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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                            ------------------------
 
   
                                 FORM 10-KSB/A
    
 
   
                        AMENDMENT NO. 1 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)
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        (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 to the Annual Report of Objective Communications, Inc. (the
"Company") on Form 10-KSB/A is being filed to reflect the amendment and
restatement of the following items in the Company's Annual Report on Form 10-KSB
filed with the Securities and Exchange Commission on March 31, 1999: Item 6,
Management's Discussion and Analysis of Financial Condition and Results of
Operations; Item 7, Financial Statements; and Item 13, Exhibits, Lists and
Reports on Form 8-K. Share information and per share price information in this
Form 10-KSB/A give effect to a one share for seven shares reverse stock split of
the issued and outstanding common stock of the Company effected on April 14,
1999.
    
 
   
ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 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
 
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accounts, create brand name recognition of the VidPhone system and have longer,
more established relationships with resellers.
 
     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
 
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"Y2K") issue. The Y2K issue can arise at any point in a company's supply,
manufacturing, processing, distribution, and financial chains.
 
     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.
 
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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.
 
     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.
 
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     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.
 
     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.
 
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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 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
    
 
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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 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.
 
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ITEM 7.  FINANCIAL STATEMENTS
 
   
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Report of Independent Accountants...........................    9
Balance Sheets as of December 31, 1996, 1997 and 1998.......   10
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..................   11
Statements of Changes in Stockholders' Equity (Deficit) for
  the period October 5, 1993 (date of inception) to December
  31, 1998..................................................   12
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..................   14
Notes to Financial Statements...............................   16
</TABLE>
    
 
                                        8
<PAGE>   10
 
                       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
 
                                        9
<PAGE>   11
 
                         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.
 
                                       10
<PAGE>   12
 
                         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.
 
                                       11
<PAGE>   13
 
                         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>
    
 
                                       12
<PAGE>   14
 
   
<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.
 
                                       13
<PAGE>   15
 
                         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
</TABLE>
 
                                       14
<PAGE>   16
 
<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
     stock options..................        20,000             --         15,304              35,304
  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.
 
                                       15
<PAGE>   17
 
   
                         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".
 
                                       16
<PAGE>   18
   
                         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.
                                       17
<PAGE>   19
   
                         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).
 
                                       18
<PAGE>   20
   
                         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
    
 
                                       19
<PAGE>   21
   
                         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.
 
                                       20
<PAGE>   22
   
                         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
    
 
                                       21
<PAGE>   23
   
                         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
                                       22
<PAGE>   24
   
                         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.
    
 
                                       23
<PAGE>   25
   
                         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
    
                                       24
<PAGE>   26
   
                         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>
    
 
                                       25
<PAGE>   27
   
                         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.
    
 
                                       26
<PAGE>   28
   
                         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
    
 
                                       27
<PAGE>   29
   
                         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 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.
    
 
                                       28
<PAGE>   30
   
                         OBJECTIVE COMMUNICATIONS, INC.
    
 
   
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
     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 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
                                       29
<PAGE>   31
   
                         OBJECTIVE COMMUNICATIONS, INC.
    
 
   
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    
 
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 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.
    
 
                                       30
<PAGE>   32
 
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>
    
 
                                       31
<PAGE>   33
 
   
<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.
 
                                       32
<PAGE>   34
 
                                   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: May 13, 1999
    
                                          OBJECTIVE COMMUNICATIONS, INC.
                                          (Registrant)
 
                                          By:      /s/ JAMES F. BUNKER
 
                                            ------------------------------------
                                                      James F. Bunker
                                               President and Chief Executive
                                                           Officer
 
                                       33
<PAGE>   35
 
   
                                 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>   36
 
   
<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>
    
 
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*  Management contract or compensatory plan or arrangement.
** Confidential portions omitted and supplied separately to the Securities and
   Exchange Commission.
   
+  Previously filed.