<PAGE>   1
                                                       1999 Financial Highlights

                                                   Ezenia! Inc. and subsidiaries

                                          In thousands, except per-share amounts

<TABLE>
<CAPTION>
                                                                                  Years ended December 31
                                                             1995            1996           1997           1998           1999
<S>                                                        <C>             <C>            <C>             <C>            <C>
OPERATING DATA
   Revenue                                                 $28,197         $48,833        $53,495         $55,939        $58,109
   Income (loss) from operations*                            4,552          12,162         (9,494)            751           (760)
   Net income (loss)*                                        4,687          10,194         (4,732)          1,814          1,134
   Net income (loss) per-share diluted*                       0.39            0.77          (0.37)           0.13           0.08

BALANCE SHEET DATA
   Cash and marketable securities                          $45,168         $54,684        $46,531         $50,606        $53,080
   Total assets                                             53,902          73,096         72,899          80,132         79,738
   Redeemable preferred stock and
     long-term debt, less current portion                      673             167             --              --             --
   Stockholders' equity                                     45,789          59,871         60,091          64,145         66,790
</TABLE>

*    1997 amounts include a pre-tax charge to operations of $14,000,000, or
     $0.69 per-share after taxes, for purchased research and development related
     to the acquisition of the network access card business unit of Promptus
     Communications, Inc.

*    1998 amounts include a pre-tax charge to operations totaling $1,300,000, or
     $0.10 per-share after taxes related to the restructuring of certain of the
     Company's operations.

                                      (ii)

<PAGE>   2

                                               Consolidated Financial Statements
                                                   Ezenia! Inc. and subsidiaries
                                                 For the three-year period ended
                                                               December 31, 1999

Contents

   13      Management's Discussion and Analysis of Financial Condition
             and Results of Operations
   17      Consolidated Balance Sheets
   18      Consolidated Statements of Operations
   19      Consolidated Statements of Stockholders' Equity
   20      Consolidated Statements of Cash Flows
   21      Notes to Consolidated Financial Statements
   30      Report of Independent Auditors


<PAGE>   3


Management's Discussion and Analysis of Financial Condition and Results of
Operations

The following table sets forth the percentage change in certain financial data
compared to the previous year, and the financial data as a percentage of revenue
for the years indicated.

<TABLE>
<CAPTION>
                                    Percent increase (decrease) year to year        Items as a percentage of revenue
   Income and Expense Items                  1999/98        1998/97                1999            1998           1997
<S>                                             <C>            <C>                  <C>             <C>            <C>
Revenues                                        4%             5%                   100%            100%           100%
Cost of revenues                                2             11                     38              39             36
   Gross profit                                 5              1                     62              61             64

Operating expenses
   Research and development                    16             15                     30              27             24
   Sales and marketing                         11              6                     25              23             23
   General and administrative                   2             14                      9               9              8
   Purchased research and development          *              *                                                     27
   Non-recurring expenses                      *              *                                       1
Total operating expenses                       10            (23)                    64              60             82

Income (loss) from operations                 (*)            108                     (1)              1            (18)
Interest income, net                           15             17                      4               4              3
Income (loss) before income taxes             (44)           135                      3               5            (15)
Income taxes (benefit)                        (57)           131                      1               2             (6)
   Net income (loss)                          (37%)          138%                     2%              3%            (9%)
</TABLE>

* Percentage not meaningful.

Results of operations - years ended December 31, 1999, 1998, and 1997

REVENUE
Revenue increased by 4% to $58.1 million in 1999. The change was primarily
attributable to increased sales of the Company's Encounter family of Internet
Protocol (IP)-based products and increased service revenue offset by a decrease
in revenue from sales of the Company's network access card products resulting
principally from new product offerings that carry a lower selling price. Revenue
from sales of the Company's ISDN products increased marginally in 1999 as the
market for videoconferencing products continues to grow at a slower rate than
the market for IP-based products.

Revenue increased by 5% to $55.9 million in 1998. The change was primarily
attributable to increased sales of the Company's Encounter products, initially
released in the first quarter of the year and increased service revenues. Sales
of the Company's ISDN products declined slightly in 1998. This decrease was
attributed to general softness in the market for video-conferencing products.

GROSS PROFIT
Cost of revenues includes material costs, manufacturing labor, and overhead and
customer support costs. Gross profit as a percentage of revenues increased
slightly in 1999 to 62.3% from 61.5% in 1998. This increase was primarily
attributable to increased margins on service contracts resulting from increases
in service revenues that share in the absorption of fixed costs. Gross profit as
a percentage of revenues declined in 1998 to 61.5% from 63.7% in 1997. This
decrease was primarily attributable to a greater proportion of lower margin
products in the product mix, including network access cards and lower-priced,
small group conferencing servers.

OPERATING EXPENSES
Operating expenses increased by 10% in 1999 as compared to 1998. This increase
was principally attributable to increased research and developing spending for
the development of new IP and web-based Internet products, the first of which
was released in the first quarter of 2000. Sales and marketing expenses
increased by 11% in 1999 from 1998 spending levels. This increase resulted from
costs incurred in connection with the Company's name change and expanded
marketing programs relating to the continued development of the Company's
Encounter family of IP-based products.

Excluding the effects of non-recurring charges and purchased research and
development expense recognized in 1997 in connection with the Company's
acquisition of the network access card business unit of Promptus Communications,
Inc. (see Note 3 of Notes to Consolidated Financial Statements), operating
expenses increased by approximately 12% in 1998

                                      (13)


<PAGE>   4
as compared to 1997. Research and development expenses increased by 15% in 1998
primarily due to increased staffing for the development of products for the IP
market. Sales and marketing expenses increased by 6% in 1998. This increase was
related principally to the addition of sales and marketing personnel to support
the Company's expansion of field sales offices, particularly in the European and
Asia Pacific markets and the ongoing expansion of marketing programs.

