SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

                            ANNUAL REPORT PURSUANT TO
           SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

  For the fiscal year ended December 31, 1998 Commission File Number 333-12979

                                 VOICENET, INC.
           (Name of small business issuer as specified in its charter)

              DELAWARE                                      13-3896031
   (State or other jurisdiction of                        (I.R.S. Employer
   incorporation or organization)                     Identification Number)

    1040 First Avenue, New York, NY                            10022
    (Address of principal executive offices)                (Zip Code)

Issuer's telephone number, including area code: (212) 642-5476

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

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

                                           Common Stock, $.01 par value

    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  preceding 12 months (or for
such shorter period that the registrant was required to file such reports),  and
(2) has been subject to such filing requirements for the past 90 days.

YES  X         NO
   -----         -----

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

    State Issuer's revenues for its most recent fiscal year: $45,500

    As of December 31, 1998: (a) 3,338,650 Common Shares, $.01 par value, of the
registrant were outstanding;  (b) approximately  641,150 Common Shares were held
by non-affiliates;  and (c) the aggregate market value of the Common Shares held
by non-affiliates was $2,564,600 based on the last sale of $4.00 per share


<PAGE>


                                     PART I

    This Annual Report on Form 10-KSB contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, or Section
21 E of  the  Securities  Exchange  Act  of  1934,  as  amended,  or  subsequent
expansions or replacements of such sections,  including information with respect
to the  Company's  plans and strategy for its business.  For this  purpose,  any
statements  contained  herein that are not statements of historical  fact may be
deemed to be  forward-looking  statements.  Without limiting the foregoing,  the
words "believes,"  "anticipates,"  "plans,"  "estimates," "feels," "expects" and
similar expressions are intended to identify forward-looking  statements.  There
are a number  of  important  factors  that  could  cause  actual  events  or the
Company's  actual  results to differ  materially  from those  indicated  by such
forward-looking statements. These factors include, without limitation, those set
forth below under the caption "Factors That May Affect Future Results"  included
under  "Management's  Discussion and Analysis of Financial Condition and Results
of Operations" in Part II of this Annual Report on Form 10-KSB.

ITEM 1.  DESCRIPTION OF BUSINESS
  General

    Voicenet,  Inc. (the "Company" or "Voicenet"),  a Delaware corporation,  was
established  on  April 2,  1996  for the  marketing  and  distribution  of large
vocabulary,   continuous  speech,  recognition  systems  and  of  digital  audio
reporting,    transcription,    storage,   archiving   and   retrieval   systems
(collectively,  the  "Voice  Systems").  The  products  and  technologies  to be
marketed by the Company are the result of research and development  conducted by
Voicenet  (Aust) Ltd. ( formerly  Southern  Group  Limited)  ("VNA") and Philips
Electronics,  N.V. ("Philips").  VNA is a publicly owned Australian  corporation
listed on the Australian Stock Exchange.  Philips is a multinational corporation
based in the  Netherlands  which has been in the  forefront of the dictation and
recording markets world-wide.

    The Company  acquired from VNA pursuant to a Technology  Transfer  Agreement
dated as of August 1, 1996 (the "Technology  Transfer  Agreement") the exclusive
rights for the North,  Central and South American  markets (the  "Territory") to
the latest  version of the  technology  developed  by VNA  relating to the voice
products and the Voice Systems,  including the right to  manufacture  and market
VNA's latest  version of (i) digital  audio  recording,  archiving and retrieval
systems known as COURTSCRIPT(TM) for the court recording industry  (collectively
the  "Court  Reporting  Systems");  (ii)  large  vocabulary,  continuous  speech
recognition  systems  for  the  medical  industry  known  as  RADTALK(TM),   and
PSYCHTALK(TM) (collectively the "Medical Systems"); (iii) digital audio products
and  technologies  for the  broadcasting  industry;  and (iv) VNA's  current and
future digital voice-to-text audio products developed to exploit the markets for
continuous,   speech   recognition   and  automatic   transcription   technology
(collectively, the "Technology").

    Pursuant to the terms of the Technology Transfer Agreement,  VNA transferred
the  Technology  and related  rights to the Company  for the  purchase  price of
$4,500,000.  The Company paid the purchase price by issuing its Promissory  Note
in the amount of  $4,500,000.  Pursuant to an amendment to the  Promissory  Note
dated  September 25, 1997, the Company and VNA agreed that the  Promissory  Note
may be converted into Common Stock of the Company at a conversion price of $8.00
per share.  VNA elected to exercise that conversion  option and was consequently
issued 562,500 registered shares of common stock of the Company.  VNA therefore,
holds  a  controlling  interest  in  the  Company.  Additionally  the  Company's
President and Chief Executive Officer is also the Chairman and a Board Member of
VNA. See "Description of Business-Technology Transfer Agreement; "Management."

    The  Technology  and products  acquired by the Company under the  Technology
Transfer  Agreement  embrace  two main voice  technologies:  (i)  digital  voice
compression, storage and retrieval, and (ii) speech recognition.


<PAGE>


    Philips  developed a large  vocabulary  (64,000 word  capacity),  continuous
speech  recognition  engine (the "Philips Engine") which can process speech from
normal parlance.  VNA is the developer of proprietary digital audio compression,
storage and retrieval systems and speech recognition  systems and software which
incorporate  the  Philips  Engine.  In  April  and  October,  1996,  VNA  signed
technology  licensing and  development  agreements  with Philips for the product
recognition system using the Philips Engine.

    In August 1997,  Philips and the Company  signed an agreement  for the joint
development of the U.S. market for the Company's speech recognition products.

    The Company's  objective is to become a leader in the marketing of the Voice
Systems.  The Company's strategy is to (i) establish a sales force to market the
Court Reporting Systems to court administrators,  (ii) obtain marketing partners
and distributors which already have a significant  presence in the field for the
marketing of its Medical Systems to hospitals, physicians and physician practice
management  groups and (iii) obtain  marketing  partners and  licensees  for the
sales and  distribution of its voice systems to other  applications and field of
use.

    Particular  marketing  emphasis  will  be  placed  on a  range  of  Voicenet
products,  including  COURTSCRIPT(TM)  a  digital  audio  recording,  archiving,
retrieval and  transcription  system for the court industry and  high-vocabulary
continuous speech  recognition  recording,  transcription and archiving suite of
systems.

    RADTALK(TM) a system for radiology practitioners,  is currently installed in
a number of leading  Australian  hospitals and is creating  interest  within the
U.S. radiology community, while COURTSCRIPT(TM), a digital audio court recording
and  transcription  system, is either in use or being tested in a growing number
of countries, including the United States, Canada, Hong Kong and Australia.

    The Company is in the  development  stage and its  operations are subject to
all the problems, expenses, delays and other risks inherent in the establishment
of a new business enterprise, as well as the problems inherent in developing and
marketing  a new  product/service  and  in  establishing  a  name  and  business
reputation. The likelihood of the success of the Company must also be considered
in  connection  with the rapidly and  continually  changing  technology  and the
competitive  environment  in which the  Company  will  operate.  There can be no
assurance that the Company's operations will result in its becoming or remaining
economically  viable.  Shareholders  should  be aware of the  problems,  delays,
expenses and  difficulties  encountered  by any company in a development  stage,
many of which may be beyond the Company's  control.  These include,  but are not
limited to,  organization  and hiring of sales,  administrative  and  management
personnel,  lack of customer  acceptance  of the Company's  products,  sales and
marketing problems, intense competition, product quality control, and inadequate
financial  resources.  The Company has had no revenues  from  operations to date
and,  because it is just beginning to enter the commercial  stage, it may likely
sustain operating losses for an indeterminate  time period.  Since its inception
in April 1996,  the Company  has  devoted  substantially  all of its efforts and
resources to raising  capital  through an initial public  offering of its common
stock. During the year ended December 31, 1998, the Company generated a net loss
from operations of $2,117,866 and has a total accumulated deficit of $2,733,921.

    The  Company  had  limited  revenues in 1998 in the amount of $45,500 and no
revenues from  continuing  operations in the year ending  December 31, 1997. The
Company has  incurred  net losses since its  inception  in 1996.  The  Company's
losses   incurred  since  inception  have  resulted   principally   from  legal,
accounting, printing, marketing and travel expenditures incurred in pursuing its
capital raising activities, and to a lesser extent early stage product marketing
expenses.  The Company  expects to incur  operating  costs and  possible  losses
therefrom  over the next  several  years due  primarily  to  expanded  sales and
marketing  efforts,  including the  establishment  of product sales office,  the
staffing of such office with marketing, administrative and management personnel,
and travel and related  business  entertainment  expenses  incurred by the sales
personnel as they seek potential customers for the Company's products. There can
be no assurance of when and whether the Company will generate revenues or become
profitable on a sustained  basis,  if at all.  Although the Company  anticipates
sales to increase substantially in 1999, the Company's results of operations may
vary  significantly  from quarter to quarter due to timing of payments and other
factors. The timing of the Company's revenues,  if any, may not match the timing
of associated product development of other expenses.

    The  Company's  ability to achieve  sales and increase its levels of revenue
will  depend  upon its  ability  to  secure  capital  financing  and to sell the
Company's  products.  The Company's ability to generate  significant revenue and
become  profitable  is  dependent  in  large  part  on its  commercializing  the
Company's lead product, the CourtScript

                                      -2-
<PAGE>


system for  digital  recording  of courts.  There can be no  assurance  that the
operations  of the Company  will  generate  significant  revenue or will ever be
profitable.

BUSINESS STRATEGY
    The Company's  objective is to become a leader in the marketing of the Voice
Systems.   Implementing   the  Company's   strategies   involves  the  following
activities:

    o   EMPHASIZE  LARGE  VOCABULARY,   CONTINUOUS  SPEECH  RECOGNITION  SYSTEMS
        PRODUCT LINE. The Company intends to emphasize the continued development
        of its state-of-the-art  high vocabulary,  continuous speech recognition
        systems  product line,  which product line management  anticipates  will
        lead  to the  development  of new  products  and  product  enhancements.
        Examples of such  products are the Company's  soon to be released  third
        generation of Court Reporting  System and first  generation of a Medical
        Recordkeeping  System in the Territory,  a high  vocabulary,  continuous
        speech  recognition  system for the medical industry which has completed
        commercial installations.

    o   TARGET  AND  EXPAND  COURT  REPORTING  MARKET.  The  Company  intends to
        establish  a sales  force to  market  its  Court  Reporting  Systems  to
        legislative bodies and administrative agencies within the Territory. VNA
        has tested its Court  Reporting  Systems in courts  within the Territory
        and has experienced positive results and inquiries from governments that
        have heard about the Court Reporting Systems.  Management  believes that
        use of the Court  Reporting  Systems will result in lower costs and more
        efficient and accurate court reporting.

    o   PURSUE MARKET THROUGH MARKETING  PARTNER AND DISTRIBUTOR  RELATIONSHIPS.
        The Company intends to market some of its products,  such as the Medical
        Systems,  within the Territory by entering into  strategic  distribution
        agreements.  The Company  believes that systems like those  developed by
        the Company have not been previously available to users distributors may
        reach.

    o   FURTHER DEVELOP  STRATEGIC  ALLIANCES.  The Company will support most of
        its internal development and marketing efforts with strategic alliances.
        To date, the Company has  established  significant  product  development
        relationships  with VNA and directly with Philips.  The Company believes
        that its  collaborative  relationships  with these companies will expand
        the breath of opportunities  for the Company's  technology.  The Company
        intends to continue to enhance the established  strategic  alliances and
        it  believes  the  relationships  will  further  enhance  the  Company's
        development and marketing efforts.

VOICENET (AUST) LTD. AND DEVELOPMENT OF THE TECHNOLOGY
    VNA is a research and  development  company  that  focuses on digital  audio
applications. In 1989, VNA developed one of the world's first digital audio mass
storage system ("DAMS(TM)) for the broadcasting  industry. The system permitted,
for the first time, the facility for radio  broadcasters to digitally store, and
instantaneously  access  from a  simple  in-studio  system  control  panel,  all
broadcast material from archives which could be saved on hard disk or CD Rom.

    In 1992,  VNA was  commissioned  by a  division  of the  Australian  Federal
Attorney  General's  department  to  develop a  digital  system  for  recording,
reporting and archiving court proceedings. The result of that commission was the
development of a system code named DART(TM).  On completion and sale to Auscript
of the DART",  VNA continued to research and develop the  application,  and with
the  assistance  of the  Los  Angeles  County  Superior  Court  Division,  which
permitted  the use of four of its  courts  as a test  site  for a  twelve  month
period,  completed an earlier version of the Court  Reporting  System of digital
audio recording and transcription. Earlier versions of the system have been sold
by VNA to courts in Canberra (the Australian Capital Territory), Hong Kong, and,
by a  non-exclusive  licensee in North America,  Karri  Technologies  Corp.,  in
Pennsylvania,  California and Maryland.  Newer  versions of the Court  Reporting
System are currently being marketed by VNA and others in various other countries
around the world.  While Karri  Technologies  Corp.  has  non-exclusive  license
rights to use certain components of the earlier version of the System and to use
the name in  COURTSMART(TM)  in  connection  therewith in North  America,  VNA's
subsidiary  KTI ceased  operation  in 1994 in the  United  States.  The  Company
anticipates  that its newer version of Court  Reporting  Systems,  some of which
will incorporate  continuous,  voice-to-text ability, may be also marketed under
the names COURTSCRIPT(TM) AND VOICESCRIPT(TM).



                                      -3-
<PAGE>


    VNA has signed technology  licensing agreements with Philips for the product
development,   marketing  and  distribution  of  its  continuous  speech,  large
vocabulary  recognition  system.  Although  there can be no assurance,  advances
facilitated  by  an  amalgamation  of  the  large  vocabulary  continuous  voice
recognition  digital  technology  applications  developed by VNA are expected by
management  to have a  significant  impact  on the  interactivity  aspect of the
computer  industry,  where continuous large vocabulary  speech can be processed,
transcribed,  stored and printed. Both the audio and transcribed material can be
archived  and  retrieved on and from the same  storage  medium in a  synchronous
manner.

