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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                 FORM 10-KSB/A

           AMENDMENT NO. 2 TO ANNUAL REPORT UNDER SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934.
                  For the fiscal year ended December 31, 1998

                        Commission File Number 000-22235
                            ------------------------

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

<TABLE>
<S>                                              <C>
                   DELAWARE                                        54-1707962
        (State or Other Jurisdiction of               (I.R.S. Employer Identification No.)
        Incorporation or Organization)

            50 INTERNATIONAL DRIVE,                                   03801
           PORTSMOUTH, NEW HAMPSHIRE                               (Zip Code)
   (Address of Principal Executive Offices)
</TABLE>

        (ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE): (603) 334-6700

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

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

                         COMMON STOCK, PAR VALUE $0.01

                                (TITLE OF CLASS)

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

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this Form, and no disclosure will be
contained, to the best of issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]

     State issuer's revenues for its most recent fiscal year. (Not applicable)

     The aggregate market value of the voting common equity held by
non-affiliates as of March 15, 1999, was $6,132,460.

     The number of shares of the issuer's Common Stock outstanding as of March
15, 1999, was 6,881,035 shares. Transitional Small Business Disclosure Format
(check one): Yes [ ]  No [X]
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     This Amendment No. 2 to the Annual Report on Form 10-KSB/A for the year
ended December 31, 1998 of Objective Communications, Inc. (the "Company") is
being filed solely to give effect to the one share for seven shares reverse
stock split of the Company's outstanding common stock effective on April 14,
1999, and integrates the information previously filed in Amendment No. 1 to Form
10-KSB filed on May 13, 1999. Share information and per share price information
in this Form 10-KSB/A give effect to the one share for seven shares reverse
stock split of the issued and outstanding common stock of the Company effected
on April 14, 1999. Information set forth in this Amendment No. 2 to Form 10-KSB
on Form 10-KSB/A has not been otherwise updated or amended to reflect the
occurrence of events since March 31, 1999, the date on which the Company's
Annual Report on Form 10-KSB was originally filed.

                               TABLE OF CONTENTS

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ITEM                                                                PAGE
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<C>   <S>                                                           <C>
                                 PART I
 1.   Business....................................................    1
 2.   Properties..................................................    8
 3.   Legal Proceedings...........................................    8
 4.   Submission of Matters to a Vote of Security Holders.........    8

                                PART II
 5.   Market for Common Equity and Related Stockholder Matters....    8
 6.   Management's Discussion and Analysis of Financial Conditions
      and Results of Operations...................................    9
 7.   Financial Statements........................................   16
 8.   Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure....................................   17

                                PART III
 9.   Directors, Executive Officers, Promoters and Control
      Persons; Compliance with Section 16(a) of the Exchange
      Act.........................................................   18
10.   Executive Compensation......................................   20
11.   Security Ownership of Certain Beneficial Owners and
      Management..................................................   23
12.   Certain Relationships and Related Transactions..............   24
13.   Exhibits, Lists and Reports on Form 8-K.....................   27
14.   Signatures..................................................   29
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                                     PART I

     Unless otherwise indicated, all information in this Form 10-KSB gives
effect to a one-for-two reverse stock split of our common stock effective as of
December 5, 1996.

     Some of the statements in this Form 10-KSB are "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 and
involve a number of risks and uncertainties. We have made these statements based
on currently available operating, financial and competitive information.
However, actual results and future events may differ significantly from the
results contemplated in the forward-looking statements because of a number of
factors, including product and technology development, customer and market
acceptance of our product, demand for our product, the impact of competitive
products and pricing, and other risks detailed in this Form 10-KSB and in our
Securities and Exchange Commission filings.

     In this Form 10-KSB, we refer to Objective Communications, Inc., a Delaware
corporation, as we, the Company or Objective Communications.

ITEM 1.  BUSINESS

INTRODUCTION

     Objective Communications is a Delaware corporation formed in 1993 to
design, develop and market a full motion, high resolution, cost-effective video
network system. Users of the VidPhone video network system can view broadcast
video and participate in multi-party video conferences. With the introduction of
Release 1.5 of our VidPhone software, which we expect to occur in the second
quarter of 1999, users also will be able to retrieve stored video on demand. Our
VidPhone system distributes video to and from desktop or laptop personal
computers and conference rooms configured with a VidPhone station, over the same
wiring used by the telephone. We believe that the VidPhone system offers greater
functionality and compatibility with existing infrastructure and higher quality
than other video network or conferencing systems available today.

RECENT DEVELOPMENTS

     In July 1998, we began a significant restructuring of our operations,
including changes in senior management. We hired James Bunker, who has extensive
experience "turning-around" businesses, as our President and Chief Executive
Officer. Steven Rogers, our founder, became Chief Technology Officer and Vice
President, Engineering and assumed responsibility for completing the development
of our commercial VidPhone system. We shipped the first commercial version of
our VidPhone system in August 1998. To lower our operating expenses, in July
1998, we reduced the number of our employees to approximately 90 from
approximately 135. Since then, we have reduced our staff by approximately 35
additional people. We also implemented new cash management and expense policies.
We believe that these changes will reduce our total operating expenses in 1999
by approximately 50% compared to 1998.

     During this period we also refined our sales and marketing strategy,
focusing on promoting the VidPhone system to our large resellers and their
customers. In October 1998, we entered into a strategic partnership with Unisys,
under which Unisys is the preferred systems integrator that will sell our
VidPhone system to the federal government. We are also pursuing a number of
other joint marketing initiatives with Unisys. For example, Unisys exhibited the
VidPhone system at 11 trade shows in 1998. Bell Atlantic and Sprint also
recently renewed their reseller agreements with us.

     We require additional financing for our operations. At December 31, 1998,
we had essentially no cash from which to fund operations. In February 1999, we
completed a private placement of $2,850,000 of unsecured promissory notes and
162,844 shares of common stock, from which we received net proceeds of
approximately $2,430,000. Before completing the February 1999 private placement,
we were able to pay only those expenses that were essential to continue
operations. We financed those payments, in part, with advances of $125,000 from
two of our executive officers. Since completing the February 1999 private
placement, we have continued to monitor payments carefully. On February 16,
1999, we filed a registration statement with the Securities and Exchange
Commission relating to a proposed firm commitment underwritten public
<PAGE>   4

offering of $15,000,000 of our common stock. Although we currently expect to
complete that public offering in late April 1999, our ability to complete the
offering is subject to a number of factors, many of which are beyond our
control. Therefore, we cannot assure you that we will be able to complete the
proposed public offering or, if we complete the offering, the timing of the
offering.

INDUSTRY BACKGROUND

     Business demand for video communications, historically limited primarily to
video conferencing, is driven by the desire to achieve the most effective means
of communication. Information that is exchanged or presented visually, such as
during in-person meetings or video presentations, has a stronger impact on the
end-user than non-visual communication. People cannot always exchange or present
information in person, and technology limitations and cost constraints have
restricted the use of video applications. Consequently, people rely on
non-visual forms of communication, such as telephony, voice mail and e-mail.
Recent video application developments such as targeted broadcasting and
conferencing achieve the effectiveness of face-to-face meetings while retaining
the convenience of a telephone call.

     We believe that video networks that fully support video broadcast, video
retrieval and video conferencing applications address many of the communications
requirements of the business community. Video networks can improve worker
productivity by facilitating the efficient exchange of information between
geographically dispersed parties and reducing travel expenses. In addition, they
can enable the use of video material for training and research at the
convenience of the user rather than the presenter and permit businesses to
access business broadcasts, such as CNN, CNNfn and CNBC, at a desktop or laptop
computer. To date, however, infrastructure and transmission constraints, costs
and other limitations have precluded business quality video broadcast, retrieval
and conferencing applications at desktop computers.

     Until recently, most video communications systems were boardroom video
conferencing systems. These systems were expensive for most businesses. Even
today, most boardroom video conferencing systems require substantial capital
expenditures and trained personnel for set up and maintenance during video
conferencing calls. Most boardroom systems also do not provide video quality
adequate for video broadcast and retrieval and are limited by distracting
latency transmission delays that result in unsynchronized audio and video. In
addition, these systems normally require the use of the public telephone system
for all video calls, including those within a building or across a small
business campus, thereby incurring telephone usage charges for each call.

     Over the past decade, video conferencing systems have begun to evolve from
high cost, low quality, stand-alone boardroom systems to desktop systems.
However, desktop systems have not been widely adopted. We believe that this is
primarily because most video network systems produce inadequate video quality
for business purposes.

     Most desktop video conferencing systems use either dedicated telephone
lines or the local area network ("LAN") to transmit video data. Some desktop
video conferencing systems use dedicated Integrated Services Digital Network
("ISDN") lines to achieve acceptable video quality (384 Kbps) for business
purposes. However, to achieve this quality, a minimum of three dedicated ISDN
lines with six associated telephone numbers must be provided to each desktop.
The installation costs of these additional lines and line use charges render
this approach prohibitively expensive on any significant scale. In addition,
these systems require the installation of either expensive and complex hardware
coder-decoders ("CODECs") in each PC, or software CODECs that render the PC
unavailable for other applications during video conferencing.

     Some video conferencing systems attempt to use the LAN rather than
dedicated telephone lines. These are referred to as IP or H.323 systems.
LAN-based systems also require the installation of hardware or software CODECs
in each user's desktop or laptop computer. Data LANs were not designed for
isochronous, i.e., time dependent, data such as video and audio. LANs were
designed to be shared by individuals using the transmission medium for short
periods of time. Most LANs today do not have the bandwidth to accommodate the
volume of data inherent in full-motion video applications. Consequently, even a
single video conference would significantly diminish the capacity of most LANs
to support other users. Information technology managers resist LAN-based video
applications because of the additional volume of data and new infrastruc-
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ture and the associated maintenance required to support them. Although high
speed Ethernet and gigabit routing switches may alleviate some of the bandwidth
problems resulting from the transmission of video on the LAN, we believe that
these new technologies do not adequately address the transmission delay problems
plaguing such systems. We believe that, in the future, synchronous fiber optic
networks and Asynchronous Transfer Mode ("ATM") switching will dominate in the
wide area network ("WAN"). However, we do not believe that ATM will reach
desktop computers due to the high cost.

     We do not expect business users to adopt video applications on any
significant scale until video systems are capable of providing TV-quality video
and FM-quality stereo audio and are cost effective. We believe that our VidPhone
video network meets these requirements because it takes advantage of existing
telephone wiring and supports high quality video and audio, but does not
interfere with the existing LAN-based computer system or impede the performance
of an individual desktop or laptop computer.

PRODUCTS AND TECHNOLOGY

     Our VidPhone system is a full-motion, high resolution, cost-effective video
network system that uses the same wiring as the telephone, which gives it a
competitive cost advantage over other types of video network systems. Users of
the VidPhone video network system can view broadcast video and participate in
multi-party video conferences from desktop personal computers or conference
rooms. With the introduction of Release 1.5 of our VidPhone software, which we
expect to occur in the second quarter of 1999, users also will be able to
retrieve stored video on demand.

     Our VidPhone system is comprised of the following core components:

     VidPhone Switch.  The VidPhone switch is the video, audio and data switch
that is the cornerstone of our VidPhone video network system. It enables users
to access all VidPhone system functions within a building or across a small
business campus and, using one of our gateway products, to communicate with
remote locations through a WAN. A VidPhone switch is a scalable, modular video
network switch that supports from five to 50 concurrent users. Up to four
VidPhone switches may be connected to support up to 150 concurrent users. The
VidPhone switches normally reside near the PBX or CENTREX point of entry and can
be mounted in standard 19-inch racks.

     VidModem.  The VidModem connects the desktop and the VidPhone switch using
the existing telephone wiring. The desktop and VidPhone switch versions of
VidModem incorporate the patented VidModem technology that enables distribution
of TV-quality video, FM-quality stereo audio and high speed data over the single
twisted pair of copper wire that connects the telephone to the PBX or CENTREX.
The transmission does not require compression or decompression of data. The
connection is transparent to the telephone and the PBX, so the user also can use
the telephone concurrently with the VidPhone system, and the telephone operates
independent of any video applications.

     VidPhone Station Software.  VidPhone station software is the software
platform supporting users of the VidPhone system. It provides an easy-to-use
graphical user interface for all video applications offered by the VidPhone
system and transforms a user's desktop or laptop computer into a VidPhone
station. The user's computer is configured with non-proprietary equipment such
as a microphone, speakers and a camera. VidPhone stations connect to the
VidPhone switch through a VidModem. A VidPhone station user can view broadcast
video and participate in video conferences. With the introduction of our Release
1.5 VidPhone software, VidPhone stations may be located up to 1,000 feet from
the VidPhone switch when using category 3 wiring, and up to 2,000 feet when
using category 5 wiring. We believe that most modern business telephone systems
use at least category 3 wire. VidPhone stations do not need a terminal-resident
ISDN or ATM CODECs because they connect directly to the VidPhone switch.
VidPhone stations may be easily and inexpensively modified for conference room
systems. The VidPhone system also supports all video network applications in a
large screen multi-party conference room setting.

     VidPhone Remote Terminal.  VidPhone remote terminals connect remote users
who are not directly connected to a VidPhone switch through a VidModem to the
VidPhone system. Employees in branch offices, individuals working from home, and
other parties outside a building or business campus are potential users of

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VidPhone remote terminals. VidPhone remote terminal users have access to all
video network functions of the VidPhone switch to which they connect; however,
the quality of the video and audio presentation will be limited by the bandwidth
of the external communications connection. VidPhone remote terminal connectivity
may be over a variety of communications circuits, such as single or multi-line
ISDN.

     We also have developed and are continuing to develop additional components
that enhance the VidPhone system. Three of these components are the VidPhone
Gateway2, the ATM Gateway2 and our VidServer video storage and access device.
Our VidPhone Gateway2 and ATM Gateway2 can be used to connect VidPhone systems
across a wide area network. The VidPhone Gateway2 interfaces with and transmits
signals across a WAN using the public telephone system's ISDN lines, which are a
network of ISDN lines operating worldwide. The VidPhone system ATM Gateway2
interfaces with and transmits signals over a fiber optic network WAN. Both the
VidPhone Gateway2 and the ATM Gateway2 compress the video data signal at the
location where the video call is initiated, interface with the WAN, decompress
the video signal at the location where the video call is received, and transmit
the video signal to the VidModem switch for distribution to the VidPhone user to
whom the call is directed. The VidPhone VidServer will be available with
software Release 1.5 expected to occur in the second quarter of 1999. The
VidServer will permit VidPhone users access to and control of stored video.

SYSTEM FUNCTIONALITY

     The VidPhone system can support three business video requirements.

     Broadcast Video.  Sources of broadcast video material include, but are not
limited to, satellite broadcasts, cable television, and narrowcasts over an ATM
network. These sources are connected to the VidPhone switch through a specially
designed circuit card. The user selects the desired broadcast from a menu using
standard point-and-click techniques. The non-blocking architecture of the
VidPhone switch permits multiple users to simultaneously access the same
broadcast video source without degrading system performance.

     Video Conferencing.  The VidPhone system supports two-way and multi-party
video conferencing. A VidPhone system user can maintain a telephone directory
and contact other VidPhone users using standard point-and-click techniques at
any time without prior coordination.

     Retrieval of Stored Video.  With the commercial introduction of Release 1.5
of the VidPhone software, which we expect to occur in the second quarter of
1999, VidPhone system users will be able to access stored video material. The
stored video material may reside on a variety of different types of devices,
such as a video server, a video jukebox or a video tape player. Users will be
able to access stored video using point-and-click techniques similar to those
used to access broadcast video.

SALES AND MARKETING

     Our sales and marketing strategy is to create brand-name recognition of the
VidPhone video network system. We actively promote the VidPhone system through
various initiatives including press releases, targeting key media outlets,
presentations to industry analysts and consultants, technology announcements,
formal product launches, and participation in trade shows. In 1998, we exhibited
the VidPhone system at five trade shows held in Washington, D.C., Boston and
three cities in California. Our strategic partner, Unisys, exhibited the
VidPhone system at 11 additional trade shows. Those shows targeted the federal
government, including the Department of Defense and U.S. military bases. We also
made a presentation and exhibited the VidPhone system at the Sprint ATM User's
Conference held in Atlanta in 1998.

     Resellers.  We market our VidPhone system primarily through telephone
product and service companies, systems integrators and VARs who generally will
market and sell our video network system as an upgrade to their existing
customers' telephone and information systems. We currently have agreements with
16 resellers. In part, our strategy is to capitalize on the drive by some of the
telephone product and service resellers to gain prominence in the corporate
information systems market. The attributes of the VidPhone system enable our
resellers to offer a fully functional video network that competes directly with
video network

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functions offered by computer and LAN vendors. We believe the VidPhone system is
more attractive to information technology administrators than LAN-based systems
because it does not use LAN bandwidth, compromise LAN integrity, affect LAN
reliability or use significant personal computer processing power. The VidPhone
system architecture also enables information technology administrators to
centrally manage system resources and feature upgrades. The VidPhone system
provides higher quality video and audio than any LAN-based system currently
available.

     Telephone product and service providers, systems integrators and VARs offer
sales, service and support and have large customer bases. These distribution
channels have a large existing customer base that is generally receptive to
system upgrades. We have an agreement with Bell Atlantic, expiring in October
1999, to market and sell our video network to the Department of Defense and
other governmental agencies. We also have a reseller agreement with Sprint to
market and sell VidPhone systems worldwide which terminates in July 1999. In
October 1998, we entered into a strategic alliance with Unisys under which
Unisys is the preferred systems integrator that resells our VidPhone system to
the federal government.

     We have a limited operating history and, therefore, we do not have any
substantial basis on which to predict our sales cycle. However, we expect that
we will have a relatively long sales cycle for our products, in part because of
our strategy of marketing our VidPhone system through resellers. It takes a
relatively long time for us to establish a relationship with our resellers. It
also takes time for us to familiarize our resellers and their personnel with the
VidPhone system and to train the resellers' sales force. However, we also expect
that the time involved in our sales cycle will decrease after we establish
customer reference accounts, create brand name recognition of the VidPhone
system and have longer, more established relationships with our resellers.

     Direct Sales.  We have a small internal direct sales force to promote our
VidPhone system, to create reference accounts in major markets, and to support
our third-party resellers. We intend to continue to develop our direct sales
force, focusing on adding a small number of sales people in specific geographic
areas to further our sales and marketing efforts.

     Vertical Distribution Channels.  We are developing vertical distribution
channels for our VidPhone system. Initially, our sales and marketing efforts
target the government sector and the financial and medical industries. We are
targeting the government sector because it tends to adopt technology early and
has many uses for a video network system. We are targeting the financial and
medical industries because these industries have a demonstrated need to
broadcast and distribute video to many users at their desktop computers.

     Customer Service and Support.  We expect that our resellers will provide
their customers with service and support for the VidPhone system. In addition,
we maintain a customer support department that assists our resellers and
end-user customers with problems related to our video network system, including
the initial installation of the VidPhone system, technical questions, problem
resolution and systems engineering. As our resellers become more familiar with
the VidPhone system, we expect that they will be the primary customer support
for our products to their customers, and that our customer support department
will become a secondary customer support, focusing on providing service
regarding issues like software performance and hardware re-engineering
requirements. We also expect that, in the future, our customer support
department will provide services to our resellers rather than to the end-user
customer.

     Training.  To promote reseller sales and marketing efforts, as well as
resellers' support for our products, we hold in-depth training programs to
educate our resellers about our products. During 1998, we held training classes
for reseller sales, support and service personnel, both at our facilities and at
our resellers' facilities. We intend to increase the number and availability of
our training programs in the future, which we believe will help build brand
awareness, promote reseller sales and marketing of the VidPhone system, and
improve reseller service and support for our VidPhone systems.

PRODUCT RESEARCH AND DEVELOPMENT

     During 1997, our research and development efforts focused on completing the
initial development and production of the VidPhone system. We introduced the
VidPhone system in the fourth quarter of 1997, and we

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made the first shipments of the commercial VidPhone system in the third quarter
of 1998. Since then, our research and development has focused on:

     - adding new features requested by our customers;

     - adding additional user capacity to the VidPhone system; and

     - lowering production costs.