General and administrative expenses in 1999 remained at approximately the same
levels as the prior year. Increased general and administrative spending in 1998,
as compared to 1997, resulted principally from the addition of finance and
administrative personnel to support overall company growth and the
implementation of a new corporate-wide financial accounting, manufacturing, and
sales and distribution system.

INTEREST INCOME, NET
Interest income, net, consists of interest on cash, cash equivalents, and
marketable securities. Increases in interest income in 1999 and 1998 were
primarily related to an increase in cash available for investment.

INCOME TAXES
The Company has an asset recorded for deferred income taxes representing the
estimated future tax benefits associated with expenses recorded for financial
reporting purposes. The realization of this deferred tax asset is subject to
certain variables, including future profitability of the Company. In the event a
valuation reserve is required in order to reflect the deferred tax asset at its
net realizable value, it would be recorded as an additional element of income
tax expense in the Company's financial statements.

Other factors which may affect future operations
The Company's Annual Report includes discussions of its long-term growth
outlook, including various forward-looking statements. The following risks and
uncertainties, among others, could affect the degree to which such expectations
are realized.

DEPENDENCE ON MAJOR CUSTOMERS.
While the Company is focusing efforts on broadening its reseller, distribution,
and OEM sales channels, sales to a relatively small number of customers have
accounted for a significant portion of the Company's revenue. The Company
believes that its dependence on a similarly few number of customers will
continue during 2000. This concentration of customers may cause revenues and
operating results to fluctuate from quarter to quarter based on major customers'
requirements and the timing of their orders and shipments. The Company's
agreements with its customers generally do not include minimum purchase
commitments or exclusivity arrangements. The Company's operating results could
be materially and adversely affected if any present or future major customer
were to choose to reduce its level of orders, were to change to another vendor
for purchases of a similar product, were to combine their operations with
another company who had an established relationship with another vendor for
purchases of a similar product, were to experience financial, operational, or
other difficulties, or were to delay paying or fail to pay amounts due the
Company.

GROWTH IN DEMAND FOR NETWORKED CONFERENCING PRODUCTS.
The Company primarily serves the videoconferencing market, which, historically,
has experienced significant fluctuations in growth rates from year to year.
Recently, market growth has varied due to factors such as the adoption of new
technologies like Internet Protocol (IP), the impact of these new technologies
on the rate of growth or decline in traditional conferencing technologies such
as ISDN, uncertainty around future network technologies, the availability of
lower-priced, low-end, and desktop conferencing systems, and the consolidation
of traditional videoconferencing OEM and distribution channels. The Company is
unable to predict the potential impact of these and other factors on customer
demand and the resultant impact on the Company's future operating results.

EVOLVING MARKETS.
Sales of Multimedia Conference Server (MCS) products account for most of the
Company's revenue. The Company's success depends, to a significant extent, on
the acceptance, and the rate of adoption, of MCS products in a number of market
segments, many of which are in the early stages of development. These markets
include group teleconferencing systems, desktop conferencing systems, and
collaborative data-sharing and carrier-based conferencing services. There is
inadequate experience to predict whether MCS products ultimately will be
accepted within these market segments. There can be no assurance that any of the
markets for the Company's products will develop to the extent, in the manner, or
at the rate anticipated by the Company. In addition, future prices the Company
is able to obtain for its products may decrease from historical levels as a
result of new product introductions by others, price competition, technological
change, or other factors.

                                      (14)
<PAGE>   5
RAPID TECHNOLOGICAL CHANGE.
The market for the Company's products is characterized by rapidly changing
technology, evolving industry standards, emerging network architectures, and
frequent new product introductions. The adoption rate of new technologies and
products may adversely impact near-term growth of the conferencing market as
users evaluate the alternatives. The Company has invested, and for 2000 plans to
continue to invest, in software development and products incorporating certain
of these new technologies. Many other companies, including the Company's largest
customer, are also developing products incorporating these new technologies that
are competitive with the Company's current and future offerings. The Company's
success will depend, in part, upon its ability through continued investments to
maintain technological leadership, to enhance and expand its existing product
offerings, and to select and develop in a timely manner new products that
achieve market acceptance.

COMPETITION.
The market for networking and communications products is highly competitive. The
Company expects competition to increase significantly in the future. A number of
companies have introduced or announced their intention to introduce products
that could be competitive with the Company's products, and the rapidly evolving
nature of the markets in which the Company competes may attract other new
entrants as they perceive opportunities. Some of the Company's current and
potential competitors have longer operating histories and greater financial,
technical, and sales and marketing resources.

ACQUISITIONS.
In 1997, the Company acquired the network access card business unit from
Promptus Communications. The Company may continue to make acquisitions of, or
significant investments in, businesses that offer complementary products,
services, and technologies as part of its overall business strategy. Any such
acquisitions or investments will likely be accompanied by the risks commonly
encountered in acquisitions of businesses, including, among others, the
difficulty of assimilating the operations and personnel of the acquired
businesses, the potential disruption of the Company's ongoing business, and a
reduction in the value of the investment.

