UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K

(Mark One)
(X)  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange 
     Act of 1934 [FEE REQUIRED]
     For the fiscal year ended December 31, 1998.
     OR
( )  Transition  Report Pursuant to Section 13 or 15(d) of the Securities  
     Exchange Act of 1934 [FEE REQUIRED]

For the transition period from __________________ to _________________

Commission File Number: 0-18280
                        -------

                            PULSEPOINT COMMUNICATIONS
              ------------------------------------------------------
              (Exact name of Registrant as specified in its charter)

                 California                                     95-3222624
------------------------------------------------            -------------------
     (State or other jurisdiction of                         (I.R.S. Employer)
      incorporation or organization)                        Identification No.)

6307 Carpinteria Avenue, Carpinteria, California                   93013
------------------------------------------------            -------------------
  (Address of principal executive offices)                      (Zip Code)

                                 (805) 566-2000
           -----------------------------------------------------------
              (Registrant's telephone number, including area code)

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

                                      None

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

                           Common Stock, no par value
                                (Title of class)

Indicate by check mark whether  Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

     Yes    X                                     No  
         -------                                     -------

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K (229.405 of this chapter) is not contained  herein,  and will
not 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-K
or any amendment to this Form 10-K. [ X ]

The aggregate market value of Registrant's  voting stock held by  non-affiliates
of the Registrant as of February 26, 1999 was approximately $19,751,185.

The number of shares outstanding of Registrant's Common Stock as of February 26,
1999: 5,289,545.


Documents Incorporated by Reference:

Part III of this  Annual  Report on 10-K is  incorporated  by  reference:  Proxy
Statement for the  Registrant's  1999 Annual Meeting of Stockholders  (the "1999
Proxy Statement").

<PAGE>

                            PULSEPOINT COMMUNICATIONS
                           Annual Report on Form 10-K
                                December 31, 1998

                                TABLE OF CONTENTS

                                     PART I
                                                                            Page

Item 1.       Business.........................................................1
Item 2.       Properties.......................................................6
Item 3.       Legal Proceedings................................................6
Item 4.       Submission of Matters to a Vote of Security Holders..............6
              Executive Officers of the Company ...............................7

                                    PART II

Item 5.       Market  for  Company's  Common  Equity  and  Related   
              Stockholder Matters .............................................8
Item 6.       Selected Financial Data..........................................9
Item 7.       Management's Discussion and Analysis of Financial Condition and
              Results of Operations...........................................10
              Quantitative and Qualitative Disclosure About Market Risk.......14
Item 8.       Financial Statements and Supplementary Data.....................16
Item 9.       Changes in and Disagreements with Accountants on Accounting and
              Financial Disclosure............................................29

                                    PART III

Item 10.      Directors and Executive Officers of the Company.................30
Item 11.      Executive Compensation..........................................30
Item 12.      Security Ownership of Certain Beneficial Owners and Management..30
Item 13.      Certain Relationships and Related Transactions..................30

                                    PART IV

Item 14.      Exhibits, Financial Statement Schedules, and Reports on 
              Form 8-K .......................................................30

Signatures....................................................................32
_________________


Trademarks - PulsePoint(TM), PulsePoint Communications(TM),  VoiceServer(R), and
InfoMail(R) are registered trademarks of the Company. Other products and company
names mentioned herein may be trademarks of their respective owners.


                                     Page i
<PAGE>

                                     PART I

IN ADDITION TO  HISTORICAL  INFORMATION,  THIS ANNUAL  REPORT  CONTAINS  CERTAIN
FORWARD-LOOKING  STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.  THE COMPANY'S
ACTUAL  RESULTS  COULD  DIFFER  MATERIALLY  FROM THE  RESULTS  DISCUSSED  IN THE
FORWARD-LOOKING  STATEMENTS.  FACTORS  THAT COULD  CAUSE OR  CONTRIBUTE  TO SUCH
DIFFERENCE  INCLUDE,  BUT ARE NOT LIMITED  TO,  THOSE  DISCUSSED  IN THE SECTION
ENTITLED  "MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND
RESULTS OF OPERATIONS -- FACTORS THAT MAY AFFECT FUTURE RESULTS." READERS SHOULD
CAREFULLY REVIEW THE RISK FACTORS DESCRIBED IN OTHER DOCUMENTS THE COMPANY FILES
FROM TIME TO TIME WITH THE  SECURITIES  AND EXCHANGE  COMMISSION,  INCLUDING THE
QUARTERLY REPORTS ON FORM 10-Q AND ANY CURRENT REPORTS ON FORM 8-K.


ITEM 1.   BUSINESS
          --------

PulsePoint  Communications,  a  California  corporation,  designs,  develops and
markets high-capacity,  network-based  enhanced services solutions.  The Company
has two product lines, the new product line and the legacy product line. The new
product line, the PulsePoint Enhanced Application Platform and Applications, and
the  legacy  product  line,  the  VoiceServer  Family  of  Multimedia  Messaging
Products,  are sold to  telecommunications  network service providers worldwide.
Both  the  PulsePoint  Enhanced   Application   Platform  and  Applications  and
VoiceServer  products are  architected to ultimately  integrate  voice,  fax and
e-mail  messaging  applications  on a single  platform for  implementation  with
telephony  (both  wireline and wireless)  and data  networks to provide  Unified
Messaging.  Unified  Messaging  allows end users to manage their  messages using
telephones,  cellular  phones,  fax machines or  screen-based  devices,  such as
desktop or portable personal computers.  The VoiceServer platform functions in a
public  switch  telephony  environment.   The  PulsePoint  Enhanced  Application
Platform  functions in either a public switch telephone  network or IP-telephony
environment, making it suitable for next generation network deployments.

The Company sells its products to  progressive  and  competitive  public network
service  providers  worldwide  through a variety  of  channels.  These  channels
include  both  direct  and  indirect   sales.   Complementing   a  direct  sales
organization,  the public  enhanced  services  markets  are  served by  indirect
channels,  including equipment manufacturers (OEMs). The public service provider
market includes a broad array of established and emerging  carriers that provide
voice and data services to business and residential  customers.  These providers
offer enhanced services to their customers to increase adoption, reduce churn of
their  customer  base and  provide  strategic  differentiation  of  their  basic
services.   These  enhanced  services  are  typically   comprised  of  messaging
applications,  which include voice and fax messaging,  and  occasionally  e-mail
messaging,  and are provided using enhanced  services  solutions  located at the
service provider's central switching offices.

PLATFORM AND APPLICATION PRODUCTS

The PulsePoint  Enhanced  Application  Platform - PulsePoint's  next  generation
enhanced  services  solution is a  revolutionary  new kind of enhanced  services
platform,  called an enhanced  application  platform.  The  PulsePoint  Enhanced
Application  Platform is the world's first  carrier-grade  and  standards-based,
open-system  Enhanced  Application  Platform based on the  Microsoft(R)  Windows
NT(R) Server operating system. It uses  off-the-shelf  hardware and software and
PulsePoint  middleware to ensure  scalability and  availability and enable rapid
application   innovation.   The  PulsePoint  Enhanced  Application  Platform  is
comprised of hardware components,  along with the operating system, a middleware
software  layer,  rapid  application  creation  tools,  standard  interfaces and
migration   tools.   PulsePoint's   applications   together   with  third  party
applications ride on top of the enhanced  application  platform.  Together,  the
applications and platform comprise the enhanced services solution.

APPLICATIONS TO BE AVAILABLE ON THE PULSEPOINT ENHANCED APPLICATION PLATFORM

The PulsePoint  Messaging  Applications will be comprised of four  applications:
The PulsePoint Call Answering,  Voice Messaging,  Home/Office  Unified Messaging
and Enterprise Messaging Applications.  The Company has completed development of
many of the features identified below and others are currently scheduled for
completion at various times over the next few years.

PulsePoint  Call Answering  targets  home/office  workers and  consumers.  It is
comprised  of a core set of  features,  which  provides a single  inbox for both
wireline  and  wireless  messages.  For multiple  member  households,  it offers
roommate features, allowing each member of a household to have a unique greeting
and  private  access  to  their  messages.  Major  features  supported  by  this
application at this time include: Call Answering,  Any Phone Access,  Multi-line
Mailbox,  Wake-up and Reminder Calls, Extra Mailboxes,  Paging/SMS Notification,
Unlimited Languages, Multiple Greetings.

                                     Page 1
<PAGE>

PulsePoint  Voice Messaging  targets  home/office  workers,  consumers and small
business users. It is comprised of a core set of features,  including all of the
features in Call Answering,  plus features required to enable two-way messaging,
including reply from a message session.  The primary benefits to an end user are
two-way  messaging  and  broader  reach and  control  of  communications.  Major
features ultimately to be supported by this application include:  Call Answering
Application Features Plus,  Send-Forward-Reply  From a Subscriber Session,  Mark
Message as Urgent and/or Private,  Address Book to Manage Groups of Subscribers,
Main-Alternate-3   System   Greetings,   Mailbox  Transfer   Options,   Enhanced
Tutorial--No User Training.

PulsePoint Home/Office Unified Messaging targets home office, consumer and small
business segments.  In this implementation,  voice, fax and e-mail messages will
be accessed using IMAP compatible  clients.  Voice and fax messages are accessed
by a  telephone  user  interface.  Message  notification  is  provided  for  all
messages.  Features will ultimately  include:  Voice  Messaging  Features plus a
single inbox for  Voice-Fax-Email  Messages,  IMAP4  Client  Access to Microsoft
OutLook & Outlook Express,  Netscape(TM)  Communicator,  QUALCOMM(TM) Eudora and
IBM(TM)/Lotus  Notes,  Paging and SMS Notification  for all Messages,  Telephone
User Interface for Fax and Voice Messages.

This application also supports a web-based  implementation,  which targets heavy
wireless users. In this implementation,  all messages will be accessed by either
a telephone user interface or by customizable web pages. Messages are accessible
by either thick PC browsers such as Netscape  Navigator  and Microsoft  Internet
Explorer, or thin browsers, using protocols,  such as extensible markup language
(XML) and the wireless  markup  language  (WML),  among others.  Major  features
ultimately supported by this application include:  Voice Messaging plus a single
inbox for  Voice-Fax-Email  Messages,  accessible by Telephone User Interface or
Browsers such as Netscape Navigator,  Microsoft Internet Explorer,  XML and WML,
with Paging and SMS Notification for all Messages.

PulsePoint  Enterprise  Unified Messaging targets medium business and enterprise
segments.  In this  implementation,  voice,  fax  and  e-mail  messages  will be
accessed  using IMAP  compatible  clients or a telephone  user  interface.  Full
collaboration  and  message  notification  will be  provided  for all  messages.
Ultimately  this  carrier-grade  solution will integrate with Microsoft  Windows
2000,  incorporating all of the features  typically reserved for the enterprise,
into the public network. Major features ultimately supported by this application
include:  Voice  Messaging  Features  plus a single  inbox  for  Voice-Fax-Email
Messages,  accessible by Telephone  User Interface or  IMAP4-Compatible  Clients
(Server-Integrated),  for access to Microsoft Exchange,  IBM/Lotus Notes Server,
Netscape  Messaging  Server,  with Paging and SMS Notification for all Messages,
with a Remote Application Module Hosting Microsoft Exchange.

Initial  implementation  will  ultimately  incorporate  Microsoft  Exchange 5.5,
leveraging the broad medium-sized business and enterprise  acceptance,  and rich
services beyond the core message application, including contact database, shared
calendar   and  public   folder   collaboration,   among   others.   The  second
implementation  of this solution will ultimately  feature Microsoft Windows 2000
with Exchange Platinum Server,  providing access to Microsoft's Active Directory
services,  enabling  additional  features  such  as:  Global  Address  List  and
Company-wide Address List, Full Collaboration and Notification Support.

The PulsePoint  Call Controller  Application  answers calls then directs callers
through  a  range  of  choices  that  include  transferring  to  attendants  and
extensions, or other services, and listening to Audiotext information.  The call
logic, prompts and phrases are completely customizable in an unlimited number of
languages to meet the needs of  individual  businesses.  Users can provision and
update phrases simply by using a touch tone telephone.  This application targets
small business segments, which uses Centrex and voice mail services, is short on
administrative  staff,  and  does  not  have an IT  department  to  manage a CPE
solution. It also targets medium business segments, which will value the control
to route calls across multiple departments and multiple locations.

The  VoiceServer  Platform  is based on UNIX  System V  operating  system with a
number of PulsePoint Communications proprietary technologies.

     VoiceServer  2110 - Designed to meet the voice and fax  messaging  needs of
     small- to medium-sized telephone public service providers and resellers. It
     supports up to 25,000 mailboxes and provides from 8 to 120 voice ports.

     VoiceServer  3110 - Designed  to meet the  messaging  needs of  large-sized
     public service providers and resellers.  It supports up to 50,000 mailboxes
     and provides up to 240 voice ports.

Applications Available on the VoiceServer Platform

InfoMail 4.3 -- InfoMail is a full-featured  voice/fax messaging product for the
public enhanced  service provider  markets.  It includes voice mail features and
offers  flexible  administration.  InfoMail  offers  integrated  fax  messaging,
on-line tutorial,  guest mailboxes,  scheduled future delivery of messages up to
one year in  advance,  non-delivery  notification,  name  delivery,  a  personal
reminder  interface for users, user programming of calls to other extensions and
group distribution lists. Major features supported by this application  include:
FaxMail with Voice Comment Attachments, Fax Overflow,  Hands-Free Operation with
Spoken Password.

                                     Page 2
<PAGE>

InfoMail  Express  --  InfoMail  Express  integrates  Internet  e-mail  with the
InfoMail  multimedia  platform to provide full unified  messaging for the public
service provider market,  and extends the unified messaging services of InfoMail
to personal  computers.  With  InfoMail  Express,  users of  personal  computers
running  Microsoft's  Windows 95, Windows 98 and Internet  Explorer can visually
access mailboxes on InfoMail Express to review voice, fax and e-mail messages.

