<PAGE>

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                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC 20549

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

                                 FORM 10-KSB/A

(Mark one)
[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.

For the transition period from       to

                         Commission File No. 000-27095

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

                          AVERY COMMUNICATIONS, INC.
                (Name of Small Business Issuer in Its Charter)

               Delaware                              12-2227079
    (State or other jurisdiction of               (I.R.S. Employer
    incorporation or organization)               Identification No.)

 190 South LaSalle Street, Suite 1710                   60603
           Chicago, Illinois                         (Zip code)
    (Address of Principal Executive
               Offices)

                                (312) 419-0077
               (Issuer's Telephone Number, Including Area Code)

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

      Securities registered under Section 12(b) of the Exchange Act: None

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

                    Common Stock, par value $.01 per share

                                Title of Class

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

  Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90
days. YES [X] NO [_]

  Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [_]

<TABLE>
   <S>                                                               <C>
   Issuers revenues for the most recent fiscal year................  $4,547,703
   Aggregate market value of the 5,829,518 shares of Common Stock
   held
   by non-affiliates of the registrant at the average bid and asked
   price on
   April 20, 2000..................................................  $9,837,312
   Number of shares of Common Stock outstanding as of the close of
   business on April 20, 2000......................................   8,745,651
</TABLE>

  Transitional Small Business Disclosure Format (Check one): Yes [_] No [X]

                   DOCUMENTS INCORPORATED BY REFERENCE: NONE

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----

<S>                                                                        <C>
                                 PART II

Item 7.  Financial Statements.............................................   1

                                 PART III

Item 9.    Directors, Executive Officers, Promoters and Control Persons;
           Compliance with Section 16(a) of the Exchange Act..............   2
Item 10.   Executive Compensation.........................................   4
Item 11.   Security Ownership of Certain Beneficial Owners and
      Management..........................................................   6
Item 12.   Certain Relationships and Related Transactions.................   7
Index to Financial Statements.............................................   9
</TABLE>
<PAGE>

                                    PART II

Item 7. Financial Statements

Our consolidated financial statements required to be included in Item 7 are
set forth in the Index to Financial Statements set forth on page 9 of this
report. We are filing our financial statements with this amendment for the
purposes of correcting an error in footnote 2 to the financial statements and
to correct immaterial typographical errors.

                                       1
<PAGE>

                                   PART III

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

The following table sets forth certain information with respect to the
directors and executive officers of Avery.

<TABLE>
<CAPTION>
   Name        Age Position
   ----        --- --------
   <S>         <C> <C>
   Patrick J.
    Haynes,
    III         51 Director and Chairman of the Board
   Mark J.
    Nielsen     41 Director, President and Chief Executive Officer
   Scot M.
    McCormick   46 Director, Vice President, Chief Financial Officer and Secretary
   Norman M.
    Phipps      40 Director
   J. Alan
    Lindauer    60 Director
   Stephen L.
    Brown       61 Director and Vice Chairman of the Board
   Spencer L.
    Brown       34 Director
   Robert T.
    Isham,
    Jr.         47 Director
</TABLE>

Directors hold office until the next annual meeting of stockholders and until
their successors are duly elected and qualify.

Patrick J. Haynes, III has served as a director and Chairman of the Board of
Avery since November 1995. Mr. Haynes was elected President and Chief
Executive Officer of Avery in July 1998, and served in such capacity until
December 1, 1998. In 1992, Mr. Haynes founded and became President of American
Communications Services, Inc., a start-up, fiber optic, competitive access
provider telephone company. Mr. Haynes directed development of the strategic
plan, put management in place and operated the company on a day-to-day basis
for 18 months. He also advised and consulted in connection with the placement
of $52 million in equity and $81 million in debt. American Communications is
now a NASDAQ-listed company with a market capitalization in excess of $400
million. Mr. Haynes is the Senior Managing Director of the Thurston Group,
Inc., a private merchant bank in Chicago. Mr. Haynes and Russell T. Stern, Jr.
founded the Thurston Group in 1987. Previously, Mr. Haynes was associated with
Merrill Lynch, Oppenheimer & Company, and Lehman Brothers as an investment
banker.

Mark J. Nielsen has served as President and Chief Executive Officer of Avery
since December 1, 1998, and was elected as a director on December 15, 1998.
From February 1998 until joining Avery, Mr. Nielsen served as the Chairman of
Primal Systems, Inc., a private company engaged in providing software
consulting and decision support systems to the telecommunications industry.
From 1988 to 1997, Mr. Nielsen was President and Chief Executive Officer; and
Chairman until 1998, of Subscriber Computing, Inc., a private company
providing billing and customer care solutions to the telecommunications
industry worldwide. During his tenure at Subscriber Computing, he completed a
$15 million private placement, acquired another software company, and
positioned the company for its ultimate sale to Corsair Communications, Inc.
in 1998. Previously, Mr. Nielsen was Industry Director--Mobile Communications
for Cincinnati Bell Information Systems and Director of Sales and Marketing
for Cellular Business Systems, Inc. serving the billing and customer care
needs of the telecommunications industry on a service bureau basis. Mr.
Nielsen has delivered a letter to Avery's Board of Directors advising Avery
and the Board that the letter should be considered as his notice of
termination of his employment agreement, effective May 5, 2000.

Scot M. McCormick has served as Vice President, Chief Financial Officer and
Assistant Secretary of Avery since July 1996. Mr. McCormick was elected as a
director and to the office of Secretary in July 1998. Prior to becoming the
Chief Financial Officer of Avery, Mr. McCormick was a consultant to Avery from
1995 through June 1996. From 1993 to 1995, Mr. McCormick served as Chief
Financial Officer and Secretary of The Park Corporation in Barrington,
Illinois. From 1990 to 1993, he served as Chief Financial and Administrative
Officer and Secretary of Whitestar Graphics, Inc. From 1978 to 1990, Mr.
McCormick was associated with the Crown organization in Chicago, including
Controller of American Envelope Company from 1980 to 1990. From 1976 to 1978,
Mr. McCormick worked for Coopers & Lybrand.

                                       2
<PAGE>

Norman M. Phipps has served as a director of Avery since November 1995. Mr.
Phipps is a director of LogiMetrics, Inc., a company primarily involved in the
manufacture of infrastructure equipment for the wireless broadband
telecommunications market. Mr. Phipps has served as the President and Chief
Operating Officer of LogiMetrics since April 1997, and also as interim Chief
Financial Officer since March 1998. From May 1996 to April 1997, Mr. Phipps
served as Chairman of the Board and Acting President of LogiMetrics. Mr.
Phipps has served as a principal of two private investment firms, Phipps,
Teman & Company, L.L.C. (from January 1994 to December 1997) and CP Capital
Partners (from January 1991 to December 1993).

J. Alan Lindauer currently serves as President of Waterside Capital and has
served as President of Waterside Management, Inc., a business consulting firm,
since 1986. Mr. Lindauer has also served as a director of Commerce Bank of
Virginia since 1986 and serves as chair of its Loan Committee, Norfolk
Division, and a member of the Executive, Trust, Marketing, Compensation, and
Mergers & Acquisition Committees. Mr. Lindauer served as director of Citizens
Trust Bank from 1982 to 1985 as well as a member of its Trust and Loan
Committees. Mr. Lindauer founded Minute-Man Fuels in 1963 and managed Minute-
Man Fuels until 1985.

Stephen L. Brown has served as Chairman of the Board of Directors and Chief
Executive Officer of Franklin Capital Corporation since October 1986. Since
June 1984, Mr. Brown has been Chairman of SLB & Co., Inc., a private
investment firm. Mr. Brown is a director of Copley Financial Services
Corporation and an advisor to Copley Fund, Inc., a mutual fund. Spencer L.
Brown is Mr. Brown's son.

Spencer L. Brown has been Senior Vice President of Franklin Capital since
November 1995, Secretary of Franklin Capital since October 1994 and was Vice
President of Franklin Capital from August 1994 to November 1995. From
September 1993 to July 1994 Mr. Brown was an attorney with the firm of Wilson,
Elser, Moskowitz, Edelman & Dicker, and from September 1991 to September 1993
he was an attorney with the firm of Weil, Gotshal & Manges LLP. Mr. Brown is
the son of Mr. Stephen L. Brown, the Chairman and Chief Executive Officer of
Franklin. Stephen L. Brown is Mr. Brown's father.

Robert T. Isham, Jr. originally served as a director of Avery from November
1995 to March 1996, and then rejoined the Board in July 1998. Mr. Isham is
currently a managing director of the Thurston Group, Inc., a private merchant
bank based in Chicago. Previously, he ran his own commercial law practice in
Chicago and, before that, he was a partner with the law firm of McDermott,
Will & Emery.

Significant Employees

Harold D. ("Rick") Box is Vice President of Operations and Marketing of HBS.
Mr. Box has been involved in the telecommunications industry since 1983 in
areas such as paging, long distance and local exchange carrier clearing house
services. He served as Director of Client Relations for HBS's major
competitor, Zero Plus Dialing (a subsidiary of Billing Concepts, Inc.) from
1988 to 1993. He was a Vice President of Operations of Home Owners Long
Distance Incorporated from 1993 to 1994 and a founding partner of HBS. Mr. Box
holds a Bachelor's Degree in Business Administration from North Texas State
University.

William L. Salway was appointed President of Primal in January 2000. Mr.
Salway has extensive experience in software development and
telecommunications. He began consulting for Primal in January, 1999 and was
named Vice President and General Manager in February of that same year. Prior
to his involvement with Primal, Mr. Salway was President and Chief Operating
Officer of Garg Data International in Newport Beach, California, a privately
held information technology company engaged in consulting services software
products. Mr. Salway was Vice President of Sales and Marketing and,
subsequently, President of CAIR Systems, a venture capital backed provider of
property and casualty insurance software from 1989 through 1996. From 1965
through 1989, Mr. Salway was employed in a variety of positions of increasing
responsibility in software and telecommunications with both large-scale
companies, such as RCA, Citicorp and United Technologies, as well as with
small cap and venture capital backed start-ups. He is a graduate of Rutgers
University.

