<PAGE>
 
   -------------------------------------------------------------------------

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   FORM 10-Q
   (Mark one)
     [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                             EXCHANGE ACT OF 1934
               FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998

                                      or

     [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES
                             EXCHANGE ACT OF 1934
             FOR THE TRANSITION PERIOD FROM ________ TO ________.


                       COMMISSION FILE NUMBER:  O-26886


                      OBJECTIVE SYSTEMS INTEGRATORS, INC.
            (Exact name of registrant as specified in its charter)


                   DELAWARE                           68-0239619
       (State or other jurisdiction of      (I.R.S. Identification Number)
        incorporation or organization)

                             100 BLUE RAVINE ROAD
                           FOLSOM, CALIFORNIA 95630
          (Address of principal executive office, including zip code)

                                (916) 353-2400
             (Registrant's telephone number, including area code)

Indicate by check mark whether the 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
                                         --------       ---------- 

Number of shares of registrant's common stock outstanding as of January 31,
1999: 35,399,423

   -------------------------------------------------------------------------
<PAGE>
 
                      OBJECTIVE SYSTEMS INTEGRATORS, INC.

                               TABLE OF CONTENTS

<TABLE> 
<CAPTION> 
                                                                            PAGE
                                                                            ----
<S>                                                                         <C> 
PART I.   FINANCIAL INFORMATION

Item 1.   Condensed Consolidated Financial Statements......................   1

          Condensed Consolidated Balance Sheets at December 31, 1998
          and June 30, 1998................................................   1

          Condensed Consolidated Statements of Operations for the three
          months and six months ended December 31, 1998 and 1997...........   2

          Condensed Consolidated Statements of Cash Flows for the
          six months ended December 31, 1998 and 1997......................   3

          Notes to Condensed Consolidated Financial Statements.............   4

Item 2.   Management's Discussion and Analysis of Financial Condition and
          Results of Operations............................................   5

Item 3.   Quantitative and Qualitative Disclosure About Market Risk........  15

Item 4.   Vote of Stockholders.............................................  16


PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings................................................  16

Item 6.   Exhibits and Reports on Form 8-K.................................  16
 
SIGNATURE
</TABLE> 
<PAGE>
 
PART I.   FINANCIAL INFORMATION

ITEM 1.        CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                      OBJECTIVE SYSTEMS INTEGRATORS, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                (in thousands)

<TABLE>
<CAPTION>
                                                                            DECEMBER 31,          JUNE 30,
                                                                                1998                1998
                                                                          --------------      --------------
                                                                            (UNAUDITED)            (1)
<S>                                                                       <C>                 <C>
ASSETS
Current assets:
  Cash and cash equivalents...............................................       $17,462            $ 24,568
  Short-term investments..................................................        15,674              16,718
  Accounts receivable (net of allowance of $1,437 and $1,517).............        18,928              16,846
  Deferred income taxes...................................................        24,087              23,194
  Prepaid expenses and other current assets...............................         1,452               1,336
                                                                               ---------           ---------
     Total current assets.................................................        77,603              82,662
Property and equipment, net...............................................        14,500              15,129
Other assets, net.........................................................         4,576               3,567
                                                                               ---------           ---------
     Total assets.........................................................       $96,679            $101,358
                                                                               =========           =========
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable........................................................       $ 4,901            $  5,487
  Accrued liabilities.....................................................         5,795               7,379
  Deferred revenue........................................................         8,892              10,386
                                                                               ---------           ---------
     Total current liabilities............................................        19,588              23,252
 
Deferred income taxes.....................................................           522                 586
 
Stockholders' equity:
  Common stock............................................................        86,418              86,434
  Accumulated translation adjustment......................................        (1,170)             (1,127)
  Retained earnings (deficit).............................................        (8,679)             (7,787)
                                                                               ---------           ---------
     Total stockholders' equity...........................................        76,569              77,520
                                                                               ---------           ---------
       Total liabilities and stockholders' equity.........................       $96,679            $101,358
                                                                               =========           =========
</TABLE>

(1) Information in this column derived from the Company's audited consolidated
balance sheet as of June 30, 1998.


See notes to condensed consolidated financial statements.

                                       1
<PAGE>
 
                      OBJECTIVE SYSTEMS INTEGRATORS, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                   (in thousands, except per share amounts)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                          THREE MONTHS ENDED                    SIX MONTHS ENDED
                                                             DECEMBER 31,                         DECEMBER 31,
                                                  -------------------------------      --------------------------------
                                                        1998              1997              1998               1997
                                                  --------------     ------------      ------------     ---------------
<S>                                               <C>                <C>               <C>              <C> 
Revenues:
  License.........................................       $10,258          $ 9,182           $21,686            $ 11,984
  Service and other...............................         7,325            6,292            13,857              10,893
                                                       ---------         --------          --------           ---------
     Total revenues...............................        17,583           15,474            35,543              22,877
                                                       ---------         --------          --------           ---------
Cost of revenues:
  License.........................................           485              576               934                 887
  Service and other...............................         4,692            6,555             9,362              11,634
                                                        ---------         --------          --------           ---------
     Total cost of revenues.......................         5,177            7,131            10,296              12,521
                                                       ---------         --------          --------           ---------
Gross profit......................................        12,406            8,343            25,247              10,356
                                                       ---------         --------          --------           ---------
Operating expenses:
  Sales and marketing.............................         7,812            9,206            15,191              16,573
  Research and development........................         4,939            3,623             9,421               7,065
  General and administrative......................         1,648            2,050             3,145               3,902
                                                       ---------         --------          --------           ---------
     Total operating expenses.....................        14,399           14,879            27,757              27,540
                                                       ---------         --------          --------           ---------
Loss from operations..............................        (1,993)          (6,536)           (2,510)            (17,184)
Other income, net.................................           341              337               980                 852
                                                       ---------         --------          --------           ---------
Loss before income taxes                                  (1,652)          (6,199)           (1,530)            (16,332)
Benefit for income taxes..........................          (798)          (2,178)             (750)             (5,501)
                                                       ---------         --------          --------           ---------
Net loss..........................................       $  (854)         $(4,021)          $  (780)           $(10,831)
                                                       =========         ========          ========           =========
Basic and diluted net loss per share..............        $(0.02)          $(0.12)           $(0.02)             $(0.33)
                                                       =========         ========          ========           =========
Average shares outstanding........................        34,948           33,402            34,878              33,032
                                                       =========         ========          ========           =========
</TABLE>

See notes to condensed consolidated financial statements.

