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                                 UNITED STATES
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                   FORM 10-K
 
           [X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                          SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
 
                                       OR
 
         [ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                          SECURITIES EXCHANGE ACT OF 1934
 
         FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
 
                         COMMISSION FILE NUMBER 0-18511
 
                                  MOSAIX, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
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                   WASHINGTON                                       91-1273645
          (STATE OR OTHER JURISDICTION                 (I.R.S. EMPLOYER IDENTIFICATION NO.)
       OF INCORPORATION OR ORGANIZATION)
 
   6464 185TH AVENUE N.E. REDMOND, WASHINGTON                         98052
    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                        (ZIP CODE)
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       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (425) 881-7544
 
        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                    COMMON STOCK, PAR VALUE $0.01 PER SHARE
 
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]  No [ ]
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K.  [X]
 
     The aggregate market value of the common stock held by nonaffiliates of the
registrant as of March 3, 1999 was $84,596,499 (based on the closing sale price
of $8.05 per share on the Nasdaq National Market on such date).
 
     The number of shares outstanding of the registrant's common stock, $0.01
par value per share as of March 3, 1999 was 10,512,963.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     PART III of this Form 10-K incorporates information by reference from the
registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission within 120 days after the close of the fiscal year.
 
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                                  MOSAIX, INC.
 
                               TABLE OF CONTENTS
 
                                     PART I
 
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Item 1.   Business....................................................    1
Item 2.   Properties..................................................   11
Item 3.   Legal Proceedings...........................................   11
Item 4.   Submission of Matters to a Vote of Security Holders.........   11
 
                                    PART II
 
Item 5.   Market for the Registrant's Common Equity and Related          12
          Stockholder Matters.........................................
Item 6.   Selected Financial Data.....................................   13
Item 7.   Management's Discussion and Analysis of Results of             14
          Operations and Financial Condition..........................
Item 7A.  Quantitative and Qualitative Disclosures about Market          24
          Risk........................................................
Item 8.   Financial Statements and Supplementary Data.................   25
Item 9.   Changes in and Disagreements with Accountants on Accounting    25
          and Financial Disclosure....................................
 
                                    PART III
 
Item 10.  Directors and Executive Officers of the Registrant..........   25
Item 11.  Executive Compensation......................................   25
Item 12.  Security Ownership of Certain Beneficial Owners and            25
          Management..................................................
Item 13.  Certain Relationships and Related Transactions..............   25
 
                                    PART IV
 
Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form   26
          8-K.........................................................
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                                     PART I
 
                                    ITEM ONE
                                    BUSINESS
 
     Mosaix, Inc. and subsidiaries (hereinafter referred to as "Mosaix" or the
"Company") is a global provider of call center software, predictive dialers and
workflow applications that enable companies to acquire, retain, and develop
customer relationships. With these products, companies can integrate sales,
marketing, and customer services applications in their call centers with
back-office applications throughout the enterprise. Mosaix manages its
operations through two lines of business, Call Management Systems (CMS), and
Customer Relationship Management (CRM) applications.
 
  CALL MANAGEMENT SYSTEMS (CMS)
 
     Mosaix call management systems are sophisticated computer telephony
integration (CTI) enabled systems for processing and managing outbound and
blended inbound/outbound telephone communications. These predictive dialing
applications allow customer information to be captured and coordinated with a
telephone call and quickly routed to the person best equipped to manage the
customer relationship. With its technology of intelligently predicting the
availability of an agent to manage a phone call, either inbound or outbound,
Mosaix can optimally improve call center efficiencies. Mosaix offers a broad
range of professional services and support for these call management systems. In
addition, Mosaix also develops and markets applications designed to enhance and
develop the effectiveness of call center agents. Known as agent effectiveness
applications (AEA), these products are designed to improve call center managers'
ability to hire, train, coach and review call center agents. Mosaix call
management systems are found in a broad range of industries, including financial
services, credit card and consumer collections, telecommunications and
utilities, retail, cable television, healthcare, fund raising, education and
telemarketing.
 
  CUSTOMER RELATIONSHIP MANAGEMENT (CRM)
 
     Customer relationship management workflow applications are
client/server-based software that enables customers to automate and integrate
customer-facing business processes beginning in the contact center and extending
across the enterprise. This occurs through the implementation of the Company's
workflow software which is a family of integrated software modules that provide
an enterprise-ready framework for rapidly designing, developing, and deploying
customer-centric workflow applications across the enterprise. The workflow
software allows for front-office applications and fulfillment processes, or
back-office functions, to be tightly integrated with multiple channels of
interaction used by consumers to communicate with corporations. Whether it is
the telephone or the Internet, Mosaix CRM software will intelligently manage a
customer contact in the most efficient and effective manner by matching the
needs of the customer with the appropriate resources of a company. These
solutions are used in a wide variety of applications, including consumer and
mortgage lending, claims processing, underwriting, trust management, contract
management, accounts payable, and customer service.
 
     Headquartered in Redmond, Washington, Mosaix has a sales, support and
product development facility in Alameda, California; and sales offices in
Wilmington, Delaware; Atlanta, Georgia; Chicago, Illinois; New York City, New
York; Charlotte, North Carolina; Dallas, Texas; and near London, England. Mosaix
also has established value-added reseller relationships in North America, Asia,
South America, Africa and Europe.
 
     Mosaix, a Washington corporation, was incorporated in 1984.
 
INDUSTRY BACKGROUND
 
     Over the past ten years, businesses and other organizations have
increasingly used dedicated call centers for processing and managing high
volumes of incoming and outgoing telephone traffic. Call centers have been used
extensively in such fields as credit card and consumer collections, catalog
sales, telemarketing and customer service. In these call centers, activities
such as placing and receiving telephone calls are linked to the computer
functions of relational database management to capture, store and report on
relevant customer
 
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information. As the importance of call centers has increased and as more
functions and capabilities have been combined, a parallel industry has emerged
to create and support the evolution of call centers. The industry includes
vendors who deliver systems, software and services that are designed to make
call centers efficient, effective and well matched to the broader corporate
mission of the enterprise. Call centers are transforming from merely handling
calls to becoming customer contact centers. They are also transforming from
functional cost centers to strategic "profit centers" as their mission evolves
to become highly integrated customer interaction and fulfillment centers that
can handle multiple channels of communication. These multiple channels include
correspondence, documents, faxes, e-mail, Internet contacts, as well as
traditional telephone calls. This resulting shift places a higher value on
customer care as the primary contact center mission and reflects the ascendancy
of customer service as a primary source of competitive differentiation
 
     Typically, the call center is the primary "hub" within an organization for
placing or receiving a large volume of customer calls. Customer Service
Representatives (CSRs) or Agents are responsible for meeting customer needs in a
variety of areas including reservations, product information, service requests,
order fulfillment, account information and problem resolution. The communication
objectives are as varied as the businesses that employ call centers as part of
their marketing and/or services strategy. Mosaix believes that the call center
has become a strategic business asset as well as the logical point of
integration for customer communications within the enterprise.
 
     Call centers can range in size from fewer than five agents in one location
to thousands of agents in multiple locations, networked together via computer
and telecommunications systems. With the significant variability of call center
sizes and call handling objectives, the industry relies on a variety of
suppliers to provide product and service solutions to address their business and
communication needs. Today these product and service solutions include:
 
     - Customer premise telephone call routing and switching systems (ACDs and
       PBXs)
 
     - Computer Telephony Integration (CTI) software which brings together data
       and voice
 
     - Application software to enhance, facilitate and manage inbound and
       outbound customer communications
 
     - Agent performance management and quality assurance software tools
 
     - Reporting tools to measure and report on agent effectiveness and overall
       system performance
 
     - Peripheral products (headsets, speakers, video displays)
 
     - Voice mail and interactive voice response (IVR) systems, which enable
       callers to access information in an organization's computer database via
       touch-tone dialing
 
     - Computer networking and communications systems, including e-mail and
       Internet access systems
 
     - Database/back office information processing systems
 
  BUSINESS PROCESS AUTOMATION (BPA) IN THE CALL CENTER
 
     The growth of client/server computing has also had a dramatic effect on the
call center industry and has fueled the need for applications that process and
manage unstructured as well as structured data. Structured data, such as
financial or inventory data, are typically stored in the rows and columns of
databases. Traditional relational database systems and their underlying
technologies are not designed to manage the increasing complexity and variety of
the information content and transaction requirements inherent in most business
processes. According to some industry reports, as much as 80% of corporate data
is unstructured, consisting of scanned documents, faxes, electronic documents,
forms, mainframe-generated reports, digitized voice messages, electronic data
interchange (EDI) records and World Wide Web (Web) documents. For example,
customer service agents as well as loan officers who process loan applications
need access to a variety of structured data, such as customer and product
information, and unstructured data, including images of applications, credit
reports, credit analysis spreadsheets and other documents. The ability to
access, manage and process all relevant information content, including the
seamless integration of structured and unstructured data, has emerged as a key
requirement for call centers today. Furthermore, BPA offers a flexible means for
implementing specific strategies, such as providing a level of service that is
commensurate with the value of
 
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the customer (service level management to the organization), designed to fully
leverage a company's relationship with its customers.
 
     Initial efforts to automate data-intensive processes began with electronic
imaging technologies in the late 1980's. These early image-processing products
provided on-line equivalents to paper-based storage and management of business
information. These systems focused primarily on storage and retrieval
applications and were generally only available on dedicated, expensive and
proprietary platforms.
 
     Workflow technology emerged first with the development of rigid and highly
customized software that addressed transaction-based applications focused on the
automated routing of document images and related information. Although this
software generated significant benefits both in improved operational efficiency
and cost reductions, implementations were costly, limited in scope and difficult
to change. At the same time, document management emerged as a means for managing
electronic documents and certain other types of unstructured business
information. While these solutions provide significant benefits by allowing an
enterprise electronic access to document information, document management
systems do not generally address the fundamental need to improve business
processes. This has resulted in growing market demand for solutions that combine
sophisticated business process functionality with the ability to seamlessly
manage both structured and unstructured business information. These BPA
applications were the next step for workflow and document management offerings.
 
     With the availability of the Internet and intranets, companies have also
recognized the opportunity to provide their employees, business partners, and
customers with even greater access to business information. By combining BPA and
document management with Internet and intranet technologies, companies will be
able to significantly broaden access to automated business processes within
their enterprises. They will extend the reach and value of BPA to include
business transactions with their partners and customers beyond their internal
enterprise. As a result, businesses now seek next-generation business process
automation solutions that include Internet and intranet capabilities.
 
  SERVICE LEADERSHIP
 
     As companies face increasing pressure to retain and grow their customer
base, corporate call centers are emerging as a strategic weapon in the fight for
customer loyalty and increased revenue. This is particularly true in industries
such as telecommunications, utilities and financial services where product
differentiation is difficult to discern. In industries where products are
difficult for consumers to distinguish, companies are seeking to differentiate
themselves based on the quality of service they deliver. The call center is the
natural leverage point for delivering the services that make a difference in
both acquiring and retaining customers. Corporate demand is on the rise for
systems that foster customer relationships and that create a competitive
advantage. This demand is driving the need to integrate telephony and
computer-based applications to provide a complete, company-wide view of customer
attributes and account history.
 
PRODUCTS
 
  CALL MANAGEMENT SYSTEMS (CMS)
 
     Mosaix Call Management Systems are the Company's suite of combined hardware
and software systems used for the processing and management of a call center's
inbound and outbound telephone activity. These systems utilize both UNIX- and
Microsoft Windows-based technologies. Integrating directly with an
organization's existing telecommunications system and customer databases, the
Mosaix call management system processes and manages inbound, outbound, and
blended inbound/outbound customer contacts. Typical functions provided by Mosaix
products for outbound calling include: acquiring, reviewing and organizing
customer data; quickly and automatically dialing phone numbers; monitoring,
interpreting and acting upon each telephone call's progress; programming redials
at the appropriate time and rate; routing live voice responses immediately to an
operator; and posting and reporting record updates. For customers who want to
efficiently manage incoming as well as outgoing telephone calls, Mosaix's
Intelligent Call Blending technology allows call centers to blend their inbound
(ACD) and outbound (Mosaix systems) call activity into a single
 
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environment, automatically moving calls between inbound and outbound agents to
optimally handle call center traffic.
 
     Mosaix currently has two call center products available: the Mosaix 5000
and Mosaix 4000 Call Management Systems. The Mosaix 5000 is the Company's most
advanced system and is scaleable to 150 outbound workstations and 300 lines. The
Mosaix 5000 performs all of the standard functions described above and, in
addition, has Predictive Agent Blending, a patented technology that uses
sophisticated algorithms to anticipate call volumes and to move agents before
the expected inbound and outbound call workloads actually occur. The Mosaix 4000
is similar to the Mosaix 5000 though limited to 60 outbound workstations and 180
lines with no predictive blend capabilities.
 
     In order to help companies more effectively manage their call centers,
Mosaix has also developed a variety of software products that work exclusively
with Mosaix call management systems.
 
          Campaign Director -- ships with Mosaix systems and provides customers
     with the ability to create campaigns using a Microsoft Windows-based point
     and click interface. Campaign Director is also used to monitor, on a
     real-time basis, the status of the campaign and the effectiveness of the
     agents, and to make changes while the campaign is in process.
 
          Producer -- a sophisticated configuration tool that enables customers
     to dynamically manage the operation and system parameters of their Mosaix
     CMS. Producer allows customers to record voice messages, design wait
     queues, edit agent function keys, and create and modify completion codes
     using a simple-to-use PC based software solution.
 
          Campaign Surfer -- an Internet browser-based tool that enables a
     company or its customers to view information about calling campaigns and
     agent performance from virtually anywhere over the Internet.
 
          Agent API -- simplifies the creation and maintenance of custom agent
     interfaces, which allow agents access to the disparate information they
     need to more effectively serve customers.
 
     Mosaix's TM Express product is a packaged solution that includes predictive
dialing, scripting, list and campaign management applications. The package has
been designed to meet the needs of the new telemarketing call centers where a
complete turnkey solution is required. It also serves the needs of call centers
that are converting from older host-based telemarketing systems.
 
     Campaign Analyst for the Enterprise software produces detailed reports,
integrating statistics from various vendor products, including the ACD/PBX
(telephone switch), the IVR system, host computer, predictive dialer and other
applications. It can also integrate with other software programs, such as
payroll or executive reporting systems. This product is designed to assist call
center managers in reviewing the performance of multiple call center systems by
integrating and normalizing raw data and generating key statistics. Campaign
Analyst for the Enterprise also includes features that allow managers to
establish goals for their agents as well as extracting data that can be utilized
by other software programs. For example, Campaign Analyst can generate an
extract of all agent hours for use in the payroll system or an extract of system
performance information to be placed into an executive presentation document.
 
     The Company has also designed a suite products to help call center managers
more successfully develop and enhance the effectiveness of call center agents.
These products are called agent effectiveness applications, or AEA products.
 
          Guide -- allows a call center supervisor to control the content and
     flow of each customer contact. Call guides (or scripts) for call center
     employees have historically been programmed by the vendor or by application
     specialists. Changes require system shut down and reprogramming. By
     contrast, Guide allows call center supervisors with minimal programming
     skills to design and maintain complex, sophisticated scripts without
     relying on the vendor or third party application specialists. Supervisors
     can modify scripts as necessary -- even mid-campaign -- providing increased
     flexibility and enabling the organization to tailor scripts based on agent
     skill levels and campaign objectives.
 
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          Chronicle -- provides a set of integrated tools that aid call center
     supervisors in measuring the performance of call center agents and the
     quality of their interactions with customers. Chronicle is used to schedule
     and automatically record agent conversations with callers. Both voice and
     data (screen) recording is supported. Chronicle has built-in CTI
     capabilities that broaden the set of criteria that can trigger call
     recording. These characteristics include the number that was dialed by the
     caller, IVR codes, area codes, etc. In addition, Chronicle includes a set
     of evaluation and reporting tools designed to increase the efficiency with
     which performance management programs can be implemented. Mosaix has
     licensed Chronicle technology from a partner.
 
          Concur -- enables call center agents to initiate recordings of their
     conversation with customers. Typical applications include sales
     verification, call escalation, and self evaluation. In addition, on demand
     recording gives agents a way to capture customer comments verbatim to later
     review by marketing or product development. Recordings can be retrieved
     based on phone number, date, agent or comment field. Concur is licensed
     from a partner.
 
          Talent -- addresses the issue of call center agent effectiveness
     during the hiring and training process. Talent is a training application
     that duplicates the conditions of a "live" agent/customer interaction using
     recorded voice and agent screen data. Talent uses a proprietary sensing
     technology to detect breaks in a trainee's voice energy and automatically
     delivers simulated customer responses at the appropriate time in the
     conversation. A wide variety of customer types can be simulated -- from
     accessible to guarded or hostile -- so that the agent-trainee's or
     job-candidate's reactions can be evaluated. Talent can also be used to
     record lessons created by senior agents. This enables junior agents to
     benefit from their experience without taking them off the phones for
     extended periods of time.
 
     All of the Company's currently shipping CMS and AEA products are year 2000
compliant. In addition, whenever possible, the Company has made system upgrades
available to certain existing customers. Along with related hardware upgrades,
the system upgrades will enable customers to be year 2000 compliant. For others
where a simple upgrade is not possible and a complete system change is required,
the Company has offered attractive year 2000 compliant replacement system
pricing. In spite of this pricing strategy, the Company expects certain
customers will not purchase year 2000 compliant systems. While it is expected
that there will be some loss of support revenues, management does not expect the
year 2000 to have a material impact on the operations of the Company.
 