Compensation of Directors

Each member of the Board receives a one-time warrant to purchase 75,000 shares
of common stock at an exercise price determined by the Board at the time of
issuance. Each non-employee director also receives an annual stipend of
$10,000 and an annual grant of options to purchase 10,000 shares of common
stock at an exercise price determined by the Board at the time of grant. The
non-employee directors of Avery also receive $1,000 for each meeting attended,
plus reimbursement of travel expenses.

                                       3
<PAGE>

Item 10. Executive Compensation

The following table summarizes certain information relating to the
compensation paid or accrued by Avery for services rendered during the years
ended December 31, 1999 and 1998, to each person serving as its Chief
Executive Officer and each of Avery's other most highly paid executive
officers whose total annual salary and bonus for the years ended December 31,
1999 and 1998, exceeded $100,000.

                     Summary Executive Compensation Table

<TABLE>
<CAPTION>
                                               Annual Compensation
                          -------------------------------------------------------------
                                                                         Long-Term
Name and Principal        Fiscal  Salary              Other Annual      Compensation
Position                   Year    ($)    Bonus ($) Compensation ($) Awards/Options (#)
------------------        ------ -------- --------- ---------------- ------------------
<S>                       <C>    <C>      <C>       <C>              <C>
Patrick J. Haynes,         1999  $200,000 $100,000      $36,804           100,000
 III(/1/)...............
 Chairman of the Board     1998  $100,000 $     --      $30,000           420,000
Mark J.                    1999  $200,000 $117,500      $14,400                --
 Nielsen(/2/)(/3/)......
 President and Chief       1998  $ 16,667 $     --      $    --           925,000
  Executive Officer
Scot M. McCormick(/3/)..   1999  $130,000 $ 50,000      $12,192           150,000
 Vice President, Chief     1998  $122,667 $ 35,000      $    --            75,000
  Financial Officer
  and Secretary
</TABLE>
--------
(/1/)Mr. Haynes served as the Chief Executive Officer of Avery through
     November 30, 1998. "Other Annual Compensation" represents monthly
     automobile allowance and premiums on health and major medical insurance.
(/2/)Mr. Nielsen became the Chief Executive Officer of Avery on December 1,
     1998.
(/3/)"Other Annual Compensation" represents premiums on health, life,
     disability and medical insurance.

                       Option Grants in Last Fiscal Year

<TABLE>
<CAPTION>
                               Indvidual Grants
-------------------------------------------------------------------------------
                          Number of    % of Total
                          Securities    Options
                          Underlying   Granted to
                           Options     Employees    Exercise or Base Expiration
Name                       Granted   in Fiscal Year   Price ($/Sh)      Date
----                      ---------- -------------- ---------------- ----------
<S>                       <C>        <C>            <C>              <C>
Patrick J. Haynes, III...  100,000         8.0%          $1.63        11/18/09
Scot M. McCormick........  150,000        11.9%          $1.63        11/18/04
</TABLE>

   Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values

<TABLE>
<CAPTION>
                                                   Number of
                                                  Securities       Value of
                                                  Underlying      Unexercised
                                                  Unexercised    In-the-Money
                                                  Options at      Options at
                                                   FY-End(#)       FY-End($)

              Shares Acquired                    Exercisable/    Exercisable/
Name          on Exercise (#) Value Realized($)  Unexercisable   Unexercisable
----          --------------- -----------------  -------------   -------------
<S>           <C>             <C>               <C>             <C>
Patrick J.
 Haynes,
 III........        --               --         380,000/140,000 $37,500/$0
Mark J.
 Neilsen....        --               --         925,000/0            $0/$0
Scot M.
 McCormick..        --               --         125,000/100,000 $56,250/$37,500
</TABLE>

                                       4
<PAGE>

Employment Agreements

Effective July 1, 1998, Mr. Haynes entered into an employment agreement with
Avery. Under his employment agreement, Mr. Haynes will serve as Chairman of
the Board, President and Chief Executive Officer, subject to the Board of
Directors power to elect and remove officers of Avery. The employment
agreement expires June 30, 2003. Mr. Haynes' initial base salary is $200,000
annually. In addition, Mr. Haynes is entitled to receive bonuses based on
performance goals as established by the Board, to receive stock options, to
participate in applicable incentive plans established by Avery, to participate
in Avery's hospitalization and major medical plans, or, at his option, to be
reimbursed for amounts paid by Mr. Haynes for comparable coverage, and to an
automobile of his choice. Mr. Haynes also received a ten-year warrant to
purchase 420,000 shares of common stock at $3.00 per share.

Effective December 1, 1998, Mark J. Nielsen entered into an employment and
noncompetition agreement with Avery. Under his employment agreement, Mr.
Nielsen will serve as President and Chief Executive Officer, and will be
elected Chairman of the Board by December 1, 1999, subject to the Board of
Directors power to elect and remove officers of Avery. Mr. Nielsen waived
until March 31, 2000 his right to be elected Chairman of the Board. The
employment agreement had an original term of one year and automatically renews
for additional terms unless either party notifies the other prior to October
of a given year that they do not wish to renew the agreement. Mr. Nielsen's
initial base salary is $200,000 annually. In addition, Mr. Nielsen is entitled
to receive an aggregate bonus of $100,000 during the first year of his
employment ending on December 1, 1999, to participate in applicable incentive
plans established by Avery, to participate in Avery's hospitalization and
major medical plans, or, at his option, to be reimbursed for amounts paid by
Mr. Nielsen for comparable coverage, and to receive such other bonuses as the
Board may determine in its sole discretion. Mr. Nielsen also received a ten-
year stock option to purchase 925,000 shares of Avery's common stock at $2.00
per share. Mr. Nielsen has delivered a letter to Avery's Board of Directors
advising Avery and the Board that the letter should be considered as his
notice of termination of his employment agreement, effective May 5, 2000.

Effective January 1, 2000, Scot M. McCormick entered into an employment
agreement with Avery. Under his employment agreement, Mr. McCormick will serve
as Vice President, Chief Financial Officer and Secretary, subject to the Board
of Directors power to elect and remove officers of Avery. The employment
agreement expires December 31, 2000, and will automatically be renewed for
additional terms unless either party notifies the other prior to November 1 of
a given year that they do not wish to renew the agreement. Mr. McCormick's
initial base salary is $143,000 annually. In addition, Mr. McCormick is
entitled to annual incentive compensation in an amount equal to 40% of his
annual salary if certain performance goals established by the Board of
Directors are met or exceeded. Mr. McCormick is entitled to participate in
applicable incentive plans established by Avery, to participate in Avery's
hospitalization and major medical plans, or, at his option, to be reimbursed
for amounts paid by Mr. McCormick for comparable coverage, and to receive such
other bonuses as the Board may determine in its sole discretion.

Effective November 1, 1996, Harold D. Box entered into an employment and
noncompetition agreement with HBS. Under his employment agreement, Mr. Box
will serve as Vice President of Operations and Marketing of HBS, subject to
the general partner's power to elect and remove officers of HBS. The
employment agreement expires on December 31, 2000, and will automatically be
renewed for additional terms of one year unless either party notifies the
other prior to January of a given year that they do not wish to renew the
employment agreement. Mr. Box is entitled to receive an annual salary of
$100,000, subject to standard payroll deductions, and is entitled to receive
the same benefits as HBS provides to other employees at comparable salaries
and responsibilities to those of Mr. Box. In addition, Mr. Box is entitled to
participate in HBS's profit sharing plan, entitled to receive up to 83,333
shares of common stock in each of calendar years 1998, 1999, 2000 and 2001 if
HBS's pre-tax earnings equal or exceed certain specified targets for the
respective preceding year, and to receive such other bonuses as the Board may
determine in its sole discretion.

The employment agreements with Mr. Nielsen and Mr. Box contain certain
covenants by such employees not to compete with the business of Avery. A state
court may determine not to enforce, or only partially enforce, these
covenants.

                                       5
<PAGE>

            SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires Avery's
directors and executive officers, and persons who own more than 10% of Avery's
common stock, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Directors, executive officers and greater
than 10% shareholders are required by SEC regulations to furnish Avery with
copies of all Section 16(a) forms they file. Based on a review of such forms,
Avery believes that all Section 16(a) filing requirements applicable to its
directors and executive officers, and all persons who own more than 10% of
Avery's common stock, were complied with for the year ended December 31, 1999,
except that Franklin Capital Corporation, a 10% holder of Avery's common
stock, did not report the purchase of 2,600 shares of Avery's common stock in
the month of December 1999 on Form 4, and did not report this purchase on Form
5 until March 2000.

Item 11. Security Ownership of Certain Beneficial Owners and Management

The table following sets forth information regarding the beneficial ownership
of common stock for each person who is known by Avery to be the beneficial
owner of more than five percent of Avery's voting securities, for each
director and named executive officer of Avery, and all directors and executive
officers of Avery as a group. Unless otherwise indicated in the footnotes,
each person named below has sole voting and investment power over the shares
indicated.

All information is as of April 20, 2000. As of such date, 8,745,651 shares of
common stock were outstanding, which excludes 1,215,216 held by Avery as
treasury shares. For purposes of this table, a person is deemed to be the
"beneficial owner" of the number of shares of common stock that such person
has the right to acquire within 60 days through the exercise of any option,
warrant or right, through the conversion of any security, through the power to
revoke a trust, discretionary account, or similar arrangement, or through the
automatic termination of a trust, discretionary account or similar
arrangement.

<TABLE>
<CAPTION>
Name of Beneficial Owner  Number of Shares                          Percent of Class
------------------------  ----------------                          ----------------
<S>                       <C>                                       <C>
Franklin Capital
 Corporation(/1/).......     1,645,938                                    18.1%
Waterside Capital
 Corporation(/2/).......       686,000                                     7.5%
Thurston Group,
 Inc.(/3/)..............     1,085,917(/4/)                               11.2%
Waveland, LLC(/3/)......       566,286(/5/)                                6.1%
John Faltys(/6/)........       593,008                                     6.4%
Patrick J. Haynes,
 III(/3/)...............     2,688,877(/5/)(/8/)                          26.6%
Mark J. Nielsen(/9/)....     1,260,893                                    12.6%
Scot M. McCormick.......       245,000                                     2.7%
Norman M. Phipps........        75,000                                     0.9%
J. Alan Lindauer(/2/)...       803,700(/10/)                               8.6%
Stephen L. Brown(/1/)...     1,770,938(/11/)                              19.2%
Spencer L. Brown(/1/)...     1,742,188(/11/)                              19.0%
Robert T. Isham, Jr. ...       182,355                                     2.0%
All executive officers
 and directors as a
 group..................     8,768,951(/7/)(/8/)(/10/)(/11/)              65.9%
</TABLE>
--------
(1) The business address for this person is 450 Park Avenue, 10th Floor, New
    York, NY 10022.
(2) The business address for this person is 300 East Main Street, Suite 1380,
    Norfolk, VA 23510.
(3) The business address for this person is 190 South LaSalle Street, Suite
    1710, Chicago, IL 60603.
(4) The ultimate beneficial owners of these shares is Patrick J. Haynes, III.
(5) The ultimate beneficial owner of these shares is Patrick J. Haynes, III.
(6) The business address for this person is 18881 Von Karman, Suite 400,
    Irvine, California 92612.
(7) Includes 1,085,917 shares beneficially owned by Thurston Group, Inc.

