   RESTRUCTURING OF OPERATIONS

     During the third and fourth quarters of 1995, the Company recorded charges
     of $2,369,000 and $1,529,000, respectively, for restructuring associated
     with the Company's determination that certain software assets were not
     compatible with the reorganized product strategy. The charges consists of
     the write-down of previously capitalized software development costs. The
     Company's entire research and development, marketing and sales efforts were
     refocused upon the Company's core competence in sound and music.  Products
     that represented education, entertainment and business were written off as
     it was determined that no further internal resources would be spent to
     develop or promote them.  The Company has established licensing agreements
     for these products to third party publishers for per unit royalty payments.


5.   ACCOUNTS RECEIVABLE AND MAJOR CUSTOMER INFORMATION

     The Company operates in a single business segment.  During the years ended
     December 31, 1996 and 1995, the Company had revenue from foreign customers
     of $603,000 and $944,000, respectively.  Foreign sales as a percentage of
     the Company's total revenue in 1996 and 1995 were 19% and 17%,
     respectively.  In 1996 and 1995 separate domestic reseller customers
     accounted for revenues of $2,071,000 and $2,255,000, respectively, equal to
     67% and 42% of the Company's total revenue in the periods.

     Accounts receivable are summarized as follows:

                                                      1996           1995
                                                      ----           ----
          OEM                                     $  1,600,000   $  2,398,000
          Resellers and other                          734,000      1,481,000
                                                 -------------- --------------
           Subtotal                                  2,334,000      3,879,000
          Less:  Allowance for doubtful accounts      (781,000)    (1,120,000)
                 Allowance for sales returns          (271,000)      (430,000)
                                                 -------------- --------------
          Total accounts receivable               $  1,282,000   $  2,329,000
                                                 -------------- --------------
                                                 -------------- --------------


     Accounts receivable consist principally of amounts due from OEMs and
     reseller customers for licensing fees, royalties and direct sales of
     products.  OEM customer payment terms typically are one year in duration
     and require payments to be made in quarterly installments.  At December 31,
     1996 and 1995, OEM accounts receivable amounts not yet due were $173,000
     and $971,000, equal to 11% and 40%, respectively, of total OEM receivables.
     At December 31, 1996 and 1995, reseller accounts receivable amounts not yet
     due were $154,000 and $421,000 equal to 21% and 28%, 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, and Japan.


                                                                              23

<PAGE>

     Domestic customers comprise $1,540,000 and $2,769,000 of accounts
     receivable at December 31, 1996 and 1995, respectively.  Foreign customers
     comprised $794,000 of accounts receivable at December 31, 1996 compared to
     $1,110,000 at December 31, 1995.

6.   INVENTORIES

     Inventories are summarized as follows:
                                                          December 31,
                                                          ------------
                                                      1996           1995
                                                      ----           ----

          Raw materials                            $  760,000     $  455,000
          Finished goods                              287,000        284,000
          Less:  Allowance for obsolescence          (105,000)      (245,000)
                                                 -------------- --------------
          Total inventory                          $  942,000     $  494,000
                                                 -------------- --------------
                                                 -------------- --------------

7.   PROPERTY AND EQUIPMENT

     Property and equipment are summarized as follows:

                                                         December 31,
                                                         ------------
                                                      1996          1995
                                                      ----          ----

          Equipment                                $  917,000    $  839,000
          Furniture                                    81,000        79,000
          Leasehold improvement                        30,000        23,000
                                                 -------------- --------------
          Property and equipment, at cost           1,028,000       941,000
          Less:  Accumulated depreciation            (599,000)      (376,000)
                  Accumulated amortization             (8,000)        (3,000)
                                                 -------------- --------------
          Property and equipment, net                 421,000       562,000
                                                 -------------- --------------
                                                 -------------- --------------

8.   CAPITALIZED SOFTWARE AND OTHER COSTS

     Capitalized software and other costs are summarized as follows:
<TABLE>
<CAPTION>