     The Mosaix 4000 and 5000 Call Management Systems, related software
products, and the agent effectiveness applications are marketed through Mosaix's
telesales and direct sales force as well as a worldwide network of strategic
partners. The Mosaix 5000 and 4000 are designed for mid- and high-end financial
services, telecommunications, insurance, and telemarketing customers. Mosaix's
agent effectiveness applications are designed for use in inbound, outbound and
blended call center operations.
 
     Mosaix's CMS are used in a broad range of industries, including financial
services, credit card and consumer collections, insurance, telecommunications,
utilities, retail, cable television, healthcare, fundraising, education and
telemarketing. Historically, the majority of sales have been to the financial
services and telecommunications industries.
 
  CUSTOMER RELATIONSHIP MANAGEMENT SOFTWARE (CRM)
 
     ViewStar is an enterprise-class, client/server application framework that
is built on Windows NT and utilizes Microsoft's enterprise-computing
architecture. It is designed to automate customer-facing business processes and
integrate structured and unstructured data, including imaged documents, faxes,
electronic documents, forms, mainframe-generated reports, digitized voice
messages, EDI records, and Web documents. In addition, this software will
intelligently manage telephone calls and the systems that route those calls. The
current version of this product is ViewStar 5.0, and this version is year 2000
compliant.
 
     ViewStar 5.0 is comprised of the following four key components:
 
          Process Architect -- Mosaix's visual workflow and process modeling
     application framework that enables interactive definition, configuration
     and deployment of complex business processes. Using Process
 
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     Architect, business analysts and application designers can define work
     content, business rules, workflow maps and user roles and activities.
     Process Architect provides a library of predefined business functions and
     reusable tasks that can be easily configured to create a workflow map
     representing the business process from the interaction in a front-office
     customer contact center to the back-office fulfillment of a customer's
     request. Through Process Architect's simulation feature, "what if "
     analyses of the throughput can be undertaken and bottlenecks predicted.
     Process Architect can also be used to dynamically change the business
     process and automatically rebuild the application with little impact on
     downtime or re-training.
 
          Process Manager -- Mosaix's workflow monitoring, tracking, and
     reporting module that provides comprehensive analyses of customer processes
     across the enterprise. Process Manager presents a detailed history of all
     customer interactions regardless of the communication channel used. A
     complete "step-by-step" view of all customer case activities performed
     either by front-office customer service representatives or back-office
     processors is available on demand. In addition, Process Manager records
     overall system capacity and efficiency, user productivity, and current
     customer case status. The Process Tracker interface can locate customer
     cases across the enterprise whether they are active within the business
     process or archived for long-term storage.
 
          Business Process Interface (BPI) -- A set of automation interfaces
     that enables the creation of custom workflow tasks, interaction channels,
     and user applications using any ActiveX-compliant visual programming
     environments. BPI consists of high-level automation objects and a set of
     ActiveX controls. Any third-party development tool that supports ActiveX
     interfaces, such as Visual Basic, Visual C++, Delphi and PowerBuilder, can
     be used with BPI. In addition, BPI's COM-based component architecture
     enables integration with enterprise application software and information
     repositories, including document management, COLD, and relational database
     subsystems, host and legacy subsystems, and enterprise applications, such
     as PeopleSoft and SAP.
 
          ViewStar Channel Services -- A series of bi-directional gateway
     software and software components for customer interactions, including web,
     fax, e-mail, scan, and telephony channels. ViewStar Channel Services
     provides the functionality required to intelligently and consistently
     manage customer interactions initiated from a wide variety of channels and
     route them to qualified resources in the enterprise based on business
     rules. Information captured about the customer, as well as other relevant
     data extracted from disparate data repositories and applications across the
     enterprise, is used to determine the appropriate resources needed to
     fulfill that customer's requests. ViewStar Channel Services normalizes all
     interaction channels and enables consistent reporting and monitoring,
     reducing system administration and simplifying training requirements.
 
SERVICES
 
  PROFESSIONAL SERVICES
 
     Mosaix's professional services group provides fee-based business-process
consulting and CTI services. This group helps clients plan, budget, design and
implement new business processes and technologies with the goal of improving
customer relationship management and call center workflow. This group also
utilizes its network of service providers and system integration partners to
provide customers with a broad range of application development, systems
planning, configuration, and system integration services.
 
  CUSTOMER SUPPORT AND SERVICES
 
     Mosaix believes that customer service and support are an integral part of
its strategy. Service capability, availability and responsiveness play an
important role in marketing and selling products. This is particularly true as
these mission-critical products and services become more technologically
complex.
 
     Mosaix earns system and software support fees by providing ongoing support
and training for all of its CMS products. Mosaix offers a full range of product
support options, including telephone support from "normal business hours" to "24
hours a day" and on-site response from the "next-half-day" to "immediate
 
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service (four hours or less)." CMS support representatives are able to service
customer call center systems on a remote basis from the customer support center
in Redmond, Washington and London, England. If needed, CMS support
representatives will dispatch on-site support, which is provided by IBM in North
America and the United Kingdom. Mosaix charges separate fees to upgrade CMS
products to the latest version when a new product is released. Mosaix earns
other fees by providing, upon customer request, certain special services, such
as system relocation and additional training. The Company has CMS training
facilities located in Redmond, Washington, Wilmington, Delaware and at the
principal office of its subsidiary in the United Kingdom.
 
     Customer support representatives in Alameda, California and London, England
support CRM customers. Mosaix offers a full range of product support options,
including various levels of telephone support that range from "normal business
hours" to "24 hours a day" and on-site response from the "next-half-day" to
"immediate service (four hours or less)." CRM support representatives are able
to service customer call center systems on a remote basis from the customer
support center in Alameda, California and London, England. Fees are generally
charged on an annual basis and include upgrades to the latest version when a new
product is released. Mosaix earns other fees by providing, upon customer
request, certain special services, such as additional training. The Company has
CRM training facilities located in Alameda, California, and at the principal
office of its subsidiary in the United Kingdom.
 
PRODUCT DEVELOPMENT
 
     Mosaix engineers continue to develop new products and new versions of
existing products designed to improve the unique enterprise customer management
missions of Mosaix's customers. In recent years, Mosaix increasingly has focused
its development efforts on client/server, Windows NT-based and Internet-enabled
software solutions that address issues and challenges facing call centers and
workflow processes. On an ongoing basis Mosaix releases new features and
enhancements to existing products as well as, new products and services. Mosaix
supplements its product development efforts by reviewing customer feedback on
existing products and working with current and potential customers to anticipate
functionality requirements. Product development efforts are directed at
increasing product functionality, improving product performance, and expanding
product capabilities to shorten the application development and deployment cycle
and further leverage the Microsoft Windows NT platform. Mosaix continues to
identify and prioritize various technologies for potential future product
offerings.
 
     Mosaix has committed and expects to continue to commit substantial
resources to research and development. In 1998, 1997, and 1996, research and
development expenses were $15.0 million, $15.2 million and $14.9 million,
respectively, net of capitalized software development costs. During 1998 no
development costs were capitalized. In 1997 and 1996 Mosaix capitalized $0.3
million and $1.0 million, respectively, of software development costs.
 
     The Mosaix CMS and Guide products have been localized for sale in the
Japanese and Korean markets. The ViewStar System has been double-byte enabled
for sales in the Japanese and Korean markets.
 
MANUFACTURING
 
     Mosaix's manufacturing operations for CMS products are primarily performed
by an independent third-party on a turnkey basis. The third party contracts with
other vendors for components and subassemblies. Mosaix's CMS suppliers maintain
quality control by subjecting components and subassemblies to rigorous testing,
including in-circuit automated testing. Mosaix's manufacturing operations for
CRM products are performed in-house and consist mainly of CD duplication.
 
SALES AND MARKETING
 
     Mosaix markets its CMS and CRM products and services through a direct sales
force operating from Mosaix's headquarters in Redmond, Washington and offices in
Alameda, California; Wilmington, Delaware; Atlanta, Georgia; Chicago, Illinois;
New York City, New York; Charlotte, North Carolina; Dallas, Texas; and near
London, England. Mosaix also has established value-added reseller relationships
in North and South America, Asia, Africa, and Europe.
 
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COMPETITION
 
     The market for Mosaix's products and services is highly competitive.
Important competitive factors include price, performance, diversity of product
line, reliability, delivery capabilities, and customer service and support.
 
     Mosaix's principal competitors in the outbound call management systems
market include Davox Corporation, EIS International, Inc. and Melita
International Corporation. The potential entry into the market of major ACD and
PBX suppliers (suppliers of customer-premise call routing and switching systems)
also presents a strong competitive threat. These companies may elect to acquire
or align with Mosaix's competitors, increasing their market presence and
distribution; resell principal competitors' products; or elect to develop and
market their own predictive dialing application software. As Mosaix expands its
CMS offerings, it may also encounter increased competition from call center
application providers such as Information Management Associates.
 
     The market for agent effectiveness applications is an emerging market.
Mosaix's principal competitors in this market include Teknekron Infoswitch,
Witness Systems, Nice Systems, Eyretel, Comverse, and Dictaphone. As in the
market for CMS products, the potential entry into the market of major ACD and
PBX vendors presents a strong competitive threat. Furthermore, any of these
companies may acquire, be acquired or otherwise align with Mosaix's competitors
in the CMS market. Because the market for these applications is new, and no
clear market leader has emerged to establish an "industry-standard" solution,
the potential exists for new market entrants to appear with strongly
differentiated solutions that would constitute a strong competitive threat.
 
     The traditional competition for horizontal workflow technology has been
workflow software vendors, including direct competition from a number of public
and private companies or divisions thereof, including FileNET, IBM, Action
Technologies, Staffware, Optika, and Eastman Kodak. As ViewStar 5.0 extends its
value into the customer relationship management market, it will face competition
from new competitors, including process-oriented applications vendors such as
Pegasystems, Chordiant, and DST Systems. Mosaix's CRM applications may encounter
competition from a number of software companies that want to extend their reach
in the enterprise, including Vantive and Seibel Systems. Several of these
companies have already announced and others may announce document workflow
capabilities for their existing or future products.
 
     Mosaix relies on a number of system integration firms for implementation
and other services, as well as recommendations of its products during the
evaluation stage of the purchasing process. Although Mosaix seeks to maintain
close relationships with these service providers, many of these third parties
have similar, and often more established relationships with Mosaix's principal
competitors. If Mosaix were unable to develop and retain effective, long-term
relationships with these third parties, Mosaix's competitive position would be
materially adversely affected. See "Forward Looking Statements-Risk Factors
Regarding Future Performance -- Uncertainties Relating to Competition and
Development of Industry and Distribution Relationships" in Item Seven.
 
INTERNATIONAL OPERATIONS
 
     Mosaix's sales to customers in international markets outside the United
States comprised approximately 28.9%, 26.4% and 19.0% of total revenue in 1998,
1997, and 1996, respectively. In most cases, Mosaix markets its products and
services internationally through value-added resellers.
 
                                        8
<PAGE>   11
 
     The following table presents certain information relating to Mosaix's
foreign and domestic operations for the years ended December 31, 1998, 1997, and
1996.
 
<TABLE>
<CAPTION>
                                                       1998        1997        1996
                                                     --------    --------    --------
<S>                                                  <C>         <C>         <C>
Revenue -- U.S. operations:
  United States....................................  $ 78,257    $ 89,153    $ 94,870
  United States export.............................    14,090      14,477      12,083
Revenue-foreign subsidiaries.......................    17,721      17,514      10,228
                                                     --------    --------    --------
                                                     $110,068    $121,144    $117,181
                                                     ========    ========    ========
Operating income:
  U.S. operations..................................  $    599    $  8,045    $  4,235
  Foreign subsidiaries.............................     2,451       3,936       1,867
  Eliminations.....................................       227        (215)        130
                                                     --------    --------    --------
                                                     $  3,277    $ 11,766    $  6,232
                                                     ========    ========    ========
Assets:
  U.S. operations..................................  $ 64,619    $ 74,725    $ 85,235
  Foreign subsidiaries.............................     9,439       9,653       5,528
                                                     --------    --------    --------
                                                     $ 74,058    $ 84,378    $ 90,763
                                                     ========    ========    ========
</TABLE>
 
SEASONALITY
 
     Mosaix's quarterly operating results are subject to seasonal influences.
The Company generally has realized lower revenues in the first quarter of the
year than the immediately preceding quarter. The Company believes that this has
been due primarily to the concentration by some customers of larger capital
purchases in the fourth quarter of the calendar year to avoid end-of-year
budgetary limitations, followed by lower purchasing activity during the first
quarter of the next calendar year. Further, to the extent that international
operations in the future constitute a higher percentage of total revenues, the
Company anticipates it will experience relatively weaker demand in the quarter
ending September 30 due to reduced customer activity in Europe during the summer
months.
 
REGULATORY ENVIRONMENT
 
     Mosaix's CMS products are subject to and conform with FCC regulations under
the Communications Act of 1934. Future products developed by Mosaix also may be
required to comply with certain registration and technical requirements before
they can be sold in the United States. As Mosaix expands its operations in other
countries, its products will become subject to regulation by foreign
governments.
 
     While existing industry regulation does not directly regulate the
manufacture and sale of Mosaix's CMS products, certain existing laws and
regulations may affect the ability of Mosaix's customers to utilize some of its
product in certain ways. For example, Mosaix's call management systems may not
be used for certain prohibited debt collection and remote telephone solicitation
practices, nor may they be used under certain circumstances to leave or play
artificial or prerecorded messages. These practices are governed by such federal
laws as the Telephone Consumer Protection Act of 1991 and the Telemarketing and
Consumer Fraud and Abuse Prevention Act, which authorize the FCC and Federal
Trade Commission, respectively, to issue additional regulations and administer
such laws. In addition, most states have enacted legislation limiting certain
telephone solicitation practices or restricting use of automatic dialing and
announcement devices.
 
     Other federal and state legislation that has been proposed from time to
time include bills that would, if enacted, recognize certain privacy rights of
employees at the work site and regulate the ability of employers to monitor job
performance, including monitoring employees' telephone communication or
gathering information regarding such communications. It is possible that such
legislation or other legislation, if enacted, might directly or indirectly
affect how Mosaix's products can be used and the demand for its products.
 
                                        9
<PAGE>   12
 
     Mosaix fully supports legislation designed to promote the responsible use
of auto dialing equipment and automated recording/monitoring technology, and
laws which otherwise restrict abusive collections or telemarketing activities.
Mosaix endeavors to design its products to enable its customers to comply with
the requirements of current and anticipated regulations.
 
PROPRIETARY RIGHTS
 
     As new products are identified and created, Mosaix has sought, and will
continue to seek, patent protection, where appropriate, for inventions arising
out of its development efforts. On March 30, 1992, U.S. Patent No. 5,101,425 was
issued to Mosaix on Realtime Monitor, a device enabling real time monitoring of
predictive dialing systems. On November 14, 1995, Mosaix obtained a U.S. Patent
No. 5,467,391 on its Integrated Intelligent Call Blending technology, which
describes a system and method for sharing a pool of CSRs in a telephone call
servicing operation so that CSRs are utilized effectively. Most recently, on
October 13, 1998, U.S. Patent No. 5,822,416 was issued to Mosaix for its System
and Method for Real-Time Screening and Routing of Telephone Calls, which
provides a method of automatically routing incoming telephone calls to either
internal phone call processing resources or to destination parties (system
users) as defined by the individual destination parties. Mosaix has an
additional eight patent applications pending. Mosaix also intends to pursue,
where appropriate, patent protection for these inventions in the international
markets where they are offered.
 
     Although Mosaix has not registered its copyrighted software, copyright and
trade secret laws protect it. In addition, to protect its proprietary
technology, Mosaix enters into confidentiality agreements with certain of its
employees, consultants, distributors, value-added resellers and customers;
limits access to and distribution of its software, documentation and other
proprietary information; and enters into noncompete agreements with certain of
its employees.
 
     Mosaix has registered trademarks in the United States and various foreign
jurisdictions for certain of its product trademarks including Adapts(R),
Analyst(R), Campaign Director(R), Campaign Manager(TM), Guide(R),
Infostore@Work(R), Mosaix(R), Predictive Blend(R), Producer(R), Process
Architect(R), Screenbuilder(R), Searchlink(R), The Foresight Report(R) and
ViewStar(R).
 
     Despite Mosaix's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy Mosaix's products or to obtain and use Mosaix's
proprietary information. Policing unauthorized use of Mosaix's products is
difficult, and since Mosaix is unable to determine the extent to which piracy of
its software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect Mosaix's
proprietary rights to as great an extent as the laws of the United States. There
can be no assurance that Mosaix's means of protecting its proprietary rights
will be adequate or that competitors will not independently develop similar
technology.
 
     Mosaix also relies on certain software licensed from third parties,
including software that is integrated with internally developed software and
used in the Company's products to perform key functions. There can be no
assurance that these third parties will remain in business, that they will
continue to support their products or that their products will otherwise
continue to be available to Mosaix on commercially reasonable terms. The loss or
inability to maintain any of these software licenses could materially adversely
affect the Company's business. See "Forward Looking Statements -- Risk Factors
Regarding Future Performance -- Uncertainties Relating to Dependence on
Proprietary Rights, Infringement Claims, Uncertainty of Obtaining Licenses" in
Item Seven.
 
EMPLOYEES
 
     As of December 31, 1998 Mosaix employed approximately 531 persons (not
including independent contractors and temporary employees) on a full-time basis.
None of Mosaix's employees are covered by collective bargaining agreements, nor
has it ever experienced a work stoppage. Mosaix considers its employee relations
to be good.
 