                                       6
<PAGE>

(8) Includes 1,085,917 shares beneficially owned by Thurston Group, Inc.,
    426,286 shares beneficially owned by Waveland, LLC, and 1,036,664 shares
    of common stock beneficially owned by Bank One, Texas, N.A, for which
    Mr. Haynes holds an irrevocable proxy.
(9) The business address of this person is 18881 Von Karman, Suite 400,
    Irvine, California 92612.
(10) Includes 651,000 shares beneficially owned by Waterside Capital
     Corporation, of which Mr. Lindauer is the President.
(11) Includes 1,645,938 shares beneficially owned by Franklin Capital
     Corporation, of which Stephen L. Brown is Chairman of the Board and Chief
     Executive Officer and Spencer L. Brown is Senior Vice President.

Item 12. Certain Relationships and Related Transactions


In December 1998, Avery's Board of Directors authorized Avery to repurchase
any or all of its outstanding warrants for a price of $1.00 per underlying
share. In December 1998, Avery repurchased warrants held by Waveland, LLC to
purchase 100,000 shares of common stock at an exercise price of $1.50 per
share. On January 5, 1999, Avery repurchased warrants held by the Thurston
Group, Inc. to purchase 300,000 shares of common stock at an exercise price of
$1.00 per share and warrants to purchase 200,000 shares of common stock at
$1.50 per share. On March 31, 1998, Avery repurchased warrants held by the
Thurston Group to purchase 80,000 shares of common stock at an exercise price
of $1.50 per share. On April 16, 1999, Avery repurchased warrants held by
Thurston Interests, LLC to purchase 41,746 shares of common stock at an
exercise price of $1.50 per share. Of the total $621,736 used to repurchase
the warrants, $300,000 was classified as compensation paid to Mr. Haynes. None
of this amount was classified as compensation paid to Mr. Isham. Waveland,
Thurston Group and Thurston Interests are affiliates of Mr. Haynes. Thurston
Group and Thurston Interests are also affiliates of Mr. Isham.

Mark J. Nielsen, Avery's President and Chief Executive Officer, was also the
Chairman of Primal Systems and owns approximately 16.04% of the Primal Systems
common equity on a fully diluted basis at the time the agreement to acquire
Primal Systems was entered and on October 1, 1999, the date the acquisition
was completed. Mr. Nielsen received 320,893 shares of Avery's convertible
preferred stock in the merger. If the maximum number of shares that could be
issued under the earn-out provisions of the merger agreement were issued, Mr.
Nielsen could receive up to an additional 953,608 shares of Avery's
convertible preferred stock. Each share of Avery's convertible preferred stock
issued in the merger is immediately convertible into shares of Avery's common
stock on a one-for-one basis.

In contemplation of entering into an agreement for the acquisition of Primal
Systems, Avery made a $100,000 working capital loan to Primal Systems on
December 15, 1998. The loan was secured by a first lien on the accounts
receivable of Primal Systems. On January 25, 1999, the working capital loan
was increased to $180,000. This loan has been replaced with the loan described
in the following paragraph.

In contemplation of the Corsair transaction, on February 3, 1999, Avery agreed
to loan Primal Systems up to $1,000,000 on a revolving credit basis in
replacement of the then-outstanding $180,000 loan described above. This loan
was secured by a pledge of all the stock of Primal Billing Solutions, the
wholly owned subsidiary of Primal Systems that acquired the Corsair assets,
and by a security interest in all of the accounts receivable and general
intangibles, including all intellectual property of Primal Systems. As noted
above, Avery completed its acquisition of Primal Systems after the close of
business on September 30, 1999.

                                       7
<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.

                                          Avery Communications, Inc.

                                                   /s/ Scot M. McCormick
                                          By: _________________________________
                                                     Scot M. McCormick
                                                      Vice President,
                                                Chief Financial Officer and
                                                         Secretary

Date: April 28, 2000


                                       8
<PAGE>

                  AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
Report of Independent Certified Public Accountants........................ F-1

Financial Statements:
  Consolidated Balance Sheets at December 31, 1999 and 1998............... F-2

  Consolidated Statements of Operations for the years ended December 31,
   1999 and 1998.......................................................... F-3

  Consolidated Statements of Stockholders' Equity (Deficit) for the years
   ended December 31, 1999 and 1998....................................... F-4

  Consolidated Statements of Cash Flows for the years ended December 31,
   1999 and 1998.......................................................... F-5

  Notes to Consolidated Financial Statements.............................. F-6
</TABLE>

                                       9
<PAGE>

              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
Avery Communications, Inc.

  We have audited the accompanying consolidated balance sheets of Avery
Communications, Inc., and subsidiaries as of December 31, 1999 and 1998 and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the financial statements of
Primal Solutions, Inc., a consolidated subsidiary, which statements reflect
total assets of $9,674,468 as of December 31, 1999, and total revenue of
$4,547,703 for the three months ended December 31, 1999. These statements were
audited by other auditors whose report has been furnished to us and our
opinion, insofar as it relates to the amounts included for Primal Solutions,
Inc. is based solely on the report of the other auditors.

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

  In our opinion, based on our report and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Avery Communications, Inc. and
subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.

                                          King Griffin & Adamson P.C.

March 15, 2000
Dallas, Texas

                                      F-1
<PAGE>

                  AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                            December 31,
                                                       -----------------------
                                                          1999         1998
                                                       -----------  ----------
<S>                                                    <C>          <C>
                       ASSETS
Current assets:
 Cash and cash equivalents...........................  $ 1,777,015  $  867,198
 Trade accounts and notes receivable, net of
  allowance for doubtful accounts of $102,580 at
  December 31, 1999..................................      993,406         --
 Other...............................................      368,588         444
                                                       -----------  ----------
 Total current assets................................    3,139,009     867,642
                                                       -----------  ----------
Property and equipment, net..........................    1,608,845         --
                                                       -----------  ----------
Other assets:
 Goodwill, net.......................................    4,563,584         --
 Net long-term assets of discontinued operations.....    4,588,549   6,068,972
 Other...............................................       61,552     100,000
                                                       -----------  ----------
 Total other assets..................................    9,213,685   6,168,972
                                                       -----------  ----------
 Total assets........................................  $13,961,539  $7,036,614
                                                       ===========  ==========
   LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
 Current portion of notes payable (including $88,333
  to related parties at December 31, 1999)...........  $   473,252  $      --
 Current portion of capital lease obligations........       89,577         --
 Trade accounts payable..............................      371,121     125,308
 Accrued liabilities.................................      860,473      79,631
 Income taxes payable................................      137,651         --
 Deferred revenue....................................    1,023,605         --
 Net current liabilities of discontinued operations..    3,564,078   7,676,837
                                                       -----------  ----------
 Total current liabilities...........................    6,519,757   7,881,776
                                                       -----------  ----------
Long-term liabilities:
 Capital lease obligations...........................       62,049         --
 Long-term portion of notes payables (including
  $407,436 and $316,916 to related parties at
  December 31, 1999 and 1998, respectively)..........    2,053,303     316,916
                                                       -----------  ----------
 Total long-term liabilities.........................    2,115,352     316,916
                                                       -----------  ----------
Commitments and contingencies (Note 5)
Stockholders' equity (deficit):
 Preferred stock (20,000,000 authorized):
 Series A; $0.01 par value, 800,000 shares
  authorized, 400,000 shares issued and outstanding
  at December 31, 1999 and 1998 (liquidation
  preference of $400,000)............................        4,000       4,000
 Series B; $0.01 par value, 1,050,000 shares
  authorized, 390,000 shares issued and outstanding
  at December 31, 1999 and 1998 (liquidation
  preference of $390,000)............................        3,900       3,900
 Series C; $0.01 par value, 340,000 shares
  authorized, 70,000 shares issued and outstanding at
  December 31, 1999 and 1998 (liquidation preference
  of $70,000)........................................          700         700
 Series D; $0.01 par value, 1,500,000 authorized,
  issued and outstanding at December 31, 1999 and
  1998 (liquidation preference of $1,500,000)........       15,000      15,000
 Series E; $0.01 par value, 350,000 authorized,
  issued and outstanding at December 31, 1999 and
  1998 (liquidation preference of $350,000)..........        3,500       3,500
 Series F; $0.01 par value, 8,000,000 shares
  authorized, 3,890,373 shares issued and outstanding
  at December 31, 1999 (liquidation preference of
  $38,904)...........................................       38,904         --
 Common stock, $0.01 par value, 20,000,000 shares
  authorized, 9,803,949 shares issued at December 31,
  1999 and 1998, respectively........................       98,040      98,040
 Additional paid-in capital..........................   12,306,163   8,417,991
 Accumulated deficit.................................   (5,161,778) (7,838,842)
 Treasury stock, 1,176,916 and 1,130,250 shares at
  December 31, 1999 and 1998, respectively, at cost..   (1,981,999) (1,866,367)
                                                       -----------  ----------
 Total stockholders' equity (deficit)................    5,326,430  (1,162,078)
                                                       -----------  ----------
 Total liabilities and stockholders' equity
  (deficit)..........................................  $13,961,539  $7,036,614
                                                       ===========  ==========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-2
<PAGE>