Call Controller -- Call Controller provides call-processing capabilities,  which
allow  callers to route their calls to a specific  destination  by  listening to
voice menus and entering  responses on a telephone keypad.  When integrated with
InfoMail,  the caller can leave a voice message when encountering a busy line or
no answer when dialing an extension.  As a flexible call processing and audiotex
application, Call Controller enables companies to program various greetings.

SWITCH INTEGRATIONS

The PulsePoint Enhanced  Application Platform and VoiceServer Platform integrate
most major central  office  switches,  including  those  manufactured  by Lucent
Technologies Inc., Ericsson, Inc., Alcatel Alsthom S.A., Siemens AG and Northern
Telecom Ltd.

1998 PRODUCT DEVELOPMENT

During  1998,  the Company  continued  development  of the  PulsePoint  Enhanced
Application  Platform,  PulsePoint  Messaging and Call Controller  Applications.
Primary  focus on the platform  development  was to create a platform that would
meet   service   provider    requirements    for   reliability,    availability,
serviceability,  as well as scalability to enable central office  deployments of
the  platform.  In  addition,  considerable  investment  was made to  refine  an
environment for rapid application  innovation,  so service providers  ultimately
will be able to innovate in "Internet time".  Finally,  investments were made to
ensure the platform  could bridge old and new networks and provide  applications
for  multiple  networks  from  a  single  platform,   giving  service  providers
investment  protection  and reducing  their total cost of  ownership.  Principal
focus on  application  development  was to replicate the feature sets  currently
available on the  VoiceServer  platform,  so legacy  customers  would be able to
migrate customers from VoiceServer platforms to Enhanced Application  Platforms,
without a reduction in service. These efforts position PulsePoint Communications
with a platform  for  service  providers  that is able to perform  reliably in a
mission-critical  environment,  with the basic features currently offered today,
on a platform  architecture that positions them for next generation networks and
an application path for the future.

Also,  to  further  strengthen  its  product  line,  the  Company  continued  to
incorporate new hardware and software  technologies into the VoiceServer product
line.

The  Company  continued  to invest in  upgrading  the skills of the  engineering
organization.  The  Company's  engineering  and  development  group  included 66
employees at December 31, 1998.  During the years ended December 31, 1996,  1997
and 1998 the Company spent  approximately $8.9 million,  $12.2 million and $11.3
million,  respectively,  on  engineering  and  development.  To date, all of the
Company's engineering and development  expenses,  including software development
costs, have been charged to operations as incurred.

1999 PRODUCT DEVELOPMENT OUTLOOK

In 1999, the Company  intends to focus  development  activities on adding to its
messaging   applications  by  building  out  the  PulsePoint   Voice  Messaging,
Home/Office Unified Messaging and Call Controller Applications.  The Home/Office
Unified Messaging  Application will be a fundamental piece of development needed
to bring Unified Messaging onto the Enhanced Application  Platform. It is also a
crucial  foundation piece for the next release of Unified Messaging that enables
network service providers to target large and medium-sized  business users, with
enterprise  e-mail  solutions.  In  addition,  the Company  intends to focus its
resources on moving the media  modules of the  PulsePoint  Enhanced  Application
Platform onto Microsoft Windows NT Server operating system and moving to compact
PCI technologies, which the Company believes will ultimately provide significant
cost reductions to the platform,  enabling the Company to offer a lower capacity
configuration,  as well as improve  serviceability.  There can be no  assurance,
however,   that  the  Company  will  realize  such  development  goals  or  cost
reductions.

QUALITY ASSURANCE AND MANUFACTURING

PulsePoint  Communications  earned  re-certification to one of the most rigorous
international quality standards,  ISO 9001, initially achieving  registration in
1995 and re-registration in each year since, including 1998. The ISO 9000 series
of standards represents an international  consensus on the essential features of
a quality  system to ensure the effective  operation of any  business,  and more
than 90 countries have adopted the ISO 9001 series as national standards.  There
have  also  been two large  regional  adoptions,  CEN  (European  Committee  for
Standardization) and COPANT (the Pan-American Standards Commission). The Company
believes its  certification  to be the most stringent level of the series (9001)
and  it  provides  significant  competitive  advantage.   Further,  the  quality
management  system  implemented in support of the  certification  effort ensures
that  procedures are  implemented  and  responsibilities  defined to provide all
employees with the ability to pursue continuous  quality  improvement in meeting
customer requirements.

                                     Page 3
<PAGE>

The Company's manufacturing operations consist principally of final assembly and
testing of subassemblies and systems for VoiceServer products.  The Company uses
independent manufacturers to perform printed circuit board assembly, building of
cabinets and  subassemblies  and sheet metal  fabrication.  These  suppliers all
satisfy the strictest  quality  standards such as ISO or MIL-SPEC.  Although the
Company  generally  uses standard parts and  components in  manufacturing  these
products,  certain components,  primarily power supplies, disk drives, interface
cards and certain  semiconductors,  are presently  available  only from a single
source or from  limited  sources.  To date,  the Company has been able to obtain
adequate  supplies of these components in a timely manner from existing sources.
However,  delay or lack of supply  from  existing  sources or the  inability  to
develop alternative  sources, if and as required in the future,  could adversely
affect the Company's operating results.

The  Company  uses  Solectron  Corp.  to  manufacture  the  PulsePoint  Enhanced
Application  Platform on a turnkey  basis,  buying  components  to the Company's
specifications.  Solectron Corp., the world's largest third-party  manufacturer,
is ISO 9000  certified  and the only  two-time  winner of the Malcolm  Baldridge
Award.

At December 31, 1998, the Company's quality  assurance and  manufacturing  group
included 11 employees.

CUSTOMER SUPPORT, SALES AND MARKETING

The Company  sells its products into the public  network  service  market.  This
market  consists  of  local  exchange  carriers,  including  the  Regional  Bell
Operating Companies ("RBOCs"), Post Telephone and Telegraphs ("PTT's", providers
of  telephone  and  telecommunications  services  in  most  foreign  countries),
independent  telephone  companies,  service  bureaus,  inter-exchange  carriers,
cellular  service  providers and internet  service  providers.  During 1998, the
Company maintained distribution  agreements with Siemens AG of Germany,  Marconi
Communications Limited of Coventry, England, Consultronix Systems Corporation of
the  Philippines,  PT Galva of  Indonesia,  Intecom and Volt Delta of the United
States.

Customer service and support are of great importance to the Company. The Company
believes  customer  satisfaction  is achieved  through  continued high levels of
quality service and support. The Company's customer support group includes field
engineers, applications specialists,  implementation specialists and third party
maintenance  providers  and is supported by a training  staff and the  Company's
entire technical staff when necessary.  The Company  maintains a 24-hour service
and support  center at its  Carpinteria  facility.  The Company has an extensive
field service  organization and outsources service and support from IBM's Global
Services  organization to provide on-site  emergency  assistance should the need
arise from IBM's 160 support offices,  worldwide.  Most customers'  problems are
resolved over the telephone by remote diagnostic and corrective actions.

The Company  maintains a training center at its Carpinteria  facility to support
the needs of its  customers  for  instructional,  administrative  and  technical
training.  Additionally,  the  Company  maintains  a staff of  highly  qualified
trainers  available to support  customers'  requests for on-site training at all
levels. Prior to equipment delivery, training and implementation,  personnel are
made available to the customer to ensure a smooth  installation,  with follow-up
visits performed to reinforce  previous  training and answer new questions.  The
training  organization  also  offers  technical  software,  system  maintenance,
customer support and  administrative  courses.  The Company's  customer support,
sales and marketing group included 57 employees at December 31, 1998.

During the year ended December 31, 1996, GTE Corp., PT Galva,  Indonesia and GPT
Limited (now Marconi Communications Limited), England accounted for 40%, 13% and
11%,  respectively,  of the net sales for the  Company.  During  the year  ended
December  31,  1997,  GTE  accounted  for 58% of the net sales for the  Company.
During the year ended December 31, 1998, GTE and NEXTLINK  Communications,  Inc.
accounted for 55% and 16% of the net sales for the Company, respectively.

Sales  depend on the  Company's  continued  ability to meet  agreed  milestones,
specifications,  requirements  and  conditions  of sales  contracts  in a timely
manner.  The Company's  goal is to meet these  requirements  as agreed with each
customer,  however,  forward  planning  involves risk; there can be no assurance
that it will do so or realize the corresponding revenue.

The Company provides a system product warranty for parts and labor for 12 months
from date of shipment.  The Company offers several  options for  maintenance and
support  services  of its  products  on a  contractual  basis  after the limited
product  warranty has expired.  After June 30, 1999, it is the Company's  intent
that coverage for maintenance  and support  services shall be limited to systems
that have been  upgraded  by the  customer  to a Year  2000  compliant  version.
Customers    may    request     maintenance    and    support    services    for
non-Year-2000-compliant  systems for the period  June 30,  1999 to December  31,
1999, and the Company shall,  at its  discretion,  provide such  maintenance and
support  on a time and  materials  basis.  Additionally,  the  Company  offers a
performance   guarantee  for  the  VoiceServer,   which  guarantees  the  system
performance  (measured  by the average  delay time for  response to key presses)
will not deteriorate under maximum load conditions.  Otherwise, the Company will
re-configure the system or replace it at no cost to the customer.

                                     Page 4
<PAGE>

BACKLOG

The  Company's  backlog at December 31, 1998 was $2.4  million  compared to $1.5
million at  December  31,  1997.  The  Company  includes  in backlog  orders for
products  or  services  to be shipped or  performed  within 180 days.  Quarterly
revenues  and  operating  results  will  depend on the  volume and timing of new
orders  received during a quarter,  which are difficult to forecast.  Because of
the  possibility of customer  changes in delivery  schedules or  cancellation of
orders, the Company's backlog as of any particular date may not result in actual
sales for any future period.

COMPETITION

The  messaging  industry is highly  competitive  and the Company  believes  that
competition will intensify as the industry grows, matures and consolidates.  The
Company competes with different  companies in the different  customer markets it
serves and the  principal  competitive  factors  vary  depending on the customer
market.

PulsePoint  Communications  focuses  primarily  on selling  its  products to the
domestic  and  international   network  service  provider  segments.   Principal
competitive factors are reliability, scalability and the ability to offer a rich
suite of integrated multimedia  applications on one platform.  For public switch
telephone network service provider segments, the Company's principal competitors
include Lucent  Technologies Inc.,  Comverse  Technology Inc., Unisys Corp., and
Centigram   Communications   Corp.  In  IP-telephony  network  service  provider
segments, the Company's principal competitors include Amteva Technologies, Inc.
and MediaGate, Inc.

The Company continues to develop enhancements to its products and to develop new
products  in order  to  address  what  the  Company  believes  are the  emerging
requirements  of public  network  service  providers.  However,  there can be no
assurance that product  requirements  will not change as this market develops or
that  other  companies  will  not be  faster  or  more  successful  in  bringing
comparable products to market.

The  Company  believes  that its  competitive  strengths  include  carrier-class
reliability  and  scalability,  a modular and integrated  suite of messaging and
communication-management applications, a rapid application creation environment,
state-of-the-art  digital networking,  software-embedded  signaling  technology,
easy-to-use  interfaces,  and the  ability to  integrate  with the  switches  of
multiple manufacturers.

In the  network  service  provider  markets,  these  competitors  and  other new
entrants may introduce and deliver new products with expanded  capabilities that
could  adversely  affect the  competitive  position of the Company.  The Company
believes  competition  for the sale of voice  processing  systems in its markets
will continue to evolve as customers'  applications  and technology  become more
sophisticated.  Some of the Company's  competitors  have  substantially  greater
development, marketing and capital resources than the Company.

PATENTS, COPYRIGHTS AND TECHNOLOGY LICENSES

The Company policy on intellectual  property is to develop,  utilize and protect
its patents,  trademarks,  copyrights and trade secrets in order to maximize the
value of the Company's technological expertise and innovation.

The Company holds five United States  patents and has seven patent  applications
pending.  The  Company  also  has one  foreign  patent  and ten  foreign  patent
applications  pending.  The Company has registered a number of trademarks in the
United  States and has a number of  trademark  applications  pending both in the
United States and in foreign  countries.  The Company's software is protected by
copyright and trade secrecy laws. However,  such protection does not ensure that
the  Company's  competitors  will not develop  similar  technology.  The Company
periodically   acquires   technology   from  third  parties  to  supplement  its
development efforts.  These acquisitions may require prepaid license fees and/or
the payment of royalties.  The Company  holds a perpetual  license from AT&T for
the UNIX operating system.

EMPLOYEES

At December  31,  1998,  the Company had 155  employees,  including 57 in sales,
marketing and customer support, 66 in engineering and development, 11 in quality
assurance and manufacturing and 21 in corporate administration and finance. Many
of the Company's  employees are highly skilled,  and the Company's  success will
depend in part on its ability to attract and retain such employees.

The Company has never had a work  stoppage.  No employees are  represented  by a
labor organization and the Company considers its employee relations to be good.

                                     Page 5
<PAGE>

ITEM 2.   PROPERTIES
          ----------

The Company's  corporate  offices,  engineering and  development  facilities and
manufacturing facilities are located in Carpinteria,  California,  in a total of
approximately  53,000 square feet. In December of 1996, the Company entered into
a ten year lease and  consolidated  into half of the facility  that it currently
occupies.  The move resulted in a savings of  approximately  45% of the previous
annual  lease  payments.  The  facility  is  leased  for a period  of ten  years
beginning in December 1996, with two five-year renewal options. Annual rental on
the facility was  approximately  $0.7 million in 1998,  with the rent subject to
annual increases.

The Company  currently  maintains  support and sales offices and/or has sales or
technical support representatives in the following locations:  Phoenix, Arizona;
Irvine, California;  Carpinteria,  California; Tampa, Florida; Atlanta, Georgia;
Chicago, Illinois; Lowell,  Massachusetts;  Oakdale,  Minnesota;  Dallas, Texas;
Cedarpark, Texas; and Bobingen, Germany.

The  Company  believes  that its  current  facilities  are well  maintained  and
sufficient to satisfy its operations for the next several years.