PERIOD-TO-PERIOD FLUCTUATIONS.
The Company's operating results are likely to vary significantly from quarter to
quarter as a result of several factors, including: the timing of new product
announcements and introductions by the Company, its major customers and its
competitors; market acceptance of new or enhanced versions of the Company's
products; changes in the product mix of revenue; changes in the relative
proportions of revenue among distribution channels or among customers within
each distribution channel; changes in manufacturing costs; price reductions for
the Company's products; the gain or loss of significant customers; increased
research and development expenses associated with new product introductions;
seasonally; and general economic conditions. New customers' orders have
generally been characterized by lengthy sales cycles, making it difficult to
predict the quarter in which sales will occur. Carriers' deployment projects
involve particularly long sales cycles, and shipments for such projects are
therefore often difficult to forecast. In addition, such shipments are subject
to delays in the timing of such projects. The Company typically operates with a
small backlog. As a result, quarterly revenue and operating results generally
depend on the volume, timing of, and ability to fulfill orders received within
the quarter, which are difficult to forecast. Also, changes in ordering patterns
have resulted in the Company recognizing a substantial portion of its revenue in
a given quarter from sales booked and shipped in the last weeks of that quarter.
All of the above factors can materially adversely affect the Company's business
and operating results for one quarter or a series of quarters, and are difficult
to forecast. The Company establishes its expenditure levels for product
development and other operating expenses based, in large part, on its expected
future sales. As a result, if revenues fall below expectations, there would
likely be a material adverse effect on the Company's operating results and net
income because only a small portion of the Company's expenses vary with its
sales in the short term.

PROTECTION OF PROPRIETARY TECHNOLOGY.
The Company's success depends, to a large extent, on its ability to protect its
proprietary technology. The Company currently holds seven U.S. patents relating
to its existing products and has several patent applications pending. In
addition to its patents, the Company relies primarily on a combination of
contractual rights, trade secrets, and copyrights to protect its intellectual
property rights.

RETENTION OF KEY EMPLOYEES.
The Company's success depends, to a significant degree, upon the continuing
contributions of its key management, sales, marketing, and research and
development personnel, many of whom would be difficult to replace. The Company
does not have employment contracts with most of its key personnel. The Company
believes that its future success will depend in large part upon its ability to
attract and retain such key employees.

                                      (15)
<PAGE>   6
UNCERTAINTIES REGARDING PATENTS.
On November 20, 1988, the Company commenced an action for patent infringement
against Accord Networks, Inc. f/k/a Accord Video Telecommunications, Inc.
("Accord") in the United States District Court for the District of
Massachusetts. The complaint alleged that Accord was infringing and has
infringed and contributed to and induced infringement one of the Company's
patents, including by making, using, selling and offering to sell Accord's "MGC"
products. The Company has filed subsequent amendments to the complaint, alleging
that Accord has infringed on three other patents of the Company and that
Accord's affiliate in Israel, Accord Networks, Ltd. f/k/a Accord
Telecommunications, Ltd. also infringed on all four of these patents. The
underlying technology for these patents enables several fundamental
videoconferencing capabilities. The Company is seeking damages and injunctive
relief.

Accord has counterclaimed for declaratory judgment that the patents are invalid
and unenforceable and that the Company has violated the Lanham Act, interfered
with Accord's contractual and prospective business advantage and defamed and
disparaged Accord and its products. In its counterclaim, Accord is seeking
unspecified damages, costs, and injunctive relief. The Company intends to
vigorously defend against Accord's counterclaim.

IMPACT OF YEAR 2000.
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000-ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission-critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company is not
aware of any material problems resulting from Year 2000 issues, either with its
products, its internal systems, or the products and services of third parties.
The Company will continue to monitor its mission critical computer applications
and those of its suppliers and vendors throughout the year 2000 to ensure that
any latent Year 2000 matters that may arise are addressed.

LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company has cash, cash equivalents, and marketable
securities of $53.1 million, an increase of $2.5 million from December 31, 1998.
The Company regularly invests excess funds in short-term money market funds,
government securities, and commercial paper. The Company has no long-term debt.

The Company believes that cash generated from operating activities along with
its existing cash, cash equivalents, and marketable securities will be
sufficient to meet the Company's cash requirements for the foreseeable future.

                                      (16)
<PAGE>   7
 CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                          Year ended December 31

(In thousands)                                                                           1999                 1998
<S>                                                                                   <C>                  <C>
ASSETS
Current assets
   Cash and cash equivalents                                                          $35,095              $23,225
   Marketable securities                                                               17,985               27,381
   Accounts receivable, less allowances of
    $1,518 in 1999 and $1,534 in 1998                                                   6,800                7,778
   Inventories                                                                          2,610                3,693
   Deferred income taxes                                                                3,733                3,300
   Other current assets                                                                 1,183                1,497
Total current assets                                                                   67,406               66,874
Equipment and improvements, net of
 accumulated depreciation                                                               6,461                6,616
Deferred income taxes                                                                   4,047                4,000
Other assets, net of accumulated amortization of

 $1,113 in 1999 and $1,599 in 1998                                                      1,824                2,642
                                                                                      $79,738              $80,132

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
   Accounts payable                                                                     4,750                3,546
   Accrued expenses                                                                     7,595               11,396
   Deferred revenue                                                                       603                1,045

Total current liabilities                                                              12,948               15,987

Commitments and contingencies - Note 9

Stockholders' equity
   Preferred stock, $.01 par value; 2,000,000
    shares authorized, none issued and outstanding
   Common stock, $.01 par value; 40,000,000 shares authorized; 13,588,505 issued
    and outstanding in 1999; 13,381,746 issued and
    outstanding in 1998                                                                   136                  134
   Capital in excess of par value                                                      58,483               56,720
   Retained earnings                                                                    8,441                7,307
   Accumulated other comprehensive loss                                                  (270)                 (16)
                                                                                       66,790               64,145
                                                                                      $79,738              $80,132
</TABLE>

See accompanying notes.