     Our engineering staff closely monitors technical developments and works
with our marketing personnel to assess evolving business video network
requirements. We will monitor emerging technologies that support new video
applications for business and tailor our research and development accordingly.
In addition to our internal research and development resources, we engage
contract engineering services when we believe that the use of such services will
be efficient. Research and development efforts target both hardware and software
enhancements to video network capabilities. Our research and development efforts
are complemented by internal quality and assurance procedures.

INTELLECTUAL PROPERTY

     Our proprietary VidModem transmission technology, incorporated in our
VidPhone system, is covered by two U.S. patents issued in April 1997 and July
1998, which relate to a method and apparatus for transmitting video information
over telephone wiring and variations of the basic VidModem technology.

     We also are currently prosecuting a patent application covering the
VidPhone system's networking and switching technology, and we have pending
patent applications with respect to a scalable high-speed packet switch and to a
U-channel interface device. We cannot predict when we will receive a dispositive
ruling from the U.S. Patent and Trademark Office concerning these patent
applications. We expect to file approximately six to nine new U.S. patent
applications in 1999 covering various improvements in the field of video
distribution, but we do not expect to receive notice from the U.S. Patent and
Trademark Office for at least one year after filing. The success of our products
depends in part on our continuing ability to obtain and protect patents,
licenses and other intellectual property rights covering our significant
hardware and software products. We have registered the trademarks Objective
Communications, VidPhone, and VidModem.

     The process of seeking patent and trademark protection can be long and
expensive, and there can be no assurance that patents and trademarks will issue
from currently pending or future applications or that any patents or trademarks
that are issued will be of sufficient scope to provide meaningful protection or
any commercial advantage to us.

MANUFACTURING

     We outsource the manufacture and assembly of components used in the
VidPhone system. In particular, we outsource to Sanmina Corporation the
manufacture and assembly of components used in the VidPhone switch. Several
other manufacturers are producing smaller sub-assemblies and components for us.
We believe we will be able to continue to outsource production and that there
are a number of manufacturers qualified to produce components of our VidPhone
system, because the production process is relatively routine and does not
require any unique expertise. Although our products incorporate unique, patented
technology, we also believe that all of the components used in our equipment are
readily available from commercial suppliers. As a result, we do not believe that
we depend on any single manufacturer or supplier to a material extent. All
products produced by third-party manufacturers are shipped to us for final
assembly, systems integration and quality assurance testing. We plan to retain
test and quality assurance functions until subcontractors can be certified with
respect to quality. Any difficulties encountered with third-party manufacturers
could result in product defects, production delays, cost overruns or the
inability to fulfill orders on a timely basis. Any of these difficulties could
have a material adverse effect on us.

     As of December 31, 1998, we had overdue accounts payable to Sanmina of an
aggregate of approximately $3,200,000 and we had approximately $1,100,000 in
value of our inventory and materials located at Sanmina. In January 1999, we
restructured these obligations by converting the outstanding $3,200,000
obligation to

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Sanmina and the $1,100,000 in inventory and materials to a three-year term note
in the principal amount of $4,300,000. The note bears interest at 7% per year.
We also issued to Sanmina warrants to purchase 39,285 shares of our common stock
at an exercise price of $19.25 per share. We are obligated to pay Sanmina
$1,100,000 in principal on the note at the time this offering is completed and,
at that time, Sanmina will transfer to us title to our inventory and materials
located at its facilities.

COMPETITION

     The market for our products is new, highly competitive and rapidly
evolving. We believe that the principal competitive factors in the markets in
which we compete are product performance, price and product support. Our
principal competitors in the video network market are MMAC, FVC.com and VTEL
Corp. We also expect to compete with new entrants in the market and with
providers supporting IP and LAN-based video networks, including Intel,
Microsoft, and Cisco. To date, no desktop system has captured any significant
portion of the potential market.

     Our video network system permits users to view broadcast video and
participate in multi-party video conferences from the desktop and, upon the
introduction of our Release 1.5 software, will permit retrieval of stored video
on demand. As a result, we also compete with companies that offer video
broadcast and video retrieval products. Competitors in the video broadcast
market include cable television and direct satellite broadcast system providers
such as DirecTV, TCI, and News Network Vision.

     Our principal competitors in the video conferencing market have been
PictureTel, VTEL and its wholly-owned subsidiary CLI, Intel and Polycom. We
believe that PictureTel currently has the largest market share in both the group
and desktop video conferencing markets. We also expect to compete with new
market entrants in the video conferencing market. We are not aware of any
current competitors in the video retrieval market.

     Virtually all of our competitors have longer operating histories, greater
name recognition, larger customer bases and significantly greater financial,
technical and marketing resources than we do. We believe that we will be able to
compete effectively against larger companies with substantially greater
resources on the basis of our product's capabilities, our distribution strategy,
and price. We do not believe that LAN-based competitors will be able to provide
business quality video network systems in the foreseeable future. There can be
no assurance, however, that we will be able to compete successfully against
these or future competitors.

GOVERNMENT REGULATION

     The Federal Communications Commission ("FCC") regulates the operation of
telecommunications equipment for use in the United States. The VidModem and
VidPhone switch components of the VidPhone system must comply with certain FCC
regulations.

     VidModem.  The VidModem is a Class A digital device that may be operated
without an individual license. Under FCC regulations, we will be required to
follow a verification procedure consisting of a self-certification that the
radio frequency device complies with applicable regulations. A qualified,
independent testing facility tested the VidModem and it was found to comply with
FCC regulations.

     VidPhone.  We obtained equipment registration from the FCC for certain
VidPhone system components, including the VidPhone switch, that are connected to
the public switched telephone network.

     Future government regulations could increase the cost of bringing products
to market or adversely affect our ability to market and sell our products or
technology.

EMPLOYEES

     As of March 31, 1999, we had approximately 55 employees, all of whom were
full-time. We also use the services of technical consultants and subcontractors
on an as-needed basis. Each employee and consultant has executed both a
confidentiality agreement and an agreement not to compete with us for a period
of 24 months after performing services for us. We do not have employment
agreements with any of our employees, except

                                        7
<PAGE>   10

for James F. Bunker, our President and Chief Executive Officer, and Steven A.
Rogers, our founder, Chief Technology Officer and Vice President.

ITEM 2.  PROPERTIES

     We lease one facility in Portsmouth, New Hampshire at a current monthly
rental rate of $11.00 per square foot under a lease that expires in March 2008.
Rent on the facility increases over the term of the lease from an initial rate
of $11.00 per square foot to $15.00 per square foot. That facility consists of
approximately 26,000 square feet, of which approximately 13,000 square feet is
office space, approximately 6,500 square feet is a research and development
laboratory, and approximately 6,500 square feet is a production facility used
for equipment assembly and testing, customer support, and training.

ITEM 3.  LEGAL PROCEEDINGS

     We are a party to a number of lawsuits and proceedings relating to overdue
obligations. Most of these proceedings seek to recover relatively small amounts
of money and, as of the date of this Form 10-KSB, the total amount of damages
sought in these proceedings is approximately $137,000, plus in certain cases,
court costs and attorney's fees. We are seeking to negotiate payment terms
regarding many of these obligations, but to date our efforts to resolve them
have not been successful. We have numerous other overdue obligations which could
result in additional lawsuits being filed against us. We are not aware of any
other legal proceedings pending or threatened against the Company.

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

     No matters were submitted to a vote of the Company's security holders
during the quarter ended December 31, 1998.

                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Our common stock traded on the Nasdaq SmallCap Market from April 3, 1997 to
October 30, 1997 and traded on the Nasdaq National Market from October 31, 1997
to April 30, 1999. As of May 3, 1999, our common stock trades on the Nasdaq
SmallCap Market. The following table sets forth, for the periods indicated, the
range of high and low sales prices per share reported on such quotation systems
as adjusted to reflect the one share for seven shares reverse split in the
common stock that occurred on April 14, 1999.

<TABLE>
<CAPTION>
                                                                  AS ADJUSTED
                                                              -------------------
                                                                HIGH       LOW
                                                              --------   --------
<S>                                                           <C>        <C>
PERIOD ENDING:
  June 30, 1997 (from April 3, 1997)........................  $ 99.750   $ 41.125
  September 30, 1997........................................   267.750     77.875
  December 31, 1997.........................................   257.250     89.250
  March 31, 1998............................................   173.250    101.066
  June 30, 1998.............................................   141.750     46.375
  September 30, 1998........................................    67.375     18.375
  December 30, 1998.........................................    38.500     12.250
</TABLE>

     At March 24, 1999, the last sale price per share of common stock as
reported on the Nasdaq National Market was $7.4375. As of February 16, 1999,
there were approximately 157 holders of record of our common stock.

     We have not paid cash dividends on our common stock in the past. We expect
to retain all earnings generated by our operations for the development and
growth of our business, and do not anticipate paying any cash dividends to
holders of our common stock in the foreseeable future. The payment of future
dividends on

                                        8
<PAGE>   11

the common stock and the rate of such dividends, if any, will be determined by
our Board of Directors in light of our earnings, financial condition, capital
requirements and other factors.

     Information regarding the 5% convertible debentures that we issued in July
1998 and the Series B preferred stock that we issued in August 1998 previously
was disclosed in our Quarterly Report on Form 10-QSB filed with the Commission
relating to the quarter ended September 30, 1998.

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

     You should read the following discussion in conjunction with our audited
financial statements and notes thereto which are included elsewhere in this Form
10-KSB.

OVERVIEW

     Objective Communications was formed in 1993 to design, develop and market a
full motion, high resolution, cost-effective video network system, the VidPhone
system. Users of the VidPhone video network system can view broadcast video and
participate in multi-party video conferences. With the introduction of Release
1.5 of our VidPhone software, which we expect to occur in the second quarter of
1999, users also will be able to retrieve and view stored video on demand. Our
VidPhone system distributes video to and from desktop or laptop personal
computers and conference rooms configured with a VidPhone station, over the same
wiring used by the telephone.

     Our operations focused on research and development until we shipped our
first commercial VidPhone system in the third quarter of 1998. To date, we have
not generated substantial revenues from the sale of our VidPhone system. Since
shipping our first commercial VidPhone system, we have focused on sales and
marketing of our product and customer support, while continuing to enhance our
product's development.

     In July 1998, we began a significant restructuring of our operations,
including changes in senior management. We hired James Bunker, who has extensive
experience "turning-around" businesses, as our President and Chief Executive
Officer. Steven Rogers, our founder, became Chief Technology Officer and Vice
President, Engineering and assumed responsibility for completing the development
of our commercial VidPhone system. We shipped the first commercial version of
our VidPhone system in August 1998. To lower our operating expenses, in July
1998, we reduced the number of our employees to approximately 90 from
approximately 135. Since then, we have reduced our staff by approximately 35
additional people. We also implemented new cash management and expense policies.
We believe that these changes will reduce our total operating expenses in 1999
by approximately 50% compared to 1998.

     Our first commercial VidPhone system included Release 1.4 of our VidPhone
software. Release 1.4 enabled certain features of the VidPhone system, including
ATM and enhanced ISDN wide area connectivity. Release 1.5, which we expect to
introduce in the second quarter of 1999, will add additional features to our
VidPhone system, including the VidServer and the VidPhone gateways. We expect
that the VidServer will permit VidPhone users access to and control of stored
video on demand and that the VidPhone gateways will permit VidPhone systems or a
VidPhone system and another vendor's video network to be connected across a wide
area network. With the introduction of Release 1.5, our VidPhone system will
offer a complete video network system providing the following video functions to
users: broadcast video, videoconferencing, and retrieval of stored video on
demand.

     We have a limited operating history and, therefore, we do not have any
substantial basis on which to predict our sales cycle. However, we expect that
the sales cycle for our products will be relatively long primarily for two
reasons. First, it takes substantial time for us to establish relationships with
our resellers. It also takes time to familiarize resellers with the VidPhone
system and to train their sales forces. Second, our VidPhone video network
system is a new product that requires a substantial capital commitment.
Accordingly, we believe that it is likely to take the end-user customer at least
several months to decide to purchase our VidPhone video network system. We
expect our sales cycle will decrease after we establish customer reference
accounts, create brand name recognition of the VidPhone system and have longer,
more established relationships with resellers.

                                        9
<PAGE>   12

     Although we distribute and sell our products through resellers, we
typically ship VidPhone systems directly to end-user customers and install the
systems at customers' locations. The VidPhone system technology is new and the
purchase of a VidPhone system requires a significant capital investment.
Generally, our policy currently is to permit new prospective end-user customers
to evaluate the VidPhone system for 30 to 45 days. Following that period, our
policy generally requires customers to pay for the VidPhone system in full
within 30 days, or to return the product. In some cases, we require a down
payment at the time an order is placed.

     We generally recognize revenues after the end-user customer accepts the
products ordered and pays. In the future, we may recognize a portion of the
revenues generated when products are shipped to customers and collection is
reasonably assured.

     In 1999, we intend to focus on sales and marketing of the VidPhone system,
and continuing product development to meet customer demands for new
functionality and to lower costs. Specifically, we intend to: (i) use current
strategic and reseller arrangements to increase sales of the VidPhone system and
create brand name recognition of our product, (ii) distribute the VidPhone
system through established distribution channels, (iii) position the VidPhone
system as an enhancement to existing telephone and information systems, (iv)
develop our direct sales capabilities, and (v) continue engineering on our
VidPhone system to refine and improve current functionality to meet new customer
requirements and to lower costs through improved design. However, we cannot
assure you that we will be able to meet these objectives. We plan to continue to
subcontract all major manufacturing and production activities for the
foreseeable future, but we will continue to retain test and quality assurance
functions until all subcontractors are certified with respect to quality.

     In 1999, we expect to continue to incur operating expenses to support our
product development efforts and to enhance our sales and marketing capabilities
and organization but we anticipate that our development expenditures will be
lower than in prior years due to the commercialization of the VidPhone system in
1998. Our results of operations may vary significantly from quarter to quarter
during this period of product introduction and initial sales.

     We require additional financing for our operations. To date, we have
financed operations principally through public and private sales of debt and
equity. In July 1998, we raised $3.125 million in gross proceeds from the
private placement of 5% convertible debentures. In August 1998, we completed a
private placement of preferred stock and warrants, from which we received $1.15
million in gross proceeds. We used the proceeds of both financings for working
capital and general corporate purposes. However, at December 31, 1998, we had
essentially no cash remaining from which to fund operations. In February 1999,
we completed a private placement of $2,850,000 of unsecured promissory notes and
162,844 shares of common stock, from which we received net proceeds of
approximately $2,430,000. We are using the net proceeds from the offering for
working capital and general corporate purposes, including using approximately
$560,000 to repay certain outstanding accounts payable. Before completing the
February 1999 private placement, we were able to pay only those expenses that
were essential to continue operations. We financed those payments, in part, with
advances of $125,000 from our executive officers. Since completing the February
1999 private placement, we have continued to monitor payments carefully. We
estimate that our current cash will be sufficient to fund operations only until
we complete our proposed $15,000,000 public offering, which is expected to occur
in the second quarter of 1999.

YEAR 2000

     As many computer systems and other equipment with embedded chips or
processors use only two digits to represent the year, they may be unable to
process accurately certain data before, during or after the year 2000. As a
result, business and governmental entities are at risk for possible
miscalculations or systems failures causing disruptions in their business
operations. This is commonly known as the Year 2000 (or "Y2K") issue. The Y2K
issue can arise at any point in a company's supply, manufacturing, processing,
distribution, and financial chains.

                                       10
<PAGE>   13

     We have evaluated the impact of the Y2K issue on our operations. This
evaluation consisted of identifying the sources of potential exposure to risk of
systems malfunction or failure in internal information technology ("IT")
infrastructure, in our product, including embedded systems and software, and in
systems utilized by significant vendors and customers. The evaluation process
also developed contingency plans in order to mitigate the negative effects to us
of any failure of these systems. We have completed our review process, and the
costs associated with our Y2K compliance evaluation were not material.

     We believe that the VidPhone system is not susceptible to Y2K problems
because the VidPhone system does not contain an internal clock. We also have
evaluated whether equipment and software that we use or that is embedded in the
VidPhone system is Y2K compliant. Our evaluation consisted principally of
securing certifications from each of the vendors of these products that their
product is Y2K compliant and we did not independently assess whether a product
has Y2K problems. With respect to our internal IT infrastructure, including the
commercial financial software that we use, we have also obtained certifications
that the products that we use are Y2K compliant.

     If, however, the equipment or software currently used or produced by us
proves to be susceptible to the Y2K issue, we may incur significant costs to
modify, re-program or replace the affected equipment or software. In addition,
because the VidPhone operates in a Windows environment, any susceptibility of
the Microsoft Windows operating system to Y2K issues could affect the operation
of the VidPhone system.

     We began an evaluation of the compliance of our current and future major
supplier's systems in the fourth quarter of 1998. Failure of any of our
significant supplier's systems could result in our inability to supply products
to our customers and adversely affect our operating results and cash flow. Our
Y2K plan includes contingency plans to reduce the risk of a disruption to normal
access to required components and materials or services. Our evaluation consists
of obtaining Y2K compliance certification from major software and hardware
suppliers. Although the cost of assessing Y2K compliance by third parties has
not been material to date and we believe that it will not be material in the
future, at this time we cannot estimate the costs of any steps that will need to
be taken to resolve any problems or secure alternative relationships with Y2K
compliant third parties.

     In addition, we have evaluated the impact of the existence of Y2K issues on
our customer base. Based on those evaluations, we do not expect our potential
customers to reduce their capital expenditure budgets or to defer purchases of
the VidPhone system because of concern about potential Y2K issues. We provide
all of our customers with Y2K certifications with respect to our VidPhone
system, and we do not believe that the existence of Y2K issues with respect to
other technologies will materially adversely impact sales of the VidPhone
system.

     Our assessment of the impact of Y2K on our operations is based on current
facts and our assessment process is not complete. Accordingly, we cannot assure
you that there will not be interruptions or other limitations of financial and
operation systems functionality or that we will not incur greater costs than
projected to avoid such interruptions. Our expectations about future costs
associated with the Y2K issue are subject to certain uncertainties that could
cause actual results to have a greater financial impact than currently
anticipated. Factors that could influence the amount and timing of future costs
include our success in identifying Y2K issues, the costs of remediation or
avoidance, the costs of assessing third-party compliance and its impact on our
operations, and other factors. The forward-looking statements discussed in this
section regarding Y2K compliance involve a number of risks and uncertainties,
including those described above, and general economic conditions, the
competitive environment in which we operate, and other risks and uncertainties
identified elsewhere in this Form 10-KSB.

RESULTS OF OPERATIONS

COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997

     Revenues.  We had $765,617 in revenues in 1998, compared to no revenues in
1997. Revenues are presented net of a $22,000 reserve for returns and
allowances.

                                       11
<PAGE>   14

     Gross Margin.  Cost of sales for 1998 were $544,853, resulting in a gross
margin of $220,764 or approximately 28.8% of revenues. Cost of sales includes
the costs of materials, labor, and production overhead necessary to convert
purchased components to finished products. In the future, we expect to lower the
costs of production through engineering advances and purchasing economies, and
to increase gross margin while also reducing the cost of the VidPhone system per
user.

     Research and Development.  Research and development expenses increased
significantly to $11,488,000 in 1998, from $6,219,000 in the prior year, an
increase of $5,269,000, or 85%. Of the increase, $2,342,000 was attributable to
higher staffing costs as we added a significant number of product development
personnel during the first half of 1998. Product development staffing costs
declined during the second half of 1998, as we reduced personnel as part of our
overall cost-reduction plan. Of the overall increase in research and development
costs, $1,705,000 was due to increased materials costs, again primarily in the
first half of 1998. We also incurred approximately $610,000 in additional costs
in 1998 related to the increased use of facilities and information technology,
representing a 139% increase over 1997. In addition, equipment and equipment
rental costs to support research and development increased to $544,000 in 1998,
compared to $187,000 in 1997, an increase of approximately $357,000, or 191%.
Computer and software costs increased to $215,000 in 1998 from $91,000 in 1997,
an increase of $124,000, or 136%.

