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

[X] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of
            1934 For the Fiscal Year Ended December 31, 1999 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                                Act of 1934

                    Commission File Number: 000-22172

                          RecordLab Corporation
                     (formerly 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 Identification No.)
 incorporation or organization)

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

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

        Securities registered pursuant to Section 12(b) of the Act:
                                                          Name of each exchange
Title of each class                                        on which registered
      None                                                         N/A
         Securities registered pursuant to Section 12(g) of the Act:
                      Common Stock, no par value
                           (Title of Class)

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

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

Issuer's revenues for its most recent fiscal year were $574,497.

Aggregate market value of voting stock held by  non-affiliates of the registrant
as of April 10, 2000 was $22,674,429 (based upon the closing sale price of $2.75
per share on such  date).  Number of shares of Common  Stock  outstanding  as of
April 10, 2000: 16,642,291 shares.

                      DOCUMENTS INCORPORATED BY REFERENCE
                                    None


<PAGE>


                                TABLE OF CONTENTS


                                     Part I



                                                                           Page

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

Item 2.    Description of Property...........................................7

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

Item 4.    Submission of Matters to a Vote of Security Holders...............8


                                     Part II

Item 5.    Market for Common Equity and Related Shareholder Matters..........9

Item 6.    Management's Discussion and Analysis of Financial Condition and
           Results of Operations.............................................9

Item 7.    Financial Statements.............................................17

Item 8.    Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure.............................................38


                                    Part III

Item 9.    Directors, Executive Officers, Promoters and Control Persons;
           Compliance with Section 16(a) of the Exchange Act................38

Item 10.   Executive Compensation...........................................38

Item 11.   Security Ownership of Certain Beneficial Owners and Management...38

Item 12.   Certain Relationships and Related Transactions...................38

Item 13.   Exhibits List and Reports on Form 8-K............................38


SIGNATURES..................................................................41

                                      -2-

<PAGE>






                                    PART I

Item 1.  DESCRIPTION OF BUSINESS

IN ADDITION TO HISTORICAL INFORMATION,  THIS FORM 10-K CONTAINS  FORWARD-LOOKING
STATEMENTS SUCH AS STATEMENTS OF THE COMPANY'S  EXPECTATIONS,  PLANS, OBJECTIVES
AND  BELIEFS.  THESE  STATEMENTS  USE SUCH  WORDS AS  "MAY,"  "WILL,"  "EXPECT,"
"ANTICIPATE,"  "BELIEVE," "PLAN," AND OTHER SIMILAR TERMINOLOGY.  ACTUAL RESULTS
COULD DIFFER  MATERIALLY  DUE TO CHANGES IN THE MARKET  ACCEPTANCE  OF RECORDLAB
PRODUCTS,  MARKET INTRODUCTION OR PRODUCT  DEVELOPMENT DELAYS,  GLOBAL AND LOCAL
BUSINESS CONDITIONS, LEGISLATION AND GOVERNMENTAL REGULATIONS,  COMPETITION, THE
COMPANY'S  ABILITY TO  EFFECTIVELY  MAINTAIN  AND UPDATE ITS PRODUCT  PORTFOLIO,
SHIFTS IN TECHNOLOGY,  POLITICAL OR ECONOMIC  INSTABILITY IN LOCAL MARKETS,  AND
CURRENCY AND EXCHANGE RATES. THESE  FORWARD-LOOKING  STATEMENTS SPEAK ONLY AS OF
THE DATE HEREOF.  THIS  DISCUSSION  SHOULD BE READ  TOGETHER  WITH THE FINANCIAL
STATEMENTS AND OTHER FINANCIAL INFORMATION INCLUDED IN THIS FORM 10-K.

General

recordLab  Corporation (formerly Midisoft Corporation) (the "Company") has since
its  incorporation in 1986 developed  software for the creation and distribution
of music and the  control of sound on  personal  computers.  The  products  have
enabled  users to learn to play  instruments,  create and share  music,  produce
print  quality  sheet music and view the musical  notation of sounds as they are
being  played on the computer or just enjoy the  experience  of sound on the PC.
The  Company  has refined and  expanded  these  products to include  playing and
viewing other forms of media, such as video.

In the past the  Company  has  marketed  its  products  in several  ways.  Media
utilities  were  sold  to  original  equipment  manufacturers   ("OEM's"),   who
incorporated   these   utilities  into  their  products  for  sale  to  computer
manufacturers  or end users. The Company has also formed alliances with Internet
content  aggregators  and  providers to download  its Internet  Media Player and
other Internet  products.  Although these sources of revenue are  unpredictable,
the  costs  of  revenues  are  minimal  and  the  Company  continues  to  pursue
opportunities in this area.

The Company's  consumer  products have been sold primarily through retail stores
specializing in the sale of personal computers and software. As the ownership of
PC's has become more  common,  the Company  added  direct  sales  channels in an
effort to reach more potential  users of its boxed  products.  Two years ago the
Company  began  selling  through  music and  instrument  stores to reach amateur
musicians  and in 1999 the  introduction  of Worship  Studio  made  distribution
through Christian bookstores an essential new channel.

The  explosive  growth of the  Internet in recent years has provided the Company
with the  avenue it has  needed  to reach  its  target  customer,  the  nation's
millions of amateur  musicians.  According to a Gallup Survey  conducted for the
National  Association  of  Music  Merchants,  MusicUSA  1998,  25% of  the  U.S.
population, or approximately 68 million Americans, are amateur musicians.  These
amateurs have a passion for playing music and want to become more  knowledgeable
and proficient at recording their music for their personal satisfaction.

The Company  believes that amateur  musicians and aspiring artists do not have a
place to go on the  Internet  to learn how to make music or to make their  music
better. They are limited to their local stores, teachers and network of friends.
The Company  intends to change that by providing  easy and direct  access to top
music industry talent,  expertise,  technology and learning opportunities.  With
this  category-creation  opportunity,  the  Company is focused on  reaching  the
broadest  number of  musicians  possible  and intends to capture and sustain the
leadership position in the music creation space on the Internet.
                                    -3-
<PAGE>

In the fourth quarter of 1999,  the Company  announced  sweeping  changes in its
business and revealed a new corporate  identity and  strategies  that deploy its
proprietary music creation technology,  and complimentary services and products,
over the Internet. The Company's core customer focus continues to be the amateur
and  non-professional  musician and aspiring artist.  In order to implement this
change in strategy,  recordLab  diverted  marketing  resources from  traditional
sales  channels  to invest in website  infrastructure  development  and  product
technology  engineering.  These  changes  have had the  effect of  removing  the
Company's products from the computer/software retail channel, which has been the
source  of most of the  Company's  revenue  since  its  founding  in  1986.  The
withdrawal  from this channel has resulted in a significant  reduction in 1999's
last  quarter  revenues  and an  increase in cost of  revenues,  as a percent of
revenues,  resulting from providing for product returns and inventory writedowns
during the same period.

The Company believes this reduction in sales will continue until the development
of  the   recordLab.com   website   infrastructure,   product   engineering  and
complimentary content and service creation is substantially completed, which the
Company anticipates will take place during the year 2000.  However,  the Company
will not be able to fund  this  development  from  operations  and will  require
additional investment to continue operations and complete  implementation of its
plans.  The Company has invested and intends to continue  investing the majority
of its financial and  management  resources on website and product  development,
marketing and promotion,  strategic  relationships  and technology and operating
infrastructure.

In November 1999 the Company opened its flagship  website,  recordLab.com.  When
completed  later this year, the website will present a series of online learning
laboratories  providing  information,  education,  downloadable  music  creation
software,  musical  equipment,  business and  entertainment  services that offer
visitors  access to the knowledge and technology  that simplifies the process of
composing, writing, recording, editing and publishing music.

Products

The  fundamental  focus  of  the  Company's  products  is  to  provide  software
applications and add-ons to fully outfit  musicians for their musical  journeys.
The following describes the Company's current software products:

Internet  TapeDeck(TM):   Internet  TapeDeck  is  a  multi-track  digital  audio
recording  application  for  Windows 9x PC's.  Internet  TapeDeck  emulates  the
functionality  of a $300 - $1,500  hardware-based  four or eight-track  cassette
recorder  (e.g.,  Tascam  Portastudio(TM)),  which is currently  one of the most
popular pieces of equipment sold in the musical  instrument  stores.  A hardware
multi-track  cassette  recorder is typically the first equipment amateur artists
or music enthusiasts acquire to capture and perfect their own music.

Studio(TM)  6.0 and  Desktop  Sheet  Music(TM)  2.0:  These  are  the  Company's
signature  music  software  products.  Studio  6.0 is the  first  notation-based
sequencing  product  for  Windows  `95 and `98,  while  Desktop  Sheet Music 2.0
enables amateur musicians to create and print professional  quality sheet music.
Worship  Studio(TM) is the Company's  first foray into creating  higher  margin,
niche-specific  versions that cater to the needs of a specific,  target  market,
church worship or music directors.

PlayPiano(R)  2.0: Play Piano is a tutorial software package that takes learning
to play the piano and is designed to be useful to users at all skill levels. The
"student"  selects  a song to  learn  and the  program  creates  a  lesson  plan
"on-the-fly" based on the players  proficiency and perceived skills.  Some music
theory and music history is also  provided,  making it an  edutainment  title as
well as an  instructional  tool.  The  product is rich with  multimedia  content
(audio and video clips and animation) and has potential for the music  education
market.

MediaWorks(TM):  MediaWorks is the Company's  lead audio utility which  supports
playback  and  management  of  popular  local  media  and CD  audio on the PC. A
significant  upgrade is in the design phase that will dramatically  increase the
number  of media  formats  supported  and will add many new  features  including
support for CD Audio "ripping" and MP3 encoding,  integrated support for Diamond
Multimedia's Rio MP3 Player and streaming audio playback.
                                    -4-
<PAGE>

Internet Media  Player(TM):  Internet Media Player is a free  companion,  add-on
utility  for the  Microsoft  Windows  Media  Player  that  provides  users  with
much-improved content management and playback of popular Internet-oriented media
including streaming  audio/video and MP3. Internet Media Player is positioned as
the "deluxe  player" for content  supported by Windows  Media  Technologies.  It
features an innovative ad banner and content management architecture that allows
the Company to automatically refresh and update ads and "pre-loaded" content. It
also delivers player and content usage demographics that are used for soliciting
advertisers and sponsorships.

Future products include a major product,  iDrum,(TM) add-on effects for Internet
TapeDeck  and  percussion  sounds for iDrum.  iDrum is a  software-only  product
designed to emulate a hardware electronic drum machine.  The drum machine,  like
the four or eight track  cassette  recorder is a popular  piece of musical  gear
sold in the music instrument  channel.  Using high-quality drum sound "samples,"
drum machines are  programmed to create and replay a drum or percussion  pattern
that can be used during a performance or in the studio.  It is particularly well
suited for the solo musician who does not play  percussion  and needs a beat for
practicing, performing or recording.

Enhancements  to  current  titles  are  also  planned.   MediaWorks(TM)   i2000:
MediaWorks  i2000 is a product under  development that combines the features and
functionality of Internet Media Player and MediaWorks '98 into a single, modular
and  configurable  code base upon which future  version of Internet Media Player
and MediaWorks  will be built.  New features  include an updated user interface,
support for additional file formats, more extensive user configuration  control,
support for audio effect  "plug-ins"  and improved  support for  co-branded  and
private label  opportunities with strategic partners and advertisers.  A Content
Developer's  Kit will provide  third-party  developers of content the ability to
plug-in their content to the recording platform.

Market

The demand for music content on the Internet is substantial and growing. Amateur
musicians  abound in large numbers today and the Internet has provided the means
by which  these  highly  active  groups can connect  and  interact.  The Company
believes  it is well  positioned  to take  advantage  of this growth and driving
trend in the marketplace.

The number of Internet  companies  and websites  that offer  musical  content is
expanding rapidly.  These companies  generally operate under a distribution-only
model that allows users to download  compressed  music (typically as MP3 files).
In so doing,  the  Company  believes  they miss the larger  universe  of amateur
musicians  who  have a  desire  or need to  create  music  but who  have not yet
recorded  their  music.  The Company  plans to address  this larger  universe of
amateur  musicians by offering a range of  vertically-integrated  knowledge  and
technology  products  and  services,   for  example  online  video  seminars  on
production techniques and other topics, music creation software, merchandise and
business services on recordLab.com.