                                       2
<PAGE>
 
                      OBJECTIVE SYSTEMS INTEGRATORS, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                      SIX MONTHS ENDED
                                                                                        DECEMBER 31,
                                                                           -----------------------------------
                                                                                  1998                1997
                                                                           ---------------      --------------
<S>                                                                        <C>                  <C> 
Cash flows from operating activities:
  Net loss                                                                         $  (780)           $(10,831)
  Adjustments to reconcile net loss to net cash used for operating
   activities:                                                    
   Depreciation and amortization..........................................           3,514               4,261
   Deferred income taxes..................................................            (959)             (6,061)
   Stock compensation expense.............................................             174                 185
   Effect of changes in:                                                   
     Accounts receivable..................................................          (2,079)              4,656
     Prepaid expenses and other current assets............................            (158)               (383)
     Accounts payable.....................................................            (596)             (1,355)
     Accrued liabilities..................................................          (1,611)               (515)
     Deferred revenue.....................................................          (1,494)                 66
                                                                                 ---------           ---------
       Net cash used for operating activities.............................          (3,989)             (9,977)
                                                                                 ---------           ---------
Cash flows from investing activities:                                      
   Sales of short-term investments........................................           1,044               8,524
   Purchases of property and equipment....................................          (2,247)             (2,936)
   Purchases of other assets..............................................          (1,570)               ----
       Net cash provided by (used for) investing activities...............          (2,773)              5,588
                                                                                 ---------           ---------
Cash flows from financing activities:                                
   Proceeds from issuance of common and treasury stock....................           1,655               2,586
   Purchase of treasury stock.............................................          (1,957)               ----
                                                                                 ---------           ---------
       Net cash provided by (used for) financing activities...............            (302)              2,586
                                                                                 ---------           ---------
Effect of exchange rate changes on cash...................................             (42)                175
                                                                                 ---------           ---------
       Net decrease in cash and cash equivalents..........................          (7,106)             (1,628)
Cash and cash equivalents:                                                
   Beginning of the period................................................          24,568              17,817
                                                                                 ---------           ---------
   End of the period......................................................         $17,462            $ 16,189
                                                                                 =========           =========
</TABLE>

See notes to condensed consolidated financial statements.

                                       3
<PAGE>
 
                      OBJECTIVE SYSTEMS INTEGRATORS, INC.
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (unaudited)

1.   BASIS OF PRESENTATION

     These unaudited, condensed, consolidated financial statements have been
prepared by Objective Systems Integrators, Inc. ("OSI") under the rules and
regulations of the Securities and Exchange Commission.  In accordance with those
rules and regulations, some of the information normally included in financial
statements prepared in accordance with generally accepted accounting principles
has been condensed or omitted.

     The information in this report reflects all adjustments that we believe are
necessary to fairly state OSI's financial position, the results of its
operations and cash flows for the periods presented.  These adjustments consist
of items that are normally recurring in nature. In addition, we have made 
certain reclassifications to last year's Condensed Consolidated Financial 
Statements so that they conform with this year's presentation.

     These financial statements should be read in conjunction with the 
consolidated audited financial statements and their notes contained in OSI's
Annual Report on Form 10-K for the fiscal year ended June 30, 1998. Results
for interim periods are not necessarily indicative of the results expected for
the full fiscal year or for any other period.

2.   NET INCOME (LOSS) PER SHARE

     During the quarter ended December 31, 1997, we adopted Statement of
Financial Accounting Standards No. 128 (SFAS 128), Earnings per Share.  SFAS 128
requires that we compute net income (loss) per share using two different
calculations, basic and diluted, and that we disclose the methods we use for
this calculation.  We have restated our earnings (loss) per share for prior
periods to conform with SFAS 128.

     Under SFAS 128, basic net income (loss) per share is computed using the
weighted average of common shares outstanding.  Diluted net income (loss) per
share is computed using the weighted average number of common and common
equivalent shares outstanding during the period.  Common equivalent shares are
the incremental common shares that could be issued following the exercise of
stock options (using the treasury stock method).  Common equivalent shares
outstanding are not included in the net loss per share computations as their
inclusion would have the effect of showing a smaller loss per share.

3.   COMPREHENSIVE INCOME

     In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), Reporting
Comprehensive Income, which we adopted in the first quarter of fiscal 1999.
SFAS 130 requires companies to report a new, additional measure of income on the
income statement or to create a new financial statement that shows the new
measure of income.  "Comprehensive Income" includes foreign currency translation
gains and losses and unrealized gains and losses on equity securities that have
been previously excluded from net income and reflected instead in equity.  The
following table sets forth the calculation of comprehensive income:

<TABLE>
<CAPTION>
                                            FOR THE THREE MONTHS ENDED           FOR THE SIX MONTHS ENDED
                                                   DECEMBER 31,                        DECEMBER 31,
                                      -----------------------------------------------------------------------
(in thousands)                                1998              1997              1998              1997
                                      -----------------------------------------------------------------------
<S>                                   <C>                       <C>               <C>               <C>
Net loss                                           (854)           (4,021)             (780)          (10,831)
Foreign Currency Translation Gains
(Losses)                                            117              (350)              (43)             (542)
                                      -----------------------------------------------------------------------
Total Comprehensive Income                        $(737)          $(4,371)            $(823)         $(11,373)
                                      =======================================================================
</TABLE>

                                       4
<PAGE>
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Certain statements in this Report are "forward-looking statements" as defined in
the Private Securities Litigation Reform Act of 1995 ("Reform Act").  We have
identified them with an asterisk (*).  Our actual results may differ materially
because in making these statements we have had to make a number of assumptions
about risks, both known and unknown.  Some of these assumptions involve the
impact of fluctuations in our quarterly results, our ability to effectively
manage growth, our ability to effectively manage our professional services and
customer support organizations consistent with the changes in our business and
industry, our management of product transitions, the impact of product and
customer concentrations on future growth, our ability to attract and retain
key employees, the growth of emerging markets for our products and their
ability to absorb new technologies, the effects of the Year 2000 transition on
OSI and our customer base, the effects of competition and technological change
in our markets, the relative strength of the U.S. dollar against other
currencies, the continued viability of our third-party relationships, our
ability to develop, implement and protect our proprietary technology, the
effects of changes in, or our failure to comply with, government regulations,
and projections regarding overall economic and business conditions. For a more
detailed discussion of these risks and some of the other factors that have and
will affect our business, see OSI's Annual Report on Form 10-K for the fiscal
                          ---                          
year ended June 30, 1998.  See also the Section titled "Factors That May Affect 
                           --------       
Future Results" in this Report.