                  AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                             Year Ended
                                                            December 31,
                                                       -----------------------
                                                          1999        1998
                                                       ----------  -----------
<S>                                                    <C>         <C>
Total revenues:
  Systems revenues.................................... $1,639,314  $       --
  Service revenues....................................  2,908,389          --
                                                       ----------  -----------
    Total revenues....................................  4,547,703          --
Cost of revenues......................................  1,069,108          --
                                                       ----------  -----------
    Gross profit......................................  3,478,595          --
Operating expenses....................................  3,056,255      804,581
                                                       ----------  -----------
    Operating income (loss)...........................    422,340     (804,581)
Other income (expense):
  Interest expense....................................   (372,625)    (511,741)
  Other, net..........................................      6,349          --
                                                       ----------  -----------
    Total other expense, net..........................   (366,276)    (511,741)
                                                       ----------  -----------
Income (loss) from continuing operations before
 provision for income taxes...........................     56,064   (1,316,322)
Provision for income taxes............................   (137,651)         --
                                                       ----------  -----------
Loss from continuing operations.......................    (81,587)  (1,316,322)
Income (loss) from discontinued operations (including
 applicable income tax benefit of $118,413 for the
 year ended December 31, 1999)........................  2,758,651       (7,156)
                                                       ----------  -----------
    Net income (loss)................................. $2,677,064  $(1,323,478)
                                                       ==========  ===========
Per share data
Basic net income (loss) per share:
Continuing operations................................. $    (0.04) $     (0.19)
Discontinued operations...............................       0.32          --
                                                       ----------  -----------
Net income (loss)..................................... $     0.28  $     (0.19)
                                                       ==========  ===========
Diluted net income (loss) per share:
Continuing operations................................. $    (0.04) $     (0.19)
Discontinued operations...............................       0.32          --
                                                       ----------  -----------
Net income (loss)..................................... $     0.28  $     (0.19)
                                                       ==========  ===========
Weighted average number of common shares:
  Basic common shares.................................  8,643,526    8,541,575
                                                       ==========  ===========
  Diluted common shares...............................  8,643,526    8,541,575
                                                       ==========  ===========
</TABLE>


  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-3
<PAGE>

                  AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                          Preferred Stock      Common Stock    Additional      Treasury Stock
                         ------------------  -----------------   Paid-in    ---------------------  Accumulated
                          Shares    Amount    Shares   Amount    Capital     Shares     Amount       Deficit      Total
                         ---------  -------  --------- ------- -----------  --------- -----------  -----------  ----------
<S>                      <C>        <C>      <C>       <C>     <C>          <C>       <C>          <C>          <C>
Balance at December 31,
 1997..................  4,566,667  $45,667  8,640,893 $86,410 $ 9,882,156    550,000 $  (496,537) $(6,515,364) $3,002,332
Issuance of shares for
 cash in connection
 with exercise of
 warrants..............        --       --     198,705   1,986     224,820        --          --           --      226,806
Issuance of shares in
 connection with
 exercise of cashless
 warrants..............        --       --     196,502   1,965      (1,965)       --          --           --          --
Accounts payable paid
 through issuance of
 common shares.........        --       --      43,184     432      58,946        --          --           --       59,378
Issuance of HBS escrow
 shares--employment
 agreements............        --       --     499,998   5,000      (5,000)       --          --           --          --
Redemption of HBS
 Exchange Series.......   (640,000)  (6,400)       --      --     (633,600)       --          --           --     (640,000)
Partial redemption of
 HBS Series............   (400,000)  (4,000)       --      --     (396,000)       --          --           --     (400,000)
Partial conversion of
 HBS Series............   (200,000)  (2,000)   100,000   1,000       1,000        --          --           --          --
Partial redemption of
 Series A..............   (300,000)  (3,000)       --      --     (297,000)       --          --           --     (300,000)
Partial conversion of
 Series B..............   (110,000)  (1,100)   110,000   1,100         --         --          --           --          --
Partial redemption of
 Series C..............   (200,000)  (2,000)       --      --     (118,000)       --          --           --     (120,000)
Partial conversion of
 Series C..............     (6,667)     (67)     2,667      27          40        --          --           --          --
Issuance of common
 stock in exchange for
 debt..................        --       --      12,000     120      29,880        --          --           --       30,000
Common shares received
 into treasury in
 connection with sale
 of Bordercom and
 related company.......        --       --         --      --          --     419,000    (900,000)         --     (900,000)
Purchase of common
 shares for the
 treasury..............        --       --         --      --          --     161,250    (469,830)         --     (469,830)
Issuance of
 compensatory stock
 warrants..............        --       --         --      --      118,590        --          --           --      118,590
Payment of preferred
 stock dividend........        --       --         --      --     (445,876)       --          --           --     (445,876)
Net loss...............        --       --         --      --          --         --          --    (1,323,478) (1,323,478)
                         ---------  -------  --------- ------- -----------  --------- -----------  -----------  ----------
Balance at December 31,
 1998..................  2,710,000   27,100  9,803,949  98,040   8,417,991  1,130,250  (1,866,367)  (7,838,842) (1,162,078)
Purchase of common
 shares for the
 treasury..............        --       --         --      --          --      46,666    (115,632)         --     (115,632)
Payment of preferred
 stock dividend........        --       --         --      --     (468,300)       --          --           --     (468,300)
Purchase of Primal
 Systems,
 Inc. .................  3,890,373   38,904        --      --    3,365,172        --          --           --    3,404,076
Release of HBS escrow
 shares-employment
 agreements............        --       --         --      --      991,300        --          --           --      991,300
Net income.............        --       --         --      --          --         --          --     2,677,064   2,677,064
                         ---------  -------  --------- ------- -----------  --------- -----------  -----------  ----------
Balance at December 31,
 1999..................  6,600,373  $66,004  9,803,949 $98,040 $12,306,163  1,176,916 $(1,981,999) $(5,161,778) $5,326,430
                         =========  =======  ========= ======= ===========  ========= ===========  ===========  ==========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-4
<PAGE>

                  AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                                     ------------------------
                                                        1999         1998
                                                     -----------  -----------
<S>                                                  <C>          <C>
Cash flows from operating activities:
Net (income) loss................................... $ 2,677,064  $(1,323,478)
Earnings from discontinued operations...............  (2,758,651)       7,156
Adjustments to reconcile net income (loss) to net
 cash provided by (used in) operating activities
 from continuing operations:
  Bad debt expense..................................     102,580          --
  Amortization of loan discounts....................       8,280       30,166
  Write-off unamortized loan discounts..............         --        83,930
  Write-off debt issuance costs.....................         --        90,203
  Depreciation and amortization.....................     192,642       23,532
  Compensation in connection with issuance of
   warrants.........................................         --       118,590
  Common stock issued to settle debt................         --        30,000
Change in assets and liabilities, net of effects of
 assets and liabilities acquired and disposed of:
  Trade accounts receivable.........................     952,010          --
  Deferred revenue..................................  (1,241,004)         --
  Other current assets..............................     190,679         (444)
  Other current liabilities.........................         --      (200,000)
  Trade accounts payable and accrued liabilities....     302,714     (203,900)
  Income tax payable................................     137,651          --
  Other assets......................................     136,107       41,667
                                                     -----------  -----------
    Net cash provided by (used in) continuing
     operations.....................................     700,072   (1,302,578)
    Net cash provided by discontinued operations....   1,117,617    5,389,607
                                                     -----------  -----------
    Net cash provided by operating activities.......   1,817,689    4,087,029
                                                     -----------  -----------
Cash flows from investing activities:
  Purchase of property and equipment................    (316,479)         --
  Capitalized costs in connection with Primal
   acquisition......................................    (356,845)         --
  Cash paid for treasury stock......................    (115,632)    (469,830)
  Cash acquired from Primal acquisition.............     401,081          --
  Issuance of notes receivable......................         --      (100,000)
                                                     -----------  -----------
    Net cash (used in) investing activities.........    (387,875)    (569,830)
                                                     -----------  -----------
Cash flows from financing activities:
  Proceeds from notes payable.......................      37,963          --
  Principal payments on notes payable...............     (89,660)  (1,000,000)
  Payment of preferred stock dividends..............    (468,300)    (445,876)
  Redemption of preferred stock for cash............         --    (1,460,000)
  Issuance of shares of common and preferred stock
   for cash.........................................         --       226,806
                                                     -----------  -----------
    Net cash (used in) financing activities.........    (519,997)  (2,679,070)
                                                     -----------  -----------
Increase in cash....................................     909,817      838,129
Cash at beginning of year...........................     867,198       29,069
                                                     -----------  -----------
Cash at end of year................................. $ 1,777,015  $   867,198
                                                     ===========  ===========
Supplemental disclosures:
  Interest paid..................................... $    98,444  $   127,770
                                                     ===========  ===========
Schedule of non-cash financing and investing
 transactions:
  Preferred stock issued in acquisition of Primal... $ 3,404,076  $       --
                                                     ===========  ===========
  Net liabilities assumed in acquisition of Primal.. $   971,874  $       --
                                                     ===========  ===========
  Release of HBS escrow shares-employment and earn-
   out-agreements................................... $   991,300  $       --
                                                     ===========  ===========
  Financing fees in connection with issuance of
   warrants......................................... $       --   $   118,590
                                                     ===========  ===========
  Payment of accounts payable through issuance of
   common stock..................................... $       --   $    59,378
                                                     ===========  ===========
  Payment of debt through issuance of common stock.. $       --   $    30,000
                                                     ===========  ===========
  Receipt of treasury stock in connection with sale
   of Bordercomm.................................... $       --   $   900,000
                                                     ===========  ===========
  Loss on disposal of discontinued operations....... $       --   $    51,301
                                                     ===========  ===========
</TABLE>
  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-5
<PAGE>

                  AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. General and Summary of Significant Accounting Principles

Business Activity

  Avery Communications, Inc. ("Avery") is the parent company of five wholly-
owned subsidiaries, Avery Communications, Inc. a Texas corporation, Hold
Billing Services, Ltd. ("HBS"), Primal Solutions, Inc. ("PSI") and Wireless
Billing Solutions, doing business as Primal Billing Solutions ("Primal Billing
Solutions") . Avery Communications, Inc. and its subsidiaries are collectively
referred to as the "Company."

  Avery acquired PSI effective October 1, 1999. The consolidated results of
operations of this acquisition (accounted for as a purchase) are included in
these consolidated financial statements from October 1, 1999. Through this
entity and its subsidiary, the Company provides computer software programming,
customization, program maintenance and product marketing for a variety of
software languages and platforms. PSI also designs, develops and supports an
integrated suit of client/server and browser-based software solutions focusing
on customer acquisition and retention in the telecommunications industry
primarily utilizing decision support software and internet technologies.