                                       10
<PAGE>   13
 
                                    ITEM TWO
                                   PROPERTIES
 
     Mosaix's corporate offices are located in Redmond, Washington in an 83,000
square-foot leased office facility at 6464 185th Avenue N.E., Redmond,
Washington 98052. The lease expires February 28, 2004. The corporate offices
include sales and marketing, professional service and customer support,
engineering, and finance.
 
     The Company also leases offices, which occupy approximately 48,000 square
feet in Alameda, California, under a lease that expires in May 31, 1999. The
Company has renewed the lease and expires on September 30, 2004. Additional
sales, marketing, engineering and service functions are located in Alameda.
Mosaix also leases domestic sales offices in Atlanta, Charlotte, Chicago,
Cleveland, Costa Mesa, Dallas, New York, and Wilmington. The Company's sales,
marketing, service and administrative function for Europe, the Middle East and
Africa is located in leased office space near London, England. The London
facility lease expires in 2017.
 
                                   ITEM THREE
                               LEGAL PROCEEDINGS
 
     Mosaix is subject to various legal proceedings that arise in the ordinary
course of its business. While the outcome of these proceedings cannot be
predicted with certainty, the Company believes that none of such proceedings,
individually or in the aggregate, will have a material adverse effect on the
Company's business or financial condition.
 
                                   ITEM FOUR
              SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     No matters have been submitted to a vote of Mosaix's shareholders since the
Company's last annual meeting of shareholders in April 1998.
 
                                       11
<PAGE>   14
 
                                    PART II
                                   ITEM FIVE
   MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
     Mosaix common stock, $0.01 par value per share, is traded over the counter
under the symbol "MOSX" and is an authorized security for quotation on the
National Association of Securities Dealers, Inc. Automated Quotations National
Market ("Nasdaq/NM").
 
     The market prices of a share of Mosaix common stock are set forth below.
The prices reflect the high and low trading prices for each quarter as reported
by Nasdaq/NM. Over-the-counter market quotations reflect interdealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
 
<TABLE>
<CAPTION>
                                                    HIGH        LOW
                                                   -------    -------
<S>                                                <C>        <C>
1998
  4th Quarter..................................    $ 8.250    $ 4.625
  3rd Quarter..................................    $ 9.875    $ 4.000
  2nd Quarter..................................    $12.125    $ 9.813
  1st Quarter..................................    $12.000    $ 8.750
1997
  4th Quarter..................................    $11.313    $ 7.938
  3rd Quarter..................................    $15.000    $ 9.000
  2nd Quarter..................................    $15.250    $11.750
  1st Quarter..................................    $16.000    $ 9.750
</TABLE>
 
     There were approximately 3,600 shareholders of the Company's common stock
as of March 3, 1999. This includes approximately 3,200 street-name holders and
400 registered certificate holders.
 
     No cash dividends were declared or paid by Mosaix during any of the periods
presented. Mosaix presently does not anticipate paying any cash dividends in the
foreseeable future.
 
                                       12
<PAGE>   15
 
                                    ITEM SIX
                            SELECTED FINANCIAL DATA
 
     The selected financial data and balance sheet data presented below for each
of the five years in the period ended December 31, 1998 have been derived from
the consolidated financial statements of the Company which financial statements
have been audited by KPMG LLP, independent certified public accountants.
 
     The following financial information should be read in conjunction with
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and the Consolidated Financial Statements of the Company and the
notes thereto, included elsewhere in this report.
 
<TABLE>
<CAPTION>
                                          1998       1997       1996      1995      1994
                                        --------   --------   --------   -------   -------
                                             (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                     <C>        <C>        <C>        <C>       <C>
Revenue...............................  $110,068   $121,144   $117,181   $93,248   $76,090
Operating income (loss)...............     3,277     11,766      6,232     1,858    (8,357)
Net income (loss).....................     4,240      9,757      3,618      (563)   (6,482)
Net income (loss) per share:
  Basic...............................      0.36       0.74       0.29     (0.06)    (0.65)
  Diluted.............................      0.35       0.71       0.27     (0.06)    (0.65)
Weighted average common shares
  outstanding:
  Basic...............................    11,793     13,169     12,677     9,846     9,998
  Diluted.............................    11,998     13,667     13,570     9,846     9,998
Working capital.......................  $ 39,457   $ 46,257   $ 46,804   $37,624   $38,738
Total assets..........................    74,058     84,378     90,763    93,571    95,796
Long-term obligations.................        --         97        575     1,085     1,123
Shareholders' equity..................    47,868     55,805     57,343    48,683    52,799
</TABLE>
 
                                       13
<PAGE>   16
 
                                   ITEM SEVEN
  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
                                   CONDITION
 
     The following table sets forth certain operating data for 1998, 1997 and
1996 expressed as a percentage of revenue for all items except cost of revenue
and gross profit which are shown as a percentage of the corresponding revenue:
 
<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                          ---------------------------
                                                          1998       1997       1996
                                                          -----      -----      -----
<S>                                                       <C>        <C>        <C>
Revenues:
  System sales..........................................   42.8%      40.6%      45.6%
  Software licenses.....................................   17.9       19.8       17.6
  Services and other....................................   39.3       39.6       36.8
                                                          -----      -----      -----
                                                          100.0      100.0      100.0
Cost of revenues:
  System sales..........................................   38.4       37.6       35.2
  Software licenses.....................................   11.9       10.1        6.6
  Services and other....................................   59.3       51.1       50.0
                                                          -----      -----      -----
                                                           41.8       37.5       35.6
Gross profit:
  System sales..........................................   61.6       62.4       64.8
  Software licenses.....................................   88.1       89.9       93.4
  Services and other....................................   40.7       48.9       50.0
                                                          -----      -----      -----
                                                           58.2       62.5       64.4
Operating expenses:
  Selling, general and administrative...................   41.5       39.4       38.7
  Research and development..............................   13.7       12.6       12.7
  Restructuring charges.................................     --        0.8         --
  Write-off of capitalized software costs...............     --         --        0.6
  Purchase of in-process research and development.......     --         --        3.7
  Merger related costs..................................     --         --        3.3
                                                          -----      -----      -----
       Total operating expenses.........................   55.2       52.8       59.0
                                                          -----      -----      -----
Operating income........................................    3.0        9.7        5.4
Interest and other income, net..........................    1.7        1.8        1.4
                                                          -----      -----      -----
Income before income taxes..............................    4.7       11.5        6.8
Income tax expense......................................    0.8        3.4        3.7
                                                          -----      -----      -----
Net income..............................................    3.9%       8.1%       3.1%
                                                          =====      =====      =====
</TABLE>
 
RESULTS OF OPERATIONS
 
  YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
 
     For 1998, Mosaix reported net income of $4.2 million, or $0.35 diluted
earnings per share, compared to $9.8 million, or $0.71 diluted earnings per
share, for 1997. During 1997, Mosaix recorded a $0.9 million ($0.6 million after
tax) restructuring charge. Without this charge, net income and diluted earnings
per share for 1997 would have been $10.4 million and $0.76, respectively.
 
     Revenue
 
     Revenue of $110.1 million for 1998 represented a 9.1% decrease from 1997
revenue of $121.1 million, as the Company experienced a decline in all revenue
categories during 1998. System sales decreased $2.1 million, or 4.3%, to $47.1
million in 1998. Historically, a majority of the Company's system sales have
come from the
 
                                       14
<PAGE>   17
 
large formal call center market segment, with a high percentage representing
repeat business with established customers. During 1998, Mosaix experienced a
decline in sales from its large formal domestic call center installed base. This
decrease was partially offset by increases in international sales, particularly
in Latin America.
 
     Software licenses revenue decreased by 17.6% to $19.7 million for 1998
compared to $23.9 million in 1997. The decrease in software license revenue was
primarily due to lower Customer Relationship Management ("CRM") software license
sales, principally in the European marketplace. This decrease was partially
offset by increased domestic market Call Management Systems ("CMS") software
license sales.
 
     Services and other revenue decreased by $4.7 million, or 9.8%, for 1998 as
a result of decreased level of billable professional services related to CRM
projects. In addition, the discontinuance of the Company's sales and business
tax collection services in the second half of 1997 contributed to the decline in
1998 revenues. These decreases were partially offset by a $1.4 million increase
in customer service and maintenance fees in 1998.
 
     International revenue, in absolute dollars, decreased slightly to $31.8
million in 1998 from $32.0 million in 1997. However, international revenue, as a
percentage of total revenues, increased to 28.9% compared to 26.4% in 1997.
During 1998, the Company had increased Canadian software license revenues and
increased Latin American and Asian call center system sales while European
software license revenues decreased. In future periods the Company anticipates
continued improvements in international revenues as a percentage of total
revenues.
 
     Currently, backlog is not significant in relation to Mosaix's revenue and
may not be indicative of future performance.
 
     Gross Profit
 
     Total gross profit decreased to 58.2% in 1998 from 62.5% in 1997. System
sales gross profit, which was 61.6% in 1998 and 62.4% in 1997, was negatively
influenced by decreased sales volume, and by the shift in the product mix to
lower margin products.
 
     Gross profit on software licenses decreased to 88.1% in 1998 from 89.9% in
1997, primarily due to the first significant sales of the Company's third party
agent effectiveness application ("AEA"). The margins for this software product
are lower than the margins on the Company's internally developed software
products.
 
     Gross profit on services and other revenue for 1998 was 40.7% compared to
48.9% in the prior year. The decrease was primarily due to the performance of
reduced rate consulting services for early adopters of the Company's CRM
solution.
 
     Selling, General and Administrative
 
     For 1998, selling, general and administrative ("SG&A") expenses decreased
to $45.7 million from $47.8 million in 1997. The decrease was a result of
decreased expenses resulting from the Company's cost containment initiatives
undertaken in the second half of 1998. In addition, reduced variable
compensation costs related to the reduced revenues also contributed to the
decline in 1998 SG&A expenses.
 
     Research and Development
 
     For 1998, research and development expenses were $15.0 million, or 13.7% of
revenue, compared to $15.2 million, or 12.6% of revenue, in 1997. Mosaix remains
committed to the ongoing development of enhancements to existing products as
well as the development of new products, and accordingly held 1998 expense
levels consistent with 1997 levels although total revenues decreased during
1998. During 1998, no software development costs were capitalized and during
1997, $0.3 million of software development costs were capitalized. As of
December 31, 1998, unamortized software development costs were reduced to $0
versus $0.9 million as of December 31, 1997.
 
                                       15
<PAGE>   18
 
     Restructuring Charges
 
     As a result of the December 1996 ViewStar merger, Mosaix streamlined its
management structure and consolidated its sales, support and service operations
in 1997. These changes resulted in a charge of $0.9 million for severance and
other employee related costs. During 1997 and 1998, all compensation and other
restructuring costs that comprised the restructuring charge were paid in their
entirety.
 
     Interest and Other Income, Net
 
     Interest and other income, net decreased from $2.2 million in 1997 to $1.9
million in 1998. The decrease is attributable to reduced interest earnings due
to lower cash, cash equivalents and short-term investment balances and reduced
interest rates during 1998. During 1998, the Company repurchased 1,792,000
shares of its common stock for $14.7 million, which reduced the Company's funds
available for investment and, consequently interest income during 1998.
 
     Income Taxes
 
     The effective income tax rate for 1998 was 17.9% compared to 30.2% in 1997.
The effective rates differ from the statutory rate of 34% due primarily to the
utilization of ViewStar net operating loss carryforwards.
 
  YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
 
     For 1997, Mosaix reported net income of $9.8 million, or $0.71 diluted net
income per share, compared to $3.6 million, or $0.27 diluted net income per
share, for 1996. As previously discussed, during 1997, Mosaix incurred
restructuring charges of $0.9 million ($0.6 million after tax). During 1996,
Mosaix incurred the following charges: (a) the write-off of $4.3 million ($4.3
million after tax) of acquired in-process research and development costs related
to the 1996 acquisition of Caleo Software, Inc. ("Caleo"); (b) $0.7 million
($0.5 million after tax) of previously capitalized software development costs
also related to the Caleo acquisition; and (c) $3.9 million ($3.9 million after
tax) related to the merger with ViewStar. Excluding these charges net income for
1997 would have been $10.4 million, or $0.76 diluted net income per share,
compared to $12.3 million, or $0.91 diluted net income per share, for 1996.
 
     Revenue
 
     Revenue of $121.1 million in 1997 represented a 3.3% increase over 1996
revenue of $117.2 million. System sales, however, decreased $4.2 million, or
7.8%, to $49.2 million in 1997. Historically, system sales have come from the
large formal call center market segment, with a high percentage representing
repeat business with established customers. During 1997, Mosaix experienced a
decline in the number of large system sales, a decline in sales from its
domestic installed base and fewer new name customers than in prior years.
 
     Software licenses revenue increased by 15.9% to $23.9 million for 1997.
This increase was primarily due to increased sales of workflow products.
 
     Services and other revenue increased by $4.9 million, or 11.3%, for 1997 as
a result of increased professional services related to CRM projects. Customer
support revenue increased as a result of new system and software sales.
 
     International revenue increased 43.4% to $32.0 million in 1997 and
accounted for 26.4% of total revenue. This increase was primarily due to
increased sales in the United Kingdom and the growing acceptance of Mosaix
products in international markets.
 
     Gross Profit
 
     Gross profit decreased to 62.5% in 1997 from 64.4% in 1996. System sales
gross profit, which was 62.4% in 1997 and 64.8% in 1996, was influenced by the
decrease in sales volume as well as changes in the product
 
                                       16
<PAGE>   19
 
mix. Mosaix's highest gross margins occur on large system sales. During 1997,
Mosaix sold fewer large systems than in 1996, which negatively affected margins.
 
     Gross profit on software licenses decreased to 89.9% in 1997 from 93.4% in
1996, primarily due to increased amortization of previously capitalized software
costs.
 
     Gross profit on services and other revenue for 1997 was 48.9% compared to
50.0% in the prior year, due to the growth in professional services, which have
a lower margin and grew faster than systems and software support fees.
 
     Selling, General and Administrative
 
     For 1997, SG&A expenses were $47.8 million, or 39.4% of revenue, compared
to $45.4 million, or 38.7% of revenue, in 1996. The increase in spending was due
primarily to the expansion of marketing activities, investments in sales and
employee training and recruiting.
 
     Research and Development
 
     For 1997, research and development expenses, net of amounts capitalized,
were $15.2 million, or 12.6% of revenue, compared to $14.9 million, or 12.7% of
revenue, in 1996. Research and development spending, without regard to amounts
capitalized, was $15.5 million in 1997 compared to $15.9 million in 1996.
 
     Software costs capitalized were $0.3 million in 1997 and $1.0 million in
1996. Capitalized software decreased, and as of December 31, 1997, had been
reduced to $0.9 million versus $2.0 million as of December 31, 1996.
 
     Write-Off of Capitalized Software Costs
 
     When the Company completed the acquisition of Caleo, it replaced certain
technology it was developing with technology acquired in the Caleo purchase. The
Company had previously capitalized $0.7 million of costs related to the replaced
technology and, consequently, the costs were expensed.
 
     Purchase of In-Process Research and Development
 
     In February 1996, the Company purchased Caleo for approximately $4.8
million. The business combination was accounted for as a purchase and,
accordingly, the purchase price was allocated to the underlying net assets based
on the asset's fair values. Of the total purchase price, $4.3 million was
allocated to in-process research and development and expensed at the time of the
business combination. In 1998, the Company sold the technology acquired from
Caleo for $0.5 million which was included in software licenses revenues.
 
     Merger Related Costs
 
     In December 1996, the Company issued approximately 3.8 million shares of
its common stock in the acquisition of ViewStar Corporation, a provider of
workflow software. The business combination was accounted for as a pooling of
interests and, accordingly, the merger related costs of $3.9 million were
expensed.
 
     Interest and Other Income, Net
 
     Interest and other income, net increased from $1.7 million in 1996 to $2.2
million in 1997. The increase was primarily the result of increased yields on
investments and increased cash available for investment.
 
     Income Taxes
 
     The effective income tax rate for 1997 was 30.2% compared to 54.2% in 1996.
The 1997 variance from the statutory rate of 34% was primarily related to the
utilization of ViewStar net operating loss carryforwards. The
 
                                       17
<PAGE>   20
 
unusually high effective tax rate in 1996 was primarily the result of
non-deductible merger related expenses and purchased in-process research and
development costs.
 
  LIQUIDITY AND CAPITAL RESOURCES
 
     Mosaix's financial condition remained strong as of December 31, 1998, with
cash and cash equivalents and short-term investments totaling $28.6 million. The
short-term investment portfolio is primarily invested in corporate debt
securities with maturities of one year or less. The portfolio is diversified
among security types and issuers, and does not include any derivative products.
At December 31, 1998, Mosaix's working capital was $39.5 million, the current
ratio was 2.5 to 1.0 and during 1998, Mosaix generated $10.1 million of cash
from operations.
 
     Historically, working capital used to finance Mosaix has been provided by
cash flow from operations, leases, and various forms of stock issuances,
including the exercise of stock options by employees. During 1998, Mosaix
invested $4.8 million to purchase furniture and equipment including investments
in internal customer management hardware and software systems.
 
     On July 16, 1997, the Mosaix Board of Directors authorized, subject to
certain terms and conditions, the repurchase of up to 1,700,000 shares of common
stock. In February and September 1998, the Board of Directors authorized the
repurchase of an additional 1,000,000 and 1,500,000 shares of the Company's
common stock, respectively. During 1998, the Company repurchased 1,792,000
shares at a total cost of $14.7 million. As of December 31, 1998, under these
authorizations, the Company had repurchased 3,229,500 shares at a total cost of
$28.7 million.
 