     Selling, General, and Administrative Expenses.  Selling, general and
administrative expenses increased significantly to $9,015,000 in 1998 from
$4,335,000 in 1997, an increase of $4,680,000, or 108%. Staffing-related costs
increased to $3,798,000 in 1998 from $1,927,000 in 1997, an increase of
$1,871,000, or 97%. Of this increase, $2,075,000 was attributable to additional
sales and marketing staff, offset by a reduction of $204,000 in general and
administrative staffing costs. General and administrative staffing costs
declined in 1998 compared to 1997 because we had a one-time, non-cash
compensation charge of $340,000 in 1997 related to a warrant exchange
transaction. Costs associated with the use of consultants and other professional
services increased during 1998 relative to 1997 by $767,000, or 123%. Of that
increase, $564,000 was attributable to non-cash charges associated with granting
options to an investment banking firm in December 1997. Sales and marketing
costs increased significantly during 1998 compared to 1997 as we introduced the
first commercial version of our VidPhone system. Advertising and promotion
costs, including installations of demonstration equipment at potential customer
or reseller sites and attendance at trade shows (exclusive of travel expenses)
increased to $1,085,000 in 1998, representing an approximately 258% increase
over 1997. In January 1999, we sold furniture and equipment to a third party in
connection with our relinquishment of a lease on excess space in Portsmouth, New
Hampshire. The loss on the sale of this equipment and on the abandonment of
leasehold improvements was an estimated $195,000, which was accrued in 1998. We
did not record any similar charge in 1997. Allocated costs related to facilities
and information technology infrastructure also increased to $580,000 in 1998
from $407,000 in 1997, an increase of $173,000, or 43%. This increase primarily
is due to significantly higher telephone costs in 1998, as we increased the
testing of the VidPhone system over ISDN lines, and higher personnel costs and
uncapitalized equipment in our information technology department. Recruiting and
relocation costs declined in 1998 by approximately $190,000 to approximately
$203,000. The higher level of such costs in 1997 was associated with the move of
the Company's headquarters.

     Depreciation and Amortization.  Depreciation and amortization increased to
$2,241,000 in 1998 from $829,000 in 1997, an increase of $1,412,000, or 170%.
The $1,616,000 increase in depreciation costs was offset by a $209,000 decrease
in amortization costs. Depreciation increased as a result of the significantly
higher level of depreciable fixed assets in 1998. Amortization decreased because
we amortized $209,000 of capitalized debt issuance costs upon the repayment of
debt paid from the proceeds of our initial public offering in April 1997, but we
did not incur any similar charge in 1998.

     Interest Income, Net.  We earned $120,000 in net interest income in 1998
compared to incurring $203,000 of net interest expense in 1997. We earned
interest income of $292,000 on invested excess cash during 1998, compared to
interest income of $272,000 in 1997. We paid interest expense of $172,000 in
1998 related to capital lease obligations and notes payable, compared to
$475,000 in 1997. Of the interest expense incurred in 1997, $385,000 related to
the write-off of unamortized debt discount representing the fair value of
warrants we issued to holders of notes in connection with a financing completed
in November 1996.
                                       12
<PAGE>   15

     Net Loss.  Our net loss for 1998 increased by $10.8 million, or 93%, to
$22.4 million, from $11.6 million for 1997.

COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996

     Revenues.  We had no revenues in the year ended December 31, 1997 compared
to revenues of $81,375 in the same period in 1996. The revenues recorded in 1996
were generated from consulting arrangements, not from our primary business. In
1997, we devoted all of our resources to the development, production, and sale
and delivery of the VidPhone system and related software products.

     Gross Margin.  We recorded no revenues in 1997 and correspondingly had no
gross margin to report, as compared to a gross margin of approximately 23.3% of
total revenues for 1996.

     Research and Development.  Research and development expenses increased by
approximately $5,112,000, or 462%, for the year ended December 31, 1997, to
approximately $6,219,000 as compared to $1,107,000 for the year ended December
31, 1996. The increase was primarily due to hiring of technical staff and
increasing levels of spending in connection with final product design and, to a
lesser extent, costs incurred in connection with preparing our new production
facilities. Research and development expenses include the costs associated with
all personnel, materials and contract personnel engaged in research and
development for Objective Communications, as well as an allocated portion of
overhead expenses, such as rent, telephone, and office supplies.

     Selling, General, and Administrative Expenses.  Selling, general and
administrative expenses increased by approximately $3,293,000, or 316%, in the
year ended December 31, 1997 to approximately $4,335,000 from approximately
$1,042,000 in the same period in 1996. Sales and marketing costs increased in
preparation for the introduction of our products to the marketplace. Significant
expenses were incurred during 1997 in connection with a multi-city product
introduction tour and the addition of sales, marketing, and customer support
staff. Legal, accounting, personnel and insurance expenses increased as a result
of our growth, becoming a publicly traded company and the increased size and
complexity of operations.

     Depreciation and Amortization.  Depreciation and amortization increased
approximately $670,000, or 421%, to $829,000 in the year ended December 31, 1997
from $159,000 in the year ended December 31, 1996. During 1997, we charged to
amortization expense $209,000 of capitalized debt issuance costs upon the
repayment of the debt from the proceeds of our initial public offering. The
remainder of the increase was primarily due to approximately $614,000 in
depreciation of fixed assets and approximately $6,000 in amortization of
trademarks and patents.

     Interest Expense.  We incurred approximately $203,000 in net interest
expense for the year ended December 31, 1997 compared to approximately $404,000
in net interest expense for the year ended December 31, 1996. Interest income of
approximately $272,000 was earned in 1997, principally derived from the invested
proceeds of our initial public offering completed in April 1997 and the
follow-on offering completed in November 1997 (the "Follow-on Offering").
Interest expense in 1997 included a write-off of approximately $385,000 of
unamortized debt discount representing the fair value of warrants we issued to
holders of notes issued in connection with a financing completed in November
1996.

     Net Loss.  As a result of the foregoing factors, the net loss increased by
approximately $8.9 million, or 330%, to approximately $11.6 million for the year
ended December 31, 1997 from approximately $2.7 million during the year ended
December 31, 1996.

LIQUIDITY AND CAPITAL RESOURCES

     We incurred cumulative losses aggregating approximately $39.1 million from
inception through December 31, 1998. We expect to continue to incur additional
operating losses for the foreseeable future, principally as a result of expenses
associated with our product development efforts and anticipated sales, marketing
and general and administrative expenses. During 1998, we satisfied our cash
requirements principally from the proceeds of the Follow-on Offering and
approximately $3.1 million of net proceeds from the issuance of the 5%
convertible debentures and approximately $1.1 million of proceeds from the
issuance of the Series B
                                       13
<PAGE>   16

preferred stock. In June 1998, we sold to the Portsmouth Development Authority
("PDA") certain leasehold improvements that we had made to our principal office
building. We received approximately $1.5 million from the sale, but we also are
obligated to pay higher rental costs on our current headquarters in the future
as a result of the transaction. Our primary uses of cash have been to fund
research and development, sales, general and administrative expenses, and to
build inventory levels to support future sales.

     Our cash and cash equivalents decreased by $18.2 million to $8,500 at
December 31, 1998, compared to $18.2 million at December 31, 1997. Cash was used
to produce inventory for future anticipated shipments, to fund research and
development costs related to new functions on which we were working in response
to market demands, and to increase our marketing capabilities to support
anticipated and existing reseller relationships.

     Net cash used in operating activities in 1998 was $19.6 million. The net
loss reduced by depreciation and amortization and the non-cash compensation and
other non-cash charges, was $19.5 million. Inventories increased by $4.1
million, funded in part by an increase of $3.7 million in accounts payable.
Inventory at December 31, 1998 was $5.8 million, compared to $1.7 million at
December 31, 1997. Inventory at December 31, 1998 included $43,000 of finished
goods representing the cost of equipment shipped in the fourth quarter of 1998
which was not recorded as sales in that quarter.

     Net cash used in investing activities in 1998 was $2.3 million. The $3.8
million in cash used for capital items was partially offset by the $1.5 million
received from the sale of leasehold improvements to the PDA. Of the $3.0 million
in additions to property and equipment in 1998, $719,000 was financed by
additions to capital lease obligations. Total additions to property and
equipment consisted of additions to offices, furniture and fixtures and related
items, and computer and telecommunications equipment and software.

     Net cash provided by financing activities was $3.6 million in 1998. In
July, we raised $3.125 million from the issuance of 5% convertible debentures,
$625,000 of which was purchased by certain directors and executive officers and
certain other affiliated investors. In August, we raised $1.15 million by
issuing Series B preferred stock. We also received $221,000 of proceeds from the
exercise of warrants and options by certain warrant and option holders in the
second quarter of 1998. The proceeds from financing activities were partially
offset by $703,000 of principal payments on capital lease obligations and
$145,000 of principal payments on a note payable.

     To date, we have not generated substantial revenues from the sale of our
product. We did not earn any revenues in 1997, and recognized only $765,617 in
revenues in 1998. We have suffered recurring losses from operations, have
recurring negative cash flows from operations and an accumulated deficit and the
report of our independent accountants on our financial statements included
elsewhere in this prospectus includes an explanatory paragraph indicating that
there is substantial doubt about our ability to continue as a going concern. Our
financial statements included elsewhere in this Form 10-KSB do not include any
adjustments that might result from the outcome of this uncertainty.

     At December 31, 1998, we had essentially no cash from which to fund
operations. In February 1999, we completed a private placement of $2,850,000 in
aggregate principal amount of unsecured promissory notes and 162,844 shares of
common stock. We received net proceeds of approximately $2,430,000 from the
February 1999 private placement. Before completing that private placement, we
were able to pay only those expenses that were essential to continue operations.
Based upon our current plan of operations, we believe that our existing
resources will be sufficient to fund operations only until we complete our
proposed public offering. As a result of our liquidity problems, we have not
paid many of our creditors, including trade creditors, on a timely basis and
remain in default on a number of significant overdue obligations. Some of these
creditors have instituted or threatened to institute legal proceedings against
us to obtain repayment of these debts. If we continue not paying our debts as
they become due, it is likely that other creditors will take legal action
against us and that other firms may refuse to sell the products and services we
need to continue operations. We anticipate that our proposed public offering
will be completed in the second quarter of 1999. We estimate that the net
proceeds from that offering will be sufficient to fund our operations for
approximately 12 months.

     Although we believe that we will be successful in our efforts to raise
additional capital, there can be no assurance that we will be able to do so,
particularly given our current cash position. Our ability to attract

                                       14
<PAGE>   17

capital has been hampered by a number of adverse conditions, certain of which
are beyond our control, including uncertainty regarding economic conditions
generally and the uneven performance in the market for technology stocks. In
addition, adverse conditions in our operations have impeded financing efforts,
including our inability to secure substantial additional orders for our
products, concern about product reliability and customer acceptance, and concern
about the market for video conferencing products generally. Accordingly, there
can be no assurance we will be successful in our efforts to secure additional
debt or equity financing through a strategic alliance, private placement, or
otherwise, on terms acceptable to us, or at all.

     With respect to our plan of operations, we intend to continue to focus on
seeking to operate efficiently and preserve cash by closely monitoring
expenditures and payments to vendors on outstanding payables, reviewing
appropriate staffing levels without sacrificing product performance, and
continuing to increase product functionality and promote customer acceptance of
the VidPhone system.

NEW ACCOUNTING PRONOUNCEMENTS

     In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires computer
software costs associated with internal use software to be charged to operations
as incurred until certain capitalization criteria are met. SOP 98-1 is effective
beginning January 1, 1999. We plan to adopt this method of accounting in January
1999.

     In April 1998, the Accounting Standards Executive Committee issued
Statement of Position No. 98-5, "Reporting on the Costs of Start-up Activities."
This statement provides guidance in the financial reporting of start-up costs
and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. The statement is effective for
fiscal years beginning after December 15, 1998. Adoption of this standard will
not have a material impact our financial results.

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. The statement requires companies to recognize all
derivatives as either assets or liabilities, with the instruments measured at
fair value. The accounting for changes in fair value, gains or losses, depends
on the intended use of the derivative and its resulting designation. The
statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. Adoption of this standard will not have a material impact our
financial results.

INFLATION

     The impact of inflation on our business has been insignificant to date, and
we believe that it will continue to be insignificant for the foreseeable future.

                                       15
<PAGE>   18

ITEM 7.  FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Accountants...........................  F-1
Balance Sheets as of December 31, 1996, 1997 and 1998.......  F-2
Statements of Operations for the years ended December 31,
  1996, 1997 and 1998 and for the period October 5, 1993
  (date of inception) to December 31, 1998..................  F-3
Statements of Changes in Stockholders' Equity (Deficit) for
  the period October 5, 1993 (date of inception) to December
  31, 1998..................................................  F-4
Statements of Cash Flows for the years ended December 31,
  1996, 1997 and 1998 and for the period October 5, 1993
  (date of inception) to December 31, 1998..................  F-6
Notes to Financial Statements...............................  F-8
</TABLE>

                                       16
<PAGE>   19

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
  Objective Communications, Inc.:

     In our opinion, the accompanying balance sheets and the related statements
of operations, changes in stockholders' equity (deficit) and cash flows present
fairly, in all material respects, the financial position of Objective
Communications, Inc. (the "Company") at December 31, 1998 and 1997, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998 and for the period October 5, 1993 (date of
inception) to December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

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

Boston, Massachusetts
February 26, 1999, except for
Note 14, as to which the
date is April 14, 1999

                                                      PricewaterhouseCoopers LLP

                                       F-1
<PAGE>   20

                         OBJECTIVE COMMUNICATIONS, INC.
                        (A Development Stage Enterprise)

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                              DECEMBER 31,    DECEMBER 31,
                                                                  1997            1998
                                                              ------------    ------------
<S>                                                           <C>             <C>
                                          ASSETS
Current assets:
Cash and cash equivalents...................................  $18,199,434     $      8,532
Account receivable, less allowance for doubtful accounts
  of $22,246 in 1998........................................           --          184,670
Inventory...................................................    1,700,935        5,793,801
Other current assets........................................      675,289          250,709
                                                              -----------     ------------
Total current assets........................................   20,575,658        6,237,712
Property and equipment, net.................................    2,306,048        3,096,752
Trademarks and patents, less accumulated amortization of
  $11,220 and $22,660 in 1997 and 1998, respectively........      108,475          200,204
Other assets................................................       92,519           88,321
                                                              -----------     ------------
                                                              $23,082,700     $  9,622,989
                                                              ===========     ============
                      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable...............................................  $        --     $    125,543
Subordinated convertible debentures.........................           --        3,200,674
Accounts payable............................................    3,077,723        6,748,538
Deferred revenue............................................      133,180           40,000
Accrued liabilities.........................................      752,018          841,526
Obligations under capital lease, current portion............      190,454          187,220
                                                              -----------     ------------
Total current liabilities...................................    4,153,375       11,143,501
Obligations under capital lease.............................       57,196           76,008
COMMITMENTS (Notes 6 and 13)
Stockholders' equity (deficit):
Series B Convertible Preferred Stock, par value $.01,
  954,545 shares authorized; none and 209,091 issued and
  outstanding at December 31, 1997 and 1998, respectively...           --        1,173,958
Common stock, par value $.01, 30,000,000 shares authorized;
  810,978 and 820,147 issued and outstanding at December 31,
  1997 and 1998, respectively...............................        8,110            8,201
Additional paid-in capital..................................   36,009,125       36,770,004
Deficit accumulated during development stage................  (17,145,106)     (39,548,683)
                                                              -----------     ------------
Total stockholders' equity (deficit)........................   18,872,129       (1,596,520)
                                                              -----------     ------------
                                                              $23,082,700     $  9,622,989
                                                              ===========     ============
</TABLE>

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

                                       F-2
<PAGE>   21

                         OBJECTIVE COMMUNICATIONS, INC.
                        (A Development Stage Enterprise)

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                       FOR THE PERIOD
                                           FOR THE YEARS ENDED DECEMBER 31,           OCTOBER 5, 1993
                                       -----------------------------------------   (DATE OF INCEPTION) TO
                                          1996           1997           1998         DECEMBER 31, 1998
                                       -----------   ------------   ------------   ----------------------
<S>                                    <C>           <C>            <C>            <C>
Revenues-net.........................  $    81,375   $         --   $    765,617        $  1,261,277
Cost of sales........................       62,353             --        544,853             794,228
                                       -----------   ------------   ------------        ------------
                                            19,022             --        220,764             467,049
Operating expenses:
Research and development.............    1,106,901      6,218,637     11,488,262          20,211,652
Selling, general and
  administrative.....................    1,043,553      4,334,754      9,015,437          15,620,059
Depreciation and amortization........      158,714        829,462      2,240,878           3,293,114
                                       -----------   ------------   ------------        ------------
Total operating expenses.............    2,309,168     11,382,853     22,744,577          39,124,825
                                       -----------   ------------   ------------        ------------
Loss from operations.................   (2,290,146)   (11,382,853)   (22,523,813)        (38,657,776)
Interest (income)
  expense, net.......................      404,290        203,441       (120,236)            484,010
                                       -----------   ------------   ------------        ------------
Net loss.............................   (2,694,436)   (11,586,294)   (22,403,577)       $(39,141,786)
                                       -----------   ------------   ------------        ============
Cumulative Series B dividend.........           --             --        (23,958)
                                       -----------   ------------   ------------
Net loss attributable to common
  stockholders.......................  $(2,694,436)  $(11,586,294)  $(22,427,535)
                                       ===========   ============   ============
Net loss per common share -- basic
  and diluted........................  $     (5.23)  $     (19.90)  $     (27.45)
                                       ===========   ============   ============
Weighted average shares outstanding
  -- basic and diluted...............      515,376        582,307        816,972
                                       ===========   ============   ============
</TABLE>

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

                                       F-3
<PAGE>   22

                         OBJECTIVE COMMUNICATIONS, INC.
                        (A Development Stage Enterprise)

            STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
    FOR THE PERIOD OCTOBER 5, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1998

<TABLE>
<CAPTION>
                                                                                     DEFICIT
                                                                      SERIES B     ACCUMULATED
                                                                     CONVERTIBLE      DURING
                                         COMMON      ADDITIONAL       PREFERRED    DEVELOPMENT
                              SHARES      STOCK    PAID-IN CAPITAL      STOCK         STAGE          TOTAL
                             ---------   -------   ---------------   -----------   ------------   ------------
<S>                          <C>         <C>       <C>               <C>           <C>            <C>
Balance, October 5, 1993...         71   $     1     $       999     $       --    $         --   $      1,000
Net loss...................         --        --              --             --          (4,521)        (4,521)
Balance, December 31,
  1993.....................         71         1             999             --          (4,521)        (3,521)
Stock dividend.............    185,644     1,856          11,139             --         (12,995)            --
Issuance of common stock at
  $14/share................     24,429       244         341,756             --              --        342,000
Issuance of common stock at
  $14/share (issued in
  exchange for services)...      2,380        24          33,310             --              --         33,334
Issuance of common stock at
  $42/share................      6,429        64         269,936             --              --        270,000
Expenses associated with
  issuance of common
  stock....................         --        --         (47,418)            --              --        (47,418)
Issuance of common stock at
  $18.76/share (issued in
  exchange for services)...      1,196        12          22,488             --              --         22,500
Net loss...................         --        --              --             --        (406,842)      (406,842)
                             ---------   -------     -----------                   ------------   ------------
Balance, December 31,
  1994.....................    220,149     2,201         632,210             --        (424,358)       210,053
Issuance of common stock at
  $42/share................     15,952       160         669,840             --              --        670,000
Expenses associated with
  issuance of common
  stock....................         --        --         (81,389)            --              --        (81,389)
Notes payable converted to
  commons stock at
  $42/share................      8,386        84         352,139             --              --        352,223
Net loss...................         --        --              --             --      (2,046,116)    (2,046,116)
                             ---------   -------     -----------                   ------------   ------------
Balance, December 31,
  1995.....................    244,487     2,445       1,572,800             --      (2,470,474)      (895,229)
Exercise of common stock
  options at $14/share.....      1,428        14          19,986             --              --         20,000
Issuance of common stock at
  $42/share................     25,024       250       1,053,733             --              --      1,053,983
Expenses associated with
  issuance of common
  stock....................         --        --        (166,936)            --              --       (166,936)
Interest expense incurred
  for issuance of
  warrants.................         --        --         907,789             --              --        907,789
Net loss...................         --        --              --             --      (2,694,436)    (2,694,436)
                             ---------   -------     -----------     ----------    ------------   ------------
Balance, December 31,
  1996.....................    270,939     2,709       3,387,372             --      (5,164,910)    (1,774,829)
Issuance of common stock
  pursuant to warrant
  exchange agreement.......     23,610       236         660,832             --        (320,902)       340,166
Reversal of interest
  expense upon surrender of
  Bridge Warrants..........         --        --        (201,000)            --              --       (201,000)
</TABLE>