  Effective February 29, 2000, the board of directors approved the spin-off of
HBS. The operations of this entity have been reflected as discontinued
operations for all periods presented in these consolidated financial
statements (See Note 3). This entity provides billing and collection services
to local exchange carriers ("LEC's") pursuant to long-term contracts. The
Company presently operates under billing contracts with all seven of the
regional Bell operating companies and GTE. The contracts give the Company the
capability of providing billing services in 49 states and the District of
Columbia.

  Effective January 1, 1998, Avery disposed of two of its previously owned
subsidiaries, Alternate Telephone and Communications, Inc. ("ATC") and
BorderComm, Inc. ("Bordercomm").

Consolidation

  The accompanying consolidated financial statements include the accounts of
Avery and all of its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.

Statement of Cash Flows

  For purposes of the statement of cash flows, cash equivalents include time
deposits, certificates of deposits, and all highly liquid debt instruments
with original maturities of 3 months or less when purchased.

Property and Equipment

  Property and equipment are stated at cost. Depreciation and amortization are
provided on the straight-line method over the following estimated useful
lives:

<TABLE>
   <S>                       <C>
   Computer and office
    equipment..............  5 years
   Furniture and fixtures..  7 years
   Leasehold improvements..  Shorter of the estimated useful life or life of the lease
</TABLE>

  Depreciation from continuing operations for the year ended December 31, 1999
was $23,431. Maintenance and repairs are charged to operations when incurred.
Betterments and renewals are capitalized.


                                      F-6
<PAGE>

                  AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Long-Lived Assets

  The Company accounts for the impairment and disposition of long-lived assets
in accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of. In accordance with SFAS No. 121, long-lived assets are reviewed
for events or changes in circumstances which indicate that their carrying
value may not be recoverable. There was no impairment of the value of such
assets for the years ended December 31, 1999.

Software Development Costs

  Costs incurred in the research and development of new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility has been established. After technological
feasibility is established, any additional costs are capitalized in accordance
with SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold,
Leased or Otherwise Marketed. Because the Company believes that its current
process for developing software is essentially completed concurrently with the
establishment of technological feasibility, no software development costs have
been capitalized as of December 31, 1999. Total research and development costs
expensed during the year ended December 31, 1999 totaled $543,525.

Goodwill

  Goodwill is the difference between the purchase price paid and liabilities
assumed over the estimated fair market value of assets acquired from PSI.
Goodwill recorded in connection with the acquisition of PSI amounted to
$4,732,795 and is being amortized using the straight-line method over 7 years.

  Amortization expense for the year ended December 31, 1999 was $169,211. On a
periodic basis, management reviews intangible assets for possible impairment
based on several criteria, including but not limited to, sales trends,
undiscounted operating cash flows and other operating factors.

Revenue Recognition

  Continuing Operations:

  Software Licenses, Services and Post-Contract Customer Support

  Revenues from sales of software licenses, which generally do not contain
  multiple elements, are recognized upon shipment of the related product if
  the requirements of AICPA Statement of Position 97-2, as amended, are met.
  If the requirements of AICPA Statement of Position 97-2, including evidence
  of an arrangement, client acceptance, a fixed or determinable fee,
  collectibility or vendor-specific objective evidence about the value of an
  element are not met at the date of shipment, revenue recognition is
  deferred until such items are known or resolved. Revenues from service and
  post-contract customer support is deferred and recognized ratably over the
  term of the contract.

  Software Programming and Customization Services

  Revenues are recognized as services are performed under the agreements.

  Discontinued Operations:

  Revenue and Cost Recognition on Contracts, Billing Services, and Advance
Funding Programs

  Billing Services--The Company recognizes billing services revenues when its
  customers' records are accepted by HBS for billing and collections. Bills
  are generated by LEC's and the collected funds are remitted to the Company,
  which in turn remits these funds, net of fees and reserves, to its billing
  customers.

                                      F-7
<PAGE>

                  AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  The obligations consist of local exchange carrier billing fee, bad debts
  and sales and excise taxes. The Company records trade accounts receivable
  and service revenue for fees charged for its billing services. When the
  customers receivables are collected by the Company from the LEC's, the
  Company's trade receivables are reduced by the amount corresponding to the
  Company's processing fees and the remaining funds are recorded as amounts
  due to customers, included in deposits and other payables in the
  accompanying balance sheets. The Company also retains a reserve from its
  customers' settlement proceeds, calculated to cover accounts that the LEC's
  are unable to collect, LEC billing fees and sales taxes.

Stock Based Compensation

  The Company measures compensation cost for its stock based compensation
plans under the provisions of Accounting Principles Board Opinion No. 25 ("APB
25"), Accounting for Stock Issued to Employees. The difference, if any,
between the fair value of the stock on the date of grant over the amount
received for the stock is expensed over the related vesting period. Statement
of Financial Accounting Standard No. 123, Accounting for Stock-Based
Compensation, ("SFAS 123") requires companies electing to continue to use APB
25 to account for its stock-based compensation plan to make pro forma
disclosures of net income (loss) and earnings (loss) per share as if SFAS 123
had been applied (See Note 10).

Net Income (Loss) Per Common Share

  Net income (loss) per common share is computed by dividing the net income
(loss), (decreased) increased by preferred stock dividends of $287,200 and
$338,582 for the years ended December 31, 1999 and 1998, respectively, by the
weighted average number of shares of common stock outstanding during the
respective periods. The effect of the preferred stock dividend on the net
income (loss) per common share was $0.03 and $0.04 per weighted average common
share outstanding for the years ended December 31, 1999 and 1998,
respectively. Diluted earnings per share includes the effect of all dilutive
options and warrants and instruments convertible into common stock. During the
years ended December 31, 1999 and 1998, the effect of outstanding warrants and
options on the computation of net income (loss) per share would be anti-
dilutive and, therefore, is not included in the computation of weighted
average shares.

Use of Estimates and Assumptions

  Management uses estimates and assumptions in preparing financial statements
in accordance with generally accepted accounting principles. Those estimates
and assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could vary from the estimates that were
used.

Concentration of Credit Risk

  The Company sells its products primarily to large commercial companies.
Credit is extended based on an evaluation of the Customer's financial
condition, and collateral is generally not required. The Company also
evaluates its credit customers for potential credit losses. From time to time,
the Company may hold cash with financial institutions in excess of FDIC
insurance limits. The Company deposits its cash with high credit quality
financial institutions.

Reclassifications

  Certain prior year amounts have been reclassified to conform with the 1999
presentation.

Fair Value of Financial Instruments

  The recorded amounts of financial assets and liabilities at December 31,
1999 and 1998, approximate fair value, based on the Company's incremental
borrowing rate or due to the relatively short period of time between
origination of the instruments and their expected realization.

                                      F-8
<PAGE>

                  AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Adoption of New Accounting Standards

  Effective January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. This standard requires the presentation of comprehensive
income and its components for each year in which a statement of operations is
presented. The Company had no transactions during the years ended December 31,
1999 and 1998 that would be included as comprehensive income.

  Effective January 1, 1998, the Company adopted SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. This statement
establishes the standard for the way business enterprises report information
about operating segments in annual and interim financial statements. The
statement also establishes standards for related disclosures about products
and services, geographic areas, and major customers. After excluding the
discontinued operations segment, the Company currently has only one operating
segment.

  The FASB has issued SFAS No. 132, Employers' Disclosures about Pensions and
Other Post-retirement Benefits, an amendment of FASB Statements No. 87, 88,
and 106. This Statement revises employers' disclosures about pension and other
post-retirement benefit plans and standardizes the disclosure requirements for
pensions and other postretirement benefits. The Company adopted the statement
effective January 1, 1998. The Company typically does not offer the types of
benefit programs that fall under the guidelines of SFAS No. 132.

  The FASB issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, during the second quarter of 1998. SFAS No. 133 becomes
effective for the Company's fiscal year 2000. The statement establishes
accounting and reporting standards requiring that every derivative instrument,
including certain derivative instruments imbedded in other contracts, be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement also requires that changes in the derivative's fair
value be recognized in earnings unless specific hedge accounting criteria are
met. The Company does not currently engage in hedging activities, but will
continue to evaluate the effects of adopting the statement.

                                      F-9
<PAGE>

                  AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


2. Acquisitions and Dispositions

The Alternate Telephone and BorderComm Disposition

  Effective January 1, 1998, the Company disposed of ATC and Bordercomm and
its subsidiaries in exchange for 419,000 shares of the Company's common stock,
valued at $900,000, cash of $1,600,000 and a receivable for $185,000 from a
third party. Assets and liabilities disposed of are as follows:

<TABLE>
   <S>                                                              <C>
   Current assets.................................................. $ 2,302,665
   Equipment in service and furniture and equipment................     226,363
   Microwave concessions and other assets..........................   1,819,394
   Inter-company receivable........................................   1,321,627
   Current liabilities.............................................  (2,955,895)
   Long-term liabilities...........................................    (162,853)
                                                                    -----------
                                                                    $ 2,551,301
                                                                    ===========
</TABLE>

The Corsair Transaction

  In February 1999, Corsair Communications, Inc. ("Corsair") and its wholly
owned subsidiary, Subscriber Computing, Inc., sold substantially all of the
assets relating to Subscriber's Communication Resource Manager billing system
and Intelligent Message Router to Primal Billing Solutions, a wholly owned
subsidiary of Primal Systems, Inc. Primal Systems, Inc. changed its name to
Primal Solutions, Inc. concurrent with its acquisition by Avery on October 1,
1999. As consideration for Primal Billing Solutions entering into the Corsair
transaction, Corsair paid $1,000,000 cash to Primal Billing Solutions. Corsair
also agreed to loan Primal Billing Solutions the difference between the assets
and liabilities acquired by Primal Billing Solutions, plus $200,000 cash. The
terms of the Note are 10% annual interest, five year amortization, and payment
in full required in May 2001. Avery guaranteed the obligations of Primal
Billing Solutions. The Corsair transaction was entered into in contemplation
of Avery's acquisition of Primal Systems, Inc. discussed below. Primal Billing
Solutions recorded the acquisition under the purchase method of accounting,
acquiring assets at fair value of $4,581,889 and assuming liabilities of
$2,343,647 in addition to the note payable to Corsair. There was no goodwill
recorded in connection with this transaction.