                                      (17)
<PAGE>   8
 CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                     Year ended December 31
(In thousands, except for share-related data)             1999                1998                 1997
<S>                                                    <C>                 <C>                  <C>
Revenues
   Product revenue                                     $51,058             $50,340               $49,415
   Service revenue                                       7,051               5,599                 4,080
                                                        58,109              55,939                53,495
Costs of revenues
   Cost of product revenue                              17,903              17,338                15,660
   Cost of service revenue                               4,032               4,191                 3,736
                                                        21,935              21,529                19,396
Gross profit                                            36,174              34,410                34,099

Operating expenses
   Research and development                             17,301              14,878                12,886
   Sales and marketing                                  14,412              13,005                12,217
   General and administrative                            5,221               5,119                 4,490
   Purchased research and development                                                             14,000
   Non-recurring charges                                                       657
                                                        36,934              33,659                43,593
Income (loss) from operations                             (760)                751                (9,494)

Interest income, net                                     2,293               1,998                 1,712

Income (loss) before income taxes                        1,533               2,749                (7,782)

Income taxes (benefit)                                     399                 935                (3,050)

Net income (loss)                                      $ 1,134             $ 1,814               $(4,732)

Net income (loss) per share:
   Basic                                               $  0.08             $  0.14               $ (0.37)
   Diluted                                             $  0.08             $  0.13               $ (0.37)
</TABLE>

See accompanying notes.

                                      (18)
<PAGE>   9
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
(In thousands, except for share-related data)                                                       Accumulated
                                                                         Capital                       Other          Total
                                                 Common Stock         in Excess of      Retained   Comprehensive  Stockholders'
                                             Shares       Par Value     Par Value       Earnings       Loss           Equity
<S>                                       <C>              <C>           <C>            <C>           <C>            <C>
BALANCES AS OF
DECEMBER 31, 1996                         12,620,760       $  126        $ 49,573       $ 10,225      $   (53)       $59,871
   Stock issued under
    employee benefit plans                   278,202            3           1,418                                      1,421
   Tax benefit related to
    employee stock plans                                                      180                                        180
   Stock issuance related to
    acquisition of business,
    net of issuance costs
    of $27                                   223,881            2           3,413                                      3,415
   Foreign currency
    translation adjustment                                                                                (64)           (64)
   Net loss                                                                               (4,732)                     (4,732)

BALANCES AS OF
DECEMBER 31, 1997                         13,122,843          131          54,584          5,493         (117)        60,091
   Stock issued under
    employee benefit plans                   258,903            3           2,066                                      2,069
   Tax benefit related to
    employee stock plans                                                       70                                         70
   Foreign currency
    translation adjustment                                                                                101            101
   Net income                                                                              1,814                       1,814

BALANCES AS OF
DECEMBER 31, 1998                         13,381,746          134          56,720          7,307          (16)        64,145
   Stock issued under
    employee benefit plans                   206,759            2           1,589                                      1,591
   Tax benefit related to
    employee stock plans                                                      174                                        174
   Foreign currency
    translation adjustment                                                                               (254)          (254)
   Net income                                                                              1,134                       1,134

BALANCES AS OF
DECEMBER 31, 1999                         13,588,505       $  136        $ 58,483        $ 8,441      $  (270)       $66,790
</TABLE>

See accompanying notes.

                                      (19)
<PAGE>   10
 CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                       Year ended December 31
(In thousands)                                                 1999              1998              1997
<S>                                                        <C>                <C>              <C>
Operating activities

Net income (loss)                                          $  1,134           $ 1,814          $ (4,732)
Adjustments to reconcile net income (loss)
 to net cash provided by operating activities:
      Purchased research and development                                                         14,000
      Depreciation and amortization                           3,768             3,686             3,076
      Purchased technology write-off                          1,034
      Deferred income taxes                                    (480)             (340)           (4,680)
      Tax benefit related to stock plan activities              174                70               180
      Changes in operating assets and liabilities:
        Accounts receivable                                     978              (534)            2,120
        Inventories                                           1,083               189               979
        Other current assets                                    314              (556)              (50)
        Accounts payable and accrued expenses                (2,597)            3,265            (1,338)
        Deferred revenue                                       (442)               81               133
Net cash provided by operating activities                     4,966             7,675             9,688

Investing activities

Net purchases of equipment and improvements                  (3,093)           (4,545)           (2,954)
Purchases of marketable securities                           (3,634)          (13,198)           (2,634)
Proceeds from sale of marketable securities                  13,030             7,482             7,777
Acquisition of business, net of cash acquired                                                   (15,416)
Increase in other assets                                       (736)           (1,058)             (271)
Net cash provided by (used for) investing activities          5,567           (11,319)          (13,498)

Financing activities

Repayment of long-term debt                                                      (167)             (557)
Net proceeds from issuance of stock
 under employee benefit plans                                 1,591             2,069             1,421
Net cash provided by financing activities                     1,591             1,902               864
Effect of exchange rate on cash and
 cash equivalents                                              (254)              101               (64)
Increase (decrease) in cash and cash equivalents             11,870            (1,641)           (3,010)

Cash and cash equivalents at beginning of year               23,225            24,866            27,876

Cash and cash equivalents at end of year                    $35,095           $23,225           $24,866

Supplementary disclosure of cash flow
 information:
      Interest paid                                        $     86          $     77          $    165
</TABLE>

See accompanying notes.

                                      (20)
<PAGE>   11
Notes to Consolidated Financial Statements

1  BUSINESS

Ezenia! Inc. and its subsidiaries (the Company) operate in one business segment,
which is the design, development, manufacture, marketing, sale, and service of
networking equipment and associated software used to create interactive
multimedia collaboration and conferences that connect multiple users over
wide-area networks and allow them to interact as a group. During 1999, the
Company changed its name to Ezenia! Inc. from VideoServer, Inc.

