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               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K
   Annual Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
                                   Act Of 1934
For the Fiscal Year Ended March 31, 1999        Commission file number 0 - 22804

                            ACTIVE VOICE CORPORATION
                            ------------------------
             (Exact name of registrant as specified in its charter)

         Washington                                     91-1235111
         ----------                                     ----------
  (State of incorporation)               (I.R.S. Employer Identification Number)

          2901 Third Avenue, Suite 500, Seattle, Washington 98121-9800
          ------------------------------------------------------------
               (Address of principal executive offices, Zip Code)

                                 (206) 441-4700
                                 --------------
              (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 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
                                      ---   ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the 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 the Common Stock held by non-affiliates of the
registrant, based on the closing price on June 15, 1999, as reported by the
Nasdaq Stock Market was $48,313,340.(1)

The number of shares of the registrant's Common Stock outstanding as of June 15,
1999, was 4,588,862.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Proxy Statement relating to the registrant's 1999
Annual Meeting of Shareholders to be held on August 19, 1999, are incorporated
by reference into Part III of this Report.

---------------------------
(1)Excludes shares held of record on that date by directors and officers of the
registrant. Exclusion of such shares should not be construed to indicate that
any such person directly or indirectly possesses the power to direct or cause
the direction of the management of the policies of the registrant.


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                                                   TABLE OF CONTENTS
<TABLE>
<CAPTION>

  PART I                                                                                      PAGE
  <S>             <C>                                                                          <C>
  Item 1.         Business.......................................................................1
                  Industry.......................................................................1
                  Strategy.......................................................................3
                  Products.......................................................................4
                  Sales and Marketing............................................................7
                  Product Development...........................................................10
                  Manufacturing.................................................................10
                  Competition...................................................................11
                  Proprietary Rights............................................................12
                  Employees.....................................................................13
  Item 2.         Properties....................................................................13
  Item 3.         Legal Proceedings.............................................................13
  Item 4.         Submission of Matters to a Vote of Security Holders...........................13
  Item 4A.        Executive Officers of the Registrant..........................................14

  PART II

  Item 5.         Market for Registrant's Common Equity and Related Stockholder Matters.........15
  Item 6.         Selected Financial Data.......................................................15
  Item 7.         Management's Discussion and Analysis of Financial Condition
                  and Results of Operations.....................................................16
  Item 7A.        Quantitative and Qualitative Disclosure About Market Risk.....................26
  Item 8.         Financial Statements and Supplementary Data...................................27
  Item 9.         Changes in and Disagreements with Accountants
                  on Accounting and Financial Disclosure........................................44

  PART III

  Item 10.        Directors and Executive Officers of the Registrant............................44
  Item 11.        Executive Compensation........................................................44
  Item 12.        Security Ownership of Certain Beneficial Owners and Management................44
  Item 13.        Certain Relationships and Related Transactions................................44

  PART IV

  Item 14.        Exhibits, Financial Statement Schedules, and Reports on Form 8-K..............44

                  SIGNATURES....................................................................50

</TABLE>

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PART I.

ITEM 1.           BUSINESS

Active Voice Corporation (Active Voice or the Company) is a leading manufacturer
of voice processing systems and PC-based computer telephony integration (CTI)
solutions, with more than 70,000 installations in virtually every kind of
business in over 60 countries. Active Voice develops technology that helps
businesses communicate better. Active Voice products are sold through a global
network of independent telecommunications dealers, telephone equipment
manufacturers, and computer resellers. Active Voice corporate headquarters are
located in Seattle, with representatives throughout the United States, as well
as offices in Australia, Canada, China, France, India, The Netherlands, South
Africa, Sweden, and the United Kingdom.