ITEM 3.   LEGAL PROCEEDINGS
          -----------------

As reported in Note 11 to the  Company's  financial  statements  included in the
Company's 1997 Annual Report to  Shareholders  and  incorporated by reference in
the Company's  Annual Report on Form 10-K for the fiscal year ended December 31,
1997, the Company is involved in patent  litigation  with Theis  Research,  Inc.
("Theis").   This  action  was  stayed  pending   resolution  of  Theis'  patent
infringement action against Octel Communications  Corporation (now a division of
Lucent  Technologies)  and  Northern  Telecom  Inc. In 1997,  the U.S.  Court of
Appeals affirmed a district court's decision that the claims of the five patents
Theis asserted against both Octel and Northern Telecom were each either invalid,
not infringed or both.  Theis' writ of certiorari to the U.S.  Supreme Court was
denied on June 26, 1998,  exhausting Theis' appeals.  On September 29, 1998, the
district  court  entered a judgment  that the claims of a sixth patent  asserted
against Northern Telecom are invalid. Theis filed a notice of appeal to the U.S.
Court of Appeals for the Federal  Circuit on October 29, 1998. The action should
remain  stayed  with  respect  to the  Company  at least  until  this  appeal is
concluded.

Additionally,  the  Company is subject to pending  claims  primarily  related to
contractual and product issues.  Management,  after review and consultation with
the Company's counsel, believes that the liability, if any, from the disposition
of such claims and litigation would not have a materially  adverse effect on the
financial condition or results of operations of the Company.


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

None.

                                     Page 6
<PAGE>

Item S-K 401(b).   EXECUTIVE OFFICERS OF THE COMPANY

Pursuant to the Instructions to Paragraph (b) of Item 401 of Regulation S-K, the
current executive officers of the Company,  their ages and respective  positions
with the Company are set forth in the following table.  Biographical information
on each of the executive officers is set forth following the table. There are no
family  relationships  between any director or  executive  officer and any other
director or executive  officer of the Company.  Executive  officers serve at the
discretion of the Board of Directors.

                                                               Served as Officer
Name                    Age    Position                               Since
================================================================================
Mark C. Ozur            43     President                              1993
                               Chief Executive Officer
Keith M. Beckwith       44     Vice President, Sales                  1994
James C. Eby            52     Vice President, Chief Quality and      1983
                               Operations Officer, Assistant
                               Secretary
Benn L. Schreiber       46     Vice President, Engineering            1997
B. Robert Suh           39     Vice President, Finance,               1995
                               Chief Financial Officer and 
                               Corporate Secretary
Pamela J. Thompson      41     Vice President, Marketing              1997

MR. OZUR has been  President  and Chief  Executive  Officer of the Company since
December  1994.  From April 1993 to  November  1994 he served as Vice  President
Chief  Technical  Officer.  From 1990 to 1992 he was Vice President of Precision
Visuals, a software  development company, and from 1978 to 1982 and 1986 to 1990
he was at Digital  Equipment  Corporation,  a  computer  hardware  and  software
company,  developing  software.  During 1982, he founded Omtool  Corporation,  a
compiler and software publishing company.

MR. BECKWITH has been Vice  President,  Sales since September 1994. From January
1991 to August 1994 he was Director,  Voice  Information  Services.  From August
1988 to December 1990 he was National  Sales  Manager.  From August 1986 to July
1988 he was Regional Sales Manager.

MR. EBY has been Vice  President,  Chief  Quality and  Operations  Officer since
September 1994. From January 1992 to August 1994 he was Vice President - Quality
Assurance and  Manufacturing of the Company.  From October 1983 to December 1991
he was Vice President, Manufacturing.

MR.  SCHREIBER  has  been  Vice  President,   Engineering   since  August  1997.
Previously,  he worked at Digital  Equipment  Corporation (DEC) where he was the
director of Windows NT Systems Software.  Previously, Mr. Schreiber held several
other engineering management positions at DEC.

MR. SUH has been Vice President and Chief Financial Officer since November 1995.
From September 1992 to October 1995 he was Chief Financial  Officer for the Bank
of Boston's European Division. From February 1988 to August 1992 he was Director
of Finance for the Bank of Boston's  retail  franchise  throughout  New England.
From July 1985 to January 1988 he was a Manager in corporate  development at MCI
Communications Corporation.

MS. THOMPSON has been Vice President, Marketing since October 1997. Ms. Thompson
came to PulsePoint  Communications after eight years at Motorola, Inc. where she
was  most  recently  the  Director  of  Strategic  Businesses,  responsible  for
developing  and  implementing  wireless  content  solutions for paging  carriers
around the globe.  Prior to this,  she was  Managing  Director  for Motorola Air
Communications,  Ltd. Previously,  she held other senior management positions at
Motorola,  including Vice  President and Director of Asia Pacific  Wireless Data
Network Operations and Manager of Corporate Strategy.

                                     Page 7
<PAGE>

                                    PART II


ITEM 5.   MARKET FOR the COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER 
          MATTERS
          --------------------------------------------------------------

Through  February 2, 1998, the Company's Common Stock traded on the Nasdaq Stock
Market under the symbol DGSD.  From  February 2, 1998 through May 13, 1998,  the
Company's  stock  traded on the Nasdaq  Stock  Market  under the  symbol  PLPTD.
Beginning May 14, 1998,  the  Company's  stock began trading on the Nasdaq Stock
Market under the symbol PLPT.  The  following  tables set forth the high and low
closing  prices in each  quarter  during 1997 and 1998 as reported by the NASDAQ
National Market System. On April 10, 1998, the Company's  Shareholders  approved
and on April 20,  1998,  the  Company  effected  a 1 for 4 reverse  split of the
Company's Common Stock. The stock prices below have been adjusted to reflect the
reverse stock split for all periods reported.


                                              1997
                                        High        Low 
                  ---------------------------------------                       

                  1st Quarter        $  6.88      $  5.12
                  2nd Quarter           5.88         2.76
                  3rd Quarter           7.36         3.52
                  4th Quarter           6.52         3.76
                  =======================================


                                              1998
                                        High        Low 
                  ---------------------------------------                       

                  1st Quarter        $  9.75      $  6.50
                  2nd Quarter          10.13         5.63
                  3rd Quarter           7.69         2.00
                  4th Quarter           4.63         2.22
                  =======================================

The Company has never paid any cash dividends on its stock and anticipates that,
for the foreseeable  future,  it will continue to retain any earnings for use in
the operation of its business.  At February 26, 1999,  there were  approximately
750 holders of record of the Company's Common Stock.

                                     Page 8
<PAGE>

ITEM 6.   SELECTED FINANCIAL DATA
          -----------------------

<TABLE>
Consolidated Selected Financial Data

PulsePoint Communications
(In thousands, except per share data)
<CAPTION>
                                                                              Year Ended December 31,
------------------------------------------------------------------------------------------------------------------------------
                                                          1994           1995           1996           1997            1998
==============================================================================================================================
STATEMENT OF OPERATIONS DATA:
<S>                                                     <C>            <C>            <C>            <C>             <C>     
Net sales                                               $ 31,687       $ 23,201       $ 22,332       $ 20,644        $ 25,449
Cost of sales                                             13,295         10,858          8,312         10,523          12,268
------------------------------------------------------------------------------------------------------------------------------
Gross margin                                              18,392         12,343         14,020         10,121          13,181
------------------------------------------------------------------------------------------------------------------------------

Selling, general and administrative                       10,165         11,781         12,846         17,122          14,386
Engineering and development                                6,328          7,209          8,903         12,181          11,291
------------------------------------------------------------------------------------------------------------------------------
   Total operating expense                                16,493         18,990         21,749         29,303          25,677
------------------------------------------------------------------------------------------------------------------------------

Income (loss) from operations                              1,899         (6,647)        (7,729)       (19,182)        (12,496)
Interest and other income, net                               669          1,473            950            273             645
------------------------------------------------------------------------------------------------------------------------------

Income (loss) before provision or income taxes             2,568         (5,174)        (6,779)       (18,909)        (11,851)
Provision for income taxes                                   (80)           (14)           (22)           (15)            (18)
------------------------------------------------------------------------------------------------------------------------------
Net income (loss)                                          2,488         (5,188)        (6,801)       (18,924)        (11,869)
------------------------------------------------------------------------------------------------------------------------------

Earnings (loss) per common share                        $    .52       $  (1.04)      $  (1.36)      $  (3.72)       $  (2.29)
Earnings (loss) per common share -
     assuming dilution                                  $    .48       $  (1.04)      $  (1.36)      $  (3.72)       $  (2.29)
Weighted average common and common
     equivalent shares outstanding                         5,295          4,970          5,021          5,090           5,188
==============================================================================================================================

<CAPTION>
                                                                              Year Ended December 31,
------------------------------------------------------------------------------------------------------------------------------
                                                          1994           1995           1996           1997            1998
==============================================================================================================================
<S>                                                     <C>            <C>            <C>            <C>             <C>     
BALANCE SHEET DATA:
Working capital                                         $ 31,695       $ 25,085       $ 20,345       $ 12,131        $ 11,989
Total assets                                              43,960         38,914         33,333         37,441          30,527
Long-term obligations, excluding current portion             127              -              -              -           1,498
Shareholders' equity                                      37,327         32,557         26,027         20,443          15,802
==============================================================================================================================


                                     Page 9
</TABLE>
<PAGE>

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
          AND RESULTS OF OPERATIONS
          -----------------------------------------------------------

1998  COMPARED TO 1997.  Net sales  increased  23% to $25.4 million in 1998 from
$20.6  million  in 1997.  Consistent  with  the  Company's  focus  on the  Voice
Information  Services (VIS) market,  sales to network service  providers totaled
$21.2  million  and  accounted  for  approximately  83% of total  sales in 1998,
compared  with sales of $15.5 million or 75% of total sales from the previous 12
months.  Sales to the Customer  Premise  Equipment (CPE) market  represented the
remaining 17% of total sales in 1998 compared with 25% in 1997.

Gross margin as a percentage  of net sales  increased to 52% in 1998 from 49% in
1997,  primarily the result of the higher production volumes which allow for the
wider  spreading of fixed costs and an increase in the number of larger  systems
sold. During 1998, the Company established a reserve to allow for certain of the
Company's  products sold to be  potentially  traded-in  for new  products,  when
generally  available.  The allowance to establish this reserve was recognized in
Cost of Goods Sold and was $1.4 million at December 31, 1998.  During 1997,  the
Company took a one-time charge to cost of sales of approximately $1.5 million in
connection with a review of the Company's operations, cost structure and balance
sheet.  Excluding these two events, the adjusted gross margin in 1998 would have
been 57% compared with an adjusted  gross margin in 1997 of 55%.  Margins on the
sale of new systems increased from 46% in 1997 to 49% in 1998. In addition,  the
margin on the sale of system  upgrades and  enhancements  and service  increased
from 50% in 1997 to 59% in 1998.

Throughout  1998, the Company has effectively  managed and controlled  operating
expenses by instituting various cost efficiency measures. As a result,  selling,
general and  administrative  expenses  decreased  from $17.1  million in 1997 to
$14.4 million in 1998. Combining the impact of the cost efficiency measures with
the higher volume in net sales resulted in selling,  general and  administrative
expenses as a percentage of sales of 57% in 1998 as compared to 83% in 1997.

Similar cost  management  and control  measures have been applied to engineering
and  development  expenses,  which decreased from $12.2 million in 1997 to $11.3
million in 1998. For 1997 and 1998, engineering and development expenses reflect
the Company's  strategy of continued  investment in new product  development and
product  enhancements.  As a result of the decrease in spending for  engineering
development  and increased sales levels,  engineering  and development  expenses
were lower as a percentage of sales in 1998 (44%) as compared to 1997 (59%).

Interest and other income increased from $0.3 million in 1997 to $0.6 million in
1998, principally as the result of a higher average cash balance.

The  provision  for income  taxes in 1998 was $18,000.  Totaling the above,  the
Company incurred a net loss of $11.9 million as of December 31, 1998 compared to
a net loss of $18.9 million in 1997.

The extent and timing of new orders for the Company's existing products from VIS
providers have substantial  effects on the Company's net sales.  Such orders are
usually significant in size and can materially affect sales in any quarter.  The
Company's  operations  are not  subject to a  particular  seasonality;  however,
historically first quarter sales have been less than fourth quarter sales. It is
difficult to predict receipt of new orders  reliably and quarterly  revenues and
operating results will depend on volume and timing of new orders received during
a quarter.

1997  COMPARED TO 1996.  Net sales  decreased  8% from $22.3  million in 1996 to
$20.6 million in 1997, a decrease of $1.7  million.  Compared to the prior year,
sales in the Voice  Information  Services  (VIS) market  decreased  $1.7 million
while sales in the Customer Premises Equipment (CPE) showed no change.

Gross margin as a percentage of net sales  decreased  from 63% in 1996 to 49% in
1997,  primarily  as a result of the  decrease in  international  sales and as a
result of a one-time  charge to cost of sales of  approximately  $1.5 million in
connection with a review of the Company's operations, cost structure and balance
sheet.  Excluding the one-time charge, the gross margin was 55% in 1997. Margins
on the  sale of new  systems  decreased  from  50% in 1996  to 46% in  1997.  In
addition, the margin on the sale of system upgrades and enhancements and service
decreased  from 71% in 1996 to 50% in 1997.  This decrease in margins for system
upgrades,  enhancements  and service was  reflective of a smaller  percentage of
software upgrades, principally upgrades to the Company's latest version of voice
messaging software, InfoMail 4.0, performed in 1997.

Selling,  general and  administrative  expenses  increased from $12.8 million in
1996 to $17.1 million in 1997 as the Company invested in upgrading its personnel
and capabilities, primarily in Sales and Marketing. As a result of the increased
investment  and decreased  sales  levels,  selling,  general and  administrative
expenses  were higher as a percentage of sales in 1997 (83%) as compared to 1996
(53%).

Engineering  and  development  expenses  increased  from $8.9 million in 1996 to
$12.2 million in 1997. For 1997,  engineering and development expenses reflected
the Company's  strategy of continued  investment in new product  development and
product  enhancements.  As a result of the increase in spending for  engineering
development  in 1997 and decreased  sales levels,  engineering  and  development
expenses  were higher as a percentage of sales in 1997 (59%) as compared to 1996
(40%).