TECHNICAL SUMMARY OF COURT REPORTING SYSTEM AND CONTINUOUS
SPEECH RECOGNITION ENGINE AND MEDICAL RECORDKEEPING SYSTEM

    The  Technology  and products  acquired by the Company under the  Technology
Transfer   Agreement  embrace  two  main  voice   technologies:   digital  audio
compression/transmission and speech recognition.

    The  proprietary  hardware  and software  utilized in VNA's Court  Reporting
System  has  been  designed,   developed  and   manufactured   by  VNA  and  its
subsidiaries. The system currently operates over a Microsoft(TM) network.

    The second  generation of the Court Reporting  System that is being acquired
by the Company will include an encoder card that will make the external analogue
mixer  redundant as the encoder card will input directly 16 channels of analogue
audio,  perform AGC, mix the audio into 4 channels and digitize with a choice of
using either ADPCM or MPEG for  compression  facilitating  audio quality ranging
from voice grade to broadcast grade as required.  The new encoder card will also
have an in-built wide area network ("WAN") capability.

    The main  barrier  for  processing  speech  continuously  has been  computer
processing  power.  Even with rapid  developments  in personal  computer  ("PC")
technology,  management  believes  that  not even the  currently  fastest  Intel
Pentium(TM)  microprocessor  can process speech  continuously.  Hence, a special
accelerator  board has  recently  been  developed  by  Philips to  increase  the
processing  of continuous  speech by  approximately  ten fold,  which along with
proprietary  software embodies the Philips Engine.  The methodology  embraced in
utilizing  this  continuous  speech  recognition  technology  is heavily  speech
context  orientated.  The reason is that to process  continuous  speech, you not
only need  acoustical  models  for  comparison  computation,  but a  statistical
language  model that can calculate  the  probability  of word  sequences in this
context.  This is an integral part of achieving high speech  recognition  rates.
The Philips  Engine  performs  these  comparisons  by using feature  vectors.  A
feature vector is a mathematical  representation  of phonemes (the smallest unit
of speech)  that is created  from the input  speech to compare with a library of
feature  vectors to identify the correct  interpretation  with the aid of Hidden
Markov Modelling.  The accelerator board acts a pre-processor (i.e., it performs
the  computationally  intensive numerical  calculations).  The board's principal
function is to compare  feature  vectors  created from the input speech with the
feature  vectors in the known  context  (vocabulary)  and  output  the  required
distance value between the vectors for the voice  recognition  engine to process
quickly, without this initial computational overhead.

INDUSTRY COMPARISON OF TECHNOLOGY
    VNA's technology  licensing agreement with Philips for product  development,
integration,  marketing  and  distribution,  and in  turn  the  transfer  of the
Technology from VNA under the Technology  Transfer Agreement to the Company,  is
for its large vocabulary,  continuous speech recognition systems.  This is to be
distinguished  from speech  technology that has been available for several years
in various limited  applications,  which have had two major limitations (i) that
the speech  recognition  systems could only facilitate  "discrete" speech (i.e.,
distinct  pauses are  required  between  the words  spoken for the  computer  to
recognize the individual words) and (ii) speaker  dependence  whereby there is a
requirement  for each  individual  user to train or custom program the system to
ensure an acceptable level of recognition of the speaker's voice. These previous
limitations have made the adoption of the speech recognized  technology slow and
isolated in use.

    Because there are many voice recognition ("VR") technology  providers in the
market  today,  it is important to compare  these other systems to the Company's
technology.  The three  principal  bases  typically used the VR industry are (i)
continuous versus discrete speech; (ii) large versus small vocabulary; and (iii)
speaker dependent versus speaker  independent.  There is a relationship  between
the size of the vocabulary which determines the effectiveness of its recognition
factor,  i.e. the smaller the  vocabulary,  the easier it is for recognition and
conversely,  the  larger the  vocabulary,  the more  difficult  it is to achieve
recognition.


                                      -4-
<PAGE>



    The  specific  use  contexts  can  also  be  broken  down  into  three  main
categories:  (i) dictation,  (ii) telephony,  and (iii) "command & control." The
Company intends to operate in a dictation context.  Each use context needs to be
benchmarked  in a manner  consistent  with the baselines set for the  applicable
use,  (e.g.,  the baseline for large  vocabulary in the telephony  context means
2,000  words).  It is not  uncommon  for  telephony  or  "command & control"  VR
developers  to provide a  "continuous  speech"  facility  because  they are used
solely  for  small  vocabularies  which  address  basic  telephony   application
interaction  (i.e.  continuous  digit  recognition  for credit  card  details or
limited  phrases  for  action  commands  such  as  phone  number   retrieval  or
progressive information steps).

    However,  in the dictation  context the baseline for "large  vocabulary"  is
considered to be greater than 20,000 words.  Moreover,  a continuous  and active
large vocabulary  dictation  context is even more technically  challenging.  The
speech  recognition  technology  to be  marketed  by the  Company  is  the  only
technology  in the  dictation  context  which  can  process  very  large  active
vocabulary  (64,000  words) with  continuous  voice  recognition  in a dictation
context.  IBM has recently introduced a continuous voice recognition system with
a reported vocabulary of 20,000 words for the medical recordkeeping industry.

DEVELOPMENT AND USE OF THE COURTSMART(TM) COURT REPORTING SYSTEM
    The earlier  version of the court  reporting  system was  developed  and was
installed as a test site, in December  1993 in a courtroom  operated for the Los
Angeles County  Superior Court  Division.  During that period,  the  information
received from the Los Angeles Superior Court  administration on the operation of
the system was  instrumental  in determining  the final  characteristics  of the
subsequent versions of the system.

    The court  reporting  system using computer and other shelf and  proprietary
hardware with proprietary software,  operates as follows: (1) microphones within
the  courtroom  are combined and  processed  with other  relevant  communication
channels  and employ  automation  and control  techniques  that  normally do not
require a local  operator  to be in  attendance;  (2)  speech  is then  recorded
directly to a combination of digital storage media which provide the optimum mix
of both instant  access and archived  storage in a secure and efficient  manner.
During this process several levels of automated "tagging" are available, to both
users  and  operators  so that  sections  of text can be  readily  recalled  and
identified at a later time; and (3) the voice recordings once stored  digitally,
are made  available in rapidly  accessible  and reusable  format through a local
network,  to  any  number  of  workstations  for  transcription  purposes.  Each
workstation can take any part of any recording and in any required  length.  The
text thus produced using any one of several popular word processing packages, is
then  automatically  merged and stored in association  with the voice recording.
The  network  can then at any time  print  text,  replay  the  audio or  archive
material in any required format. Non-active material is archived to DDS (Digital
Data Storage) tape or CD-ROM  providing  storage  densities far greater than any
analogue system, and can be easily reloaded at any subsequent time.

    The  Company  believes  that  its  version  of the  Court  Reporting  System
introduces  three major  advances  over  traditional  systems:  the first is the
delivery of recorded audio direct from the court to the  transcription  operator
via computer network negating all physical handling of recordings  (present tape
based systems are labor  intensive);  the second is the ability to tag direct to
incoming audio providing  Transcription  Staff with fault free  recognition of a
particular  speaker;  and the  third is the  ability  to  search  many  hours of
recorded audio rapidly (random access), based on the permanently stored time and
date stamp or text tag attached to each one second of audio.

    All facilities  provided by the latest version of the Court Reporting System
are  aimed  at   increasing   the  overall   efficiency  of  the  recording  and
transcription operation, thus ultimately,  being reflected in a reduction in the
cost per page of transcript generated.

MARKETING
  Court Reporting

    Court  reporting is the verbatim  transcription  of the spoken work into the
written word, generally from sworn legal testimony. The industry is divided into
two distinct  sectors - the  recording of  proceedings  in court,  or "official"
court  reporting,  and all other court  reporting.  Official court  reporting is
performed by civil servant court  reporters  employed by  municipal,  state,  or
federal courts.  All other court reporting is performed outside the courtroom by
free-lance court  reporters,  who may be either  self-employed,  or employees of
independent contractors affiliated with a court reporting agency.


                                      -5-
<PAGE>


    Although there are no independently  verified statistics with respect to the
number  of court  reporters,  there  are  approximately  20,000  members  of the
National Court Reporting  Association  "NACRA"),  the only national professional
association  in the industry,  and an additional  13,000  student  members.  The
Company  estimates that there are  approximately  40,000 court  reporters in the
United States.

    Court reporting requires trained professional capable of transcribing speech
usually  by steno  type  machine,  which  generally  approximates  200 words per
minute,  using  shorthand  symbols.  The shorthand notes are translated from the
paper or magnetic medium, then edited to produce a final transcript.

    The Company intends to market and distribute the  COURTSCRIPT(TM)  system to
courts initially.  It can be anticipated,  however, that court reporters,  which
are generally unionized  government  employees,  may resist the introduction and
implementation of electronic court reporting  systems.  Although there can be no
assurance,  the  Company  believes,  however,  that the cost and  benefit of its
system in comparison to court  reporters will convince court  administrators  to
begin using its Court Reporting Systems.  The Company also intends to market its
Court Reporting Systems to parliamentary and legislative bodies. The Company may
use the name VOICESCRIPT(TM) in connection with such systems.

MARKETING STRATEGY
    The  Company  plans  to seek  ongoing  relationship  with a  distributor  or
distributors  that have a strong  foothold in the medical  marketplace to market
the Medical Systems. The Company's initial focus for the distributors will be on
major hospitals and medical centers within the Territory.

    The Company plans to market the Court Reporting  Systems by appointing up to
eleven  sales  representatives  for the  United  States,  who  will  operate  as
independent  contractors  and primarily be  compensated  on a commission  basis,
which represents one for each of the eleven Federal Court Circuits.  The Company
intends to appoint sales  representatives  for the circuits after the completion
of this  offering at the rate of one per month.  The Company  intends to appoint
three sales  representatives  for Canada,  covering  the  provinces  of Ontario,
Quebec and British Columbia. The first of these has been appointed.

    The Company has had marketing  material  prepared by an  advertising  agency
including a professional  video of approximately 7 minutes duration which covers
(a) the  existing  court  system;  (b)  cost  benefit  analysis;  (c) the  Court
Reporting System; and (d) how its Court Reporting System functions.

    Pursuant to the  Company's  agreement  with VNA, all potential and executory
contracts  being  negotiated by VNA within North America will be  transferred to
the Company.

COMPETITION
    Competition in the continuous speech  recognition  systems and digital audio
technology   market  is  intense.   The  Company  believes  that  its  principal
competitors in the field of voice  recognition  are IBM, AT&T,  Microsoft,  Kurz
Weil, Philips  Electronics,  N.V., Dragon Systems,  Inc.,  Kolvox,  Fonix, Voice
Control Systems, Inc., Voice Processing Corporation, Lernout & Hauspie, Inc. and
Karrit Technologies  Corp., one of VNA's non-exclusive  licensees of the earlier
version of certain components of the system which has the non-exclusive right to
also use the name  COURTSMART(TM)  in connection  with such  components in North
America.  In particular,  IBM and Dragon Systems have recently  introduced voice
recognition systems which have continuous voice recognition  abilities and large
vocabulary.  Further,  although the Company will have the exclusive right to the
Technology  from  VNA,  the  Company  does not have the  exclusive  right to the
Philips  Engine in its Territory.  Consequently,  it is possible that Philips or
another Philips licensee could develop a combined product similar to VNA's voice
system and  Technology  and market such voice  recognition  product in the areas
encompassed by the Company's  Territory from VNA.  Lernout & Hauspie is involved
in "command and  control"  aspects of speech  recognition  within a sentence and
based on small  vocabulary:  the Dragon  Dictate  system has a large  vocabulary
capacity.  Voice Control Systems, Inc. and Voice Processing  Corporation seem to
be principally involved in speech recognition in telephony  applications such as
voice  verification  over telephone fields of "command and control,"  continuous
digit  recognition  and  alpha-numerics.  There can be no  guarantee  that these
companies or other new entrants into the market segments or similar technologies
will not succeed in developing similar or more effective competitive products or
technologies.


                                      -6-
<PAGE>


    Many of the  Company's  competitors  are large  established  companies  with
greater resources, greater marketing and operating experience,  greater research
and development and greater production capabilities than those of the Company.

    The  Company's  competitive  position  will also  depend upon its ability to
attract and retain qualified  personnel,  obtain patent  protection or otherwise
develop  proprietary  products or processes and secure sufficient  resources for
the  marketing and  servicing of its  products.  There is no assurance  that the
Company will be able to compete successfully.

TECHNOLOGY TRANSFER AGREEMENT
    The  Company  has  acquired  from  VNA  pursuant  to a  Technology  Transfer
Agreement dated as of August 1, 1996 the exclusive rights for the North, Central
and South American  markets to the  Technology  developed by VNA relating to the
voice  products and the digital audio  reporting,  transcription,  archiving and
retrieval  systems,  including  the right to  manufacture  and market the latest
version of digital  audio  reporting,  transcription,  archiving  and  retrieval
systems for the court recording  industry;  high  vocabulary;  continuous  voice
recognition and digital voice-to-text  recording;  storage and retrieval for the
medical  industry;  digital audio products and technologies for the broadcasting
industry;  and the digital audio  products  developed to exploit the markets for
continuous speech recognition and automatic transcription  technology.  Pursuant
to  the  terms  of  the  Technology  Transfer  Agreement,  VNA  transferred  the
Technology and related  rights for the purchase  price of $4,500,000,  which was
paid by the Company  issuing its  non-interest  bearing  Promissory Note in such
amount.  The note has been  altered to be payable as follows:  (a) $2.5  million
upon the earlier of March 31, 1998 or the  successful  closing of the  Company's
offering,  (b) $1 million  upon the first  signed  installation  contract  for a
COURTSMART(TM)  system  in the  United  States  of at least  $30,000  and (c) $1
million on March 31, 1998. By amendment to the Promissory  Note dated  September
25, 1997, the Company and VNA agreed that the  Promissory  Note may be converted
into Common Stock of the Company at a conversion price of $8.00 per share.  That
Promissory  Note has been converted and upon  conversion of the promissory  Note
and  issuance of the 562,500 to the Selling  Stockholder,  VNA, the $4.5 million
obligation has been satisfied in full.