OVERVIEW

OSI develops, markets and supports object-oriented, component based software for
service and network management.  We were founded in June 1989 and began
shipments of our NetExpert(R) product line in August 1990.  As of December 31,
1998, we had directly or indirectly licensed our products to more than 200
customers around the world.

A typical NetExpert sale includes a combination of license fees, fees for
professional services and fees for customer support and training.  Revenue from
licensing, servicing and supporting NetExpert products has accounted for
substantially all of our revenues since OSI was founded.  In addition, a large
part of our revenue has come from substantial orders placed by large
organizations.  We do not believe that these factors will change in the near
term.*

The timing of large orders and their fulfillment has caused material
fluctuations in our operating results, particularly on a quarterly basis.  We do
not believe that this situation is likely to change.*  For this reason and
others, some of which are discussed in "Factors That May Affect Future Results,"
you should expect that our quarterly revenues and operating results will vary
significantly in the future, that period-to-period comparisons of our revenues
and results are not necessarily meaningful and that quarterly revenues should
not be relied on as indications of future performance.*

Over the past several years, we have experienced a shift in our customer base
and in our product and services offerings.  A growing percentage of our sales
are being made to new, emerging communications service providers.  Rather than
buying "point" solutions for one requirement, they frequently procure a full
suite of service and network operational support systems using NetExpert and
NetExpert-based application components.  In addition, many of these customers do
not have adequate in-house staff to rapidly deploy a full suite of  NetExpert
solutions.  Therefore, they tend to rely increasingly on us for help in
deploying their operational support systems.

The effects of this shift have been a lengthening of the sales cycle, an
increase in the relative percentage of our business involving professional
services, an increase in the time required for a 

                                       5
<PAGE>
 
successful implementation of our solutions and an increase in customer credit
risks. Another effect has been a relative increase in time between the execution
of a customer contract and recognition of revenue from that contract.
Moreover, we expect that these effects will continue for the forseeable
future.*

We distribute and sell our NetExpert products in North America primarily through
a direct sales force.  Outside of North America, we typically sell our products
and services through systems integrators, local distributors and, to a lesser
extent, through an in-region direct sales force.  We intend to enter into
additional international markets and to continue to grow our operations outside
of North America by expanding our direct sales force, opening additional in-
region customer support and sales offices, adding distributors and pursuing
additional strategic relationships.*  See further discussion in the "Results of
                                      ---                                      
Operations" section below.

For the second quarter of fiscal 1999, we had a net loss of $0.9 million
compared to a net loss of $4.0 million for the same period in fiscal 1998.  For
the first half of fiscal 1999, we had a net loss of $0.8 million compared to a
net loss of $10.8 for the same period in fiscal 1998.  Some of the factors that
contributed to this decrease in net loss are described in the following "Results
of Operations" section.  We are continuing to follow a strategy that is aimed at
(1) focusing on the emerging and wireless service provider markets, (2)
narrowing our product development and professional services efforts to achieve
more reusable application components, (3) building stronger sales and customer
interface organizations, and (4) forging strategic alliances and strengthening
existing relationships.

RESULTS OF OPERATIONS

REVENUES:

<TABLE>
<CAPTION>
                                      FOR THE THREE MONTHS ENDED                        FOR THE SIX MONTHS ENDED
                                             DECEMBER 31,                                     DECEMBER  31,
                            --------------------------------------------     --------------------------------------------
(in thousands, except
 percentages)                    1998           CHANGE           1997             1998           CHANGE           1997
                            ------------     ----------     ------------     ------------     ----------     ------------
<S>                         <C>              <C>            <C>              <C>              <C>            <C>
License...................       $10,258          12%            $ 9,182          $21,686          81%            $11,984
Percentage of revenues....            58%                             59%              61%                             52%
Service and other.........       $ 7,325          16%            $ 6,292          $13,857          27%            $10,893
Percentage of revenues....            42%                             41%              39%                             48%
Total revenues............       $17,583          14%            $15,474          $35,543          55%            $22,877
</TABLE>

License Revenues.  Software licenses are generally granted and priced on a per-
instance, per-server basis, although we sometimes grant site, network-wide or
enterprise-wide licenses for larger operating support systems or networks.
License revenues are generally recognized when a noncancellable license
agreement has been signed, the product has been shipped, the fees are fixed and
determinable, and collection is probable.  Revenues under contracts that require
significant customization of our application components are recognized using the
percentage-of-completion method of contract accounting based on the ratio of
incurred costs to total estimated costs.  Although our license agreements
generally do not provide for a right of return, we maintain reserves for returns
and potential credit losses.

License revenues increased in absolute dollars and decreased slightly as a
percentage of total revenues for the three months ended December 31, 1998,
compared with the three months ended December 31, 1997.  The increase in license
revenues was caused by an expanded base of revenue generating 

                                       6
<PAGE>
 
customers in the quarter, especially in Europe. License revenues from Europe
increased $2.4 million or 615% over the prior year's quarter. License revenues
increased in both absolute dollars and as a percentage of total revenues for the
six months ended December 31, 1998 compared with the six months ended December
31, 1997. This increase is attributed to an increase in overall orders
particularly in the first quarter of fiscal 1999. License revenues represented
the majority of our total revenues for the three months and six months ended
December 31, 1998. We anticipate that this will continue to be the case in the
foreseeable future.* However, historic growth rates in our license revenues
should not be relied on to predict future growth rates.