     In addition to its cash and short-term investment balances, Mosaix has a
$10 million domestic line of credit available to meet cash flow needs. The line
of credit expires on May 31, 1999. The Company intends, however, to renew the
line of credit for another year. Management believes that existing cash and
short-term investments and cash flow from operations, together with its
available credit line, will continue to be sufficient to meet ongoing operating
requirements as well as Mosaix's investment in capital assets and research and
development activities. In connection with research and development and market
expansion, cash may be used to acquire technology or to fund strategic ventures.
 
  IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
 
     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments embedded in other contracts, and
for hedging activities. The Statement requires that entities recognize all
derivatives as either assets or liabilities on the balance sheet and measure
these derivatives at fair value. SFAS 133 also specifies a new method of
accounting for hedging transactions, prescribes the type of items and
transactions that may be hedged, and specifies detailed criteria to be met to
qualify for hedge accounting. This Statement is effective for financial
statements for years beginning after June 15, 1999. The Company does not expect
the adoption of this Statement to have a material impact on the consolidated
financial statements.
 
     In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The SOP will require the
capitalization of certain costs incurred after the date of adoption in
connection with developing or obtaining software for internal use purposes. SOP
98-1 is effective for fiscal years beginning after December 15, 1998. The
Company does not expect the adoption of this Statement to have a material impact
on the consolidated financial statements.
 
                                       18
<PAGE>   21
 
FORWARD LOOKING STATEMENTS -- RISK FACTORS REGARDING FUTURE PERFORMANCE
 
     Certain statements in this Annual Report on Form 10-K contain
"forward-looking" information (as defined in the Private Securities Litigation
Reform Act of 1995) that involve risks and uncertainties. The Company cautions
that actual future quarterly and annual results are subject to a wide variety of
factors that could materially and adversely affect revenues and profitability,
including, without limitation, the following:
 
     Uncertainties Relating to Market Acceptance of the Company's New Products,
     including Market Acceptance of Underlying Technologies, such as the
     Internet and the Microsoft NT Operating System, and Relating to the Nature
     of the Emerging Customer Relationship Management Market
 
     Rapid technological change and frequent product introductions and
improvements characterize the document management and workflow software market
and the call management market. Accordingly, the financial performance of the
Company will depend upon its ability to develop product enhancements and new
products that keep pace with continuing changes in technology and customer
preferences, while also remaining price competitive.
 
     The Company has incurred, and expects to continue to incur, substantial
expenses associated with the introduction and promotion of new products. It is
possible that the expenses incurred will exceed development budgets, that the
Company will not be able to introduce products in a timely fashion, if at all,
or that such products will not achieve market acceptance or generate sales
sufficient to offset development costs or otherwise achieve forecasted or
expected revenue goals or plans. In addition, the success of the Company's
products which are designed for use on the Internet or intranets will depend
upon the acceptance of the Internet, intranets and World Wide Web technologies,
as well as the products' compatibility with such technologies.
 
     The success of many of the Company's products and potential products
further depends upon the continued acceptance and use in critical business
applications of Microsoft's Windows NT platform and other core Microsoft
technologies, such as the Windows NT Server, the Microsoft SQL Server database
and related Back Office software on which such products are, or will be, based.
If the Windows NT platform market fails to grow, grows more slowly than
anticipated or becomes obsolete, the Company's business, results of operations
and financial condition would be materially adversely affected.
 
     The Company has expended significant resources developing products for the
emerging CRM market. There continues to be substantial uncertainty about the
nature and functionality of those products that will ultimately gain acceptance
in this new market, as such there can be no assurance that the Company's
approach will be successful.
 
     Uncertainties Relating to Year 2000 Computer Problems
 
     The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive and complex, and virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause system
failures.
 
     The Company has tested and believes all of the Company's currently shipping
products are year 2000 compliant. In addition, whenever possible, the Company
has made software and hardware upgrades available to existing customers that
will enable their systems to be year 2000 compliant. It is possible that the
Company's current products contain undetected errors related to year 2000 that
may result in material additional costs or liabilities, which could have a
material adverse effect on the Company.
 
     The Company does have some customers who have purchased call management
systems in the past for which hardware upgrades are not available to allow the
customer to become year 2000 compliant. The Company has and will continue to
encourage such customers to migrate to current product versions. It is possible
that the Company will incur additional expenses in addressing these migration
issues. In addition, a
 
                                       19
<PAGE>   22
 
significant number of existing customers, who are currently paying maintenance
fees, have not yet upgraded to the latest year 2000 compliant products. The
demand for upgrade services by these customers will be significant, and may
exceed the Company's resources of skilled technical personnel dedicated to
providing year 2000 upgrade services, thus resulting in customers with
non-compliant systems at January 1, 2000. Because of these issues, the Company
may be subject to litigation seeking damages relating to non-year 2000 compliant
products sold in the past, and for business interruptions caused by the
Company's inability to upgrade all customers to a year 2000 compliant system. It
is also possible that support fee revenues may be adversely and materially
affected if customers choose not to upgrade or otherwise to discontinue use of
Mosaix products. The Company's international distributors, who support their end
user customers directly, may encounter similar issues, which may, in turn,
affect adversely their demand for Mosaix products in the coming quarters.
 
     Year 2000 issues may negatively affect the Company's revenues in future
quarters in ways beyond non-renewal of maintenance service or support fees. Some
customers or prospects may decline to purchase new systems or products from the
Company until all of their internal systems have been upgraded to year 2000
compliant versions. The market for the Company's products may be materially
adversely affected by this internal focus of resources and available budgets on
resolving year 2000 problems. The potential for distraction from normal customer
purchasing cycles and activities will exist throughout fiscal year 1999, and
possibly into the fiscal year 2000.
 
     With regard to the Company's internal processing and operational systems,
the Company has substantially completed installation of an enterprise-wide
financial and operational system from a major vendor that is year 2000
compliant. The Company anticipates that all critical components of this system
will be operational by mid-1999. Significant portions of this system are
currently operational. The Company has capitalized the price of this system and
third party consulting costs incurred to date and will continue to do so as the
system is completed. With regard to other systems, the Company is identifying,
reprogramming and testing all systems for year 2000 compliance. Although the
Company is not aware of any additional material operational issues or costs
associated with preparing the internal systems for the year 2000, it is possible
the Company will experience material adverse effects from undetected errors or
the failure of such systems to be year 2000 compliant.
 
     The Company has further attempted to ascertain the year 2000 readiness
status of its primary vendors of goods and services to assess and minimize the
risk of interruptions of delivery of such goods and services. Although the
Company is not currently aware of any material vendor year 2000 performance
issues, it is possible that unknown or unforeseen vendor operational problems,
stemming from year 2000 problems, will materially adversely impact the Company's
financial performance.
 
     While the Company continues to develop and implement readiness and
contingency plans intended to minimize the impacts of foreseeable year 2000
problems (the Company currently does not have a contingency plan to address
areas of potential failure, but anticipates developing contingency plans prior
to December 31, 1999 with regard to specific areas of risk where the Company has
not been able to gain reasonable assurance of year 2000 compliance), it is
possible the full and complete impact of the year 2000 on the future results of
the Company will be material and adverse. This risk is difficult to fully
determine at present, and should be considered in evaluating the financial
prospects and future growth of the Company. The Company does not believe that
the expenses incurred to date, or to be incurred in the future, in connection
with currently planned year 2000 remediation efforts, has had, or will have, a
material adverse effect on the Company.
 
     Uncertainties Relating to Lengthy Sales and Implementation Cycles, Complex
     Service Requirements and Seasonality
 
     The purchase or license of the Company's products is usually a significant
decision by prospective customers, requiring the Company to engage in a lengthy
sales cycle, typically between six and twelve months, without any assurance that
a sale will result. Moreover, the cost to the customer of the Company's products
typically is only a portion of the cost of implementing a large-scale CMS or CRM
solution. System sales and software license revenues are difficult to forecast,
due to the fact that quarterly revenues depend on a relatively few large
contracts that are subject to changes in customer budgets and general economic
conditions. In
 
                                       20
<PAGE>   23
 
addition, the sales cycle is subject to a number of significant delays over
which the Company has little or no control. Successful implementation of the
Company's products may also require lengthy and complex implementation and
integration services, which services may be provided by the Company or by a
third party. It is becoming increasingly competitive to recruit the talent
required to perform the required services. The Company's future operating
results therefore depend upon its ability to coordinate these complex service
resources and ensure successful implementation of its products, while managing
costs. Furthermore, because the Company's products generally are shipped as
orders are received, revenues in any quarter are substantially dependent on
orders booked and shipped in that quarter. The Company's operating results have
fluctuated in the past on both an annual and quarterly basis, and are likely to
do so in the future. For these reasons, results of operations for any particular
period are not necessarily indicative of future performance.
 
     In addition, changes in levels of the Company's consulting activity and
seasonality in its consulting revenues have resulted in variability of service
revenues from quarter to quarter. Historically, the Company often has recognized
a substantial portion of its revenues in the last month of the quarter, with
these revenues frequently concentrated in the last week of the quarter. In
addition, the Company generally has realized lower revenues from system sales
and software license fees in the first quarter of the year than in the
immediately preceding quarter. Mosaix believes that this has been due primarily
to the concentration by some customers of larger capital purchases in the fourth
quarter of the calendar year to avoid end-of-year budgetary limitations,
followed by lower purchasing activity during the first quarter of the next
calendar year.
 
     Further, to the extent that international operations in the future
constitute a higher percentage of total revenues, the Company anticipates that
it ordinarily will experience relatively weaker demand in the quarter ending
September 30, due to reduced customer activity in Europe during the summer
months.
 
     Uncertainties Relating to Competition and Development of Industry and
     Distribution Relationships
 
     The market for Mosaix's products and services is highly competitive.
Important competitive factors include price, performance, diversity of product
line, reliability, delivery capabilities, and customer service and support. Some
of the Company's competitors have significantly greater financial, technical,
manufacturing, marketing and other resources. Competitors may develop products
and technologies that are less expensive or technologically superior to the
Company's products, or form strategic alliances that provide a broader, better
integrated solution to certain of the Company's potential customers.
 
     Mosaix's principal competitors in the outbound call management systems
market include Davox Corporation, EIS International, Inc. and Melita
International Corporation. The potential entry into the market of major ACD and
PBX suppliers (suppliers of customer-premise call routing and switching systems)
also presents a strong competitive threat. These companies may elect to acquire
or align with Mosaix's competitors, increasing their market presence and
distribution; resell principal competitors' products; or elect to develop and
market their own predictive dialing application software. As Mosaix expands its
CMS offerings, it may also encounter increased competition from call center
application providers such as Information Management Associates.
 
     The market for agent effectiveness applications is an emerging market.
Mosaix's principal competitors in this market include Teknekron Infoswitch,
Witness Systems, Nice Systems, Eyretel, Comverse, and Dictaphone. As in the
market for CMS products, the potential entry into the market of major ACD and
PBX vendors presents a strong competitive threat. Furthermore, any of these
companies may elect to acquire, be acquired or otherwise align with Mosaix's
competitors in the CMS market. Because the market for these applications is new,
and no clear market leader has emerged to establish an "industry-standard"
solution, new market entrants may appear with strongly differentiated solutions
that would present a strong competitive threat.
 
     The traditional competition for horizontal workflow technology has been
workflow software vendors, including direct competition from a number of public
and private companies or divisions thereof, including FileNET, IBM, Action
Technologies, Staffware, Optika, and Eastman Kodak. As ViewStar 5.0 extends into
the customer relationship management market, it will face competition from new
competitors, including process-oriented applications vendors such as
Pegasystems, Chordiant, and DST Systems. Mosaix's CRM
 
                                       21
<PAGE>   24
 
applications may encounter competition from a number of software companies that
want to extend their reach in the enterprise, including Vantive and Seibel
Systems. Several of these companies have already announced and others may
announce document workflow capabilities for their existing or future products.
 
     Many of the Company's current or potential competitors have greater
financial, technical and marketing resources. As the Company's markets mature
and new and existing companies compete for the same customers, price competition
is likely to intensify, which could adversely affect the operating results of
the Company.
 
     The Company relies on a number of consulting and other system integration
firms for implementation and other services, as well as recommendations of its
products during the evaluation stage of the purchasing process. The Company also
relies upon a number of distribution relationships and intends to create new
channels for distribution of its products. Although the Company seeks to
maintain close relationships with these parties, many of them have similar, and
often more established relationships with the Company's principal competitors.
If the Company is unable to develop and retain effective, long-term
relationships with these third party distributors, system integrators and
marketing partners, the Company's competitive position and financial performance
could be materially adversely affected.
 
     Uncertainties Relating to the Management of Remote Operations
 
     In December of 1996, the Company completed a merger with ViewStar, and
during 1997 and 1998, several administrative and management functions were
combined or reorganized. Certain sales, customer support, professional service
and development functions remain in Alameda, California. The Company does not
have significant experience in the management of remote operations, and the
geographical separation of Alameda operations may hinder efforts to integrate
operations and product development. The failure to effectively manage the
operations in Alameda or to realize the potential product synergies could have a
material adverse effect on the Company's business.
 
     Uncertainties Relating to Competition for Employees
 
     Competition for engineers, professional services, customer support and
sales employees has continued to increase in the high technology industry. In
order for the Company to develop new and enhanced versions of existing products
and to properly support customers, the Company must continue to successfully
retain existing employees and recruit additional skilled people. In the event
the Company is not able to attract personnel with the requisite skills in a
reasonable time frame or as the costs of doing so increase, the Company could be
materially adversely affected.
 
     Uncertainties Relating to Limited Source of Supply
 
     The Company purchases two principal components for its system product from
sole-source vendors. If these components become unavailable without sufficient
advance notice to enable the Company to develop alternative sources, or if
efforts to establish alternate sources are unsuccessful, this would adversely
affect the Company's ability to manufacture its call center system products. Any
such delay could materially adversely affect the operating results of the
Company.
 
     Uncertainties Relating to Lack of Product Revenue Diversification
 
     While the Company has developed new software products and services and has
multiple distribution channels, the Company expects that its CMS and CRM
products will continue to account for a significant amount of the Company's
revenues in the future. A decline in demand for those products as a result of
competition, technological change or other factors would have a material adverse
effect on the Company's results of operations.
 
                                       22
<PAGE>   25
 
     Uncertainties Relating to International Sales and Economies
 
     Mosaix sells products to customers in international markets, with such
sales accounting for 28.9% of the Company's total sales in 1998. Accordingly,
Mosaix is subject to the normal risks of international sales, such as currency
fluctuations, longer payment cycles, greater difficulties in accounts receivable
collections and compliance with export laws and a wide variety of foreign laws.
Any difficulties with respect to foreign export or other laws would have a
material adverse effect on the Company's international sales. The current year
financial crisis in Asia adversely affected sales in the region in 1998 and may
continue to negatively affect anticipated growth in Asia in future quarters.
Additionally, similar crises could develop in other foreign markets in the
future and have a material adverse impact in a future period. Because the
Company invoices certain of its foreign sales in local currency (the British
Pound Sterling) and does not hedge these transactions, fluctuations in exchange
rates could adversely affect the Company's revenues and costs and could create
significant foreign currency losses.
 
     Uncertainties Relating to Dependence on Proprietary Rights, Infringement
     Claims, Uncertainty of Obtaining Licenses
 
     Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy the Company's products or to obtain and
use the Company's proprietary information. Policing unauthorized use of the
Company's products is difficult, and since the Company is typically unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. In addition, the laws of some
foreign countries do not protect the Company's proprietary rights to as great an
extent as the laws of the United States. There can be no assurance that the
Company's means of protecting its proprietary rights will be adequate or that
its competitors will not independently develop similar technology.
 
     The Company has received communications from time to time, asserting that
its products infringe the proprietary rights of third parties, or seeking
indemnification against such infringement. While the Company currently has no
reason to believe or suspect that its products infringe the proprietary rights
of third parties, it is possible that third parties will claim infringement with
respect to current or future products. The Company expects that software product
developers will increasingly be subject to infringement claims as the number of
products and competitors grows and the functionality of products in different
markets overlaps. Any such claims, with or without merit, could be
time-consuming, result in costly litigation, adversely affect revenues, cause
product shipment delays or require the Company to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to the Company, if at all, and could have a
material adverse effect on the Company's business, results of operations and
financial condition.
 
     The Company also relies on certain software licensed from third parties,
including software that is integrated with internally developed software and
used in the Company's stand alone products, and in products to perform key
functions. There can be no assurance that such third parties will remain in
business, that they will continue to support their products or that their
products will otherwise continue to be available to the Company on commercially
reasonable terms. The loss or inability to maintain any of these software
licenses could materially adversely affect the Company's business.
 
     Uncertainties Relating to Risk of Product Defects
 
     Software, system and other products as internally complex, with as many
interfaces to third party vendors as those offered by the Company, frequently
contain errors or defects, especially when first introduced or when new versions
are released. Although the Company conducts extensive product testing during
product development, it has experienced delays in the commercial release of
products pending the correction of software and hardware problems. In some
cases, the Company has provided product enhancements to correct errors or
defects in released products due to the difficulty of testing for all possible
conditions that may be encountered at a customer site. The Company could
therefore, in the future, lose revenues as a result of product defects. The
Company's products and future products are intended for use in applications that
are
 
                                       23
<PAGE>   26
 
critical to a customer's business. As a result, the Company expects that its
customers and potential customers have a greater sensitivity to product defects
than the market for software and hardware products generally.
 