    The  Company  commissioned  Gorey  &  Sinclair,  an  independent  Australian
chartered accounting firm to prepare a valuation report of the latest version of
the  COURTSMART(TM)  system in the  United  States.  In the  opinion  of Gorey &
Sinclair,  based upon certain  assumptions,  the  COURTSMART(TM)  system for the
United  States has a potential  value between $23.7 million and $32 million upon
full commercialization. The Company relied on this report as its primarily basis
for  determining  the purchase price of the  Technology  from VNA. The report by
Gorey & Sinclair is  necessarily  based upon a number of estimates,  assumptions
and  forecasts  that,  while  they are  considered  reasonable  by the  Company,
assuming  the  Company  has  adequate  financing,   are  inherently  subject  to
significant  material  business,  economic,  and competitive  uncertainties  and
contingencies which are beyond the control of the Company,  and upon assumptions
with respect to future sales which may never develop. Accordingly,  there can be
no assurance that these results will be archived or that the value  estimated by
Gorey & Sinclair  will ever be realized.  The  prospective  financial  valuation
presented  in the Gorey & Sinclair  report  will vary from actual  results,  and
these variations may be material. The inclusion of such information in the Gorey
& Sinclair report should not be regarded as a  representation  by the Company or
any other person that these results or estimates  will be ever  obtained.  It is
merely an estimation of potential if the  underlying  assumptions  are realized.
The Company  believes  prospective  purchasers  of our Common Stock not to place
undue reliance on this information.

MANUFACTURING AND SUPPLY OF PRODUCTS
    The Company has no  manufacturing  facilities  and relies upon VNA and other
contract  manufacturers  to manufacture  its proposed  products.  Except for one
small  hardware  component  and two software  components,  all of the  remaining
components utilized in the latest version of the Court Reporting Systems and the
Medical  Recordkeeping  Systems, are readily available and can be purchased from
numerous sources in the United States and abroad. The one hardware component and
the two software components that contain the proprietary technology developed by
VNA which  incorporates  the Philips  Engine will be acquired  from VNA. VNA has
agreed to manufacture the one hardware component and the two software components
of the system in  Australia  and sell them to the Company at prices  which shall
not be greater than the prices at which VNA sells the components to unaffiliated
parties, less a minimum discount of 10%.


                                      -7-
<PAGE>


INTELLECTUAL PROPERTY
    The Company does not own any patents, trademarks or trade secrets. Under the
Technology  Transfer  Agreement  for the  court  reporting  system  and  related
technology,  the Company is granted the exclusive right to manufacture,  market,
sell and  distribute  the latest  version of the system and other  digital voice
systems  developed  by VNA in North,  Central  and  South  America  under  VNA's
trademarks. VNA developed the systems, and has copyrighted the computer software
used in the  Court  Reporting  System  and it has  applied  for a patent  on the
hardware component that it developed. Pending the issuance of any patents, which
cannot be assured, VNA intends to rely on unpatented  proprietary technology and
technical know-how. Accordingly, because the Company will only receive under the
Technology Transfer Agreement such intellectual  property rights as may be owned
by VNA, the Company will similarly rely on unpatented proprietary technology and
technical know-how.  Philip owns and has patented the technology  comprising the
Philips Engine. VNA is a licensee of the Philips Engine. The Company's composite
product  which is VNA's  patented  and  proprietary  digital  cardio  recording,
storage,  archiving and retrieval technology integrated with the Philips Engine.
The Company does not have an exclusive  right from Philips to the Philips Engine
in the Territory.  No assurance can be given that others will not  independently
develop  substantially  equivalent  technology,   knowledge  and  techniques  or
otherwise gain access to VNA's  technology,  or use the Philips Engine to make a
similar product, or that VNA or the Company can meaningfully  protect its rights
in such unpatented proprietary technology or know-how.

    The Company's principal business address is 1040 First Avenue, New York, New
York 10022, and its telephone number is (212) 642-5476.

ITEM 2.  PROPERTIES
    The Company  leases  approximately  office space at 1040 First  Avenue,  New
York, NY on a month-to-month basis at the rate of $1,600 per month.

ITEM 3.  LEGAL PROCEEDINGS
    The Company is not aware of any other material  pending or threatened  legal
proceedings against the Company or its officers and directors.

ITEM 4.  SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
    There were no matters  submitted  to a vote of the  security  holders in the
fourth quarter of 1997.

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
  (a)   Market Information

    There is currently a limited public trading market for the Company's  Common
Stock.  There are currently 2 market-makers  for the Company's Common Stock. The
Common Stock has traded on a limited  basis on the OTC Bulletin  Board under the
symbol "VNET" since January 5, 1998.  The stock  register and transfer agent for
the Company is American Stock Transfer & Trust Company, New York, New York.

  (b)    Holders of Common Stock

                                         Approximate Number of
  TITLE OF CLASS                RECORD HOLDERS AS OF DECEMBER 31, 1998
  --------------                --------------------------------------
Common Stock, $.01 par value                     1,630

    A number of shares are held by record by brokerage  and other  institutional
firms for their customers.

  (c)   Dividends

    The Company has never  declared or paid a cash dividend on its common stock,
and it is anticipated  that the Company will continue to retain its earnings for
use in its  business  and not pay cash  dividends.  Declaration  and  payment of
dividends are within the discretion of the Company's  Board of Directors,  which
will review such dividend policy from time to time.


                                      -8-
<PAGE>


ITEM 6. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS RESULTS OF OPERATIONS 1998 AS COMPARED TO 199
    Net losses increased from $615,330 for the 1997 Period to $2,117,866 for the
1998 Period.  The Company had revenue of $45,500 for the year ended December 31,
1998 as compared  to no revenue in 1997.  The  Company  had  interest  income of
$7,235 in 1998 as  compared  to $38,372  for the 1997  Period.  The  decrease in
interest  was  due to the  use of  funds  raised  in the  prior  period  to meet
operating expense  requirements.  Total general,  administrative and development
expenses were  $2,156,493  for the 1998 Period in comparison to $638,610 for the
1997  Period an increase of  $1,517,883.  This  increase  was due  primarily  to
consulting  and  compensation  expenses  totaling  $1,490,050  relating  to  the
issuance of 75,000  shares of common stock and stock options at prices less than
the fair market  value as of the date of grant and $72,000 of  amortization  for
technology.

    At December 31, 1998,  the Company had total  assets of  $4,586,196,  and at
December 31, 1997,  the Company had total  assets of  $5,424,499,  a decrease of
$838,303.  At December 31, 1997, the Company had total  liabilities of $455,267,
and at December  31, 1998 the Company had total  liabilities  of  $217,249.  The
decrease in liabilities is  attributable  of amounts due to a related party.  At
December 31, 1998 the Company had an total stockholders  equity of $4,368,947 in
comparison to a total stockholders'  equity of $4,969,232 at the comparable date
in 1997.

    The Company had a working capital deficit of $80,878 as of December 31, 1998
as compared to working  capital of $465,332 as of December 31, 1997. The Company
had an accumulated  deficit of $616,055 as of December 31, 1997 in comparison to
an  accumulated  deficit of $2,733,921 at December 31, 1998. The increase in the
accumulated  deficit is primarily related to continuing  operating costs without
any operating  income.  For the 1998 Period the Company's cash requirements were
satisfied from the cash reserves in its operating and investment accounts.

RESULTS OF OPERATIONS FROM INCEPTION THROUGH DECEMBER 31, 1997
    Results  of  operations  for the  period  commencing  April 2, 1996  through
December 31, 1997 (the "1997 Period"); compared with the period commencing April
2, 1996 through December 31, 1996 (the "1996 Period").

    Net losses  increased from $725 for the 1996 Period to $615,330 for the 1997
Period.  The  Company had no revenue or  operating  income for the 1996 and 1997
Periods from continuing  operations.  The Company had interest income of $38,372
for the 1997 Period and $106 in the 1996 Period.  Total general,  administrative
and development expenses were $638,610 for the 1997 Period in comparison to $831
for the 1996 Period an increase of $637,779.

    At December 31, 1996,  the Company had total  assets of  $4,623,324,  and at
December 31, 1997,  the Company had total assets of  $5,424,499,  an increase of
$801,175. At December 31, 1996, the Company had total liabilities of $4,599,029,
and at  December  31, 1997 the Company had total  liabilities  of  $455,267.  At
December 31, 1997 the Company had an total stockholders  equity of $4,969,232 in
comparison to a total stockholders'  equity of $24,295 at the comparable date in
1996.

    The  Company  had  working  capital as of  December  31, 1997 of $465,332 in
comparison  to negative  working  capital of $4,590,059 as of December 31, 1996.
The  Company  had an  accumulated  deficit of $725 as of  December  31,  1996 in
comparison  to an  accumulated  deficit of $616,055 at December 31, 1997 period.
The  increase in the  accumulated  deficit is  primarily  related to  continuing
operating costs without any operating income.  For the 1997 Period the Company's
cash  requirements  were  satisfied  from the cash reserves in its operating and
investment  accounts and from  unsecured  loans made by the  Company's  majority
shareholder, VNA, which totalled $312,624 at December 31, 1997.

    On November 5, 1997,  the Company  successfully  completed an initial public
offering of its common stock. In the public  offering,  562,500 shares of common
stock were issued to VNA at a conversion price of $8.00 per share in payment and
satisfaction  of a $4.5 million  promissory  note which the Company had executed
and  delivered  to VNA in  August,  1996  pursuant  to the  purchase  of digital
technology from VNA under a Technology  Purchase Agreement dated August 1, 1996,
and 188,250 shares of common stock were sold to new shareholders at the price of
$8.00 per share.  After the underwriters  selling  commission and discount,  the
Company had net proceeds of  approximately  $973,867.  In addition,  the Company
incurred  approximately  $532,133 in  transaction  costs in connection  with the
offering,  including  filing fees,  attorney fees,  accountants  fees,  printing
costs, transfer agent's fees, travel expenses and other costs and expenses.


                                      -9-
<PAGE>


                         LIQUIDITY AND CAPITAL RESOURCES

    The Company does not  currently  possess a bank source of financing  and has
had only revenues of  approximately  $45,000  during the year ended December 31,
1998.  The Company  cannot be certain that its existing  sources of cash will be
adequate  to  meet  its  liquidity  requirements.   Therefore,  the  Company  is
considering the following options to meet its liquidity requirements:

        (a)  attempting  to raise  additional  funds  through the sale of equity
    securities to persons or entities who are not presently  stockholders of the
    Company;

        (b)  attempting to obtain a bank line of credit; and

        (c)  should insufficient  funds be available from the foregoing sources,
    reducing the Company's  present rate of expenditures  which might materially
    adversely affect the ability of the Company to produce competitive  products
    and services and to market them effectively.

    The Company  believes  that its existing cash and cash  equivalents  and any
potential  cash flow  from  operating  revenue  will be  sufficient  to meet its
operating expenses and capital expenditures requirements for at least the next 6
months.  The Company's  future  capital  requirements,  however,  will depend on
numerous factors,  including (i) the effectiveness of product  commercialization
activities and marketing activities,  including the creation and progress of its
sales and marketing operations,  (ii) the effect of competing  technological and
market  developments,  from  competitors  that have greater  resources  than the
Company. However, if operating expenses are higher than expected or if cash flow
from  operations is lower than  anticipated,  there can be no assurance that the
Company will have sufficient capital resources to be able to continue as a going
concern.  Therefore,  the  Company's  ability to continue in business as a going
concern  depends upon its ability to sell  products,  to generate  fees from the
sale of its  services,  to conserve  liquidity  by getting  marketing  and other
priorities  and  reducing  expenditures,  to  obtain  additional  funds  through
offering of its  securities.  The  Company's  ability to obtain funds through an
offering of its debt securities is limited by its lack of revenue. In any event,
there is no  assurance  that any  expenditure  reductions,  financings  or other
measures  that the  Company  may be able to  effect  will  enable it to meet its
working capital requirements. Accordingly, if operating expenses are higher than
expected or if cash flow from operations is lower than anticipated, there can be
no assurance that the Company will have sufficient  capital resources to be able
to continue as a going concern.


                     FACTORS THAT MAY AFFECT FUTURE RESULTS

    Statements  included  in  this  "Management's  Discussion  and  Analysis  of
Financial  Condition and Results of  Operations"  Section,  in other sections of
this Annual Report on Form 10-KSB including, without limitation the "Description
of Business"  Section in Part I, and in prior and future  filings by the Company
with the Securities and Exchange Commission, in the Company's press releases and
in oral statements  made with the approval of an authorized  executive which are
not historical or current facts are  "forward-looking  statements" made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995 and are subject to certain risks and uncertainties  that could cause actual
results to differ materially from those presently anticipated or projected. Such
statements can be identified by the use of  forward-looking  terminology such as
"may," "will," "expect," "believe," "intend," "anticipate,"  "estimate," "hope,"
"content,"   "continue"  or  similar  words.  These  statements  discuss  future
expectations, estimate the happening of future events or our financial condition
or state other  "forward-looking"  information.  The  Company  wishes to caution
readers not to place  undue  reliance  on any such  forward-looking  statements,
which speak only as of the date made.  The following  important  factors,  among
others, in some cases have affected and in the future could affect the Company's
actual  results and could cause the  Company's  actual  financial  and operating
performance  to differ  materially  from that  expressed in any expressed in any
forward-looking statement:

LIMITED OPERATING HISTORY
    Voicenet, Inc. is a development stage company, incorporated on April 2, 1996
in the  State of  Delaware.  Its  proposed  operations  are  subject  to all the
problems,  expenses,  delays and other risks inherent in the  establishment of a
new business  enterprise without an operating  history,  as well as the problems
inherent in developing and marketing a new product/service and in establishing a
name and business reputation.  The likelihood of the success of the Company must
also be  considered  in  connection  with the rapidly and  continually  changing
technology  and the  competitive  environment in which the Company will operate.
There can be no  assurance  that the  Company's  operations  will  result in its
becoming or remaining  economically viable. The Company may experience problems,
delays,  expenses and  difficulties  typically  encountered  by any company in a
developmental stage, many of which


                                      -10-
<PAGE>


    may be beyond the Company's control.  These include, but are not limited to,
unanticipated regulatory compliance,  marketing problems and intense competition
that may exceed current estimates.  The Company has had minimal revenues to date
and has incurred  losses since  inception  including for the year ended December
31, 1998. As a result of the developing nature of the Company's business and the
fact that it has limited  operations,  the Company will likely sustain operating
losses for an indeterminate time period.  Unless the Company is able to generate
revenues  or  obtain  financing  through  some  means  in the near  future,  the
operations  of the  Company in its  development  phase may raise doubt about the
ability of the Company to continue as a going  concern  after such twelve  month
period.  There can be no assurance  that the operations of the Company will ever
be competitive or profitable.