Strategy

The  Company's  core strategy is to create THE platform for amateur the creation
of original  musical content on the Internet.  recordLab.com  will provide music
authoring software,  craft enhancement  seminars and career development services
that allow amateur musicians to produce and improve their music.  Presented as a
community-based online "laboratory," recordLab.com will provide members with: 1]
access to expert knowledge of those practicing  specific crafts within the music
industry;  and 2] the Company's  technology that aims to simplify the process of
recording,  editing, printing and distributing their music. The Company believes
that these are the keys to enabling  amateur  musicians to  contribute  original
artistic content and to creating communities of interest.  This in turn, creates
a  platform  for the  Company to  deliver a number of  additional  complimentary
services  to  amateur  musicians.   The  Company  believes  that  this  strategy
establishes significant differentiation between the Company and its competition.
                                     -5-
<PAGE>

Distribution

The Company  will  continue  to sell its boxed  product  directly to  consumers,
through existing retail channels and through its websites. The Company will also
generate revenues by selling  downloadable  music software  (recording and sheet
music  applications  and sound and effects  add-ons for  Internet  TapeDeck  and
iDrum),   selling  classes,   coursework  and  seminars   (streaming  videos  of
professional producers, arrangers, vocal coaches and publishers) and selling ads
on the website and on its Internet Media Player. Revenue from music fans will be
generated  from  advertising   accompanying   compelling  content  and  consumer
electronic merchandise.

Competition

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

Manufacturing

The  Company  had  used a  third-party  contractor  for  assembly  and  outbound
distribution,  but moved these  activities  in-house in 1999.  The Company  uses
in-house   capability  for  customer  order  processing,   component   inventory
procurement,  material  requirements  planning and  production  scheduling.  The
manufacturing  process for software  involves  duplication of software code onto
floppy diskettes or CD's,  printing of packaging and  documentation and assembly
of final  packaged  products.  Manufacturing  output can  generally be increased
rapidly  to  respond  to  increases  in  demand.  The  Company  has  experienced
occasional delays in manufacturing its products  resulting from not consistently
remaining  within  credit  terms with some of its  vendors.  The Company has not
encountered unusual levels of returns resulting from product defects.

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

Proprietary Rights

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

The Company  intends to maintain the  integrity  of its trade name,  trademarks,
copyrights and other proprietary rights against  unauthorized use and to protect
against infringement and unfair competition where circumstances warrant.
                                     -6-
<PAGE>

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 April 10, 2000, employed 25 persons. Of these, 9 are employed
in  administration,  8 in  product  development  and 8 in sales  and  marketing.
Employees  are covered by  confidentiality  agreements,  and no employee  has an
employment contract.  None of the Company's employees are represented by a union
or other  bargaining  group.  The Company  believes it maintains  good  employee
relations.  The Company also utilizes  independent  consultants  for a number of
purposes,  primarily in the area of product  development.  These consultants are
also covered by confidentiality agreements.

Dividends

The Company has declared no  dividends on its Common Stock since its  inception.
While subject to review if the Company achieves an operating surplus,  the Board
of Directors has no plans to declare a dividend on the Company's Common Stock.

Forward-Looking Statements

This report contains certain  forward-looking  statements  within the meaning of
Section 27A of the  Securities  Act of 1933 and  Section  21E of the  Securities
Exchange  Act of 1934,  and such  statements  are  subject  to the safe  harbors
created  thereby.  These  forward-looking   statements  include  the  plans  and
objectives of management for future  operations,  including plans and objectives
relating to (a) the development of new music,  strategic and Internet  products,
(b)  the  expansion  of  domestic  and   international   marketing,   sales  and
distribution programs, (c) the continued protection of proprietary  technologies
and (d) the  ability  to  fund  continued  operations  out of  existing  working
capital,  additional capital infusion and cash flow from future operations.  The
forward-looking  statements  included  herein are based on current  expectations
that involve a number of risks and uncertainties. The forward-looking statements
also  assume that the Company  will be able to raise the  capital  necessary  to
continue  as a going  concern,  but there can be no  assurance  that  sources of
capital  to  sustain  operations  will  be  available.   These   forward-looking
statements  are based on  assumptions  that the Company will continue to develop
and introduce new music, strategic and Internet products on a timely basis, that
rapid changes in technology  will not make the  Company's  products  obsolete or
otherwise reduce their ability to compete in the  marketplace,  that competitive
conditions within the industry will not change materially or adversely, that the
use of multimedia  PC's in homes and small  offices will  continue to grow,  and
that there will be no material  adverse  change in the  Company's  operations or
business.  Assumptions  relating to the foregoing involve judgments with respect
to, among other things, future economic,  competitive and market conditions, and
future business  decisions,  all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that the assumptions underlying the forward-looking  statements
are reasonable,  any of the assumptions could prove inaccurate and, there can be
no assurance that the forward-looking  information will prove to be accurate. In
light  of  the  significant   uncertainties   inherent  in  the  forward-looking
information  included herein,  the inclusion of such  information  should not be
regarded  as a  representation  by the  Company  or any  other  person  that the
objectives or plans of the Company will be achieved.
                                        -7-
<PAGE>

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 will pay $41,500 per month under its
lease  agreement.  The Company  considers  its leased  properties  to be in good
condition, well maintained,  and generally suitable and adequate for its present
and foreseeable future needs.

Item 3.  LEGAL PROCEEDINGS

In 1997, an entity  ("Claimant")  which sold  substantially all of its assets to
the Company in 1995 demanded that the Company  arbitrate  certain claims arising
from the sale.  The  claims  aggregated  in excess of $1  million.  The  parties
reached an agreement in July 1998  outside of  arbitration.  In exchange for the
mutual  release of all claims and  counterclaims,  the Company agreed to provide
total consideration of $420,000,  $25,000 in cash and the remainder comprised of
forgiveness of $112,000 in debt and issuance of approximately  633,000 recordLab
common shares.  The Company  agreed to file a  registration  statement for these
shares within 30 days after final authorization by the shareholders in 1998, but
has not filed the  registration  statement  as of this date.  Payments  totaling
$20,000 have been made. The debt of $112,000 has been fully reserved and expense
of $283,000 for the additional  common shares has been booked as of December 31,
1998.  recordLab agreed to remove  restrictive  legends on 166,667 of previously
issued  shares.  The Company  believes that the  Claimant's  subsequent  actions
nullified this  agreement.  In July 1999 the Company  demanded the return of all
consideration.  In December 1999 the Company cancelled the 633,000 shares
previously issued and reserved the $269,000 related to recording those shares.
recordLab has petitioned the court to dismiss the case.  The Company intends to
vigorously defend against the claim and to pursue collection.

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

On April 3, 1997 the  Company  began  arbitration  proceedings  against a former
customer.  On  September  24,  1997,  the Company was awarded a judgement in the
amount of  $194,983.37  against  the  former  customer.  The amount of the award
represents  the sum of 1)  $160,000.00,  the unpaid  portion of the base  annual
license  royalty under the Company's  OEM License  Agreement and 2)  $34,983.37,
representing interest on the unpaid installments from their respective due dates
through the date of the award  computed at 12% per annum.  In November 1998, the
former  customer had  exhausted its appeals when the  Washington  State Court of
Appeals denied the former  customer's  appeal motion,  thereby  terminating  the
appellate  process.  In March 1999,  the Company  amended the  judgement  to add
attorneys' fees and interest  accrued since the original  judgement was entered.
The total  amount of the  amended  judgement  is  $247,925.34.  The  Company has
engaged a California  law firm to enforce  judgement in the state of California,
the headquarters  location of the former customer.  The Company has reserved the
entire sum of the debt on the financial statements as of December 31, 1999.

As of December 31, 1999, the Company had $457,000 of accounts  payable that were
current,  $152,000 extended to between 31 and 60 days and $590,000 extended over
60 days.  The level of extended  accounts  payable  results  from the  Company's
negative  operating  cashflows.  The Company  has  entered  into plans to extend
payments beyond due dates in the original purchase orders. There is no certainty
that the Company will be able to continue to meet extended  payment  terms.  The
Company has received  demand letters from certain vendors  requesting  immediate
payment of amounts owing them  totaling  approximately  $395,000.  Four of these
vendors  have  initiated  litigation  for  claims  received  judgments  totaling
approximately  $28,000. The Company has reached settlement  agreements with some
vendors and is negotiating with the remainder.  Some vendors have stopped making
sales to the Company and others have required cash on delivery terms.
                                        -8-
<PAGE>

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

No matter  was  submitted  to a vote of the  Company's  shareholders  during the
fourth quarter of 1999.
                                        -9-
<PAGE>

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Market Information: The Company's Common Stock is traded under the symbol "RCLB"
on the OTC Bulletin Board.  The following table sets forth the range of high and
low closing bid prices,  as reported,  from January 1, 1998 through December 31,
1999.  The prices set forth  reflect  closing  price,  without  retail  markups,
markdowns or commissions.  As of April 10, 2000, the number of holders of record
of the  Company's  Common Stock was  approximately  1,418.  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
         1998
   First quarter                        $   1.2500               $   0.6250
   Second quarter                           0.8125                   0.3125
   Third quarter                            1.0000                   0.3750
   Fourth quarter                           0.7500                   0.2300


         1999
   First quarter                        $   1.0313               $   0.3750
   Second quarter                           3.8750                   0.9063
   Third quarter                            3.6563                   1.8125
   Fourth quarter                           4.7500                   2.3750


Dividends:  The Company has  declared no dividends on its Common Stock since its
inception. While subject to review if the Company achieves an operating surplus,
the Board of  Directors  has no plans to  declare a  dividend  on the  Company's
Common Stock.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

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

General

This table provides  comparative results of the twelve months ended December 31,
1999 and 1998. A general discussion of these results follows.

                                             Twelve months ended December 31,
                                                  1999              1998
                                              % of Revenue      % of Revenue
Net Sales Revenue                                      100%              100%
Gross Profit                                            52%               62%
Sales & Marketing Expense                              130%               68%
General & Administrative Expense                       612%              106%
Research & Development                                 166%               36%
Total Operating Expenses                               908%              209%
Net Operating Income (Loss)                            857%             -147%
Other (Income) Expense                                -232%              -89%
Net Income (Loss)                                     1089%             -236%
                                         -10-
<PAGE>

The Company's  revenues  include sales of software and software  licenses net of
sales returns.  The Company made a strategic  decision in 1999 to  significantly
reduce the  distribution of its products  through the  computer/software  retail
channel.  This channel had typically  produced  large  revenues in the third and
fourth  quarter of each year  followed by large  sales  returns in the first and
second quarter of the following year. As the ratio of these sales to returns has
deteriorated  in recent years,  the Company  decided to change its focus for the
sale  of its  boxed  products  to  retail  channels  that  might  find a  higher
proportion of customers  interested in its products.  The Company  believes this
will result in lower returns of products  distributed to retailers.  In 1998 the
Company began  distribution  through music and instrument  stores. In 1999, with
the release of Worship Studio, the Company began distribution  through Christian
bookstores.

In 1999 the Company  began  developing  a new  marketing  plan  designed to take
maximum  advantage of the growing  access of its potential  customer base to the
Internet. The Company changed its name to recordLab  Corporation.  The Company's
strategy is based on its belief that the Internet provides an ideal platform for
promoting,  marketing and selling music and related  products and services.  The
Company  diverted  marketing  resources from  traditional  channels to invest in
website,  product and  technology  engineering.  These changes had the effect of
reducing  revenues.  The Company has  invested and intends to continue to invest
significant  financial  and  management  resources  on the  website  and product
development, marketing and promotion, strategic relationships and technology and
operating infrastructure. The website, recordLab.com,  opened as a Beta site for
public access in the Fall,  1999. This website will be developed over the coming
year to include online laboratories,  downloadable software, musical instruments
and other music related products and services.  recordLab.com will seek to serve
a large market of amateur  musicians  and  songwriters  and will provide all the
tools and services necessary for non-professional  musicians to create,  produce
and  distribute  their  music.  The  Company  will  not be  able  to  fund  this
development from operations and will require  additional  investment to continue
operations and complete the  development of this website.  If the Company cannot
obtain additional working capital immediately, it may not be able to continue as
a going concern.