                                    Page 10
<PAGE>

Interest and other income decreased from $1.0 million in 1996 to $0.3 million in
1997, principally as the result of a lower average cash balance.

The provision for income taxes in 1997 was $15,000. Given the above, the Company
incurred a net loss of $18.9  million as of December 31, 1997  compared to a net
loss of $6.8 million in 1996.

FACTORS THAT MAY AFFECT FUTURE RESULTS

The Annual  Report to  Shareholders  and this Annual Report on Form 10-K contain
forward-looking  statements  within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21S of the Securities Exchange Act of 1934,
as amended.  Actual results could differ materially from those projected in such
forward-looking  statements  as a result  of the  factors  set  forth  below and
elsewhere in this document.

PulsePoint  Communications  operates  in a  rapidly  changing  environment  that
involves a number of risks, some of which are beyond the Company's control.  The
following discussion highlights some of these risks.

The Company has developed and  introduced  its new product line,  the PulsePoint
Enhanced   Application   Platform   and   Communication-Management    Suite   of
Applications.  The new  platform and  applications  are designed to increase the
Company's market share and boost its position in the industry.  See "Part I Item
1.  Business."  The successful  introduction  of these and other new products is
dependent  upon a number of  factors,  some of which are  beyond  the  Company's
control,  including  product  acceptance  in the  marketplace,  introduction  of
competitive  products  by existing or new  competitors,  changes in  technology,
price  competition  and other  factors.  Any failure of such products to achieve
acceptance  in  the  marketplace  could  significantly  reduce  future  expected
revenues or result in the need for  additional  expenses to bring the product to
market.  Furthermore,  there  can be no  assurance  that  the  Company  will  be
successful  in  introducing  new products or that such  products  will  generate
significant  revenues  or  profits.  The  Company's  inability  to  successfully
generate  revenues  from the  introduction  of these new  products  would have a
material  adverse  effect on the  Company's  financial  condition and ability to
implement its business strategy.

The Company has not been operating  profitably.  The Company's strategy has been
to develop new  technology  and to expand its marketing  capabilities,  with the
goal of creating successful new products and marketing them effectively, thereby
returning the Company to profitability.  The Company's  on-going  investments in
technology and marketing require funds, and although the Company presently has a
positive cash balance as a result of the consummation of a private  placement in
December 1997, the Company's financial resources are limited,  and the Company's
funds will be exhausted if the Company's  strategy does not succeed in returning
the Company to profitability or otherwise enable it to raise additional  working
capital.

The voice processing and messaging  industry is highly  competitive,  with rapid
technological  advances  and  constantly  improving  price/performance.  As  the
markets  in which  the  Company  operates  continue  to  grow,  the  Company  is
experiencing an increase in competition,  and it expects this trend to continue.
The  Company  is not  one of the  largest  providers  of  voice  processing  and
messaging  equipment in the  industry.  Some of the Company's  competitors  have
substantially greater technical,  marketing and financial resources and, in some
markets,  a larger  installed  base of customers  and a wider range of available
applications  software.  Certain of the  Company's  potential  customers  may be
reluctant to purchase mission critical technology from a smaller supplier,  such
as the Company.

The voice  processing  and  messaging  industry  has  experienced  a  continuing
evolution of product offerings and alternatives for delivery of services.  These
trends  have  affected  and may be  expected  to have a  significant  continuing
influence on  conditions  in the  industry,  although the impact on the industry
generally and on the Company's position in the industry cannot be predicted with
assurance. The Company and the industry are, in general, dependent upon the U.S.
domestic telephone companies for a large percentage of revenue. The suppliers to
the telephone company market,  which is primarily composed of seven (7) regional
Bell operating companies and GTE, have largely been decided for first generation
voice processing requirements.

The  market  for  voice  processing  and  messaging  systems  is in a period  of
transition. Budgetary constraints, uncertainties resulting from the introduction
of new  technologies  in the  telecommunications  environment and changes in the
government regulations have increased  uncertainties in the market.  Significant
changes in the domestic U.S. industry as a result of the 1996 Telecommunications
Act make planning decisions more difficult and increase the risk inherent in the
planning process.

The  Company's  operating  results may  fluctuate  for a number of reasons.  The
Company  has short  delivery  cycles and as a result does not have a large order
backlog,  which makes the  forecasting  of revenue  inherently  uncertain.  This
uncertainty is compounded  because each quarter's revenue results  predominantly
from orders  booked and shipped  during the third month of the quarter.  Because
the Company plans its operating expenses,  many of which are relatively fixed in
the short term,  on the basis of its  anticipated  revenues,  even a  relatively
small revenue  shortfall may cause a period's results to be substantially  below
expectations.  Such a revenue  shortfall could arise from any number of factors,
including  lower  than  expected  demand,  supply  constraints,  delays  in  the
availability of new products, overall economic conditions or natural disasters.

                                    Page 11
<PAGE>

The development of new  technologies  and products is  increasingly  complex and
uncertain,  which increases the risk of delays.  The introduction of new systems
requires close collaboration and continued  technological  advancement involving
multiple hardware and software design, manufacturing,  marketing and sales teams
within the Company as well as teams at outside suppliers of key components.  The
failure of any one of these  elements  could cause the Company's new products to
fail to meet  specifications  or to miss  the  aggressive  timetables  that  the
Company  establishes.  As the variety and  complexity of the  Company's  product
families increase,  the process of planning production and inventory levels also
becomes more  difficult.  The Company expects to continue  investing  heavily in
supporting  the  development  effort  required  to bring  new  technologies  and
products to the market. To support this, substantial financial resources will be
expended.

The Company  believes  that its  production  capacity  should be  sufficient  to
support  anticipated  unit volumes for the  foreseeable  future.  The Company is
primarily engaged in the final assembly and testing of the hardware equipment of
its  VoiceServer  product line.  The Company plans to outsource the assembly and
testing of the EAP product line to a third party service  provider.  The Company
currently buys the majority of its  subassembly  inventory from a limited number
of suppliers.  The failure of these suppliers to provide such subassemblies on a
timely basis and within specifications could have a materially adverse effect on
the  Company's  business.  If the  Company  is  unable  to  obtain  certain  key
components,  or to effectively forecast customer demand or manage its inventory,
increased  inventory  obsolescence or reduced utilization of production capacity
could adversely impact the Company's gross margins and results of operations.

The Company has  historically  derived a significant  portion of its revenue and
operating  profit from a relatively  small  number of  customers.  In 1998,  the
Company derived 55% of its revenue from a single customer (GTE). Should sales to
this customer be significantly reduced, the Company's operating results could be
materially  adversely  affected.   International   proposals  for  large  system
installations  typically  involve a lengthy  and complex  bidding and  selection
process and the ability of the Company to obtain a particular  proposal award is
inherently difficult to predict. The Company believes that the opportunities for
these  installations will continue to grow and intends to continue to expand its
research and development, manufacturing, sales and marketing and product support
capabilities in anticipation  of such growth.  However,  the timing and scope of
these  opportunities  and the pricing and margins  associated  with any eventual
proposal  award are  difficult  to  forecast,  and may vary  substantially  from
transaction  to  transaction.   The  Company's  future  operating  results  may,
accordingly, exhibit a higher degree of volatility than the operating results of
other companies in its industry that have adopted different strategies. Although
the Company is actively  pursuing a number of  opportunities  both in and out of
the  United  States,  both the  timing  of any  eventual  opportunities  and the
probability  of the  Company's  receipts  of  significant  purchase  orders  are
uncertain.  The degree of  dependence  by the Company on large  orders,  and the
investment  required  to enable  the  Company to perform  such  orders,  without
assurance of continuing order flow from the same customers and predictability of
gross  margins on any  future  orders,  increase  the risk  associated  with its
business.

The Company's stock price, like that of other technology  companies,  is subject
to significant  volatility.  If revenues or earnings in any quarter fail to meet
the investment community's  expectations,  there could be an immediate impact on
the  Company's  stock  price.  The stock  price may also be  affected by broader
market trends unrelated to the Company's performance.

The Company  routinely  receives  communications  from third  parties  asserting
patent or other rights covering the Company's  products and technologies.  Based
upon the Company's evaluation,  it may take no action or it may seek to obtain a
license.  In any given case there is a risk that a license will not be available
with terms that the Company considers reasonable, or that litigation will ensue.
The Company expects that, as the number of hardware and software  patents issued
continues to increase,  and as the Company's business grows, the volume of these
third party communications will also increase.

The  Company's  corporate  headquarters  facility,  at which the majority of its
research  and  development  activities  are  conducted,  is  located  near major
earthquake  faults which have  experienced  earthquakes  in the past.  While the
Company does carry insurance at levels management believes to be prudent, in the
event of a major  earthquake  or  other  disaster  affecting  one or more of the
Company's  facilities,  it is likely that insurance proceeds would not cover all
of the costs incurred and,  therefore,  the operations and operating  results of
the Company could be adversely affected.

Due to the factors  noted above and  elsewhere in  management's  discussion  and
analysis of financial condition and results of operations,  the Company's future
earnings  and  Common  Stock  price may be subject  to  significant  volatility,
particularly  on a quarterly  basis.  Past financial  performance  should not be
considered a reliable  indicator of future  performance and investors should not
use historical  trends to anticipate  results or trends in future  periods.  Any
shortfall  in revenue or  earnings  from the levels  anticipated  by  securities
analysts could have an immediate and  significant  adverse effect on the trading
price of the  Company's  Common  Stock in any given  period.  Additionally,  the
Company may not learn of such shortfalls  until late in a fiscal quarter,  which
could result in an even more  immediate and adverse  effect on the trading price
of the Company's Common Stock. Furthermore, the Company participates in a highly
dynamic industry which often results in volatility of the Company's Common Stock
price.

                                    Page 12
<PAGE>

YEAR 2000 UPDATE

Certain computer  programs and embedded computer chips are unable to distinguish
between the year 1900 and the year 2000 (the "Year 2000  Problem").  The Company
has undertaken a  comprehensive  program to address the effects of the Year 2000
Problem on its products and systems ("The Program").  The Program  addresses the
Year 2000  Problem as it impacts the Company in three  distinct  areas:  (1) the
Company's  products;  (2) the Company's internal systems;  and (3) third parties
with which the Company has material relationships.

The Company sold certain  equipment  prior to 1992 which may still be in service
but which the  Company  no  longer  supports.  As the  Company  no longer  takes
responsibility for any aspect of this equipment, the Company does not believe it
has any  responsibility  to remediate the Year 2000 Problem with regard to these
systems.  Though the Company does not anticipate receiving any requests for such
remediation, there can be no assurance that these claims will not occur.

The Company believes that its current products are either Year 2000 compliant or
that Year 2000 compliant solutions are available for the products.  Although the
Company has not received any customer complaints, there can be no assurance that
such complaints will not be received. The Company has also been developing a new
product line, and any new products the Company releases are being designed to be
Year 2000  compliant.  Insofar  as the  Company  is  incorporating  third  party
products into its new product line, the Company is both relying upon information
from such third parties  concerning the Year 2000 readiness of such products and
attempting to ascertain the accuracy of such information with respect to the way
in which the Company has incorporated  such product into the Company's  product.
As such the Company is not in a position to confirm  independently  the complete
accuracy of the  information  reported by these third parties.  If any aspect of
the  third  party  product  remains  non-Year  2000  compliant  or if any of the
statements  concerning Year 2000 compliance of such products is inaccurate,  the
non-compliance  of such products  could have material  adverse  effects upon the
operations of the Company.

In 1997, the Company  replaced its primary internal  accounting,  manufacturing,
and inventory  systems with a new system which the vendor  warrants is Year 2000
compliant.  The Company is approximately  70% complete with its testing of other
internal systems and imbedded processors.  These include, among many others, the
Company's payroll,  internal  networking,  engineering  development,  and office
security  systems.  The Company expects to complete testing of the remaining 30%
and to have repaired or replaced any systems that the Company has  determined to
be mission  critical  that are found to be non-Year  2000  compliant by June 30,
1999.

The Program has  identified  third  parties  with which the Company has material
relationships.  To date, approximately 40% of these third parties have responded
to the Company's queries regarding their Year 2000 compliance and, to date, none
of these third  parties have  disclosed  any material  risk to the Company.  The
Company  currently  plans to have received  responses  from the remaining 60% by
June 30,  1999.  In many  cases,  the  Company is not in a  position  to confirm
independently  the accuracy of the information  reported by these third parties.
Non-Year 2000  compliance,  by any of these third  parties,  could have material
adverse effects upon the operations of the Company.

The  Company  expects  the total cost of The  Program to be  approximately  $0.8
million.  To date, the Company has incurred  approximately $0.6 million of these
costs.  Should  the  Company  encounter  unexpected  problems  in  any  area  of
compliancy  with the Year  2000  Problem,  this  amount  could be  substantially
increased.  With the exception of non-mission  critical  business  systems,  the
Company  currently  plans to have The Program  completed not later than June 30,
1999,  which is prior  to any  anticipated  impact  on the  Company's  operating
systems.  The Company anticipates that the Program for some non-mission critical
business  systems  will not be completed  until  September  30, 1999.  While the
Company  does not  expect  the  Year  2000  Problem  to  cause  any  significant
operational  problems,  there can be no assurance  that such  problems  will not
occur.  As part of The  Program,  the  Company is  working  to develop  the most
reasonably  likely  worst case  scenario  after which the Company will develop a
contingency plan. The anticipated completion date for this is June 30, 1999.

                                    Page 13
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

For the year ended  December 31,  1998,  net working  capital  decreased by $0.1
million to $12.0  million  compared to $12.1  million at December 31, 1997.  The
decrease in working capital resulted principally from a decrease in cash of $9.5
million, partially offset by the conversion of $6.6 million of shareholder notes
payable into 881,667  shares of the  Company's  Series B  Convertible  Preferred
Stock  (see  Note  11 to the  Company's  financial  statements  included  in the
Company's 1998 Annual Report to Shareholders  and in the Company's Annual Report
on Form 10-K for the fiscal year ended  December 31,  1998.) Other factors which
affected net working  capital were an increase in inventory of $3.8  million,  a
decrease in the amount borrowed under the Company's credit line of $1.1 million,
an increase in accounts  payable and accrued  liabilities  of $1.1  million,  an
increase  in other  liabilities  of $0.9  million,  an  increase  in the current
portion of notes payable of $0.6 million, and an increase in accounts receivable
and other current assets of $0.4 million.