POSSIBLE NEED FOR ADDITIONAL FINANCING
    The Company anticipates that its existing capital resources will be adequate
to satisfy its  current  capital  requirement  for at least the next six months.
Thereafter,  the  Company  may in  the  future  determine,  depending  upon  the
opportunities  available to it, to seek additional  debt or equity  financing to
fund the cost of continuing  expansion.  To the extent that the Company  obtains
equity  financing or finances an acquisition  with equity  securities,  any such
issuance of equity  securities  could result in dilution to the interests of the
Company's  stockholders.  Additionally,  to the extent that the  Company  incurs
additional  indebtedness  or  issues  debt  securities  in  connection  with  an
acquisition,  the Company  will be subject to risks  associated  with  incurring
substantial additional indebtedness including the possibility that cash flow may
be  insufficient to pay principal and interest on any such  indebtedness.  There
can be no assurance that  additional  financing will be available to the Company
on acceptable terms, or at all.

EARLY STAGE OF MARKET DEVELOPMENT
    The speech  technology market is at a relatively early stage of development.
To date, the speech  technology  products that will be manufactured and marketed
by the Company have only been incorporated in commercially available products on
a limited basis.  Acceptance of these technologies on a commercial basis will be
dependent upon the development of the speech technology markets, the performance
and price of the  Company's  products and customer  reaction to these  products.
There can be no assurance that the speech technology market will develop further
or  that  the  Company's   products  will  achieve  any  or  significant  market
acceptance. See "Description of Business-Industry Comparison of Technology."

DEPENDENCE ON ACCEPTANCE BY COURT ADMINISTRATORS
    Sales of the Company's Court Reporting System products on a commercial basis
will be  substantially  dependent on  acceptance by the court  community.  It is
anticipated  that  court  reporters  which are  generally  unionized  government
employees will resist the  introduction and  implementation  of electronic court
reporting  systems such as  COURTSCRIPT(TM).  There can be no assurance that the
Company's proposed Court Reporting System products will be accepted in the court
community,  and the  Company is unable to  estimate  the length of time it would
take to gain such acceptance. See "Description of Business."

UNCERTAINTY OF MARKET ACCEPTANCE - LACK OF MARKETING ARRANGEMENTS
    The Company has only recently commenced  significant  marketing  activities,
primarily  through  instituting  trade  agreements,   and  the  distribution  of
promotional  materials.  Achieving market acceptance for the Company's  products
will require  substantial  marketing  efforts and the expenditure of significant
funds.  There  is no  assurance  that  the  Company  will be able  to  create  a
successful  marketing  program,  or that the Company's products can be sold in a
manner  that will  permit the Company to achieve  long range  profitability,  if
ever. See "Description of Business."

LIMITATIONS OF SCOPE FOR THE COMPANY'S PRODUCT LINE
    The Company  intends to engage in the marketing and  distribution  of speech
recognition  systems and of Court  Reporting  Systems and Medical  Systems.  The
Company's success will be totally dependent on its ability to market its product
line. The Company's  current plans do not include any other potential sources of
revenue. See "Description of Business."

POSSIBLE PRODUCT OBSOLESCENCE
    The Company expects  technological  developments to continue at a rapid pace
in the computer  and  communications  industries,  and there can be no assurance
that  technological  developments will not cause the Company's  Technology to be
rendered obsolete.  The Company's future success, if any, will be dependent upon
its  ability to remain  competitive  with others  involved  in the  development,
manufacture and marketing of similar


                                      -11-
<PAGE>


products  and  technologies  through  its  continued  capability  to design high
quality products in a cost efficient and timely manner, of which there can be no
assurance. See "Description of Business."

NO  ASSURANCE  AS  TO  PROTECTION  OF  INTELLECTUAL   PROPERTY;   DEPENDENCE  ON
INTELLECTUAL PROPERTY
    Patents  have been  applied for by VNA in  relation  to the court  reporting
system and its components.  No patents have, as yet, been issued.  However,  the
Company's  ability to compete  effectively with other companies will depend,  in
part, on its ability to maintain the proprietary nature of its technologies. The
Company also intends to rely on unpatented proprietary information and know-how,
and there can be no assurance that others will not develop such  information and
know-how  independently or otherwise obtain access to the Company's  technology.
Also, no assurance  can be given that the  Company's  products will not infringe
upon the  patents  of  others,  licenses  to which may not be  available  to the
Company.  The computer software source codes which are essential elements of the
Company's  products,  are proprietary trade secrets of the Company.  The Company
has attempted to protect the  proprietary  nature of this technology by reliance
upon copyright laws, patents applied for, and contractual  arrangements with its
employees and customers,  although it is questionable  whether computer software
and  technology can be adequately  protected by such means.  In the event of any
misappropriation,  the Company may be without an effective  legal remedy.  There
can be no  assurance  that the  Company's  competitors  will  not  independently
develop comparable or superior  technologies.  In the future,  third parties may
assert that the Company's or its licensor's  products infringe their proprietary
rights.  Should  litigation  with  respect  to any such  claims  commence,  such
litigation could be extremely  expensive and time consuming and could materially
and  adversely  affect the  Company's  results of  operations  regardless of the
outcome of the  litigation.  There can be no assurance that VNA will defend,  or
will be in a financial  position to defend against third party  infringements on
their proprietary rights. See "Description of Business - Intellectual Property."

DEPENDENCE UPON KEY PERSONNEL AND POSSIBLE CONFLICT OF INTEREST
    The  success  of  the  Company  is  substantially  dependent  upon  existing
management,  all of whom  devote  only a portion of their  time to the  Company.
These  individuals  may have  conflicts  between their  responsibilities  to the
Company and to other entities with which they are  affiliated.  The directors or
affiliates of the Company may in the future seek to exploit  opportunities which
the Company is not able to undertake because of limited capital. Frank Carr, the
President,  Chief Executive Officer and Chief Financial Officer will devote only
a portion of his time to the Company as set forth in his  Employment  Agreement.
Mr. Carr is also the Managing Director and Chief Executive Officer of VNA, which
is the  transferor of the  Technology,  and the payee of  $4,500,000  Promissory
Note. Mr. Carr's  employment  agreement with the Company having an annual salary
of $180,000, was to have commenced upon the closing of the offering. The loss of
the services of Mr. Carr,  as well as other key  personnel,  or any inability to
attract and retain  qualified  personnel,  may  adversely  affect the  Company's
business.  The Company has not applied for key man life insurance on the life of
Frank Carr and does not intend  to. See  "Management."  Because of the nature of
its  business,  the Company  will be  dependent  upon its ability to attract and
retain   qualified   personnel,   including   competition  from  companies  with
substantially greater resources than the Company. There is no assurance that the
Company will successfully recruit or retain personnel of the requisite technical
caliber or in adequate numbers to enable it to conduct its business as proposed.
Mr. Carr may also have  conflicts  of interest if a dispute  were to arise under
the  Technology  Transfer  Agreement.  See  "Management - Potential  Conflict of
Interest."

INITIAL RELIANCE ON SOLE MANUFACTURER AND SUPPLIER
    The  Company  does  not  own or  operate  any  manufacturing  or  production
facilities.  VNA, an Australian company which owns 65% of the Company, causes or
provides  for the  manufacturing  of three of the  components  required  for the
operation  of the Voice  Systems,  including  the Court  Reporting  Systems  and
Medical Systems.  Should VNA terminate its relationship with the Company,  there
can be no assurance  that the Company  could obtain a  satisfactory  arrangement
with another manufacturer on the same terms, i.e., price and credit terms.
See "Description of Business - Technology Transfer Agreement."

NO FEASIBILITY AND MARKETING STUDIES
    The  Company's  planned  commencement  of  operations  is  being  undertaken
primarily on the basis of management's  evaluation of market potential regarding
its proposed operations in North, Central and South America.

PRODUCT DEVELOPMENT AND INTEGRATION
    The development of the Company's  technology for its customers has required,
and will  continue  to  require,  significant  technical  innovations.  Once the
Company has products such as the Court Reporting Systems or Medical


                                      -12-
<PAGE>


Recordkeeping  Systems, the Company must adapt that product to meet the specific
requirements  of  the  customer  hardware  or  software  in  which  it  is to be
integrated.  There can be no assurance  that the Company will be  successful  in
developing new products or enhancing the  performance  of its existing  products
for customer use on a timely basis or within budget, if at all. Any such failure
could materially and adversely affect the Company's  technology and its business
and prospects.

MANAGEMENT OF CHANGING BUSINESS
    Due to the level of technical and marketing  expertise  necessary to support
its  anticipated  new  customers,  the Company  must  attract and retain  highly
qualified and well-trained personnel. There are a limited number of persons with
the requisite skills to serve in these positions, and it may become increasingly
difficult for the Company to hire such personnel. There can be no assurance that
the Company will be able to have such personnel,  and if so, on favorable terms.
The Company's expansion may also significantly strain the Company's  management,
financial  and other  resources.  The  Company  believes  that  improvements  in
management and  operational  controls and  operations,  financial and management
information  systems are needed to manage future  growth,  should it occur.  The
failure to implement such improvements could have a material adverse effect upon
the Company. See "Management.

PRODUCTS RELIABILITY
    Most  applications   incorporating  the  Company's  technologies  are  being
developed or have only  recently been  introduced to the market.  As a result of
the limited  period of use and the  controlled  environment in which most of the
Company's  technologies  have  been  tested  and used to date,  there  can be no
assurance  that  they  will  meet  their  performance  specifications  under all
conditions or for all applications. If any of the Company's technologies fail to
meet such  expectations,  the Company may be required to enhance or improve that
technology,  and there can be no assurance  that the Company would be able to do
so on a timely basis, if at all. Any significant reliability problems could have
material adverse effect on the Company's business and prospects.

RAPID TECHNOLOGICAL CHANGE
    The market for speech  technology  products has been  characterized by rapid
technological  change,  frequent  product  introductions  and evolving  industry
requirements.  The Company  believes  that these trends will  continue  into the
foreseeable future. The Company's success will depend,  among the other matters,
upon its ability to enhance its existing products being acquired pursuant to the
Technology Transfer Agreement and to successfully develop new products that meet
increasing  customer  requirements and gain market  acceptance.  Achieving these
goals will require  continued  substantial  investment by the Company in product
development and marketing.  There can be no assurance that the Company will have
sufficient  resources  to make  these  investments,  that  the  Company  will be
successful in developing product enhancements or new products on a timely basis,
if at all,  or that  the  Company  will be  able to  successfully  market  these
enhancements and new products once developed. Further, there can be no assurance
that the  Company's  products  will not be  rendered  obsolete  by new  industry
standards  or  changing   technology.   See  "Description  of  Business-Industry
Comparison of Technology."

PRODUCTS LIABILITY AND OTHER CLAIMS
    The Company may be subject to substantial products liability costs if claims
arise out of problems associated with the Company's  products.  The Company will
seek to maintain products  liability  coverage for the benefit of the Company to
protect the Company against such liabilities, but there can be no assurance that
such  arrangements  can be made,  or if made,  will be effective to insulate the
assets of the company  from such  claims.  The Company  will attempt to maintain
insurance against such  contingencies,  in scope and amount which it believes to
be  adequate;  prior to selling  its first  products.  However,  there can be no
assurance  that  such  product  liability  insurance  will be  available,  or if
available, that it will adequately insure against such claim.

COMPETITION
    Competition in the continuous speech,  voice recognition systems and digital
audio  technology  market is intense.  The Company faces  competition  from many
companies in the United States and abroad, including a number of large companies
and firms specialized in the development and production of systems.  Most of the
Company's  competitors have substantially  greater resources,  greater operating
experience,  greater  research and  development and marketing  capabilities  and
greater  production  capabilities  than  those of the  Company.  There can be no
assurance  that the Company's  competitors  will not develop  voice  recognition
technologies  and products that are more  effective or less  expensive  than the
Company's or which would render the Company's  technology and products  obsolete
and noncompetitive.