                                       F-4
<PAGE>   23

<TABLE>
<CAPTION>
                                                                                     DEFICIT
                                                                      SERIES B     ACCUMULATED
                                                                     CONVERTIBLE      DURING
                                         COMMON      ADDITIONAL       PREFERRED    DEVELOPMENT
                              SHARES      STOCK    PAID-IN CAPITAL      STOCK         STAGE          TOTAL
                             ---------   -------   ---------------   -----------   ------------   ------------
<S>                          <C>         <C>       <C>               <C>           <C>            <C>
Shares issued in connection
  with initial public
  offering, net of
  expenses.................    295,714     2,957       9,349,122             --              --      9,352,079
Conversion of Redeemable
  Series A Convertible
  Preferred Stock to common
  stock....................     71,429       714       1,809,929             --              --      1,810,643
Exercise of warrants.......      6,429        64          29,936             --              --         30,000
Shares issued in connection
  with secondary public
  offering, net of
  expenses.................    142,857     1,430      20,899,934             --              --     20,901,364
Interest expense incurred
  for issuance of
  warrants.................         --        --          73,000             --         (73,000)            --
Net loss...................         --        --              --             --     (11,586,294)   (11,586,294)
                             ---------   -------     -----------     ----------    ------------   ------------
Balance, December 31,
  1997.....................    810,978     8,110      36,009,125             --     (17,145,106)    18,872,129
Exercise of warrants.......      8,839        88         205,849             --              --        205,937
Exercise of common stock
  options at
  $48.38/share.............        330         3          15,301             --              --         15,304
Compensation expense
  related to options
  granted to financial
  advisor..................         --        --         563,687             --              --        563,687
Issuance of Series B
  Convertible Preferred
  Stock....................         --        --              --      1,150,000              --      1,150,000
Dividend...................         --        --         (23,958)        23,958              --             --
Net loss...................         --        --              --             --     (22,403,577)   (22,403,577)
                             ---------   -------     -----------     ----------    ------------   ------------
Balance, December 31,
  1998.....................    820,147   $ 8,201     $36,770,004     $1,173,958    $(39,548,683)  $ (1,596,520)
                             =========   =======     ===========     ==========    ============   ============
</TABLE>

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

                                       F-5
<PAGE>   24

                         OBJECTIVE COMMUNICATIONS, INC.
                        (A Development Stage Enterprise)

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                       FOR THE PERIOD
                                           FOR THE YEARS ENDED DECEMBER 31,            OCTOBER 5,1993
                                       -----------------------------------------   (DATE OF INCEPTION) TO
                                          1996           1997           1998         DECEMBER 31, 1998
                                       -----------   ------------   ------------   ----------------------
<S>                                    <C>           <C>            <C>            <C>
Cash flows from operating activities:
Net loss.............................  $(2,694,436)  $(11,586,294)  $(22,403,577)       $(39,141,786)
Adjustments to reconcile net loss to
  net cash used in operating
  activities:
Depreciation.........................      109,025        614,467      2,229,437           3,016,989
Amortization.........................       49,689        214,995         11,440             276,124
Interest expense related to issuance
  of warrants........................      321,789        385,000             --             706,789
Interest accrued on debentures.......           --             --         75,674              75,674
Non-cash compensation expense........           --        340,166        563,687             903,853
Stock issued in exchange for services
  rendered...........................           --             --             --              55,834
Other non-cash charges...............           --             --         18,819              18,819
Changes in operating assets and
  liabilities:
Accounts receivable..................      (19,385)        84,855       (184,670)           (184,670)
Other current assets.................     (166,792)      (496,913)       654,643             (20,646)
Inventory............................     (335,105)    (1,689,140)    (4,125,091)         (5,826,026)
Other assets.........................           --        (87,852)         4,198             (83,654)
Trademarks and patents...............      (19,595)       (81,202)      (103,169)           (222,864)
Accounts payable.....................     (324,937)     2,687,285      3,710,956           6,788,679
Deferred revenues....................           --        133,180        (93,180)             40,000
Accrued liabilities..................      163,038        488,642         89,508             841,526
                                       -----------   ------------   ------------        ------------
     Net cash used in operating
       activities....................   (2,916,709)    (8,992,811)   (19,551,325)        (32,755,359)
Cash flows from investing activities:
Purchase of property and equipment...     (116,892)    (2,036,190)    (3,763,231)         (6,455,724)
  Sale of other fixed assets.........           --             --          5,000               5,000
Sale of leasehold improvements.......           --             --      1,470,000           1,470,000
                                       -----------   ------------   ------------        ------------
     Net cash used in investing
       activities....................     (116,892)    (2,036,190)    (2,288,231)         (4,980,724)
                                       -----------   ------------   ------------        ------------
Cash flows from financing activities:
  Net proceeds from the issuance of
     Series A preferred stock........      848,440        962,203             --           1,810,643
  Net proceeds from the issuance of
     Series B preferred stock........           --             --      1,150,000           1,150,000
  Net proceeds from the issuance of
     common stock....................      887,047     30,253,443             --          32,294,683
  Net proceeds from the exercise of
     stock options...................       20,000             --         15,304              35,304
</TABLE>

                                       F-6
<PAGE>   25

<TABLE>
<CAPTION>
                                                                                       FOR THE PERIOD
                                           FOR THE YEARS ENDED DECEMBER 31,            OCTOBER 5,1993
                                       -----------------------------------------   (DATE OF INCEPTION) TO
                                          1996           1997           1998         DECEMBER 31, 1998
                                       -----------   ------------   ------------   ----------------------
<S>                                    <C>           <C>            <C>            <C>
  Net proceeds from the exercise of
     warrants........................           --         30,000        205,937             235,937
  Net proceeds from the issuance of
     debentures......................           --             --      3,125,000           3,125,000
  Net proceeds from the issuance of
     notes payable...................    2,300,000             --             --           2,550,000
  Repayments of notes payable........     (250,000)    (2,300,000)      (144,661)         (2,694,661)
  Proceeds from the issuance of notes
     payable to related parties......      170,000             --             --             716,223
  Repayments of notes payable to
     related parties.................     (135,000)      (199,000)            --            (364,000)
  Debt issuance costs................     (258,131)            --             --            (258,131)
  Principal payments on capital
     leases..........................      (12,005)      (141,452)      (702,926)           (856,383)
                                       -----------   ------------   ------------        ------------
     Net cash provided by financing
       activities....................    3,570,351     28,605,194      3,648,654          37,744,615
                                       -----------   ------------   ------------        ------------
Net increase (decrease) in cash and
  cash equivalents...................      536,750     17,576,193    (18,190,902)              8,532
Cash and cash equivalents, at
  beginning of year..................       86,491        623,241     18,199,434                  --
                                       -----------   ------------   ------------        ------------
Cash and cash equivalents, at end of
  year...............................  $   623,241   $ 18,199,434   $      8,532        $      8,532
                                       ===========   ============   ============        ============
Supplemental disclosure of cash flow
  information:
Interest paid........................  $    57,628   $    115,739   $     94,272        $    280,777
Supplemental disclosure of non-cash
  investing and financing activities:
     Conversion of notes
       payable-related parties and
       Accrued interest into common
       stock.........................           --             --             --        $    352,223
     Capital lease obligations.......  $    53,158   $    347,950   $    718,504        $  1,119,612
     Reclassification of inventory to
       fixed assets..................           --   $    354,304   $     32,225        $     32,225
     Current asset financed by
       issuance of note payable......           --             --   $    230,063        $    230,063
     Dividend on preferred stock.....                               $     23,958        $     23,958
     Accounts payable transferred to
       notes payable.................                               $     40,141        $     40,141
</TABLE>

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

                                       F-7
<PAGE>   26

                         OBJECTIVE COMMUNICATIONS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   NATURE OF BUSINESS

     Objective Communications is a Delaware corporation formed in 1993 to
design, develop and market a full motion, high resolution, cost-effective video
network system. Users of the VidPhone video network system can view broadcast
video and participate in multi-party video conferences. With the introduction of
Release 1.5 of the VidPhone software, which management expects to occur in the
first half of 1999, users also will be able to retrieve stored video on demand.
The VidPhone system distributes video to and from desktop or laptop personal
computers and conference rooms configured with a VidPhone station, over the same
wiring used by the telephone.

     To date, the Company has not generated substantial revenues from the sale
of its products and services. The Company did not earn any revenues from the
sale of products or services during 1997, and recognized only $765,617 in
revenues from the sale of products during 1998. The Company has suffered
recurring losses from operations, has recurring negative cash flow from
operations and an accumulated deficit that raise substantial doubt about its
ability to continue as a going concern. The Financial Statements do not include
any adjustments that might result from the outcome of this uncertainty. The
Company has required substantial funding through debt and equity financings
since its inception to complete its development plans and commence full-scale
operations. At December 31, 1998, the Company had essentially no cash from which
to fund operations. In February 1999, the Company completed a private placement
of $2,850,000 of unsecured promissory notes and 162,844 shares of common stock,
from which the Company received net proceeds of approximately $2,430,000. Before
completing the February 1999 private placement, the Company was able to pay only
those expenses that were essential to continue operations. The Company estimates
that the net proceeds from the private placement will fund operations only
through April 1999. Those net proceeds are not sufficient to fund the continued
development of the VidPhone system or any expansion of the Company's business
operations. As a result of these liquidity problems, the Company has not paid
many of its creditors, including trade creditors, on a timely basis and remains
in default on a number of significant overdue obligations. Some of these
creditors have instituted or threatened to institute legal proceedings against
the Company to obtain repayment of these debts. If the Company continues not
paying its debts as they become due, it is likely that other creditors will take
legal action against the Company and that other firms will refuse to sell the
products and services the Company need to continue operations. In February 1999,
the Company announced that it had filed a registration statement relating to a
proposed $15,000,000 underwritten offering of common stock. The Company
anticipates that the public offering will be completed in the second quarter of
1999; however, its ability to complete the offering, the timing of the offering
and its terms are subject to a number of conditions, some of which are beyond
its control, including market conditions. There can be no assurance that the
Company will complete the public offering. If the Company is not successful in
securing additional financing, the Company will be forced to consider
alternative methods of maximizing shareholder value, which could include sales
of the Company's assets, a sale of the Company, workout alternatives, or
bankruptcy.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF ACCOUNTING

     The Company's principal activities to date have been planning and
organizing, initiating research and development projects, conducting market
research and securing adequate financing for the development of its products.
Accordingly, the Company's financial statements are presented as those of a
development stage enterprise, as prescribed by Statement of Financial Accounting
Standards ("SFAS") No. 7, "Accounting and Reporting by Development Stage
Enterprises".

                                       F-8
<PAGE>   27
                         OBJECTIVE COMMUNICATIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CASH AND CASH EQUIVALENTS

     Cash and cash equivalents consist of cash and investments with original
maturities of three months or less. Cash and cash equivalents are stated at
cost, which approximates fair value because of the short maturity of these
investments.

REVENUE RECOGNITION

     The Company's revenues, consisting principally of sales of the Company's
video network system and related products, are recognized upon delivery and
acceptance by customers.

RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS

     Software development costs are included in research and development and are
expensed as incurred. SFAS No. 86, "Accounting for the Cost of Computer Software
to be Sold, Leased or Otherwise Marketed" requires the capitalization of certain
software development costs once technological feasibility is established.
Capitalization ceases when the products are available for general release to
customers, at which time amortization of the capitalized costs begins on a
straight-line basis over the estimated product life, or on the ratio of current
revenues to total projected product revenues, whichever is greater. To date, the
period between achieving technological feasibility and the general availability
of such software has been short, and the software development costs qualifying
for capitalization have been insignificant. Accordingly, the Company has not
capitalized any software development costs.

PROPERTY AND EQUIPMENT

     Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Upon retirement or disposition of
property and equipment, the cost and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is reflected in income.
The Company uses accelerated methods of depreciation for book and for tax
purposes. The annual provisions for depreciation have been computed principally
in accordance with the following ranges of asset lives: computer and lab
equipment, 3 to 5 years; capitalized software, 3 years; furniture and fixtures,
5 years; office equipment, 5 years; and leasehold improvements over the lesser
of 7 years or the term of the lease relating to the improved asset. Assets held
under the construction in progress caption are not depreciated until the asset
is completed and placed in service.

TRADEMARKS AND PATENTS

     Trademarks and patents are stated at cost and are amortized on a
straight-line basis over 15 years.

LONG-LIVED ASSETS

     The Company periodically evaluates the net realizable value of long-lived
assets, including trademarks and patents and property and equipment, relying on
a number of factors including operating results, business plans, economic
projections and anticipated future cash flows. An impairment in the carrying
value of an asset is recognized when the expected future operating cash flows
derived from the asset are less than its carrying value. In addition, the
Company's evaluation considers non-financial data such as market trends, product
and development cycles, and changes in management's market emphasis.

INVENTORY

     Inventory, consisting principally of hardware for the Company's video
networking products, is valued at the lower of cost or market, with the cost
being determined using the FIFO ("first-in, first-out") method of accounting.
                                       F-9
<PAGE>   28
                         OBJECTIVE COMMUNICATIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONCENTRATION OF CREDIT RISK

     Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company's cash and cash equivalents are held with a
U.S. commercial bank. The Company has not experienced any losses related to its
cash and cash equivalents. The Company generally grants uncollateralized credit
terms to its customers and has not experienced any credit-related losses.

INCOME TAXES

     Deferred income taxes are recognized for the tax consequences in future
years for differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end, based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets and liabilities.

NET LOSS PER COMMON SHARE

     The Company computes basic and diluted earnings per share in accordance
with Statement of Financial Accounting Standards No. 128, "Earnings per Share".
Net loss per common share is based on the weighted average number of common
shares and dilutive common share equivalents outstanding during the periods
presented. Basic earnings (loss) per share are calculated by dividing net income
(loss) by the weighted average shares outstanding. Diluted earnings (loss) per
share reflect the dilutive effect of stock options, warrants, convertible
preferred stock, and convertible debentures and are presented only if the effect
is not anti-dilutive. As the Company incurred losses for all periods, there is
no difference between basic and diluted earnings per share. Had options,
warrants and convertible preferred stock been included in the computation,
shares for the diluted computation would have increased by 283,786 and 397,026
as of December 31, 1997 and 1998, respectively. The convertible debentures would
also be included in the diluted computation based on the conversion calculation
in note 9. See note 10, Subsequent Events, with regards to shares issued
subsequent to year-end.

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 at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

     The carrying value of cash and cash equivalents, accounts receivable and
notes payable approximate fair value because of the relatively short maturity of
those instruments.

STOCK-BASED COMPENSATION

     The Company adopted Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), "Accounting for Stock-Based Compensation" in 1996. SFAS No.
123 permits companies to account for stock-based compensation based on the
provisions prescribed in SFAS No. 123 or based on the authoritative guidance in
the Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees." The Company has elected to continue to account for its
stock-based compensation in accordance with APB 25; however, as required by SFAS
No. 123, the Company has disclosed the pro forma impact on the financial
statements assuming the measurement provisions of SFAS No. 123 had been adopted
(see Note 10).

                                      F-10
<PAGE>   29
                         OBJECTIVE COMMUNICATIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SEGMENT INFORMATION

     The Company is in one business segment; the design, development, and
marketing of a video network system. The Company follows the requirements of
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information."

RECLASSIFICATIONS

     Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation.

3.   INVENTORIES

     Inventories consist of the following at:

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                              ------------------------
                                                                 1997          1998
                                                              ----------    ----------
<S>                                                           <C>           <C>
Raw materials.............................................    $  901,548    $5,750,733
Work in process...........................................        24,272            --
Finished goods............................................       775,115        43,068
                                                              ----------    ----------
                                                              $1,700,935    $5,793,801
                                                              ==========    ==========
</TABLE>

4.   PROPERTY AND EQUIPMENT

     Property and equipment consist of the following at:

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                              ------------------------
                                                                 1997          1998
                                                              ----------    ----------
<S>                                                           <C>           <C>
Computer and laboratory equipment.........................    $2,070,415    $3,186,976
Computer software.........................................       220,711       368,441
Leasehold improvements....................................       174,697       787,484
Furniture and fixtures....................................       342,835     1,148,210
Office equipment                                                   5,190       173,333
Construction in progress..................................       279,754       443,116
                                                              ----------    ----------
                                                               3,093,602     6,107,560
Accumulated depreciation..................................      (787,554)   (3,010,808)
                                                              ----------    ----------
                                                              $2,306,048    $3,096,752
                                                              ==========    ==========
</TABLE>

5.   SALE OF LEASEHOLD IMPROVEMENTS

     In the fourth quarter of 1997, the Company reached an agreement with the
Portsmouth Development Authority ("PDA") to enter into a lease agreement for
additional office space and, in exchange for a favorable rental rate, the
Company agreed to fund significant improvements to the facility. Through June
1998 the Company had invested in excess of $1.8 million in improvements to the
new offices. In June 1998, the Company and the PDA modified the previous
agreement in that the PDA agreed to purchase $1,470,000 of the leasehold
improvements in consideration of the Company's agreement to adjust the
previously agreed

                                      F-11
<PAGE>   30
                         OBJECTIVE COMMUNICATIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

rental rate to a market rate. In June 1998, the Company received the proceeds
from the sale, less accrued rent of $83,870.

6.   COMMITMENTS

     The Company leases office and manufacturing space and miscellaneous office
and testing equipment under various operating and capital leases. Commitments
for minimum rentals under non-cancelable leases at December 31, 1998 are as
follows:

<TABLE>
<CAPTION>
                                                               CAPITAL     OPERATING
                                                                LEASES       LEASES
                                                               --------    ----------
<S>                                                            <C>         <C>
1999.......................................................    $214,772    $  295,800
2000.......................................................      49,031       315,139
2001.......................................................      17,040       321,350
2002.......................................................      17,040       321,585
2003.......................................................       2,840       328,759
Thereafter.................................................          --     1,511,646
                                                               --------    ----------
Total minimum lease payments...............................     300,723    $3,094,279
                                                                           ==========
Less amount representing interest..........................     (37,495)
                                                               --------
Present value of net minimum lease payments................    $263,228
                                                               ========
</TABLE>

     Property, plant, and equipment at year-end include the following amounts
for capitalized leases:

<TABLE>
<CAPTION>
                                                                 1997         1998
                                                               --------    ----------
<S>                                                            <C>         <C>
Computer and laboratory equipment..........................    $275,608    $  407,039
Furniture and fixtures.....................................     273,320       760,041
Office equipment...........................................          --        64,545
                                                               --------    ----------
                                                                548,928     1,231,625
Less: allowance for depreciation...........................     (78,752)     (447,864)
                                                               --------    ----------
                                                               $470,176    $  783,761
                                                               ========    ==========
</TABLE>

     Rent payments made in 1996, 1997, and 1998 were $228,000, $293,000, and
$793,000, respectively.

7.   INCOME TAXES

     At December 31, 1998, the Company has available net operating loss
carryforwards for federal and state tax purposes of approximately $35,518,000
and $5,633,000, respectively. The federal and state net operating losses begin
to expire in 2009 and 1999, respectively. As of December 31, 1998, a valuation
allowance of $11,685,000 has been recorded against total deferred tax assets,
due to the uncertainty surrounding their realization.