The Company's software and servers enable people to manage information and
communicate more effectively by integrating their traditional office telephone
systems (also known as telephone switches) with personal computers, the local
area network (LAN), and the Internet. Its products allow businesses to
incorporate telephony functions and PC-based unified messaging and desktop call
handling into their daily operations. This functionality includes such basic
applications as voice mail, and more advanced applications such as CTI. CTI
allows people to control all voice, fax, and e-mail messages, as well as inbound
and outbound telephone calls, and to control them visually using a personal
computer. The Company was one of the first voice processing manufacturers to
offer an integrated product that permits on-screen desktop management of the
entire spectrum of personal communications, and has continued to research,
develop, market, and distribute novel CTI solutions.

Founded in 1983, the Company was one of the pioneers of PC-based voice
processing and is now a recognized leader in CTI applications. The Company's
product philosophy originates from research performed at Massachusetts Institute
of Technology's Media Laboratory for Speech and Artificial Intelligence. The
Company believes its focus on comprehensive solutions that are both simple to
learn and easy to use, combined with its commitment to continued product
innovation, give it a competitive advantage in a dynamic industry.

INDUSTRY

According to industry statistics, the domestic market for voice processing
systems comprises more than 50 manufacturers, whose voice messaging products
accounted for aggregate end user revenues of approximately $2.3 billion in 1998.
Manufacturers of voice processing systems include switch suppliers such as
Lucent Technologies, Inc., Nortel Networks Corporation and Siemens Business
Communication Systems, Inc.; independent manufacturers of proprietary systems
such as BayPoint Innovations, a division of Mitel Corporation, Octel
Communications - now a division of Lucent Technologies; and Comverse Technology,
Inc.; and independent manufacturers of PC-based, open-architecture systems such
as Active Voice and AVT Corporation. According to industry statistics for total
number of domestic voice processing systems shipped in 1998, the Company ranked
third only behind Lucent Technologies and Nortel Networks Corporation.
References in this paragraph, as well as elsewhere in this Report, to industry
statistics concerning sales and shipments by the Company and its competitors are
based on estimates compiled relative to the U.S. market by Dataquest
Corporation, an independent research firm specializing in high technology
industries.

Traditionally, the term voice processing has referred to various ways to
facilitate interaction over the telephone between a caller, one or more persons,
and a computer. These systems were generally offered as stand-alone products by
different vendors and distributors and were based on expensive proprietary
hardware and software.

The first voice processing systems performed basic applications. The three most
common of these basic voice processing features are: 1) VOICE MAIL - which
allows a caller to store voice messages in a

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computer. Typical voice mail features include the ability to screen callers,
record, store, and delete messages, as well as to direct messages to multiple
subscribers. 2) AUTOMATED ATTENDANT - which allows a caller to direct the
computer to switch the call automatically to a telephone extension different
from the one dialed. 3) INTERACTIVE VOICE RESPONSE (IVR) which allows a
caller to obtain requested information in voice form from a local or remote
database. An example of IVR is simply selecting announcements from a list of
options stored in the computer (also known as AUDIOTEXT). These basic voice
processing functions offer integrated and simplified access to various types
of communications and information through the traditional telephone system.

As the demand to integrate communication technologies, lower product costs, and
reduce the time to market of new products increased, and as significant advances
in personal computer hardware and software were made, three trends developed
that facilitated the creation of more advanced messaging applications. The first
trend was a shift from proprietary hardware and software. As the costs of
personal computers and their operating systems decreased, it became more
economical for system developers to create scaleable, non-proprietary (also
known as open-architecture) products that used standard hardware and software.
Historically, the Company has focused its development efforts on open
architecture-based systems, an approach that has allowed the Company to take
advantage of rapid improvements in third-party hardware and software.

The second trend was a shift from central office, or centralized, computing
environments to client-server, groupware architectures that utilized a company's
local area network (LAN; also known as the Intranet) and the Internet. This
created demand for new communications solutions that would provide
communications networking between branch offices.

The third trend is the convergence of voice and data technologies. While voice
has traditionally been carried separately from data, the proliferation of the
Internet has led many industry watchers to conclude that voice traffic will soon
become a subset of the data now being carried on a larger data network. The
Company believes the union of voice and data traffic on a single network may
transform the office environment at a fundamental level.