                                      -13-
<PAGE>


    Although the Company is of the opinion that the speech  recognition  systems
and VNA's latest revision of the Court Reporting Systems and Medical Systems are
at the forefront of their  respective  fields at the present  time,  there is no
assurance that other  companies with greater  resources than the Company may not
enter the field.  The speech  technology  markets are extremely  competitive and
rapidly  changing.  A number of companies have already developed or are expected
to develop  speech  technology  products  that will compete  with the  Company's
products in North America. In particular,  International Business Machines Corp.
("IBM")  ha  recently   introduced  a  speech  recognition  system  for  medical
applications  which has continuous  voice  recognition  abilities and a reported
20,000 word vocabulary.  Another such company,  Karri  Technologies  Corp., is a
licensee of VNA of the earlier version of certain  components of  COURTSMART(TM)
in  North  America,  which  also  has the  non-exclusive  right  to use the name
COURTSMART(TM) in connection with those components in North America.  Many other
competitors and potential  competitors,  including AT&T,  Apple Computer,  Inc.,
IBM,  Microsoft  Corporation,  NEC  Corp.,  Dictaphone,   Philips,  N.V.,  Texas
Instruments  Incorporated  and  Lernout and  Hauspie,  Inc.  have  substantially
greater resources than the Company. The Company also competes with other smaller
companies which have developed  advanced speech  technology  products.  Further,
although the Company will have the exclusive right to the Technology from VNA in
the Company's  Territory,  the Company does not have the exclusive  right to the
Philips Engine in such Territory.  Consequently,  it is possible that Philips or
another Philips licensee could develop a combined product similar to VNA's Voice
System  Technology  and  market  such  voice  recognition  product  in the areas
encompassed  by the  Company's  Territory  from VNA.  In  addition,  current and
potential   competitors   have   established   or  may   establish   cooperative
relationships  among  themselves or with other parties to increase the abilities
of their  speech  technology  products  to  address  the needs of the  Company's
prospective  customers.  Accordingly,  it is possible  that new  competitors  or
alliances among  competitors may emerge and rapidly acquire  significant  market
share.  There  is no  assurance  that  the  Company  will  be  able  to  compete
successfully.

GENERAL ECONOMIC CONDITIONS
    The  operations of the Company are subject to general  economic  conditions,
particularly  relating to government agency spending and payment practices.  The
risks would include  governmental  appropriations  and budgeting,  any potential
restrictions imposed by governmental authorities,  changes in federal, state, or
local  tax laws  applicable  to the  Company,  availability  of  skilled  labor,
availability of capital for future needs, purchasing habits and trends, etc. The
Company  may not  have  sufficient  capitalization  to  survive  lack of  market
acceptance and economic exigencies in general.

    YEAR 2000 ISSUES
    Many currently  installed computer systems are not capable of distinguishing
21st century dates from 20th century dates. As a result,  in less than one year,
computer  systems and/or  software used by many companies in a very wide variety
of applications will experience operating  difficulties unless they are modified
or upgraded to adequately process information involving, related to or dependent
upon the century  change.  Some  businesses may be financially  affected by such
computer problems.

    The Company's  systems are Year 2000 compliant and its products and software
are also Year 2000 compliant.  To the best of the Company's knowledge and belief
none of its  operating  systems  will be affected by the Year 2000  problem,  as
defined.

    ISSUANCE OF ADDITIONAL SHARES
    The Company is  currently  authorized  to issue up to a total of  10,000,000
shares of Common  Stock and  1,000,000  shares  of  preferred  stock.  There are
currently 3,338,650 shares of Common Stock outstanding.

    The Company's  Board of Directors is authorized to issue  preferred stock in
one  or  more  series  and  to fix  the  voting  powers  and  the  designations,
preferences   and  relative,   participating,   optional  or  other  rights  and
restrictions  thereof.  Accordingly,  the Company may further  issue a series of
preferred  stock in the future that will have  preference  over the Common Stock
with  respect to the  payment  of  dividends  and  proceeds  from the  Company's
liquidation,  dissolution  or winding up or having voting or  conversion  rights
which could  adversely  affect the voting power and percentage  ownership of the
holders  of  the  Common  Stock.   The  Company  has  no  plans,   arrangements,
understandings or commitments to issue any preferred stock. However, the ability
of the Company to issue such additional  shares and the possible exercise of the
Representative's  Warrants may prove to be a hindrance to future  financings  by
the Company  since the holders of such Warrants may be expected to exercise them
at a time when the Company would otherwise be able to obtain  additional  equity
capital on terms more favorable to the Company.  Also,  rights granted to future
holders of preferred  stock could be used to restrict the  Company's  ability to
merge


                                      -14-
<PAGE>


with,  or sell its assets  to, a third  party,  and the  ability of the Board of
Directors to issue preferred stock could discourage, delay or prevent a takeover
of the  Company,  thereby  preserving  control  of the  Company  by the  current
shareholders. See "Description of Securities-Preferred Stock."

SHARES ELIGIBLE FOR FUTURE SALE
    All of the 2,500,000  shares of Common Stock  outstanding  as of the date of
the Prospectus  filed with the Securities and Exchange  Commission on October 7,
1997  are  "restricted  securities,"  as that  term is  defined  under  Rule 144
promulgated under the Securities Act of 1933, as amended (the "Securities Act").
All of such shares  became  eligible for resale under Rule 144 in April 1997. In
general,   under  Rule  144,  subject  to  the  satisfaction  of  certain  other
conditions,  a person (or persons whose shares are aggregated under the terms of
Rule 144),  including  an affiliate  of the  Company,  who has owned  restricted
shares of Common Stock  beneficially for at least one year, is entitled to sell,
within  any  three-month  period,  a number of shares  that does not  exceed the
greater of 1% of the total number of  outstanding  shares of the same class,  or
the average  weekly  trading volume of the Common Stock during the four calendar
weeks  preceding the sale, as reported by all national  securities  exchanges on
which the Common  Stock is traded  and/or the  automated  quotation  system of a
registered  securities  association,  or an  approved  consolidated  transaction
reporting  system.  A person who has not been an affiliate of the Company for at
least the three months  immediately  preceding the sale and who has beneficially
owned  shares of Common  Stock for at least two years is  entitled  to sell such
shares under Rule 144 without regard to the volume limitations  described above.
No  prediction  can be made as to the  effect,  if any,  that sales of shares of
Common  Stock or the  availability  of shares  for sale will have on the  market
prices prevailing from time to time. The possibility that substantial amounts of
Common Stock may be sold in the public market in the future may adversely affect
prevailing  market  prices for the Common Stock and could  impair the  Company's
ability to raise capital through the sale of its equity securities.  See "Shares
Eligible for Future Sale."

ANTI-TAKEOVER PROVISIONS
    Certain provisions of Delaware law, the Certificate of Incorporation and the
Company's By-laws,  as amended (the "By-laws"),  could have the effect of making
it more difficult for a third party to acquire, or of discouraging a third party
from  attempting to acquire,  control of the Company.  These  provisions and the
prohibition  against  certain  business  combinations  could  have the effect of
delaying, deferring or preventing a change in control or the removal of existing
management of the Company. See "Description of Securities."

SERVICE OF PROCESS IN AUSTRALIA
    Certain of the Company's  officers and directors are residents of Australia,
and VNA Group Limited, the transferor of the Technology, is incorporated and has
its principal  place of business under the laws of Australia.  Consequently,  it
might be difficult  for  investors  or the Company to effect  service of process
within the United States upon such persons, or to enforce against them judgments
obtained in United States courts predicated upon the civil liability  provisions
of the  Securities  Act,  or any  other  U.S.  or  individual  state's  laws  or
regulations.  There is also  substantially  doubt  whether  an  action  could be
brought in Australia in the first instance on the basis of liability  predicated
upon such law.

RISKS OF LOW PRICED SECURITIES
    If the price per share of the  Company's  common stock is below $5.00,  then
unless the Company satisfied  certain net asset tests, the Company's  securities
would  become  subject  to  certain  "penny  stock"  rules  promulgated  by  the
Commission.  The  penny  stock  rules  require  a  broker-dealer,   prior  to  a
transaction in a penny stock not otherwise  exempt from the rules,  to deliver a
standardized  risk disclosure  document prepared by the Commission that provides
information  about  penny  stocks and the nature and level of risks in the penny
stock market.  The broker-dealer also must provide the customer with current bid
and offer quotations for the penny stock, the compensation of the  broker-dealer
and its salesperson in the transaction  and monthly account  statements  showing
the  market  value  of each  penny  stock  held in the  customer's  account.  In
addition,  the penny stock rules require that prior to a transaction  in a penny
stock not  otherwise  exempt  from such  rules,  the  broker-dealer  must make a
special written  determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's  written agreement to the transaction.
These  disclosure  requirements  may have the  effect of  reducing  the level of
trading activity in the secondary market for a stock that becomes subject to the
penny stock rules.  If the Common Stock become subject to the penny stock rules,
owners of the  Company's  common stock may find it more  difficult to sell their
shares.


                                      -15-
<PAGE>


ABSENCE OF DIVIDENDS
    The Company has never  declared or paid cash  dividends  on its Common Stock
and does not anticipate  paying cash dividends in the  foreseeable  future.  The
Company  currently  intends  to  retain  future  earnings,  if any,  to fund the
development and growth of its business.

ITEM 7.  FINANCIAL STATEMENTS

    The Company's financial  statements for the fiscal years ending December 31,
1998, and 1997 are included herein and consist of:

    Balance Sheet                                                       F-2
    Statement of Operations and Deficit                                 F-4
    Consolidated Statement of Stockholders' Equity (Deficit)            F-5-6
    Statement of Non-Owner changes in Equity                            F-7
    Statement of Cash Flows                                             F-8-9
    Notes to Consolidated Financial Statements                          F-10-17

ITEM8.  CHANGES  IN  AND  DISAGREEMENTS   WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
        FINANCIAL DISCLOSURE 
    There have been no changes in or reported disagreements with the accountants
on any  matter  of  accounting  principles,  practices  or  financial  statement
disclosure.


                                      -16-
<PAGE>


                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(A) OF THE EXCHANGE ACT
    The  following  table  sets  forth  information   concerning  the  executive
officers, directors and key employees of the Company:

    (a) The  directors  of the Company as of December  31, 1998 are set forth in
the following table:

                                Year First Elected As
Name                    Age            Director          Directorship Held
--------                ---     ----------------------   -----------------------
Frank Carr              49               1997            Chairman and Director
Chris Brown             41               1998            Director
Howard Messer           46               1998            Chief Financial Officer
                                         
    Each  Director  is elected  for a period of one year and  thereafter  serves
until his successor is duly elected by the stockholders.

    On March 18, 1998, Mr. Christopher John Brown, CPA, was appointed a Director
    of the Company.

    On March 18, 1998, Mr. Howard  Messer,  CPA, was appointed  Chief  Financial
    Officer of the Company.

    (b) The  current  executive  officers  of the  Company  are set forth in the
following table:

                                   Year First
Name                     Age    Elected into Office   Office Held
----                     ---    -------------------   --------
Frank Carr               50           1997            Chairman, President, Chief
                                                      Executive Officer
Howard Messer            46           1998            Chief Financial Officer

Jason Beever             28           1997            Vice President, Speech
                                                      Technologies
Christopher J. Brown     41           1998            Director

    Except  for its  agreement  with Mr.  Carr,  there  are no other  employment
contracts with the executive  officers.  Officers serve at the will of the Board
of Directors.

    (c) The  following  persons are  considered  a  significant  employee of the
Company:

    Frank Carr,  Chairman,  President and Chief Executive Officer.  Mr. Carr has
    -------------------------------------------------------------
been a director,  President and Chief Executive Officer of the Company since its
inception  in 1996.  He has been the Chief  Executive  Officer  of VNA, a public
company listed on the Australia Stock Exchange Limited, for 5 years. He has been
involved  in  company  management  and  direction  for 25 years  and in 1986 was
jointly awarded the Australian  Business  Entrepreneur of the Year Award for his
work in establishing  and developing a waste disposal  business and, in the same
year, his company was awarded the marketing  award by the  Australian  Marketing
Institute.  Mr. Carr was elected to  Fellowship of the Institute of Directors in
the U.K. in 1981 and to Fellowship of the Australian  Institute of Management in
1986.

    Jason Beever, Vice President, Speech Technologies.  Mr. Beever has been Vice
    -------------------------------------------------
President,  Speech  Technologies  of the Company  since 1996.  Mr. Beever is VNA
Group's General Manager for its speech  recognition  products and  technologies.
Formerly a computer programmer,  he has for three years been responsible for the
successful development, marketing and sale of such products; systems integration
of voice recognition products; and the design, development and implementation of
interactive   voice  response  systems.   He  has  most  recently   completed  a
certification  program on the large vocabulary continuous speech technology with
Philips Dictation Systems at Vienna,  Austria.  Mr. Beever graduated from Curtin
University of Technology in Western  Australia with a Bachelor of Science degree
in computer science and marketing.


                                      -17-
<PAGE>



     Christopher J. Brown,  Director.  Mr. Brown was appointed Company Secretary
     -------------------------------
of Voicenet  (Aust)  Ltd. in August of 1995 and to the Board of Voicenet  (Aust)
Ltd. in July of 1997. In his role as Company  Secretary he is actively  involved
on a daily basis in the operations and direction of the Company.  Mr. Brown is a
principal  of a  leading  Australian  accounting  firm,  William  Buck.  He  has
extensive  experience in the field of strategic planning,  corporate  marketing,
international  tax planning  and  technology  transfer.  He received his Masters
degree in Business  Administration from Curtin University of Technology in Perth
and is, among his other pursuits,  currently completing doctorate studies in the
field of intellectual  property and international  technology transfer.  He is a
member  of  the  Australian  Society  of  CPA's,  the  Australian  Institute  of
Management Consultants and the World Institute of Management Consultants.

    Howard Messer, Chief Financial Officer.  Howard Messer is a CPA in the State
    --------------------------------------
of New Jersey.  Since March of 1994,  Mr.  Messer  served as Vice  President  of
Finance of Compuflex  Systems,  Inc. and was instrumental in its acquisition and
pooling of interests between it and Intec Overseas Software Limited. During that
period Compuflex  combined revenues grew at an annual rate of 50% per annum, Mr.
Messer  assisted  the company in its  acquisition  of debt  financing  and, as a
result of his  business  plan,  in July 1997,  Compuflex  was  acquired in a $12
million stock purchase agreement. He is a graduate of the University of Virginia
with a B.S.  Commerce  degree  and began his  professional  career  with  Arthur
Andersen & Co. Mr. Messer left Arthur Andersen as an audit manager.