At December 31, 1998,  the Company had cash of $11.5 million and $2.1 million of
debt, $0.6 million of which was due within twelve months.  During 1998, net cash
used by operations  was $9.3 million.  The 1998 capital  expenditures  were $1.6
million,  principally  hardware and software for test  equipment  and  equipment
leased to GTE.  Budgeted  capital  expenditures  for 1999 are $0.8 million.  The
Company has never paid any cash dividends on its stock and anticipates that, for
the foreseeable  future,  it will continue to retain any earnings for use in the
operation of its business.

For the year ended  December 31,  1997,  net working  capital  decreased by $8.2
million to $12.1 million compared to $20.3 million at December 31, 1996. In 1997
the  decrease  in working  capital  resulted  principally  from a  reduction  in
accounts  receivable of $1.6 million,  an increase in amounts borrowed under the
Company's  credit line of $1.6  million,  and an increase in  shareholder  notes
payable of $6.6 million. The increase in shareholder notes payable is the result
of the Company's December 1997 private placement of convertible securities;  see
Notes 8 and 9 to the Consolidated Financial Statements included in the Company's
1997 Annual Report.

At December  31,  1997,  the Company had cash of $21.0  million and no long-term
debt.  During 1997,  net cash used by  operations  was $13.6  million.  The 1997
capital expenditures were $4.1 million.


ITEM 7(a).  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 
            ---------------------------------------------------------
The  Company's  exposure to market risk for  changes in interest  rates  relates
primarily  to  the  Company's  cash  equivalents.  The  Company  does  not  have
operations subject to material risk of foreign currency  fluctuations,  nor does
it use derivative  financial  instruments.  Cash  equivalents  consist of demand
deposit  and money  market  accounts,  certificates  of deposit  and  short-term
commercial  paper.  The Company's $5 million credit line has a variable rate and
the Company's $3 million term loan has a fixed  interest  rate. The Company does
not believe that it has any  material  exposure to market risk  associated  with
interest rates.

                                    Page 14
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
-------------------------------------------------

The Board of Directors and Shareholders
PulsePoint Communications

We have audited the accompanying balance sheets of PulsePoint  Communications as
of  December  31,  1998 and 1997,  and the  related  statements  of  operations,
shareholders'  equity,  and cash flows for each of the three years in the period
ended December 31, 1998. 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 PulsePoint  Communications at
December 31, 1998 and 1997,  and the results of their  operations and their cash
flows for each of the three years in the period  ended  December  31,  1998,  in
conformity with generally accepted accounting principles.





                                                  /s/ Ernst & Young LLP




Woodland Hills, CA
January 28, 1999

                                    Page 15
<PAGE>

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
          -------------------------------------------

<TABLE>
Consolidated Balance Sheets

PulsePoint Communications
(In thousands, except share data)
                                                                                                  December 31,
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
                                                                                         1997                     1998
=========================================================================================================================
ASSETS
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>                      <C>     
Current assets:
     Cash, cash equivalents and pledged cash                                           $ 20,973                 $ 11,473
     Accounts receivable, less allowance for doubtful accounts of $527
          and $725 at December 31, 1997 and 1998, respectively                            4,111                    4,215
     Inventories, net                                                                     3,876                    7,652
     Other current assets                                                                   169                      516
-------------------------------------------------------------------------------------------------------------------------
         Total current assets                                                            29,129                   23,856

Property and equipment, at cost:
     Computers and other equipment                                                        9,504                   10,334
     Furniture and fixtures                                                                 999                      999
     Leasehold improvements                                                               1,357                    1,955
-------------------------------------------------------------------------------------------------------------------------
                                                                                         11,860                   13,288
     Less accumulated depreciation and amortization                                      (6,776)                  (9,046)
-------------------------------------------------------------------------------------------------------------------------
                                                                                          5,084                    4,242
Other assets: 
     Investment securities                                                                1,030                    1,101
     Other assets                                                                         2,198                    1,328
-------------------------------------------------------------------------------------------------------------------------
          Total other assets                                                              3,228                    2,429
-------------------------------------------------------------------------------------------------------------------------
Total assets                                                                           $ 37,441                 $ 30,527
=========================================================================================================================

LIABILITIES & SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------------------------------------------------------
Current liabilities:
     Credit line                                                                       $  1,581                 $    540
     Notes payable, current                                                                   -                      613
     Shareholder notes payable                                                            6,613                        -
     Accounts payable                                                                     3,532                    5,335
     Accrued payroll and related                                                          3,102                    2,264
     Other accrued liabilities                                                            2,170                    3,115
-------------------------------------------------------------------------------------------------------------------------
         Total current liabilities                                                       16,998                   11,867
Trade-in allowance                                                                            -                    1,360
Notes payable, long-term                                                                      -                    1,498
Commitments and contingencies
Shareholders' equity:
     Preferred stock, 15,000,000 shares authorized:
        Series A, no par value, no shares issued and outstanding
        at December 31, 1997 and 1998                                                         -                        -
        Series B, no par value, 2,451,667 and 3,333,334 shares issued and
        outstanding at December 31, 1997 and December 31, 1998, respectively             18,110                   24,723
     Common stock, no par value - 50,000,000  shares  authorized,  
        5,140,398 and 5,237,699 shares issued and outstanding
        at December 31, 1997 and December 31, 1998, respectively                         69,205                   69,820
     Accumulated deficit                                                                (66,872)                 (78,741)
-------------------------------------------------------------------------------------------------------------------------
             Total shareholders' equity                                                  20,443                   15,802
-------------------------------------------------------------------------------------------------------------------------
Total liabilities & shareholders' equity                                               $ 37,441                 $ 30,527
=========================================================================================================================
See accompanying notes.
</TABLE>

                                    Page 16
<PAGE>

<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS

PulsePoint Communications
(In thousands, except per share data)
<CAPTION>
                                                                                   Year Ended December 31,
---------------------------------------------------------------------------------------------------------------------------------
                                                               1996                          1997                          1998
=================================================================================================================================
<S>                                                         <C>                           <C>                           <C>     
Net sales                                                   $ 22,332                      $ 20,644                      $ 25,449
Cost of sales                                                  8,312                        10,523                        12,268
---------------------------------------------------------------------------------------------------------------------------------
Gross margin                                                  14,020                        10,121                        13,181
---------------------------------------------------------------------------------------------------------------------------------

Selling, general and administrative expenses                  12,846                        17,122                        14,386
Engineering and development expenses                           8,903                        12,181                        11,291
---------------------------------------------------------------------------------------------------------------------------------

   Total operating expense                                    21,749                        29,303                        25,677
---------------------------------------------------------------------------------------------------------------------------------
Loss from operations                                          (7,729)                      (19,182)                      (12,496)
Interest and other income, net                                   950                           273                           645
---------------------------------------------------------------------------------------------------------------------------------

Loss before provision for income taxes                        (6,779)                      (18,909)                      (11,851)
Provision for income taxes                                       (22)                          (15)                          (18)
---------------------------------------------------------------------------------------------------------------------------------
Net loss and comprehensive loss                             $ (6,801)                     $(18,924)                     $(11,869)
=================================================================================================================================

Loss per common share - basic and diluted                   $  (1.36)                     $  (3.72)                     $  (2.29)
=================================================================================================================================
See accompanying notes.
</TABLE>

                                    Page 17
<PAGE>

<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

PulsePoint Communications
(In thousands, except share data)

<CAPTION>
                                      Convertible Preferred  Convertible Preferred                                         Total
                                         Stock Series A          Stock Series B          Common Stock      Accumulated Shareholders'
-----------------------------------------------------------------------------------------------------------------------------------
                                       Shares      Amount      Shares      Amount      Shares      Amount     Deficit      Equity
===================================================================================================================================
<S>                                  <C>           <C>       <C>          <C>        <C>          <C>         <C>         <C>     
Balance, December 31, 1995           2,631,579     $ 5,000           -    $      -   5,000,239    $ 68,704    $(41,147)   $ 32,557
Exercise of stock options                                                                7,906          47                      47
Shares issued under
     employee stock purchase plan                                                       47,990         224                     224
Net loss                                                                                                        (6,801)     (6,801)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996           2,631,579     $ 5,000           -    $      -   5,056,135    $ 68,975    $(47,948)   $ 26,027
Exercise of stock options                                                                1,094           7                       7
Shares issued under
     employee stock purchase plan                                                       83,169         223                     223
Conversion of Series A shares
     to Series B shares             (2,631,579)     (5,000)    666,667       5,000                                               -
Shares issued under
     private placement of
     convertible securities                                  1,785,000      13,110                                          13,110
Net loss                                                                                                       (18,924)    (18,924)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997                   -     $     -   2,451,667    $ 18,110   5,140,398    $ 69,205    $(66,872)   $ 20,443
Exercise of stock options                                                               18,092         115                     115
Shares issued under
   employee stock purchase plan                                                         79,209         246                     246
Warrants issued                                                                              -         254                     254
Conversion of shareholder notes                                881,667       6,613                                           6,613
Net loss                                                                                                       (11,869)    (11,869)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998                   -     $     -   3,333,334    $ 24,723   5,237,699    $ 69,820    $(78,741)   $ 15,802
===================================================================================================================================
See accompanying notes.
</TABLE>

                                    Page 18
<PAGE>

<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS

PulsePoint Communications
(In thousands)
<CAPTION>
                                                                                   Year Ended December 31,
---------------------------------------------------------------------------------------------------------------------------------
                                                               1996                          1997                          1998
=================================================================================================================================
<S>                                                         <C>                           <C>                           <C>      
Cash flows from operating activities:
Net loss                                                    $ (6,801)                     $(18,924)                     $(11,869)
Adjustments to reconcile net loss 
     to net cash used in operations:
          Depreciation and amortization                        2,349                         2,979                         3,377
          Provision for losses on accounts receivable             60                           393                           300
          Provision for losses on inventory                      198                           833                           344
          Stock warrant expense                                    -                             -                            64
          Gain on disposal of fixed assets                         3                             -                             -
          Changes in operating assets and liabilities:
              Accounts receivable                             (2,351)                        1,191                          (404)
              Inventories                                        430                        (1,743)                       (4,120)
              Other current assets                               135                           168                          (284)
              Other assets                                         -                             -                            28
              Accounts payable                                   927                          (145)                        1,834
              Accrued payroll and related                        373                         1,116                          (838)
              Trade-in allowance                                   -                             -                         1,360
              Other accrued liabilities                         (351)                          489                           945
---------------------------------------------------------------------------------------------------------------------------------
                 Net cash used in operations                  (5,028)                      (13,643)                       (9,263)
---------------------------------------------------------------------------------------------------------------------------------

Cash flows from investing activities:
     Increase in investment securities                         1,400                        (1,030)                          (71)
     Additions to property and equipment                      (1,959)                       (4,075)                       (1,566)
---------------------------------------------------------------------------------------------------------------------------------
              Net cash used in investing activities             (559)                       (5,105)                       (1,637)
---------------------------------------------------------------------------------------------------------------------------------

Cash flows from financing activities:
     Proceeds from issuance of preferred stock                     -                        13,110                             -
     Proceeds from issuance of shareholder notes payable           -                         6,613                             -
     Proceeds from issuance of long-term debt                      -                             -                         2,080
     Proceeds from issuance of common stock                      271                           230                           361
     Net proceeds from (paydown of) line of credit                 -                         1,581                        (1,041)
---------------------------------------------------------------------------------------------------------------------------------
              Net cash provided by financing activities          271                        21,534                         1,400
---------------------------------------------------------------------------------------------------------------------------------

Net increase (decrease) in cash and equivalents               (5,316)                        2,786                        (9,500)
Cash and equivalents at beginning of period                   23,503                        18,187                        20,973
---------------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period                       $ 18,187                      $ 20,973                      $ 11,473
=================================================================================================================================

Supplemental disclosures
     Cash paid for interest                                 $      -                      $      6                      $     76
     Cash paid for taxes                                    $     21                      $     23                      $     18
=================================================================================================================================
See accompanying notes.
</TABLE>

                                    Page 19
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   Summary of Significant Accounting Policies

Nature of business.  PulsePoint  Communications (the Company) designs,  develops
and markets high-capacity, network-based enhanced services solutions.

Principles of consolidation.  The consolidated  financial statements include the
accounts  of  PulsePoint   Communications  and  its  wholly  owned  subsidiaries
PulsePoint    Communications    International    Corporation    and   PulsePoint
Communications Malaysia Corporation.  All significant intercompany  transactions
and balances have been eliminated.

Revenue recognition. Generally sales are recognized when products are shipped or
when  services are  performed.  Warranty  costs are accrued at the time of sale.
Revenue from sales of extended  warranties is accounted for as deferred revenues
and recognized into income over the warranty or maintenance period.

In October 1997, the American  Institute of Certified Public  Accountants issued
Statement of Position,  "Software Revenue  Recognition"  ("SOP 97-2").  SOP 97-2
establishes  standards  relating to the  recognition  of all aspects of software
revenue.  SOP 97-2 is effective  for  transactions  entered into in fiscal years
beginning  after  December 15, 1997.  The Company  adopted the provisions of SOP
97-2 as of  January  1,  1998.  The  adoption  had no  effect  on the  financial
statements.

Short term investments. Short term investments (principally commercial paper and
discount notes with maturity dates generally  within 90 days and considered cash
equivalents)  are  classified  as "held  to  maturity"  based  on the  Company's
positive  intent  and  ability  to  hold  the  securities  until  maturity.  The
securities  are  presented  at  amortized  cost which  approximates  fair value.
Amortization  and interest on  securities  classified  as "held to maturity" are
included in investment income.