2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated. All assets and liabilities of the Company's
foreign subsidiary are translated at the rate of exchange at the end of the
year, while revenues, costs, and expenses are translated at the average rates in
effect during the year. The net effect of these translation adjustments is shown
in the accompanying financial statements as a component of stockholders' equity.

SIGNIFICANT ESTIMATES AND ASSUMPTIONS
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities, if any, at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.

REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment, and the Company's
products are generally delivered without significant post-sale obligations to
the customer. If significant obligations exist, revenue recognition is deferred
until the obligations are satisfied. Estimated product warranty costs are
accrued at the time of sale. Revenue from maintenance agreements is recognized
ratably over the terms of the agreements, and other service revenue is
recognized as the services are performed.

CASH EQUIVALENTS AND MARKETABLE SECURITIES
All of the Company's cash equivalents and marketable securities are classified
as available-for-sale, and accordingly are carried at fair market value based on
quoted market prices, which approximate their cost. Unrealized gains and losses
were not material in 1999 or 1998. Realized gains and losses are included in net
interest income. The Company considers all liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents. Cash
equivalents and marketable securities consist of highly rated U.S. and state
government securities, commercial paper, and short-term money market funds.

Marketable securities at December 31, 1999, by contractual maturity, included
$8.2 million due in one year or less, and $9.8 million due between one year and
two years.

CONCENTRATIONS OF CREDIT RISK
Sales to two customers accounted for 49%, 53%, and 50% of total revenues in
1999, 1998, and 1997, respectively. Accounts receivable from these customers
amounted to approximately $3.2 million and $3.3 million at December 31, 1999 and
1998, respectively. Export sales, primarily to Europe, were $15.7 million in
1999, $15.7 million in 1998, and $17.4 million in 1997.

Financial instruments, which potentially subject the Company to concentrations
of credit risk, are cash equivalents, marketable securities, and accounts
receivable. All of the Company's cash equivalents and marketable securities are
maintained by major financial institutions. Concentration of credit risk with
respect to accounts receivable is limited to certain customers to whom the
Company makes substantial sales. To reduce risk, the Company routinely assesses
the financial strength of its customers. The Company has not incurred any
material write-offs related to its accounts receivable.

INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined
using the first-in, first-out method.

                                      (21)
<PAGE>   12
EQUIPMENT AND IMPROVEMENTS
Equipment and improvements are stated at cost. Depreciation is computed using
the straight-line method over the following estimated useful lives:

 Computer and office equipment                                           3 years
 Furniture and fixtures                                                  5 years
 Leasehold improvements                                 Shorter of lease term or
                                                           estimated useful life

 Deferred revenue
 Deferred revenue represents amounts received from customers under maintenance
 agreements or for product sales in advance of revenue recognition.

 Research and development costs
 Research and development costs are charged to expense as incurred. To date,
 costs of internally developed software eligible for capitalization have been
 immaterial and have been expensed as incurred.

 Net income (loss) per share
 The Company reports earnings per share in accordance with the Statement of
 Financial Accounting Standards No. 128 "Earnings per Share." Diluted earnings
 per share include the effect of dilutive stock options.

 Shares used in computing basic and diluted net income (loss) per share are as
 follows:

<TABLE>
<CAPTION>
                             1999                 1998                 1997
<S>                        <C>                 <C>                  <C>
 Basic                     13,450,000          13,236,000           12,867,000
 Diluted                   13,730,000          13,578,000           12,867,000
</TABLE>

The effect of dilutive stock options on the total shares used to compute diluted
net income per share was 280,000 in 1999 and 342,000 in 1998.

ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for Impairment of Long-Lived Assets," the Company will record
impairment losses on long-lived assets used in operations when indicators of
impairment are present. On an ongoing basis, management reviews the value and
period of amortization or depreciation of long-lived assets. During this review,
the Company reevaluates the significant assumptions used in determining the
original cost of long-lived assets. Although the assumptions may vary from
transaction to transaction, they generally include revenue growth, operating
results, cash flows, and other indicators of value. Management then determines
whether there has been a permanent impairment of the value of long-lived assets
based upon events or circumstances, which have occurred since acquisition.

ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected to account for its stock-based compensation plans
following Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees" (APB 25) and related interpretations rather than the
alternative fair value accounting provided under Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS
123). Accordingly, no compensation expense has been recognized by the Company
for its stock option plans and its stock purchase plan.

ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which establishes
standards for the recognition, measurement, and reporting of derivatives and
hedging activities and is effective, as amended, for all quarters in fiscal
years beginning after December 31, 2000. The Company anticipates that the
adoption of this new accounting standard will not have a material impact on the
Company's consolidated financial statements.

                                      (22)
<PAGE>   13
3  BUSINESS COMBINATION

On April 28, 1997, the Company purchased the network access card ("NAC")
business unit of Promptus Communications, Inc. ("Promptus"). The assets acquired
included all tangible and intangible assets of Promptus' NAC business unit,
including fixed assets, inventories, trade receivables, products, and
technology. Liabilities assumed included all third-party trade liabilities and
other accrued obligations pertaining to the acquired NAC assets. The total
purchase price of approximately $18.8 million included $14.5 million of cash
consideration and 223,881 shares of the Company's common stock. The acquisition
was accounted for under the purchase method of accounting. The purchase price
was allocated to the tangible and intangible assets acquired based upon their
estimated fair market values. The intangible assets acquired were valued using
risk-adjusted cash flow models under which estimated future cash flows were
discounted taking into account risks related to existing and future target
markets and to the completion of the products expected to be ultimately marketed
by the Company, and assessments of the life expectancy of the underlying
technology. The analysis resulted in an allocation of $2.0 million to purchased
software, which had reached technological feasibility, principally represented
by the technology comprising the NAC products being sold by Promptus at the
acquisition date. This amount was capitalized and amortized over a five-year
period. In addition, $14.0 million was allocated to purchased research and
development, which had not reached technological feasibility and had no
alternative future use. This amount was charged to operations at the acquisition
date.