    The  Company  has  retained  Frank Carr as its  President,  Chief  Executive
Officer  under  remuneration  contract at a fee of $180,000 per year for a three
year term which commenced in October 1997.

    During the year ended December 31, 1998, the Company  granted 50,000 options
to Frank Carr to purchase 50,000 shares of the Company's  Common Stock for $1.00
per share.

    Except as set forth above,  no director or executive  officer of the Company
is  currently  a  director  with any other  Company  with a class of  securities
registered  pursuant  to  Section  12 of  the  Exchange  Act or  subject  to the
requirements of Section 15(d) of such act or any investment  company  registered
under the Investment Company Act of 1940.

ELECTION OF DIRECTORS AND OFFICERS; COMMITTEES
    The Company's bylaws provide for a Board of Directors consisting of not less
than  three  nor  more  than  nine  members  who  are  elected  annually  by the
shareholders.  The officers of the Company are elected by the Board of Directors
from time to time.

    The Company currently has no committees of its Board of Directors, but it is
anticipated that standing audit and compensation  committees will be established
following  the  offering.  It  is  expected  that  the  audit  and  compensation
committees  will consist of three  members of the Board,  a majority of whom are
not otherwise affiliated with the Company as officers or employers.

EMPLOYMENT ARRANGEMENTS
    The  Company  has  retained  Frank Carr as its  President,  Chief  Executive
Officer under a remuneration  contract at a fee of $180,000 per year for a three
year term which commenced in October 1997.

  (d)   Family Relationships
  --------------------------

    No family relationships exist among the executive officers of the company.

ITEM 9.  EXECUTIVE COMPENSATION

                          SUMMARY COMPENSATION TABLE

    No executive officer received  compensation,  annual salary, and bonus which
exceeded $100,000 in any of the fiscal years ended December 31, 1998 and 1997.



                                      -18-
<PAGE>


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
    The following  table  identifies  each person known to the Company to be the
beneficial owner of more than five percent of the Company's  Common Stock,  each
director  of the  Company  and all  directors  and  officers of the Company as a
group,  and sets  forth  the  number of shares  of the  Company's  Common  Stock
beneficially  owned by each such person and such group and the percentage of the
shares of the Company's  outstanding  Common Stock owned by each such person and
such group.  In all cases,  the named person  individually  or together with his
spouse has sole voting power and sole investment power over the securities.

    (a) As of the December 31, 1998,  five persons owned of record or were known
by the Company to own  beneficially  more than five  percent  (5%) of the Common
Stock outstanding.

    (b) The  following  table  sets  forth  certain  information  regarding  the
beneficial  ownership  (determined  in accordance  with  Securities and Exchange
Commission  Rule 13d-3  Securities  Exchange Act of 1934) of common stock of the
Company as of December 31, 1998, by: (i) each person who is known by the Company
to own beneficially more than 5% of the outstanding shares of common stock; (ii)
each of the  Company's  directors;  and (iii) all officers and  directors of the
Company's as a group:

Name and Address of                Amount and Nature of
Beneficial Owner                 Beneficial Ownership (2)       Percent of Class
----------------                 ------------------------       ----------------

Voicenet (Aust) Ltd.(1)
72 Kings Park Road
West Perth, Australia 6005              2,170,000                    65.0%

Frank Carr(1)
72 Kings Park Road
West Perth, Australia 6005                      0                       0%

Quarten Holdings, Ltd.                    290,000                     8.9%
George Street
Caymen Islands

F.D. Costa(3)                             290,000                     8.9%

All Officers and Directors
as a group (3 persons)                    437,675                    13.4%

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

(1)  Reflects shares  indirectly  owned by Mr. Frank Carr who owns a majority of
     the shares in a private  corporation which owns approximately 11% of VNA, a
     publicly owned Australian  corporation.  Mr. Carr is also Managing Director
     and Chief  Executive  Officer of VNA.  Mr. Carr does not  directly  own any
     shares of the Company.  By reason of his interest in and ability to control
     VNA, he will be able to elect all of the directors  and  otherwise  control
     the Company.

(2)  Includes the  issuance of 562,500 shares to VNA upon conversion of the $4.5
     million Promissory Note.

(3)  Includes 290,000 shares owned by Quartern  Holdings,  Ltd., Mr. Costa is an
     officer, director and principal shareholder of Quartern Holdings, Ltd., and
     through such  position is an indirect  Beneficial  owner of the  designated
     shares of the Company.

(4)  Unless  otherwise noted, the Company believes that each person named in the
     table has sole voting and  investment  power with  respect to all shares of
     common stock beneficially owned by him or it.


                                      -19-
<PAGE>


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    (a) All of the  shareholders  existing  at the date of  registration  of the
Prospectus  of the Company  acquired  the  outstanding  2,500,000  shares of the
Company's common stock for $.01 per Share.

    In connection  with the  acquisition of the Technology from VNA, the Company
agreed to pay VNA $4,500,000.  This obligation is evidenced by a Promissory Note
in the  amount  of  $4,500,000,  which  bears no  interest,  secured  by a first
security  interest  collateral  pledge of the Technology to VNA. By amendment to
the  Promissory  Note dated  September 25, 1997, the Company and VNA agreed that
the  Promissory  Note may be  converted  into  Common  Stock of the Company at a
conversion  price of $8.00 per share.  Upon  conversion of the Promissory  Note,
562,500  additional  shares will be issued to VNA, the Selling  Stockholder,  in
satisfaction of the Company's $4.5 million  obligation.  VNA elected to exercise
its right of conversion and 562,500 shares of common stock were issued to VNA.

    (b) Except as above  described,  there have been no  business  relationships
with directors or nominees for director of the Company since January 1, 1998.

    (c) At December 31,  1998,  no officers or  directors  were  indebted to the
Company.

    (d) See 7(b) above.

    (e) Reports on Form 8-K

    The  Company  filed no report on Form 8-K for the year ending  December  31,
1998.


                                      -20-
<PAGE>



                                 VOICENET, INC.
                          (A Development Stage Company)

                                    CONTENTS

                                                                         PAGE
REPORT OF INDEPENDENT CERTIFIED
        PUBLIC ACCOUNTANTS                                                F-1

FINANCIAL STATEMENTS
        Balance Sheets                                                  F-2-3
        Statements of Operations                                          F-4
        Statements of Stockholders' Equity                              F-5-6
        Statement of Non-Owner Changes in Equity                          F-7
        Statements of Cash Flows                                        F-8-9

NOTES TO FINANCIAL STATEMENTS                                         F-10-17



                                      -21-
<PAGE>









                                 VOICENET, INC.
                          (A DEVELOPMENT STAGE COMPANY)


                              FINANCIAL STATEMENTS


                 For the Years Ended December 31, 1998 and 1997




<PAGE>


                                 VOICENET, INC.
                          (A DEVELOPMENT STAGE COMPANY)


                                    CONTENTS



                                                                        PAGE

REPORT OF INDEPENDENT CERTIFIED
  PUBLIC ACCOUNTANTS                                                      1


FINANCIAL STATEMENTS

  Balance Sheets                                                        2-3
  Statements of Operations                                                4
  Statements of Stockholders' Equity                                    5-6
  Statement of Non-Owner Changes in Equity                                7
  Statements of Cash Flows                                              8-9


NOTES TO FINANCIAL STATEMENTS                                         10-17


                                      -i-
<PAGE>



               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS




To the Board of Directors of
Voicenet, Inc.


We have audited the accompanying balance sheets of Voicenet, Inc. (a development
stage company) as of December 31, 1998 and 1997,  and the related  statements of
operations, non-owner changes in equity, stockholders' equity and cash flows for
the years ended December 31, 1998 and 1997.  These financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Voicenet,  Inc. as of December
31, 1998 and 1997,  and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in Note 10 to the
financial  statements,  the Company incurred net losses of $2,117,866 during the
year ended  December  31,  1998 and as of that date,  the  Company had a working
capital deficit of $80,878.  These conditions 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.


                                                /s/Marcum & Kliegman LLP

New York, New York
April 7, 1999


                                      F-1
<PAGE>


                                 VOICENET, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                                 BALANCE SHEETS

                           December 31, 1998 and 1997



                                     ASSETS


                                                         1998            1997
                                                         ----            ----
CURRENT ASSETS
 Cash and cash equivalents                             $34,610        $909,217
 Investment, at market value                            12,246             -0-
 Accounts receivable, net                               39,700             -0-
 Prepaid expenses                                          -0-          11,382
 Due from Voicenet (Aust) Ltd.                          45,015             -0-
 Other receivables                                       4,800             -0-
                                                    ----------      ----------


      Total Current Assets                             136,371         920,599
                                                   -----------     -----------


OTHER ASSETS
 Organization costs, net                                   900           1,300
 Intangible assets                                   4,410,000       4,500,000
 Security deposit                                       12,475           2,600
 Deferred compensation expense                          26,450             -0-
                                                    ----------      ----------


      Total Other Assets                             4,449,825       4,503,900
                                                    ----------      ----------


      TOTAL ASSETS                                  $4,586,196      $5,424,499
                                                    ==========      ==========



                                      F-2
<PAGE>


                                             VOICENET, INC.
                                     (A DEVELOPMENT STAGE COMPANY)

                                             BALANCE SHEETS

                                        December 31, 1998 and 1997


<TABLE>
<CAPTION>
    LIABILITIES AND STOCKHOLDERS' EQUITY
    ------------------------------------
                                                                          1998            1997
                                                                          ----            ----

CURRENT LIABILITIES
-------------------
<S>                                                                  <C>              <C>        
 Accounts payable ..............................................     $   217,249      $   138,643
 Due to Voicenet (Aust) Ltd. ...................................             -0-          312,624
 Due to related party ..........................................             -0-           4,000
                                                                     -----------      -----------


      TOTAL LIABILITIES ........................................         217,249          455,267
                                                                     -----------      -----------


STOCKHOLDERS' EQUITY
--------------------
 Preferred stock, $.01 par value, 1,000,000 shares
  authorized, no shares issued and outstanding .................             -0-              -0-
 Common stock, $.01 par value, 10,000,000 shares
  authorized, 3,338,650 and 3,261,550 shares issued
  and outstanding in 1998 and 1997, respectively ...............          33,387           32,616
 Additional paid-in-capital ....................................       6,168,700        5,552,671
 Stock option outstanding ......................................         916,500              -0-
 Other non-owner changes in equity .............................         (15,719)             -0-
 Deficit accumulated during the development stage ..............      (2,733,921)        (616,055)
                                                                     -----------      -----------


      TOTAL STOCKHOLDERS' EQUITY ...............................       4,368,947        4,969,232
                                                                     -----------      -----------


      TOTAL LIABILITIES AND
       STOCKHOLDERS' EQUITY ....................................     $ 4,586,196      $ 5,424,499
                                                                     ===========      ===========
</TABLE>


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



                                      F-3
<PAGE>

<TABLE>

                                 VOICENET, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                            STATEMENTS OF OPERATIONS

               For the Years Ended December 31, 1998 and 1997 and
       For the Period April 2, 1996 (Inception) Through December 31, 1998


<CAPTION>

                                                                                      For the
                                                                                      Period
                                                                                   April 2, 1996
                                                                                     (Inception)
                                                                                      Through
                                                                                    December 31,
                                                      1998            1997              1998
                                                      ----            ----           -----------

<S>                                              <C>              <C>              <C>        
REVENUE ....................................     $    45,500      $       -0-      $    45,500

COST OF GOODS SOLD .........................          25,958              -0-           25,958
                                                 -----------      -----------      -----------

      GROSS PROFIT .........................          19,542          -0-               19,542

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
                                                   2,138,493          638,610        2,777,406
                                                 -----------      -----------      -----------

      OPERATING LOSS .......................      (2,118,951)        (638,610)      (2,757,864)

OTHER INCOME
 Interest income ...........................           7,235           38,372           45,713
                                                 -----------      -----------      -----------


      LOSS BEFORE INCOME TAXES .............      (2,111,716)        (600,238)      (2,712,151)

INCOME TAXES ...............................           6,150           15,092           21,770
                                                  -----------      -----------      -----------


      NET LOSS .............................     $(2,117,866)     $  (615,330)     $(2,733,921)
                                                 ============     ============     ============

NET LOSS PER SHARE, Basic and Diluted                              
-------------------                                   $(0.64)          $(0.23)
                                                 ============     ============

Weighted average number of common
  shares outstanding during the years              3,328,162        2,619,327
                                                 ============     ============  

</TABLE>

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


                                      F-4
<PAGE>


<TABLE>
                                                           VOICENET, INC.
                                                    (A DEVELOPMENT STAGE COMPANY)
               
                                                 STATEMENTS OF STOCKHOLDERS' EQUITY
               
                                         For the Years Ended December 31, 1998 and 1997 and
                                 For the Period April 2, 1996 (Inception) Through December 31, 1996
    
<CAPTION>
                                                                                                            Deficit
                                                                                                 Other     Accumulated
                                                  Common Stock       Additional    Stock       Non-Owner   During the
                                                                      Paid-in      Option     Changes in   Development
                                               Shares      Amount     Capital    Outstanding    Equity        Stage        Total
                                               ------      ------     -------    -----------    ------     -----------     -----
                                                                                        

<S>                                         <C>            <C>      <C>          <C>        <C>         <C>            <C>
Initial issuance of shares                      1,000           $1     $25,019          --          --   $      -0-       $25,020

Stock split                                 2,499,000       24,999     (24,999)         --          --           --           -0-

Net loss for the period April 2, 1996
 (inception) through December 31, 1996                                                                         (725)         (725)
                                            ---------   ---------   ----------   ---------  ----------   -----------  -----------

Balance - December 31, 1996                 2,500,000       25,000          20   $     -0-  $      -0-         (725)       24,295
-------

Issuance of shares in connection with the
 initial public offering, net of offering     188,250        1,883     971,984          --          --           --       973,867
costs