As a result of these developments, voice processing systems now provide more
advanced functions that enable users to utilize voice, personal computers, and
touchtone telephones in different ways to manipulate calls, interact with
computer databases, and access and respond to messages or data. Examples of
advanced applications include the ability to visually manage all telephone
traffic from a personal computer, listen to voice messages using the PC speaker,
redirect voice messages with a mouse, use touchtones to route a fax or an e-mail
to the nearest facsimile machine for printout, and the ability to listen and
reply to e-mail messages over a telephone. The Company has developed products
that take advantage of these trends in the market, thereby making internal and
external communications more efficient.

In addition to developments in computer hardware and software, over the past
decade there has been a proliferation of new methods of business communication,
such as facsimile (fax), electronic mail (e-mail), and Internet telephony (the
ability to make voice phone calls over the Internet). These advances in
technology and communications infrastructure make it easier to exchange voice
and data using pagers, cellular phones, and portable computers with
communications capabilities. As a result, voice processing systems can now
access and interact with a wide range of communications devices, such as
cellular telephones and pagers. The creation of each new communications device,
accompanied by the integration of telephone systems with computers on an
Intranet or the Internet, give rise to the demand for innovative products to
streamline the message retrieval process and allow the user to access all
electronic messages using the most convenient communications device from
anywhere in a cost effective way.

The Company has responded to this market demand by developing unified messaging
products that store all messages in one location for access via any device or
application. Unified messaging means all messages are stored and maintained on a
groupware database with one single list of users for e-mail, fax, voice,
telephones, and computers-saving IS departments resources. The products take
advantage


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of groupware standards such as Internet-connectivity, scalability to very
large sizes, and automatic synchronization of messages between numerous
servers. The connectivity among various means of electronic communication
(the merging of data networks and telephones) is delivering to people more
choices of how and when they wish to access information.

STRATEGY

MISSION STATEMENT: Active Voice makes products that empower people to
communicate in the easiest, most efficient, and unified way. With Active Voice
open standards-based software running on its servers and PCs, an organization's
employees and customers can communicate all over the world, at any time, and
control multimedia messages (voice mail, e-mail, or fax mail) with whatever
medium (currently desktop and laptop computers, wired and wireless telephones,
and pagers) is the most convenient and preferred way.

The Company's strategy is to develop innovative, easy-to-use, cost efficient,
PC-based voice processing systems and computer telephony integration solutions
to offer integrated access to a broad range of communications with other people
and databases.

THE COMPANY'S STRATEGY IS BASED ON FIVE BASIC ELEMENTS:

EMPHASIZE SOFTWARE, NOT HARDWARE. The Company concentrates its development
efforts on software rather than on the design or modification of hardware. The
Company believes product value is created most efficiently by emphasizing
software solutions to meet customer needs.

USE STANDARD, OPEN SYSTEMS AND HARDWARE. The Company's products use standard,
open-architecture PC platforms, operating systems and groupware, like Microsoft
NT, Exchange and BackOffice, DOS or OS2, rather than proprietary computer
hardware and operating systems. As a result, the Company can rapidly adopt new
PC-based technologies and capitalize on the substantial expenditures made by
third parties that develop new technologies for the general PC environment. The
use of commonly available hardware components and software minimizes the
Company's manufacturing activity and helps reduce the overall cost of its
products while continuing to add enhanced functionality.

MAKE PRODUCTS EASY TO USE, INSTALL, AND MODIFY. The Company strives to
maximize ease-of-use for the end user, the system manager, and the installer.
Some of the Company's products are designed to be "people-oriented," with
features that can be used readily without special training or manuals. For
example, companies can choose from numerous telephone user interfaces like
the Company's 1 FOR YES, 2 FOR NO-Registered Trademark- user dialogue which
gives first time voice mail users easy and immediate access to all of the
system's features or a legacy emulated telephone user interface whereby when
the Company's product replaces an existing voice mail system, no training is
required. Also, the Company programs into its products installation
procedures, screens, and menus that allow automatic configuration to over 200
different PBX, key system, and Centrex switches and enable the system manager
to modify features to meet user needs.