                                                                                  December 31,
                                                                                  ------------
                                                                              1996           1995
                                                                              ----           ----
     <S>                                                                   <C>           <C>
     Purchased software technology, net of accumulated amortization of
      $412,000 and $177,000, respectively, in 1996 and 1995                $  193,000     $  428,000
     Purchased contract software technology, net of accumulated amorti-
      zation of $380,000 and $131,000, respectively, in 1996 and 1995         115,000        364,000
     Capitalized software development costs, net of accumulated amorti-
      zation of 430,000 and $139,000, respectively,  in 1996 and 1995         147,000        438,000
                                                                          -------------  -------------
   Total capitalized software                                              $  455,000    $ 1,230,000
                                                                          -------------  -------------
                                                                          -------------  -------------
</TABLE>

     PURCHASED SOFTWARE TECHNOLOGY
     The Company purchased software technology from various sources during 1995.
     The estimated useful lives of the remaining product costs range from
     eighteen months to two years.  Amortization expense related to purchased
     software technology for the years ended December 31, 1996 and 1995 was
     $235,000 and $561,000, respectively.

     PURCHASED CONTRACT SOFTWARE TECHNOLOGY


                                                                              24

<PAGE>

     Purchased contract software technology costs represent contract software
     development costs incurred for work performed by external contract software
     engineers in developing computer software.  Amortization expense related to
     purchased contract software technology was $249,000 and $111,000 for 1996
     and 1995, respectively.

     CAPITALIZED SOFTWARE DEVELOPMENT COSTS
     Capitalized software development costs represent software product
     development and product enhancements consisting of salaries and related
     benefits, incurred internally in developing computer software after
     technological feasibility has been established.  Amortization expense
     related to capitalized software development costs was $291,000 and $148,000
     for 1996 and 1995, respectively.

9.   BANK CREDIT LINE FACILITY

     The Company has a bank line of credit facility, from U.S. Bank of
     Washington.  Pursuant to the terms of the agreement, the Company may borrow
     on a secured basis up to $3,000,000 at the bank's prime rate and up to
     $120,000 on corporate bank cards.  The credit facility has a 1/4%
     commitment fee, matures May 31, 1997.  At December 31, 1996, no amount was
     drawn on either credit facility.

10.  OTHER ACCRUED EXPENSES

     The following table summarizes the components of the other current
     liabilities:
                                                          December 31,
                                                          ------------
                                                      1996          1995
                                                      ----          ----

          Shareholder litigation settlement        $        -   $  1,644,000
          Other accrued expenses                      118,000        160,000
                                                 -------------- --------------
                                                   $  118,000   $  1,804,000
                                                 -------------- --------------
                                                 -------------- --------------

     The shareholder litigation settlement is comprised of 650,000 shares of the
     Company's common stock which were issued in the fourth quarter of 1996.
     The cash payment portion of the settlement in the amount of $100,000 was
     made in May, 1996.

11.  INCOME TAXES

     There is no provision for income taxes for the years ended December 31,
     1996 and 1995 due to the net loss incurred.

     The components of deferred income taxes are summarized as follows:


                                                                              25

<PAGE>

                                                         December 31,
                                                         ------------
                                                     1996           1995
                                                     ----           ----

          Deferred income tax assets
           Net operating losses                     6,152,000      3,861,000
           Accrued liabilities and allowances         403,000      1,193,000
           Capitalized software                       226,000
           Other                                      214,000         72,000
                                                 -------------- --------------
                                                    6,995,000      5,126,000
          Deferred income tax liabilities
           Capitalized software                                     (482,000)
           Other                                       (6,000)

          Valuation allowance                      (6,989,000)    (4,644,000)
                                                 -------------- --------------
          Net deferred tax liabilities                      -              -
                                                 -------------- --------------
                                                 -------------- --------------


     At December 31, 1996, the Company had net operating losses of $18.1 million
     that will reduce taxes due in future periods and 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.