Success  of  the  Company's  strategy  depends  in  large  part  on  the  global
development of an  infrastructure  for providing  Internet  access and services.
Because  global  e-commerce and online  exchange of  information  and compelling
music  content on the Internet and other similar open wide area networks are new
and  evolving,  it is not  possible to  anticipate  with  assurance  whether the
Internet  will prove to be a viable  commercial  marketplace  for the  Company's
technology.  Even  though the  Internet  has  experienced,  and is  expected  to
continue to experience  significant  and rapid growth in the number of users and
amount of traffic,  there can be no assurance  that the Internet  infrastructure
will continue to be able to support the demands  placed on it by this  continued
growth. In addition,  the Internet could lose its viability because of delays in
the  development or adoption of new standards and protocols to handle  increased
levels of  Internet  activity,  or  increased  governmental  regulation.  If the
necessary  infrastructure  or  complementary  services  or  facilities  are  not
developed,  or if the Internet does not become a viable commercial  marketplace,
the  Company's  ability to execute its strategy  could be seriously  limited and
this would  materially  and  adversely  affect its  results  of  operations  and
financial position.

The principal  competitive  factors  affecting the music  creation  software and
Internet music creation and distribution markets include product  functionality,
ease of use, performance and reliability;  customer service and support; product
availability;  vendor  credibility;  brand awareness;  ability to keep pace with
technological change; and price. Although the Company believes that its products
currently  compete  favorably  with  respect to these  factors,  there can be no
assurance that the Company can achieve an improved  competitive  position in the
face of increasing competition from new products and enhancements  introduced by
existing  competitors  and new companies  entering its markets.  Markets for the
Company's products are characterized by significant price  competition,  and the
Company expects it will continue to face increasing pricing pressures. There can
be no assurance  that the Company will be able to compete  successfully  against
current  and  future  competitors  or that  competitive  pressures  faced by the
Company will not materially  adversely affect its business,  financial  position
and results of operations.

Certain of the  Company's  competitors  have  substantially  greater  financial,
marketing or  technical  resources  than the Company.  There can be no assurance
that other  companies  have not  developed  or  marketed  or will not develop or
market  products that are superior to those of the Company,  that are offered at
substantially  lower  prices  than  those of the  Company  or that  have or will
achieve greater market acceptance than those of the Company.
                                     -11-
<PAGE>

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

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

Research and development  expenses consist  primarily of personnel and equipment
costs  and the  cost of  services  from  consultants  required  to  conduct  the
Company's development effort.

During 1999 and 1998,  the  Company's  research  and  development  efforts  were
focused upon the Company's  core  technologies  in sound and music.  In 1999 the
Company  substantially  increased its expenditures for product development as it
began  development  of  recordLab.com  and content for the website.  The Company
believes that successful  execution of this strategy will result in higher gross
margins for its software business.  These development  efforts may not result in
timely  introduction  of  new  products,  and  these  new  products  may  not be
commercially successful.  Inability to successfully develop new products, delays
in the introduction of these new products, or lower-than-anticipated  demand for
these  products  could  have a  material  and  adverse  effect on the  Company's
business and results of operations.

At December 31, 1999, the Company had Federal net operating  loss  carryovers of
approximately   $30.6  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  carryovers.  An investor  who owned
$3,200,000 in principal amount of convertible debentures and associated warrants
converted that debt to 8.4 million  shares of the Company's  common stock in the
fourth quarter.  The investor still holds warrants for about 3.78 million shares
A change in control has occurred as a result of the above investments.

Seasonality

Sales to distributors  have tended to be greater in the third and fourth quarter
as  consumers  buy  software  to  supplement  their  holiday  computer  hardware
purchases. The change in channels of distribution may balance the sales of boxed
product more evenly  throughout the year. OEM sales are  concentrated in a small
number  of  customer  contracts  and tend to occur  sporadically.  Direct  sales
generally  increase when software upgrades become  available.  Sales of services
and products through the recordLab.com website have not begun.
                                    -12-
<PAGE>

Comparison of Years Ended December 31, 1999 and 1998

In the fourth quarter of 1999,  the Company  announced  sweeping  changes in its
business and revealed a new corporate  identity and  strategies  that deploy its
proprietary music creation technology,  and complimentary services and products,
over the Internet. The Company's core customer focus continues to be the amateur
and  non-professional  musician.  In order to implement this change in strategy,
recordLab diverted marketing resources from traditional sales channels to invest
in website infrastructure development and product technology engineering.  These
changes  have  had  the  effect  of  removing  the  Company's  products  in  the
computer/software  retail  channel,  which  has been the  source  of most of the
Company's  revenue since its founding in 1986. The withdrawal  from this channel
has resulted in a significant  reduction  during 1999's last quarter in revenues
and an increase in cost of revenues,  as a percent of revenues,  resulting  from
providing for product returns and inventory writedowns during the same period.

The Company believes this reduction in sales will continue until the development
of  the   recordLab.com   website   infrastructure,   product   engineering  and
complimentary content and service creation is substantially completed, which the
Company anticipates will take place during the year 2000.  However,  the Company
will not be able to fund  this  development  from  operations  and will  require
additional investment to continue operations and complete  implementation of its
plans. If the Company does not obtain additional working capital immediately, it
may not be able to continue as a going  concern.  The Company has  invested  and
intends to continue  investing  the  majority of its  financial  and  management
resources on website and product development, marketing and promotion, strategic
relationships  and  technology  and  operating   infrastructure.   The  website,
recordLab.com, opened as a Beta site for public access in Novmeber 1999.

Revenues for 1999 were $574 thousand  compared to $1.8 million in 1998. Sales to
software distributors and resellers, together with direct sales, represented 44%
and  79%  of  revenues  for  the  years  ended   December  31,  1999  and  1998,
respectively.  Withdrawal  from the  computer/software  retail  channel  in 1999
resulted  in lower  sales and higher  returns  and  reserves  for  returns.  OEM
revenues represented 56% and 21% during the same periods.  Sales to distributors
and resellers  were lower in large part from higher returns and lower unit sales
in 1999 compared to 1998. The Company  believes that the decline in OEM revenues
is substantially related to significant  industry-wide  reductions in PC prices,
which began in the fourth quarter of 1997.  International sales accounted for 5%
of the Company's  revenues in 1999 compared to 8% of revenues in 1998  resulting
from the Company's continued emphasis on US sales in 1999.

Gross profit for 1998 was $297 thousand,  a decrease of $791 thousand,  compared
to $1.1  million for the prior year.  As a  percentage  of net  revenues,  gross
profit decreased to 52% in 1999 from 62% in 1998. Gross profits, in general, are
affected by the mix of OEM licensing sales versus music product sales as well as
the mix within music  products.  The retail channel and inside sales channel for
music  products  consist of boxed  software  product.  $125 thousand of obsolete
inventory for boxed  products were written off in 1999. OEM cost of revenues are
nearly  zero in that they  generally  consist  of one  master CD from which OEMs
duplicate  the  Company's   software.   The   Company's   withdrawal   from  the
computer/software  retail  channel in 1999  resulted in higher than normal sales
returns and provisions for reductions in inventory carrying values.

Research  and  development  expenses  for 1999 were  $955,000,  an  increase  of
$329,000  compared  to  $626,000  for 1998.  As a  percentage  of net  revenues,
research and  development  expenses  increased to 166% in 1999 from 36% in 1998.
This increase  reflects the Company's  initial  investment in the  recordLab.com
website  (less  $201  thousand  capitalized  as  website  development  cost) and
continuing product upgrades.

Sales and  marketing  expenses for 1999 were $746  thousand,  a decrease of $444
thousand, compared to $1.2 million for 1998. As a percent of net revenues, sales
and  marketing  expenses  increased to 130% in 1999 from 68% in 1998.  Principal
cost reductions were in sales and marketing  employees,  advertising,  and trade
shows.  The increase in sales and marketing  expense as a percentage of revenues
resulted  from lower  revenues.  The  reduction in expense  levels  reflects the
Company's continuing emphasis on cost controls and targeting marketing and sales
efforts into direct sales channels.
                                      -13-
<PAGE>

General and administrative  expenses for 1999 were $3.5 million,  an increase of
$1.6  million,  compared  to $1.9  million  for  1998.  As a  percentage  of net
revenues,  these  expenses  for 1999  increased  to 612% from 106% in 1998.  The
increase in general and administrative expenses in 1999 is due to an increase of
$700 thousand in non-cash compensation to consultants,  a $450 thousand increase
in compensation expense and a one time non-cash charge of $400 thousand
associated with the issuance of warrants.

Interest expense for 1999 was $1.3 million,  a decrease of $0.3 million compared
to $1.6  million in 1998.  The decrease in interest  expense  results from lower
non-cash  charges  relating to the intrinsic  value of  in-the-money  conversion
options associated with convertible debentures and detachable warrants issued by
the Company in 1999 off-set buy non-cash  charges relating to warrants issued to
the guarantors of the Company's $2 million line of credit.

Liquidity and Capital Resources

As of December 31, 1999, the Company's  principal sources of liquidity  included
cash and cash  equivalents of $198,000,  net accounts  receivable of $63,000 and
$500,000 available under the Company's $2 million line of credit. As of December
31,  1999,  working  capital  was a negative  $2.9  million,  a decrease of $1.5
million from the negative $1.2 million at December 31, 1998.

The Company's operating activities used cash of $2.8 million for the year ended
December 31, 1999 due primarily to operating losses of $4.9 million.

Current assets decreased $299,000 to $311,000 at December 31, 1999 from $610,000
at the end of  1998.  The  decrease  was due to  reductions  of  cash,  accounts
receivable,  inventories  and  prepaid  expenses.  Long  term  assets  increased
$555,000 to $922,000 at December 31, 1999 from $367,000 at the end of 1998. This
increase resulted largely from  capitalization of website  development costs for
recordLab.com and debt issuance costs. Current liabilities totaled $3.2 million
at December 31, 1999, an increase of $1.4 million from the balance at December
31, 1998 of $1.8 million.  The  increase was due to a new note  payable  of $1.5
million and the cancellation of shares in a settlement being reserved for
$269,000, which was  partially  offset by a  decrease  of  $100,000  in  accrued
expenses and the  conversion of a $250,000 note to common stock.  Long term debt
and warrant  obligations  were  eliminated  as the debt was  converted to common
stock and the warrant was exercised. Shareholders'deficit increased $1.7 million
to negative  $2 million at December  31, 1999 from a negative  $3.1 million at
the end of 1998. The change in equity  resulted from a net loss recorded in 1999
of $6.3  million,  offset by  approximately  $4.9 million in additions to common
stock from the sale for $1 million,  $3.5  million of debt  converted  to common
stock, cancellation of common stock issued for $269,000 in a settlement and
$400,000 issued for the exercise of options and warrants and for payment for
services and accounts payable.