Operating results of the NAC business unit have been included in the financial
statements from the acquisition date. The following pro-forma information
presents the results of operations for the year ended December 31, 1997, as if
the NAC business unit of Promptus had been acquired as of January 1, 1997,
including the charge to operations of $14.0 million related to purchased
in-process research and development resulting from the acquisition, as if
expensed on the date acquired. The NAC business unit was fully incorporated in
the Company's 1997 operating results.

<TABLE>
<CAPTION>
                                 (In thousands, except for share-related data)
<S>                                                                  <C>
Total revenues                                                       $ 57,122
Net loss                                                               (4,692)
Net loss per share
   Basic                                                                (0.36)
   Diluted                                                              (0.36)
</TABLE>

The unaudited pro-forma results do not purport to be indicative of the results
which actually would have been obtained had the acquisition been effected on the
dates indicated, or of results which may be achieved in the future.

4  INVENTORIES

Inventories consist of:

<TABLE>
<CAPTION>
                                                      Year ended December 31
(In thousands)                                       1999                 1998
<S>                                                <C>                  <C>
Raw materials and subassemblies                    $1,790               $3,188
Work in process                                       565                   27
Finished goods                                        255                  478
                                                   $2,610               $3,693
</TABLE>

                                      (23)
<PAGE>   14
5  EQUIPMENT AND IMPROVEMENTS

Equipment and improvements consist of:

<TABLE>
<CAPTION>
                                                       Year ended December 31
(In thousands)                                        1999                 1998
<S>                                                <C>                  <C>
Computer and office equipment                      $18,475              $15,532
Furniture and fixtures                                 408                  411
Leasehold improvements                                 926                  921
                                                    19,809               16,864
Less accumulated depreciation                       13,348               10,248
                                                   $ 6,461              $ 6,616
</TABLE>

6  ACCRUED EXPENSES

Accrued expenses consist of:

<TABLE>
<CAPTION>
                                                        Year ended December 31
(In thousands)                                         1999                 1998
<S>                                                  <C>                 <C>
Employee compensation and benefits                   $2,042              $ 2,974
Professional fees                                       763                1,191
Warranties and other customer-related costs           1,907                4,093
Income taxes                                          1,448                2,299
Other                                                 1,435                  839
                                                     $7,595              $11,396
</TABLE>

7  INCOME TAXES

The provision for income taxes (benefit) for 1999, 1998, and 1997 is as follows:

<TABLE>
<CAPTION>
                                            Year ended December 31
(In thousands)                   1999                1998                 1997
<S>                              <C>               <C>                 <C>
Current:
   Federal                       $619              $1,029              $ 1,104
   State                           43                 112                  403
   Foreign                        217                 134                  123
                                  879               1,275                1,630
Deferred:
   Federal                       (382)               (298)              (4,095)
   State                          (54)                (42)                (585)
   Foreign                        (44)

                                 (480)               (340)              (4,680)
                                 $399              $  935              $(3,050)
</TABLE>

                                      (24)
<PAGE>   15
Cash payments for income taxes totaled approximately $1,700,000 in 1999,
$254,000 in 1998, and $1,254,000 in 1997.

The effective tax rate differs from the statutory federal income tax rate due to
the following:

<TABLE>
<CAPTION>
                                                                   Year ended December 31
                                                          1999                1998                 1997
<S>                                                      <C>                 <C>                 <C>
Statutory income tax rate                                34.0%               34.0%               (34.0)%
State income taxes, net of federal benefit                2.4                 6.0                 (1.5)
Research and development tax credits                     17.1)               (3.4)                (2.0)
Meals and entertainment expense                           3.9                 1.6                  0.5
Tax-exempt interest income                               (4.2)               (8.8)                (4.6)
Foreign                                                   2.2                 1.8                  1.6
Other                                                     4.8                 2.8                  0.8

Effective tax rate                                       26.0%               34.0%               (39.2)%
</TABLE>

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.

Income taxes for 1997 include tax benefits related to the charge to operations
of $14.0 million for purchased research and development resulting from the
acquisition of the NAC business unit.

The following is a summary of the significant components of the Company's
deferred tax assets and liabilities:

<TABLE>
<CAPTION>
                                                      Year ended December 31
(In thousands)                                     1999                 1998
<S>                                              <C>                  <C>
Deferred tax asset:
   Purchased research and development            $4,589               $4,481
   Research and development credits                 625
   Accruals and allowances not currently
    deductible for tax purposes                   2,038                2,606
   Depreciation and other                           528                  213
Total deferred tax assets                        $7,780               $7,300
</TABLE>

At December 31, 1999, the Company had available federal research and development
tax credit carryforwards of approximately $625,000 which expire in 2020.

8  NON-RECURRING CHARGES AND CREDIT

In July 1999, the Court of Appeals for the Federal Circuit upheld a Federal
District court's previous ruling in Datapoint's patent infringement case with
PictureTel Corporation, that products sold by PictureTel, including those
manufactured by the Company, do not infringe on any of the Datapoint patents in
the videoconferencing field and that the patent claims asserted against
PictureTel are invalid. In the opinion of management, this decision makes remote
the possibility that the Company would incur any costs associated with these
patent claims. As a result, the Company reversed into cost of product revenue an
accrual of $1,075,000, which had been established in prior periods, for
estimated potential liability associated with this litigation.