Engineering and development. Statement of Financial Accounting Standards No. 86,
"Accounting  for the Cost of Computer  Software to Be Sold,  Leased or Otherwise
Marketed,"  requires that development costs incurred in connection with research
and  development  of software  products and  enhancements  to existing  software
products  be  expensed  as incurred  until  technological  feasibility  has been
established.  Costs incurred  subsequent to the  establishment  of technological
feasibility  must be  capitalized  until the product is released  for sale.  The
Company  considers  technological  feasibility to be  demonstrated  when a fully
functional  working model has been produced.  To date, all costs associated with
the development of new software  products or  enhancements to existing  software
products have been expensed as incurred.  The costs incurred  beyond the working
model stage are not  significant.  Other  engineering and development  costs are
also expensed as incurred.

Inventories.  Inventories  are  stated  at the  lower of  standard  cost  (which
approximates the first-in first-out method) or market.

Property  and  equipment.  Property  and  equipment  are  depreciated  using the
straight-line  method over the respective  estimated  useful lives,  which range
from two to five years.  Leasehold improvements are amortized over the period of
the lease or the estimated useful life, whichever is shorter.

Loss per common  share.  Loss per common  share is computed in  accordance  with
Statement of Financial Accounting Standards No. 128, "Earnings per Share," based
upon the weighted  average number of common shares  outstanding  for the period.
Antidilutive Common Stock equivalents were 10,126,917 in 1998, 7,182,095 in 1997
and 662,881 in 1996 and were  excluded from the  calculation  of loss per common
share.

Stock-based  compensation.  Effective  January  1,  1996,  the  Company  adopted
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Pursuant to SFAS No. 123, a company may elect to
continue expense  recognition under Accounting  Principles Board Opinion No. 25,
"Accounting  for Stock  Issued to  Employees"  ("APB  No.  25") or to  recognize
compensation  expense  for  grants of stock,  stock  options,  and other  equity
instruments to employees  based on the fair value  methodology  outlined in SFAS
No. 123.  SFAS No. 123 further  specifies  that  companies  electing to continue
expense  recognition  under APB No. 25 are  required to  disclose  pro forma net
income  and pro  forma  earning  per  share as if fair  value  based  accounting
prescribed by SFAS No. 123 has been applied. The Company has elected to continue
expense recognition pursuant to APB No. 25.

Comprehensive  income  (loss).  As of  January  1,  1998,  the  Company  adopted
Statement of Financial  Accounting  Standards No. 130, "Reporting  Comprehensive
Income"  ("SFAS  130").  SFAS 130  establishes  new rules for the  reporting and
display of comprehensive income (loss) and its components; however, the adoption
of SFAS 130 had no impact on the Company's financial statements.

                                    Page 20
<PAGE>

Cash,  cash  equivalents  and  pledged  cash.  The  Company  considers  as  cash
equivalents only those investments that are short-term,  highly liquid,  readily
convertible to cash, and so near their maturity that they present  insignificant
risk of changes in value  because of changes  in  interest  rates.  The  Company
classifies as cash equivalents  only those  investments with maturities of three
months or less.  The Company  pledged $1.0 million to facilitate a  construction
loan for the landlord to build new office space in its existing building.  These
funds became available to the Company in February 1998.

Income taxes. The Company accounts for income taxes in accordance with Statement
of Financial  Accounting  Standards No. 109,  "Accounting for Income Taxes". The
standard  prescribes a liability method for calculating the provision for income
taxes.

Deferred license fees. The Company has entered into license agreements for which
the fees are amortized  based on sales of product  technology over the estimated
useful life of the technology, which is generally four years.

Estimates and assumptions. 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 December 31,
1998 and the  reported  amounts of revenues  and  expenses  during the year then
ended. Actual results could differ from those estimates.

2.   Segment Information

On December  31, 1998,  the Company  adopted  Statement of Financial  Accounting
Standards  No. 131  "Disclosures  about  Segments of an  Enterprise  and Related
Information"  ("SFAS 131"). The new rules establish revised standards for public
companies  relating to the  reporting of financial and  descriptive  information
about their business segments and their enterprise-wide  operations. The Company
operates in one segment.

Enterprise-wide information required by SFAS 131 is as follows:

  Revenue by product or service:

--------------------------------------------------------------------------------
                                                 1996        1997        1998
================================================================================
    Voice Information Services (VIS)          $ 16,451    $ 15,488    $ 21,244
    Customer Premises Equipment (CPE)            5,881       5,156       4,205
--------------------------------------------------------------------------------
                                              $ 22,332    $ 20,644    $ 25,449
================================================================================

  Revenue by geographic area (based on domicile of customer):

--------------------------------------------------------------------------------
                                                 1996        1997        1998
================================================================================
    Domestic                                  $ 16,621    $ 19,521    $ 25,168
    International                                5,711       1,123         281
--------------------------------------------------------------------------------
                                              $ 22,332    $ 20,644    $ 25,449
================================================================================

All of the Company's long-lived assets are located in the United States.

3.   Concentration of Financial Risk

During the year ended  December 31, 1998,  two  customers  accounted for 55% and
16%,  respectively,  of the  Company's  net  sales.  As of  December  31,  1998,
$1,510,000 and $1,270,000  respectively,  of the Company's  accounts  receivable
were due from these two customers.  During the year ended December 31, 1997, one
customer  accounted for 58% of the  Company's  net sales.  During the year ended
December 31, 1996, three customers accounted for 40%, 13% and 11%, respectively,
of the  Company's  net sales.  No other  customer  accounted for sales of 10% or
more.  A  majority  of  the  Company's  sales  are  made  to  telecommunications
companies.  The Company  performs  ongoing credit  evaluations of its customers'
financial condition and,  generally,  requires no collateral from its customers.
In 1998, export sales accounted for 1% of the Company's net sales as compared to
5% in 1997.

The Company's cash, cash equivalents and pledged cash is primarily  comprised of
demand deposit and money market accounts, certificates of deposit and short-term
commercial paper with several financial institutions.  Some account balances are
in excess of amounts insured by the Federal Deposit Insurance Corporation.

                                    Page 21
<PAGE>

4.   Inventories

Inventories at December 31 consist of the following:

--------------------------------------------------------------------------------
(In thousands)                                       1997                1998
================================================================================
Raw material and purchased parts                  $  2,077            $  6,399
Work-in-process                                      1,521                 751
Finished goods                                         278                 502
--------------------------------------------------------------------------------
                                                  $  3,876            $  7,652
================================================================================

5.   Certain One Time Charges

In the fourth quarter of 1997,  the Company  recorded  charges of  approximately
$1.5 million in connection with a review of its  operations,  cost structure and
balance  sheet.  The charges  included  $0.5 million in property  and  equipment
write-offs  related to obsolescence of test fixtures and other equipment used in
the  production  of the current  product  line,  and $1.0  million in  inventory
write-downs,  resulting from obsolescence of current inventory and licenses that
are unable to be used in the new product line due to  technological  changes and
enhancements.

6.   Other Assets

Other assets at December 31 consist of the following:

--------------------------------------------------------------------------------
(In thousands)                                       1997                1998
================================================================================
Deferred license fees, net of accumulated 
  amortization of $5,769 and $6,753 at 
  December 31, 1997 and 1998, respectively        $  1,933            $  1,049
Other                                                  265                 279
--------------------------------------------------------------------------------
                                                  $  2,198            $  1,328
================================================================================

7.   Leases

In December  1996,  the Company  entered into a ten year lease for the corporate
headquarters  in  Carpinteria,  California.  The lease is  subject  to an annual
adjustment  based on total sales of the Company.  In December  1996, the Company
consolidated into half of the building that it currently occupies. The new lease
coupled with the consolidation of space resulted in a reduction in monthly lease
expenses of approximately  45%. The Company also leases office equipment as well
as regional office space under one to five year operating lease agreements.

Effective  January 1997, the Company  entered into master lease  agreements with
BancBoston  Leasing Inc.  and Mellon US Leasing  ("the Lease  Agreements").  The
BancBoston  lease  agreement is for a maximum of $3.0 million in equipment  cost
and the term of the lease is 48 months.  The BancBoston lease agreement requires
cash  collateral  equal to the  acquisition  cost of the equipment  leased.  The
Company has  utilized  $1.25  million of the  BancBoston  lease  agreement as of
December 31, 1998. The Company accounts for these leases as operating leases.

The  Mellon US  Leasing  lease  agreement  is for a maximum  of $1.0  million in
equipment  cost and the term of the lease is for 30  months.  The  Mellon  lease
agreement requires  collateralization via a letter of credit equal to 50% of the
acquisition cost of the equipment  leased.  During 1997, a bank had provided the
Company  with this  letter of credit,  which was in turn  collateralized  by the
Company's  certificate  of  deposit.  Beginning  in January  1998,  the  Company
collateralized  the letter of credit with available  borrowing  under its credit
line. The Company has fully utilized the Mellon US Leasing lease agreement as of
December 31, 1998. The Company accounts for these leases as operating leases.

                                    Page 22
<PAGE>

Minimum future lease payments as of December 31, 1998 are as follows:

--------------------------------------------------------------------------------
(In thousands)
================================================================================
1999                                                      $  1,462
2000                                                         1,291
2001                                                         1,654
2002                                                           999
2003                                                         1,047
2004 and beyond                                              3,158
--------------------------------------------------------------------------------
                                                          $  9,611
================================================================================

Rent expense,  including rent under  noncancelable  operating lease obligations,
was  approximately  $1.5  million,  $1.6  million and $1.6 million for the years
ended December 31, 1996, 1997 and 1998, respectively.

8.   Other Accrued Liabilities

Other accrued liabilities at December 31 consist of the following:

--------------------------------------------------------------------------------
(In thousands)                                       1997                1998
================================================================================
Sales taxes payable                               $    202            $    139
Accrued legal and accounting                           446                 190
Deferred revenue                                       317                 822
Accrued warranty reserve                               429                 438
Other                                                1,038               1,526
--------------------------------------------------------------------------------
                                                  $  2,432            $  3,115
================================================================================

9.   Income Taxes

The  provision  for income  taxes  included in the  Consolidated  Statements  of
Operations consists of:

--------------------------------------------------------------------------------
(In thousands)                                   1996        1997        1998
================================================================================
Current
    Federal                                   $      -    $      -    $      -
    State                                           22          15          18
--------------------------------------------------------------------------------
                                              $     22    $     15    $     18
================================================================================

The  provision  for income taxes is at a rate  different  than the U.S.  federal
statutory tax rate for the following reasons:

--------------------------------------------------------------------------------
(In thousands)                                   1996        1997        1998
================================================================================
Computed tax at statutory rate                $ (2,380)   $ (6,523)   $ (4,158)
State taxes, net of federal benefit                 14          10          12
Loss not benefited                               2,336       6,519       4,145
Other                                               52           9          19
--------------------------------------------------------------------------------
                                              $     22    $     15    $     18
================================================================================

Deferred  income taxes reflect the tax impact of temporary  differences  between
the amounts of assets and liabilities for financial  reporting purposes and such
amounts as measured by tax laws and regulations.

                                    Page 23
<PAGE>

The  components  of deferred  tax assets as of December 31, 1997 and 1998 are as
follows:

--------------------------------------------------------------------------------
(In thousands)                                       1997               1998
================================================================================
Net operating loss carryforwards                  $ 21,323              26,022
General business credit carryforwards                3,140               2,312
Alternative minimum tax credit carryforwards           190                 190
Inventory accounting methods                         1,833               1,091
Allowance for doubtful accounts                        220                 297
Trade-in allowance                                       -                 560
Accrued vacation                                       278                 291
Warranty service                                       179                 180
Excess of tax over book depreciation                  (296)             (1,749)
Research expenditures accounting method                821                 970
Other                                                  641               1,025
--------------------------------------------------------------------------------
    Deferred tax assets, net                        28,329              31,189
Valuation allowance                                (28,329)            (31,189)
--------------------------------------------------------------------------------
    Net deferred tax asset                        $      -            $      -
================================================================================

Management determined that a valuation allowance of approximately $31.2 million,
primarily   related  to  net  operating   loss  and  general   business   credit
carryforwards,  was required.  The valuation allowance  increased  approximately
$2.3 million  during 1998,  primarily  reflecting the current year net operating
loss.

At December  31,  1998,  the Company has net  operating  loss  carryforward  for
federal  income tax purposes of  approximately  $71.2  million which expire from
2000  through  2012.  The  Company  has net  operating  loss  carryforwards  for
California  tax  purposes of  approximately  $17.5  million at December 31, 1998
which expire from 1999 through 2003. The Company's  ability to utilize the above
net  operating  loss  carryforward  may be  limited  due to the  application  of
statutory provisions.

At December 31, 1998, the Company has general  business credits of approximately
$1.8  million for federal  income tax  purposes  which  expire from 1999 through
2007.

10.  Debt

Shareholder  notes payable.  The $6.6 million in shareholder notes payable which
were outstanding at December 31, 1997 arose in connection with the December 1997
$20 million private placement (See Note 11).

Credit  line.  On July 28,  1997,  the Company  entered into a Security and Loan
Agreement  ("the Credit Line") with Imperial Bank for the purpose of obtaining a
$5 million credit line. The credit line was secured by substantially  all of the
assets of the  Company,  and  allowed for  borrowings  of up to the lesser of $2
million or an amount  equal to 50% of  eligible  domestic  accounts  receivable.
Interest  under the Credit Line was at the Prime rate plus 0.5%. The Credit Line
also allowed for  borrowing up to the lesser of $3 million or an amount equal to
90% of eligible foreign accounts receivable and inventory.  Borrowings under the
Credit Line were subject to certain  financial  covenants  and  restrictions  on
receivables, financial guarantees, and other related items. On October 31, 1997,
the  Company  entered  into an  amendment  to the Credit  Line  providing  for a
relaxation  of certain  financial  covenants.  The  amendment  also  allowed for
borrowing  up to $5  million  or an  amount  equal to 65% of  eligible  accounts
receivable,  foreign or domestic. The interest charged under the Credit Line was
increased to Prime plus 2% (two  percent).  The Company also issued a warrant to
the Imperial  Bank (the  "Warrant")  for the  purchase of 100,000  shares of the
Company's Common Stock at an exercise price of $3.00 per share.