The Primal Acquisition

  In March 1999, Avery entered into a merger agreement with Primal Systems,
Inc. and certain shareholders of Primal Systems, Inc. Pursuant to this
agreement, Primal Systems, Inc. was purchased effective after the close of
business on September 30, 1999. At the time of the merger, Avery issued
3,890,373 shares of Avery's convertible preferred stock in exchange for all of
the issued and outstanding shares of Primal Systems, Inc. Of this amount,
1,945,188 shares will be held in escrow, to be issued to Primal Systems,
Inc.'s shareholders based upon the operating performance of Primal Systems,
Inc. from August 1, 1999 through July 31, 2000. Upon the meeting of certain
operating performance thresholds by Primal Systems, Inc. during this period,
the Primal Systems, Inc. shareholders may receive up to a maximum of 4,000,000
additional shares of Avery convertible preferred stock as additional
consideration for the merger. In addition, upon Primal Systems, Inc.'s
satisfaction of certain operating performance levels during this period,
certain shareholders of Primal Systems, Inc. will have the right in September
through October, 2000 to require Avery to repurchase up to 1,550,000 shares of
Avery common stock issued upon the conversion of Avery preferred stock
received in the merger for the purchase price of $2.50 per share.

  The transaction was accounted for using the purchase method of accounting
with revenues and expenses of Primal Systems, Inc. being included in the
Company's operations from the acquisition date. The stock issued in the merger
was valued at $3,404,076 using the closing price of Avery's common stock on
the acquisition date plus other acquisition costs of $356,845. The Company
acquired assets at fair value of $4,421,356 and assumed liabilities of
$5,393,230. The Company recorded goodwill of $4,732,795 in connection with
this transaction which includes the expenses incurred to consummate the
transaction.

                                     F-10
<PAGE>

                  AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Mark J. Nielsen, the Company's President and Chief Executive Officer, was
the Chairman of the Board and a significant shareholder of Primal Systems,
Inc. at the time of its acquisition by the Company.

  Unaudited pro forma financial information for the years ended December 31,
1999 and 1998 as though the Primal acquisition had occurred on January 1, 1998
is as follows:

<TABLE>
<CAPTION>
                                                         1999         1998
                                                      -----------  -----------
     <S>                                              <C>          <C>
     Revenues........................................ $11,139,101  $ 1,458,924
                                                      ===========  ===========
     Net loss........................................ $  (759,426) $(1,582,801)
                                                      ===========  ===========
     Net loss per share-continuing operations:
       Basic......................................... $     (0.12) $     (0.22)
                                                      ===========  ===========
       Diluted....................................... $     (0.12) $     (0.22)
                                                      ===========  ===========
</TABLE>

3. Discontinued Operations

  On February 29, 2000, the board of directors of the Company approved the
spin-off of Thurston Communications Corporation ("TCC") (See Note 12). TCC is
a holding company and its wholly owned operating subsidiary is HBS. In essence
the spin-off of TCC, is a spin-off of HBS. Each shareholder of the Company on
the record date for the spin-off will receive one share of TCC for each share
of the Company owned on that date. The spin-off will be recorded at book value
for accounting purposes since HBS is an ongoing business. HBS was originally
acquired during 1996. Pursuant to certain contingent incremental issuances of
the Company's common stock in connection with HBS achieving required earnings
projections, the Company released 185,000 of its common stock in 1999 as
additional consideration for the HBS purchase. The shares were recorded at
fair value of $297,900. This amount is included within the total $991,300
addition to paid-in capital in the statement of stockholders equity for the
year ended December 31, 1999.

  At December 31, 1999 and 1998, the net current liabilities and net long-term
assets of HBS were as follows:

<TABLE>
<CAPTION>
                                                           1999        1998
                                                        ----------- -----------
<S>                                                     <C>         <C>
Current assets
  Cash................................................. $ 5,678,050 $   219,275
  Advance payment receivables..........................   6,621,348  11,893,146
  Trade accounts receivable............................   1,002,490   1,090,672
  Other receivables....................................     681,526     486,152
  Deferred tax assets..................................     374,086         --
  Other current assets.................................      25,027      11,981
                                                        ----------- -----------
    Total current assets...............................  14,382,527  13,701,226
                                                        ----------- -----------
Current liabilities
  Line of credit.......................................         --    5,766,832
  Current portion of notes payable.....................       6,667       6,667
  Trade accounts payable...............................   4,345,373   3,765,762
  Current tax payable..................................     255,673         --
  Accrued liabilities..................................   2,347,676   1,984,397
  Accrued interest.....................................       5,227       2,007
  Deposits and other payables..........................  10,985,989   9,852,398
                                                        ----------- -----------
    Total current liabilities..........................  17,946,605  21,378,063
                                                        ----------- -----------
Net current liabilities of discontinued operations..... $ 3,564,078 $ 7,676,837
                                                        =========== ===========
</TABLE>

                                     F-11
<PAGE>

                  AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

<TABLE>
<CAPTION>
                                                            1999        1998
                                                         ----------  ----------
<S>                                                      <C>         <C>
Property and equipment
  Computer equipment and software.......................  1,063,674     902,841
  Furniture and fixtures................................    334,944     321,589
  Accumulated depreciation and amortization.............   (506,535)   (249,217)
                                                         ----------  ----------
                                                            892,083     975,213
                                                         ----------  ----------
Other assets
  Goodwill, net.........................................  3,022,748   2,993,539
  Purchased contracts, net..............................     70,555      35,092
  Deposits..............................................    185,514   1,570,278
  Other.................................................    417,649     494,850
                                                         ----------  ----------
    Total other assets..................................  3,696,466   5,093,759
                                                         ----------  ----------
Net long-term assets of discontinued operations......... $4,588,549  $6,068,972
                                                         ==========  ==========
</TABLE>

  The operating results of HBS for the years ended December 31, 1999 and 1998
are as follows:

<TABLE>
<CAPTION>
                                                        1999          1998
                                                    ------------  ------------
<S>                                                 <C>           <C>
Operating revenues................................. $ 23,702,748  $ 19,633,576
Cost of revenues...................................  (17,385,337)  (13,043,784)
                                                    ------------  ------------
    Gross profit...................................    6,317,411     6,589,792
Selling, general and administrative expenses.......   (4,061,227)   (2,932,615)
Charge in connection with terminated customers.....      226,219    (4,271,394)
Advance funding program income, net................      341,294       691,174
                                                    ------------  ------------
  Income from operations...........................    2,823,697        76,957
Other income (expense).............................     (183,459)      (84,113)
                                                    ------------  ------------
  Income (loss) before income tax provision........    2,640,238        (7,156)
  Income tax provision.............................      118,413           --
                                                    ------------  ------------
  Net income (loss)................................ $  2,758,651  $     (7,156)
                                                    ============  ============
</TABLE>

                                      F-12
<PAGE>

                  AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  During the year ended December 31, 1998, HBS recorded a charge of
$4,271,394. The charge relates primarily to cash received from LECs that has
been paid by HBS to terminated customers and must be refunded to the LECs.
Under its billing contracts with the LECs, HBS is obligated to pay these
refunds if it is unable to collect them from its customers. During the later
half of 1998, HBS paid an estimated $3,800,000 to terminated customers that
will have to be refunded to the LECs. Of this amount, $1,471,742 were actually
refunded to local exchange carriers in calendar 1998. Management does not
believe that these amounts can be collected from the four customers that
generated most of the charge since they are out of business with no material
surviving assets. The refunds resulted from customers placing inappropriate
charges on consumer's local telephone bills. The inappropriate charges stem
from unauthorized switching of long distance service from a consumer's
incumbent provider to our customer and placing unauthorized charges for
services such as voice mail, internet access and paging on consumer's local
telephone bills. Prior to incurring these refunds, HBS had processed billing
records for these customers for periods ranging from approximately 10 months
to two years. During these periods LEC refunds were within acceptable levels.

  The $4,271,394 consists of cash refunds made in calendar 1998 of $1,471,742
and estimated future refunds as of December 31, 1998 of $2,799,652 which is
included in deposits and other payables in the balance sheet presented above.
HBS estimated the $2,799,652 by reviewing actual refunds for the terminated
customers in 1998 and 1999 and projecting future refunds based on each
customer's actual refund pattern. In addition to the $3,800,000 discussed
above, included in the $4,271,394 charge is a $250,000 payment made to the FTC
as further described in Note 5, legal fees and other charges. HBS has
instituted a series of controls to limit its exposure to this type of refund
in the future.

  In 1999, HBS expended $1,663,221 in cash relating to the $4,271,394 dollar
loss. Management determined that the loss was overestimated by $226,219, and
accordingly, adjusted the reserve. At December 31, 1999, $910,212 of the
original $4,271,394 estimated loss remained in the deposits and other payables
section of the balance sheet presented above. This is the remaining amount
estimated for future cash expenditures expected to be charged by the LECs in
connection with the terminated customers.

                                     F-13
<PAGE>

                  AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


4. Property and Equipment

  At December 31, 1999, property and equipment consists of the following:

<TABLE>
   <S>                                                               <C>
   Computers and office equipment................................... $1,524,626
   Furniture and fixtures...........................................     87,802
   Leasehold improvements...........................................     19,848
                                                                     ----------
                                                                      1,632,276
   Less accumulated depreciation and amortization...................    (23,431)
                                                                     ----------
   Property and equipment, net...................................... $1,608,845
                                                                     ==========
</TABLE>

  Amortization of equipment purchased under capitalized lease obligations is
included in depreciation expense. Included in property and equipment is
$209,782 of equipment under capital leases at December 31, 1999. Accumulated
amortization related to equipment under capital leases amounted to $13,111 at
December 31, 1999.