     Uncertainties Relating to Governmental Regulation
 
     While existing industry legislation does not directly regulate the
manufacture and sale of the Company's call management products, certain existing
legislation may affect the ability of the Company's customers to utilize some of
its products in certain ways. For example, call management systems may not be
used for certain prohibited debt collection and remote telephone solicitation
practices, nor may they be used under certain circumstances to leave or play
artificial or prerecorded messages. These practices are governed by such federal
laws as the Telephone Consumer Protection Act of 1991 and the Telemarketing and
Consumer Fraud and Abuse Prevention Act, which authorize the FCC and Federal
Trade Commission, respectively, to issue additional regulations and administer
such laws. In response to such regulations, telecommunications companies and
other service providers are developing products that allow consumers to block or
screen in-bound telemarketing phone calls. The development of these products may
reduce the effectiveness of the Company's products when used for such purposes.
In addition, most states have enacted legislation limiting certain telephone
solicitation practices or restricting use of automatic dialing and announcement
devices. Other federal and state legislation that has been proposed from time to
time include bills that would, if enacted, recognize certain privacy rights of
employees at the work site and regulate the ability of employers to monitor job
performance, including monitoring employees' telephone communication or
gathering information regarding such communications. It is possible that such
legislation or other legislation, if enacted, might directly or indirectly
affect how the Company's call management systems, or some feature thereof, can
be used. Similarly, international regulations and laws, particularly in Europe
and Asia, could have a negative impact on the Company.
 
     Conclusion
 
     Due to all of the foregoing factors, it is likely that without advance
warning or notice, in some future quarter the Company's operating results will
be below the expectations of market analysts and investors. This may cause the
market price of the Company's common stock to fall. These risks are impossible
to fully determine at present, and should be considered in evaluating the
financial prospects and future growth of the Company.
 
                                  ITEM SEVEN A
           QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
     Mosaix does not use derivative financial instruments in its investment
portfolio. Its financial instruments consist of cash and cash equivalents,
short-term investments, trade accounts and contracts receivable, accounts
payable, and long-term obligations. The Company considers investments in highly
liquid instruments purchased with an original maturity of 90 days or less to be
cash equivalents. All of Mosaix's cash equivalents and short-term investments,
principally consist of commercial paper and debt securities, and are classified
as held-to-maturity as of December 31, 1998. The Company's exposure to market
risk for changes in interest rates relates primarily to its short-term
investments and short-term obligations, thus, fluctuations in interest rates
would not have a material impact on the fair value of these securities. (See
note 3 and note 7 to the Company's consolidated financial statements contained
in ITEM EIGHT).
 
     Sales to foreign countries accounted for approximately 29% of the total
sales for the year ended December 31, 1998 compared to 26% in 1997. Because the
Company invoices certain of its foreign sales in local currency (British Pound
Sterling) and does not hedge these transactions, fluctuations in exchange rates
could adversely affect the translated results of operations of the Company's
foreign subsidiary. Therefore, foreign exchange fluctuation could create a risk
of significant balance sheet gains or losses on the Company's consolidated
financial statements.
 
                                       24
<PAGE>   27
 
                                   ITEM EIGHT
                   FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
 
     For financial statements, see F-1 to F-20.
 
                                   ITEM NINE
   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                                   DISCLOSURE
 
     None.
 
                                    PART III
                                    ITEM TEN
               DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The information required by this Item is incorporated by reference to the
Company's Proxy Statement to be filed with the Securities and Exchange
Commission within 120 days after the close of the Company's fiscal year.
 
                                  ITEM ELEVEN
                             EXECUTIVE COMPENSATION
 
     The information required by this Item is incorporated by reference to the
Company's Proxy Statement to be filed with the Securities and Exchange
Commission within 120 days after the close of the Company's fiscal year.
 
                                  ITEM TWELVE
         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The information required by this Item is incorporated by reference to the
Company's Proxy Statement to be filed with the Securities and Exchange
Commission within 120 days after the close of the Company's fiscal year.
 
                                 ITEM THIRTEEN
                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     None.
 
                                       25
<PAGE>   28
 
                                    PART IV
                                 ITEM FOURTEEN
             EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
 
CONSOLIDATED FINANCIAL STATEMENTS:
 
     See F-1 to F-20.
 
FINANCIAL STATEMENTS SCHEDULES:
 
     Independent Auditors' Report (contained on page F-21)
 
     Schedule II Valuation and Qualifying Accounts (contained on page F-22)
 
     All other Schedules are omitted because they are inapplicable or because
the requested information is shown in the Consolidated Financial Statements of
the Company or in the related Notes thereto.
 
<TABLE>
<CAPTION>
EXHIBITS
--------
<C>         <S>                                                           <C>
  3.1       Restated Articles of Incorporation of the Registrant          (B)
  3.2       Restated Bylaws of the Registrant                             (C)
  4.1       Form of Certificate Evidencing Common Stock, par value $0.01
            per share                                                     (B)
 10.1       Restated 1987 Stock Option Plan, as amended*                  (F)
 10.2       Amended and Restated 1996 Stock Incentive Compensation Plan*  (A)
 10.3       Restated 1992 Stock Option Plan for Non-Employee Directors,
            as amended*                                                   (F)
 10.4       1991 Employee Stock Purchase Plan, as amended*                (D)
 10.5       Executive Employment Agreement, dated April 28, 1998,
            between Kim Mackay and the Registrant*                        (A)
 10.6       Amendment No. 1, dated August 18, 1998, to Executive
            Employment Agreement between Kim Mackay and the Registrant*   (A)
 10.7       1999 Management Bonus Plan*                                   (A)
 10.8       1999 Performance Bonus Plan*                                  (A)
 10.9       Executive Employment Agreement, dated March 1, 1995, between
            John J. Flavio and the Registrant*                            (E)
 10.10      Amendment No. 1, dated August 18, 1998, to Executive
            Employment Agreement between John J. Flavio and the
            Registrant*                                                   (A)
 10.11      Lease for Building 17, dated May 20, 1991, among Michael R.
            Mastro, Redmond East Associates and the Registrant            (A)
 10.12      Amendment No. 1 to Lease for Building 17, dated July 1991,
            between Redmond East Associates and the Registrant            (A)
 10.13      Amendment No. 2 to Lease for Building 17, effective June 1,
            1997, between Carr Redmond Corporation, successor in
            interest to Redmond East, L.L.C, and the Registrant           (A)
 10.14      Amendment No. 3 to Lease for Building 17, dated November 2,
            1998, between Carr Redmond Corporation, successor in
            interest to Redmond East Associates, and the Registrant.      (A)
 10.15      Business Loan Agreement dated June 25, 1997 with
            Seattle-First National Bank                                   (H)
 10.16      Customer Purchase Agreement dated December 27, 1990 with
            Summa Four, Inc.**                                            (C)
 10.17      Software Source Code and Manufacturing Data Deposit and
            Escrow Agreement dated December 27, 1990 with Summa Four,
            Inc. and Data Securities and International Ind.**             (C)
 10.18      ViewStar Corporation Amended 1986 Incentive Stock Plan and
            form of agreement thereunder*                                 (G)
</TABLE>
 
                                       26
<PAGE>   29
 
<TABLE>
<CAPTION>
EXHIBITS
--------
<C>         <S>                                                           <C>
 10.19      ViewStar Corporation Amended 1994 Stock Plan, as amended,
            and form of agreement thereunder*                             (G)
 10.20      ViewStar Corporation 1996 Incentive Stock Plan*               (G)
 10.21      Sublease Agreement between the ASK Group, Inc. and ViewStar
            Corporation dated October 8, 1993, for ViewStar's facility
            located at 1101 Marina Village Parkway, Alameda, California   (G)
 10.22      First Amendment to Sublease Agreement between the ASK Group,
            Inc. and ViewStar Corporation, dated September 8, 1994, for
            ViewStar's facility located at 1101 Marina Village Parkway,
            Alameda, California                                           (H)
 10.23      Executive Employment Agreement, dated October 14, 1996,
            between Steven R. Russell and the Registrant*                 (H)
 10.24      Executive Employment Agreement, dated February 5, 1998,
            between Nicholas A. Tiliacos and the Registrant*              (H)
 10.25      Amendment No. 1, dated August 18, 1998, to Executive
            Employment Agreement between Nicholas A. Tiliacos and the
            Registrant*                                                   (A)
 10.26      Executive Employment Agreement, dated April 28, 1998,
            between Theodore Manakas and the Registrant*                  (A)
 10.27      Amendment No. 1, dated August 18, 1998, to Executive
            Employment Agreement between Theodore Manakas and the
            Registrant*                                                   (A)
 10.28      1998 Management and Performance Bonus Plans*                  (H)
 10.29      Amendment No. 1, dated August 18, 1998, to Executive
            Employment Agreement between Steven R. Russell and the
            Registrant*                                                   (A)
 21.1       List of Subsidiaries of the Registrant                        (A)
 23.1       Consent of KPMG LLP                                           (A)
 27.1       Financial Data Schedule                                       (A)
</TABLE>
 
---------------
 *     Management contract or compensation plan.
 
 **    Confidential treatment has been requested with respect to portions of the
       agreement.
 
(A)   Filed herewith.
 
(B)   Incorporated by reference from exhibits filed in connection with the
      Registrant's Registration Statement on Form S-1 (Registration No.
      33-34561) filed with the Securities and Exchange Commission on April 26,
      1990, as amended.
 
(C)   Incorporated by reference from exhibits filed in connection with the
      Registrant's Annual Report on Form 10-K for the year ended December 31,
      1992.
 
(D)   Incorporated by reference from exhibits filed in connection with the
      Registrant's Annual Report on Form 10-K/A for the year ended December 31,
      1994.
 
(E)   Incorporated by reference from exhibits filed in connection with the
      Registrant's Quarterly Report on From 10-Q for the quarter ended March 31,
      1995.
 
(F)   Incorporated by reference from exhibits filed in connection with the
      Registrant's Annual Report on Form 10-K for the year ended December 31,
      1995.
 
(G)   Incorporated by reference from exhibits filed in connection with the
      Registrant's Registration Statement on Form S4 (Registration No.
      333-14887) initially filed with the Securities and Exchange Commission on
      October 25, 1996.
 
(H)  Incorporated by reference from exhibits filed in connection with the
     Registrant's Annual Report on Form 10-K for the year ended December 31,
     1997.
 
                                       27
<PAGE>   30
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
 
                                          MOSAIX, INC.
 
                                          By: /s/ NICHOLAS A. TILIACOS
 
                                            ------------------------------------
                                            Nicholas A. Tiliacos
                                            Director and Chief Executive Officer
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report is signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
                     SIGNATURE                                     TITLE                     DATE
                     ---------                                     -----                     ----
<C>                                                  <C>                                 <S>
 
               /s/ HARVEY N. GILLIS                  Chairman of the Board and Director  March 4, 1999
---------------------------------------------------
                 Harvey N. Gillis
 
             /s/ NICHOLAS A. TILIACOS                President, Chief Executive Officer  March 4, 1999
---------------------------------------------------             and Director
               Nicholas A. Tiliacos
 
                /s/ JOHN J. FLAVIO                       Senior Vice President and       March 4, 1999
---------------------------------------------------       Chief Financial Officer
                  John J. Flavio
 
              /s/ MICHAEL A. JACOBSEN                          Controller and            March 4, 1999
---------------------------------------------------     Principal Accounting Officer
                Michael A. Jacobsen
 
                 /s/ TOM A. ALBERG                                Director               March 4, 1999
---------------------------------------------------
                   Tom A. Alberg
 
                /s/ H. ROBERT GILL                                Director               March 4, 1999
---------------------------------------------------
                  H. Robert Gill
 
                  /s/ UMANG GUPTA                                 Director               March 4, 1999
---------------------------------------------------
                    Umang Gupta
 
                 /s/ DAVID J. LADD                                Director               March 4, 1999
---------------------------------------------------
                   David J. Ladd
 
              /s/ ROBERT S. LEVENTHAL                             Director               March 4, 1999
---------------------------------------------------
                Robert S. Leventhal
</TABLE>
 
                                       28
<PAGE>   31
 
                          INDEPENDENT AUDITORS' REPORT
 
The Board of Directors and Shareholders
Mosaix, Inc.:
 
     We have audited the accompanying consolidated balance sheets of Mosaix,
Inc. and subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of income and comprehensive income, shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1998. 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 conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mosaix, Inc.
and subsidiaries as of December 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
 
KPMG SIGNATURE
Seattle, Washington
January 29, 1999
 
                                       F-1
<PAGE>   32
 
                         MOSAIX, INC. AND SUBSIDIARIES
 
           CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                             --------------------------------
                                                               1998        1997        1996
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
Revenues:
  Systems sales............................................  $ 47,059    $ 49,198    $ 53,384
  Software licenses........................................    19,732      23,947      20,654
  Services and other.......................................    43,277      47,999      43,143
                                                             --------    --------    --------
          Total revenue....................................   110,068     121,144     117,181
                                                             --------    --------    --------
Cost of revenues:
  Systems sales............................................    18,073      18,510      18,813
  Software licenses........................................     2,342       2,416       1,364
  Services and other.......................................    25,658      24,504      21,588
                                                             --------    --------    --------
          Total cost of revenue............................    46,073      45,430      41,765
                                                             --------    --------    --------
Gross profit...............................................    63,995      75,714      75,416
                                                             --------    --------    --------
Operating expenses:
  Selling, general and administrative......................    45,674      47,774      45,355
  Research and development.................................    15,044      15,226      14,912
  Restructuring charge.....................................        --         948          --
  Write-off of capitalized software costs..................        --          --         705
  Purchase of in-process research and development..........        --          --       4,307
  Merger related costs.....................................        --          --       3,905
                                                             --------    --------    --------
          Total operating expenses.........................    60,718      63,948      69,184
                                                             --------    --------    --------
Operating income...........................................     3,277      11,766       6,232
Interest and other income, net.............................     1,887       2,208       1,674
                                                             --------    --------    --------
Income before income taxes.................................     5,164      13,974       7,906
Income tax expense.........................................       924       4,217       4,288
                                                             --------    --------    --------
Net income.................................................  $  4,240    $  9,757    $  3,618
                                                             ========    ========    ========
Net income per share:
  Basic....................................................  $   0.36    $   0.74    $   0.29
  Diluted..................................................  $   0.35    $   0.71    $   0.27
Weighted average common shares outstanding:
  Basic....................................................    11,793      13,169      12,677
  Diluted..................................................    11,998      13,667      13,570
Comprehensive income:
  Net income...............................................  $  4,240    $  9,757    $  3,618
  Foreign currency translation gain........................        24         198         133
                                                             --------    --------    --------
     Comprehensive income..................................  $  4,264    $  9,955    $  3,751
                                                             ========    ========    ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       F-2
<PAGE>   33
 
                         MOSAIX, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              ------------------
                                                               1998       1997
                                                              -------    -------
<S>                                                           <C>        <C>
Current assets:
  Cash and cash equivalents.................................  $ 5,423    $ 5,532
  Short-term investments, at amortized cost.................   23,131     30,548
  Trade accounts receivable, less allowance for doubtful
     accounts
     of $2,076 in 1998 and $1,749 in 1997...................   30,837     30,325
  Inventories...............................................      591      2,532
  Current installments of contracts receivable, less
     allowance for
     doubtful accounts of $497 in 1997......................       98      1,555
  Deferred income taxes.....................................    3,481      1,338
  Prepaid expenses and other current assets.................    2,086      2,881
                                                              -------    -------
          Total current assets..............................   65,647     74,711
Furniture, equipment and leasehold improvements, net........    7,672      7,449
Capitalized software costs, net of accumulated amortization
  of $701 in 1997...........................................       --        930
Deferred income taxes.......................................      739        837
Other assets, net...........................................       --        451
                                                              -------    -------
          Total assets......................................  $74,058    $84,378
                                                              =======    =======
 
                      LIABILITIES AND SHAREHOLDERS' EQUITY
 
Current liabilities:
  Accounts payable..........................................  $ 5,301    $ 5,455
  Accrued compensation......................................    7,617      8,762
  Other accrued expenses....................................    6,862      6,413
  Current portion of long-term obligations..................       78        381
  Customer deposits and unearned revenue....................    6,332      7,443
                                                              -------    -------
          Total current liabilities.........................   26,190     28,454
Long-term obligations, excluding current installments.......       --         97
Unearned revenue, less current portion......................       --         22
                                                              -------    -------
          Total liabilities.................................   26,190     28,573
Shareholders' equity:
  Common stock, $.01 par value. Authorized 25,000 shares;
     issued and
     outstanding 10,841 shares in 1998 and 12,229 shares in
     1997...................................................      108        122
  Additional paid-in-capital................................   37,581     50,040
  Accumulated comprehensive income..........................       21         (3)
  Notes receivable from shareholders........................       --       (272)
  Retained earnings.........................................   10,158      5,918
                                                              -------    -------
          Total shareholders' equity........................   47,868     55,805
                                                              -------    -------
          Total liabilities and shareholders' equity........  $74,058    $84,378
                                                              =======    =======
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       F-3
<PAGE>   34
 