On October 28, 1997, the Company entered into a Securities  Purchase  Agreement,
which was amended on January 7, 1998, (the  "Agreement") with an unrelated third
party  (the  "Lender").  The  Agreement  provided  for the sale of $2 million of
convertible debentures with the option for an additional $2 million through June
1999.  The Company  sold  $500,000 of  debentures  on each of October 28,  1997,
November 28, 1997, January 9, 1998 and January 28, 1998. The first $1 million in
debentures  sold were  convertible  into a total of  1,666,667  shares of Common
Stock and were issued with warrants to purchase an additional  833,333 shares of
Common Stock at a price of $1.50 per share.  The second $1 million in debentures
sold were  convertible into a total of 1,923,077 shares of Common Stock and were
issued with warrants to purchase an additional 961,538 shares of Common Stock at
a price of $1.25 per share. The debentures earned interest at the rate of 1% per
annum  payable in cash or, at the Company's  option,  in shares of Common Stock.
The Company was  obligated  to pay a finder's  fee of 3% of the money  raised as
that money was  received  by the  Company.  The  Company had the right to redeem
these  debentures at any time prior to conversion for an amount equal to the sum
of the  outstanding  principal  amount plus accrued  interest  plus a redemption
premium which  increased from 7% of the principal  amount if redeemed  within 45
days from issuance to 25% of the outstanding  principal amount if the redemption
date was more than 90 days from the issuance date. For so long as the debentures
were  outstanding  or the Lender owns at least 25% of the Company's  outstanding
Common Stock,  the Lender shall have the right to (i) approve  certain merger or
acquisition transactions,  (ii) appoint two of the Company's five Directors with
the Company's  concurrence and (iii) purchase any equity  securities the Company
may propose to sell.  Item (ii) above was later amended to "appoint three of the
Company's seven Directors with the Company's concurrence and".
                                      -14-
<PAGE>

The Company and the debenture holder amended the Securities  Purchase Agreement,
with respect to the proposed  June 15, 1998 sale of  $1,000,000  of  convertible
debentures,  to provide for the sale of up to $1,000,000  of Senior  Convertible
Secured Notes in 1998 and another $1,000,000 of Senior Convertible Secured Notes
in 1999.  The first  $500,000  of these  notes  were for five  years and  earned
interest at the rate of one percent (1%) per annum,  payable in cash annually on
the anniversary  date of the notes.  These notes were convertible into 2,500,000
shares of Common  Stock.  The note holder also  received  five year  warrants to
purchase 500,000 shares of Common Stock at an exercise price of $0.75 per share.
The  notes  were  secured  by  first,  prior  and  perfected  interests  in  all
intellectual  property rights,  fixed assets and contracts for product delivery.
The note holder had the option to purchase an additional  $500,000 of notes with
terms and conditions  similar to those referenced above, with a conversion price
equal to  forty-seven  percent  (47%) of the value of each share of common stock
for the ten trading days prior to exercise of the conversion option. This option
was exercised in two  installments.  The Company sold $250,000 of these notes in
December  1998  and a like  amount  in March  1999.  Each of  these  notes  were
convertible into 1,000,000 shares of Common Stock. The note holder also received
five year  warrants to purchase  500,000  shares of Common  Stock at an exercise
price of $0.75 per share  with each note.  On April 30,  1999 the  Company  sold
another $200,000 of convertible notes bearing interest at 1% per annum,  payable
annually in cash, or shares of the Company's  common stock, and convertible into
250,000 shares of common stock.  The note holder received  five-year  detachable
warrants to purchase  250,000 shares of the Company's common stock for $1.75 per
share.  In the  October  1999 all of the $3.2  million  of debt and all  accrued
interest  were  converted by the lender to 8.4 million  shares of the  Company's
common stock. This conversion eliminated all of the Company's long term debt.

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

In September 1997 the Company received  $250,000 for which it was to issue an 8%
convertible  note due September 1998 (the Note).  The Note and accrued  interest
were to be  convertible  into common  stock at a  conversion  price of $0.65 per
share,  at the option of the holder,  at any time after October 30, 1997 through
maturity.  A debt  discount of $135,000  was recorded  related to the  intrinsic
value  of  the  in-the-money   conversion  option  at  the  close  of  the  debt
transaction.  The discount was expensed on October 30, 1997.  In September  1999
the note and all  accrued  interest  were  converted  to  451,000  shares of the
Company's common stock.

In June 1999 the Company  opened two lines of credit with Key Bank of Washington
for  $750,000  each,  or  $1,500,000  combined.  These  lines of credit  jointly
obligated the Company and the Company's largest shareholder.. These credit lines
were expanded to $1,000,000 each, or $2,000,000 combined,  on July 15, 1999. All
outstanding  principal and interest was to have been paid on both lines by March
4, 2000. In October 1999 the notes were modified to include one of the Company's
board  members,  Mr. Kaye, as a guarantor.  In March 2000 the repayment date was
extended to June 4, 2000.  The amount  borrowed  under the lines at December 31,
1999 was $1,500,000.

On July 14, 1999 the Company entered into  Subscription and Registration  Rights
Agreements  to sell  781,250  shares  of the  Company's  common  stock  to a new
investor for total consideration of $1,000,000.  The funds were received on July
14, 1999. As part of the  transaction,  the Company agreed to pay a finder's fee
of $30,000 to an  unrelated  third  party.  The  finder's  fee was paid with the
issuance of 9,321 shares of the Company's common stock in September 1999.
                                     -15-
<PAGE>

Through  April 14, 2000,  the Company has financed  its  operations  principally
through net proceeds from two public  offerings  and private  placements of debt
and equity.  The Company  believes that cash on hand,  along with cash generated
from the sale of products and  collections of accounts  receivable,  will not be
sufficient  to meet the Company's  requirements  for the month of April 2000 and
there are no remaining funds available under the Company's lines of credit.  The
Company's  ability to fund  continued  operations  depend on raising  additional
capital  immediately.  Should the Company be unable to raise additional capital,
the  Company  will  be  required  to  significantly  reduce  operations,  reduce
expenses,  and may find it necessary to file for protection under the bankruptcy
code.  Such steps would likely have a material  adverse  effect on the Company's
ability to  establish  profitable  operations  in the future.  The Company  will
continue to pursue financing  arrangements to increase its cash reserves.  There
can be no assurance the Company will be capable of raising additional capital or
that the terms upon which such  capital will be available to the Company will be
acceptable.

Trade Debt and Other Matters

As of December 31, 1999, the Company had $457,000 of accounts  payable that were
current,  $152,000 extended to between 31 and 60 days and $590,000 extended over
60 days.  The level of extended  accounts  payable  results  from the  Company's
negative  operating  cashflows.  The Company  has  entered  into plans to extend
payments beyond due dates in the original purchase orders. There is no certainty
that the Company will be able to continue to meet extended  payment  terms.  The
Company has received  demand letters from certain vendors  requesting  immediate
payment of amounts owing them  totaling  approximately  $395,000.  Four of these
vendors  have  initiated  litigation  for  claims  received  judgments  totaling
approximately  $28,000. The Company has reached settlement  agreements with some
vendors and is negotiating with the remainder.  Some vendors have stopped making
sales to the Company and others have required cash on delivery terms.

Nasdaq

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

YEAR 2000

The information  provided below complies with the disclosure  requirements under
the Year 2000 Information and Readiness Disclosure Act.

The Company  established  a Y2K task force in early 1999 to identify and correct
any computer  problems that may arise with hardware or software  resulting  from
the change of year from 1999 to 2000.  The task force  worked  with  vendors and
suppliers to assure that no  disruptions  would occur that would  interfere with
the Company's  operations.  The Company's existing accounting system was not Y2K
compliant  and the Company  used this  opportunity  to change to a more  capable
accounting  system  rather  than  upgrade  the old  system.  The new  system  is
completely  installed  and  data  entry  is  proceeding.  The  Company  does not
anticipate any significant problems arising from this new installation.  To date
the Company has encountered no disruptions and is not aware of any problems with
any of its internal systems or the operation of any of its vendors or suppliers.
The total cost of this program has not been determined, but the Company believes
the cost of this  program  has not and will not have a  material  impact  on the
Company's operating results.

While the Company is not aware of any  disruptions  or losses of data  resulting
from Year 2000 problems, there is no assurance that problems may not arise after
the  anticipated  event date.  If such  problems  were to occur,  there could be
significant  loss of data that may affect the Company's  future  operations.  As
part of the Y2K program the Company developed  contingency plans in the event of
any system failures.  These plans call for frequent backups of critical data and
arrangements  for  substitute  systems  in the  event of  hardware  or  software
failures.

Subsequent Events

In February  and March 2000 the Company  sold  267,818  shares of the  Company's
common stock to several  investors under stock  subscription  agreements.  These
agreements  provided  for  investment  at  $2.75  per  share,  yielding  a total
investment of $736,500.  The agreements further provided for three year warrants
to purchase  10% of the shares  purchased  under the  agreements,  or a total of
26,782 shares for $4.00 per share.
                                       -16-
<PAGE>
--------------------------------------------------------------------------------

ITEM 8.       FINANCIAL STATEMENTS

Report of Independent Accountants

To the Board of Directors and Shareholders of
    recordLab Corporation


In our  opinion,  the  accompanying  balance  sheets and related  statements  of
operations,  of  changes in  shareholders'  deficit  and of cash  flows  present
fairly,  in  all  material   respects,   the  financial  position  of  recordLab
Corporation at December 31, 1999 and 1998, and the results of its operations and
its cash flows for the years then ended in conformity with accounting principles
generally  accepted in the United  States.  These  financial  statements are the
responsibility of the Company's management;  our responsibility is to express an
opinion on these  financial  statements  based on our audits.  We conducted  our
audits of these  statements in  accordance  with  auditing  standards  generally
accepted in the United  States which  require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and  disclosures in the financial  statements,  assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.

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






PricewaterhouseCoopers LLP
Seattle, Washington
March 1, 2000


                                      -17-
<PAGE>

--------------------------------------------------------------------------------

recordLab Corporation
Balance Sheets
December 31, 1999 and 1998
--------------------------------------------------------------------------------
<TABLE>
<S>                                         <C>                <C>
                                                  1999                1998
Assets:
  Current assets
    Cash and cash equivalents               $       198,000    $        270,000
    Accounts receivable, net                         63,000             183,000
    Inventories, net                                 38,000             115,000
    Prepaids and other                               12,000              42,000
                                            ----------------   -----------------
             Total current assets                   311,000             610,000

  Long-term receivable, net                               0             195,000
  Property and equipment, net                       476,000             116,000
  Debt issuance costs, net of
  accumulated amortization of
  $770,000 in 1999 and $23,000 in 1998              446,000              56,000
                                            ----------------   -----------------

             Total assets                   $     1,233,000    $        977,000
                                            ================   =================

Liabilities and Shareholders' Deficit:
  Current liabilities
    Note payable to bank                    $     1,500,000    $              0
    Trade accounts payable                        1,199,000           1,181,000
    Current portion of long-term debt                     0             250,000
    Accrued wages and payroll taxes                 118,000              93,000
    Other accrued expenses                          414,000             273,000
    Deferred revenue                                  6,000               6,000
                                            ----------------   -----------------
             Total current liabilities            3,237,000           1,803,000
                                            ----------------   -----------------

    Long-term debt, net of discount                       0           2,258,000
                                            ----------------   -----------------

    Warrant obligations                                   0              81,000
                                            ----------------   -----------------

Commitments and contingencies

Shareholders' deficit:
  Preferred stock, Series A convertible,
    no par value; 2,500,000 shares
    authorized, zero issued and outstanding
    in 1999 and 1998                                      0                   0
  Common stock, no par value; 25,000,000
    shares authorized,16,565,000 and
    7,251,000 issued and outstanding in
    1999 and 1998, respectively                  25,121,000          20,488,000
  Additional paid-in capital                      5,885,000           3,026,000
  Deferred stock compensation                      (162,000)                  0
  Notes receivable from shareholders               (109,000)           (191,000)
  Accumulated deficit                           (32,739,000)        (26,488,000)
                                            ----------------   -----------------
  Total shareholders' deficit                    (2,004,000)         (3,165,000)
                                            ----------------   -----------------

Total liabilities and shareholders' deficit $     1,233,000    $        977,000
                                            ================     ===============
</TABLE>

              See accompanying notes to financial statements.

                                      -18-
<PAGE>


--------------------------------------------------------------------------------

recordLab Corporation
Statements of Operations
For the years ending December 31, 1999 and 1998
--------------------------------------------------------------------------------
<TABLE>
<S>                                           <C>               <C>

                                                    1999              1998

Revenues                                      $       574,000   $     1,760,000

Cost of revenues                                      277,000           672,000
                                              ----------------  ----------------

Gross profit                                          297,000         1,088,000
                                              ----------------  ----------------

Operating expenses:
  Sales and marketing                                 746,000         1,190,000
  General and administrative                        3,513,000         1,864,000
  Research and development                            955,000           626,000
                                              ----------------  ----------------
    Total operating expenses                        5,214,000         3,680,000
                                              ----------------  ----------------

Operating loss                                     (4,917,000)       (2,592,000)

Other income (expense):
  Interest expense                                 (1,317,000)       (1,565,000)
  Interest income                                      19,000            17,000
  Other expense                                       (36,000)          (20,000)
                                              ----------------    --------------
    Total other income (expense)                   (1,334,000)       (1,568,000)
                                              ----------------  ----------------

Net loss                                      $    (6,251,000)  $    (4,160,000)
                                              ================  ================

Basic and diluted net loss per share          $         (0.67)  $         (0.64)
                                              ================  ================

Weighted average shares used in computing
basic and diluted net loss per share                9,267,000         6,457,000
                                              ================  ================
</TABLE>
             See accompanying notes to financial statements.