5. Commitments and Contingencies

Continuing Operations:

  PSI leases office space and certain equipment under various noncancelable
operating and capital leases. Future minimum lease payments required under the
operating and capital leases are as follows:

<TABLE>
<CAPTION>
                                                             Operating Capital
   Year ended December 31,                                    leases    leases
   -----------------------                                   --------- --------
   <S>                                                       <C>       <C>
   2000..................................................... $466,419  $107,010
   2001.....................................................  155,473    42,910
   2002.....................................................      --     28,261
   2003.....................................................      --        --
   2004.....................................................      --        --
                                                             --------  --------
   Total minimum lease payments............................. $621,892   178,181
                                                             ========
   Less amount representing interest........................             26,555
                                                                       --------
   Present value of minimum lease payments..................            151,626
   Less current portion at December 31, 1999................             89,577
                                                                       --------
   Long-term obligation at December 31, 1999................           $ 62,049
                                                                       ========
</TABLE>

  Rent expense under such leases was $23,664 for the year ended December 31,
1999.

Discontinued operations:

  HBS has entered into various non-cancelable operating leases relating to
equipment and office space. Future minimum payments on leases having remaining
terms in excess of one year as of December 31, 1999 are as follows:

<TABLE>
<CAPTION>
   Year ended December 31,
   -----------------------
   <S>                                                                 <C>
   2000............................................................... $108,462
   2001...............................................................  108,462
   2002...............................................................  108,462
   2003...............................................................      --
   2004...............................................................      --
                                                                       --------
   Total minimum lease payments....................................... $325,386
                                                                       ========
</TABLE>

                                     F-14
<PAGE>

                  AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Rent expense for the years ended December 31, 1999 and 1998 amounted to
$108,462 and $109,026, respectively.

  HBS is obligated to pay minimum usage charges over the lifetime of most LEC
billing contracts. Each contract has a minimum usage amount which relates to
HBS' customers' sales volume to be processed through the LEC. HBS does not
expect to incur any losses with respect to these minimum usage requirements.
The remaining minimum usage for significant contracts at December 31, 1999 is
as follows:

<TABLE>
<CAPTION>
                                                        Amount       Expires
                                                      ---------- ---------------
   <S>                                                <C>        <C>
   Contract 1........................................ $4,850,000   March 1, 2001
   Contract 2........................................    450,000 January 1, 2003
   Others............................................    757,000 Throughout 2003
                                                      ----------
                                                      $6,057,000
                                                      ==========
</TABLE>

  HBS files consolidated sales and excise tax returns on behalf of its
customers for the various municipal, state and Federal jurisdictions in which
its customers do business. HBS relies on monthly tax reports it receives from
the LEC's in reporting and remitting such taxes. HBS' customers are
contractually obligated to reimburse HBS for any disputes with taxing
authorities that may arise from filing the sales and excise tax returns on
behalf of their customers. HBS is contingently liable for any such disputes or
assessments if its customers are unable or unwilling to honor the contract
provisions. There were no such disputes at December 31, 1999. HBS is also
contingently liable for chargebacks from the LEC's, to the extent such charge
backs exceed HBS' reserves for such charge backs. This contingent liability is
increased when HBS discontinues business with a particular customer.

  In connection with the acquisition of HBS, two of the previous partners of
HBS entered into contingent incentive compensation agreements with HBS under
which 666,664 shares are issuable based on HBS achieving certain pre-tax
income levels (as defined). During 1998 and 1999, 0 and 416,665 shares,
respectively, were released pursuant to these contingent incentive
compensation agreements. These shares are reflected as compensation and an
increase in stockholders equity in the accompanying financial statements.
Furthermore, they are included in the $991,300 addition to paid-in capital in
the statement of stockholders equity for the year ended December 31, 1999.

  HBS was party to a legal proceeding filed in July 1998. HBS was named in a
complaint for injunctive relief filed by the Federal Trade Commission ("FTC")
against Veterans of America Association ("VOAA"). The suit alleged that VOAA
caused unauthorized charges to appear on end users' bills based on deceptive
marketing programs and sought relief against HBS and others. Several months
prior to the filing of the suit, HBS terminated its contract with VOAA based
on suspicion of the same activities alleged by the FTC in its suit. Since
termination, HBS has voluntarily paid out approximately twice the revenue it
took in from this account in order to reimburse end-users for credits due and
owing. Attorneys for HBS and Avery met with the FTC immediately after suit was
filed and offered full cooperation in its investigation. Without admitting any
liability or complicity in the alleged activities of its former customer, HBS
and Avery agreed to a stipulated preliminary injunction with terms consistent
with existing HBS guidelines as revised before suit was filed. The suit also
sought monetary fines and/or reimbursement to end-users from all parties
jointly and severally. No trial date has been set by the Court, and while
denying liability, HBS has offered to cooperate with the FTC in developing new
standards for the industry designed to better protect end-users. In 1999, HBS
settled with the FTC in the amount of $250,000 and agreed to abide by the
standards set by the FTC.

  From time to time, HBS is party to what it believes is routine litigation
and proceedings that may be considered as part of the ordinary course of its
business. Currently, HBS is not aware of any current or pending litigation or
proceedings that would have a material adverse effect on HBS' business,
results of operations or financial condition.

                                     F-15
<PAGE>

                  AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


6. Notes Payable

  Notes payable at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
                                                              December 31,
                                                           -------------------
                                                              1999      1998
                                                           ---------- --------
   <S>                                                     <C>        <C>
   Note payable to related party bearing interest at 12%
    per annum, principal due December 10, 2002,
    convertible to common stock at a price of $1.25 per
    share at any time, unsecured. Principal at December
    31, 1999 and 1998 is $350,000 adjusted for a discount
    for warrants issued in connection with the note based
    on imputed interest rate of 20%....................... $  325,195 $316,916
   Note payable to officers bearing interest at 10% per
    annum effective rate, principal due September 30,
    2001, net of discount.................................    170,575      --
   Note payable to seller of Primal Billing Solutions
    bearing interest at 10%, principal maturing
    May, 2001.............................................  2,030,785      --
                                                           ---------- --------
   Sub total..............................................  2,526,555  316,916
   Less current maturities................................    473,252      --
                                                           ---------- --------
   Long term portion...................................... $2,053,303 $316,916
                                                           ========== ========
</TABLE>

  Principal amounts due on long-term debt at December 31, 1999 are as follows:

<TABLE>
   <S>                                                               <C>
   2000............................................................. $  473,252
   2001.............................................................  1,728,108
   2002.............................................................    350,000
   2003.............................................................        --
   2004.............................................................        --
                                                                     ----------
     Total..........................................................  2,551,360
   Loan discounts...................................................    (24,805)
                                                                     ----------
     Total.......................................................... $2,526,555
                                                                     ==========
</TABLE>

7. Stockholders' Equity (Deficit)

  The Company had six and five series of preferred stock outstanding as of
December 31, 1999 and 1998, respectively.

  The preferred stock Series' A, B, C, D and E contain a conditional mandatory
redemption feature. Beginning in 1998 and continuing from year to year
thereafter, once audited stockholders' equity increased to $7,000,000, as
compared to the December 31, 1996 stockholders' equity balance of $1,295,437,
the Company would redeem the outstanding shares in each series on or before
the first September 30 following that audited balance sheet date. Each series
has a liquidation preference of $1.00 per share together with all unpaid
dividends. Each series also includes a conversion feature. This feature
provides for the preferred stockholder to convert their shares into common
stock at a stated conversion price as follows: Series A and C--$2.50 per
share, Series B and E--$1.00 per share, and Series D--$2.00 per share. The
preferred stock Series D contains additional mandatory redemption provisions
which are enacted based upon the sale of HBS. Series A, B, C, D and E
preferred stock are automatically convertible at the earlier of 1) a vote of
2/3 of the shares of the respective series outstanding, or 2) the closing of
an initial public offering of at least $5 per share and at least $7,000,000 in
aggregate proceeds.

  The preferred stock Series F is participating and convertible. The
participating feature entitles the holders to participate, on a "if converted"
basis, in any and all dividends paid with respect to the common stock. The
conversion feature associated with the Series F provides for the issuance of
one share of common stock for every share of preferred Series F issued.

  Dividends are payable, as and if declared by the Board of Directors at an
annual rate of $0.10 per share (Series A and D) and $0.12 per share (Series B,
C and E), all payable quarterly.

                                     F-16
<PAGE>

                  AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


8. Income Taxes

  The provision for income taxes consisted of the following:

<TABLE>
<CAPTION>
                                                                  Years Ended
                                                                  December 31,
                                                                ----------------
                                                                  1999    1998
                                                                -------- -------
   <S>                                                          <C>      <C>
   Federal
    Current.................................................... $ 82,651 $   --
    Deferred...................................................      --      --
   State.......................................................   55,000     --
                                                                -------- -------
                                                                $137,651 $   --
                                                                ======== =======
</TABLE>

  A reconciliation of the federal income tax provision (benefit) based on the
U.S. Corporate income tax rate of 34% for 1999 and 1998 is as follows:

<TABLE>
<CAPTION>
                                                            1999      1998
                                                          --------  ---------
   <S>                                                    <C>       <C>
   Income tax provision (benefit) at statutory rate...... $ 19,062  $(447,550)
   Meals and entertainment...............................   11,454      8,500
   Effect of sale of subsidiaries........................      --     144,365
   Stock option deduction for Federal tax purposes not
    deductible for financial reporting purposes..........      --    (269,373)
   State tax net of federal benefit......................   36,300        --
   Change in net operating loss - no benefit received.... (322,438)       --
   Net operating loss utilized...........................  (67,097)       --
   Non-deductible amortization...........................   56,223        --
   Other.................................................    8,647    (68,571)
   Valuation allowance...................................  395,500    632,629
                                                          --------  ---------
     Income tax expense.................................. $137,651  $     --
                                                          ========  =========
</TABLE>

  Deferred taxes are provided for the temporary differences between the
financial reporting bases and the tax bases of the Company's assets and
liabilities. The temporary differences that give rise to the deferred tax
assets or liabilities are as follows:
<TABLE>
<CAPTION>
                                                          December 31,
                                                     ------------------------
                                                        1999         1998
   Deferred tax assets                               -----------  -----------
   <S>                                               <C>          <C>
   Accounts receivable.............................. $   126,682  $    86,880
   Accrued expenses.................................      60,264       15,370
   Capital losses in excess of capital gains........      52,564          --
   Compensatory stock options.......................      43,716       43,716
   Net operating loss...............................   1,755,240    1,497,000
   Other............................................         664          664
   Less: Valuation allowance........................  (2,039,130)  (1,643,630)
                                                     -----------  -----------
     Net deferred tax asset......................... $       --   $       --
                                                     ===========  ===========

  Deferred tax assets and liabilities as of December 31, 1999 and 1998 are as
follows:

<CAPTION>
                                                        1999         1998
                                                     -----------  -----------
   <S>                                               <C>          <C>
   Current deferred tax asset....................... $   186,946  $   102,250
   Valuation allowance for current deferred tax
    asset...........................................    (186,946)    (102,250)
                                                     -----------  -----------
     Net current deferred tax asset................. $       --   $       --
                                                     ===========  ===========
   Non-current deferred tax asset................... $ 1,852,184  $ 1,541,380
   Valuation allowance for non-current deferred tax
    asset...........................................  (1,852,184)  (1,541,380)
                                                     -----------  -----------
     Net non-current deferred tax asset............. $       --   $       --
                                                     ===========  ===========
</TABLE>

                                     F-17
<PAGE>

                  AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)



  The current and non-current deferred tax assets have a 100% valuation
allowance due to the uncertainty of generating future taxable income.