                         MOSAIX, INC. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                                      NOTES                         DEFERRED
                                  PREFERRED STOCK    COMMON STOCK     ADDITIONAL    RECEIVABLE     ACCUMULATED    STOCK OPTION
                                  ---------------   ---------------    PAID-IN         FROM       COMPREHENSIVE   COMPENSATION
                                  SHARES   AMOUNT   SHARES   AMOUNT    CAPITAL     SHAREHOLDERS      INCOME         EXPENSE
                                  ------   ------   ------   ------   ----------   ------------   -------------   ------------
<S>                               <C>      <C>      <C>      <C>      <C>          <C>            <C>             <C>
Balances at December 31, 1995...   1,847    $ 18     9,768    $ 98     $ 56,688       $(299)          $(334)          $(31)
  Issuance of preferred stock...   3,293      33        --      --        3,294          --              --             --
  Exercise of stock options.....      --      --       369       4        1,440        (136)             --             --
  Amortization of deferred
    compensation expense........      --      --        --      --           --          --              --             31
  Tax benefit realized upon
    exercise of stock options...      --      --        --      --        1,051          --              --             --
  Common stock sold pursuant to
    employee stock purchase
    plan........................      --      --        33      --          388          --              --             --
  Comprehensive income..........      --      --        --      --           --          --             133             --
  Restricted stock issued in
    exchange for note
    receivable..................      --      --       311       3          152        (155)             --             --
  Conversion of preferred stock
    to common stock.............  (5,140)    (51)    2,797      28           23          --              --             --
  Exercise of stock warrants....      --      --        42      --           30          --              --             --
  Repurchase of common stock....      --      --       (83)     (1)      (1,225)         --              --             --
  Net income....................      --      --        --      --           --          --              --             --
                                  ------    ----    ------    ----     --------       -----           -----           ----
Balances at December 31, 1996...      --      --    13,237     132       61,841        (590)           (201)            --
  Exercise of stock options.....      --      --       409       4        1,161          --              --             --
  Tax benefit realized upon
    exercise of stock options...      --      --        --      --          700          --              --             --
  Common stock sold pursuant to
    employee stock purchase
    plan........................      --      --        38       1          365          --              --             --
  Comprehensive income..........      --      --        --      --           --          --             198             --
  Collection of shareholder
    notes.......................      --      --        --      --           --         318              --             --
  Repurchase of common stock....      --      --    (1,455)    (15)     (14,027)         --              --             --
  Net income....................      --      --        --      --           --          --              --             --
                                  ------    ----    ------    ----     --------       -----           -----           ----
Balances at December 31, 1997...      --      --    12,229     122       50,040        (272)             (3)            --
  Exercise of stock options.....      --      --       354       4        1,164          --              --             --
  Tax benefit realized upon
    exercise of stock options...      --      --        --      --          638          --              --             --
  Common stock sold pursuant to
    employee stock purchase
    plan........................      --      --        50      --          376          --              --             --
  Comprehensive income..........      --      --        --      --           --          --              24             --
  Collection of shareholder
    notes.......................      --      --        --      --           --         272              --             --
  Repurchase of common stock....      --      --    (1,792)    (18)     (14,637)         --              --             --
  Net income....................      --      --        --      --           --          --              --             --
                                  ------    ----    ------    ----     --------       -----           -----           ----
Balances at December 31, 1998...      --    $ --    10,841    $108     $ 37,581       $  --           $  21           $ --
                                  ======    ====    ======    ====     ========       =====           =====           ====
 
<CAPTION>
 
                                  RETAINED        TOTAL
                                  EARNINGS    SHAREHOLDERS'
                                  (DEFICIT)      EQUITY
                                  ---------   -------------
<S>                               <C>         <C>
Balances at December 31, 1995...   $(7,457)     $ 48,683
  Issuance of preferred stock...        --         3,327
  Exercise of stock options.....        --         1,308
  Amortization of deferred
    compensation expense........        --            31
  Tax benefit realized upon
    exercise of stock options...        --         1,051
  Common stock sold pursuant to
    employee stock purchase
    plan........................        --           388
  Comprehensive income..........        --           133
  Restricted stock issued in
    exchange for note
    receivable..................        --            --
  Conversion of preferred stock
    to common stock.............        --            --
  Exercise of stock warrants....        --            30
  Repurchase of common stock....        --        (1,226)
  Net income....................     3,618         3,618
                                   -------      --------
Balances at December 31, 1996...    (3,839)       57,343
  Exercise of stock options.....        --         1,165
  Tax benefit realized upon
    exercise of stock options...        --           700
  Common stock sold pursuant to
    employee stock purchase
    plan........................        --           366
  Comprehensive income..........        --           198
  Collection of shareholder
    notes.......................        --           318
  Repurchase of common stock....        --       (14,042)
  Net income....................     9,757         9,757
                                   -------      --------
Balances at December 31, 1997...     5,918        55,805
  Exercise of stock options.....        --         1,168
  Tax benefit realized upon
    exercise of stock options...        --           638
  Common stock sold pursuant to
    employee stock purchase
    plan........................        --           376
  Comprehensive income..........        --            24
  Collection of shareholder
    notes.......................        --           272
  Repurchase of common stock....        --       (14,655)
  Net income....................     4,240         4,240
                                   -------      --------
Balances at December 31, 1998...   $10,158      $ 47,868
                                   =======      ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       F-4
<PAGE>   35
 
                         MOSAIX, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                              ------------------------------
                                                                1998       1997       1996
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Cash flows from operating activities:
  Net income................................................  $  4,240   $  9,757   $  3,618
  Adjustments to reconcile net income to net cash provided
     by operating activities:
     Depreciation and amortization..........................     5,513      6,028      6,315
     Changes in operating assets and liabilities:
       Trade and other receivables..........................       945     (3,385)     1,181
       Other assets.........................................     1,328      1,927     (2,162)
       Accounts payable and accrued expenses................      (850)      (803)     2,977
       Customer deposits and unearned revenue...............    (1,111)    (3,013)    (7,023)
                                                              --------   --------   --------
          Net cash provided by operating activities.........    10,065     10,511      4,906
                                                              --------   --------   --------
Cash flows from investing activities:
  Purchase of short-term investments........................   (31,176)   (35,978)   (40,635)
  Proceeds from maturities of short-term investments........    38,532     37,255     42,658
  Purchases of furniture and equipment......................    (4,780)    (4,778)    (3,456)
  Increase in capitalized software costs....................        --       (256)      (976)
  Other.....................................................       487        820        207
                                                              --------   --------   --------
          Net cash provided by (used in) investing
            activities......................................     3,063     (2,937)    (2,202)
                                                              --------   --------   --------
Cash flows from financing activities:
  Collection of shareholder notes receivable................       272        318         --
  Repayments of long-term obligations.......................      (422)    (1,031)    (1,262)
  Common stock repurchased..................................   (14,655)   (14,042)    (1,226)
  Proceeds from issuance of preferred and common stock......     1,544      1,531      2,905
                                                              --------   --------   --------
          Net cash provided by (used in) financing
            activities......................................   (13,261)   (13,224)       417
                                                              --------   --------   --------
Effect of exchange rate changes on cash.....................        24        198        117
                                                              --------   --------   --------
Increase (decrease) in cash and cash equivalents............      (109)    (5,452)     3,238
Cash and cash equivalents, beginning of year................     5,532     10,984      7,746
                                                              --------   --------   --------
Cash and cash equivalents, end of year......................     5,423      5,532     10,984
Short-term investments......................................    23,131     30,548     31,825
                                                              --------   --------   --------
Cash and cash equivalents and short-term investments........  $ 28,554   $ 36,080   $ 42,809
                                                              ========   ========   ========
Supplemental disclosures of cash flow information:
  Cash paid during the year for:
     Income taxes...........................................  $    226   $  1,816   $  5,611
     Interest...............................................  $     30   $    105   $    290
  Noncash investing and financing activities:
     Equipment transferred from inventory...................  $     --   $     14   $    363
     Tax benefit realized upon exercise of stock options....  $    638   $    700   $  1,051
     Equipment acquired under capital leases................  $     --   $     --   $    554
     Issuance of common stock in exchange for notes
       receivable...........................................  $     --   $     --   $    291
     Issuance of preferred stock in exchange for
       subordinated notes payable and related accrued
       interest.............................................  $     --   $     --   $  2,148
</TABLE>
 
          See accompanying notes to consolidated financial statements.
                                       F-5
<PAGE>   36
 
                         MOSAIX, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
 
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
a. Description of Business
 
     Mosaix, Inc. and subsidiaries (hereinafter referred to as "Mosaix" or the
"Company") is a global provider of call center software, predictive dialers and
workflow applications that enable companies to acquire, retain, and develop
customer relationships. With these products, companies can integrate sales,
marketing, and customer services applications in their call centers with
back-office applications throughout the enterprise. The two product areas
include call management systems (CMS), including agent effectiveness
applications (AEA), and customer relationship management (CRM) applications.
 
     Mosaix' principal markets are North America, South America, Europe, and
Asia.
 
b. Basis of Presentation
 
     The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
 
c. Cash Equivalents and Short-Term Investments
 
     All short-term investments with a maturity of three months or less at the
date of purchase are considered to be cash equivalents. The Company's short-term
investments are classified as held-to-maturity and, as such, are carried at
amortized cost.
 
d. Inventories
 
     Inventories are stated at the lower of cost (first-in, first-out) or market
(replacement cost for raw materials and spare parts and net realizable value for
work-in-process, finished goods, and installations in progress).
 
e. Furniture, Equipment and Leasehold Improvements
 
     Furniture, equipment and leasehold improvements are stated at cost.
Depreciation of furniture and equipment is on the straight-line method over the
three to five year estimated useful lives of the assets. Leasehold improvements
and assets recorded under capital leases are amortized over the shorter of their
estimated useful lives or the related lease term. Maintenance and repairs are
expensed as incurred. When furniture, equipment and leasehold improvements are
retired or otherwise disposed, gains and losses are reflected in the
consolidated statement of income.
 
f. Capitalized Software Costs
 
     Software development costs incurred in conjunction with product development
are charged to research and development expense until technological feasibility
has been established. Once technological feasibility of a software product to be
marketed has been established, development and enhancement costs are capitalized
and reported at the lower of unamortized cost or net realizable value. Net
realizable value for a particular product is assessed based on anticipated gross
margins applicable to sales of the related product in future periods. All
capitalized software costs have been removed from the Company's accounts at
December 31, 1998.
 
     Amortization of capitalized software costs begins when the related product
is available for general release to customers and is computed for each product
based on the greater of (a) the ratio of current gross revenue for a product to
the total of current and anticipated future gross revenue for the product or (b)
the straight line
 
                                       F-6
<PAGE>   37
                         MOSAIX, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
 
method over the estimated life of the product. Fully amortized software
development costs are removed from the Company's accounts. Amortization expense
related to capitalized software costs amounted to $930, $1,318 and $1,448 for
1998, 1997 and 1996, respectively. These amounts are included in cost of systems
and software licenses revenue.
 
g. Revenue Recognition
 
     The Company's revenues are primarily derived from: systems sales, software
licenses and services. Systems sales are comprised of revenue related to
products sold that include both hardware and software. Software licenses include
revenue related to software-only applications that operate on industry standard
hardware available from the Company and other vendors. Services revenue consists
of consulting services and annual recurring software and system support fees.
During 1998, the Company implemented Statement of Position (SOP) 97-2, "Software
Revenue Recognition" and the implementation had no material impact to the 1998
financial statements.
 
     Revenue on system sales is generally recognized when the units are shipped.
For system sales requiring significant customization or for new products,
revenue is recognized upon completion of the customization or customer
acceptance. Installation fees relating to system sales are recognized when the
related system installation is complete. Revenue from the sale of software
licenses is recognized when (i) a signed contract exists, (ii) delivery has
occurred, (iii) collectibility is probable, and (iv) significant acceptance
terms have been fulfilled. Generally, revenues from the sale of software
licenses through distributors are recognized after contract signing and
shipment, and upon the earlier of sale to the end user or upon receipt of
nonrefundable cash payments from the distributors. Revenue from annual system
and software support services is recognized using the straight-line method over
the term of the contract. Revenue from professional services is recognized as
the related work is performed. Revenue from software arrangements involving
multiple elements is allocated to each element based on the relative fair values
of the elements.
 
     Customer payment terms vary. Amounts billed in advance of satisfying
revenue recognition criteria are classified in "customer deposits and unearned
revenue." Costs incurred prior to satisfying revenue recognition criteria are
deferred and are classified as a component of inventories.
 
     The Company had historically sold and licensed systems pursuant to lease
agreements which qualify as sales type leases with an initial term of three
years or more. Revenue from these contracts was recognized when units were
shipped, at the present value of the minimum payments at the beginning of the
contract discounted at the Company's incremental borrowing rate. No such
contracts were sold in 1998 or 1997.
 
h. Research and Development Costs
 
     Research and development costs are charged to expense as incurred, except
as described in note 1f. Capitalized Software Costs above.
 
i. Income Taxes
 
     The Company computes income taxes using the asset and liability method,
under which deferred income taxes are provided for the temporary differences
between the financial reporting basis and the tax basis of the Company's assets
and liabilities. Deferred tax assets and liabilities are measured using
currently enacted tax rates that are expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. A valuation allowance is established when necessary to reduce deferred
tax assets to the amounts that will more likely than not be realized.
 
     The Company provides for Federal and state income tax expense on foreign
earnings without regard to whether such earnings will be permanently reinvested
outside the United States.
                                       F-7
<PAGE>   38
                         MOSAIX, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
 
j. Product Warranties
 
     The Company generally provides a 90-day warranty for all systems sold and a
30-day warranty for software products. A charge to the statement of operations
is made at the time of sale for estimated costs of repair or replacement of the
products during the warranty period as these costs are relatively minor.
 
k. Net Income Per Share
 
     Basic net income per share is computed using the weighted average number of
common shares outstanding. Diluted net earnings per share is computed using the
weighted average number of common shares plus dilutive common share equivalents
outstanding during the period using the treasury stock method. Common share
equivalents consist of employee stock options and convertible preferred stock.
 
l. Foreign Currency Translation
 
     Assets and liabilities of foreign operations are translated into U.S.
dollars using rates of exchange in effect at the end of the year. Income and
expense accounts are translated into U.S. dollars using average rates of
exchange. The net gain or loss resulting from translation is shown as a
component of comprehensive income. Gains and losses from foreign currency
transactions are included in interest and other income, net.
 
m. Financial Instruments
 
     The Company's financial instruments consist of cash and cash equivalents,
short-term investments, trade accounts and contracts receivable, accounts
payable, and long-term obligations. The Company's cash and cash equivalents and
short-term investments are diversified among security types and issuers, and
approximate fair value. The fair value of financial instruments that are
short-term and/or that have little or no risk are considered to have a fair
value equal to book value. Assets and liabilities that are included in this
category are receivables, accounts payable, accrued liabilities and long term
obligations.
 
n. Concentrations of Credit Risk and Source of Supply
 
     Concentrations of credit risk with respect to receivables are limited due
to the diversity in geographic location of customers as well as diversity in
industries. In addition, the Company performs initial and ongoing evaluations of
its customers' financial position, and generally extends credit on open account
without requiring collateral.
 
     The Company purchases two principal components for its system product from
sole-source vendors. If these components become unavailable without sufficient
advance notice to enable the Company to develop alternative sources, or if
efforts to establish alternate sources are unsuccessful, this would adversely
affect the Company's ability to manufacture its call center system products. Any
such delay could materially adversely affect the operating results of the
Company.
 
o. Stock Based Compensation
 
     In accordance with the provisions of Statement of Financial Accounting
Standard (SFAS) No. 123, "Accounting for Stock Based Compensation," Mosaix has
elected to continue to apply the provisions of Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for its stock option
and stock purchase plans for employees. Accordingly, Mosaix does not recognize
compensation expense for options granted to employees with an exercise price
equal to or in excess of the fair value of the related common stock at the date
of grant. Note 8 -- Shareholders' Equity to the consolidated financial
statements contains a summary of pro forma results of operations for 1998, 1997
and 1996 as if Mosaix had recognized
 
                                       F-8
<PAGE>   39
                         MOSAIX, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
 
compensation expense based on the fair value of the options and stock purchase
rights granted at grant date as required by SFAS No. 123.
 
p. Comprehensive Income
 
     In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS 130 establishes new rules for the reporting and disclosure of
comprehensive income and its components. Comprehensive income measures all
changes in equity of an enterprise that do not result from transactions with
owners. SFAS 130 requires the Company's foreign currency translation
adjustments, which prior to adoption were only reported separately in
shareholders' equity, to be included in the determination of comprehensive
income.
 
q. New Accounting Pronouncements
 
     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes accounting and reporting standards for derivative instruments
embedded in other contracts, and for hedging activities. The Statement requires
that entities recognize all derivatives as either assets or liabilities on the
balance sheet and measure these derivatives at fair value. SFAS 133 also
specifies a new method of accounting for hedging transactions, prescribes the
type of items and transactions that may be hedged, and specifies detailed
criteria to be met to qualify for hedge accounting. This Statement is effective
for financial statements for years beginning after June 15, 1999. The Company
does not expect the adoption of this Statement to have a material impact on the
consolidated financial statements.
 
     In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." The SOP will require the capitalization of certain
costs incurred after the date of adoption in connection with developing or
obtaining software for internal use purposes. SOP 98-1 is effective for fiscal
years beginning after December 15, 1998. The Company does not expect the
adoption of this Statement to have a material impact on the consolidated
financial statements.
 
r. Use of Estimates
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
 
s. Reclassifications
 
     Certain reclassifications have been made to the prior period financial
statements to conform with the current year presentation.
 
2. BUSINESS COMBINATIONS
 
a. ViewStar Corporation
 
     In December 1996, the Company issued 3,777,078 shares of $.01 par value
common stock in exchange for all of the outstanding common shares of ViewStar
Corporation (ViewStar), a provider of client/server document management and
workflow software. This business combination was accounted for as a pooling-of-
 
                                       F-9
<PAGE>   40
                         MOSAIX, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
 
interests and, accordingly, the consolidated financial statements for all
periods prior to the combination were restated to include the accounts and
results of operations of ViewStar. In connection with the business combination,
$3,905 of merger related costs were incurred and included in operating expenses
in 1996.
 
b. Caleo Software, Inc.
 