We adopted Statement of Position 97-2 ("SOP 97-2"), "Software Revenue
Recognition," effective July 1, 1998.  This did not have, and is not expected to
have, a material effect on our revenues and net income.*

Services and Other Revenues.  Revenues for training, consulting and professional
services are recognized as the services are performed and acceptance criteria
have been met.  We offer support contracts to our customers that provide for
telephone support, product updates and technical support during the support
period. Support revenues are deferred and recognized ratably over the term of
the support agreement, typically 12 months. Payments for support are generally
made in advance and are nonrefundable. The growth in our service and other
revenues in absolute dollars for the three months ended December 31, 1998,
compared with the three months ended December 31, 1997, reflects an increase
in both our installed customer base and in the number of active customer
projects. For the six months ended December 31, 1998 compared to the six
months ended December 31, 1997, service revenues increased in absolute dollars
and decreased as a percentage of total revenues. The increase in absolute
dollars was due to an increased level of professional service projects along
with revenue growth in support services, which increased as a direct result of
increases in OSI's customer base. The decrease in services and other revenues
as a percentage of total revenues is a result of the significant increase in
license revenue, which increased 81% for the six months ended December 31,
1998 in comparison with the six months ended December 31, 1997.

We expect that service and other revenues will continue to represent a
significant portion of our total revenues in future periods.*  We anticipate
continued demand for professional services in connection with licenses of
NetExpert, renewal of existing support contracts and new projects in a growing
installed base.*  However, historic growth rates in our service and other
revenues should not be relied on as an indication of future growth rates.

International Revenues.  International revenues represented 42% and 18% of total
revenues for the three months ended December 31, 1998 and 1997, respectively.
International revenues represented 44% and 22% of total revenues for the six
months ended December 31, 1998 and 1997 respectively.  Increased international
revenues, both as a percentage of total revenues and in absolute dollars, were
due primarily to our on-going investment in this segment of our business. The
result has been an increase in orders for software for both existing and new
international customers. Given the current economic uncertainties in world
markets, there are no assurances that this trend will continue.*

A significant portion of our international revenues were derived from increased
sales in Europe and Latin America.  Deregulation of the European
telecommunications market, which began in January, 1998, has created an active
market and a number of opportunities for us.  Also, the weakened economy in the
Latin American region has not had a negative effect on our revenues to date.
However, this may not be the case for future periods.*

The weakened economies in the Asia-Pacific region have had some effect on
revenues, but the effect has not been material.  However, we continue to see
indications that this may not be the case for future periods.*  There can be no
assurances that the economies in Asia-Pacific will recover in the 

                                       7
<PAGE>
 
near term or that local currencies will strengthen relative to the U.S. dollar.
The result could be delayed payments for pending orders, a slowdown in the rate
of privatization of telecommunications services providers, a further slowing of
economic growth in the region and a resulting reduction in future purchases of
our products and services.*

A majority of our international sales are currently denominated in U.S. dollars.
As a result, our current exchange rate exposure is not material.  However, the
increase in the value of the U.S. dollar relative to foreign currencies has made
our products more expensive for international purchasers and, therefore, less
competitive in markets outside the United States.  In addition, we are facing
increased pressure to price and bid our products in non-U.S. currencies. In the
event that contracts denominated in foreign currencies become significant, we
will consider hedging to reduce the exposure to fluctuations in foreign
currency exchange rates. As a result, we can give no assurances that we will
continue to be successful in minimizing our exchange rate exposures.*

OSI's international business involves a number of inherent risks.  These include
longer accounts receivable collection periods, greater difficulty in
collections, difficulty in staffing and managing operations; longer sales
cycles; potentially unstable political conditions; language barriers; cultural
differences; unexpected changes in regulatory requirements; the burden of
complying with a wide variety of foreign laws, including reduced protection for
intellectual property rights; potentially adverse tax consequences and tariffs
and other trade barriers.  While we expect that international revenues will
continue to provide a material portion of our total revenues, we can give no
assurances that our current international risk profile will remain stable.*  Any
changes could have a material adverse effect on our future international sales
and, therefore, our overall operating results and financial condition.

COST OF REVENUES:

<TABLE>
<CAPTION>
                                       FOR THE THREE MONTHS ENDED                                FOR THE SIX MONTHS ENDED
                                              DECEMBER 31,                                             DECEMBER 31,
                            ----------------------------------------------          -----------------------------------------------
(in thousands, except
 percentages)                   1998               CHANGE            1997               1998               CHANGE            1997
                            ----------          --------       -----------          ----------          --------       ------------
<S>                         <C>                 <C>            <C>                  <C>                 <C>            <C>
Cost of license revenues...    $   485             (16%)            $  576             $   934               5%             $   887
Percentage of revenues.....          3%                                  4%                  3%                                   4%

Cost of service and other                                                                                         
     revenues..............    $ 4,692             (28%)            $6,555             $ 9,362             (20%)  
Percentage of revenues.....         26%                                 42%                 26%                                  51%

Total cost of revenues.....    $ 5,177             (27%)            $7,131             $10,296             (18%)            $12,521
Percentage of revenues.....         29%                                 46%                 29%                                  55%

Gross profit...............    $12,406              49%             $8,343             $25,247             144%             $10,356
Percentage of revenues.....         71%                                 54%                 71%                                  45%

</TABLE>

Cost of License Revenues.  Cost of license revenues consists of license fees
paid to third-party software vendors and the costs of product media and
duplication, manuals, packaging materials, shipping expenses, amortization of
capitalized software costs, amortization of intangible costs, and related labor
costs.  As a percentage of revenues, the cost of license revenues remained
relatively flat because many of these costs are fixed and do not vary with the
amount of our licensing revenue.  However, for the three months ended December
31, 1998, compared with the three months ended December 31 1997,  the decrease
in the cost of license revenues is attributed to lower amounts for third-party
software licenses.  For the six months ended December 31, 1998, compared with
the six months ended December 31, 1997, the cost of license revenues increased
slightly, which was attributed to the increase in license revenue and related
costs for third-party software.

Cost of Service and Other Revenues.  Cost of service and other revenues consists
mainly of personnel costs related to providing professional and support services
to assist our customers in deploying our products.  It also includes outside
service fees paid to third-party providers of professional services, 

                                       8
<PAGE>
 
related travel costs and overhead. The cost of service revenues related to
providing professional services for our customers decreased for the three months
ended December 31, 1998, compared with the three months ended December 31, 1997.
This decrease was due to the significant decrease in head count in 
professional services, a reduction in the use of contractors, reduced travel
costs and reduced facilities and communications costs. A reduction in our
professional services costs was somewhat offset by an increase in our cost for
maintenance and support services. We added head count and increased our spending
for communications and computer-related items to provide maintenance and support
services to a larger installed base. For the six months ended December 31, 1998
compared with the six months ended December 31, 1997, the cost of service
revenues related to providing professional services decreased for the same
reasons as stated above in the quarterly comparison.