                                      -19-
<PAGE>



--------------------------------------------------------------------------------

recordLab Corporation
Statements of Changes in Shareholders' Deficit
For the years ending December 31, 1999 and 1998
--------------------------------------------------------------------------------
<TABLE>
<S>                              <C>           <C>            <C>           <C>          <C>          <C>              <C>

                                                                                             Notes
                                                               Additional     Deferred    Receivable                       Total
                                        Common Stock             Paid-In        Stock        From        Accumulated   Shareholders'
                                ------------------------------
                                     Shares        Amount        Capital    Compensation Shareholders     Deficit         Deficit
                                 ------------- -------------- ------------- ------------ ------------ --------------- --------------

Balance at December 31, 1997        6,359,000  $  20,165,000  $  1,245,000  $          0 $  (191,000) $  (22,328,000) $ (1,109,000)

  Common stock issued                  91,000
  Common stock issued in
    settlement of claims              650,000        283,000                                                               283,000
  Common stock issued in
    settlement of accounts payable    128,000         38,000                                                                38,000
  Exercise of stock options            23,000          2,000                                                                 2,000
  Warrants issued with convertible
    debt                                                           416,000                                                 416,000
  In the money conversion option on
    convertible debt                                             1,334,000                                               1,334,000
  In the money options granted                                      31,000                                                  31,000
  Net loss                                                                                                (4,160,000)   (4,160,000)
                               --------------- -------------- ------------- ------------ ------------  -------------- -------------

Balance at December 31, 1998        7,251,000  $  20,488,000  $  3,026,000               $  (191,000) $  (26,488,000) $ (3,165,000)

  Common stock issued                 790,000      1,000,000                                                             1,000,000
  Common stock issued in settlement
    of accounts payable                 7,000         17,000                                                                17,000
  Common stock issued in exchange
    for goods and services             76,000        153,000                                                               153,000
  Common stock cancelled             (633,000)      (269,000)                                                             (269,000)
  Exercise of stock options           137,000        109,000                                                               109,000
  Convertible debt and interest
    converted to common stock       8,848,000      3,542,000      (558,000)                                              2,984,000
  Options issued for compensation                                  646,000  $  (162,000)                                   484,000
  Warrants issued to consultants
    for services                                                 1,105,000                                               1,105,000
  Warrants issued in connection
    with financing                                               1,666,000                                               1,666,000
  Warrents exercised                   89,000         81,000                                                                81,000
  Repayment of shareholder note                                                               82,000                        82,000
  Net loss                                                                                               (6,251,000)    (6,251,000)
                               --------------- -------------- ------------- ------------ ------------ -------------- --------------

Balance at December 31, 1999       16,565,000  $  25,121,000  $  5,885,000  $  (162,000) $  (109,000) $ (32,739,000) $  (2,004,000)
                               =============== ============== ============= ============ ============ ============== ==============
</TABLE>
                 See accompanying notes to financial statements.

                                      -20-
<PAGE>



--------------------------------------------------------------------------------

recordLab Corporation
Statements of Cash Flows
For the years ending December 31, 1999 and 1998
--------------------------------------------------------------------------------
<TABLE>
<S>                                          <C>                <C>

                                                    1999               1998

Cash flows from operating activities:
  Net loss                                   $    (6,251,000)   $    (4,160,000)
  Adjustments to reconcile net loss to
    net cash used in operating activities:
      Depreciation and amortization                   80,000            127,000
      Provision for returns and bad debt             590,000            172,000
      Provision for long-term receivable             195,000                  0
      Amortization of debt discount and
        debt issuance costs                        1,253,000          1,541,000
      Options issued for compensation                484,000             31,000
      Warrants issued to consultants for
        services                                   1,105,000                  0
      Common stock issued in settlement
        of claims                                   (269,000)           283,000
      Common stock issued for goods and
        services                                     153,000                  0
      Accrued interest                                43,000                  0
      Changes in operating assets and liabilities:
        Accounts receivable                         (470,000)           219,000
        Inventories                                   77,000            107,000
        Prepaids and other                            30,000             40,000
        Trade accounts payable                        35,000            250,000
        Accrued wages and payroll taxes               25,000             (7,000)
        Other accrued expenses, net of
          accrued interest converted to
          common stock                               168,000           (118,000)
        Deferred revenue                                   0            (24,000)
                                             ----------------   ----------------
Net cash used in operating activities             (2,752,000)        (1,539,000)
                                             ----------------   ----------------

Cash flows from investing activities:
  Additions to property and equipment               (440,000)            (4,000)
                                             ----------------   ----------------
Net cash used in investing activities               (440,000)            (4,000)
                                             ----------------   ----------------

Cash flows from financing activities:
  Exercise of stock options                          109,000              2,000
  Issuance of common stock                         1,000,000
  Repayment of shareholder receivables                82,000
  Proceeds from borrowings on note
    payable to bank                                1,500,000
  Proceeds from issuance of long-term
    debt and warrants, net of debt issue costs       429,000          1,721,000
                                             ----------------   ----------------
Net cash provided by financing activities          3,120,000          1,723,000
                                             ----------------   ----------------

Net increase (decrease) in cash and
  cash equivalents                                   (72,000)           180,000

Cash and cash equivalents, beginning of year         270,000             90,000
                                             ----------------   ----------------

Cash and cash equivalents, end of year       $       198,000    $       270,000
                                             ================   ================

Supplemental cash flow information:

  Cash paid during year for interest         $        33,000    $             0
                                             ================   ================
</TABLE>

   See Note 15 for supplemental information of noncash financing activities.

               See accompanying notes to financial statements.

                                     -21-
<PAGE>


--------------------------------------------------------------------------------



   1.   Organization and Business:

        recordLab   Corporation  (the  Company)   (formerly  known  as  Midisoft
        Corporation) provides knowledge,  services and technology to amateur and
        aspiring  musicians  to help them create and improve  their  music.  The
        Company was  incorporated in Washington in 1986 and introduced its first
        product,  Midisoft  Studio,  in that year.  The  Company has focused its
        product  lines  to  include  music  learning,  music  creation  and  the
        integration  of sound and media in today's PC  environment.  In November
        1999 the Company launched recordLab.com, which the Company is developing
        to provide a full  spectrum of  know-how,  products  and  services  that
        enable and empower  amateur  musicians to develop their craft and create
        music.

            Going concern and liquidity

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

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

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



   2.   Significant Accounting Policies:

            Revenue recognition

            Revenue from products licensed to original  equipment  manufacturers
            (OEMs) consisting of one-time license fees and contracts for minimum
            advances  against  future  unit  licenses  are  recognized  when the
            criteria  for fixed  fee  revenue  recognition  under  Statement  of
            Position  No. 97-2,  Software  Revenue  Recognition,  (SOP 97-2) are
            satisfied.  These criteria include, but are not limited to, delivery
            of the software  master,  the  Company's  lack of other  significant
            obligations to the customer and a determination that  collectibility
            of the amount due is probable.  Revenues on  contracts  which do not
            meet the  fixed fee  revenue  recognition  criteria  in SOP 97-2 are
            included in deferred revenue in the  accompanying  balance sheet and
            are recognized as revenue on the  installment  basis as payments are
            received  or  until  the  Company  has no  significant  obligations.
            Additional royalty use or unit copy royalty fees are recognized when
            they  are  earned  pursuant  to  the  license  agreements  and  upon
            notification of shipment and
                                      -22-
<PAGE>

   2.   Significant Accounting Policies, Continued:

            Revenue recognition, continued

            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,  or upon receipt of
            payment if an estimate for anticipated  returns cannot reasonably be
            made.  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,  co-operative advertising and price protection.  Customers
            are granted price protection for a period of up to 60 days after the
            Company  reduces the price of a product.  The Company  provides  for
            warranties and estimated returns at the time of product sale.

            Advertising costs

            The  Company  generally  provides  for  cooperative  advertising  at
            agreed-upon  rates.   Advertising  costs,   included  in  sales  and
            marketing  expenses,  are expensed as incurred and were $178,000 and
            $330,000   for  the  years  ended   December   31,  1999  and  1998,
            respectively.

            Research and development

            Research and development  expenses consist principally of consulting
            fees, payroll and related expenses and are expensed as incurred.

            Website development costs

            Costs incurred in the development of core software for the Company's
            website  infrastructure are capitalized in accordance with SOP 98-1,
            Accounting  for the Costs of  Software  Developed  or  Obtained  for
            Internal Use. Costs  incurred in the  development of content for the
            Company's  website are expensed as incurred.  Capitalized  costs are
            amortized  over a period of  eighteen  months  and are  included  in
            property and equipment in the accompanying balance sheet.

            Income taxes

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

            Net loss per share

            The Company computed net loss per share in accordance with Statement
            of Financial  Accounting  Standards No. 128 (FAS 128),  Earnings per
            Share. Basic earnings per share is computed by dividing the net loss
            for the  period by the  weighted  average  number  of common  shares
            outstanding  during the period.  Diluted net loss per share includes
            the dilutive effects
                                       -23-
<PAGE>

   2.   Significant Accounting Policies, Continued:

            Net loss per share, continued

            of options,  warrants and convertible  securities.  Diluted net loss
            per share for the years ended December 31, 1999 and 1998 is equal to
            basic net loss per  share due to the fact that the  effect of common
            equivalent shares outstanding during the periods is anti-dilutive.

            The following  table sets forth the computation of basic and diluted
            net loss per share:
<TABLE>
<S>                                        <C>                <C>

                                                  Year Ended December 31,
                                           ------------------------------------
                                           ----------------   -----------------
                                                 1999                1998
                                           ----------------   -----------------
Numerator:
     Net loss                              $    (6,251,000)   $     (4,160,000)
Denominator:
     Weighted-average shares                     9,267,000           6,457,000
                                           ----------------   -----------------

Basic and diluted net loss per share       $         (0.67)   $          (0.64)
                                           ================   =================
</TABLE>

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

            Cash and cash equivalents

            The Company considers all highly liquid  investments with a maturity
            of  three  months  or  less  at the  date  of  purchase  to be  cash
            equivalents.

            Inventories

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

            Property and equipment

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

            Valuation of long-lived assets

            The Company periodically  evaluates the carrying value of long-lived
            assets to be held and used, including,  but not limited to, property
            and  equipment  and other  assets,  when  events  and  circumstances
            warrant such a review.  The carrying value of a long-lived  asset is
            considered impaired when the anticipated undiscounted cash flow from
            such asset is separately  identifiable and is less than its carrying
            value.  In that event,  a loss is recognized  based on the amount by
            which the carrying  value  exceeds the fair value of the  long-lived
            asset. Fair value is determined primarily using the anticipated cash
            flow discounted at a rate commensurate with the risk involved.  Loss
            on  long-lived  assets to be disposed of is  determined in a similar
            manner, except that fair values are reduced for the cost to dispose.
                                       -24-
<PAGE>

   2.   Significant Accounting Policies, Continued:

            Debt issued with stock purchase warrants

            Proceeds from debt issued with stock purchase warrants are allocated
            between  the debt and the  warrants  based  on their  relative  fair
            values,  and  the  value  ascribed  to the  warrants,  based  on the
            Black-Scholes option pricing model, is amortized to interest expense
            over the term of the  related  debt  using  the  effective  interest
            method.

            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 not  required.  The Company's
            trade  receivables   include  amounts  due  from  U.S.  and  foreign
            customers  in the computer  software  and hardware  industry and are
            derived  from  sales  of  products,  OEM  licensing  fees  and  unit
            royalties (Note 3). The Company performs ongoing credit  evaluations
            of its  customers'  financial  condition  and limits its exposure to
            losses by limiting  the amount of credit  extended  whenever  deemed
            necessary.

            The carrying  values of cash and cash  equivalents  and other assets
            and   liabilities   (such  as  accounts   receivable   and  payable)
            approximate fair value at December 31, 1999 and 1998. Fair values of
            note payable to bank and long-term debt are determined  using future
            cash flows  discounted at a rate of interest  currently  offered for
            debt with similar remaining  maturities and approximate the carrying
            values.