Issuance of shares on December 30, 1997        10,800          108      86,292          --          --           --        86,400

Conversion of debt to common shares           562,500        5,625   4,494,375          --          --           --     4,500,000

Net loss for the year ended
 December 31, 1997                                                                                         (615,330)     (615,330)
                                            ---------   ---------   ----------   ---------  ----------   -----------  -----------

BALANCE - December 31, 1997 (Forward)       3,261,550      $32,616  $5,552,671   $     -0-  $      -0-   $ (616,055)   $4,969,232
-------                                     ---------   ---------   ----------   ---------  ----------   -----------  -----------


                              The accompanying notes are an integral part of these financial statements.
</TABLE>


                                                                       F-5
<PAGE>

<TABLE>


                                                            VOICENET, INC.
                                                    (A DEVELOPMENT STAGE COMPANY)
               
                                            STATEMENTS OF STOCKHOLDERS' EQUITY, Continued
               
                                         For the Years Ended December 31, 1998 and 1997 and
                                 For the Period April 2, 1996 (Inception)  Through December 31, 1996

<CAPTION>
                                                                                                            Deficit
                                                                                                 Other     Accumulated
                                                  Common Stock       Additional    Stock       Non-Owner   During the
                                                                      Paid-in      Option     Changes in   Development
                                               Shares      Amount     Capital    Outstanding    Equity        Stage        Total
                                               ------      ------     -------    -----------    ------     -----------     -----

<S>                                          <C>           <C>       <C>           <C>         <C>        <C>           <C>       
                     (Forward)               3,261,550     $32,616   $5,552,671    $    -0-    $     -0-    $(616,055)   $4,969,232

Issuance of shares in March 1998                 2,100          21       16,779          --           --           --       16,800

Issuance of shares for consulting services      75,000         750      599,250          --           --           --      600,000

Grant of stock options                              --          --           --     916,500           --           --      916,500

Unrealized loss on investment                       --          --           --          --      (15,719)          --      (15,719)

Net loss for the year ended
 December 31, 1998                                  --          --           --          --           --   (2,117,866)  (2,117,866)
                                             ---------     -------   ----------    --------    ---------  ------------  ----------

BALANCE - December 31, 1998                  3,338,650     $33,387   $6,168,700    $916,500    $ (15,719) $(2,733,921)  $4,368,947
                                             =========     =======   ==========    ========    =========  ============  ==========



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


                                                                        F-6
</TABLE>

<PAGE>


<TABLE>

                                               VOICENET, INC.

                                STATEMENTS OF NON-OWNER CHANGES IN EQUITY

                             For the Years Ended  December  31, 1998 and 1997
              and For the  Period  April 2, 1996  (Inception)  Through December 31, 1998



<CAPTION>
                                                                             For the
                                                                              Period
                                                                          April 2, 1996
                                                                           (Inception)
                                                                             Through
                                                                          December 31,
                                               1998            1997           1998
                                               ----            ----       ------------
                                                                        
<S>                                        <C>              <C>          <C>         
NET LOSS                                   $(2,117,866)     $(615,330)   $(2,733,921)
--------                                                                
                                                                        
                                                                        
OTHER NON-OWNER CHANGES IN EQUITY                                                                 
  Unrealized loss on investment               (15,719)            -0-        (15,719)
                                           -----------      ---------    ------------
                                                                        
      TOTAL NON-OWNER CHANGES IN                                        
        EQUITY                             $(2,133,585)     $(615,330    $(2,749,640)
                                           ============     =========    ============



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

</TABLE>

 
                                                  F-7
<PAGE>


<TABLE>

                                    VOICENET, INC.
                             (A DEVELOPMENT STAGE COMPANY)
     
                               STATEMENTS OF CASH FLOWS
     
                  For the Years Ended December 31, 1998 and 1997 and
          For the Period April 2, 1996 (Inception) Through December 31, 1998
  
<CAPTION>

                                                                                        For the
                                                                                         Period
                                                                                     April 2, 1996
                                                                                       (Inception)
                                                                                        Through
                                                                                     December 31,
                                                       1998             1997             1998
                                                       ----             ----         ------------
CASH FLOWS FROM OPERATING
-------------------------
  ACTIVITIES
  ----------
<S>                                                <C>              <C>              <C>         
 Net loss ....................................     $(2,117,866)     $  (615,330)     $(2,733,921)
                                                   -----------      -----------      -----------
 Adjustments to reconcile net loss to net cash
  used in operating activities:
   Amortization ..............................          90,400              400           91,100
   Stocks issued for consulting services .....         600,000              -0-          600,000
   Stock option compensation costs ...........         916,500              -0-          916,500
   Increase in accounts receivable ...........         (39,700)             -0-          (39,700)
   Increase in other receivables .............          (4,800)             -0-           (4,800)
   Decrease (increase) in prepaid expenses ...          11,382          (11,382)             -0-
   Increase in security deposit                         (9,875)          (2,600)         (12,475)
   Increase in deferred compensation expense           (26,450)             -0-          (26,450)
   Increase in accounts payable ..............          78,606           64,614          217,249
                                                   -----------      -----------      -----------
                                                                                         


        TOTAL ADJUSTMENTS ....................       1,616,063           51,032        1,741,424
                                                   -----------      -----------      -----------

        NET CASH USED IN OPERATING
         ACTIVITIES ..........................        (501,803)        (564,298)        (992,497)
                                                   -----------      -----------      -----------

CASH FLOWS FROM INVESTING
-------------------------
 ACTIVITIES
 ----------
  Payments for organization costs ............             -0-              -0-           (2,000)
  Purchases of investment ....................         (27,965)             -0-          (27,965)
                                                   -----------      -----------      -----------


        NET CASH USED IN INVESTING
         ACTIVITIES ..........................         (27,965)             -0-          (29,965)
                                                   -----------      -----------      -----------



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

</TABLE>



                                                                  F-8
<PAGE>

<TABLE>


                                                VOICENET, INC.
                                         (A DEVELOPMENT STAGE COMPANY)

                                      STATEMENTS OF CASH FLOWS, Continued

                              For the Years Ended December 31, 1998 and 1997 and
                      For the Period April 2, 1996 (Inception) Through December 31, 1998


<CAPTION>
                                                                                        For the
                                                                                         Period
                                                                                     April 2, 1996
                                                                                       (Inception)
                                                                                        Through
                                                                                     December 31,
                                                       1998              1997             1998
                                                       ----              ----        ------------
<S>                                                 <C>              <C>              <C>       
CASH FLOWS FROM FINANCING ACTIVITIES                              
------------------------------------                              
  Proceeds from issuance of stock                     $16,800        $1,172,921       $1,214,741
  Advances (to) from Voicenet (Aust) Ltd.            (357,639)          287,624          (45,015)
  Advances (to) from related party                     (4,000)            4,000              -0-
                                                                                   
  Payments of offering costs                              -0-               -0-         (112,654)
                                                    ----------       ----------      -----------
                                                                                   
                                                                                   
        NET CASH (USED IN) PROVIDED BY                                             
        FINANCING ACTIVITIES                         (344,839)        1,464,545        1,057,072
                                                    ----------       ----------      -----------
                                                                                   
        NET (DECREASE) INCREASE IN CASH AND                                        
        CASH EQUIVALENTS                                                          
                                                     (874,607)          900,247           34,610
                                                                                   
CASH AND CASH EQUIVALENTS - Beginning                 909,217             8,970              -0-
-------------------------                           ----------       ----------      -----------
                                                                                        
                                                                                   
CASH AND CASH EQUIVALENTS - Ending                    $34,610          $909,217          $34,610
-------------------------                           ==========       ==========      ===========
                                                    
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION  
------------------------------------------------  
Cash paid during the periods 
for:  
      
        Income taxes                                  $11,874            $3,329          $15,203
                                            
Noncash investing and financing activities: 
                                            
        Purchase of Technology from Voicenet
        (Aust) Ltd. in exchange of a note payable                                     $4,500,000
                                            
        Conversion of note payable, Voicenet
         (Aust) Ltd. to equity                     $      -0-        $4,500,000       $4,500,000
                                                                                   
        Deferred offering costs directly                                                 
         attributable to issuance of stock         $      -0-          $112,654         $112,654


            The accompanying notes are an integral part of these financial statements.
</TABLE>


                                                                 F-9
<PAGE>


                                 VOICENET, INC.

                          NOTES TO FINANCIAL STATEMENTS



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------

      NATURE OF BUSINESS
      ------------------
      Voicenet, Inc. (the ACompany@),  a Delaware corporation,  was incorporated
      on April 2, 1996.  The  Company  was  established  for the  marketing  and
      distribution  of continuous  speech and voice  recognition  systems and of
      digital audio reporting, transcription, archiving and retrieval systems in
      North America, Central America and South America. As of December 31, 1998,
      the Company had  commenced  operations  but has not  realized  significant
      revenue  from such  operations.  Therefore,  the Company is  considered  a
      development  stage  company in  accordance  with  Statement  of  Financial
      Accounting Standard No. 7. The Company is majority-owned,  (65%) and (80%)
      for the years ended December 31, 1998 and 1997, respectively,  by Voicenet
      (Aust) Ltd., an Australian company.

      Successful  operations  are  subject  to certain  risks and  uncertainties
      including,  amount others,  the Company's  proposed  operations  which are
      subject to all the problems,  expenses, delays and other risks inherent in
      developing  and  marketing  a new  product/service,  actual and  potential
      competition by entities with greater financial  resources,  experience and
      market presence than the Company.  Further risks and uncertainties  relate
      to technological advancements,  the regulatory environment and the ability
      of the Company to generate  sufficient  revenue and obtain  financing  and
      additional equity.

      NET LOSS PER SHARE
      ------------------
      Net loss per share is computed  based on the  weighted  average  number of
      shares of common stock  outstanding  for the years ended December 31, 1998
      and 1997.  Pursuant to the  Securities  and  Exchange  Commission's  Staff
      Accounting Bulletins,  common stock issued at prices below the anticipated
      public  offering  price during the  12-month  period prior to the Offering
      have been included in the calculation as if they were  outstanding for the
      entire period presented.

      In February 1997, the Financial  Accounting  Standards Board (FASB) issued
      Statement of Financial  Accounting Standards No. 128, AEarnings Per Share@
      (ASFAS 128"),  which is required to be adopted  beginning with the quarter
      ended  December 31, 1997. At December 31, 1997,  the Company  adopted SFAS
      128 which  eliminates  the  presentation  of  primary  and  fully  diluted
      earnings  per share  (AEPS@) and requires  the  presentation  of basic and
      diluted  EPS.   Common  stock   equivalents   have  been   excluded   from
      weighted-average  shares for the years ended December 31, 1998 and 1997 as
      inclusion would be anti-dilutive.

      ORGANIZATION COSTS
      ------------------
      Organization costs have been capitalized and are being amortized over five
      years  using  the  straight-line  method.  The  Company  intends  to adopt
      Statement of Position 98-5 AReporting on the Costs of Start-Up Activities@
      in 1999. Accordingly,  no adjustment has been recorded in the accompanying
      1998 financial statements.



                                      F-10
<PAGE>


                                 VOICENET, INC.

                          NOTES TO FINANCIAL STATEMENTS



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
----------------------------------------------------

      INTANGIBLE ASSET
      ----------------
      The intangible  asset related to the purchase of technology which is being
      amortized using the straight-line method over twenty-five (25) years.

      CASH EQUIVALENTS
      ----------------
      For purposes of the  statement of cash flows,  the Company  considers  all
      highly  liquid  investments  purchased  with a maturity of three months or
      less to be cash equivalents.

      INCOME TAXES
      ------------
      Income taxes are provided for the tax effects of transactions  reported in
      the financial statements and consist of taxes currently due.

      RECLASSIFICATIONS
      -----------------
      Certain  accounts  in  the  prior  year  financial  statements  have  been
      reclassified for comparative  purposes to conform with the presentation in
      the current year financial  statements.  These  reclassifications  have no
      effect on previously reported income.

      STOCK OPTIONS
      -------------
      In October 1995, the Financial Accounting Standards Board issued Statement
      of Financial  Accounting  Standards No. 123,  AAccounting  for Stock-Based
      Compensation@  (ASFAS  123").  SFAS  requires  compensation  expense to be
      recorded (i) using the fair value method or (ii) using existing accounting
      rules   prescribed  by  Accounting   Principles   Board  Opinion  No.  25,
      AAccounting  for  Stock  Issued  to  Employees@  (AAPB  25")  and  related
      interpretations  with pro forma disclosure of what net income and earnings
      per share would have been had the Company  adopted the fair value  method.
      The Company  selected to continually use APB 25 and adopted the disclosure
      - only  provisions  of SFAS 123 for employee  options and adopted SFAS 123
      for non-employee options.

      USE OF ESTIMATES IN THE FINANCIAL STATEMENTS
      --------------------------------------------
      The  preparation  of financial  statements  in conformity  with  generally
      accepted  accounting  principles requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      disclosure  of  contingent  assets  and  liabilities  at the  date  of the
      financial  statements  and the  reported  amounts of revenues and expenses
      during the  reporting  period.  Actual  results  could  differ  from those
      estimates.

      COMPREHENSIVE INCOME (NON-OWNER CHANGES IN EQUITY)
      --------------------------------------------------
      During  the year  ended  December  31,  1998,  the  Company  adopted  FASB
      Statement No. 130, AReporting  Comprehensive  Income (Non-Owner Changes in
      Equity)@ (ASFAS 130").  SFAS 130 requires the reporting of other non-owner
      changes in equity in  addition to net income  from  operations.  Non-owner
      changes in equity is a more inclusive financial reporting methodology that
      includes disclosure of certain financial information that historically has
      not been recognized in the calculation of net income.



                                      F-11
<PAGE>


                                 VOICENET, INC.