     In February 1996, the Company purchased Caleo Software, Inc. (Caleo) for
$4,750 in cash. The business combination was accounted for using the purchase
method whereby the purchase price was allocated to the underlying net assets
based on their relative fair values. Of the total purchase price, $4,307 was
charged to operations as the purchase of in-process research and development.
The results of operations of Caleo were not significant in relation to the
Company. At the time of the combination, the Company also wrote off $705 of
previously capitalized software costs representing technology replaced by
technology acquired with the Caleo purchase. The acquired technology did not
achieve the originally projected revenues which were the basis for the 1996
valuation of the in process research and development and in 1998, the Company
sold the technology acquired from Caleo for $500 which was included in software
licenses revenues.
 
3. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
 
     The Company's cash and cash equivalents and short-term investments as of
December 31, consist of the following:
 
<TABLE>
<CAPTION>
                                                               1998       1997
                                                              -------    -------
<S>                                                           <C>        <C>
Cash and cash equivalents:
  Cash......................................................  $ 3,732    $ 1,682
  Money market instruments..................................    1,691      3,850
                                                              -------    -------
          Total cash and cash equivalents...................    5,423      5,532
                                                              -------    -------
Short-term investments:
  Commercial paper..........................................    1,022         --
  Corporate notes and bonds.................................   22,109     30,548
                                                              -------    -------
          Total short-term investments......................   23,131     30,548
                                                              -------    -------
          Total cash and cash equivalents and short-term
            investments.....................................  $28,554    $36,080
                                                              =======    =======
</TABLE>
 
     The short-term investments are classified as held-to-maturity. Due to the
short-term nature of these investments, changes in market interest rates would
not have a significant impact on the fair value of these securities. These
securities are carried at amortized cost, which approximates fair value.
 
     At December 31, 1998, all short-term investments have contractual
maturities of one year or less. Interest income for 1998, 1997 and 1996 was
$1,870, $2,355 and $1,665, respectively.
 
4. INVENTORIES
 
     A summary of inventories at December 31 are as follows:
 
<TABLE>
<CAPTION>
                                                              1998     1997
                                                              ----    ------
<S>                                                           <C>     <C>
Raw materials and spare parts...............................  $483    $1,114
Work-in-process.............................................    36        64
Finished goods..............................................    13       501
Installations in progress...................................    59       853
                                                              ----    ------
                                                              $591    $2,532
                                                              ====    ======
</TABLE>
 
                                      F-10
<PAGE>   41
                         MOSAIX, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
 
5. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
 
     Furniture, equipment and leasehold improvements consist of the following as
of December 31:
 
<TABLE>
<CAPTION>
                                                               1998       1997
                                                              -------    -------
<S>                                                           <C>        <C>
Furniture and fixtures......................................  $ 2,276    $ 1,814
Computer equipment..........................................   19,077     14,907
Equipment under capital lease...............................    5,015      5,327
Office equipment............................................    1,079        825
Leasehold improvements......................................    1,933      1,859
                                                              -------    -------
                                                               29,380     24,732
Less accumulated depreciation and amortization..............   21,708     17,283
                                                              -------    -------
                                                              $ 7,672    $ 7,449
                                                              =======    =======
</TABLE>
 
     During 1998, 1997 and 1996, amortization expense related to equipment under
capital leases was $463, $717 and $627, respectively. Accumulated amortization
for equipment under capital leases at December 31, 1998 and 1997 was $4,951 and
$4,913, respectively.
 
6. BANK LINE OF CREDIT
 
     At December 31, 1998, the Company had available a $10,000 unsecured
domestic bank line of credit. Restrictive terms of this line of credit require,
among other things, that the Company maintain minimum net worth and working
capital. The Company was in compliance with all terms and conditions of this
line of credit as of December 31, 1998. There were no borrowings outstanding
under this line as of December 31, 1998.
 
7. LONG-TERM OBLIGATIONS
 
     A summary of long-term obligations as of December 31 follows:
 
<TABLE>
<CAPTION>
                                                              1998    1997
                                                              ----    ----
<S>                                                           <C>     <C>
Capital lease obligations...................................  $78     $433
Other.......................................................   --       45
                                                              ---     ----
Total long-term obligations.................................   78      478
Less current installments...................................   78      381
                                                              ---     ----
          Long-term obligations, excluding current
            installments....................................  $--     $ 97
                                                              ===     ====
</TABLE>
 
8. SHAREHOLDERS' EQUITY
 
     Stock Option Exchange
 
     In 1998, the Company offered certain employees the right to have their
outstanding stock options exchanged for new options priced at $9.50 per share.
Those employees accepting the offer agreed to a 20% reduction in the options
outstanding and agreed not to exercise any of the new options for one year. The
exchange took place in January 1998, and 776,802 options with exercise prices of
$10.88 to $19.75, were returned and canceled, and 621,442 new options were
issued at $9.50. Of the options returned and canceled, 320,031 were Restated
1987 Stock Option Plan (1987 Plan) options that could not be regranted under the
expired 1987 Plan, and were replaced with 256,025 options issued under the 1997
Stock Incentive Compensation Plan (1997 Plan) and 1996 Stock Incentive
Compensation Plan (1996 Plan). The Restated 1992 Stock Option Plan for
Non-Employee Directors (1992 Plan) options were not exchanged.
 
                                      F-11
<PAGE>   42
                         MOSAIX, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
 
     Employee Stock Option Plans
 
     The Company maintains two stock option plans for employees. The 1997 Plan
grants non-qualified options for non-officer employees, and the 1996 Plan grants
options designated as incentive stock options or non-qualified stock options at
the discretion of the Board of Directors. Generally, options vest over a
four-year period in cumulative increments of 25% beginning one year from the
date of grant or, in certain instances, one year from the individual's
employment date. All options expire ten years or less from the date of grant and
are currently granted at prices not less than fair market value.
 
     Stock Option Plan for Outside Directors
 
     An initial grant of 5,000 options is automatically made to each outside
director upon their appointment. Initial grants vest over a five-year period in
cumulative increments of 20% each year beginning from the date of the first
subsequent annual meeting of shareholders following grant. An additional 2,000
options are granted following each annual shareholders' meeting. Each additional
grant is immediately vested and exercisable. All options expire ten years from
the date of grant or, if earlier, five years after termination as a director of
the Company. Options are exercisable at the fair market value of the stock at
the date of grant.
 
     A summary of all stock option activity follows:
 
<TABLE>
<CAPTION>
                                                               SHARES                   WEIGHTED
                                                              AVAILABLE    NUMBER OF    AVERAGE
                                                                 FOR        OPTIONS     EXERCISE
                                                                GRANT     OUTSTANDING    PRICE
                                                              ---------   -----------   --------
<S>                                                           <C>         <C>           <C>
Balance at December 31, 1995................................      811        1,946       $ 4.70
     Plan amendment.........................................    2,659           --           --
     Granted................................................     (721)         721        11.19
     Exercised..............................................       --         (369)        3.91
     Expired:
       1987 Plan............................................     (412)          --           --
       ViewStar Plans.......................................   (1,559)          --           --
       Canceled.............................................      240         (240)        4.99
                                                               ------       ------       ------
Balance at December 31, 1996................................    1,018        2,058         6.62
     Additional authorization...............................      520           --           --
     Granted................................................   (1,459)       1,459        11.91
     Exercised..............................................       --         (409)        2.85
     Expired................................................     (165)          --           --
     Canceled...............................................      479         (479)       10.51
                                                               ------       ------       ------
Balance at December 31, 1997................................      393        2,629         9.98
     Additional authorization...............................      400           --           --
     Granted................................................   (1,626)       1,626         8.51
     Exercised..............................................       --         (354)        4.20
     Expired................................................     (624)          --           --
     Canceled...............................................    1,753       (1,753)       12.23
                                                               ------       ------       ------
Balance at December 31, 1998................................      296        2,148       $ 8.24
                                                               ======       ======       ======
</TABLE>
 
                                      F-12
<PAGE>   43
                         MOSAIX, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
 
     The following table summarizes options outstanding and exercisable at
December 31, 1998:
 
<TABLE>
<CAPTION>
                                OPTIONS OUTSTANDING
                  -----------------------------------------------
                                    WEIGHTED                             OPTIONS EXERCISABLE
                                    AVERAGE           WEIGHTED      ------------------------------
   RANGE OF         NUMBER         REMAINING          AVERAGE         NUMBER      WEIGHTED AVERAGE
EXERCISE PRICES   OUTSTANDING   CONTRACTUAL LIFE   EXERCISE PRICE   EXERCISABLE    EXERCISE PRICE
---------------   -----------   ----------------   --------------   -----------   ----------------
<S>               <C>           <C>                <C>              <C>           <C>
$ 0.51 -  0.51        55,400          2.93             $ 0.51          42,500          $ 0.51
  0.52 -  6.81       583,500          7.61               5.06         227,500            4.28
  6.82 - 10.38     1,135,500          8.83               8.87         196,900            9.15
 10.39 - 12.25       279,600          8.91              11.49          65,100           11.35
 12.26 - 14.50        54,800          8.34              13.81          25,700           13.68
 14.51 - 19.75        39,000          7.46              17.57          27,000           18.24
--------------     ---------          ----             ------         -------          ------
$ 0.51 - 19.75     2,147,800          8.32             $ 8.24         584,700          $ 7.49
==============     =========          ====             ======         =======          ======
</TABLE>
 
     Employee Stock Purchase Plan
 
     In April 1998, the Company's 1991 Employee Stock Purchase Plan (1991 Plan)
was amended to reserve 400,000 shares of the Company's common stock for issuance
upon exercise of purchase rights granted to participating employees of the
Company. The purchase rights are exercisable semiannually on June 30 and
December 31 of each year at a price equal to the lesser of 85% of the fair
market value of the Company's stock at the beginning or end of the respective
semi-annual periods. At December 31, 1998, 150,000 shares were reserved for
future issuance. During 1998, 50,000 shares were purchased under the 1991 Plan
at an average price of approximately $7.50 per share. During 1997 and 1996,
38,000 and 33,000 shares were purchased at average prices of approximately $9.60
and $11.75 per share, respectively.
 
     Stock Based Compensation
 
     The Company applies APB Opinion No. 25 in accounting for stock options and
stock purchase rights issued to employees. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options and stock purchase rights under SFAS No. 123 for options and purchase
rights granted since 1995, the Company's net income would have been adjusted to
the pro forma amounts indicated below:
 
<TABLE>
<CAPTION>
                                                            1998      1997      1996
                                                           ------    ------    ------
<S>                                                        <C>       <C>       <C>
Net income:
  As reported............................................  $4,240    $9,757    $3,618
  Pro forma..............................................   1,279     6,517     1,786
Basic income per share:
  As reported............................................  $ 0.36    $ 0.74    $ 0.29
  Pro forma..............................................    0.11      0.49      0.14
Diluted income per share:
  As reported............................................  $ 0.35    $ 0.71    $ 0.27
  Pro forma..............................................    0.11      0.48      0.13
</TABLE>
 
                                      F-13
<PAGE>   44
                         MOSAIX, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
 
     The per share weighted-average fair value of stock options granted during
1998, 1997 and 1996 was $4.66, $6.78 and $5.30, respectively on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions:
 
<TABLE>
<CAPTION>
                                                             1998      1997      1996
                                                             ----      ----      ----
<S>                                                          <C>       <C>       <C>
Expected dividend yield....................................   0.0%      0.0%      0.0%
Volatility.................................................  75.6%     75.7%     62.0%
Expected weighted average life (in years)..................   4.0       3.8       4.5
Weighted average risk free interest rate...................   5.2%      5.8%      6.3%
</TABLE>
 
     The per share weighted-average fair value of stock purchase rights during
1998, 1997 and 1996 was $3.40, $5.52 and $4.44, respectively, on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions:
 
<TABLE>
<CAPTION>
                                                             1998      1997      1996
                                                             ----      ----      ----
<S>                                                          <C>       <C>       <C>
Expected dividend yield....................................   0.0%      0.0%      0.0%
Volatility.................................................  75.6%     75.7%     62.0%
Expected weighted average life (in years)..................   0.5       0.5       0.5
Weighted average risk free interest rate...................   4.9%      5.6%      5.2%
</TABLE>
 
     Pro forma net income and income per share reflect only options granted
after January 1, 1995. Therefore, the full impact of calculating compensation
cost for stock options under SFAS No. 123 is not reflected in the pro forma net
income and net income per share amounts presented above because compensation
cost is reflected over the options' vesting period of four to five years, and
compensation cost for options granted prior to January 1, 1995 is not
considered.
 
     Stock Repurchase Plan
 
     In 1997, the Company's Board of Directors authorized, subject to certain
terms and conditions, the repurchase of up to 1,700,000 shares of the Company's
common stock. In February and September 1998, the Board of Directors authorized
the repurchase of an additional 1,000,000 and 1,500,000 shares of the Company's
common stock, respectively. During 1998, the Company repurchased 1,792,000
shares for approximately $14,655. As of December 31, 1998, the Company had
repurchased 3,229,500 shares at a total cost of $28,690 under these
authorizations, and the Company is authorized to repurchase an additional
970,500 shares.
 
     ViewStar Preferred Shares
 
     In March and June 1996, ViewStar completed a preferred stock financing
transaction in which a total of 3,293,467 shares were issued. ViewStar issued
2,126,024 shares in repayment of $2,000 subordinated notes outstanding plus the
related accrued interest of $148 and issued 1,167,444 shares for $1,179 in cash.
All preferred shares were converted to common stock in 1996.
 
9. INCOME TAXES
 
     The components of income before income taxes are as follows:
 
<TABLE>
<CAPTION>
                                                           1998      1997       1996
                                                          ------    -------    ------
<S>                                                       <C>       <C>        <C>
U.S. operations.........................................  $2,996    $10,073    $6,524
Foreign.................................................   2,168      3,901     1,382
                                                          ------    -------    ------
                                                          $5,164    $13,974    $7,906
                                                          ======    =======    ======
</TABLE>
 
                                      F-14
<PAGE>   45
                         MOSAIX, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
 
     Components of income tax expense are summarized as follows:
 
<TABLE>
<CAPTION>
                                                           1998       1997      1996
                                                          -------    ------    ------
<S>                                                       <C>        <C>       <C>
Current:
  Federal...............................................  $ 2,333    $2,871    $4,053
  State.................................................       65       544       446
  Foreign...............................................      571     1,239       705
                                                          -------    ------    ------
          Total current.................................    2,969     4,654     5,204
Deferred -- Federal.....................................   (2,045)     (437)     (916)
                                                          -------    ------    ------
                                                          $   924    $4,217    $4,288
                                                          =======    ======    ======
</TABLE>
 
     Income tax expense on income before income taxes differs from "expected'
income tax expense as computed by applying the U.S. federal income tax rate of
34% as follows:
 
<TABLE>
<CAPTION>
                                                           1998      1997       1996
                                                          ------    -------    ------
<S>                                                       <C>       <C>        <C>
Computed "expected" tax expense.........................  $1,756    $ 4,751    $2,688
Reduction of valuation allowance........................    (415)    (1,065)     (940)
Research and experimentation tax credits and
  foreign tax credits...................................    (599)      (462)     (387)
State income taxes, net of federal benefit..............      43        359       296
Losses of subsidiary not currently deductible...........      --         --     1,241
Purchase of in-process research and development.........      --         --     1,464
Merger related costs....................................      --         --       438
Foreign taxes withheld..................................      --         --       161
Other...................................................     139        634      (673)
                                                          ------    -------    ------
                                                          $  924    $ 4,217    $4,288
                                                          ======    =======    ======
</TABLE>
 
     Deferred income tax assets and liabilities are comprised of the following
at December 31:
 
<TABLE>
<CAPTION>
                                                               1998        1997
                                                              -------    --------
<S>                                                           <C>        <C>
Capitalized software development costs, net of
  amortization..............................................  $    --    $    316
Contract revenue............................................       --         233
Other.......................................................       --          --
                                                              -------    --------
  Deferred tax liabilities..................................       --         549
                                                              -------    --------
Provision for doubtful receivables..........................      465         655
Provision for inventory obsolescence........................      326         161
Provision for warranties and returns........................      100         230
Unearned revenue............................................    1,802       1,284
Provision for accrued compensation..........................    1,908       1,595
Net operating loss carryforwards............................    6,213       7,064
Research and experimentation tax credit carryforwards.......    1,879       1,211
Other.......................................................    1,324         736
                                                              -------    --------
  Gross deferred tax assets.................................   14,017      12,936
Deferred tax asset valuation allowance......................   (9,797)    (10,212)
                                                              -------    --------
  Deferred tax assets.......................................    4,220       2,724
                                                              -------    --------
  Net deferred tax assets...................................  $ 4,220    $  2,175
                                                              =======    ========
</TABLE>
 
                                      F-15
<PAGE>   46
                         MOSAIX, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
 
     As of December 31, 1998, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $16,864, expiring in the years
2008 through 2010, and net operating loss carryforwards for state income tax
purposes of approximately $1,410, expiring in the years 1999 through 2010. The
Company also had federal and state research and experimentation tax credit
carryforwards of approximately $1,597 and $828, respectively, which expire in
the years 2004 through 2013. Utilization of a significant portion of the
Company's net operating loss carryforwards and research and experimentation tax
credit carryforwards which relate primarily to the ViewStar subsidiary are
subject to Internal Revenue Code Section 382 limitations due to a change of
ownership. Due to uncertainty regarding their recoverability, the Company has
established valuation allowances for the related deferred income tax assets. The
remaining valuation allowance was determined by the Company after considering
taxes paid by the Company in 1998 and 1997 and projections of future taxable
income. With regard to the remaining deferred income tax assets, it is more
likely than not that the results of future operations will generate sufficient
taxable income to recognize the net deferred income tax assets.
 