In December 1997, due to the Company's  achievement of certain milestone events,
the interest rate applicable to the Credit Line was decreased from Prime plus 2%
to Prime plus 0.5% (8.25% at December  31,  1998).  At December  31,  1997,  the
Credit Line was extended to June 30, 1998 and subsequently extended to March 29,
1999.  Borrowings  under the credit line were $1.6  million and $0.5  million at
December 31, 1997 and 1998, respectively.  At December 31, 1998, the Company was
in  violation of one of the  covenants of the credit line and received  from the
bank a one-time waiver of this covenant violation on January 27, 1999.

The Company maintains a lease agreement with Mellon US Leasing.  At December 31,
1998, this lease agreement was  collateralized  by a $500,000  standby letter of
credit issued under the Company's Credit Line (See Note 7).

                                    Page 24
<PAGE>

On October 1, 1998,  the Company  entered  into an agreement  with  Transamerica
Business Credit Corporation  ("Transamerica") to provide the Company with a Term
Loan in the  amount of $3.0  million  secured  by  certain  of the assets of the
Company (the "Term  Loan").  Each funding under the Term Loan is for a period of
36 months with equal  monthly  repayments  of  approximately  3.4% of the amount
funded.  As  additional  incentive  to enter  into the Term  Loan,  the  Company
provided  warrants to purchase 92,308 shares of the Company's Common Stock at an
exercise  price  of  $3.25  per  share,  the  closing  price  on the date of the
commitment.  At December  31, 1998  borrowings  under the Term Loan totaled $2.0
million.

11.  Shareholders' Equity and Related Items

The Company's amended Articles of Incorporation  authorize  50,000,000 shares of
Common Stock and 15,000,000  shares of Preferred  Stock (of which 3,373,334 have
been  designated  Series B), no par  value,  which may be issued by the Board of
Directors without further approval by the shareholders.

In December 1997, the Company created the Series B Preferred  Stock. The holders
of the Series B  Convertible  Preferred  Stock are  entitled to dividends at the
applicable  dividend  rate for each share of the  underlying  Common  Stock into
which the Series B Convertible Preferred Stock is convertible.  Dividends on the
Series B  Convertible  Preferred  Stock are not  mandatory or  cumulative.  Upon
liquidation,  the  holders  of the  Series B  Convertible  Preferred  Stock  are
entitled to $7.50 per share plus all accrued and unpaid  dividends to the extent
funds are available  and subject to all amounts  payable in respect of any other
shares of Preferred  Stock of the Company that rank pari passu with the Series B
Convertible  Preferred Stock. Each share of Series B Convertible Preferred Stock
is entitled  to a number of votes equal to the number of shares of Common  Stock
into  which  such  share  of  Series  B  Convertible  Preferred  Stock  could be
converted.  The Series B Convertible  Preferred  Stock and the Common Stock vote
together. The Series B Convertible Preferred Stock is convertible at any time at
the option of the holder into Common Stock, initially at a conversion price (the
"Series B Preferred  Conversion  Price") of $3.00 per share of Common Stock.  In
addition to customary antidilution provisions, the Series B Preferred Conversion
Price is subject to adjustment  for certain  issuances of the  Company's  Common
Stock if the  consideration per share of such issuance is less than the Series B
Preferred  Conversion  Price.  The Series B Convertible  Preferred Stock is also
subject to  automatic  conversion  upon the  earliest  to occur of an event that
would  cause the  Series B  Convertible  Preferred  Stock to be  required  to be
registered  pursuant to the Securities  Exchange Act of 1934, or upon the filing
with the Secretary of the Company of the written approval of the holders of more
than 50% of the outstanding shares of the Series B Convertible Preferred Stock.

On  December  19,  1997,  the Company  consummated  a private  placement  of the
Company's  convertible  securities  with certain  investors  (collectively,  the
"Investors")  for an  aggregate  of  approximately  $20  million  pursuant  to a
Preferred Stock Purchase Agreement (the "Purchase  Agreement").  Pursuant to the
Purchase  Agreement,  the Company (i) sold for cash (A) 1,785,000  shares of the
Company's Series B Convertible  Preferred Stock and (B) $6,612,502.50  aggregate
principal amount of the Company's Convertible  Promissory Notes (the "Notes" and
together with the Series B Convertible  Preferred Stock, the  "Securities")  and
(ii) exchanged the 2,631,579 shares of Series A Convertible Preferred Stock held
by  affiliates  of Oak  Investment  Partners  ("Oak") for 666,667  shares of the
Series  B  Convertible  Preferred  Stock.  Each  share of  Series B  Convertible
Preferred  Stock is  convertible  into 2.5  shares of Common  Stock,  subject to
certain antidilution adjustments.  The Notes were issued because the Company did
not have an adequate number of shares of the underlying  Common Stock authorized
to permit  the  conversion  of the entire  $25  million of Series B  Convertible
Preferred  Stock.  The Company sold the Securities at a price of $3.00 per share
of Common Stock on an as-converted  basis. At the Company's 1998 annual meeting,
the Company's  shareholders approved an amendment to the Company's Ninth Amended
and Restated  Articles of Incorporation  effectuating a 1:4 reverse split of the
Company's  Common  Stock (the  "Reverse  Split").  The Reverse  Split  created a
sufficient  number of shares of Common Stock  available to permit  conversion of
all of the Series B Convertible  Preferred Stock issuable upon conversion of the
Notes,  and the Notes were  immediately  converted  into an  additional  881,667
shares of Series B Convertible Preferred Stock.

Warrants.  The Company has issued 250,308  warrants to purchase  Common Stock as
follows:

     1)   In October 1997, the Company issued 100,000 warrants, with an exercise
          price of $3.00 per share and an  expiration  date of October  2002, to
          Imperial Bank.

     2)   In November 1998, the Company issued 73,846 and 18,462 warrants,  with
          an  exercise  price of $3.25  per  shares  and an  expiration  date of
          November  2005,  to  Transamerica   Business  Credit  Corporation  and
          Priority Capital, respectively.

     3)   In September and December 1998,  the Company  issued 58,000  warrants,
          with an exercise  price of $7.06 per share and an  expiration  date of
          December 2003, to NEXTLINK Communications, Inc.

                                    Page 25
<PAGE>

Common and potentially  issuable common stock. At December 31, 1998,  there were
5,237,545 shares of the Company's Common Stock outstanding and 10,126,917 shares
of Common Stock, potentially issuable, as follows:

                                                        Number of Common Shares
                                                     Outstanding and Potentially
                                                        Issuable Common Shares
                                                     ---------------------------

  (A) Common Stock outstanding                                        5,237,545
  (B) Conversion of Series B Convertible Preferred Stock  8,333,336  
  (C) Options granted - 1983 Stock Option Plan            1,481,873  
  (D) Options granted -  Directors' Stock Option Plan        61,400 
  (E) Warrants                                              250,308
                                                            -------
              Additional shares potentially issuable                 10,126,917
                                                                     ----------
              Total potential shares of Common Stock                 15,364,462
                                                                     ==========


(A)  Number of shares of Common Stock outstanding at December 31, 1998.

(B)  Shares of Common Stock issuable upon  conversion of the Company's  Series B
     Convertible Preferred Stock outstanding at December 31, 1998.

(C)  Number of shares of Common Stock issuable pursuant to options granted under
     the Company's  1983 Stock Option Plan  (assuming  full  vesting).  Note: Of
     these 1,481,873  options,  333,358 have exercise prices below the Company's
     December 31, 1998 closing stock price of $4.063.

(D)  Number of shares of Common Stock issuable pursuant to options granted under
     the Company's Directors' Option Plan (assuming full vesting).

(E)  Warrants issued and outstanding at December 31, 1998.

Reverse split of common  stock.  On April 10, 1998,  the Company's  Shareholders
approved and on April 20, 1998, the Company  effected a 1 for 4 reverse split of
the Company's Common Stock. In accordance with SAB 83, the financial  statements
and  footnote  disclosure  reflect  the reverse  stock  split for all  reporting
periods.  In addition,  the  calculation of earnings  (loss) per share has given
effect to the reverse stock split.

1990 Employee Stock  Purchase Plan. The Company  maintains a stock purchase plan
to provide employees of the Company with a convenient means to acquire an equity
interest in the Company through payroll deductions,  and to provide an incentive
for continued  employment.  The employee  stock  purchase plan reserves  500,000
shares of Common Stock for issuance under the plan.

The plan qualifies as an "employee stock purchase plan" under Section 423 of the
Internal  Revenue  Code.  All full-time  employees  are eligible to  participate
through payroll deductions up to 10% of their compensation; participants may, at
their option,  purchase  shares from the Company at the lower of 85% of the fair
market  value  of the  Common  Stock  at  either  the  beginning  or end of each
six-month  purchase  period.  In the  event the  market  price at the end of any
purchase  period is less than 50% of the market  price at the  beginning  of the
period,  employee purchases are limited to twice the shares that could have been
purchased using the beginning market price.

During 1998, 79,209 shares were purchased at prices ranging from $2.55 to $4.68.
During 1997,  83,169  shares were  purchased  at a price of $2.56.  During 1996,
47,990 shares were  purchased at a price of $4.68.  At December 31, 1998,  1,893
shares were available for future issuance under the plan.

1983 Stock Option Plan. The Company maintains a stock option plan which provides
for the  issuance of  incentive  stock  options  (ISOs) and  nonqualified  stock
options (NSOs) to officers, employees, independent contractors,  consultants and
advisors of the Company.  In July 1997, the Company filed a Form S-8 to register
the issuance and sales of an additional  800,000 shares reserved under the plan.
The  Company  has  reserved  2,375,000  shares  of  Common  Stock  for  issuance
thereunder.  The Plan terminates October 31, 2003. At December 31, 1998, options
to purchase  1,481,873 shares were outstanding of which 297,150 were exercisable
at prices ranging from $2.28 to $11.00.

                                    Page 26
<PAGE>

Directors'  Stock Option Plan.  The Company  maintains a stock option plan which
provides for NSOs as equity  incentives to assist the Company in recruiting  and
retaining  outside  directors.  In August 1996,  the Company filed a Form S-8 to
register the issuance and sales of an additional  50,000 shares  reserved  under
the plan.  The  directors'  stock  option  plan  allows for the Company to issue
options covering up to 125,000 shares.

At December 31, 1998,  options to purchase  61,400 shares were  outstanding,  of
which 28,587 were  exercisable at prices ranging from $2.75 to $13.25 and 47,350
were  available  for future  grant of options  under the plan.  The  Company has
reserved 125,000 shares of Common Stock for issuance thereunder.

A summary of option transactions under the two option plans is as follows:

--------------------------------------------------------------------------------
                                           Number of Shares        Option Price
================================================================================
Outstanding at December 31, 1995               587,842           $ 4.00  - 13.24
      Granted                                  358,615             5.00  -  7.88
      Exercised                                 (7,906)            4.76  -  6.52
      Canceled or expired                     (272,333)            4.00  - 20.24
--------------------------------------------------------------------------------
Outstanding at December 31, 1996               666,218           $ 5.00  - 13.24
      Granted                                  416,712             2.76  -  6.24
      Exercised                                 (1,094)            6.00
      Canceled or expired                     (103,909)            3.72  - 12.52
--------------------------------------------------------------------------------
Outstanding at December 31, 1997               977,927           $ 2.75  - 13.25
      Granted                                  818,313             2.28  -  8.38
      Exercised                                (18,092)            5.50  -  8.00
      Canceled or expired                     (234,875)            2.28  - 13.00
--------------------------------------------------------------------------------
Outstanding at December 31, 1998             1,543,273           $ 2.28  - 13.25
================================================================================

Fair value disclosures.  Stock option grants are set at the closing price of the
Company's  Common  Stock on the date of grant and the  related  number of shares
granted are fixed at that point in time.  Therefore  under the principles of APB
Opinion No. 25, the Company does not recognize  compensation  expense associated
with the grant of stock  options.  SFAS No.  123,  "Accounting  for  Stock-Based
Compensation,"   requires  the  use  of  option   valuation  models  to  provide
supplemental  information  regarding  options  granted  after  1994.  Pro  forma
information  regarding net loss and loss per share shown below was determined as
if the Company had  accounted  for its  employee  stock  options and shares sold
under its stock purchase plan under the fair value method of the Statement.

The fair  value  of the  options  was  estimated  at the  date of grant  using a
Black-Scholes   option   pricing  model  with  the  following   weighted-average
assumptions for 1998, 1997 and 1996: risk-free interest rates of 6.25%; dividend
yields of 0%;  volatility  factors of the expected target price of the Company's
Common  Stock  of  62.8%;  and  expected  life  of the  options  of  5.0.  These
assumptions resulted in weighted-average  fair values of $5.15, $5.60, and $5.88
per share for stock options granted in 1998, 1997 and 1996, respectively.

The Black-Scholes option valuation model was developed for use in estimating the
fair  value of  traded  options.  The  Company's  employee  stock  options  have
characteristics  significantly  different  from those of traded  options such as
vesting  restrictions and extremely limited  transferability.  In addition,  the
assumptions used in option  valuation  models (see above) are highly  uncertain,
particularly  the  expected  stock price  volatility  of the  underlying  stock.
Because changes in these uncertain input  assumptions can materially  affect the
fair value estimate, in management's opinion, the existing models do not provide
a reliable single measure of the fair value of its employee stock options.