Gross profit increased because of the combined effects of increases in license
revenue as well as service and other revenue and decreased costs in both the
licensing and professional services segments for the three months ended December
31, 1998, as compared to the three months ended December 31, 1997.  For the six
months ended December 31, 1998 compared with the six months ended December 31,
1997, gross profit increased related to the same factors that contributed to
increases in gross profit in the quarterly comparison.

To provide for current and anticipated future professional service requirements,
we are continuing to evaluate the need for additional professional service
personnel, including the use of outside contractors.  See comments in the
                                                      ---                
"Overview" section for further discussion on services and other revenues.  We
believe that the cost of service and other revenues may increase in absolute
dollars.*


OPERATING EXPENSES:

<TABLE>
<CAPTION>
                                       FOR THE THREE MONTHS ENDED                         FOR THE SIX MONTHS ENDED
                                              DECEMBER 31,                                      DECEMBER 31,
                            ---------------------------------------------     ---------------------------------------------
(in thousands, except
 percentages)                    1998            CHANGE           1997             1998            CHANGE           1997
                            ------------     ----------      ------------     ------------     ----------      ------------
<S>                         <C>              <C>             <C>              <C>              <C>             <C>
Sales and marketing........      $ 7,812         (15%)            $ 9,206          $15,191          (8%)            $16,573
Percentage of revenues.....           44%                              59%              43%                              72%
Research and development...      $ 4,939          36%             $ 3,623          $ 9,421          33%             $ 7,065
Percentage of revenues.....           28%                              23%              27%                              31%
General and administrative.      $ 1,648         (20%)            $ 2,050          $ 3,145         (19%)            $ 3,902
Percentage of revenues.....            9%                              13%               9%                              17%
Total operating expenses...      $14,399          (3%)            $14,879          $27,757           1%             $27,540
Percentage of revenues.....           82%                              96%              78%                             120%
</TABLE>

Sales and Marketing.  Sales and marketing expenses consist mainly of salaries,
commissions and bonuses for sales and marketing personnel, facilities costs
associated with our sales and customer support offices, and promotional
expenses.  Sales and marketing expenses for the three months ended December 31,
1998, compared with the three months ended December 31, 1997, decreased both in
absolute dollars and as a percentage of revenues despite the increase in
revenue. This was also true for the six months ended December 31, 1998
compared with the six months ended December 31, 1997. The decrease during both
periods was due to a reduction in travel expenses and the additional charge of
$0.9 million to our Asia-Pacific sales operations recorded in the quarter
ended December 31, 1997. Additionally, during both periods there was a shift
of product managers with technical expertise who focus on determining product
requirements as part of the development process to research and development
from marketing. Also, we reduced the use of outside contractors for strategic
marketing efforts. However, we expect that sales and marketing expenses in
future periods will increase in absolute dollars.*

Research and Development.  Research and development expenses increased for the
three months ended December 31, 1998, compared with the three months ended
December 31, 1997. This increase 

                                       9
<PAGE>
 
was due primarily to additional head count. The higher costs resulted from the
realignment of certain personnel from marketing into research and development.
These factors also resulted in increased research and development expenses
during the six month period ended December 31, 1998 compared to the six month
period ended December 31, 1997. We expect to continue committing significant
resources to research and development in future periods to enhance and extend
our core technology and product lines.*

General and Administrative.  General and administrative expenses consist mainly
of personnel costs for finance, human resources, and general management.  Also
included are outside professional service fees, corporate insurance expense, and
provision for doubtful accounts.  The decrease in general and administrative
expenses for the three months ended December 31, 1998 compared with the three
months ended December 31, 1997, was due mainly to reduced administrative, legal,
insurance and travel costs.  General and administrative expenses decreased for
the six month period ending December 31, 1998 compared to the six month period
ending December 31, 1997.  The decrease was attributed to the same factors
stated above in the quarterly comparison.  General and administrative expenses
may increase in the future if the growth in our business continues and we hire
additional personnel.*  Although we believe our allowance for doubtful accounts
is adequate as of December 31, 1998, we will continue to review this allowance
and adjust it as needed.  There can be no assurances that future quarters will
not require significant charges which would be reflected as general and
administrative expenses.*

OTHER INCOME, NET:

<TABLE>
<CAPTION>
                                      FOR THE THREE MONTHS ENDED                        FOR THE SIX MONTHS ENDED
                                             DECEMBER 31,                                     DECEMBER 31,
                            --------------------------------------------     --------------------------------------------
(in thousands, except
 percentages)                    1998            CHANGE           1997             1998            CHANGE           1997
                            ------------     ----------      ------------     ------------     ----------      ------------
<S>                         <C>              <C>            <C>              <C>              <C>            <C> 
Other income, net..........        $ 341              1%           $ 337            $ 980             15%           $ 852
Percentage of revenues.....            2%                              2%               3%                              4%
</TABLE>

Other Income, Net. The increase in other income, net was due to reduced 
levels of foreign exchange losses offset by decreased interest income.


BENEFIT FOR INCOME TAXES:

<TABLE>
<CAPTION>
                                       FOR THE THREE MONTHS ENDED                          FOR THE SIX MONTHS ENDED
                                              DECEMBER 31,                                       DECEMBER 31,
                            ---------------------------------------------     ----------------------------------------------
(in thousands, except
 percentages)                    1998            CHANGE           1997             1998            CHANGE           1997
                            ------------     ----------      ------------     ------------     ----------      ------------
<S>                         <C>               <C>            <C>              <C>               <C>             <C> 
Provision benefit for
  income taxes............         $(798)          NM           $ (2,178)           $(750)             NM          $(5,501)
Percentage of revenues....            (5%)                           (14)%             (21%)                             (24%)
</TABLE>

nm -- Not meaningful


Benefit For Income Taxes.  The Benefit For Income Taxes includes federal, state
and foreign income taxes. The effective tax rates for the three months ended
December 31, 1998 and the three months ended December 31, 1997 were 48% and
35%, respectively. The effective tax rates for the three months ended December
31, 1998 and December 31, 1997 differs from the federal statutory rate
primarily
                                       10
<PAGE>
 
because of foreign taxes, state taxes and research and development tax credits.
The effective tax rates for the six months ended December 31, 1998 and the six
months ended December 31, 1997 were 49% and 34%, respectively. Effective tax
rates increased in the periods ended December 31, 1998 primarily due to the
reinstatement of the federal research and development tax credit by Congress in
October of 1998.