                                      F-12
<PAGE>   31
                         OBJECTIVE COMMUNICATIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The components of the Company's net deferred tax position and the tax
effects of the temporary differences giving rise to the Company's deferred tax
assets (liabilities) as of December 31, 1997 and 1998 are as follows:

<TABLE>
<CAPTION>
                                                              1997            1998
                                                           -----------    ------------
<S>                                                        <C>            <C>
Net operating loss carryforwards.......................    $ 5,817,000    $ 10,598,000
Accrued liabilities....................................        116,000         158,000
Reserves...............................................         68,000         539,000
Depreciation and amortization..........................        144,000         390,000
Valuation allowance....................................     (6,145,000)    (11,685,000)
                                                           -----------    ------------
Total deferred tax asset...............................    $        --    $         --
                                                           ===========    ============
</TABLE>

     Ownership changes, as defined in the Internal Revenue Code Section 382, may
have limited the amount of net operating loss carryforwards that can be utilized
annually to offset future taxable income. Subsequent ownership changes could
further affect the limitation in future years.

8.   NOTES PAYABLE

     During 1995 and 1996, the Company borrowed $224,000 and $170,000,
respectively, from various stockholders of the Company. The loans accrued
interest at 7% per annum and were payable, along with all accrued interest, upon
demand. In connection with the loans made in 1995, the Company issued warrants
to purchase common stock equal to the principal balance of the loans divided by
$42.00 per share, for an aggregate of 5,333 warrants. The exercise price of
these warrants was $56.00 per share. In June 1995, one of the lenders converted
a $30,000 loan plus accrued interest into 715 shares of common stock.

     Additionally, during 1995, the Company borrowed an aggregate of $320,000
from a financial advisory firm hired to assist the Company in raising equity.
This amount and $2,166 in accrued interest were converted to common stock during
1995.

     In November 1995, the Company received a letter of intent from a potential
investor pursuant to which the potential investor agreed to pay $250,000 to the
Company as an initial installment of a larger investment which would be
finalized in early 1996. The letter of intent provided that in the event that a
final agreement was not reached within a specified period of time, the letter of
intent could be canceled by the Company or the potential investor and the
$250,000 investment would be converted to a note payable, with interest accruing
at 6% per annum, payable 90 days from the date of such cancellation. The letter
of intent was canceled by the investor in June 1996, and the Company repaid the
$250,000 note, together with $5,548 in accrued interest at 6%.

     In August 1996, the Company borrowed $300,000 from an investment company.
The loan bore interest at the NationsBank prime rate plus 1.5% per annum,
adjusted quarterly beginning September 30, 1996. Interest was payable
semi-annually in arrears on the last day of January and August of each year,
commencing January 31, 1997. The full balance of this note was due and payable
on the earlier of: (1) August 14, 1997, or (2) the closing date of an initial
public offering of securities of the Company. In consideration for this loan,
the Company issued to the lender warrants to purchase 4,821 shares of the
Company's common stock at an initial exercise price of $62.30 per share. Each
time the Company declared a stock split or dividend, sold previously unissued
shares, or issued additional options, warrants or rights to purchase shares of
the Company's common stock, the Company applied a formula, pursuant to the terms
of the warrant, to determine if the number of warrants and the exercise price
thereof was required to be adjusted. As of

                                      F-13
<PAGE>   32
                         OBJECTIVE COMMUNICATIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

December 31, 1996, the number of shares subject to the warrant pursuant to the
loan agreement was 6,107 at an exercise price of $49.21.

     In November 1996, the underwriter of the Company's proposed initial public
offering of common stock (IPO) placed $2,000,000 in bridge notes of the Company
to provide the Company with operating capital until the time of the expected
closing of the IPO. The bridge notes were collateralized by substantially all of
the assets of the Company. The bridge notes were due and payable upon the
earliest of the closing of the IPO, twelve months from the date of issuance, or
the closing of a series of sales of securities of the Company with aggregate
gross proceeds of at least $2,000,000, and the notes bore interest at the rate
of 10% per annum, due and payable quarterly, beginning January 1, 1997. The
notes were issued to a total of 38 investors, in three tranches: (1) $1,025,000
as of October 18, 1996, (2) $400,000 as of November 8, 1996, and (3) $575,000 as
of November 22, 1996. The individual note holders were also issued warrants to
purchase an aggregate of 71,428 shares of the Company's common stock at an
exercise price of $23.10 per share. These fee warrants were to be forfeited upon
the completion of the Company's initial public offering. Based on an analysis
utilizing the Black-Scholes option-pricing model giving consideration to the
features of the warrants and the external economic environment provided by an
independent valuation firm, the Company estimated that the fair value of the
warrants issued in connection with these debt financings was approximately
$782,000. This aggregate amount has been recorded as a discount against the
related notes payable and an increase to additional paid-in-capital. The
discount against the related notes payable was to be amortized to interest
expense over the terms of the related notes. As of December 31, 1996,
approximately $196,000 had been amortized to interest expense. The effective
interest rate of the bridge notes is 43.3% per annum based on the 10% stated
interest rate pursuant to the bridge notes and the fair value of the 71,428
warrants that were originally issued in connection with the notes.

     All notes payable were repaid in full concurrent with the receipt of the
proceeds of the Company's IPO in April 1997. Of the $586,000 unamortized
discount recorded as at December 31, 1996, $385,000 was charged to interest
expense. The remaining $201,000 of the unamortized discount was charged against
equity as the warrant holder to whom the Bridge Warrants had been granted
returned a portion thereof.

     Notes payable outstanding at December 31, 1998 consisted of the remaining
balance due on a note that financed an insurance policy, $85,000, and two notes
to vendors for services rendered during the year, totaling $40,000.

9.   5% CUMULATIVE CONVERTIBLE DEBENTURES DUE 2003

     In July 1998, the Company completed a private placement of 5% Cumulative
Convertible Debentures due 2003 ("5% Convertible Debentures") with certain
institutional, affiliated and other investors, from which it received gross
proceeds of approximately $3.125 million. Interest thereon accrues daily and is
payable quarterly in arrears, payable in cash or, at the Company's option, by
increasing the principal amount of the 5% Convertible Debentures. For the year
ended December 31, 1998, the Company elected to pay the interest due at that
date by increasing the principal amount by approximately $76,000. The 5%
Convertible Debentures are senior in right of payment to substantially all
existing and future indebtedness of the Company and the Company's equity
securities. The Company sold and issued such securities in reliance on an
exemption from registration provided by Section 4(2) of the Securities Act of
1933, Regulation D and Rule 506.

     At the option of each holder, the Company is obligated to redeem all or any
portion of such holder's 5% Convertible Debentures effective as of the effective
date of an "Extraordinary Transaction", as defined in such debenture, and the
holder shall be entitled to receive a redemption price per $100 principal amount
of 5% Convertible Debentures being redeemed equal to 112.5% of the aggregate
principal amount of the 5% Convertible Debentures, plus accrued and unpaid
interest thereon. Also at the option of each holder, the Company is obligated to
redeem all or any portion of such holder's outstanding 5% Convertible Debentures
                                      F-14
<PAGE>   33
                         OBJECTIVE COMMUNICATIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

effective as of the date of the occurrence of certain "Triggering Events", as
defined in such debenture, and the holder shall be entitled to receive a
redemption price per $100 principal amount of 5% Convertible Debentures being
redeemed equal to 130% of the principal amount of the 5% Convertible Debentures,
plus accrued and unpaid interest.

     Subject to the contractual agreement described below, the holders of the
debentures may, in whole or in part, convert the 5% Convertible Debentures into
shares of common stock at any time. The original terms of the debentures provide
that the conversion rate of the 5% Convertible Debentures is determined by
dividing the principal amount of the 5% Convertible Debentures plus any accrued
and unpaid interest by a conversion price equal to the lesser of (i) the fixed
conversion price of $76.09, or (ii) a floating conversion price equal to the
average of the three lowest closing prices of the Common Stock on its principal
exchange during the 12 trading days immediately preceding the date upon which
the Company is notified of such conversion. The number of shares of Common Stock
issuable upon conversion of the 5% Convertible Debentures is subject to
adjustment in certain events, including without limitation a reclassification,
reorganization or exchange of the Company's Common Stock.

     On or after July 8, 2003, the Company has the option to cause the
outstanding 5% Convertible Debentures to be automatically converted to shares of
Common Stock pursuant to the Conversion Rate, as defined in such debenture, or
to redeem all outstanding 5% Convertible Debentures at a redemption price equal
to the principal amount of the 5% Convertible Debentures plus any accrued and
unpaid interest thereon. As a condition precedent to the consummation of a
private placement of units (consisting of unsecured promissory notes and common
stock) completed in February 1999, the Company entered into an agreement with
the holders of the convertible debentures, including the directors and executive
officers affiliated with the Company, amending certain terms of those
securities. In particular, each of the holders of the 5% Convertible Debentures
agreed that: (i) it would not exercise its right to convert the 5% Convertible
Debentures to common stock until the date on which the Company completes a
public or private equity financing with gross proceeds of not less than $8
million (a "qualified financing"); (ii) upon the closing of a qualified
financing, the principal amount of and accrued and unpaid interest on the
convertible debentures will automatically convert into the securities issued in
the qualified financing at a conversion price equal to the lesser of (A) $17.50
per share, or (B) 75% of the price at which the securities are sold in the
qualified financing and that the anti-dilution provisions of the convertible
debentures would be inapplicable to the conversion; and (iii) it waives any
default by the Company with respect to the obligation to register or maintain
the effectiveness of a registration statement for the shares of common stock
issuable upon conversion of the 5% Convertible Debentures. The holders of the 5%
Convertible Debentures also agreed to hold the shares of common stock issued
upon conversion of the 5% Convertible Debentures for at least 12 months
following the effective date of the registration statement that relates to the
qualified financing. The Company also agreed to include the shares of common
stock issuable upon conversion of the 5% Convertible Debentures in the
registration statement filed with the Securities and Exchange Commission
relating to the qualified financing. The Company currently has outstanding
$3.125 million original principal amount of 5% Convertible Debentures. If the
proposed public offering of common stock by the Company is completed, the 5%
Convertible Debentures will automatically convert into common stock upon
consummation of that offering.

10. CAPITAL STOCK TRANSACTIONS

COMMON STOCK

     The Company was initially capitalized in the amount of $1,000 by the
issuance of 71 shares of common stock, par value $.01. On June 28, 1994, the
Company filed a Certificate of Amendment of Certificate of Incorporation
increasing the authorized shares to 10,000,000.

     On June 28, 1994, the Company issued a stock dividend of 185,644 shares to
the Company's sole stockholder and then President and Chief Executive Officer,
Mr. Steven A. Rogers.

                                      F-15
<PAGE>   34
                         OBJECTIVE COMMUNICATIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     On August 3, 1994, the Company sold 26,809 shares of common stock for
$14.00 per share. Of the shares issued, 24,429 shares were sold for cash and
2,380 were issued in exchange for services rendered. On December 31, 1994, the
Company sold an additional 6,429 shares of common stock for $42.00 per share.

     On December 31, 1994, the Company issued 1,196 shares in fulfillment of an
obligation of $22,500 for services rendered in connection with the previous
stock offerings.

     In December 1994, the Company entered into a agreement with a financial
advisory firm to assist in raising a minimum of $600,000 in equity for the
Company. In return, the Company was required to issue warrants to the financial
advisor to purchase shares of the Company's common stock equal to 10% of the
number of shares of common stock sold by the financial advisor to investors and
10% of the number of warrants issued to investors. The exercise price for these
warrants is 110% of the common stock price or the warrant exercise price.

     Pursuant to this agreement, the Company sold 15,952 shares of common stock
for $42.00 per share during June 1995. Each share of common stock sold entitled
the investor to a warrant to purchase an additional share of the Company's
common stock, at an exercise price of $56.00 per share. Further, the Company
converted $30,057 in notes payable and accrued interest into 716 shares of
common stock. Additionally, the Company converted $202,166 in outstanding notes
payable and accrued interest to the financial advisory firm into 4,813 shares of
common stock. Each share of common stock issued in the conversion as accompanied
by a warrant to purchase one share of common stock, at an exercise price of
$56.00 per share. The Company also converted an additional $120,000 loan from
the financial advisory firm into 2,857 shares of common stock, subject to the
warrant provision described above. In connection with this transaction, holders
of the converted notes were also issued an aggregate of warrants to purchase
12,238 shares of common stock at an exercise price of $56.00 per share.

     Pursuant to its 1995 agreement with the financial advisory firm, during
June 1996, the Company sold 25,024 shares of common stock for $42.00 per share.
Each share of the common stock sold entitled the investor to a warrant to
purchase an additional share of the Company's common stock at an exercise price
of $56.00 per share. In connection with the provisions of the agreement, the
president of the financial advisory firm received 4,936 warrants at an exercise
price of $46.20 per share and 4,936 warrants at an exercise price of $61.60 per
share in consideration of the services performed to assist the Company in
obtaining equity financing. Additionally, the Company issued to certain lenders
as an inducement to make loans to the Company, warrants to purchase 2,381 shares
of common stock at $56.00 per share.

     During January 1997, the Company executed a warrant exchange agreement (the
"Exchange Agreement") with investors who purchased shares of common stock and
received warrants through the financial advisory firm during 1995 and 1996. The
purpose of the warrant exchange was to induce such investors to enter into
lock-up arrangements with the underwriter of the IPO and into agreements
consolidating such investors' registration rights with those granted by the
Company to other investors, and to provide those investors with the opportunity
to invest in the Company upon terms and conditions that more closely reflect the
terms and conditions upon which the other investors invested in the Company
during a comparable time period. Under the Exchange Agreement, each such
investor was given the opportunity to exchange existing warrants to purchase 714
shares of common stock at an exercise price of $56.00 per share for new warrants
to purchase 357 shares of common stock at an exercise prices of $28.00 per share
and an additional 357 newly issued shares of common stock. In addition, in the
original offering, certain investors purchased shares of common stock from Mr.
Steven A. Rogers at a purchase price of $14.00 per share at a time during which
other investors were purchasing shares of common stock from the Company at
$42.00 per share. As part of the warrant exchange, such investors also were
required to pay Mr. Rogers $14.00 per share of common stock purchased from him
in the original offering, so as to cause such transactions to be consummated
upon terms and conditions more closely reflecting market conditions. Mr. Rogers
received an aggregate of $340,166 in the warrant exchange transaction. As a
result of the Exchange Agreement, the Company issued an aggregate of
                                      F-16
<PAGE>   35
                         OBJECTIVE COMMUNICATIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

23,610 shares of common stock. Of the fair market value of such shares, the
Company reflected a non-cash compensation expense of $340,166, and the remaining
$320,902 was directly charged to equity as a cost of equity financing.
Additionally, an aggregate of 49,362 warrants with an exercise price of $56.00
per share were exchanged for 23,610 warrants with an exercise price of $28.00
per share and 2,143 warrants with an exercise price of $56.00 per share.
Further, in connections with the Warrant Agreement, the Company also exchanged
warrants held by the president of the financial advisory firm to purchase 4,936
warrants to purchase shares of common stock at an exercise price of $46.20 per
share, and 4,936 warrants to purchase shares of commons stock at an exercise
price of $61.60 per share, for an aggregate of 9,872 warrants to purchase shares
of common stock at an exercise price of $28.00 per share. Additionally, the
Company exchanged warrants originally issued to other investors as an inducement
to loan funds to the Company, representing the right to purchase an aggregate of
14,619 shares of common stock at an exercise price of $56.00 per share for
warrants to purchase 14,619 shares of common stock at an exercise price of
$28.00 per share. The Company did not receive any additional cash proceeds as a
result of the Exchange Agreement.

     During April 1997, the Company issued 295,714 shares of common stock, par
value $.01 for approximately $9.5 million in proceeds, net of underwriting
discounts and commissions and certain other expenses of the initial public
offering of $1.9 million. The issuance of these shares was pursuant to an
initial public offering price of $38.50 per share. The net proceeds of the
initial public offering were used primarily to repay certain outstanding notes
payable and to fund the continued research and development and the working
capital deficiencies of the Company. In connection with the initial public
offering, all of the issued and outstanding shares of Redeemable Series A
Convertible Preferred Stock were converted into common stock on a one-for-one
basis.

     In April 1997, in connection with the initial public offering, certain
holders of Bridge Warrants surrendered such warrants to acquire an aggregate of
21,428 shares of common stock with a fair value of $9.38 per warrant, resulting
in a decrease of $201,000 in stockholders' equity due to the reversal of
interest expense. The surrender and cancellation of such warrants did not have
any other effect on the Bridge Financing, nor did the Company pay any
consideration in connection with such surrender.

     On November 5, 1997, the company completed the offering and sale of 142,857
shares of the Company's common stock at a public offering price of $161.88 per
share, resulting in net proceeds to the Company of approximately $20.9 million
(net of underwriting discounts and commissions and other expenses of the
offering).

     The Company's stockholders authorized the increase in the total number of
shares of common stock authorized for issuance from 10,000,000 shares to
30,000,000. The Company filed a Second Amended and Restated Certificate of
Incorporation to effectuate such increase in May 1998.

     A summary of the number of shares of common stock subject to purchase under
all warrant agreements and related exercise prices as of December 31, 1998 is as
follows:

<TABLE>
<CAPTION>
    EXERCISE PRICE                                     NUMBER OF SHARES
    --------------                                     ----------------
    <S>                                                <C>
    $28.00...........................................       60,946
    $23.10...........................................       41,501
    $42.00...........................................        7,467
    $56.00...........................................        2,142
                                                           -------
                                                           112,056
                                                           =======
</TABLE>

                                      F-17
<PAGE>   36
                         OBJECTIVE COMMUNICATIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

STOCK OPTIONS

     On August 3, 1994, the Company granted certain outside directors of the
Company options to purchase 28,568 shares of common stock. These options vest on
the anniversary of the options grant date in accordance with a five-year vesting
schedule, 20% each year. The exercise price is $14.00 per share, which was in
excess of the fair value of the stock on the date of the grant, as determined by
the Board of Directors. As of December 31, 1998, 1,428 of these options had been
exercised and 21,427 of these options were exercisable. The right to exercise
these options terminates ten years from the grant date.

     In October 1994, the Board of Directors adopted the 1994 Stock Option Plan
(the "1994 Plan") pursuant to which 49,000 shares of common stock are reserved
for issuance. These options vest on the anniversary of the option grant date in
accordance with a vesting schedule ranging from two to five years. The options
granted under this plan are granted at an exercise price per share equal to the
fair value per share of the Company's common stock on the date of grant. As of
December 31, 1998, none of these options had been exercised and 24,814 of these
options were exercisable. The right to exercise these options terminates ten
years from the grant date.

     In January 1997, the Board of Directors adopted the 1996 Stock Option Plan
(the "1996 Plan") pursuant to which 64,285 shares of common stock were reserved
for issuance. The Board of Directors, with shareholder approval, authorized the
increase in the number of shares reserved for issuance under the 1996 Plan to
207,142 shares during 1998. The options granted under this plan are granted at
an exercise price per share equal to the fair value per share of the Company's
common stock on the date of grant. As of December 31, 1998, 330 of these options
had been exercised and 12,411 options were exercisable. The right to exercise
these options ranges from five to ten years from the grant date.

     In connection with the IPO in April 1997, the Company issued to an
investment banking firm options to purchase 25,714 shares of common stock at an
exercise price equal to 165% of the price of the common stock offered to the
public, or $63.525 per share. The right to exercise these options terminates
five years from the grant date.

     In December 1997, the Company granted to an investment banking firm options
to purchase 17,857 shares of common stock at an exercise price $96.67 per share,
which was the fair value of the stock on the date of the grant. Since this grant
is for future services to be provided, the related compensation expense, in
accordance with SFAS No. 123, will be recorded over two years, the expected term
of services. In 1997, the compensation expense was $20,355, in 1998 it was
$563,687, and will be $543,332 in 1999. The right to exercise these options
terminates five years from the grant date.