MINIMIZE DISTRIBUTION OVERHEAD. The Company achieves broad market coverage for
its products domestically and internationally, without the use of a direct sales
force, through a nationwide network of independent telephone system dealers, and
through strategic partners. With the emergence of CTI, the Company has utilized
an additional distribution channel -- the Value Added Resellers (VARs). These
experienced data professionals specialize in industry solutions and sell not
only servers, but also desktop software to businesses and offices. This
diversified distribution structure gives the Company exposure to the substantial
customer bases of these different types of organizations.

FOCUS ON SMALL- TO MEDIUM-SIZED OFFICES WITH COST COMPETITIVE SOLUTIONS; LARGER
OFFICES BY LEVERAGING OPEN STANDARDS. The Company's products are designed for
use by businesses and offices in a wide range of enterprises, including
manufacturing, retail, service, healthcare, and governmental institutions. Since
1986, the Company's products have offered many of the features commonly
available in large, proprietary voice processing systems, at price points more
affordable to the small- to medium-sized


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businesses. The Company is also entering the larger end user market through
its relationships with strategic partners and is seeing interest from larger
businesses, including Fortune 500 companies interested in its strategy for
open standards and the direction the Company is headed with its research and
development efforts. The Company believes its strategic relationships will
play a significant role in its strategy to increase market share, as well as
provide opportunities for the Company to have a greater presence in the
larger end user market.

PRODUCTS

The Company's products offer a full range of voice mail and CTI solutions, from
basic through advanced applications, and have been designed to fit the
functional and financial needs of specific market segments. All Active Voice
products offer voice mail, automated attendant, audiotext, and fax mail features
and most require the assistance of a dealer or other trained installer to
configure them to the end user's telephone. The Company also offers vertical
market applications, switch integrations, fax products, replacement hardware,
and other miscellaneous items. The Company's products are utilized by a broad
variety of enterprises in manufacturing, retail, service, healthcare,
governmental, and institutional settings.

The Company offers six products: Unity-TM-, Repartee-Registered Trademark-,
Replay Plus-Registered Trademark-, Replay-Registered Trademark-, Lingo-TM-,
and a line of InSwitch products manufactured solely for some of its strategic
partners. The Company's voice processing products typically include the
following principal components: a PC compatible platform; one or more voice
processing circuitboards (voice boards) which contain signal processors to
compress and digitize voice and detect various tones; and the
Company-designed software. To keep costs down, Lingo runs Company-designed
software on a proprietary platform. In addition, the Company's InSwitch
products run Company-designed software on a single board inserted inside the
telephone system.

The Company has developed software that enables most of its products to
integrate with more than 200 different PBX, key system, and Centrex telephone
switching systems from 70 different manufacturers. The Company's new product,
Unity, is engineered to handle streaming media and therefore integrates with
TAPI compliant and H.323 compliant IP based (IP-PBX) switches. The Company
believes this number of integrations represents approximately 90% of the
installed switches in the United States, and views its ability to integrate with
such a large portion of available telephone systems as one of its key
competitive advantages.

UNITY -- Unity is an NT Exchange-based communications server which features true
unified messaging where all messages share a common message store and address
database and delivers lower total cost of ownership benefits. Unity was released
to general availability on March 31, 1999 and represents the culmination of
three years of research and development. Features include visual voice and fax
message management on Microsoft's Outlook application, unified administration,
an HTML system administration interface, and listening to textual e-mail via
text-to-speech. Designed from the ground up to integrate with the Microsoft
Exchange server, Unity uses NT's native 32-bit architecture, streaming media,
scaleability, networking, and LDAP (lightweight directory access protocol)
directory services to give its products a competitive advantage in the
marketplace. Unity integrates with numerous third-party fax providers. The
Company's subsidiary, Pronexus Inc., provides IVR software.