FACTORS THAT MAY AFFECT FUTURE RESULTS

For a more thorough discussion of the factors and risks that may affect OSI's
future results, we urge you to see OSI's Annual Report on Form 10-K for the
                               ---                                         
fiscal year ended June 30, 1998.

Our quarterly operating results have varied significantly in the past, and we
believe that they may vary significantly in the future.*  The fluctuation in
quarterly license revenues is caused by the timing of fulfilling large orders
from our customers.  These include global telecommunications providers and the
new emerging communications service providers, as described more fully in the
"Overview" section.  Large orders are typically preceded by long sales cycles.
Accordingly, it has been and will continue to be difficult to predict when they
will be received.*  We expect that quarterly license revenues may continue to
vary significantly depending on the timing of large orders.*  The failure to
obtain a large order during any given reporting period, for whatever reason,
will have a material, adverse effect on our reported business, operating results
and financial condition.*

This variance in operating results also is affected by such factors as the
capital spending patterns of our customers; changes in our pricing policies or
those of our competitors; increased competition; cancellation of licenses or
support agreements; personnel changes; fluctuation in the demand for NetExpert;
the number, timing and significance of new products and product enhancements by
OSI and our competitors; our ability to develop, introduce and market new and
enhanced versions of NetExpert on a timely basis; the mix of direct and indirect
sales; changes in levels of operating expenses; our assessment of allowance for
bad debts or sales returns; and general economic factors, among others.  Because
of these factors, our quarterly revenue and operating results are difficult to
forecast.

Revenues are also difficult to forecast because our sales cycle, from initial
evaluation to product installation, varies substantially from customer to
customer.  The purchase of a network operations support system and service or
network management applications generally involves a large commitment of
capital.  This can add significant time to the sales cycle because of the
customer's internal approval procedures.  It also may involve testing and
acceptance of new technologies that affect crucial customer operations.  For
these and other reasons, the sales cycle for our products is often lengthy and
subject to a number of risks over which we have little or no control.  See
                                                                       ---
further discussion of the shift of our customer base in the "Overview" section.

In addition, we typically receive a significant portion of our orders, and
record the resulting revenue, in the last weeks or even days of a quarter.
Expense levels are planned in advance and are based, in part, on our
expectations of future revenues.  If actual revenues are below expectations,
operating results can be adversely affected.  In particular, because only a
small portion of our expenses varies with revenue, net income may be
disproportionately affected by a shortfall in anticipated revenue.  We believe
this pattern will continue.*

OSI's transactions have historically been primarily in U.S. dollars.  As we
expand our international operations, transactions in foreign currencies can be
expected to increase.*  This will result in a corresponding increase in our
exchange rate risk or increased costs to the extent we implement hedging
programs to reduce the level of exposure.  If exchange rates change unfavorably,
or we implement hedging programs, charges to operations could increase.

                                       11
<PAGE>
 
OSI has an ongoing program of assessing the extent to which its internal systems
and products evaluate date information, and, if so, whether they can properly
process and evaluate dates on or after the Year 2000 (i.e. whether they are
"Year 2000-compliant").  We are taking remedial action where our systems and
products are not Year 2000-compliant.  We are also evaluating contingency plans
for continuing operations if Year 2000 problems arise despite our steps to avoid
them.  We expect these activities to continue throughout calendar 1999.*

We believe that we have identified the Year 2000 dependencies in our internal
systems.  We have examined all critical systems including manufacturing, sales,
development, communications and financial systems.  We have also examined many
of our non-computer electronic devices which contain microprocessors (for
example, telephones, security systems, and HVAC systems).  As these dependencies
have been identified, we believe that we are taking the remediation measures
necessary for our internal systems to be Year 2000 compliant.  No significant
internal systems projects are being deferred due to year 2000 remediation costs.
In most instances the installation of new software or hardware that is year
2000-compliant is occurring in the normal course of business.  We are not
currently aware of any material operational issues or costs associated with
preparing our internal systems for the Year 2000.   However, no assurances can
be given that we will not experience unanticipated material costs caused by
undetected errors or defects in our internal systems.  Delays in implementation
of new information systems or a failure to identify all of our Year 2000
dependencies could result in material adverse consequences.*

The Company has evaluated all of our currently offered products.  We have been
taking measures to bring our framework products into Year 2000 compliance in a
timely way.  If our products are not able to manage and manipulate data related
to the Year 2000, the result could be a material adverse affect on our
business.*  At this time, a Year 2000 compliant version of the NetExpert
framework is available and has been successfully tested on a number of operating
systems platforms using the British Standards Institutions' criteria.  The
changes needed to make some of our other NetExpert application products
compliant are currently either completed or are being coded and tested.  We
expect these efforts to be completed by March 31, 1999.*  At this time we do not
intend to develop modifications to certain of our older products or customized
deliverables no longer under warranty to make them Year 2000-compliant. In
spite of remediation efforts, we can give no assurances that our efforts will
be successful or that our compliant products will function properly when they
are integrated with other non-compliant products, including customized OSI
software, third-party software, and hardware. Additionally, there can be no
assurance that the Company's current products will be compliant in all
environments. We have notified each of our customers by letter stating OSI's
year 2000 compliance standards. Year 2000 compliant versions of available
products have been offered at no additional charge to our customers who have
purchased maintenance and support services. We have also offered them
professional services to assist in migrating their NetExpert-based systems to
Year 2000-compliant versions.

We are working with key suppliers of third-party software products and services
used in connection with NetExpert regarding the Year 2000-compliance of their 
products and services. We are also attempting to monitor their reported
progress toward Year 2000-capability and compatibility with Year 2000-
compliant versions of NetExpert. We are not currently aware of any material
operational issues or costs associated with third party software products for
the year 2000. However, no assurances can be given that we will not experience
unanticipated material costs caused by undetected errors or defects in these
third-party software products.* Delays in remediation or a failure to identify
all of our Year 2000 dependencies could result in material adverse
consequences.