            Fair value  estimates are made at a discrete  point in time based on
            relevant  market  information  and  information  about the financial
            instruments. Because no market exists for certain of these financial
            instruments,  fair value estimates are based on judgments  regarding
            current economic  conditions and other factors.  These estimates are
            subjective  in nature  and  involve  uncertainties  and  matters  of
            significant  judgment  and,  therefore,  cannot be  determined  with
            precision.  Changes in assumptions  could  significantly  affect the
            estimates.  Accordingly,  the  estimates  presented  herein  are not
            necessarily  indicative  of what  the  Company  could  realize  in a
            current market exchange.

            Use of estimates

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

            Stock compensation

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

                                      -25-
<PAGE>

   2.   Significant Accounting Policies, Continued:

            Stock compensation, continued

            The Company accounts for stock-based non-employee compensation under
            the  provisions of FAS 123 and Emerging  Issues Task Force  ("EITF")
            96-18.

            Other comprehensive income

            The  Company  had no  items  of other  comprehensive  income  in any
            periods presented.

   3.   Accounts Receivable and Major Customer Information:

        The Company  operates a single business  segment.  During 1999 and 1998,
        the Company had revenue from foreign  customers of $27,000 and $147,000,
        respectively.  Foreign  sales as a  percentage  of the  Company's  total
        revenue in 1999 and 1998 were 5% and 8%, respectively. In 1999 and 1998,
        separate  domestic reseller  customers  accounted for revenues of $0 and
        $1,079,000,  equal to 0% and 61%,  respectively,  of the Company's total
        revenue  in  the  periods.  During  1999,  sales  to  one  OEM  customer
        individually  accounted for 40% of total revenue.  During 1998, sales to
        one domestic reseller customer accounted for 46% of total revenue.

        Accounts receivable are summarized as follows:
<TABLE>
     <S>                                     <C>                <C>

                                                   Year Ended December 31,
                                             ----------------------------------
                                             ---------------    ---------------
                                                   1999               1998
                                             ---------------    ---------------

     OEM's                                   $        7,000     $       17,000
     Resellers and other                            548,000            411,000
                                             ---------------    ---------------
                                                    555,000            428,000
                                             ---------------    ---------------

     Less:  Allowance for doubtful accounts         (22,000)           (72,000)
     Less:  Allowance for warranty and returns     (470,000)          (173,000)
                                             ---------------    ---------------

                                             $       63,000     $      183,000
                                             ===============    ===============
</TABLE>


        Accounts  receivable  consist  principally  of amounts due from OEMs and
        reseller  customers  for licensing  fees,  royalties and direct sales of
        products.  OEM customer payment terms typically are one year in duration
        and require payments to be made in quarterly  installments.  At December
        31, 1999 and 1998, OEM accounts  receivable  amounts not yet due were $0
        and $1,000, equal to 0% and 6%, respectively,  of total OEM receivables.
        At December 31, 1999 and 1998,  reseller accounts receivable amounts not
        yet due were $1,000 and $257,000 equal to 1% and 60%,  respectively,  of
        total reseller receivables.

        The Company's primary credit concentrations involve domestic and foreign
        OEM and reseller  customers.  Foreign customers comprised $0 and $13,000
        of accounts receivable at December 31, 1999 and 1998,  respectively.  At
        December  31, 1999 and 1998,  two and four  customers  accounted  for an
        aggregate balance of $440,000 and $359,000 of gross accounts receivable,
        respectively.
                                      -26-
<PAGE>


   4.   Inventories:

        Inventories are summarized as follows:
<TABLE>
     <S>                                     <C>                <C>

                                                        December 31,
                                             ----------------------------------
                                             ----------------   ---------------
                                                   1999               1998
                                             ----------------   ---------------

     Raw materials and work-in-process       $        17,000    $      106,000
     Finished goods                                   27,000            29,000
     Less:  Allowance for obsolescence                (6,000)          (20,000)
                                             ----------------   ---------------

                                             $        38,000    $      115,000
                                             ================   ===============
</TABLE>


   5.   Property and Equipment:

        Property and equipment are summarized as follows:
<TABLE>
     <S>                                    <C>                <C>

                                                        December 31,
                                            -----------------------------------
                                            ----------------   ----------------
                                                  1999               1998
                                            ----------------   ----------------

     Equipment                              $     1,164,000    $       925,000
     Furniture                                       91,000             91,000
     Website development costs                      201,000                  0
     Leasehold improvements                          30,000             30,000
                                            ----------------   ----------------

     Property and equipment, at cost              1,486,000          1,046,000

     Less:  Accumulated depreciation
            and amortization                     (1,010,000)          (930,000)
                                            ----------------   ----------------

                                            $       476,000    $       116,000
                                            ================   ================
</TABLE>



   6.   Note Payable to Bank:

        In June 1999 the Company  obtained  two lines of credit with Key Bank of
        Washington for a total of $1,500,000.  All unpaid principal and interest
        was due in March 2000. In March 2000, the Company and the bank agreed to
        extend  the  agreements  to June  2000.  These  lines of credit  jointly
        obligate the Company,  the Company's largest shareholder and a member of
        the Board of Directors.  The lines of credit were extended to a total of
        $2,000,000  on July 15, 1999 and bear  interest at Prime plus 2% (10.50%
        at December 31, 1999).  In connection  with the guarantees  provided for
        the Company under the  line-of-credit  agreements,  the guarantors  were
        granted  warrants  for  each  borrowing  by the  Company.  In the  first
        borrowing,  the  guarantors  were granted  warrants to purchase  110,000
        shares of the  Company's  common  stock at $1.10 per share,  expiring in
        2004,  and warrants to purchase  50,000 shares of the  Company's  common
        stock at $1.50 per share,  expiring in 2004.  The  borrowing  associated
        with these  warrants had an original  maturity date of December 1999. In
        the second  borrowing,  the guarantors were granted warrants to purchase
        100,000  shares  of the  Company's  common  stock  at $3.00  per  share,
        expiring  in  2001  and  warrants  to  purchase  200,000  shares  of the
        Company's  common  stock at  $3.00  per  share  expiring  in  2002.  The
        borrowing  associated with these warrants had an original  maturity date
        of March 2000.
                                       -27-
<PAGE>

   6.   Note Payable to Bank, Continued:

        These  warrants were valued using the Black Scholes option pricing model
        using the following assumptions:



        Expected Life                             2 - 5 years
        Volatility                                169% - 177%
        Risk free interest rate                          5.5%


        The Company recorded a total debt discount of $1,216,000  related to the
        fair  value  of the  warrants.  The  discount  is  amortized  using  the
        effective  interest  method over the term of the debt.  At December  31,
        1999, the Company had $446,000 of unamortized debt discounts  associated
        with these warrants.

        In addition,  certain of the guarantors  were provided with the right to
        apply any funds  used to cover the  obligation  to the  purchase  of the
        Company's  common  stock  at 69% of the  share  price in  effect  at the
        conversion  date (and in any event not to exceed $0.75 and $1.50 for the
        first  and  second  borrowings,  respectively),  plus  a  five-year  and
        three-year  warrant for 1/2 the shares  purchased at a price of not more
        than $1.50 per share for the first and second borrowings,  respectively.
        In the event that warrants are issued  additional  debt discount will be
        recorded.


   7.   Other Accrued Expenses:

        The following table summarizes the components of other accrued expenses:
<TABLE>
     <S>                                      <C>               <C>

                                                         December 31,
                                              ---------------------------------
                                              ---------------   ---------------
                                                    1999              1998
                                              ---------------   ---------------

     Accrued tax liabilities                  $       97,000    $      133,000
     Other accrued expenses                          317,000           140,000
                                              ---------------   ---------------

                                              $      414,000    $      273,000
                                              ===============   ===============
</TABLE>


   8.   Convertible Debt:

        In September  1997,  the Company  received  $250,000 for which it was to
        issue a 5% convertible  note due September 1998 (the Note). The Note and
        accrued  interest  were  to  be  convertible  into  common  stock  at  a
        conversion price of $0.65 per share, at the option of the holder, at any
        time after  October  30,  1997  through  maturity.  A debt  discount  of
        $135,000 was recorded related to the intrinsic value of the in-the-money
        conversion option at the close of the debt transaction. The discount was
        expensed on October 30,  1997.  In  September  1999 the note and accrued
        interest of $43,000 were  converted to 451,000  shares of the  Company's
        common stock.
                                        -28-
<PAGE>

   8.   Convertible Debt, Continued:

        In  October  and  November  1997,  the  Company  issued  $500,000  of 1%
        convertible  debentures (the  Debentures) due October and November 2000,
        respectively,   for  a  total  of  $1,000,000.   The   Debentures   were
        collateralized  by a  perfected  security  interest in all assets of the
        Company and were  convertible into common stock at a conversion price of
        $0.60 per share at any time through maturity, unless previously redeemed
        or repurchased. The Debentures were issued with detachable warrants that
        entitle the holders to purchase  833,333 shares of the Company's  common
        stock at a price of $1.50 per share,  and expire in October and November
        2002. A debt discount of $273,000 was recorded related to the fair value
        of the warrants.  In addition,  a debt discount of $727,000 was recorded
        related to the intrinsic value of the  in-the-money  conversion  option.
        This  discount  was  expensed  immediately  as  the  Debentures  may  be
        converted  at any time.  Debt  issue  costs of  $50,000  related  to the
        Debenture  sale were  capitalized.  In October 1999,  the Debentures and
        accrued  interest of $20,000 were  converted to 1,684,000  shares of the
        Company's common stock.

        In January  1998,  an additional 1% debenture was issued in exchange for
        proceeds  totaling  $1,000,000.   The  Debenture  was  convertible  into
        1,923,077  shares of common stock plus accrued  interest at a conversion
        price of $0.84 per share and carries detachable  warrants to purchase an
        additional 961,538 shares of common stock at a price of $1.25 per share.
        The  debenture  matures in January 2001. A debt discount of $278,000 was
        recorded  related  to the fair value of the  warrant.  The  discount  is
        amortized using the effective interest method over the term of the debt.
        An additional discount of $722,000 was recorded related to the intrinsic
        value of the in-the-money conversion option. The discount related to the
        conversion  option was expensed on the issue date. In October 1999,  the
        Debenture  and accrued  interest of $18,000 were  converted to 1,944,000
        shares of the Company's common stock.

        In June and  December  1998,  the Company  issued  another  $500,000 and
        $250,000,  respectively,  of 1% convertible debentures due June 2003 and
        December 2003. The Debentures  were  convertible  into common stock at a
        conversion  price of $0.20 per share and $0.25 per share,  respectively,
        at any time through maturity, unless previously redeemed or repurchased.
        The  Debentures  were issued with  detachable  warrants that entitle the
        holders to purchase  1,000,000 shares of the Company's common stock at a
        price of $0.75 per share,  and expire  between June and December 2003. A
        debt discount of $138,000 was recorded  related to the fair value of the
        warrants.  The discount is amortized using the effective interest method
        over the term of the debt. In addition,  a debt discount of $612,000 was
        recorded related to the intrinsic value of the  in-the-money  conversion
        option. This discount was expensed  immediately as the Debentures may be
        converted  at any time.  In October  1999,  the  Debentures  and accrued
        interest of $9,000 were  converted to 3,518,000  shares of the Company's
        common stock.

        In March 1999,  the Company  issued  another  $250,000 of 1% convertible
        debentures due March 2004. The Debentures are convertible into 1,000,000
        shares of common  stock,  and carry  detachable  warrants to purchase an
        additional 500,000 shares of common stock at a price of $0.75 per share.
        In April 1999,  the Company  issued  another  $200,000 of 1% convertible
        debentures due April 2004. The Debentures are  convertible  into 250,000
        shares of common  stock and carry  detachable  warrants  to  purchase an
        additional 250,000 shares of common stock at a price of $1.75 per share.
        A debt  discount of $169,000 was  recorded  related to the fair value of
        the 1999  detachable  warrants.  The  discount was  amortized  using the
        effective interest method over the term

                                          -29-
<PAGE>

   8.   Convertible Debt, Continued:

        of the debt.  In  addition,  a debt  discount of $280,440  was  recorded
        related to the intrinsic value of the in-the-money  conversion  options.
        This  discount  was  expensed  immediately  as  the  Debentures  may  be
        converted  at any time.  In October  1999,  the  Debentures  and accrued
        interest of $2,000 were  converted to 1,251,000  shares of the Company's
        common stock.