REPARTEE -- The Company's first product, Repartee, was introduced in 1986.
Repartee offers the largest call handling capacity of the Company's products,
plus additional features such as fax detect and transfer, fax mail (the ability
to verbally annotate, collect, and store faxes), fax-on-demand (the ability to
request via a touchtone telephone that a specific fax be sent to the caller's
fax machine), call screening, e-mail messaging using text-to-speech conversion,
multi-office networking, and easy message access via touchtone telephone or
personal computer.

In February 1998 the Company released Repartee version 7.44. This release split
the product into two models, Repartee VP and Repartee CTI, and incorporated the
most powerful features of the Company's Replay and Replay Plus voice messaging
platforms. (For a discussion of Replay and Replay Plus, see below.) Both
Repartee VP and CTI run on IBM's OS/2 Warp 4.0 operating system, use Dialogic
voice

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boards and are available as a turnkey product (already assembled) or as a kit
that the dealer may assemble on site. Repartee's target market is small- to
medium-size businesses.

REPARTEE VP -- provides users with basic applications such as voice mail,
automated attendant, and fax capabilities from any touchtone telephone. It can
network remote sites, has multilingual capabilities, and can run the Company's
lodging industry software package, Hospitality. (For a discussion of
Hospitality, see below.) Repartee VP is available in two- and four-port
configurations, and offers up to 100 hours of storage.

To make it quicker and easier for users of the system to add optional software
packages, or to upgrade from Repartee VP to Repartee CTI, all software comes on
one CD-ROM, and is installed by purchasing a code from the Company and then
inputting it into the server. This seamless upgrade path from Repartee VP to
Repartee CTI, and the simplified process of adding software packages through the
use of upgrade codes, is a strategy the Company believes increases the product's
marketability.

REPARTEE CTI -- offers all the basic communications applications found in
Repartee VP, and also works with the Company's suite of computer telephony
integration software, known as TeLANophy-Registered Trademark-, to provide
users with advanced integrated messaging and call control applications. Users
with TeLANophy have the ability to access and manage all their messages
visually from a personal computer. TeLANophy allows the user to use the PC
mouse and keyboard to perform the functions normally done on the telephone
keypad. ViewCall-Registered Trademark- Plus 2.0, ViewMail-Registered
Trademark-, ViewMail for Microsoft Messaging, Message Integration for Novell
GroupWise, ViewFax-Registered Trademark-, and E-Mail Integration are all
modules of TeLANophy. The Company sees this multiple user interface as a
benefit to consumers, since it offers the ability to control their messages
in the most convenient way.

-        VIEWCALL PLUS 2.0 - allows users to see incoming calls on their
personal computer screens and manage multiple calls as they arrive. When
Repartee CTI routes a call to an extension, ViewCall Plus 2.0 alerts users with
visual and audio cues. With their PC mouse, users click on buttons to take
calls, ask callers to hold, take messages, or transfer calls to a different
extension. Additionally, ViewCall Plus 2.0's monitor feature allows the user to
listen to a voice message as it is being recorded by the caller and, if the user
wishes to speak to the caller, he or she can pull the caller out of voice mail
and transfer the call to his or her extension.

-        VIEWMAIL -- makes voice and fax messages available on a desktop PC.
Using a Microsoft Windows interface, ViewMail displays the sender's name,
subject, and the date and time messages were sent. Messages are managed with a
few clicks of ViewMail's easy-to-use buttons, letting the user hear, reply,
redirect, archive, delete, and leave messages, as well as rewind, pause, and
fast forward them during playback.

-        VIEWMAIL FOR MICROSOFT MESSAGING (VMM) -- offers Microsoft Exchange and
Outlook users the benefits of unified messaging, including the ability to access
voice, fax, and e-mail messages from within one application. All messages are
stored in one inbox, eliminating the need to check messages in separate
applications. A user can save voice and fax messages indefinitely along with
e-mail in Exchange and Outlook folders, send voice and fax messages to an e-mail
address (even if the recipient does not have a voice mail system), and download
voice and fax messages to work with off line.