                          NOTES TO FINANCIAL STATEMENTS


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
----------------------------------------------------

      FAIR VALUE OF FINANCIAL INSTRUMENTS
      -----------------------------------
      The Company's financial  instruments include cash, accounts receivable and
      accounts payable.  Due to the short-term nature of these instruments,  the
      fair value of these  instruments  approximate  their recorded  value.  The
      Company has other  liabilities  which it  believes is stated at  estimated
      fair market value.


NOTE 2 - ORGANIZATION COSTS
---------------------------

      Organizational  costs  at  December  31,  1998  and  1997  consist  of the
following:

                                                                  Estimated
                                         1998         1997       Useful Lives
                                       --------     --------     ------------
Organizational costs                    $2,000       $2,000         5 years

Less: accumulated amortization          (1,100)        (700)
                                        -------        -----

   Organizational costs, net              $900        $1,300
                                        -------        -----

Amortization  expense  was $400 each for the years ended  December  31, 1998 and
1997.


NOTE 3 - INTANGIBLE ASSETS
--------------------------

      Intangible assets at December 31, 1998 and 1997 consist of the following:

                                                                  Estimated
                                         1998         1997       Useful Lives
                                       --------     --------     ------------
Purchase of technology                4,500,000    $4,500,000      25 years

Less: accumulated depreciation          (90,000)          -0-
                                     -----------   ----------

   Intangible asset, net             $4,410,000    $4,500,000
                                     -----------   ----------


Amortization  expense for the years ended December 31, 1998 and 1997 was $90,000
and $-0-, respectively ($18,000 and $-0- was included in cost of goods sold).



                                      F-12
<PAGE>

                                 VOICENET, INC.

                          NOTES TO FINANCIAL STATEMENTS


NOTE 4 - STOCKHOLDERS' EQUITY
-----------------------------

      COMMON STOCK
      ------------
      At  inception,  the  Company  authorized  3,000  shares of $.001 par value
      common stock and issued  1,000 of these  shares for $25,000.  On September
      15, 1996 the Company  increased its number of authorized  common shares to
      10,000,000 and changed its par value of these shares to $.01 per share.

      PREFERRED STOCK
      ---------------
      the Company  authorized  1,000,000  shares of blank check preferred stock,
      par value  $.01 per share  with such  designations,  powers,  preferences,
      rights, qualifications, limitations and restrictions and in such series as
      the Company,  subject to the State of Delaware, may determine from time to
      time.

      STOCK SPLIT
      -----------
      On September  15, 1996 the board of  directors  of the Company  declared a
      2,500-for-1 stock split on its common stock. The financial statements have
      been adjusted to reflect this transaction.

      INITIAL PUBLIC OFFERING
      -----------------------
      During  1997,  the Company  offered to sell as part of the initial  public
      offering  (AIPO@) a minimum of 187,500  shares and a maximum of  1,875,000
      shares  at a  public  offering  price  of  $8.00  per  share.  The IPO was
      completed  on  November  5, 1997,  whereby  562,500  shares were issued to
      Voicenet (Aust) Ltd. at a price of $8.00 per share in full satisfaction of
      the $4.5 million  obligation of the Company under the Promissory Note (see
      Note 6).  188,250  shares of common stock were sold to the public at $8.00
      per  share.  The net  proceeds  form the sale of the  common  stock to the
      public amounted to $973,867,  net of direct related costs of $532,133.  On
      December 30, 1997,  the Company sold an  additional  10,800  shares of its
      common  stock for $86,400 and during  March of 1999,  the Company  sold an
      additional 2,100 shares of its common stock for $16,800.

      CONSULTING COSTS
      ----------------
      During February of 1998, the Company issued 75,000 shares of the Company's
      common stock to two consultants in  consideration  for services  provided.
      The fair  market  value of stock at the date of  issuance  was  $8.00  per
      share. Consulting costs relating to this issuance amounted to $600,000 was
      recorded by the Company for the year ended December 31, 1998.



                                      F-13
<PAGE>

                                 VOICENET, INC.

                          NOTES TO FINANCIAL STATEMENTS


NOTE 5 - WARRANTS AND OPTIONS
-----------------------------

      STOCK OPTION PLAN
      -----------------
      In 1996 the  Company  adopted  a  non-qualified  stock  option  plan  (the
      APlan@).  An aggregate of 500,000 shares of Common Stock were reserved for
      issuance  under the Plan.  The Plan  provides  for the  granting of either
      incentive  stock options and  non-qualified  options to purchase shares of
      the  Company's  common  stock  and for  other  stock-based  awards  to key
      employees, officers and directors and to non-employee consultants. Options
      granted  under  the Plan are  exercisable  for a period of up to ten years
      from the  date of  grant.  In  addition,  the  Company  will  not  grant a
      non-qualified  option  with an  exercise  price  less than 85% of the fair
      market value of the underlying  common stock on the date of the grant.  As
      of December  31, 1998,  no options have been granted by the Company  under
      the Plan.

      OTHER OPTIONS
      -------------
      During the year ended  December  31,  1998,  separate  from the Plan,  the
      Company  granted  100,000 and 30,000  options to two  directors  and three
      members of the Company's advisory board, respectively,  to purchase common
      shares of the Company at an exercise price of $1.00 per share. The 100,000
      options are  immediately  exercisable  on the date of grant and the 30,000
      options  are  vested  at a rate of one half at the  date of grant  and the
      other  half at the first  anniversary  of the date of grant.  The  Company
      recorded  $890,050 in compensation  expense in 1998 for these options.  At
      December 31, 1998, no options had been exercised.

      In accordance  with SFAS 123,  these stock options must be accounting  for
      using  the fair  market  value  method.  The fair  market  value for these
      options were estimated at the date of grant using a  Black-Scholes  option
      pricing model with the following weighted-average assumptions for 1998:

      Risk-free rate                                            5.17% and 5.36%
      Dividend yield                                                       -0-%
      Volatility factor                                                   0.525
      Average life                                                       1 year

      The  Black-Scholes  option  valuation  model  was  developed  for  use  in
      estimating  the  fair  value  of  traded  options  which  have no  vesting
      restrictions  and are fully  transferable.  In addition,  option valuation
      models require the input of highly  subjective  assumptions  including the
      expected stock price volatility.  Because the Company's stock options have
      characteristics  significantly different from those of traded options, and
      because changes in the subjective input  assumptions can materially affect
      the fair value estimate,  in management's  opinion, the existing models do
      not necessarily provide a reliable single measure of the fair value of its
      stock options.  The weighted  average fair value of options granted during
      the year ended  December  31,  1998 was $7.05  based upon the  calculation
      using the Black Scholes option pricing model.



                                      F-14
<PAGE>

                                 VOICENET, INC.

                          NOTES TO FINANCIAL STATEMENTS


NOTE 5 - WARRANTS AND OPTIONS, continued
------------------------------

      OTHER OPTIONS, continued
      ------------------------
      In accordance with the amended underwriting agreement, the underwriter has
      been issued  warrants to  purchase  11,250  shares of stock at an exercise
      price of $11.20 per share.  The warrants expire on October 31, 2002 and no
      warrants have been exercised as of the balance sheet date (see Note 4).

      On June 9, 1998,  the  Company  issued a warrant to a director to purchase
      50,000 shares of the Company's  common stock at an exercise price of $8.00
      per share. The warrant expires on June 30, 2003 and has not been exercised
      at December 31, 1998.


NOTE 6 - PURCHASE OF TECHNOLOGY
-------------------------------

      On August 1, 1996 the Company entered into a Technology Sales and Purchase
      Agreement  (the  "Technology  Agreement")  with  Voicenet  (Aust)  Ltd. to
      acquire  certain  exclusive  rights  and  ownership  with  respect  to the
      development,  use,  marketing,  sales  and  distribution  of a  continuous
      computer  based  digital  voice  compression,  recognition  and  recording
      technology.  The term of the  agreement  is for the longer of  twenty-five
      (25) years or the life of any patents  and  extensions  granted  under the
      patent  applications.  The rights acquired are for  territories  including
      North  America,  Central  America  and South  America.  These  rights were
      originally  purchased for $4,500,000 in the form of a  noninterest-bearing
      promissory  note.  The note  was  converted  into  562,500  shares  of the
      Company's  common  stock  with a  conversion  price of $8.00  per share in
      conjunction with the IPO (see Note 4).


NOTE 7 - RELATED PARTY TRANSACTIONS
-----------------------------------

      DUE FROM (TO) VOICENET (AUST) LTD.
      ----------------------------------
      This balance represents advances from (to) Voicenet (Aust) Ltd. during the
      normal course of business. In addition,  the Company may incur expenses on
      behalf of Voicenet (Aust) Ltd. and Voicenet (Aust) Ltd. may incur expenses
      on  behalf of the  Company  and such  expenses  will be  reimbursed.  Such
      advances  and  reimbursable  costs  are  non-interest  bearing  and due on
      demand.  At  December  31,  1998 and 1997,  amount due from (to)  Voicenet
      (Aust) Ltd. Was $45,015 and $(312,624), respectively.

      INVESTMENT
      ----------
      Investment  at December  31, 1998  consists of 100,000  shares of Voicenet
      (Aust) Ltd.'s  common stock at market value of $12,246,  net of unrealized
      loss of $15,719.



                                      F-15
<PAGE>

                                 VOICENET, INC.

                          NOTES TO FINANCIAL STATEMENTS


NOTE 7 - RELATED PARTY TRANSACTIONS, continued
------------------------------------

      ADVISORY SERVICES AGREEMENT
      ---------------------------
      The Company had retained Ridgewood Group International Ltd. (ARidgewood@),
      a stockholder of the Company,  for various advisory services.  The Company
      paid Ridgewood $5,758 and $48,640 during the years ended December 31, 1998
      and 1997,  respectively,  for services  provided.  The  advisory  services
      agreement was terminated on March 1, 1998.

      LEASE AGREEMENT
      ---------------
      The Company rents its office  premises on a month to month basis without a
      formal lease  agreement  from an officer of the Company.  Rent expense was
      $34,240  and  $5,835  for the  years  ended  December  31,  1998 and 1997,
      respectively.


NOTE 8- INCOME TAXES
--------------------

      The Company has no taxable  income to date;  therefore,  no provision  for
      federal income taxes has been made. The minimum state and local  franchise
      taxes have been provided in the accompanying financial statements.

      Deferred  tax assets  recognized  by the  Company in  connection  with net
      operating  loss carry  forwards at December 31, 1998 and 1997 was $700,000
      and $240,000,  respectively. A valuation allowance is required if based on
      the weight of  evidence  available,  it is more  likely than not that some
      portion  or  all of the  deferred  asset  will  not  be  realized.  It was
      concluded that a valuation  allowance was  appropriate for the full amount
      of the  deferred  tax  asset  at  December  31,  1998 and 1997 due to loss
      incurred.

      Operating  loss carry  forwards  which may  provide  future  tax  benefits
      approximate  $1,800,000  and  $575,000  at  December  31,  1998 and  1997,
      respectively.  These operating loss carryforwards  expire through the year
      2113.


NOTE 9 - COMMITMENTS
--------------------

      EMPLOYMENT AGREEMENTS
      ---------------------
      On November  5, 1997,  the Company  entered  into a three year  employment
      agreement  with an officer of the Company  whereby the Company  will pay a
      salary of $180,000 per annum plus direct expenses. Salary expense relating
      to this agreement was $90,000 and $31,196 for the years ended December 31,
      1998 and 1997, respectively.



                                      F-16
<PAGE>


                                 VOICENET, INC.

                          NOTES TO FINANCIAL STATEMENTS


NOTE 9 - COMMITMENTS, continued
---------------------

      CONSULTING AGREEMENT
      --------------------
      On  February  1, 1998,  the  Company  entered  into a one year  consulting
      agreement with IPAC, Inc.  (AIPAC@)  whereby IPAC provides  consulting and
      product  development  services  for a monthly  fee of $10,000  plus direct
      expenses.  Total expense  relating to this  agreement was $111,294 for the
      year ended December 31, 1998.

      FINANCIAL ADVISORY AGREEMENT
      ----------------------------
      On March  19,  1998,  the  Company  entered  into a  five-month  financial
      advisory  agreement  with  Brooks,   Houghton  &  Company,  Inc.  (ABrooks
      Houghton@)  whereby Brooks Houghton provides  financial  advisory services
      for a down  payment of  $25,000  and  monthly  fee of $6,500  plus  direct
      expenses.  Total  expense  relating to this  agreement was $58,212 for the
      year ended December 31, 1998.


NOTE 10 - GOING CONCERN UNCERTAINTY
-----------------------------------

      As shown in the accompanying financial statements,  the Company incurred a
      net loss of  $2,117,866  during the year ended  December 31,  1998.  As of
      December 31, 1998, the Company's current liabilities  exceeded its current
      assets by $80,878.  These  conditions  raise  substantial  doubt about the
      Company's  ability to continue as a going  concern.  The Company  plans to
      increase revenue by selling the Company's product through fully commencing
      its operations and commercializing its lead product, the Courtscript.  The
      Company  also  plans  to  obtain  additional  capital  financing  from its
      existing  and  potential  investors.  These  financial  statements  do not
      include  any  adjustments  that  might  result  from the  outcome  of this
      uncertainty.



                                      F-17
<PAGE>



                                   SIGNATURES

    Pursuant  to the  requirements  of  Section  13 or 15(d)  of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                     VOICENET, INC.

                                                 By: /s/ Frank Carr
                                                    ----------------------------
                                                     Frank Carr, Chairman and
                                                     Chief Executive Officer

                                                 Date: April 15, 1999


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and on the dates indicated.


     SIGNATURES                            TITLE                       DATE
     ----------                            -----                       ----

/s/ Frank Carr
----------------------------------   President, Chief Executive   April 15, 1999
Frank Carr                           Officer Director, Principal
                                     Executive Officer
/s/ Howard Messer
----------------------------------   Chief Financial Officer      April 15, 1999
Howard Messer                        Principal Accounting Officer


/s/ Christopher J. Brown
----------------------------------   Director                     April 15, 1999
Christopher J. Brown