                                      F-18
<PAGE>   37
                         OBJECTIVE COMMUNICATIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Stock option activity is summarized as follows:

<TABLE>
<CAPTION>
                                                                                WEIGHTED
                                                                NUMBER OF       AVERAGE
                                                                 SHARES      EXERCISE PRICE
                                                                ---------    --------------
<S>                                                             <C>          <C>
1995
Granted.....................................................       33,214       $28.000
Forfeited...................................................           --            --
Exercised...................................................           --            --
Outstanding at December 31, 1995............................       61,785       $21.525
Exercisable at December 31, 1995............................        5,714       $14.000
Available for grant at December 31, 1995....................       15,785
1996
Granted.....................................................       19,714       $28.000
Forfeited...................................................       (3,928)      $28.000
Exercised...................................................        1,428       $14.000
Outstanding at December 31, 1996............................       76,142       $23.009
Exercisable at December 31, 1996............................       15,857       $22.498
Available for grant at December 31, 1996....................           --
1997
Granted.....................................................       95,614       $76.531
Forfeited...................................................       (1,428)      $82.075
Exercised...................................................           --            --
Outstanding at December 31, 1997............................      170,328       $52.556
Exercisable at December 31, 1997............................       31,228       $20.958
Available for grant at December 31, 1997....................       12,957
1998
Granted.....................................................      162,100       $61.677
Forfeited...................................................      (77,104)      $77.707
Exercised...................................................          330       $46.375
Outstanding at December 31, 1998............................      254,994       $50.771
Exercisable at December 31, 1998............................       92,940       $43.827
Available for grant at December 31, 1998....................       61,200
</TABLE>

     The following table summarizes information about stock options outstanding
at December 31, 1998:

<TABLE>
<CAPTION>
                      OPTIONS OUTSTANDING                                OPTIONS EXERCISABLE
----------------------------------------------------------------   -------------------------------
                                  WEIGHTED-AVE.
                     NUMBER         REMAINING                          NUMBER
   RANGE OF       OUTSTANDING      CONTRACTUAL    WEIGHTED-AVE.     EXERCISABLE     WEIGHTED-AVE.
EXERCISE PRICES  AS OF 12/31/98   LIFE (YEARS)    EXERCISE PRICE   AS OF 12/31/98   EXERCISE PRICE
---------------  --------------   -------------   --------------   --------------   --------------
<S>              <C>              <C>             <C>              <C>              <C>
    $14.00             26,429          5.6            $14.00            21,429          $14.00
 $21.00-$38.50         73,135          6.8            $30.66            24,457          $28.00
$42.875-$63.525       103,453          4.2            $52.64            37,650          $58.10
$80.50-$96.691         51,977          6.4            $94.01             9,404          $95.90
                   ----------                                         --------
                      254,994                                           92,940
                   ==========                                         ========
</TABLE>

     All stock options granted by the Company from its inception through
December 31, 1998 were granted with an exercise price per share equal to the
fair value of the Company's common stock on the date of grant. In December 1996,
the Company repriced the exercise price of all options previously granted to
$28.00 per

                                      F-19
<PAGE>   38
                         OBJECTIVE COMMUNICATIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

share, to reflect an exercise price consistent with the price per share paid by
outside investors of the Series A preferred stock issued in December of 1996 and
January 1997 (see Note 11).

     In July 1998, the Board approved a repricing plan to reprice employee stock
options under the Plan to restore the long-term employee retention and
performance incentives of the stock options outstanding. In accordance with the
repricing plan, all stock options held by current, active full-time employees,
with exercise prices above $50.75 or vesting periods in excess of three years,
were cancelled and replaced by the same number of options exercisable at $50.75
per share and vesting over a three year period. The options were granted at a
price equal to the fair value of the Company's common stock on the date of the
repricing.

     The Company accounts for the fair value of its options granted to employees
and directors in accordance with APB 25. Accordingly, no compensation expense
has been recognized for the options granted, since the exercise price of the
options has been in excess of the fair value of the options on the date of
grant, as determined by the Board of Directors. Had compensation expense been
determined based on the fair value of the options at the grant dates consistent
with the method of accounting under SFAS 123, the Company's net loss and net
loss per share would have increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                    1997            1998
                                                                ------------    ------------
<S>                                                             <C>             <C>
Net loss:
  As Reported...............................................    $(11,586,294)   $(22,403,577)
  Pro forma.................................................    $(11,915,198)   $(23,970,089)
Net loss per common share:
  As Reported, basic........................................    $     (19.90)   $     (27.45)
  Pro forma, basic..........................................    $     (20.46)   $     (29.34)
</TABLE>

     The fair value of each option granted in 1997 and 1998 was estimated on the
date of grant using a type of Black-Scholes option-pricing model. The model used
the following weighted-average assumptions used for grants during the years
ended December 31, 1997 and 1998: expected volatility of 75% and 95%,
respectively, risk-free interest rate of 6.4% and 5.4%, respectively; dividend
of 0% for both 1997 and 1998; and an expected term of 5 years was assumed in
both 1997 and 1998.

PREFERRED STOCK

SERIES A CONVERTIBLE PREFERRED STOCK

     On December 9, 1996, the Board of Directors and a majority of the holders
of the outstanding common stock authorized 2,500,000 shares of preferred stock,
with a par value of $.01 per share. In December 1996, the Company authorized the
issuance and sale of 500,000 shares of Series A Convertible Preferred Stock
("Series A") and warrants to purchase 14,284 shares of common stock for
aggregate consideration of $2,000,000. The Series A shares had liquidation
preferences over the common stock and any series of preferred stock authorized
in the future. The holders of Series A shares were entitled to non-cumulative
dividends when dividends are declared on the common stock as though the Series A
shares had been converted to common stock. At any time after five years
following the issuance of the Series A shares, or upon a merger in which the
Company is not the surviving entity, or upon a sale of all or substantially all
of the assets of the Company, at the request of at least 50% of the holders of
Series A shares and given sixty days notice, the Company is required to redeem
all or a portion of the outstanding Series A shares at a redemption price equal
to the amount such holders would be entitled to received had they converted the
Series A shares into common stock or the liquidation value of $28.00 per share,
whichever is greater. The Series A shares were convertible to common stock as
determined by multiplying the Series A stated value plus all declared but

                                      F-20
<PAGE>   39
                         OBJECTIVE COMMUNICATIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

unpaid dividends by $28.00 and dividing that result by the conversion price,
which as defined by the agreement will not exceed $28.00 per share. The Series A
shares automatically converted to shares of common stock upon the consummation
of the Company's IPO in April 1997.

     The warrants issued in conjunction with the Series A shares had an exercise
price of $28.00 per share. As a fee for the placement of the Series A shares and
related warrants, the underwriting firm received a $140,000 underwriter's
discount and commission in consideration of its services on this transaction.

     In December 1996 and January 1997, the Company issued 500,000 Series A
shares and 14,284 warrants for the purchase of common stock and had received
$1.8 million of consideration for the sale of the Series A shares. The Series A
shares were recorded net the underwriting discount and commission and
approximately $82,000 in other issuance costs. The 500,000 shares of Series A
shares outstanding at the time of the Initial Offering in April automatically
converted into 71,428 shares of common stock on the closing of the IPO.

5% CUMULATIVE CONVERTIBLE SERIES B PREFERRED STOCK

     In August 1998, the Company issued to certain unaffiliated investors in a
private placement 209,091 shares of 5% Cumulative Convertible Series B Preferred
Stock, par value $.01 per share (the "Series B Preferred Stock"), and warrants
to purchase an aggregate of 7,467 shares of Common Stock at an exercise price of
$42.00 per share which were valued at $94,000 (the "Series B Warrants"). The
shares of Series B Preferred Stock and the Series B Warrants were issued at an
original exercise price of $5.50 per share, resulting in gross proceeds to the
Company of $1.15 million. Dividends accrue at 5% annually, are cumulative, and
are payable in additional shares of Series B Preferred Stock. The Company sold
and issued such securities in reliance on an exemption from registration
provided by Section 4(2) of the Securities Act of 1933, Regulation D and Rule
506.

     Shares of Series B Preferred Stock are convertible at any time after the
issuance date and at the option of the holder, into shares of common stock at an
initial conversion rate of $38.50 per share, subject to adjustment in connection
with certain events, including a reclassification, reorganization or exchange of
the Company's Common Stock. The shares of Series B Preferred Stock are subject
to automatic conversion, without further action on the part of the holder or the
Company, if the closing price of the Company's common stock equals or exceeds
$77.00 per share for 15 consecutive trading days.

     In connection with the private placement by the Company of units completed
in February 1999, the Company entered into a letter agreement with both of the
holders of the Series B Preferred Stock modifying certain terms of those
securities. Specifically, the Company and the holders agreed that: (i) the
holders would not exercise their right to convert the Series B preferred stock
to common stock, or exercise the Series B Warrants for common stock, until the
date on which the Company completes a public or private equity financing with
gross proceeds to us of not less than $8 million (a "qualified financing"); (ii)
upon the closing of a qualified financing, the stated value of and accrued and
unpaid dividends on the Series B preferred stock will automatically convert into
shares of common stock at a conversion price equal to $19.25 per share, and the
exercise price of Series B Warrants would be reduced to $19.25 per share; (iii)
the anti-dilution provisions of the Series B preferred stock and the Series B
Warrants would not apply to the qualified financing, the 5% Convertible
Debenture conversion, the February 1999 private placement, the conversion of the
Series B preferred stock or the exercise of the Series B Warrants; (iv) the
holders waived and agreed not to exercise any registration rights they may have
as to the common stock issuable upon conversion of the Series B preferred stock
or the exercise of the Series B Warrants in connection with this offering; and
(v) the holders would not sell any common stock issuable upon conversion of the
Series B preferred stock for at least six months after the effectiveness of the
registration statement (or up to 24 months, if necessary to obtain regulatory
approval of this offering) filed relating to the qualified financing. The
Company currently has outstanding 209,091 shares of Series B preferred stock. If
the proposed public offering of common stock by the

                                      F-21
<PAGE>   40
                         OBJECTIVE COMMUNICATIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company is completed, the Series B preferred stock will automatically convert
into common stock upon consummation of that offering.

11. EMPLOYEE BENEFIT PLAN

     The Company implemented a profit-sharing plan under Section 401(k) of the
Internal Revenue Code (the "Code") covering substantially all employees in 1998.
The plan allows employees to make contributions up to the maximum allowed by the
Code. The Company will contribute one dollar to an employees account for each
two dollars contributed by the employee until the employee's contribution equals
6% of the employee's annual salary. The Company contributed $183,000 to the
employees' accounts during 1998.

12. NEW ACCOUNTING PRONOUNCEMENTS

     In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". SOP 98-1 requires computer
software costs associated with internal use software to be charged to operations
as incurred until certain capitalization criteria are met. SOP 98-1 is effective
beginning January 1, 1999. The Company plans to adopt this method of accounting
in January 1999.

     In April 1998, the Accounting Standards Executive Committee issued
Statement of Position No. 98-5, "Reporting on the Costs of Start-up Activities."
This statement provides guidance in the financial reporting of start-up costs
and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. The statement is effective for
fiscal years beginning after December 15, 1998. Adoption of this standard will
not impact the financial results of the Company.

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. The statement requires companies to recognize all
derivatives as either assets or liabilities, with the instruments measured at
fair value. The accounting for changes in fair value, gains or losses, depends
on the intended use of the derivative and its resulting designation. The
statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. Adoption of this standard will not impact the financial results
of the Company.

13. SUBSEQUENT EVENTS

     In January 1999, the Company restructured $3,575,000 in obligations to
vendors through the issuance of long-term notes of $4,675,000, including a
$1,100,000 increase in additional commitments to purchase inventory. In
connection with the restructuring of the commitments the Company issued warrants
to purchase an aggregate of 45,000 shares of common stock.

     In February 1999, the Company completed a private placement of $2,850,000
of unsecured promissory notes and 162,844 share of common stock, from which we
received net proceeds of approximately $2,430,000.

     On February 16, 1999, the Company filed a registration statement with the
Securities and Exchange Commission relating to a proposed firm commitment
underwritten public offering of $15,000,000 of common stock.

14. REVERSE STOCK SPLIT

     On April 14, 1999, the stockholders approved a one share for seven shares
reverse stock split of the issued and outstanding Common Stock which was
previously approved by the Board of Directors. The reverse stock

                                      F-22
<PAGE>   41
                         OBJECTIVE COMMUNICATIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

split was effected on April 14, 1999. All references throughout these financial
statements to number of shares, per share amounts, stock option and warrant data
and market prices of the Company's Common Stock have been restated. In addition,
Common Stock and additional paid-in capital for all periods presented, have been
restated to reflect this reverse stock split. The number of shares as restated
to reflect the reverse stock split has not been adjusted to give effect to the
cashing out of fractional shares. The Company believes that the cashing out of
fractional share interests will not materially change the number of shares of
Common Stock, as restated.

                                      F-23
<PAGE>   42

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

     None.

                                       17
<PAGE>   43

                                    PART III

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

     Our current directors and executive officers are set forth below.
Biographical information concerning each of the directors and executive officers
is presented on the following pages. Information is presented as of March 31,
1999.

<TABLE>
<CAPTION>
                        NAME                             AGE                     POSITION
                        ----                             ---                     --------
<S>                                                      <C>    <C>
Mr. James F. Bunker..................................    64     President, Chief Executive Officer and
                                                                Director
Mr. Roger A. Booker..................................    44     Vice President, Operations
Mr. Robert H. Emery..................................    54     Vice President, Administration and Finance
                                                                and Secretary
Mr. David P. Martin..................................    40     Vice President, Sales
Mr. Steven A. Rogers.................................    47     Chief Technology Officer and Vice
                                                                President, Engineering and Director
Mr. Stevan Vigneaux..................................    46     Vice President, Marketing
Mr. Anthony M. Agnello...............................    49     Director
Dr. Eugene R. Cacciamani.............................    62     Director
Mr. Marc S. Cooper...................................    37     Director
Mr. Richard S. Friedland.............................    48     Director
Mr. John B. Torkelsen................................    53     Director
</TABLE>

     James F. Bunker has served as President and Chief Executive Officer since
July 1998 and was elected as a director in January 1999. From January 1994 until
he joined our company in July 1998, Mr. Bunker was actively involved as an
outside consultant to high technology companies, advising them with respect to
the development of a business plan, funding, recruiting management and other key
personnel, and serving as an executive member of management teams. Previously,
from 1986 until his retirement at the end of 1993, Mr. Bunker served in various
capacities with General Instrument Corporation, most recently as the President
of the VideoCipher Division of General Instrument. Mr. Bunker also is a director
of Viasat, a public satellite telecommunications company located in Carlsbad,
California.

     Roger A. Booker has served as Vice President, Operations since February
1996. From June 1994 to February 1996, Mr. Booker served as the Vice President,
International Development and Operations at Global Partnership, Inc., where he
directed international development and operations. From February 1990 to June
1994, Mr. Booker also served as the Vice President, Manufacturing Operations at
Cryptek, Inc., an encrypted facsimile machine manufacturer, and served in the
same position at General Kinetics, Inc. until July 1990, when it acquired
Cryptek, Inc., where he was responsible for overseeing operations, including
several acquisitions and divestitures. From August 1986 to February 1990, Mr.
Booker was Director of Operations for Magnavox Government and Industrial
Electronics Company, where he managed the development of a new 200,000 square
foot manufacturing facility.

     Robert H. Emery has served as Vice President, Administration and Finance
and Secretary since December 1996, and previously served as Vice President,
Administration from May 1995 to December 1996. From May 1986 to May 1995, he
served as Vice President of Aries Systems International, Inc., an information
services company. From August 1983 to July 1986, Mr. Emery served as the ADP
Security Officer for the military's largest secure computer network. He is a
CPA.

     David P. Martin has served as Vice President, Sales since October 1998.
Previously, Mr. Martin served as the Chief Information Officer from April 1998
to October 1998. Prior to joining Objective Communications, Mr. Martin served as
the Director of Information Systems at Healthsource Inc., a healthcare
maintenance organization, from 1990 until October 1998. He also served in sales
and sales management positions at IBM Corporation in the ROLM (PBX) division and
with Western Union in the advanced transmission (ATS) division.

                                       18
<PAGE>   44

     Steven A. Rogers founded Objective Communications in 1993, and currently
serves as our Chief Technology Officer and Vice President, Engineering and as a
director. He served as President and Chief Executive Officer from our inception
until July 1998 and has served as a director since our inception. From July 1990
to July 1992, he served as a Senior Vice President of General Kinetics, Inc.
where he managed the Cryptek division. In January 1986, he founded Cryptek, Inc.
and, from January 1986 to July 1990, when it was acquired by General Kinetics,
Inc., served as its President and Chief Operating Officer. Mr. Rogers is a
co-author of the Company's patent covering the VidModem technology, and holds
several other patents.

     Stevan Vigneaux has served as Vice President, Marketing since October 1998.
Previously, he served as the Director of Product Marketing and Product
Management from February to October 1998. From July 1997 to February 1998, Mr.
Vigneaux served as a consultant to Synctrix, a manufacturer of ATM-based video
networking equipment in Glendale, California. From 1992 to July 1997, Mr.
Vigneaux was with Avid Technology, a video multi-media production systems
manufacturer in Tewksbury, Massachusetts, serving as the Director of Industry
Marketing from June 1996 to July 1997, and as Senior Product Marketing Manager
from 1992 to June 1996.

     Anthony M. Agnello has served as a director since January 1997. Mr. Agnello
co-founded Ariel Corporation, a digital signal processing equipment provider, in
1982 and currently serves as Chairman of the Board of Ariel Corporation. Mr.
Agnello holds several patents in digital signal processing.

     Eugene R. Cacciamani has served as a director since August 1994. Dr.
Cacciamani has been a Senior Vice President of Hughes Network Systems, Inc.,
which furnishes private communications networks to business, government and
common carriers since 1987, where he is responsible for developing new
technologies, systems and businesses, including lead efforts in the Hughes DBS
DirecTV system and the systems design in the ICO global satellite personal
communications systems. Dr. Cacciamani is on the Engineering Advisory Boards at
Union College and The Catholic University of America and serves as an advisor to
Aloha Networks, Inc. and Qwest Communications.

     Marc S. Cooper has served as a director since April 1997. Mr. Cooper has
been Vice Chairman of Barington Capital Group, L.P. responsible for the
Syndicate, Investment Banking and Research Departments since January 1998. From
March 1992 until January 1998, Mr. Cooper served as Executive Vice President,
Director of Investment Banking and Research at Barington. He also serves as a
director of Thinking Tools, Inc., a software developer.

     Richard S. Friedland was elected as a director in March 1999. Since October
1997, Mr. Friedland has been actively involved as an investor and consultant to
emerging high technology companies, with a focus on video and communications.
From 1978 to October 1997, Mr. Friedland served in various capacities with
General Instrument Corporation, a provider of systems and equipment to the cable
telephone and telephony industries. Most recently, from September 1995 to
October 1997, he served as Chairman of the Board of Directors and Chief
Executive Officer of General Instrument, and he served as President, Chief
Operating Officer and Director of that company from September 1993 to September
1995. Mr. Friedland also is a director of Premark International, Zilog, Inc. and
Tech-Sym, Inc.

     John B. Torkelsen has served as a director since March 1996. Mr. Torkelsen
has served as President of Princeton Venture Research, Inc. since 1984,
President of its affiliate PVR Securities, Inc. since 1987, President of its
affiliate, PVR Management, Inc. since 1997, and General Partner of its
affiliate, Acorn Technology Fund, L.P. since 1997. Mr. Torkelsen also is a
director of Voice Control Systems, Inc., Mikros Systems Corporation and
Princeton Video Image, Inc.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) of the Exchange Act requires our directors, executive
officers and persons who own more than 10% of a registered class of our equity
securities to file with the Securities and Exchange Commission and the Nasdaq
Stock Market, Inc. initial reports of ownership and reports of changes in
ownership of common stock and other equity securities of the Company. In
addition, under Section 16(a), trusts for which a reporting person is a trustee
and a beneficiary (or for which a member of his immediate family is a

                                       19
<PAGE>   45

beneficiary) may have a separate reporting obligation with regard to ownership
of the common stock and our other equity securities. Such reporting persons are
required by rules of the Securities and Exchange Commission to furnish us with
copies of all Section 16(a) reports they file. In 1998, we received Section
16(a) reports and written representations that certain reports were not
required. Based upon a review of that information, we believe that all members
of the Board of Directors, executive officers and each beneficial owner of more
than 10% of our common stock timely filed all reports required by Section 16(a)
of the Securities Exchange Act of 1934 except for the failure to file Forms 5,
by Robert H. Emery with respect to two transactions and by each of the following
directors and executive officers with respect to one transaction: James F.
Bunker, Robert A. Booker, Anthony M. Agnello, Eugene R. Cacciamani, Marc S.
Cooper, Steven A. Rogers, Clifford M. Kendall, Robert I. Barnett, Donald W.
Barnett, Lincoln D. Faurer, Richard T. Liebhaber, and Roy C. Nash.