                                    Page 27
<PAGE>

For purposes of pro forma  disclosures,  the estimated fair value of the options
is amortized over the option vesting periods. The pro forma effect on net income
for 1996,  1997 and 1998 is not  representative  of the pro forma  effect on net
income in future  years  because it does not take into  consideration  pro forma
compensation expense related to grants made prior to 1996. Pro forma information
in future  years  will  reflect  the  amortization  of a larger  number of stock
options granted in several succeeding years. The Company's pro forma information
is as follows (in thousands, except per share information):

                                                   Year ended December 31,
--------------------------------------------------------------------------------
(In thousands)                                  1996         1997        1998
================================================================================
Net loss - as reported                      $  (6,801)    $(18,924)   $(11,869)
Net loss - pro forma                           (7,097)     (19,428)    (12,860)

Loss per share - as reported                $   (1.36)   $   (3.72)   $  (2.29)
Loss per share - pro forma                  $   (1.40)   $   (3.80)   $  (2.48)

================================================================================

Information  regarding  outstanding  stock options as of December 31, 1998 is as
follows:

                       Options Outstanding                   Options Exercisable
                 -----------------------------------       ---------------------
                                           Weighted-
                            Weighted-        Average                   Weighted-
                              Average      Remaining                     Average
                             Exercise    Contractual                    Exercise
Price Range       Shares        Price           Life        Shares         Price
--------------------------------------------------------------------------------
$2.28 - $ 5.75   718,393        $4.51           7.74        32,480         $4.59
$6.13 - $ 6.50   531,861        $6.18           3.29       197,726         $6.24
$6.75 - $13.25   293,112        $8.49           5.08        95,531         $9.09


12.  Employee Benefit Plan

In  1994,  the  Company   established  a  401(k)  plan  (the  "Plan")   covering
substantially  all of its  employees.  The Plan  allows  eligible  employees  to
contribute up to 15% of their compensation.  Company contributions are voluntary
and at the  discretion  of the  Board of  Directors.  Contributions  made by the
Company for the years ended December 31, 1996,  1997, and 1998 totaled  $31,440,
$23,224, and $60,710, respectively.

13.  Contingencies

As reported in Note 11 to the  Company's  financial  statements  included in the
Company's 1997 Annual Report to  Shareholders  and  incorporated by reference in
the Company's  Annual Report on Form 10-K for the fiscal year ended December 31,
1997, the Company is involved in patent  litigation  with Theis  Research,  Inc.
("Theis").   This  action  was  stayed  pending   resolution  of  Theis'  patent
infringement action against Octel Communications  Corporation (now a division of
Lucent  Technologies)  and  Northern  Telecom  Inc. In 1997,  the U.S.  Court of
Appeals affirmed a district court's decision that the claims of the five patents
Theis asserted against both Octel and Northern Telecom were each either invalid,
not infringed or both.  Theis' writ of certiorari to the U.S.  Supreme Court was
denied on June 26, 1998,  exhausting Theis' appeals.  On September 29, 1998, the
district  court  entered a judgment  that the claims of a sixth patent  asserted
against Northern Telecom are invalid. Theis filed a notice of appeal to the U.S.
Court of Appeals for the Federal  Circuit on October 29, 1998. The action should
remain  stayed  with  respect  to the  Company  at least  until  this  appeal is
concluded.

Additionally,  the  Company is subject to pending  claims  primarily  related to
contractual and product issues.  Management,  after review and consultation with
the Company's counsel, believes that the liability, if any, from the disposition
of such claims and litigation would not have a materially  adverse effect on the
financial condition or results of operations of the Company.

                                    Page 28
<PAGE>

14.  Loss Per Share

The  following  table sets forth the  computation  of basic and diluted loss per
share (in thousands, except per share data):

                                                   Year ended December 31,
--------------------------------------------------------------------------------
(In thousands)                                  1996         1997        1998
================================================================================
Numerator for basic and diluted loss 
  per share - net loss                       $ (6,801)    $(18,924)   $(11,869)

Denominator for basic and diluted loss per      5,021        5,090       5,188
  share - weighted average shares outstanding

Basic and diluted loss per share             $  (1.36)    $  (3.72)   $  (2.29)

================================================================================

The  compilation  of diluted loss per share did not assume the conversion of the
Company's  Series B Convertible  Preferred Stock nor the exercise of outstanding
stock options and stock purchase  warrants  because their  inclusion  would have
been antidilutive.



ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING 
          AND FINANCIAL DISCLOSURE
          -----------------------------------------------------------

None.


                                    Page 29
<PAGE>

                                    PART III

Item 10.* DIRECTORS AND EXECUTIVE OFFICERS
          --------------------------------

Item 11.* EXECUTIVE COMPENSATION
          ----------------------

Item 12.* SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
          --------------------------------------------------------------

*Information regarding the Executive Officers of the Company is included in Part
I of this Annual Report on Form 10-K.  For the other  information  called for by
Items 10-12,  reference is made to the Company's  definitive proxy statement for
its annual meeting of shareholders,  which will be filed with the Securities and
Exchange  Commission  within  120  days  after  March  31,  1999,  and  which is
incorporated herein by reference.

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
          ----------------------------------------------

None.


                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
          ----------------------------------------------------------------

(a) Financial Statements, Financial Statement Schedules and Exhibits

Exhibit
 Number  Document
-------  --------

3.1     Ninth Amended and Restated  Articles of  Incorporation  (incorporated by
        reference to Exhibit 3.04 of the Company's Quarterly Report on Form 10-Q
        for the quarter ended September 30, 1998).

3.2     Amendment to the Ninth  Amended and Restated  Articles of  Incorporation
        (incorporated  by reference to Exhibit 3.03 of the  Company's  Quarterly
        Report on Form 10-Q for the quarter ended September 30, 1998).

3.3     By-Laws,  as amended to date  (incorporated by reference to Exhibit 3.02
        of the Company's  Registration  Statement  under the  Securities  Act of
        1933, as amended, filed January 19, 1990, Registration No. 33-33066).

4.1     Certificate  of  Determination  of Rights,  Preferences,  Privileges and
        Restrictions of Series B Convertible  Preferred Stock  (incorporated  by
        reference  to Exhibit 3.1 of the  Company's  Current  Report on Form 8-K
        dated December 23, 1997).

4.2     Preferred Stock Purchase Agreement dated December 19, 1997 (incorporated
        by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K
        dated December 23, 1997).

4.3     Form of  Convertible  Promissory  Note  (incorporated  by  reference  to
        Exhibit 10.2 of the Company's  Current Report on Form 8-K dated December
        23, 1997).

10.1    Form of Indemnity Agreement with Directors (incorporated by reference to
        Exhibit  10.12  of  the  Company's   Registration  Statement  under  the
        Securities Act of 1933, as amended, filed January 19, 1990, Registration
        No. 33-33066).

10.2    Lease  Agreement  by and between the Company and Bluffs  Group III dated
        October 1, 1996  (incorporated  by  reference  to  Exhibit  10.44 of the
        Company's  Quarterly Report on Form 10-Q for the quarter ended September
        30, 1996).

10.3    Lease Agreement by and between the Company and BancBoston Leasing, Inc.,
        dated January 8, 1997 (incorporated by reference to Exhibit 10.45 of the
        Company's  Quarterly Report on Form 10-Q for the quarter ended March 31,
        1997).

10.4*   The  Company's  1983 Stock  Option Plan  (incorporated  by  reference to
        Exhibit 10.07 of the Company's Annual Report on Form 10-K for the fiscal
        year ended December 31, 1991).

10.5*   Amendment  to the  Company's  1983 Stock  Option Plan  (incorporated  by
        reference to Exhibit  10.47 of the  Company's  Quarterly  Report on Form
        10-Q for the quarter ended June 30, 1997).

10.6*   Amendment  dated April 4, 1997 to the  Company's  1983 Stock Option Plan
        (incorporated  by reference to Exhibit 10.46 of the Company's  Quarterly
        Report on Form 10-Q for the quarter ended June 30, 1997).

10.7*   Amendment dated March 26, 1993 to the Company's  Employee Stock Purchase
        Plan  (incorporated  by  reference  to  Exhibit  10.47 of the  Company's
        Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).

                                    Page 30
<PAGE>

Exhibit
 Number  Document
-------  --------

10.8*   Amendment  dated April 4, 1997 to the Company's  Employee Stock Purchase
        Plan  (incorporated  by  reference  to  Exhibit  10.48 of the  Company's
        Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).

10.9*   The Amended and Restated Stock Option Plan for Independent  Directors of
        PulsePoint Communications (incorporated by reference to Exhibit 10.08 of
        the  Company's  Annual  Report on Form 10-K for the  fiscal  year  ended
        December 31, 1994).

10.10*  Letter agreement  between the Company and Mark C. Ozur  (incorporated by
        reference to the Company's Quarterly Report on Form 10-Q for the quarter
        ended March 31, 1995).

10.11   Line of Credit  Agreement  between the Company and  Imperial  Bank dated
        July  28,  1997  (incorporated  by  reference  to  Exhibit  10.49 of the
        Company's  Quarterly Report on Form 10-Q for the quarter ended September
        30, 1997).

10.12   First  Amendment  and Waiver to the Credit Terms and  Conditions  by and
        between  the  Company  and   Imperial   Bank  dated   October  30,  1997
        (incorporated  by reference to Exhibit 10.52 of the Company's  Quarterly
        Report on Form 10-Q for the quarter ended September 30, 1997).

10.13   Second  Amendment to the Credit Terms and  Conditions by and between the
        Company and Imperial  Bank dated  September  11, 1998  (incorporated  by
        reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q
        for the quarter ended September 30, 1998).

10.14   Security and Loan Agreement Domestic Facility by and between the Company
        and  Imperial  Bank dated July 28, 1997  (incorporated  by  reference to
        Exhibit  10.50 of the  Company's  Quarterly  Report on Form 10-Q for the
        quarter ended September 30, 1997).

10.15   First Amendment to Security and Loan  Agreement,  Domestic Credit by and
        between  the  Company  and   Imperial   Bank  dated   October  30,  1997
        (incorporated  by reference to Exhibit 10.53 of the Company's  Quarterly
        Report on Form 10-Q for the quarter ended September 30, 1997).

10.16   Second Amendment to Security and Loan Agreement,  Domestic Credit by and
        between  the  Company  and  Imperial  Bank  dated   September  11,  1998
        (incorporated  by reference to Exhibit 10.2 of the  Company's  Quarterly
        Report on Form 10-Q for the quarter ended September 30, 1998).

10.17   Warrant Purchase  Agreement by and between the Company and Imperial Bank
        dated  October 30, 1997  (incorporated  by reference to Exhibit 10.54 of
        the  Company's  Quarterly  Report  on Form  10-Q for the  quarter  ended
        September 30, 1997).

10.18   Antidilution  Agreement  by and between the  Company and  Imperial  Bank
        dated  October 30, 1997  (incorporated  by reference to Exhibit 10.55 of
        the  Company's  Quarterly  Report  on Form  10-Q for the  quarter  ended
        September 30, 1997).

10.19   Registration  Rights  Agreement  by and between the Company and Imperial
        Bank dated October 30, 1997  (incorporated by reference to Exhibit 10.56
        of the  Company's  Quarterly  Report on Form 10-Q for the quarter  ended
        September 30, 1997).

10.20   Registration  Rights Agreement dated December 19, 1997  (incorporated by
        reference to Exhibit 10.3 of the  Company's  Current  Report on Form 8-K
        dated December 23, 1997).

10.21   Purchase Agreement between GTE Communication Systems Corporation and the
        Company  (Contract  Number  120900-92-01),  dated January 13, 1993,  and
        Amendment Nos. 1 through 9 thereto (incorporated by reference to Exhibit
        10.57 of the  Company's  Annual  Report on Form 10-K for the fiscal year
        ended December 31, 1997).

10.22** Description of the Company's Executive Officer Bonus Plan for 1999.

10.23** Master Loan and Security  Agreement between the Company and Transamerica
        Business Credit Corporation dated October 1, 1998.

10.24** Stock  Subscription  Warrant No. 1 issued by the Company to TBCC Funding
        Trust II dated November 10, 1998.

10.25** Stock  Subscription  Warrant  No. 2 issued by the  Company  to  Priority
        Capital Resources dated November 10, 1998.

23.1**  Consent of Ernst & Young LLP, Independent Auditors.


Schedule II** Financial Data Schedule.
--------------
*   Management contract or compensatory plan or arrangement.
** Filed herewith.

(b) No Current  Reports on Form 8-K were  filed by the  Company  during the last
    quarter of 1998.

                                    Page 31
<PAGE>

                                   SIGNATURES


Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on March 15, 1999.


      PULSEPOINT COMMUNICATIONS

      By:    /s/ B. Robert Suh            
         ---------------------------
         B. Robert Suh
         Vice President, Finance and
         Chief Financial Officer

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  this  report  has been  signed  by the  following  persons  in the
capacities and on the dates indicated.

      Name                         Title                          Date
      ----                         -----                          ----

Chief Executive Officer:


/s/ Mark C. Ozur                   President,
------------------------------     Chief Executive Officer,    March 15, 1999
Mark C. Ozur                       and Director

Chief Financial Officer:


/s/ B. Robert Suh                  Vice President, Finance     March 15, 1999
------------------------------     Chief Financial Officer
B. Robert Suh                      

Directors:

/s/ John D. Beletic                Director                    March 15, 1999
------------------------------    
John D. Beletic


/s/ Bandel L. Carano               Director                    March 15, 1999
------------------------------    
Bandel L. Carano


/s/ Scot B. Jarvis                 Director                    March 15, 1999
------------------------------    
Scot B. Jarvis


/s/ Cameron D. Myhrvold            Director                    March 15, 1999
------------------------------    
Cameron D. Myhrvold


/s/ Frederick J. Warren            Director                    March 15, 1999
------------------------------    
Frederick J. Warren

                                    Page 32
<PAGE>

                            PULSEPOINT COMMUNICATIONS

                                   SCHEDULE II

                        VALUATION AND QUALIFYING ACCOUNTS
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
                              (Amount in thousands)


                                 Balance at   Additions  Deductions      Balance
                                  beginning  charged to        from       at end
                                  of period    earnings   allowance    of period
================================================================================
December 31, 1996
Allowance for doubtful receivables    $ 600       $  60       $ (60)       $ 600

Accrued warranty reserve              $ 375       $ 217       $(232)       $ 360
================================================================================
December 31, 1997
Allowance for doubtful receivables    $ 600       $ 393       $(466)       $ 527

Accrued warranty reserve              $ 360       $ 589       $(520)       $ 429
================================================================================
December 31, 1998
Allowance for doubtful receivables    $ 527       $ 251       $ (53)       $ 725

Accrued warranty reserve              $ 429       $ 110       $(101)       $ 438
================================================================================


                                    Page 33