  As of December 31, 1999, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $4,700,000, that begin
expiring in the year 2008. The utilization of the net operating loss is
subject to limitations in accordance with (S)382 of the Internal Revenue Code.

9. Related Party Transactions and Other Events

  In December 1997, the Company entered into a five-year $350,000 note payable
with a company for which its president is also a member of the board. The note
bears interest at 12%, is convertible to common stock and contains warrants
for 175,000 shares of common stock at $1.50 exercise price. The note is
outstanding as of December 31, 1999, and is included with net current
liabilities of discontinued operations.

  In May 1998, the Company granted an option to purchase 100,000 shares of its
common stock at $2.69 per share (fair value at the date of grant) to the
directors of the Company.

  During July 1998, the Company repaid a $1,000,000 loan to an entity of which
its chairperson is a partner.

  Also during July 1998, the Company entered into an employment agreement with
its chairperson and issued an option to purchase 420,000 shares of common
stock at a price of $3.00 per share (fair value at the date of grant). The
terms of the employment agreement require the Company to pay an annual salary
of $200,000 for five years.

  The Company granted another warrant to a director during July 1998 for
25,000 shares at $3.00 per share.

  During December 1998, the Company entered into an employment agreement with
its new president and issued an option to purchase 925,000 shares of common
stock at a price of $2.00 per share (which was more than fair value at the
date of grant). One-half of the option vested at the date of the grant, with
the balance vesting during the first six months of 1999. The terms of the
employment agreement require the Company to pay an annual salary of $200,000.

  During December 1998, the Company advanced $400,000 to an HBS employee at 9%
interest. This amount is included in net current liabilities of discontinued
operations. The Company advanced $100,000 to a company at 10% for which its
president is a major stockholder. The advance of $100,000 was repaid in 1999.

  In December 1998, Avery's Board of Directors authorized Avery to repurchase
any or all of its outstanding warrants for a price of $1.00 per underlying
share. In December 1998, Avery repurchased warrants held by an entity
controlled by its chairperson to purchase 100,000 shares of common stock at an
exercise price of $1.50 per share. The $100,000 amount was recorded as
compensation in 1998. During 1999, an additional 621,736 warrants and options
with $1.50 exercise prices were repurchased from entities controlled by the
Company's chairperson for a price of $1.00 per underlying share. The entire
amount of $621,736 has been included as an expense in income from discontinued
operations.

  At the close of business on September 30, 1999, the Company purchased Primal
Systems, Inc. Mark Nielsen, President and Chief Executive Officer of the
Company, was Chairman of the Board and a significant shareholder of Primal
Systems at the time of the purchase.

  In conjunction with the acquisition of PSI, Avery acquired certain notes
payable to the officers of PSI. At December 31, 1999, the total amount due on
these notes was $170,575, net of discount of $6,091. These notes bear interest
at 6%. The current portion of these notes at December 31, 1999 was $88,333 and
the long-term portion of these notes was $82,242.

                                     F-18
<PAGE>

                  AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


10. Stock Options and Warrants

  Pursuant to various note agreements and in accordance with agreements for
key employees, the Company has issued certain stock options and warrants. The
options are considered compensatory.

  Following is a summary of warrant and option activity:

<TABLE>
<CAPTION>
                                                            Weighted
                                                            Average
                         Compensatory                       Exercise
                           Options    Warrants     Total     Price     Total
                         ------------ ---------  ---------  -------- ----------
<S>                      <C>          <C>        <C>        <C>      <C>
Outstanding at December
 31, 1997...............    592,500   2,283,923  2,876,423   $1.37   $3,946,946
  Purchase of option....   (100,000)        --    (100,000)  $1.50     (150,000)
  Granted...............  1,510,000      12,500  1,522,500   $2.32    3,532,502
  Exercised.............    (17,500)   (567,871)  (585,371)  $1.38     (806,808)
                          ---------   ---------  ---------           ----------
Outstanding at December
 31, 1998...............  1,985,000   1,728,552  3,713,552            6,522,640
  Purchase of option....        --     (621,736)  (621,736)  $1.26     (783,387)
  Granted...............  1,257,777      70,000  1,327,777   $1.56    2,066,667
  Expired...............        --     (121,666)  (121,666)  $1.50     (182,499)
                          ---------   ---------  ---------           ----------
Outstanding at December
 31, 1999...............  3,242,777   1,055,150  4,297,927           $7,623,421
                          =========   =========  =========           ==========
</TABLE>

  The outstanding stock options and warrants expire from August 1998 through
2008.

  The following summarizes information about compensatory options outstanding
at December 31, 1999:

<TABLE>
<CAPTION>
                    Options Outstanding                          Options Exercisable
------------------------------------------------------------- -------------------------
                                Weighted Avg.   Weighted Avg.             Weighted Avg.
Range of Exercise    Number       Remaining       Exercise      Number      Exercise
     Prices        Outstanding Contractual Life     Price     Exercisable     Price
-----------------  ----------- ---------------- ------------- ----------- -------------
<S>                <C>         <C>              <C>           <C>         <C>
      $.50-
      $3.00         3,242,777     6.1 years         $1.85      2,281,268      $1.90
</TABLE>

  The weighted average fair values of compensatory option exercise prices
equal to and below market price at the date of grant are as follows:

<TABLE>
<CAPTION>
                                                                  Equal to Below
                                                                  -------- -----
   <S>                                                            <C>      <C>
   1999..........................................................  $ 1.17  $ --
   1998..........................................................  $ 1.52  $1.37
</TABLE>

  Compensation cost totaling $118,590 was recognized for several options
granted in 1998 as the exercise price was below the fair value at the grant
date. The considered fair value of the Company's common stock on the date of
each respective grant was based upon the quoted NASD closing share price. The
remaining options granted in 1998 and 1999 have exercise prices which
approximate fair value (which was the quoted trading price at the date of
grant) and accordingly, no compensation cost has been recognized for those
compensatory stock options in the consolidated financial statements. Had
compensation cost for the Company's stock options been determined consistent
with FASB Statement No. 123, the Company's net income (loss) and net income
(loss) per share would have been (decreased) increased to the pro forma
amounts indicated below.

<TABLE>
<CAPTION>
                                                      Years ended December 31,
                                                      ------------------------
                                                         1999         1998
                                                      ------------------------
   <S>                                    <C>         <C>         <C>
   Net income (loss)....................  As reported $ 2,677,064 $ (1,323,478)
                                          Pro forma   $ 2,126,579 $ (2,880,877)
   Income (loss) per common share (Basic
    and Diluted)........................  As reported $       .28 $       (.19)
                                          Pro forma   $       .21 $       (.38)
</TABLE>

                                     F-19
<PAGE>

                  AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  The estimate for the fair value of each option grant is on the date of grant
using the Black-Scholes method option-pricing model. The following assumptions
were used for grants in 1999--dividend yield of 0%, expected volatility of
100%, expected life of 3 to 5 years and an estimated risk free interest rate
of 6.0%. The following assumptions were used for grants in 1998--dividend
yield of 0%, expected volatility of 89%, expected life of 2 to 5 years and an
estimated risk free interest rate of 6.0%.

  The model is based on historical stock prices and volatility which, due to
the low volume of transactions, may not be representative of future price
variances.

11. 401(k) Plan

  PSI has a contributory 401(k) plan which covers substantially all employees
of PSI. PSI made no contribution to the plan during the period from October 1,
1999 through December 31, 1999. Avery also has a 401(k) plan which covers
substantially all of the employees of Avery and HBS. Avery made contributions
of $27,670 and $16,680 during the years ended December 31, 1999 and 1998,
respectively.

12. Subsequent Events

 HBS Conversion to Corporation

  HBS was converted from a Texas limited partnership to a corporation named
HBS Billing Services Company effective February 15, 2000. In connection with
the conversion, Avery-HBS, Inc., the legal entity which owned the 1% general
partnership interest of HBS, became the owner of 100% of the stock of HBS
Billing Services Company. Avery-HBS intends to reincorporate in Delaware and
to change its name to Thurston Communications Corporation. HBS Billing
Services Company will then become a wholly owned subsidiary of Thurston
Communications Corporation ("TCC"), which in turn will be a wholly owned
subsidiary of Avery. These changes were and are being made in anticipation of
the TCC spin-off discussed below.

 TCC Spin-Off

  On February 29, 2000, the board of directors approved the spin-off of TCC.
TCC is a holding company and its only operating subsidiary is HBS.
Essentially, the spin-off of TCC is a spin-off of HBS. The spin-off will be
accomplished through a distribution of one share of TCC for each share of
Avery held by stockholders as of the record date for the spin-off. The board
of directors approved the spin-off primarily due to the fact that it appears
that investors will be better able to understand the PSI and HBS businesses in
separate entities rather than being combined into one entity. The exercise and
conversion prices of our stock warrants, options and convertible securities
will all be adjusted to reflect the spin-off. The valuation of the TCC stock
to be distributed will be determined through an appraisal of the HBS business.
For accounting purposes, the spin-off will be recorded at book value since HBS
is an ongoing business. The spin-off will be a taxable transaction for federal
income tax purposes. The financial information contained in this document
presents HBS as a discontinued operation due to the spin-off. Accordingly, the
amounts in the statement of operations through the provision for income taxes
are PSI's plus expenses of Avery not associated with the discontinued
operations segment.

                                     F-20