12.  SHAREHOLDERS' EQUITY

     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 offshore private placement completed in October, 1996.  The
     Series A Preferred Stock is convertible at the holder's option into shares
     of Common Stock at a price which is 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.  The Series A Preferred Stock is also subject to mandatory
     conversion two years after its date of issuance based upon the conversion
     formula described above.  Holders of the Series A Preferred Stock are
     entitled to an 8% cumulative dividend payable in cash or Common Stock, at
     the holder's option, at the time of conversion.  Holders of Series A
     Preferred Stock are entitled to one vote for each share of stock held.

     During 1995, the Company repurchased from one of the co-founders, 53,000
     shares of common stock for $17,000 under the Founders' buy-sell agreement.

     At December 31, 1996, the Company has reserved the following shares of
     Common Stock:


                    Warrants                                     163,000
                    Stock Options                                896,936

     WARRANTS
     In connection with the July 26, 1994 and the July 19, 1993 public stock
     offerings, the Company has agreed to issue and sell to the Underwriter
     Representatives, for nominal consideration, warrants to purchase an
     aggregate of 38,000 and 100,000 shares of common stock, respectively, at a
     price of $12.90 and $4.20, respectively.  The warrants expire in 1998.

     In connection with the October, 1996 sale of Series A Preferred Stock, the
     Company is also obligated to issue one warrant (the "Warrant") with respect
     to each share of Common Stock which is issued.  Each Warrant will entitle
     the holder to purchase one share of common stock at a price equal to $8.50
     per share.


                                                                              26

<PAGE>

     The Warrants shall be exercisable for two years.  Additionally, the Company
     has agreed to issue and sell to the Placement Agent, warrants to purchase
     25,000 shares of common stock at a price of $6.00 per share.

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

     Under the terms of the Plan, 1,350,000 shares of common stock may be
     issued.  The Plan is currently administered by the Option Committee of the
     Board of Directors which determines the terms and conditions of the options
     granted under the 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 are no longer exerciseable and vested
     options remain exerciseable for a period not to exceed three months.  The
     exercise price of all ISOs granted under the Plan must be at least equal to
     the fair market value of the common stock of the Company on the date of
     grant and the term may not exceed five years.  The exercise price of all
     ISOs granted under the Plan are determined by the Option Committee and the
     term may not exceed ten years.

     At December 31, 1996 and 1995, options for 160,000 and 79,000 shares,
     respectively, of common stock were exercisable and options for 195,000 and
     347,000 shares, respectively, of common stock were available for future
     grants under the Plan.

     Activity with respect to the Stock Option Plan is as follows:

                                                                Weighted Average
                                                      Shares     Exercise Price
                                                      ------     --------------
          Options outstanding, December 31, 1994     757,504          $5.03
          Granted                                    504,764          $5.52
          Exercised                                 (258,437)         $1.19
          Canceled                                  (421,291)         $6.50

          Options outstanding, December 31, 1995     582,540          $2.48
          Granted                                    401,514          $2.89
          Exercised                                  (32,984)         $2.54
          Canceled                                  (249,134)         $2.68

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

     The following table summarizes information about fixed-price options
     outstanding at December 31, 1996:
<TABLE>
<CAPTION>

                                             Weighted-
                                              Average         Weighted-                       Weighted-
             Range of       Options          Remaining         Average           Options       Average
          Exercise Prices Outstanding     Contractual Life  Exercise Price    Exerciseable  Exercise Price
          --------------- -----------     ----------------  --------------    ------------  --------------
          <S>             <C>             <C>               <C>               <C>           <C>
          $0.10 - $2.50     154,922             8.20            $  2.11          24,922         $  0.10
          $2.56 - $2.56     380,573             8.89            $  2.56         124,887         $  2.56
          $2.75 - $8.19     166,441             9.40            $  3.30          10,191         $  2.75
                          -----------                                         -----------
          $0.10 - $8.19     701,936             8.86            $  2.64         160,000         $  2.19
</TABLE>

     The Company follows the intrinsic value method in accounting for its stock
     options.  Had compensation cost been recognized on the fair value at the
     grant date for options awarded under the Plan, the pro forma