In the quarter ended September 30, 1999, the Company experienced a significant
decline in revenue associated with technology purchased as part of the 1997
acquisition of the network access card ("NAC") business unit from Promptus
Communications. Concurrently, the Company introduced products using new network
access technology to replace the products manufactured utilizing the technology
acquired from Promptus Communications. The Company currently estimates the
contribution of the acquired NAC technology to the future operating results of
the Company will be insignificant. As a result, during the quarter ended
September 30, 1999, the Company wrote off, as part of cost of product revenue,
approximately $1,034,000 of related unamortized purchased technology.

                                      (25)
<PAGE>   16
In March 1998, the Company adopted a plan to restructure certain of its
operations to increasingly focus and streamline its product offerings. As a
result of these actions, the Company recorded charges of approximately
$1,300,000 in the quarter ended March 31, 1998. These one-time charges included
$657,000 reported as non-recurring restructuring expenses primarily covering
estimated severance costs, $450,000 reported as a part of cost of sales for
various write-downs of excess and obsolete inventory, and $193,000 for certain
facilities costs reported as research and development expenses. Approximately
$650,000 of the $1.3 million charge required a cash outlay.

9  COMMITMENTS AND CONTINGENCIES

The Company rents its primary facility under an operating lease, which expires
in February 2001. The Company also leases sales offices under leases that expire
on various dates through February 2001. Future minimum lease payments at
December 31, 1999 under these non-cancelable operating leases are approximately
$665,000 in 2000, and $89,000 in 2001.

Rent expense was approximately $916,000, $997,000, and $895,000 in 1999, 1998,
and 1997, respectively.

On November 20, 1988, the Company commenced an action for patent infringement
against Accord Networks, Inc. f/k/a Accord Video Telecommunications, Inc.
("Accord") in the United States District Court for the District of
Massachusetts. The complaint alleged that Accord was infringing and has
infringed and contributed to and induced infringement one of the Company's
patents, including by making, using, selling and offering to sell Accord's "MGC"
products. The Company has filed subsequent amendments to the complaint, alleging
that Accord has infringed on three other patents of the Company and that
Accord's affiliate in Israel, Accord Networks, Ltd. f/k/a Accord
Telecommunications, Ltd. also infringed on all four of these patents. The
underlying technology for these patents enables several fundamental
videoconferencing capabilities. The Company is seeking damages and injunctive
relief.

Accord has counterclaimed for declaratory judgment that the patents are invalid
and unenforceable and that the Company has violated the Lanham Act, interfered
with Accord's contractual and prospective business advantage and defamed and
disparaged Accord and its products. In its counterclaim, Accord is seeking
unspecified damages, costs, and injunctive relief. The Company intends to
vigorously defend against Accord's counterclaim.

10  STOCKHOLDERS' EQUITY

The Company has 40,000,000 authorized shares of common and 2,000,000 shares of
undesignated preferred stock, $.01 par value per share. Each series of Preferred
Stock shall have such rights, preferences, privileges, and restrictions,
including voting rights, dividend rights, conversion rights, redemption
privileges, and liquidation preferences as determined by the Board of Directors.

11  BENEFIT PLANS

STOCK INCENTIVE PLAN
The Company's Amended and Restated 1991 Stock Incentive Plan (the "1991 Plan")
provides for the sale or award of common stock, or the grant of incentive stock
options or nonqualified stock options for the purchase of common stock, of up to
5,425,553 shares to officers, employees, and consultants. The Plan is
administered by the Board of Directors. Options have been granted at a price not
less than the fair market value on the date of grant. The options generally
become exercisable over a four-to five-year period and expire over a period not
exceeding ten years. Shares issuable will increase as of January 1, 2000, and
will increase each January 1 thereafter during the term of the plan, by an
additional number of shares of common stock equal to five percent of the total
number of shares of common stock issued and outstanding as of December 31 of the
preceding year.

NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The Company's Amended and Restated 1994 Non-Employee Director Stock Option Plan
(the "Director Plan") provides that each non-employee director of the Company be
granted an option to acquire 15,000 shares of common stock on the date that
person becomes a director and annually be granted, beginning with the January 1
falling at least twelve months after a Director's initial grant, an option to
purchase an additional 3,000 shares. Options are granted at a price equal to the
fair market value on the date of grant. Options become exercisable over a
four-year period and expire ten years from the date of grant. The Company has
reserved 200,000 shares of common stock for issuance under the Director Plan.

                                      (26)
<PAGE>   17
A summary of option activity under the 1991 Plan and the Director Plan is as
follows:

<TABLE>
<CAPTION>
                                                                    Weighted
                                                                     Average
                                                                    Exercise
                                                 Shares                Price
<S>                                           <C>                     <C>
Outstanding at December 31, 1996              1,475,539               $17.35
   Granted                                    1,343,000                13.14
   Terminated                                  (411,102)               17.80
   Exercised                                   (217,798)                3.29

Outstanding at December 31, 1997              2,189,639                16.08
   Granted                                      965,500                 9.10
   Terminated                                  (815,090)               19.63
   Exercised                                   (163,192)                7.33

Outstanding at December 31, 1998              2,176,857                12.31
   Granted                                    1,472,875                 8.45
   Terminated                                (1,192,938)               11.61
   Exercised                                   (112,403)                6.60