-        VIEWFAX -- gives a user graphical fax handling capabilities. With
ViewFax, users can send, receive, and manipulate faxes from any networked
personal computer. ViewFax displays the fax on the computer screen.

-        MESSAGE INTEGRATION FOR NOVELL GROUPWISE -- offers a universal
messaging center where a user can check GroupWise messages (e-mail, schedules,
appointments, and tasks) and Repartee CTI voice and fax messages in one mailbox
that can be accessed by telephone or desktop PC.

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-        TEXT-TO-SPEECH E-MAIL INTEGRATION - provides 24-hour retrieval and
response of e-mail over a touchtone telephone via synthesized speech.

Repartee CTI is scaleable from four to 96 ports and has up to 1,000 hours of
storage. Repartee CTI can also run on a Compaq server grade platform, which adds
enhanced computing power and fault-tolerance to Repartee.

Version 7.47 is currently shipping worldwide. Sales of Repartee accounted for
approximately 60% of the Company's fiscal 1999 revenue.

REPLAY -- In 1991, the Company introduced Replay to segment its target market
and appeal to more price-sensitive, smaller enterprises. A simple "plug and
play" voice processing product intended for small office settings, Replay
provides automated attendant, voice mail, audiotext, and facsimile capabilities.
Replay does not require a computer screen or keyboard, and most of the
installation is performed by the end user.

Replay runs on the Microsoft DOS operating system, and features an HTML
(hypertext markup language) system administrator interface that simplifies
installation and customization. With the HTML graphical interface, system
administration can be accomplished remotely via a corporate Intranet or the
Internet. Routine maintenance and modifications can also be done via modem.

Replay is currently offered to some strategic partners and in all the Company's
markets outside North America. Sales of Replay accounted for approximately 7% of
the Company's fiscal 1999 revenue.

REPLAY PLUS --The release of Replay was followed in 1992 by the introduction of
Replay Plus. Replay Plus offers all the functionality of Replay, including the
HTML system administration interface, as well as support for fax-on-demand,
Hospitality, and the ability to customize nearly all voice mail features. The
product runs on the Microsoft DOS operating system. Replay Plus is currently
offered in all the Company's markets outside North America. Sales of Replay Plus
accounted for approximately 7% of the Company's fiscal 1999 revenue.

LINGO AND LINGO XL -- In 1997 the Company released Lingo, a full-featured voice
mail system designed at a lower price point for small businesses, the market
segment the Company believes least penetrated by voice mail products. The
Company strongly believes success in the small business market depends upon its
ability to deliver a product that offers powerful features while being
affordable, easy to use, install, and maintain. The Company feels Lingo fits
this profile.

Lingo is a turnkey product that offers voice mail, automated attendant,
audiotext, and fax detect, route, and notify capabilities from any touchtone
telephone. Lingo is a stand-alone unit that runs on an embedded PC-DOS operating
system. The product comes in two- or four-port configurations with two or four
hours of storage. In addition, Lingo is a solid-state system with no moving
parts; a design the Company believes reduces the possibility of product
malfunction while increasing its marketability. For customers who want more
voice storage capabilities, Lingo XL includes a hard drive providing 72 hours of
voice storage. The Company plans to increase the product's distribution on a
country-by-country basis during the calendar year 1999. Sales of Lingo accounted
for approximately 8% of the Company's fiscal 1999 revenue.

INSWITCH -- The Company manufactures a line of InSwitch products for one of its
strategic partners. An InSwitch product is comprised of software and hardware
incorporated directly into the telephone switch. Developing InSwitch products
allows the Company to leverage its core competency of software development to
deliver full voice mail functionality. Currently the Company's InSwitch software
ships on 65% of the specific NEC telephone system for which it was designed. The
Company is currently in negotiations with other manufacturers of telephone
systems to supply them with InSwitch products. Sales of InSwitch products
accounted for approximately 8% of the Company's fiscal 1999 revenue.