Our products are used in numerous operating environments.  Even if we bring our
principal products into Year 2000 compliance, our customers may nevertheless
experience Year 2000 difficulties due to the noncompliance of other products
provided by OSI, the customer or a third party with which our principal products
interoperate. Even if we have disclaimed responsibility for, or in certain 
cases, identified and notified our customers of these noncompliant software
issues, they may nevertheless make claims against the makers of all the
component parts of an operating

                                       12
<PAGE>
 
environment. Our agreements with our customers typically contain provisions
designed to limit our liability for these types of claims. It is possible,
however, that such provisions will not provide adequate protection from
liability under applicable regulations, codes or ordinances or under
unfavorable judicial decisions.* The outcome of such lawsuits and the impact
on the Company are not estimable at this time. Any such claims, whether with
or without merit, could result in a material adverse effect on our business,
financial condition and results of operations.*

We are in the process of contacting our suppliers of products and services to
determine the extent to which they believe their products and operations are
Year 2000-capable. The Company has requested information from its critical
suppliers and vendors to determine if they are capable of performing and the
extent to which their failure to remediate their own Year 2000 issues could
affect the Company. This survey includes providers of products and services
and addresses areas such as network and communications infrastructure,
manufacturing, facilities management, finance and human resources. We will
proceed with further testing and analysis of vendor systems as we believe
necessary.

We are currently developing contingency plans in the event of a critical
system failure or delay. We expect assessment of these plans to continue
throughout calendar year 1999. Contingency plans are being considered to
address issues regarding suppliers that are not Year 2000-capable. Our
dependence on critical suppliers and vendors, and therefore on the proper
functioning of their information systems and software, means that their
failure to address Year 2000 issues could have a material effect on the
Company's operations and financial results.* As of this date, we are not aware
of any critical systems suppliers or vendors that will not be Year 2000-
compliant. However, the Company will continue its assessment, and based on the
assessment may identify alternative suppliers and vendors.*

OSI believes that its reasonably likely worst case scenario would involve
problems with the corruption of data contained in internal information
systems, hardware failure and the failure of third-party systems. We believe
the greatest risk lies with potential failure of third-party systems rather
than with our internal systems or products. The Company has the least ability
to assess and remediate the Year 2000 problems of third parties. We believe
the greatest detrimental effect would occur if infrastructure services such as
electricity, telecommunications, transportation supply chains or suppliers of
materials were inoperable. OSI relies on local private and governmental 
suppliers for electricity, water, sewer and other needed supplies. Failure
of an electrical grid or an uneven supply of power would be a worst case
scenario that could completely shut down the affected facility and also shut
down airports and other transportation means. A worst case scenario involving
a critical supplier of materials would be the partial or complete shutdown of
the supplier and its inability to provide supplies on a timely basis. We do
not maintain the ability to replace most third-party supplies with internal
production and may not be able to obtain a replacement supplier in a timely
manner, on acceptable terms or at all.

Among other things, our contingency plan in the event of a major infrastructure
failure might include a shift in production to another unaffected site.  The
Company has plans to install a back up generator to provide a partial power
supply to its core function areas. While the Company does not maintain the
ability to replace third-party supplies with internal production, contingency
planning might involve the ongoing assessment and identification of substitute
suppliers, and in certain limited situations, a planned increase in the level of
inventory carried.

To date, we have incurred costs related to our Year 2000 readiness program.  We
have not maintained a separate cost accounting for our Year 2000 costs.  OSI's
Year 2000 readiness efforts have been performed by existing personnel and costs
have been expended as normal operating costs.  These various costs include
costs to conduct testing and modification of our computer network and our 
principal products, as well as certain products and other deliverables
(including customized OSI software rulesets and applications) for

                                       13
<PAGE>
 
which OSI has agreed by contract to provide Year 2000-compliant versions. As
of December 31, 1998, these costs are estimated to be $6.0 million. We
anticipate these costs will continue in calendar year 1999 and possibly
thereafter.*

We will incur additional costs for our Year 2000 readiness program related to
product testing and customer service requests.  These costs are currently not
expected to exceed $3.0 million during the current fiscal year.*  The
predominant portion of the costs incurred to date, as well as those expected to
be incurred, are research and development expenses related to the modification
and testing of our products.  We believe we currently have adequate general
corporate funds with which to pay for expected costs and expenditures.*  This
estimate is based on a current assessment and is subject to change as our Year
2000 readiness program progresses.  It does not include potential costs related
to customer or other claims or costs related to internal software and hardware
replaced in the normal course of business.

OSI has provided our customers with limited assurances that certain versions 
of certain OSI products comply with the Year 2000 standards adopted by OSI.
Except as specifically provided for in contracts and limited written
assurances given by OSI, OSI does not believe it is legally responsible for
costs incurred by customers to ensure the Year 2000 compliance of their
software, systems and operations.

We currently expect that the Year 2000 issue will not pose significant internal,
operational problems.*  However, a delay in implementing new information
systems, or a failure to fully identify all Year 2000 dependencies in our
internal systems or in the systems of our suppliers, customers and financial
institutions, could have material adverse consequences, including delays in the
delivery or sale of products.  Therefore, we are evaluating contingency plans
for continuing operations should these types of problems arise.  We believe that
our contingency planning will be completed and tested by the end of this
calendar year.*

While many of our customers have already migrated to Year 2000-compliant
versions of our products, we believe that the purchasing patterns of our
customers and potential customers may be affected by the Year 2000 issues as
they expend significant resources to bring their current software systems into
Year 2000 compliance.* These expenditures could be accelerated resulting in
increased sales in the near future and conversely in reduced funds available to
purchase products at a later time.  Alternatively, capital expenditures for
purchases for products such as ours could be postponed or cancelled altogether.
Although unknown at this time, potential adverse changes in purchasing patterns
such as these could have a material adverse effect on our business, operating
results or financial condition.*

Finally, we believe that competition in our markets is increasing.*  We believe
that NetExpert and the breadth of our applications give us a favorable market
position. However, increased competition could result in price reductions,
reduced gross margins or loss of market share, any of which would have a
material adverse effect on our business, operating results and financial
condition.*

Because of the factors described above, we believe our quarterly revenues and
operating results are likely to vary significantly in the future.*  We also
believe that period-to-period comparisons of our results are not necessarily
meaningful and should not be relied on as indications of future performance.
Further, it is likely that our revenues or operating results will be below the
expectations of public market analysts and investors in some future quarter.*
If that occurs, the price of our Common Stock could be materially, adversely
affected.