                                                                              27

<PAGE>

     amounts of the company's net loss and net loss per share for the years
     ended December 31, 1996 and 1995 would have been as follows:

                                               1996               1995
                                               ----               ----

          Net loss as reported            $  (5,716,000)     $  (12,132,000)
                                         ---------------    -----------------
                                         ---------------    -----------------
          Net loss pro forma              $  (6,613,000)     $  (12,882,000)
                                         ---------------    -----------------
                                         ---------------    -----------------
          Loss per share as reported           $  (1.22)           $  (2.60)
                                         ---------------    -----------------
                                         ---------------    -----------------
          Loss per share pro forma             $  (1.41)           $  (2.76)
                                         ---------------    -----------------
                                         ---------------    -----------------

     The fair value of each option grant was estimated using the Black-Scholes
     option-pricing model with the following weighted average assumptions: risk-
     free interest rates of 4.74% to 8.34%; expected option life of five years;
     expected volatility of 1.17%; and no expected dividends.  The weighted-
     average fair value of options granted during the years 1996 and 1995 was
     $2.88 and $3.61, respectively.

13.  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, 1996 and 1995, total royalty costs were $48,000
     and $195,000, respectively.

14.  COMMITMENTS AND CONTINGENCIES

     The Company leases office facilities and a warehouse for its operations.
     The leases contain renewal and expansion provisions, exerciseable at the
     discretion of the Company.  The Company's leases include scheduled rent
     increases over the term of the lease.  The total payment amount is being
     recognized to expense on a straight-line basis over the term of the lease.
     Future minimum lease rental commitments for all non-cancelable operating
     leases are summarized as follows:


               YEAR

               1997                     $    270,000
               1998                          271,000
               1999                          273,000
               2000                           73,000
                                        ------------
                                        $    887,000
                                        ------------
                                        ------------

     Rent expense for 1996 and 1995 was $263,000 and $191,000, respectively.
     The Company received $69,000 from sublease income for 1996.  There was no
     sublease income in 1995.

     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.

15.  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.


                                       28

<PAGE>

     Contributions by the Company are based on a matching formula as defined in
     the plan.  The Company made no contributions to the plan in 1996.


                                                                              29

<PAGE>

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

     1.     Previous independent accountants.
     (i)    Midisoft Corporation (the "Company") dismissed Price Waterhouse LLP
            (the "Former Accountants") as its independent accountants on January
            2, 1997.

     (ii)   The Former Accountants reported on the Company's financial
            statements for the fiscal years ended October 31, 1994 and 1995.
            The reports of the Former Accountants on the financial statements
            for such years contained no adverse opinion or disclaimer of opinion
            and were not qualified or modified as to uncertainty, audit scope or
            accounting principles.

     (iii)  The Company's Board of Directors approved the dismissal of the
            Former Accountants and the selection of Ernst & Young LLP as the
            Company's new accountants.

     (iv)   Except as described below, during the Company's fiscal years ended
            December 31, 1994 and 1995, and through the date of this report,
            there were no disagreements with the Former Accountants on any
            matter of accounting principles or practices, financial statement
            disclosure, or auditing scope or procedure, which disagreements if
            not resolved to the satisfaction of the Former Accountants would
            have caused them to make reference thereto in their report on the
            financial statements for such years.  In connection with their audit
            of the Company's financial statements for fiscal year 1994, the
            Former Accountants advised the Company and the Company's former
            management that they disagreed with the Company recognizing revenue
            for certain OEM contracts.  The disagreement was discussed by the
            Former Accountants with the Company's former management and with the
            Company's Board of Directors and the matter was resolved to the
            Former Accountant's satisfaction.