Outstanding at December 31, 1999              2,344,391                10.52

Exercisable at December 31, 1997                377,840

Exercisable at December 31, 1998                519,847

Exercisable at December 31, 1999                656,163
</TABLE>

Related information for options outstanding and exercisable as of December 31,
1999 under these benefit plans is as follows:

<TABLE>
<CAPTION>
                                                           Weighted
                                                            Average             Weighted
                                                          Remaining              Average
Outstanding options                                Contractual Life             Exercise
Range of exercise
<S>                                   <C>                       <C>               <C>
     $ 2.00 - $ 7.94                  1,146,416                 8.9               $ 7.34
     $ 8.00 - $10.00                    379,405                 8.0               $ 9.22
     $10.06 - $19.25                    718,290                 5.1               $12.98
     $23.25 - $43.25                    100,280                 3.2               $34.19
                                      2,344,391                 7.3               $10.52

<CAPTION>
                                                                                Weighted
                                                                                 Average
Exercisable options                                                             Exercise
Range of exercise prices                                     Shares                Price

     $ 2.00 - $ 7.94                                        266,931               $ 6.94
     $ 8.00 - $10.00                                         58,648               $ 9.22
     $10.06 - $19.25                                        263,501               $13.02
     $23.25 - $43.25                                         67,083               $33.87
                                                            656,163               $12.34
</TABLE>

                                      (27)
<PAGE>   18
EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan (the "Stock Purchase Plan")
under which eligible employees may purchase common stock at a price per share
equal to 85% of the lower of the fair market value of the common stock at the
beginning or end of each offering period. Participation in the offering is
limited to 10% of an employee's compensation (not to exceed amounts allowed
under Section 423 of the Internal Revenue Code), may be terminated at any time
by the employee, and automatically ends on termination of employment with the
Company. A total of 600,000 shares of common stock have been reserved for
issuance under this plan. Offering periods commence on February 1 and August 1
of each year.

PRO-FORMA INFORMATION FOR STOCK-BASED COMPENSATION
Pro-forma information regarding net income and earnings per share, as if the
Company had used the fair value method of SFAS 123 to account for stock options
issued under its 1991 Plan and Director Plan, and shares purchased under the
Stock Purchase Plan, is presented below. The fair value of stock activity under
these plans was estimated at the date of grant using a Black-Scholes option
pricing model with the following assumptions as of the date of grant: risk-free
interest rates equal to the then-available rate for zero-coupon U.S. government
issues with a remaining term equal to the expected life of the options; no
dividend yields; an average volatility factor of the expected market price of
the Company's common stock over the expected life of the option of .86 in 1999,
 .85 in 1998 and .68 in 1997; and a weighted-average expected life of the option
of 5.4 years in 1999 and 5.3 years in 1998 and 1997.

For purposes of pro-forma disclosures, the estimated weighted average fair value
of options granted during the year of $7.22, $6.47, and $8.39 in 1999, 1998 and
1997, respectively, is amortized to expense over the related vesting period.
Pro-forma information is as follows:

<TABLE>
<CAPTION>
(In thousands except for net loss per-share information)          1999                1998                 1997
<S>                                                            <C>                 <C>                 <C>
Pro-forma net loss                                            $(2,813)             $(2,375)            $(8,137)
Pro-forma net loss per share
   Basic                                                      $ (0.21)             $ (0.18)            $ (0.63)
   Diluted                                                    $ (0.21)             $ (0.18)            $ (0.63)
</TABLE>

SAVINGS PLAN
The Company sponsors a savings plan for its employees, which has been qualified
under Section 401(k) of the Internal Revenue Code. Eligible employees are
permitted to contribute to the 401(k) plan through payroll deductions within
statutory and plan limits. Contributions from the Company are made at the
discretion of the Board of Directors and approximated $293,000 in 1999, $227,000
in 1998, and $205,000 in 1997.

                                      (28)
<PAGE>   19
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
                                                                    QUARTER ENDED

(In thousands except per share amounts)          March 31        June 30         Sept 30         Dec 31
<S>                                              <C>            <C>             <C>             <C>
1998
Revenue                                          $11,753        $13,007         $14,717         $16,462
Gross profit                                       6,749          8,123           9,240          10,298
Operating income (loss)                           (1,763)           310             878           1,326
Net income (loss)                                 (1,298)           518           1,042           1,552
Net income (loss) per share - basic                (0.10)          0.04            0.08            0.12
Net income (loss) per share - diluted              (0.10)          0.04            0.08            0.11
Common stock price - high                        $ 16.00        $ 12.63         $ 14.00         $ 18.50
Common stock price - low                         $ 12.48        $  7.75         $  6.75         $  6.75

1999
Revenue                                          $16,562        $16,832         $12,036         $12,680
Gross profit                                      10,416         10,558           7,326           7,877
Operating income (loss)                            1,475          1,577          (2,127)         (1,683)
Net income (loss)                                  1,332          1,371            (993)           (574)
Net income (loss) per share - basic                 0.10           0.10           (0.07)          (0.04)
Net income (loss) per share - diluted               0.10           0.10           (0.07)          (0.04)
Common stock price - high                        $ 20.44        $ 14.50         $ 11.38         $  8.75
Common stock price - low                         $  7.44        $  6.75         $  7.25         $  4.63
</TABLE>


                                      (29)
<PAGE>   20
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
EZENIA! INC.

We have audited the accompanying consolidated balance sheets of Ezenia! Inc. and
subsidiaries (the Company) as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 consolidated financial position of Ezenia!
Inc. and subsidiaries at December 31, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.

/s/ Ernst + Young LLP

Boston, Massachusetts
February 3, 2000

                                      (30)