LIQUIDITY AND CAPITAL RESOURCES

For the six months ended December 31, 1998, net cash used for operations was
$3.8 million compared with net cash used for operations of $10 million for the
six months ended December 31, 

                                       14
<PAGE>
 
1997. This net cash used for the six months ended December 31, 1998 is due
mainly to the loss for the period, increased accounts receivables, and a
reduction in accounts payable and deferred revenue. We currently expect to make
capital expenditures of $6 million to $10 million in the next twelve months,
primarily for the acquisition of technology and the purchase of computer
equipment, related software, furniture, fixtures, and leasehold improvements.*

In September 1998 our Board of Directors authorized a stock repurchase program
under which we could purchase up to 1,000,000 shares of our common stock on the
open market.  As of December 31, 1998, we had repurchased 410,000 shares of our
common stock in the open market at an average purchase price of $4.77, for a
total cost of approximately $2.0 million. Of the repurchased shares of our 
common stock, 267,500 were used for fulfillment of a portion of the shares 
purchased through Employee Stock Purchase Plan on October 31, 1998.

As of December 31, 1998, we had working capital of approximately $58 million,
including $33.1 million in cash, cash equivalents and short-term investments.
In addition, we have a $2.5 million unsecured revolving line of credit that
expires in December 1999. Under the line of credit, borrowings bear interest at
either (1) a fluctuating rate equal to the prime lending rate in effect or (2) a
fixed rate that is 2% above the London Inter-Bank Offered Rate.  As of December
31, 1998, we had not borrowed under our line of credit.  The agreement for the
line contains certain financial covenants.  As of December 31, 1998, we were in
compliance with those covenants.

From time to time, some of our accounts receivable are beyond their payment
terms.  We maintain an allowance for doubtful accounts that we believe is
adequate to cover potential credit losses.*  On December 31, 1998, our
reserve for doubtful accounts was $1.4 million.  We believe the current reserves
are adequate to provide for potential credit losses or sales returns.*

We also believe that our cash balances and cash flow from operations are
sufficient to support our working capital requirements for at least the next
twelve months.*  Thereafter, if cash generated from operations cannot satisfy
our working capital requirements, we may need to raise additional funds.
Financing may not be available or, if it is, may not be obtainable on terms
favorable to us or our stockholders.*  If we raise additional capital by issuing
equity or convertible debt securities, ownership dilution to stockholders will
result.  If funds are unavailable, our business may be adversely affected.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We are exposed to a variety of risks, including changes in interest rates
affecting the rate of return on our investments and fluctuations in the value of
international currencies.  In the normal course of our business, we employ
established policies and procedures to manage our exposure to fluctuations in
interest rates and foreign currency values.

Our exposure to market rate risk for changes in interest rates relates primarily
to our investment portfolio.  We have not used derivative financial instruments
in our investment portfolio.  We invest with high-quality issuers and limit the
amount of credit exposure to any one issuer.  We protect and preserve our
invested funds by limiting default, market and reinvestment risk.  We have, as
of December 31, 1998, a portfolio of short-term investment securities valued at
$15.7 million.  We have determined that the interest rate risk to that portfolio
from reasonably possible near-term changes in interest rates is not material.

The net assets of our Australian subsidiary are denominated in Australian
dollars.  We operate in certain countries in Latin America, Eastern Europe and
the Asia-Pacific region where there are limited forward currency exchange
markets.  We have unhedged transaction exposures in these currencies.  We have
not entered into forward foreign exchange contracts for speculative or trading
purposes.

                                       15
<PAGE>
 
Effective January 1, 1999, eleven countries in Europe will be in the process of
converting their sovereign currencies into one common legal currency.  We are
currently evaluating the effect of the European conversion on pricing strategies
for our products and services, contractual agreements, and accounting system
capabilities.  We believe our internal accounting, order management, and finance
and banking systems will accommodate the conversion. However, there can be no
assurances that, going forward, the conversion will not have an adverse effect
on our business.


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


On November 18, 1998, we held our Annual Meeting of Stockholders.  At the
meeting, the stockholders elected as directors Richard G. Vento (with 31,579,701
affirmative votes, and 86,503 votes withheld), Tom L. Johnson (with 31,580,678
affirmative votes, and 85,526 votes withheld), George F. Schmitt (with
31,623,662 affirmative votes, and 42,542 votes withheld), Jonathan B. Shantz
(with 31,623,662 affirmative votes, and 42,542 votes withheld) and  Dr. Kornel
Terplan (with 31,484,337 affirmative votes, and 181,867 votes withheld).

An amendment to our 1995 Employee Stock Purchase Plan was approved, increasing
the number of shares of Common Stock reserved for issuance by 1,000,000 shares
(with 31,157,062 affirmative votes, 488,877 negative votes, 20,265 abstaining
and 0 nonbroker votes).

The stockholders also ratified the appointment of Deloitte & Touche, LLP as our
independent public accountants for fiscal year 1999 (with 31,625,833 affirmative
votes, 22,023 negative votes, 18,348 abstaining and 0 nonbroker votes).


PART II.  OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

From time to time, we may be a party to litigation incident to the ordinary
course of our business.  As of the date of this Report, we do not believe that
there is material litigation pending against OSI.  However, any litigation
involving OSI, whether we are the plaintiff or defendant and regardless of the
outcome, could result in substantial costs and significant diversion of effort
by our technical and management personnel.  In addition, we can give no
assurances that material litigation, either by or against OSI, will not be
necessary to resolve issues that may arise in the future.  Given the
uncertainties of litigation, any litigation could have a material adverse effect
on our business, financial condition or operating results.

On February 13, 1998, suit was filed against OSI in the United States District
Court for the Eastern District of California by Timothy J. Sebring, a former
employee of OSI, for breach of contract relating to various matters involving
his employment.  OSI does not believe that the allegations in the complaint have
merit and intends to vigorously defend the action.  However, there can be no
assurances that OSI will prevail.  If we do not prevail, we could be required to
pay monetary damages which might have a material adverse effect on our operating
results and financial condition.*

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

    (a)   Exhibits

          10.1    Lease Agreement

          27.1    Financial Data Schedule

    (b)  Reports on Form 8-K

          None.

                                       16
<PAGE>
 
                                   SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                              OBJECTIVE SYSTEMS INTEGRATORS, INC.



Dated:  February 12, 1999        By: /S/  David M. Allen
                                     --------------------------------------
                                     David M. Allen, Chief Financial Officer

                                     (Principal Financial and Accounting
                                     Officer and Duly Authorized Officer)

                                       17