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OTHER PRODUCTS AND FEATURES

ACTIVEFAX -- gives users of Repartee and Replay Plus fax handling capabilities.
It includes fax mail to store incoming faxes electronically and fax-on-demand to
let outside callers retrieve documents from a fax library.

HOSPITALITY -- provides hotel guests with easy, timely and convenient messaging,
and is available in several multi-lingual guest conversation modules. Taking
advantage of its core product technology, the Company has developed this
specialized vertical market application for the lodging and hospitality
industry. Hospitality is designed to increase the efficiency of the hotel office
staff by providing unified messaging and on-screen call management.

Other optional features for the Company's products, such as tape backup, disk
redundancy and tool kits, are offered with Repartee and Replay Plus, and can be
configured by dealers according to a particular end user's application. Revenues
for other products and features accounted for approximately 6% of the Company's
fiscal 1999 revenue.

The Company does not presently customize its products for dealers or end users,
but does perform limited feature customizations as requested by certain
strategic partners.

PRONEXUS INC.

In January 1997, the Company acquired a majority interest in privately held
Pronexus Inc., a leading provider of Visual Basic (VB) voice application tools
that enable developers to quickly and easily create Windows NT-based,
interactive voice response applications. IVR allows people to access, manipulate
and process information from computer databases with any touchtone telephone,
even while away from the office. An example of IVR is conducting business with
the bank by using a touchtone telephone to transfer money from a savings to a
checking account, review account balances, or make payment on a credit card. The
Company believes its majority ownership of Pronexus will create synergies in
distribution channels, sales and marketing, and strategic partnerships and
enable the Company to provide additional enhanced features to its product base.
In addition, the Company considers the acquisition to be important for its
overall strategic plan for long term growth. The Company has the option to
acquire the remaining interest beginning January 2000 and expiring six months
thereafter. The amount paid for the remaining 49% will be based on a third-party
appraisal. Revenues from Pronexus accounted for approximately 4% of the
Company's fiscal 1999 revenue.

SALES AND MARKETING

The Company achieves broad market coverage for its products through a variety of
wholesale distribution channels, which the Company believes to be optimal
considering the technical knowledge and skill required to sell and install voice
processing products. Domestically, the Company distributes its products through
a nationwide network of more than 700 independent telephone system dealers, and
also through strategic partner arrangements with various manufacturers of
telephone systems and business equipment. While the Company supports its dealers
and strategic partners with Company personnel, this distribution strategy limits
the Company's selling expense overhead by largely avoiding the costs of direct
sales, installation, and customer support activities. The Company leverages its
sales efforts through its affiliation with numerous established dealer,
strategic partner, and VAR sales organizations, thereby achieving exposure to
the substantial installed customer bases of these organizations. A similar
distribution strategy is utilized by the Company for its international sales.

The Company has employees engaged in domestic and international sales, sales
management, and dealer and strategic partner support activities. The Company has
sales representatives in Australia, Canada, China, France, Germany, India, The
Netherlands, South Africa, Sweden, and the United Kingdom, and has distribution
relationships with dealers, distributors, or strategic partners in 42 other
foreign countries.


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The Company maintains an in-house marketing and public relations team. In
international markets, the Company has been experiencing a demand for larger
systems, and therefore has expanded its marketing and sales efforts to meet
these demands. Products are marketed principally by attending trade shows and
advertising in periodicals oriented toward dealers and end users. The Company
provides its dealers with marketing materials, and provides specialized
documentation to its strategic partners.

AMERICAS DEALER NETWORK

The Company's Americas dealer network consists of more than 700 independent
telephone system dealers in the United States, Canada, and Latin America. The
dealer network is managed by regional and divisional managers, who often
accompany dealers on sales calls and are compensated through a commission plan
based on quarterly quotas. A typical dealer for the Company's products is a
small business operator who primarily sells telephone systems to small- and
medium-sized businesses and relies upon the Company's products to augment such
sales. Most dealers also handle competing voice processing products. The Company
attempts to maintain relationships with a large number of dealers and, because
of the potential for dealer turnover, considers it advantageous not to become
overly dependent upon a few dealers.