     The deferred income tax valuation allowance decreased $415, $1,065 and $940
in 1998, 1997 and 1996, respectively.
 
10. NET INCOME PER SHARE
 
     The following table reconciles the numerator and the denominator of the
basic and diluted per share computations for net income per share.
 
<TABLE>
<CAPTION>
                                                                  WEIGHTED       NET INCOME
                                                NET INCOME     AVERAGE SHARES       PER
                                                (NUMERATOR)    (DENOMINATOR)       SHARE
                                                -----------    --------------    ----------
<S>                                             <C>            <C>               <C>
1998:
  Basic earnings per share....................    $4,240           11,793          $0.36
  Effect of dilutive stock options............        --              205
                                                  ------           ------
  Diluted earnings per share..................    $4,240           11,998          $0.35
                                                  ======           ======
1997:
  Basic earnings per share....................    $9,757           13,169          $0.74
  Effect of dilutive stock options............        --              498
                                                  ------           ------
  Diluted earnings per share..................    $9,757           13,667          $0.71
                                                  ======           ======
1996:
  Basic earnings per share....................    $3,618           12,677          $0.29
  Effect of dilutive stock options............        --              893
                                                  ------           ------
  Diluted earnings per share..................    $3,618           13,570          $0.27
                                                  ======           ======
</TABLE>
 
     Options to purchase shares of common stock where the exercise price
exceeded the average market price were excluded from the computations in 1998,
1997 and 1996 because they would be anti-dilutive. The related shares of stock
excluded from the computations are as follows:
 
<TABLE>
<CAPTION>
                                                              SHARES
                                                             EXCLUDED
                                                            (IN 000'S)    EXERCISE PRICE
                                                            ----------    ---------------
<S>                                                         <C>           <C>
1998......................................................    1,111       $ 8.56 - $19.75
1997......................................................    1,154       $12.13 - $19.75
1996......................................................      251       $16.06 - $19.75
</TABLE>
 
                                      F-16
<PAGE>   47
                         MOSAIX, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
 
11. COMMITMENTS AND CONTINGENCIES
 
a.  Profit Sharing and Deferred Compensation Plan
 
     The Company has a Profit Sharing and Deferred Compensation Plan (Profit
Sharing Plan) under Section 401(k) of the Internal Revenue Code of 1986, as
amended. Substantially all full-time employees are eligible to participate. The
Company, at its discretion, may elect to match the participants' contributions
to the Profit Sharing Plan. Participants will receive their share of the value
of their investments upon retirement or termination, subject to a vesting
schedule for Company matching contributions. The Company's matching
contributions to the Profit Sharing Plan were $673, $752 and $471 for 1998, 1997
and 1996, respectively.
 
b.  Lease Commitments
 
     The Company leases its office space under terms of noncancelable operating
leases expiring at various dates through 2017.
 
     Future minimum lease payments under noncancelable operating leases at
December 31, 1998 are as follows:
 
<TABLE>
<S>                                                  <C>
1999...............................................  $ 2,367
2000...............................................    1,849
2001...............................................    1,669
2002...............................................    1,645
2003...............................................    1,544
Thereafter.........................................    3,386
                                                     -------
                                                     $12,460
                                                     =======
</TABLE>
 
     Rent expense under noncancelable operating leases amounted to $3,057,
$3,176 and $2,712 for 1998, 1997 and 1996, respectively.
 
c.  Litigation
 
     The Company is subject to various legal proceedings that arise in the
ordinary course of its business. While the outcome of these proceedings cannot
be predicted with certainty, the Company believes that none of such proceedings,
individually or in the aggregate will have a material adverse effect on the
Company's business or financial condition.
 
                                      F-17
<PAGE>   48
                         MOSAIX, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
 
12. GEOGRAPHIC SEGMENT INFORMATION
 
     The Company's products are marketed internationally through its subsidiary
in the United Kingdom, the U.S. parent and independent distributors.
International revenues are attributed to countries based on the location of the
customer. Substantially all revenue from the foreign subsidiary is from
customers located in the United Kingdom.
 
<TABLE>
<CAPTION>
                                                       1998        1997        1996
                                                     --------    --------    --------
<S>                                                  <C>         <C>         <C>
Revenue -- U.S. operations:
  United States....................................  $ 78,257    $ 89,153    $ 94,870
  United States export.............................    14,090      14,477      12,083
Revenue -- International operations:
  Foreign subsidiary...............................    17,721      17,514      10,228
                                                     --------    --------    --------
                                                     $110,068    $121,144    $117,181
                                                     ========    ========    ========
Operating income:
  U.S. operations..................................  $    599    $  8,045    $  4,235
  Foreign subsidiary...............................     2,451       3,936       1,867
  Eliminations.....................................       227        (215)        130
                                                     --------    --------    --------
                                                     $  3,277    $ 11,766    $  6,232
                                                     ========    ========    ========
Assets:
  U.S. operations..................................  $ 64,619    $ 74,725    $ 85,235
  Foreign subsidiary...............................     9,439       9,653       5,528
                                                     --------    --------    --------
                                                     $ 74,058    $ 84,378    $ 90,763
                                                     ========    ========    ========
</TABLE>
 
13. BUSINESS SEGMENT INFORMATION
 
     In 1998, Mosaix adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which requires disclosure of financial and
descriptive information about the Company's reportable operating segments. The
operating segments reported below are the segments of the Company for which
separate financial information is available and for which operating profit and
loss amounts are evaluated and used by the chief operating decision maker for
making operating decisions, assessing performance and deciding on how to
effectively allocate resources. Mosaix has two principal businesses and,
therefore, two reportable business segments: Call Management Systems (CMS) and
Customer Relationship Management (CRM) applications. The operating segment
information for 1998, 1997 and 1996 has been reported in accordance with the
provisions of SFAS No. 131.
 
     The CMS segment develops, designs, manufactures and markets enterprise-wide
systems for processing and managing a call center's inbound and outbound
telephone communications. Mosaix call management systems are found in a broad
range of industries throughout the world, including financial services, credit
card and consumer collections, telecommunications and utilities, retail, cable
television, healthcare, fundraising, education and telemarketing.
 
     The CRM segment develops, designs, manufactures and markets
client/server-based software applications enabling customers to automate and
integrate customer-facing business processes beginning in the call center and
extending across the enterprise. These solutions are used in a wide variety of
applications, including consumer and mortgage lending, claims processing,
underwriting, trust management, contract management, accounts payable, and
customer service.
 
                                      F-18
<PAGE>   49
                         MOSAIX, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
 
     The Company evaluates performance and allocates resources based on profit
or loss from operations before income taxes, as well as other non-financial
criteria. The accounting policies of the reportable segments are the same as
those described in the summary of significant accounting policies.
 
     Included in Reconciling Items are all operating costs associated with the
Company's international sales force and European subsidiary, as well as general
corporate expenses and non-recurring charges. These costs are generally not
allocated to either segment, as the chief operating decision maker does not
specifically consider these costs in the evaluation of the performance of the
individual reportable segments.
 
     Information by operating segment is set forth below:
 
<TABLE>
<CAPTION>
                                                                        RECONCILING
                                                    CMS        CRM         ITEMS       CONSOLIDATED
                                                  -------    -------    -----------    ------------
                                                                   (IN THOUSANDS)
    <S>                                           <C>        <C>        <C>            <C>
    1998:
      Net revenue...............................  $75,551    $34,517     $     --        $110,068
      Depreciation and amortization.............    4,473        731          309           5,513
      Operating income (loss)...................   19,389      2,580      (18,692)          3,277
      Capital expenditures......................    4,225        405          150           4,780
      Identifiable assets.......................    6,115        860       67,083          74,058
    1997:
      Net revenue...............................  $80,983    $40,161     $     --        $121,144
      Depreciation and amortization.............    4,569        549          910           6,028
      Operating income (loss)...................   21,414     10,202      (19,850)         11,766
      Capital expenditures......................    3,427        791          560           4,778
      Identifiable assets.......................    5,363      1,253       77,762          84,378
    1996:
      Net revenue...............................  $84,956    $32,225     $     --        $117,181
      Depreciation and amortization.............    4,989        379          947           6,315
      Operating income (loss)...................   26,470      6,819      (27,057)          6,232
      Capital expenditures......................    2,665        415          376           3,456
      Identifiable assets.......................    5,457      1,807       83,499          90,763
</TABLE>
 
14. RESTRUCTURING CHARGE
 
     During 1997, Mosaix recorded $948 of operating expenses for severance pay
related to streamlining the Company's sales, support and service operations.
During 1997, the Company paid $770 of these costs and during 1998, the Company
paid the remainder.
 
                                      F-19
<PAGE>   50
                         MOSAIX, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
 
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
 
     The following table summarizes the unaudited statement of operations
information for each quarter of 1998 and 1997:
 
<TABLE>
<CAPTION>
                                           FIRST     SECOND      THIRD     FOURTH      TOTAL
                                          -------    -------    -------    -------    --------
    <S>                                   <C>        <C>        <C>        <C>        <C>
    1998:
      Revenue...........................  $30,354    $24,120    $27,099    $28,495    $110,068
      Operating income (loss)...........    2,408     (3,008)     1,486      2,391       3,277
      Net income (loss).................    2,096     (1,847)     1,605      2,386       4,240
      Basic income (loss) per share.....     0.17      (0.15)      0.14       0.21        0.36
      Diluted income (loss) per share...     0.17      (0.15)      0.14       0.21        0.35
    1997:
      Revenue...........................  $30,614    $31,674    $28,043    $30,813    $121,144
      Operating income..................    3,600      4,412        991      2,763      11,766
      Net income........................    2,918      3,336      1,149      2,354       9,757
      Basic income per share............     0.22       0.25       0.09       0.19        0.74
      Diluted income per share..........     0.21       0.24       0.08       0.18        0.71
</TABLE>
 
     The quarterly net income (loss) per share presented above may not total to
the year end totals due to changes in the weighted average common shares and
common share equivalents outstanding during the year.
 
                                      F-20
<PAGE>   51
 
                          INDEPENDENT AUDITORS' REPORT
 
The Board of Directors and Shareholders
Mosaix, Inc.:
 
     Under date of January 29, 1999, we reported on the consolidated balance
sheets of Mosaix, Inc. and subsidiaries as of December 31, 1998 and 1997 and the
related consolidated statements of income and comprehensive income,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998, as contained in the 1998 annual report on Form
10-K. In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule of valuation and qualifying accounts. This consolidated financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this consolidated financial statement
schedule based on our audits.
 
     In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respect the, information set forth
therein.
 
KPMG SIGNATURE
Seattle, Washington
January 29, 1999
 
                                      F-21
<PAGE>   52
 
                                  MOSAIX, INC.
 
                       VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                  ADDITIONS
                                                    BALANCE AT    CHARGED TO                    BALANCE AT
                                                    BEGINNING    OTHER COSTS                       END
                   DESCRIPTION                       OF YEAR     AND EXPENSES   DEDUCTIONS(1)    OF YEAR
                   -----------                      ----------   ------------   -------------   ----------
<S>                                                 <C>          <C>            <C>             <C>
Year ended December 31, 1998:
  Valuation accounts deducted from assets:
     Allowance for doubtful receivables...........    $2,246         $264           $434          $2,076
Year ended December 31, 1997:
  Valuation accounts deducted from assets:
     Allowance for doubtful receivables...........    $2,016         $694           $464          $2,246
Year ended December 31, 1996:
  Valuation accounts deducted from assets:
     Allowance for doubtful receivables...........    $1,863         $395           $242          $2,016
</TABLE>
 
---------------
(1) Represents amounts written off.
 
                                      F-22
<PAGE>   53

                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
EXHIBITS
--------
<C>         <S>                                                           <C>
  3.1       Restated Articles of Incorporation of the Registrant          (B)
  3.2       Restated Bylaws of the Registrant                             (C)
  4.1       Form of Certificate Evidencing Common Stock, par value $0.01
            per share                                                     (B)
 10.1       Restated 1987 Stock Option Plan, as amended*                  (F)
 10.2       Amended and Restated 1996 Stock Incentive Compensation Plan*  (A)
 10.3       Restated 1992 Stock Option Plan for Non-Employee Directors,
            as amended*                                                   (F)
 10.4       1991 Employee Stock Purchase Plan, as amended*                (D)
 10.5       Executive Employment Agreement, dated April 28, 1998,
            between Kim Mackay and the Registrant*                        (A)
 10.6       Amendment No. 1, dated August 18, 1998, to Executive
            Employment Agreement between Kim Mackay and the Registrant*   (A)
 10.7       1999 Management Bonus Plan*                                   (A)
 10.8       1999 Performance Bonus Plan*                                  (A)
 10.9       Executive Employment Agreement, dated March 1, 1995, between
            John J. Flavio and the Registrant*                            (E)
 10.10      Amendment No. 1, dated August 18, 1998, to Executive
            Employment Agreement between John J. Flavio and the
            Registrant*                                                   (A)
 10.11      Lease for Building 17, dated May 20, 1991, among Michael R.
            Mastro, Redmond East Associates and the Registrant            (A)
 10.12      Amendment No. 1 to Lease for Building 17, dated July 1991,
            between Redmond East Associates and the Registrant            (A)
 10.13      Amendment No. 2 to Lease for Building 17, effective June 1,
            1997, between Carr Redmond Corporation, successor in
            interest to Redmond East, L.L.C, and the Registrant           (A)
 10.14      Amendment No. 3 to Lease for Building 17, dated November 2,
            1998, between Carr Redmond Corporation, successor in
            interest to Redmond East Associates, and the Registrant.      (A)
 10.15      Business Loan Agreement dated June 25, 1997 with
            Seattle-First National Bank                                   (H)
 10.16      Customer Purchase Agreement dated December 27, 1990 with
            Summa Four, Inc.**                                            (C)
 10.17      Software Source Code and Manufacturing Data Deposit and
            Escrow Agreement dated December 27, 1990 with Summa Four,
            Inc. and Data Securities and International Ind.**             (C)
 10.18      ViewStar Corporation Amended 1986 Incentive Stock Plan and
            form of agreement thereunder*                                 (G)
</TABLE>
 
                                       26
<PAGE>   54
 
<TABLE>
<CAPTION>
EXHIBITS
--------
<C>         <S>                                                           <C>
 10.19      ViewStar Corporation Amended 1994 Stock Plan, as amended,
            and form of agreement thereunder*                             (G)
 10.20      ViewStar Corporation 1996 Incentive Stock Plan*               (G)
 10.21      Sublease Agreement between the ASK Group, Inc. and ViewStar
            Corporation dated October 8, 1993, for ViewStar's facility
            located at 1101 Marina Village Parkway, Alameda, California   (G)
 10.22      First Amendment to Sublease Agreement between the ASK Group,
            Inc. and ViewStar Corporation, dated September 8, 1994, for
            ViewStar's facility located at 1101 Marina Village Parkway,
            Alameda, California                                           (H)
 10.23      Executive Employment Agreement, dated October 14, 1996,
            between Steven R. Russell and the Registrant*                 (H)
 10.24      Executive Employment Agreement, dated February 5, 1998,
            between Nicholas A. Tiliacos and the Registrant*              (H)
 10.25      Amendment No. 1, dated August 18, 1998, to Executive
            Employment Agreement between Nicholas A. Tiliacos and the
            Registrant*                                                   (A)
 10.26      Executive Employment Agreement, dated April 28, 1998,
            between Theodore Manakas and the Registrant*                  (A)
 10.27      Amendment No. 1, dated August 18, 1998, to Executive
            Employment Agreement between Theodore Manakas and the
            Registrant*                                                   (A)
 10.28      1998 Management and Performance Bonus Plans*                  (H)
 10.29      Amendment No. 1, dated August 18, 1998, to Executive
            Employment Agreement between Steven R. Russell and the
            Registrant*                                                   (A)
 21.1       List of Subsidiaries of the Registrant                        (A)
 23.1       Consent of KPMG LLP                                           (A)
 27.1       Financial Data Schedule                                       (A)
</TABLE>
 
---------------
 *     Management contract or compensation plan.
 
 **    Confidential treatment has been requested with respect to portions of the
       agreement.
 
(A)   Filed herewith.
 
(B)   Incorporated by reference from exhibits filed in connection with the
      Registrant's Registration Statement on Form S-1 (Registration No.
      33-34561) filed with the Securities and Exchange Commission on April 26,
      1990, as amended.
 
(C)   Incorporated by reference from exhibits filed in connection with the
      Registrant's Annual Report on Form 10-K for the year ended December 31,
      1992.
 
(D)   Incorporated by reference from exhibits filed in connection with the
      Registrant's Annual Report on Form 10-K/A for the year ended December 31,
      1994.
 
(E)   Incorporated by reference from exhibits filed in connection with the
      Registrant's Quarterly Report on From 10-Q for the quarter ended March 31,
      1995.
 
(F)   Incorporated by reference from exhibits filed in connection with the
      Registrant's Annual Report on Form 10-K for the year ended December 31,
      1995.
 
(G)   Incorporated by reference from exhibits filed in connection with the
      Registrant's Registration Statement on Form S4 (Registration No.
      333-14887) initially filed with the Securities and Exchange Commission on
      October 25, 1996.
 
(H)  Incorporated by reference from exhibits filed in connection with the
     Registrant's Annual Report on Form 10-K for the year ended December 31,
     1997.
 
                                       27