ITEM 10.  EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

     The following table lists the cash remuneration paid or accrued during 1998
and 1997 to our President and Chief Executive Officer, and to each of our other
three most highly compensated executive officers who earned more than $100,000
in 1998 (the "Named Executive Officers"). We do not have any pension or long-
term incentive plans, and did not grant any restricted stock awards, bonus stock
awards or stock appreciation rights to any of the executive officers named in
this table during 1998 or 1997.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                       LONG TERM
                                                                                      COMPENSATION
                                                            ANNUAL COMPENSATION          AWARDS
                                                            --------------------       SECURITIES
            NAME AND PRINCIPAL POSITION              YEAR    SALARY      BONUS     UNDERLYING OPTIONS
            ---------------------------              ----   ---------   --------   ------------------
<S>                                                  <C>    <C>         <C>        <C>
James F. Bunker(1)
President & Chief Executive Officer................  1998   $ 93,151    $   -0-          14,285
Roger A. Booker                                      1998   $105,000    $   -0-           6,428
Vice President, Operations.........................  1997   $ 85,000    $45,000           5,000
Robert H. Emery                                      1998   $105,000    $   -0-           9,285
Vice President, Administration and Finance.........  1997   $ 90,000    $45,000           5,000
Steven A. Rogers(2)
Chief Technology Officer and                         1998   $165,000    $   -0-           9,285
Vice President, Engineering........................  1997   $120,000    $60,000           7,142
</TABLE>

---------------
(1) Mr. Bunker joined the Company as President and Chief Executive Officer on
    July 13, 1998.

(2) Mr. Rogers served as President and Chief Executive Officer of the Company
    until July 13, 1998, when he became Chief Technology Officer and Vice
    President, Engineering.

STOCK OPTION GRANTS IN 1998

     The following table sets forth certain information about the stock options
granted during 1998 to the Named Executive Officers. As of the date of this Form
10-KSB, we have not granted any stock appreciation rights under the 1996 Stock
Incentive Plan.

                                       20
<PAGE>   46

                          STOCK OPTION GRANTS IN 1998

<TABLE>
<CAPTION>
                                            NUMBER OF
                                            SECURITIES        PERCENT OF TOTAL
                                        UNDERLYING OPTIONS   OPTIONS GRANTED TO   EXERCISE PRICE   EXPIRATION
                 NAME                        GRANTED         EMPLOYEES IN 1998        ($/SH)          DATE
                 ----                   ------------------   ------------------   --------------   ----------
<S>                                     <C>                  <C>                  <C>              <C>
James F. Bunker.......................        14,285(1)             9.8%              $38.50        07/12/08
Roger A. Booker.......................         6,428(2)             4.4%              $92.75        05/27/08
Robert H. Emery.......................         6,428(2)             4.4%              $92.75        05/27/08
                                               2,857(3)             2.0%              $30.63        10/01/08
Steven A. Rogers......................         9,285(2)             6.4%              $92.75        05/27/08
</TABLE>

---------------
(1) Options to purchase 7,143 shares vested on January 13, 1999, six months from
    the date of grant, and the remaining options to purchase 7,142 shares vest
    ratably on a monthly basis over the period from February 13, 1999 through
    July 13, 2000. Vesting of these options will accelerate in the event of a
    "change in control" of Objective Communications.

(2) These options vest on May 27, 2004, the date that is six years from the date
    of grant.

(3) These options vest ratably over a three-year period, annually on the
    anniversary of the date of grant.

STOCK OPTION EXERCISES IN 1998

     The Named Executive Officers did not exercise any options in 1998. The
following table sets forth the number of shares of common stock underlying
unexercised options held by the Named Executive Officers at December 31, 1998.
At December 31, 1998, no Named Executive Officer held any "in-the-money" stock
options.

         AGGREGATED OPTION EXERCISES IN 1998 AND YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                                      NUMBER OF
                                                                SECURITIES UNDERLYING
                                                               UNEXERCISED OPTIONS AT
                                                                  DECEMBER 31, 1998
                            NAME                              EXERCISABLE/UNEXERCISABLE
                            ----                              -------------------------
<S>                                                           <C>
James F. Bunker.............................................             0/14,285
Roger A. Booker.............................................         4,108/12,533
Robert H. Emery.............................................         6,179/16,534
Steven A. Rogers............................................         3,808/16,190
</TABLE>

EXECUTIVE EMPLOYMENT CONTRACTS

     We entered into an Employment and Consulting Agreement with Mr. Bunker as
of July 13, 1998. The agreement is for a one-year term, unless earlier
terminated or extended as provided in the agreement. At the conclusion of the
initial term, the term may be extended by mutual agreement for additional
successive one-month periods. If the aggregate term of employment is for less
than two years, then the agreement provides that Mr. Bunker will provide us with
consulting and advisory services for not fewer than two days per month through
July 13, 2000. The agreement also provides for a base salary of $200,000 per
year. Under the agreement, Mr. Bunker was granted stock options to purchase
14,285 shares of common stock at an exercise price of $38.50 per share, which
was the fair market value of the common stock on the date the options were
granted. The options are subject to certain vesting requirements. Mr. Bunker
also has entered into a Confidentiality, Inventions and Noncompetition Agreement
with Objective Communications.

     We also entered into an employment agreement with Mr. Rogers effective on
March 13, 1997. The agreement is terminable by either the Company or Mr. Rogers
upon 90 days' notice. The agreement provided for a base salary in 1998 of
$120,000, which was raised by the Board of Directors to $165,000 in January
1998.

                                       21
<PAGE>   47

The agreement also includes a non-competition commitment during and after the
term of the agreement, confidentiality commitments, non-solicitation of employee
provisions and assignment of work product agreements.

DIRECTOR COMPENSATION

     We reimburse directors for expenses incurred in connection with attending
Board and committee meetings, but we have not paid cash compensation for
services rendered as a director.

     In August 1994, we granted options to purchase an aggregate of 28,568
shares of common stock ("Directors' Non-Qualified Options") to the persons then
serving as our directors. The options are exercisable for a period of ten years
from the date of grant, have an exercise price of $14.00 per share and vest 20%
per year on each of the first, second, third, fourth and fifth anniversaries of
the date of grant. Directors may forfeit options if they do not meet certain
performance requirements. As of December 31, 1998, Directors' Non-Qualified
Options to purchase 21,427 shares of common stock were vested, Directors'
Non-Qualified Options to purchase 1,428 shares of common stock had been
exercised and Directors' Non-Qualified Options to purchase 714 shares of common
stock had been forfeited.

     In April 1997, we granted options to purchase an aggregate of 9,224 shares
of common stock under the 1996 Stock Incentive Plan to the persons then serving
as our directors (other than Mr. Steven A. Rogers). The options are exercisable
for a period of five years from the date of grant, have an exercise price of
$46.38 per share and vest ratably on each of the first, second and third
anniversaries of the date of grant. Directors may forfeit options if they do not
meet certain performance requirements. As of December 31, 1998, 3,075 of these
options were vested, and 609 had been forfeited.

     In May 1998, we granted options to purchase an aggregate of 12,780 shares
of common stock under the 1996 Stock Incentive Plan to the persons then serving
as our directors (other than Mr. Steven A. Rogers). The options are exercisable
for a period of five years from the date of grant, have an exercise price of
$92.75 per share and vest ratably on each of the first, second and third
anniversaries of the date of grant. Directors may forfeit options if they do not
meet certain performance requirements. As of December 31, 1998, none of these
options were vested and 1,285 had been forfeited.

     The compensation committee of the Board of Directors will meet annually to
determine option grants to the directors.

                                       22
<PAGE>   48

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information regarding the beneficial
ownership of our common stock as of March 31, 1999, by (i) all persons known by
us to beneficially own 5% or more of the outstanding shares of common stock,
(ii) each current director, (iii) each of the Named Executive Officers, and (iv)
all of our current directors and executive officers, as a group. Unless
otherwise noted, each stockholder named has sole voting and investment power
with respect to such shares, subject to community property laws where
applicable.

<TABLE>
<CAPTION>
                  NAME OF BENEFICIAL OWNER                    NUMBER OF SHARES   PERCENT(1)
                  ------------------------                    ----------------   -----------
<S>                                                           <C>                <C>
Anthony M. Agnello(2).......................................          994              *%
Roger A. Booker(3)..........................................        5,775              *
James F. Bunker(4)..........................................       14,444            1.5
Eugene R. Cacciamani(5).....................................        5,389              *
Marc S. Cooper(6)...........................................       35,746            3.5
Robert H. Emery(7)..........................................       11,964            1.2
Richard S. Friedland(8).....................................           --             --
Steven A. Rogers(9).........................................      141,414           14.3
John B. Torkelsen(10).......................................       59,973            6.0
All directors and executive officers as a group
  (11 persons)(11)..........................................      275,699           25.7%
</TABLE>

---------------
   * Less than one percent

 (1) Applicable percentage of ownership as of March 31, 1999, is based on
     982,991 shares of common stock outstanding. Beneficial ownership is
     determined in accordance with rules of the Securities and Exchange
     Commission. For each beneficial owner, shares of common stock subject to
     options or warrants exercisable within 60 days of March 31, 1999 are deemed
     outstanding. Figures for ownership exclude shares issuable upon exercise of
     the convertible debentures upon consummation of the proposed public
     offering.

 (2) The address of Mr. Agnello is c/o Objective Communications, Inc., 50
     International Drive, Portsmouth, New Hampshire 03801. Consists of 994
     shares of common stock issuable upon exercise of options.

 (3) The address of Mr. Booker is c/o Objective Communications, Inc., 50
     International Drive, Portsmouth, New Hampshire 03801. Consists of 5,775
     shares of common stock issuable upon exercise of options. Excludes shares
     of common stock issuable upon conversion of outstanding 5% convertible
     debentures, of which Mr. Booker owns $5,000 original principal amount.

 (4) The address of Mr. Bunker is c/o Objective Communications, Inc., 50
     International Drive, Portsmouth, New Hampshire 03801. Includes 8,730 shares
     of common stock that may be acquired upon exercise of outstanding options
     and 5,714 shares of common stock purchased in the February 1999 private
     placement by a limited partnership controlled by Mr. Bunker. Excludes
     shares of common stock issuable upon conversion of outstanding 5%
     convertible debentures, of which Mr. Bunker beneficially owns, through a
     limited partnership, $25,000 original principal amount.

 (5) The address of Dr. Cacciamani is c/o Objective Communications, Inc., 50
     International Drive, Portsmouth, New Hampshire 03801. Includes 3,961 shares
     of common stock issuable upon exercise of options. Excludes shares of
     common stock issuable upon conversion of outstanding 5% convertible
     debentures, of which Dr. Cacciamani owns $10,000 original principal amount.

 (6) The address of Mr. Cooper is c/o Objective Communications, Inc., 50
     International Drive, Portsmouth, New Hampshire 03801. Includes 25,714
     shares and 8,928 shares of common stock that may be acquired upon exercise
     of options held by Barington Capital Group, L.P. ("Barington") that are
     currently exercisable. Also includes 1,104 shares of common stock issuable
     upon the exercise of options held by

                                       23
<PAGE>   49

     Mr. Cooper that are currently exercisable. Excludes shares of common stock
     issuable upon conversion of outstanding 5% convertible debentures, of which
     Mr. Cooper owns $25,000 original principal amount. We granted Barington an
     option to purchase 25,714 shares of our common stock in connection with our
     initial public offering in April 1997 and an option to purchase 17,857
     shares of our common stock in December 1997 as compensation for investment
     banking services. The latter option vests over two years. Mr. Cooper is the
     Vice Chairman of Barington. Mr. Cooper also is a stockholder in LNA Capital
     Corp., the corporate general partner of Barington. Includes options to
     acquire 3,857 shares of common stock which Cross Connect, L.L.C. has the
     right to acquire from Barington under certain conditions. Cross Connect,
     L.L.C. is not affiliated with Barington or Mr. Cooper, and Mr. Cooper
     disclaims beneficial ownership of the 3,857 shares of common stock that may
     be acquired upon exercise of such options.

 (7) The address of Mr. Emery is c/o Objective Communications, Inc., 50
     International Drive, Portsmouth, New Hampshire 03801. Includes 833 shares
     of common stock issuable upon exercise of warrants and 8,989 shares of
     common stock issuable upon exercise of options. Excludes shares of common
     stock issuable upon conversion of outstanding 5% convertible debentures, of
     which Mr. Emery owns $25,000 original principal amount.

 (8) The address of Mr. Friedland is c/o Objective Communications, Inc., 50
     International Drive, Portsmouth, New Hampshire 03801.

 (9) The address of Mr. Rogers is c/o Objective Communications, Inc., 50
     International Drive, Portsmouth, New Hampshire 03801. All of the shares of
     common stock owned by Mr. Rogers are pledged to Merrill Lynch Credit
     Corporation to secure certain obligations. Includes 2,380 shares of common
     stock issuable upon exercise of warrants and 6,189 shares of common stock
     issuable upon exercise of options.

(10) The address of Mr. Torkelsen is c/o Objective Communications, Inc., 50
     International Drive, Portsmouth, New Hampshire 03801. Includes (i) 947
     shares of common stock issuable upon the exercise of options; (ii) 40,082
     shares of common stock beneficially owned by Princeton Venture Research,
     Inc. ("PVR"), of which Mr. Torkelsen is the President and majority
     stockholder, and which are pledged to BT Alex. Brown to secure certain
     obligations; (iii) 15,373 of common stock that may be acquired upon the
     exercise of warrants beneficially owned by PVR; and (iv) 2,857 shares of
     common stock owned by Pamela Torkelsen, Mr. Torkelsen's wife, and 714
     shares of common stock that may be acquired upon the exercise of warrants
     beneficially owned by Pamela Torkelsen. Mr. Torkelsen disclaims beneficial
     ownership of common stock and warrants owned by Mrs. Torkelsen.

(11) Includes 71,331 shares of common stock issuable to executive officers and
     directors upon exercise of currently exercisable options and 19,300 shares
     of common stock issuable to executive officers and directors upon exercise
     of outstanding warrants. Excludes an estimated 24,887 shares of common
     stock issuable to executive officers and directors upon conversion of
     outstanding convertible debentures.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

RELATED PARTY LOANS

     The following is a description of loan transactions of $60,000 or more
between Objective Communications and its directors, executive officers and 5% or
greater stockholders (or members of their families) since February 1997.

     In April 1996, Clifford M. Kendall, then Chairman of the Board of
Directors, loaned us $100,000 in aggregate principal amount, on which interest
accrued quarterly at a fixed rate of 7% per year. We repaid the principal amount
of and accrued interest on the loan after our initial public offering of common
stock was completed in April 1997. In July 1997, Mr. Kendall exercised an option
granted by Mr. Steven A. Rogers and purchased 7,142 shares of common stock from
Mr. Rogers at an exercise price of $14.00 per share.

     Mr. Rogers, our founder, Chief Technology Officer and Vice President,
Engineering and a director of Objective Communications, loaned us an aggregate
of $30,000 during 1995 and an additional $70,000 during 1996. The loans accrued
interest at a fixed rate of 7% per year. The principal amount of and accrued
interest on the loans were repaid in full in April 1997. As an inducement to
extend the loans to us, we also issued to

                                       24
<PAGE>   50

Mr. Rogers warrants to purchase an aggregate of 2,380 shares of common stock.
The warrants have an exercise price of $28.00 per share and are exercisable for
a period of five years from the date of issuance. We paid all loans outstanding
to Mr. Rogers in full in April 1997 upon the completion of our initial public
offering.

     On January 8, 1999, a limited partnership controlled by Mr. Bunker made a
loan to us to permit us to continue operations. The principal amount of the loan
made by Mr. Bunker was $100,000. The principal amount of the loan was converted
into units in the February 1999 private placement. The purchase of securities
made by Mr. Bunker in the February 1999 private placement was made on the same
terms and conditions as unaffiliated third parties purchasing units in the
offering. We will use a portion of the net proceeds from the proposed public
offering to repay the notes issued in the February 1999 private placement,
including the note held by Mr. Bunker.

     Mr. Bunker has voluntarily deferred the payment of his salary from November
9, 1998, through the date on which our proposed public offering is completed. As
of March 26, 1999, we owe Mr. Bunker $76,923 in accrued and unpaid salary.
Following the closing of the proposed public offering, we will again pay Mr.
Bunker his salary on a current basis in accordance with our normal payroll
practices. In addition, under a letter agreement between us and Mr. Bunker dated
February 4, 1999, after the closing of the proposed public offering, we will
repay Mr. Bunker his accrued and unpaid salary at the rate of $5,000 per week,
until the obligation is repaid in full. We may also, at our discretion, repay
the obligation in full. If, at any time, we decide not to pursue a public
offering, then Mr. Bunker has the right to elect in his discretion not to
continue his agreement to defer payment of accrued and unpaid salary. If the
proposed public offering is not completed by June 30, 1999, then we will be
obligated to pay the accrued and unpaid salary obligation in full on that date.

EQUITY TRANSACTIONS

     The following is a description of equity transactions between us and our
directors, executive officers and 5% or greater stockholders (or members of
their families) since February 1997.

  Barington Capital Group, L.P.

     Barington acted as underwriter of our initial public offering of common
stock completed in April 1997, for which it received underwriting discounts and
commissions of approximately $1,100,000. In addition, Barington received a
non-accountable expense allowance of $341,550, and was issued an option to
purchase 25,714 shares of common stock. That option is exercisable until April
8, 2002 at an exercise price of $63.53 per share. Barington also served as an
underwriter of our follow-on offering of common stock completed in October 1997,
for which it received underwriting fees and commissions of approximately
$500,000. Mr. Marc S. Cooper, a director of the Company, is the Vice Chairman of
Barington.

     In December 1997, we granted Barington an option to acquire 17,857 shares
of common stock at an exercise price of $96.67 per share, the fair market value
of the common stock on the date of grant. The option was granted as
consideration for business and financial services to be provided to us over a
two-year period, including investment banking services and consulting services
relating to mergers and acquisitions.

     We have agreed to use our best efforts (including the solicitation of
proxies, if necessary) to elect one designee of Barington to the Board of
Directors until April 8, 2002. Mr. Cooper has served as a director since April
1997 and was elected pursuant to this agreement. Mr. Cooper currently is a
member of the Executive and Audit Committees of the Board of Directors.

     In July 1998, the Company issued $3,125,000 aggregate principal amount of
convertible debentures in a private placement. Directors and executive officers
purchased an aggregate of $315,000 aggregate original principal amount of
convertible debentures. The purchasers included Mr. Cooper, who purchased
$25,000 original principal amount of convertible debentures. In addition, other
principals and employees of Barington purchased in the aggregate $135,000
original principal amount of convertible debentures. The convertible debentures
will automatically convert to common stock upon the completion of the proposed
public offering.

                                       25
<PAGE>   51

  PVR Securities, Inc.

     John B. Torkelsen, the President of Princeton Venture Research and its
affiliate, PVR Securities, Inc. has served as a director since March 1996 and is
a member of the Nominating Committee of the Board of Directors. In connection
with private placements of our equity securities by PVR Securities in 1995 and
1996, Mr. Torkelsen and Mr. Rogers entered into an agreement that provides that,
until December 5, 2000, each of them will vote any shares of common stock that
he controls for the election to the Board of Directors of an individual
nominated by the other and, on a best efforts basis, will seek additional votes
for the other party's nominee. Mr. Torkelsen was elected to the Board pursuant
to this agreement.