          Except as described below, during the fiscal years ended December 31,
          1994 and 1995 and through the date of this report, the Former
          Accountants did not advise the Company with respect to the matters
          described in paragraphs (a) (1) (vi) (B) (1) through  (3) of Item 304
          of Regulation S-B.  In connection with the Former Accountants' audit
          of the Company's financial statements for fiscal year 1994 subsequent
          to original issuance of the financial statements, information came to
          the attention of the Former Accountants which caused them to perform
          additional procedures which resulted in their unwillingness to rely
          upon the representations of the Company's former management regarding
          the December 31, 1994 financial statements, and to expand the scope of
          their audit work.  These matters were discussed with the Company's
          former management and the Company's Board of Directors.  The Former
          Accountants' further audit work led to a restatement of the Company's
          financial statements for the year ended December 31, 1994 to reverse
          certain revenue previously recognized in the Company's 1994 financial
          statements in a manner satisfactory to the Former Accountants.  The
          Former Accountants also advised the Board of Directors and former
          management of matters considered to be reportable conditions related
          to internal accounting controls under standards established by the
          AICPA.  These matters related to the Company's policies and procedures
          for recognizing revenue in its financial statements.  The Company's
          current management has adopted and implemented additional internal
          accounting controls to address these matters, and the Former
          Accountants have not issued any subsequent reports to the Company
          which include reportable conditions.

          Each of the events described in this report occurred prior to the
          appointment of the Company's existing executive officers.  In
          particular, the Company's executive officers at the time of each of
          the events described herein consisted of Raymond Bily, Chairman;
          Ronald Risdon, President; and Calvin Dyer, Chief Financial Officer.


                                                                              30

<PAGE>

          The Company has authorized the Former Accountants to respond fully to
          any inquiries of Ernst & Young LLP concerning the subject matter of
          the events described above.

     2.   The Registrant engaged Ernst & Young LLP as its new independent
          accountant effective January 2, 1997.  During the two fiscal years
          preceding its appointment and through the date hereof, the Company had
          not consulted with Ernst & Young LLP on items regarding:

     i)   The application of accounting principles to a specific completed or
          contemplated transaction, or the type of audit opinion that might be
          rendered on the Company's financial statements; there was no written
          or oral advice provided that was an important factor in reaching a
          decision as to any account, auditing or financial reporting issue; or
     ii)  Any matter that was the subject of a disagreement or event required to
          be identified pursuant to paragraph (a) (1) (iv) of Item 304 of
          Regulation S-B.

     3.   The Company has provided the Former Accountants with a copy of the
          foregoing disclosures and has requested in writing that the Former
          Accountants furnish it with a letter addressed to the SEC stating
          whether or not it agrees with such disclosures.  A copy of such letter
          is filed as an exhibit to the Company's Form 8-K filed on January 2,
          1997.
                                    PART III

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

     Item 9 is hereby incorporated by reference to the information in the
     Company's Proxy Statement relating to its 1996 annual meeting of
     Shareholders prepared in accordance with Section 14(a) of the
     Securities and Exchange Act of 1934, as amended (the "Proxy
     Statement").

ITEM 10.  EXECUTIVE COMPENSATION

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

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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


                                                                              31

<PAGE>
ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

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

     (a)  FINANCIAL STATEMENTS:  The following are filed as a part      ITEM 5.
          of this report under Financial Statements
                                                                        Page

          Report of Ernst & Young LLP. . . . . . . . . . . . . . . . .  16
          Report of Price Waterhouse LLP . . . . . . . . . . . . . . .  16
          Balance Sheets - At December 31, 1996 and 1995 . . . . . . .  17
          Income Statements - For the Years Ended December 31,
            1996 and 1995. . . . . . . . . . . . . . . . . . . . . . .  18
          Statements of Cash Flows - For the Years Ended
            December 31, 1996 and 1995 . . . . . . . . . . . . . . . .  19
          Statements of Shareholders' Equity - For the Years
            Ended December 31, 1996 and 1995 . . . . . . . . . . . . .  20
          Notes to Financial Statements - For the Years
            Ended December 31, 1996 and 1995 . . . . . . . . . . . . .  21

     (a)  REPORTS ON 8-K.

          Change in Accountants filed January 2, 1997

     (b)  EXHIBITS. The following exhibits are filed as part of this report:

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

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

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

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

          3.2.1 (b)   By-laws of the Company.