   9.   Income Taxes:

        There is no provision for income taxes for the years ended  December 31,
        1999 and 1998 due to the net losses incurred.  A valuation allowance has
        been recorded for deferred tax assets  because  realization is primarily
        dependent  on  generating   sufficient   taxable  income  prior  to  the
        expiration of net operating loss carryforwards.

        The components of deferred income taxes are summarized as follows:
<TABLE>
     <S>                                  <C>                 <C>

                                                       December 31,
                                          -------------------------------------
                                          -----------------   -----------------
                                                 1999                1998
                                          -----------------   -----------------

     Deferred income tax assets:
        Net operating losses              $     10,388,000    $      8,887,000
        Accrued liabilities and allowances         190,000              76,000
        Equity instruments                         525,000              72,000
        Other                                      288,000             227,000
                                          -----------------   -----------------
                                                11,391,000           9,262,000

     Deferred income tax liabilities:
        Other                                       (9,000)             (9,000)
        Valuation allowance                    (11,382,000)         (9,253,000)
                                          -----------------   -----------------

                                          $              0    $              0
                                          =================   =================
</TABLE>


        At December  31,  1999,  the Company  had  federal  net  operating  loss
        carryforwards  of  approximately  $30,552,000  that expire  beginning in
        2008. In certain  circumstances,  as specified in Internal  Revenue Code
        Section 382, a 50% or more ownership  change by certain  combinations of
        the  Company's  stockholders  during any  three-year  period  results in
        limitations  on the Company's  ability to utilize its net operating loss
        carryforwards.  As a result of the conversion of convertible  promissory
        notes in October  1999, a 50% or more  ownership  change  occurred.  The
        value of the Company's stock at the time of the ownership  change is the
        primary  factor in  determining  the limit on the  Company's  ability to
        utilize  its net  operating  loss  carryforwards.  In 1999  and 1998 the
        change in the  valuation  allowance  of  $2,129,000  and $936,000 is due
        primarily to the increase in net operating losses.

        Certain  net  operating  losses  arise  from the  deductibility  for tax
        purposes of compensation  under  nonqualified stock options equal to the
        difference  between  the fair value of the stock on the date of exercise
        and the exercise price of the options. For financial reporting purposes,
        the tax effect of this deduction when  recognized  will be accounted for
        as a credit to shareholders' deficit.

                                          -30-
<PAGE>

  10.   Shareholders' Deficit:

            Common stock

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

            As further  described in Note 13, the Company  issued 650,000 shares
            of common  stock in  settlement  of  claims.  The  Company  recorded
            expense totaling  $283,000 in 1998 based on the fair market value of
            the common stock on the settlement date.  In December 1999 the
            Company cancelled 633,000 of these shares previously issued and
            reserved the $269,000 related to the value of those shares.

            In July 1999 the Company entered into  Subscription and Registration
            Rights  Agreements to sell 781,250  shares of the  Company's  common
            stock to a new investor for total  consideration of $1,000,000.  The
            funds were received on July,  14, 1999. As part of the  transaction,
            the Company  paid a finders fee of 9,231 shares of common stock with
            a fair value of $30,000, to an unrelated third party.

            During the year ended  December 31, 1999 the Company agreed to issue
            76,000  shares of the  Company's  common stock valued at $153,000 as
            compensation for services.

            Additionally,  during the years ended  December 31, 1999 & 1998, the
            Company   issued  7,000  and  128,000  shares  of  common  stock  in
            settlement of  outstanding  accounts  payable  totaling  $17,000 and
            $38,000, respectively.

            At December 31, 1999, the Company has reserved the following  shares
            of common stock:

                       Warrants                         4,393,050
                       Stock options                    2,830,771
                       Private placement offering       4,800,000


            Warrants

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

            Additionally,  a warrant to purchase  40,171 shares of the Company's
            common  stock at an exercise  price of $1.17 was issued to a bank in
            connection with short-term bank  borrowings.  The warrant expires in
            September  2002  and  carries  a right to  require  the  Company  to
            purchase  the warrant for $63,000 or the fair value of the  warrant,
            at the holder's  option,  at any time after  December 31, 1997.  The
            warrant is subject to  certain  anti-dilution  provisions.  The fair
            value of the  warrant of $81,000  was  expensed  during  1997.  This
            warrant  was  exercised  in October  1999 for  89,000  shares of the
            Company's common stock.
                                       -31-
<PAGE>

  10.   Shareholders' Deficit, Continued:

            Warrants, continued

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

            In  connection  with the sale of common  stock,  the Company  issued
            warrants in August 1997 to purchase  100,000  shares of common stock
            at a price  of $1.25  per  share.  These  warrants  expired  in 1999
            without exercise.

            In  connection  with an  uncollateralized  loan of  $40,000  from an
            officer,  the Company issued a warrant to purchase  75,000 shares of
            common  stock at a price of $.75 per share.  The warrant will expire
            in 2002.

            As  described  in Note 8, during 1999 and 1998,  the Company  issued
            warrants to purchase  750,000 and 1,961,538,  respectively of common
            stock to the holder of convertible debentures.

            As described in Note 6, during 1999 the Company  issued  warrants to
            purchase  460,000  shares of common stock to the  guarantors  of the
            Company's lines of credit.

            In connection  with services  provided by a contractor in 1999,  the
            Company  agreed to issue a warrant to purchase  40,000 shares of the
            Company's  common stock at $3.25 per share.  The warrant will expire
            in 2004.  Consulting expense of $124,000 was recognized for the year
            ended December 31, 1999 for the fair value of the warrant.

            In connection  with services  provided by a contractor in 1999,  the
            Company agreed to issue a warrant to purchase  150,000 shares of the
            Company's  common stock at $4.25 per share.  The warrant will expire
            in 2002.  Consulting expense of $562,000 was recognized for the year
            ended December 31, 1999 for the fair value of the warrant.

            The Company  issued  warrants for the purchase of 123,179  shares at
            prices  ranging  from  $0.75  to  $1.50  per  share  to an  existing
            shareholder.  The fair value of the warrants,  $418,000, was charged
            to general and administrative expense in the fourth quarter of 1999.
            The warrants expire in 2002 and 2003.

            Stock option plan

            The Company  adopted the 1989 Stock Option Plan (the 1989 Plan),  as
            amended  September  28,  1994,  to provide for the  granting of both
            Incentive  Stock Options (ISOs) and  Nonqualified  Stock Options for
            employees,  directors  and  consultants  of the  Company  to acquire
            ownership in the Company and provide them with  incentives for their
            service.
                                       -32-
<PAGE>

  10.   Shareholders' Deficit, Continued:

            Stock option plan, continued

            Under the terms of the 1989 Plan,  1,350,000  shares of common stock
            may be issued.  The 1989 Plan was  administered by the  Compensation
            and Option  Committee of the Board of Directors which determined the
            terms and  conditions  of the options  granted  under the 1989 Plan,
            including  exercise  price,  number of option shares granted and the
            vesting period of such options.  Upon termination of a participant's
            employment or  consulting  relationship  with the Company,  unvested
            options  terminated and vested options  remained  exercisable  for a
            period not to exceed three  months.  The exercise  price of all ISOs
            granted  under the 1989  Plan  must have been at least  equal to the
            fair market  value of the common stock of the Company on the date of
            grant.  The exercise  price of all ISOs granted  under the 1989 Plan
            were  determined by the  Compensation  and Option  Committee and the
            term could not exceed ten years. In February 1999, the 1989 Plan was
            terminated.

            On February 10, 1998 the Company  adopted the 1998 Stock Option Plan
            (the  1998  Plan)  to  provide  for  the   granting  of  options  to
            independent  directors and outside  consultants.  Under the terms of
            the 1998 Plan,  1,000,000 shares of common stock may be issued.  The
            1998 Plan is currently  administered by the Board of Directors which
            determines the terms and  conditions of the options  granted and the
            vesting of such options.

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

            On June 2, 1999 the Company  adopted the 1999 Stock Option Plan (the
            1999 Plan) to  provide  for the  granting  of both  Incentive  Stock
            Options  (ISOs)  and  Nonqualified   Stock  Options  for  employees,
            directors and consultants of the Company.

            Under the terms of the 1999 Plan,  1,500,000  shares of common stock
            may be  issued.  The  1999  Plan is  currently  administered  by the
            Compensation  and Option  Committee of the Board of Directors  which
            determines the terms and conditions of the options granted under the
            1999 Plan, including exercise price, number of option shares granted
            and the  vesting  period  of such  options.  Upon  termination  of a
            participant's   employment  or  consulting   relationship  with  the
            Company,  unvested  options  terminate  and  vested  options  remain
            exercisable  for a period not to exceed three  months.  The exercise
            price of all ISOs granted under the 1999 Plan must be at least equal
            to the fair market  value of the common  stock of the Company on the
            date of grant. The exercise price of all ISOs granted under the 1999
            Plan are determined by the Compensation and Option Committee and the
            term may not exceed ten years.

            In August 1999 all  remaining  shares  reserved  under the Company's
            three option  plans,  a total of 2,976,250  shares of common  stock,
            were registered on Form S-8.

                                      -33-
<PAGE>

  10.   Shareholders' Deficit, Continued:

            Stock option plan, continued

            At  December  31,  1999 and 1998,  options  for  981,109 and 361,436
            shares,  respectively,  of common stock were  exercisable.  Activity
            with respect to the plans is as follows:
<TABLE>
<S>                             <C>            <C>              <C>

                                                                   Weighted-
                                                                    Average
                                                   Options         Exercise
                                  Authorized     Outstanding         Price
                                -------------- ---------------- ---------------

Balance, December 31, 1997            160,000          561,922  $         2.02

    Additional shares authorized      500,000
    Granted                          (941,922)         941,922            0.81
    Exercised                                          (22,875)           0.10
    Canceled                          789,297         (789,297)           1.72
                                -------------- ---------------- ---------------

Balance, December 31, 1998            507,375          691,672            0.78

    Additional shares authorized    2,000,000
    Granted                        (1,377,791)       1,377,791            1.95
    Exercised                                         (136,750)           0.80
    Canceled                           91,875          (91,875)           0.78
    Authorized shares expired        (231,526)
                                -------------- ---------------- ---------------

Balance, December 31, 1999            989,933        1,840,838  $         1.66
                                ============== ================ ===============
</TABLE>

            The following table summarizes information about fixed-price options
            outstanding and exercisable at December 31, 1999:

Options outstanding                                      Options exercisable
---------------------------------------------------  ---------------------------
                           Weighted-
                           Average      Weighted-                     Weighted-
Range of                   Remaining    Average                       Average
Exercise     Options       Contractual  Exercise       Options        Exercise
Prices       Outstanding   Life         Price          Exercisable    Price
--------------------------------------------------  ----------------------------

0.10 - 1.19     882,105        7.88     $ 0.78          646,043       $  0.77

1.97 - 2.81     764,333        9.58       2.17          185,066          2.16

3.00 - 4.03     194,000        9.87       3.67          150,000          3.58

                                      -34-
<PAGE>

  10.   Shareholders' Deficit, Continued:

            Stock option plan, continued

            The Company  follows the  instrinsic  value method of accounting for
            its stock  options.  Under this method,  the Company  recognized  no
            compensation  expense or stock  options  issued to  employees if the
            exercise price of the option equals or exceeds the fair market value
            of the  Company's  common  stock on the date of grant.  For  options
            granted  with an  exercise  price  less than fair  market  value the
            Company recognized $251,000 and $31,000 of compensation  expense for
            the  years  ended  December  31,  1999 and 1998,  respectively.  Had
            compensation  cost been  recognized  based on the fair  value at the
            grant date for options awarded under the Plan, the pro forma amounts
            of the Company's net loss and net loss per share for the years ended
            December 31, 1999 and 1998 would have been as follows:
<TABLE>
<S>                                          <C>                <C>
                                                        December 31,
                                             ----------------------------------
                                             ----------------   ---------------
                                                   1999               1998
                                             ----------------   ---------------

Net loss as reported                         $    (6,251,000)   $   (4,160,000)
                                             ================   ===============

Net loss pro forma                           $    (6,456,000)   $   (4,465,000)
                                             ================   ===============

Loss per share as reported                   $         (0.67)   $        (0.64)
                                             ================   ===============

Loss per share pro forma                     $         (0.69)   $        (0.69)
                                             ================   ===============

</TABLE>

            The Company recorded an additional $234,000 of compensation  expense
            for options granted to non-employees  under the fair value method of
            accounting for stock-based compensation.