     PVR Securities, a corporation of which Mr. Torkelsen is the President,
acted as the investment advisor to the two investors that purchased the
$1,150,000 stated value of Series B preferred stock in a private placement
completed in August 1998. Neither PVR Securities nor Mr. Torkelsen received any
compensation for acting in that capacity.

ISSUANCE OF 5% CONVERTIBLE DEBENTURES DUE 2003

     As described above, in July 1998, we issued $3,125,000 aggregate principal
amount of convertible debentures. $2,500,000 aggregate original principal amount
of convertible debentures were purchased by certain institutional investors (the
"Institutional Investors") and $625,000 aggregate original principal amount of
convertible debentures were purchased by certain directors and executive
officers of, and outside consultants to, the Company. Messrs. Kendall, Cooper,
Liebhaber and Dr. Cacciamani, then directors of the Company, and Messrs. Bunker,
Booker and Emery and Ms. Murphy, then executive officers of the Company,
purchased convertible debentures in the offering. Following the issuance of the
convertible debentures, the following persons held beneficially the principal
amount of debentures indicated: Mr. Bunker -- $25,000; Mr. Booker -- $5,000; Mr.
Emery -- $25,000; Ms. Murphy -- $25,000; Mr. Kendall -- $100,000; Dr.
Cacciamani -- $10,000; Mr. Cooper -- $25,000; and Mr. Liebhaber -- $100,000. The
offering, issuance and sale of the convertible debentures to certain directors
and executive officers was a condition precedent to the consummation of the
financing with the Institutional Investors.

     It was a condition precedent to the consummation of the February 1999
private placement, that we enter into an agreement with the holders of the
convertible debentures, including the directors and executive officers indicated
above, amending certain terms of those securities. In the letter agreements,
each of the holders of the convertible debentures agreed that: (i) it would not
exercise its right to convert the convertible debentures to common stock until
the date on which a public or private equity financing with gross proceeds to us
of not less than $8 million (a "qualified financing") is completed; (ii) upon
the closing of a qualified financing, the principal amount of and accrued and
unpaid interest on the convertible debentures will automatically convert into
the securities issued in the qualified financing at a conversion price equal to
the lesser of (A) $2.50 per share, or (B) 75% of the price at which the
securities are sold in the qualified financing and that the anti-dilution
provisions of the convertible debentures would be inapplicable to the
conversion; and (iii) it waives any default by us with respect to our obligation
to register or maintain the effectiveness of a registration statement for the
shares of common stock issuable upon conversion of the convertible debentures.
The holders of the convertible debentures also agreed to hold the shares of
common stock issued upon conversion of the convertible debentures for at least
12 months following the effective date of our registration statement that
relates to the qualified financing. We agreed to include the shares of common
stock issuable upon conversion of the convertible debentures in the registration
statement filed with the SEC relating to the qualified financing.

     We believe that all of the above transactions were made on terms no less
favorable to us than could have been obtained from unaffiliated third parties
and all of the transactions since our initial public offering were approved by
at least a majority of our Board of Directors, including a majority of the
disinterested members of the Board of Directors. All future transactions between
us and any of our officers, directors and principal stockholders and their
affiliates will be approved by at least a majority of the Board of Directors,
including a majority of the disinterested members of the Board of Directors, and
will be on terms no less favorable to us than could be obtained from
unaffiliated third parties.

                                       26
<PAGE>   52

ITEM 13.  EXHIBITS, LISTS AND REPORTS ON FORM 8-K

(a) Exhibits

     The following exhibits are filed herewith or are incorporated herein by
reference, as indicated.

<TABLE>
<S>                     <C>
         3.1            Third Amended and Restated Certificate of Incorporation of
                        the Registrant (Incorporated by reference to Exhibit 3.1
                        forming a part of Amendment No. 1 to the Registrant's
                        Registration Statement on Form SB-2 (File No. 333-72429)
                        filed with the Securities and Exchange Commission under the
                        Securities Act of 1933, as amended (the "1999 SB-2")).
         3.2            Amended and Restated Bylaws of the Registrant (Incorporated
                        by reference to Exhibit 3.2 to the Registrant's Registration
                        Statement on Form SB-2 (File No. 333-20625) filed with the
                        Securities and Exchange Commission under the Securities Act
                        of 1933, as amended (the "1997 SB-2")).
         3.3            Certificate of Designations of the Series B 5% Cumulative
                        Convertible Preferred Stock of the Registrant (Incorporated
                        by reference to Exhibit 4.10 forming a part of Amendment No.
                        1 to the Registrant's Registration Statement on Form S-3
                        (File No. 333-62971) filed with the Securities and Exchange
                        Commission under the Securities Act of 1933, as amended (the
                        "1998 S-3")).
         4.1            Form of Warrant for the purchase of shares of common stock,
                        issued in connection with the private placement of
                        $2,000,000 aggregate principal amount of Bridge Notes
                        (Incorporated by reference to Exhibit 3.4 to the 1997 SB-2).
         4.2            Form of Warrant for the purchase of shares of common stock,
                        issued in connection with the private placement of units in
                        June 1995 and August 1996 (Incorporated by reference to
                        Exhibit 3.5 to the 1997 SB-2).
         4.3            Form of Warrants for the purchase of 100,000 shares of
                        common stock, issued in connection with the private
                        placement of Series A Convertible Preferred Stock and
                        warrants in December 1996 and January 1997 (Incorporated by
                        reference to Exhibit 3.7 to the 1997 SB-2).
         4.4            Form of Option for the purchase of 180,000 shares of common
                        stock issued to Barington Capital Group, L.P. (Incorporated
                        by reference to Exhibit 3.8 to the 1997 SB-2).
         4.5            Specimen certificate evidencing shares of common stock of
                        the Registrant (Incorporated by reference to Exhibit 4.2
                        forming a part of Amendment No. 2 to the 1997 SB-2).
         4.6            Form of 5% Convertible Debentures due 2003 of the Registrant
                        (Incorporated by reference to Exhibits 4.3 and 4.4 forming a
                        part of the Registrant's Current Report on Form 8-K dated
                        July 1, 1998 and filed July 16, 1998 with the Securities and
                        Exchange Commission under the Securities Exchange Act of
                        1934, as amended (the "July 8-K")).
         4.7            Form of Warrants to be issued upon redemption of the 5%
                        Cumulative Convertible Debentures due 2003 of the Registrant
                        (Incorporated by reference to Exhibit 4.5 forming a part of
                        the July 8-K).
         4.8            Specimen certificate evidencing shares of the Series B 5%
                        Cumulative Convertible Preferred Stock of the Registrant
                        (Incorporated by reference to Exhibit 4.9 forming a part of
                        the 1998 S-3).
         4.9            Form of Warrant issued in connection with the Series B 5%
                        Cumulative Convertible Preferred Stock of the Registrant
                        (Incorporated by reference to Exhibit 4.11 forming a part of
                        the 1998 S-3).
         4.10+          Form of Senior Note issued to Sanmina Corporation by the
                        Registrant with a principal amount of $4,300,000.
         4.11+          Form of Note issued to Shaw Pittman Potts & Trowbridge by
                        the Registrant with a principal amount of $375,000.
         4.12+          Form of Warrant for the purchase of 275,000 shares of common
                        stock issued to Sanmina Corporation.
         4.13+          Form of Warrant for the purchase of 40,000 shares of common
                        stock issued to Shaw Pittman Potts & Trowbridge.
         4.14           Form of Unsecured Promissory Note, issued on February 4,
                        1999 to various subscribers in a private placement
                        (Incorporated by reference to Exhibit 4.14 forming a part of
                        the 1999 SB-2).
        10.1*           1994 Stock Option Plan (Incorporated by reference to Exhibit
                        10.1 forming a part of the 1997 SB-2).
        10.2*           1996 Stock Incentive Plan (Incorporated by reference to
                        Exhibit 10.2 forming a part of the 1997 SB-2).
        10.3            Form of Consulting Agreement by and between the Registrant
                        and Barington Capital Group, L.P. (Incorporated by reference
                        to Exhibit No. 10.4 forming a part of the 1997 SB-2).
</TABLE>

                                       27
<PAGE>   53
<TABLE>
<S>                     <C>
        10.4            Letter Agreement, dated October 7, 1996, between Barington
                        Capital Group and the Registrant (Incorporated by reference
                        to Exhibit No. 10.5 forming a part of Amendment No. 2 to the
                        1997 SB-2).
        10.5            Letter Agreement, dated December 5, 1995, by and among PVR
                        Securities, Inc., the Registrant, Steven A. Rogers and John
                        B. Torkelsen (Incorporated by reference to Exhibit No. 10.6
                        forming a part of Amendment No. 2 to the 1997 SB-2).
        10.6            Form of Stock Option Agreement, dated December 18, 1997, by
                        and between the Registrant and Barington Capital Group, L.P.
                        (Incorporated by reference to Exhibit 10.8 forming a part of
                        the Registrant's Annual Report on Form 10-KSB, as amended,
                        for the year ended December 31, 1997).
        10.7            Subscription Agreement, dated as of July 1, 1998, by and
                        among the Registrant and certain Institutional Investors
                        (Incorporated by reference to Exhibit 4.1 forming a part of
                        the July 8-K).
        10.8            Subscription Agreement, dated as of July 8, 1998, by and
                        among the Registrant and certain Investors (Incorporated by
                        reference to Exhibit 4.2 forming a part of the July 8-K).
        10.9**          Strategic Alliance and Marketing Agreement between the
                        Registrant and Unisys Corporation, dated October 22, 1998.
        10.10           Letter of Intent, dated January 14, 1999, between Southeast
                        Research Partners, Inc. and the Registrant (Incorporated by
                        reference to Exhibit 10.10 forming a part of the 1999 SB-2).
        10.11           Agency Agreement, dated as of January 25, 1999, between
                        Southeast Research Partners, Inc. and the Registrant
                        (Incorporated by reference to Exhibit 10.11 forming a part
                        of the 1999 SB-2).
        10.12           Form of Subscription Agreement, dated January 25, 1999,
                        between the Registrant and certain Investors (Incorporated
                        by reference to Exhibit 10.12 forming a part of the 1999
                        SB-2).
        10.13*          Employment Agreement, dated July 13, 1998, between the
                        Registrant and James F. Bunker (Incorporated by reference to
                        Exhibit 10.13 forming a part of the 1999 Form SB-2).
        10.14*          Employment Agreement between the Registrant and Steven A.
                        Rogers (Incorporated by reference to Exhibit 10.3 forming
                        part of Amendment No. 2 to the 1997 SB-2).
        10.15+          Letter Agreement, dated January 12, 1999, between the
                        Registrant and Sanmina Corporation.
        10.16+          Letter Agreement, dated January 21, 1999, between the
                        Registrant and Shaw Pittman Potts & Trowbridge.
        10.17+          Form of Letter Agreement between the Registrant and the
                        holders of the Series B 5% Convertible Cumulative Preferred
                        Stock.
        10.18+          Form of Letter Agreement between the Registrant and the
                        holders of 5% Convertible Debentures due 2003.
        11              Statement re: computation of per share earnings
                        (Incorporated by reference to Exhibit 11.1 forming a part of
                        Amendment No. 1 to the 1999 SB-2).
        21              Subsidiaries of the Registrant (Incorporated by reference to
                        Exhibit 21.1 forming a part of the 1999 SB-2).
        23              Consent of PricewaterhouseCoopers LLP.
</TABLE>

---------------
*  Management contract or compensatory plan or arrangement.
** Confidential portions omitted and supplied separately to the Securities and
   Exchange Commission.
+  Previously filed.

(b) Reports on Form 8-K:

     Current Report on Form 8-K, dated October 26, 1998.

                                       28
<PAGE>   54

                                   SIGNATURES

     In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunder
duly authorized.

Date: July 21, 1999
                                          OBJECTIVE COMMUNICATIONS, INC.
                                          (Registrant)

                                          By:      /s/ JAMES F. BUNKER
                                            ------------------------------------
                                                      James F. Bunker
                                               President and Chief Executive
                                                           Officer

                                       29
<PAGE>   55

                                 EXHIBIT INDEX

<TABLE>
<S>                     <C>
         3.1            Third Amended and Restated Certificate of Incorporation of
                        the Registrant (Incorporated by reference to Exhibit 3.1
                        forming a part of Amendment No. 1 the Registrant's
                        Registration Statement on Form SB-2 (File No. 333-72429)
                        filed with the Securities and Exchange Commission under the
                        Securities Act of 1933, as amended (the "1999 SB-2")).
         3.2            Amended and Restated Bylaws of the Registrant (Incorporated
                        by reference to Exhibit 3.2 to the Registrant's Registration
                        Statement on Form SB-2 (File No. 333-20625) filed with the
                        Securities and Exchange Commission under the Securities Act
                        of 1933, as amended (the "1997 SB-2")).
         3.3            Certificate of Designations of the Series B 5% Cumulative
                        Convertible Preferred Stock of the Registrant (Incorporated
                        by reference to Exhibit 4.10 forming a part of Amendment No.
                        1 to the Registrant's Registration Statement on Form S-3
                        (File No. 333-62971) filed with the Securities and Exchange
                        Commission under the Securities Act of 1933, as amended (the
                        "1998 S-3")).
         4.1            Form of Warrant for the purchase of shares of common stock,
                        issued in connection with the private placement of
                        $2,000,000 aggregate principal amount of Bridge Notes
                        (Incorporated by reference to Exhibit 3.4 to the 1997 SB-2).
         4.2            Form of Warrant for the purchase of shares of common stock,
                        issued in connection with the private placement of units in
                        June 1995 and August 1996 (Incorporated by reference to
                        Exhibit 3.5 to the 1997 SB-2).
         4.3            Form of Warrants for the purchase of 100,000 shares of
                        common stock, issued in connection with the private
                        placement of Series A Convertible Preferred Stock and
                        warrants in December 1996 and January 1997 (Incorporated by
                        reference to Exhibit 3.7 to the 1997 SB-2).
         4.4            Form of Option for the purchase of 180,000 shares of common
                        stock issued to Barington Capital Group, L.P. (Incorporated
                        by reference to Exhibit 3.8 to the 1997 SB-2).
         4.5            Specimen certificate evidencing shares of common stock of
                        the Registrant (Incorporated by reference to Exhibit 4.2
                        forming a part of Amendment No. 2 to the 1997 SB-2).
         4.6            Form of 5% Convertible Debentures due 2003 of the Registrant
                        (Incorporated by reference to Exhibits 4.3 and 4.4 forming a
                        part of the Registrant's Current Report on Form 8-K dated
                        July 1, 1998 and filed July 16, 1998 with the Securities and
                        Exchange Commission under the Securities Exchange Act of
                        1934, as amended (the "July 8-K")).
         4.7            Form of Warrants to be issued upon redemption of the 5%
                        Cumulative Convertible Debentures due 2003 of the Registrant
                        (Incorporated by reference to Exhibit 4.5 forming a part of
                        the July 8-K).
         4.8            Specimen certificate evidencing shares of the Series B 5%
                        Cumulative Convertible Preferred Stock of the Registrant
                        (Incorporated by reference to Exhibit 4.9 forming a part of
                        the 1998 S-3).
         4.9            Form of Warrant issued in connection with the Series B 5%
                        Cumulative Convertible Preferred Stock of the Registrant
                        (Incorporated by reference to Exhibit 4.11 forming a part of
                        the 1998 S-3).
         4.10+          Form of Senior Note issued to Sanmina Corporation by the
                        Registrant with a principal amount of $4,300,000.
         4.11+          Form of Note issued to Shaw Pittman Potts & Trowbridge by
                        the Registrant with a principal amount of $375,000.
         4.12+          Form of Warrant for the purchase of 275,000 shares of common
                        stock issued to Sanmina Corporation.
         4.13+          Form of Warrant for the purchase of 40,000 shares of common
                        stock issued to Shaw Pittman Potts & Trowbridge.
         4.14           Form of Unsecured Promissory Note, issued on February 4,
                        1999 to various subscribers in a private placement
                        (Incorporated by reference to Exhibit 4.14 forming a part of
                        the 1999 SB-2).
        10.1*           1994 Stock Option Plan (Incorporated by reference to Exhibit
                        10.1 forming a part of the 1997 SB-2).
        10.2*           1996 Stock Incentive Plan (Incorporated by reference to
                        Exhibit 10.2 forming a part of the 1997 SB-2).
        10.3            Form of Consulting Agreement by and between the Registrant
                        and Barington Capital Group, L.P. (Incorporated by reference
                        to Exhibit No. 10.4 forming a part of the 1997 SB-2).
        10.4            Letter Agreement, dated October 7, 1996, between Barington
                        Capital Group and the Registrant (Incorporated by reference
                        to Exhibit No. 10.5 forming a part of Amendment No. 2 to the
                        1997 SB-2).
</TABLE>
<PAGE>   56
<TABLE>
<S>                     <C>
        10.5            Letter Agreement, dated December 5, 1995, by and among PVR
                        Securities, Inc., the Registrant, Steven A. Rogers and John
                        B. Torkelsen (Incorporated by reference to Exhibit No. 10.6
                        forming a part of Amendment No. 2 to the 1997 SB-2).
        10.6            Form of Stock Option Agreement, dated December 18, 1997, by
                        and between the Registrant and Barington Capital Group, L.P.
                        (Incorporated by reference to Exhibit 10.8 forming a part of
                        the Registrant's Annual Report on Form 10-KSB, as amended,
                        for the year ended December 31, 1997).
        10.7            Subscription Agreement, dated as of July 1, 1998, by and
                        among the Registrant and certain Institutional Investors
                        (Incorporated by reference to Exhibit 4.1 forming a part of
                        the July 8-K).
        10.8            Subscription Agreement, dated as of July 8, 1998, by and
                        among the Registrant and certain Investors (Incorporated by
                        reference to Exhibit 4.2 forming a part of the July 8-K).
        10.9**          Strategic Alliance and Marketing Agreement between the
                        Registrant and Unisys Corporation, dated October 22, 1998.
        10.10           Letter of Intent, dated January 14, 1999, between Southeast
                        Research Partners, Inc. and the Registrant (Incorporated by
                        reference to Exhibit 10.10 forming a part of the 1999 SB-2).
        10.11           Agency Agreement, dated as of January 25, 1999, between
                        Southeast Research Partners, Inc. and the Registrant
                        (Incorporated by reference to Exhibit 10.11 forming a part
                        of the 1999 SB-2).
        10.12           Form of Subscription Agreement, dated January 25, 1999,
                        between the Registrant and certain Investors (Incorporated
                        by reference to Exhibit 10.12 forming a part of the 1999
                        SB-2).
        10.13*          Employment Agreement, dated July 13, 1998, between the
                        Registrant and James F. Bunker (Incorporated by reference to
                        Exhibit 10.13 forming a part of the 1999 Form SB-2).
        10.14*          Employment Agreement between the Registrant and Steven A.
                        Rogers (Incorporated by reference to Exhibit 10.3 forming
                        part of Amendment No. 2 to the 1997 SB-2).
        10.15+          Letter Agreement, dated January 12, 1999, between the
                        Registrant and Sanmina Corporation.
        10.16+          Letter Agreement, dated January 21, 1999, between the
                        Registrant and Shaw Pittman Potts & Trowbridge.
        10.17+          Form of Letter Agreement between the Registrant and the
                        holders of the Series B 5% Convertible Cumulative Preferred
                        Stock.
        10.18+          Form of Letter Agreement between the Registrant and the
                        holders of 5% Convertible Debentures due 2003.
        11              Statement re: computation of per share earnings
                        (Incorporated by reference to Exhibit 11.1 forming a part of
                        Amendment No. 1 to the 1999 SB-2).
        21              Subsidiaries of the Registrant (Incorporated by reference to
                        Exhibit 21.1 forming a part of the 1999 SB-2).
        23              Consent of PricewaterhouseCoopers LLP.
</TABLE>

---------------
*  Management contract or compensatory plan or arrangement.
** Confidential portions omitted and supplied separately to the Securities and
   Exchange Commission.
+  Previously filed.