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

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

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

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

          10.1.1 (b)  Employment Agreement, dated December 31, 1991, as further
                      amended on May 5, 1994, by and between Raymond Bily and
                      the Company.

          10.1.2 (b)  Employment Agreement, dated March 1, 1991, as further
                      amended on May 5, 1994, by and between Ronald E. Risdon
                      and the Company.

          10.1.3 (b)  Employment Agreement, dated May 15, 1991, as further
                      amended on May 5, 1994, by and between Jerry W. Schwartz
                      and the Company.

          10.1.4 (c)  Employment Agreement, dated July 19, 1994, by and between
                      Calvin M. Dyer and the Company.

          10.2 (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.


                                                                              32
<PAGE>

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

          10.5.1 (b)  Industrial Lease, dated January 28, 1992, by and between
                      the Teachers Insurance and Annuity Association of America,
                      as landlord, and the Company, as tenant.

          10.5.2 (c)  Industrial Leases, dated July 9, 1994, by and between
                      Teachers Insurance and Annuity Association of America, as
                      landlord, and the Company, as tenant.

          10.5.3 (c)  Amendment to Industrial Leases, dated February 15, 1994,
                      by and between Teachers and Annuity Association of
                      America, as landlord, and the Company, as tenant.

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

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

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

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

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

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


                                                                              33

<PAGE>

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

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

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

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

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

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

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

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

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

          10.9.3 (b)  OEM License Agreement, dated October 26, 1994 by and
                      between Media Vision Corporation

          10.9.4 (b)  Form of OEM License Agreement between various OEM
                      licensees and the Company.

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

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

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

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

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

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

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

          10.10.1 (b) Founders' Buy-Sell Agreement, dated February 22, 1989, by
                      and among Mark R. McCulley, Raymond Bily and the Company.

          10.10.2 (b) Addendum to Founder's Buy-Sell Agreement, dated April 30,
                      1994, by and among Mark R. McCulley, Raymond Bily and the
                      Company.

          10.10.3 (b) Shareholder Agreement, dated December 9, 1991, by and
                      among Raymond Bily, Mark R. McCulley and certain
                      shareholders of the Company, on the one hand, and the
                      Company, on the other hand.


                                                                              34

<PAGE>

          EXHIBIT NO.    DESCRIPTION
          -----------    -----------
          10.10.4 (e)  Asset Purchase Agreement Among Midisoft Corporation,
                       Knowledge Engineering, Inc. and certain shareholders of
                       Knowledge Engineering, Inc. dated January 18, 1995.

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

          10.11.1 (c)  U.S. Bank of Washington and the Company.

          10.11.2 (b)  Loan and Security Agreement, dated June 1, 1994, by and
                       between Silicon Valley Bank and the Company.

          10.12.1 (e)  Severance letter, dated July 24, 1995.

          23.1         Consent of Ernst & Young LLP.

          23.2         Consent of Price Waterhouse LLP

          ------------------
          (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-QSB filed 
               November 14, 1996. (S.E.C. File No. 000-22172)
                                                                              35

<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 15, 1997               By:    /S/ Larry Foster
                                      -------------------------------------
                                   Larry Foster, Chairman of the Board,
                                   President and Chief Executive Officer




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

     SIGNATURE                        TITLE                           DATE
     ---------                        -----                           ----

   /S/ LARRY FOSTER        Chairman of the Board,                April 15, 1997
-------------------------  President and Chief Executive
Larry Foster               Officer


  /S/ MELINDA A. BRYDEN    Vice President, Finance and           April 15, 1997
-------------------------  and Chief Financial Officer
Melinda A. Bryden          (Principal Accounting Officer)


  /S/ JOHN BAUER           Director                              April 15, 1997
-------------------------
John Bauer


  /S/ MARSHA MURRY         Director                              April 15, 1997
-------------------------
Marsha Murry


 /S/ A. PETER PARSONS      Director                              April 15, 1997
-------------------------
A. Peter Parsons


                           Director                              April 15, 1997
-------------------------
Stephen Sedmak
                                                                              36