            The fair value of each  option  grant was  estimated  on the date of
            grant  using  the  Black-Scholes   option-pricing   model  with  the
            following  assumptions  for the years  ended  December  31, 1999 and
            1998,  respectively:  risk-free interest rates ranging from 5.07% to
            6.49% and 5.512% to 5.673%,  expected option lives ranging from five
            to ten years;  expected volatility of 175% and 124%; and no expected
            dividends,  respectively. The weighted-average fair value of options
            granted during 1999 and 1998 was $1.93 and $0.79, respectively,  for
            options with an exercise price equal to market. The weighted-average
            fair value of options  granted  during 1998 at a price above  market
            was  $0.59.  There  were  no  such  options  granted  in  1999.  The
            weighted-average  fair value of  options  granted in 1999 at a price
            below market was $1.99.

  11.   License Agreements:

        The Company has license agreements with various developers and producers
        of computer  software  that  require the Company to pay  royalties.  The
        royalties are due on a per-unit sale basis and the agreements  stipulate
        no minimum liability. The products related to the royalty agreements are
        not a significant  part of the Company's  product mix.  During the years
        ended December 31, 1999 and 1998,  total royalty  expense was $2,000 and
        $13,000, respectively.
                                         -35-
<PAGE>

  12.   Lease Commitments:

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

             Year Ended
            December 31,
        -------------------

               2000                        $      403,000
               2001                               468,000
               2002                               156,000
                                           ---------------

                                           $    1,027,000
                                           ===============


        Rent expense for 1999 and 1998 was $280,000 and $256,000, respectively.
        The Company received $0 and $86,000 from sublease income for the years
        ended December 31, 1999 and 1998, respectively.


13.     Contingencies:

        In 1997 an  entity,  which sold  substantially  all of its assets to the
        Company in 1995,  demanded  that the Company  arbitrate  certain  claims
        arising from the sale.  The claims  aggregated  in excess of $1 million.
        The parties reached an agreement in July 1998 outside of arbitration. In
        exchange  for the mutual  release of all claims and  counterclaims,  the
        Company agreed to provide consideration of $420,000, $25,000 in cash and
        the remainder  comprised of forgiveness of $112,000 in debt and issuance
        of  approximately  633,000  shares of the  Company's  common  stock.  At
        December 31, 1998, the Company had paid $20,000 of the $25,000, the debt
        was fully reserved and $283,000 of expense was recognized related to the
        issuance of common stock.  The Company believes that the Claimant's
        subsequent actions nullified this agreement. In July 1999 the Company
        demanded the return of all consideration.  In December 1999 the Company
        cancelled the 633,000 shares previously issued and reserved the $269,000
        related to recording those shares. recordLab has petitioned the court
        to dismiss the case.

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

  14.   Notes Receivable from Shareholders:

        The Company has made advances and loans to employees in connection  with
        the purchase of common stock under the  Employee  Stock Option Plan.  At
        December 31, 1999 a promissory  note  totaling  $109,000 was held by the
        Company from the  Company's  Chief  Executive  Officer.  This loan bears
        interest at 8% per annum.  The  officer has pledged the common  stock as
        collateral for this loan. The full unpaid principal and accrued interest
        amounts are due and payable on August 1, 2000, but can be prepaid at any
        time.  The  terms of this  note  receivable  cause  variable  accounting
        treatment  for these  stock  options.  Compensation  on such  options is
        measured  as the amount by which the quoted  market  value of the shares
        exceeds the option  price at each  balance  sheet date until the loan is
        repaid.
                                     -36-
<PAGE>

  15.   Supplemental Cash Flow Information:

        The following items are  supplemental  information of noncash  financing
        activities:
<TABLE>
     <S>                                      <C>               <C>

                                                        December 31,
                                              ---------------------------------
                                              ---------------   ---------------
                                                    1999              1998
                                              ---------------   ---------------

     Common stock issued in exchange for
     accounts payable                         $       17,000    $       38,000
                                              ===============   ===============

     Warrants issued in connection with
     financing                                $    1,666,000    $    1,750,000
                                              ===============   ===============

     Warrants exercised                       $       81,000    $            0
                                              ===============   ===============

     Conversion of debt and accrued interest
     into common stock, net of unamortized
     debt discount and issue costs            $    2,984,000    $            0
                                              ===============   ===============
</TABLE>


  16.   Employee Benefit Plans:

        In June 1996, the Company adopted a qualified  profit-sharing plan under
        the provisions of Internal Revenue Code 401(k). The plan is available to
        all employees meeting the eligibility requirements. Contributions by the
        Company  are based on a matching  formula  as  defined in the plan.  The
        Company made no contributions to the plan in 1999 or 1998.

  17.   Related Party Transactions:

        In April 1999,  Mr.  Smart,  a director,  was issued  options for 75,000
        shares of common stock as compensation for consulting services. In April
        and June 1999, Ms. Murry, a director,  was issued options for 25,558 and
        34,442 shares,  respectively,  for consulting services performed in 1998
        and 1999.

        In June 1999,  the  Company  contracted  with Big Online for  consulting
        services. At that time Mr. Smart was a director on the Board of both the
        Company and Big Online.  Mr. Smart resigned from the Company's  Board of
        Directors in November 1999 to pursue other activities.

        As discussed in Note 6, Mr.  Kaye,  a director,  was issued  options for
        300,000  shares of common  stock in October  1999 in  consideration  for
        becoming a guarantor of one of the Company's lines of credit.

  18.   Subsequent Events:

        In  February  and March  2000 the  Company  sold  267,818  shares of the
        Company's  common stock to several  investors  under stock  subscription
        agreements. These agreements provided for investment at $2.75 per share,
        yielding a total investment of $736,500. The agreements further provided
        for three-year  warrants to purchase 10% of the shares  purchased  under
        the agreements, or a total of 26,782 shares for $4.00 per share.

                                     -37-
<PAGE>

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

           None

                                  PART III

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

           This information will be provided not later than 120 days after the
           close of the fiscal year ended December 31, 1999 by amendment.

ITEM 10. EXECUTIVE COMPENSATION

           This information will be provided not later than 120 days after the
           close of the fiscal year ended December 31, 1999 by amendment.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

           This information will be provided not later than 120 days after the
           close of the fiscal year ended December 31, 1999 by amendment.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

           This information will be provided not later than 120 days after the
           close of the fiscal year ended December 31, 1999 by amendment.

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

(a)      Financial Statements:  The following are filed as a part of this report
         under ITEM 7.                                                     Page

         Report of PricewaterhouseCoopers LLP................................17

         Balance Sheets - At December 31, 1999 and 1998......................18

         Statements of Operations - For the Years Ended
           December 31, 1999 and 1998........................................19

         Statements of Changes in Shareholders' Deficit - For the Years
           Ended December 31, 1999 and 1998..................................20

         Statements of Cash Flows - For the Years Ended
           December 31, 1999 and 1998........................................21

         Notes to Financial Statements - For the Years
           Ended December 31, 1999 and1998...................................22


(b)      Reports on Form 8-K.

              None

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

              Exhibit No.   Description

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

              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.

                                      -38-
<PAGE>

              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.

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

              3.2.1 b       By-laws of the Company.

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

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

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

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

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

              4.5  k        Form of Debenture dated October 28, 1997

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

              10.1.1b Combined  Incentive and  Nonstatutory  Stock Option Plan,
                      adopted  February 22, 1989,  and as amended April 30, 1994
                      and September 28, 1994,  authorizing  1,200,000  shares of
                      Common Stock for issuance pursuant to the combined Plan.

              10.1.2m 1998 Nonstatutory Option Plan, adopted February 10, 1998,
                      authorizing  500,000  shares of Common  Stock for issuance
                      pursuant to the Plan.

              10.1.3m 1999 Incentive and Nonstatutory Option Plan, adopted June
                      2,  1999,   authorizing  1,000,000  of  Common  Stock  for
                      issuance pursuant to the Plan.

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

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

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

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

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

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

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

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

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

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

                                       -39-
<PAGE>

              Exhibit No.           Description

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

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

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

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

              10.6.3b OEM License Agreement, dated October 26, 1994 by and
                      between Media Vision Corporation

              10.6.4b Form of OEM License Agreement between various OEM
                      licensees and the Company.

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

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

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

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

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

              10.6.10eOEM License Agreement, dated June 2, 1995, by and between
                      Acer America  Corporation  and the  Company.

              10.6.11eOEM License Agreement, dated June 5, 1995, by and between
                      NEC Technologies, Inc. and the Company.

              10.7.1eAsset Purchase and Sale Agreement by and among Midisoft
                     Corporation, Ask Me Multimedia, Inc. and Michael O'Donnell
                     dated April 14, 1995.
              ------------------

              a       Incorporated by reference from the Company's Registration
                      Statement on Form SB-2
                      (S.E.C. File No. 33-80064).
              b       Incorporated by reference from the Company's Registration
                      Statement on Form SB-2
                      (S.E.C. File No. 33-62468-5).
              c       Incorporated  by reference  from the Company's Form 10-KSB
                      filed March 30, 1994 (S.E.C. File No. 000-22172).
              d       Incorporated  by reference  from the Company's Form 10-KSB
                      filed April 13, 1995 (S.E.C. File No. 000-22172).
              e       Incorporated by reference from the Company's Form 10-KSB/A
                      filed August 4, 1995 (S.E.C. File No. 000-22172).
              f       Incorporated  by reference  from the Company's Form 10-KSB
                      filed April 15, 1997 (S.E.C. File No. 000-22172).
              g       Incorporated by reference from the Company's Form 10-KSB/A
                      filed June 20, 1997 (S.E.C. File No. 000-22172).
              h       Incorporated  by reference  from the Company's Form 10-QSB
                      filed November 12, 1997 (S.E.C. File No. 000-22172).
              i       Incorporated  by  reference  from the  Company's  Form 8-K
                      filed January 9, 1997 (S.E.C. File No. 000-22172).
              j       Incorporated  by  reference  from the  Company's  Form 8-K
                      filed November 3, 1997 (S.E.C. File No. 000-22172).
              k       Incorporated  by reference  from the Company's Form 10-KSB
                      filed April 15, 1998 (S.E.C. File No. 000-22172).
              l       Incorporated  by reference  from the Company's Form 10-QSB
                      filed August 14, 1998 (S.E.C. File No. 000-22172).
              m       Incorporated by reference from the Company's Form 10-QSB
                      filed August 14, 1999
                      (S.E.C. File No. 000-22172).

                                       -40-

<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.


                                           recordLab Corporation
                                               (Registrant)


Date: April 14, 2000                       By:  /S/ LARRY D. FOSTER
                                           Larry Foster, Chairman of the Board,
                                           President and Chief Executive Officer




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

Signature                        Title                                Date


__/S/ LARRY D. FOSTER______      Chairman of the Board,          April 14, 2000
Larry D. Foster                  President and Chief Executive
                                 Officer


__/S/ GARY M. CULLY________      Vice President, Finance,        April 14, 2000
Gary M. Cully                    Chief Financial Officer and
                                 Principal Accounting Officer


__/S/ JOHN BAUER__________       Director                        April 14, 2000
John Bauer

__/S/ MARK CHASAN________        Director                        April 14, 2000
Mark Chasan

__________________________       Director                        April 14, 2000
Dalton Kaye

__/S/ MICHAEL LLOYD_______       Director                        April 14, 2000
Michael Lloyd

__/S/ MARSHA MURRY_______        Director                        April 14, 2000
Marsha Murry

__/S/ ROBERT ORBACH  ____        Director                        April 14, 2000
Robert Orbach

                                     -41-