The Company believes that the loyalty of its dealers is dependent upon
maintaining and enhancing the value inherent in its products and the quality of
its dealer support. Dealers are encouraged to attend initial Company-sponsored
training sessions on system usage, installation, maintenance, and customer
support. In addition, the Company provides advanced training on an ongoing
basis. Since the Company began selling Unity and TeLANophy, it has been
necessary to augment advanced training for its dealer network because the sale
and installation of Unity and TeLANophy requires both telephony and computer
networking expertise.

Dealers generally purchase turnkey voice processing systems from the Company,
but may also purchase voice board-and-software kits that they can combine with
PCs of their own selection. Dealers are subject to agreements with the Company
covering matters such as payment terms, protection of proprietary rights, and
nonexclusive sales territories, but these agreements do not restrict the
dealer's ability to sell competing products and are terminable by either party
on short notice.

STRATEGIC PARTNERS

The next major channel of distributing the Company's products is through 8
domestic and international strategic partners (historically known as original
equipment manufacturers or OEMs), who are typically manufacturers of telephone
systems, including NEC Corporation and its subsidiaries; Siemens Business
Communication Systems, Inc.; Alcatel; Executone Information Systems, Inc.;
Tadiran Telecommunications, Ltd.; Harris Corporation; and Philips Communication
Systems, B.V. NEC Corporation and its subsidiaries accounted for approximately
20% of the company's fiscal 1999 revenues.

The Company has had long term relationships with a number of these
manufacturers. It believes that its strategic partner relationships enable it to
develop up-to-date switch integrations with broader features for the strategic
partner's switches, to develop exclusive InSwitch products and to gain early
insight into market trends. In addition, by designing its products to take
advantage of the unique features of a specific strategic partner telephone
system, the Company is able to further establish its voice processing systems as
the product of choice for companies wanting to leverage their existing hardware
and software investments.

Strategic partners generally market the Company's products under their own brand
name, with their own literature, and through their own sales and technical
support networks. The Company will, however, supply strategic partners with
specialized technical publications featuring the strategic partner's company and
brand names. Strategic partner contracts typically have a term of one or more
years and provide for volume discounts and some product customization.


                                       8
<PAGE>


In May 1999, the Company signed a master purchase agreement with NEC Corporation
which covers all of the Company's products sold to NEC and its affiliates. The
agreement provides uniform terms and conditions for all NEC affiliates globally,
including delivery and payment terms, and limited warranties. The initial term
of the contract is five years and automatically renews for one year terms
thereafter unless either party gives notice to the contrary. The contract may
also be terminated by either party for cause, including breach of a material
term, or the bankruptcy of or appointment of a receiver for the other party.

INTERNATIONAL SALES

In the last few years, the Company has increased its focus on international
sales and made substantial investments in expanding its penetration in
international markets. Competition has increased over the last few years,
primarily due to market acceptance and advances being made to change the
regulatory requirements and technology barriers that have characterized the
international marketplace. As international markets develop, the Company
believes that small- to medium-sized businesses will become more familiar with
voice processing and its benefits and therefore increase the demand for its
products' enhanced features and specialized applications. In addition, the
Company considers the current markets in Australia, Asia Pacific, and much of
Western Europe to exhibit characteristics similar to the U.S. market, but with
penetration in these markets being approximately two to three years behind the
domestic market. In these regions, generally only the large organizations have
installed voice processing systems, but product inquiries by potential customers
and distributors continue to increase. Although the Company believes that
smaller enterprises in most developed countries have the same needs for improved
telecommunications as in the U.S., it is difficult to predict the rate and
extent of demand for voice processing products in these markets.

In the last few years the Company has increased its research and development
efforts to localize its core products. Sales of voice processing products in
foreign countries often require additional configuration to adapt to local
telephone systems or signal standards. Conversion to foreign language and local
conversation patterns has historically been performed by the local dealer,
distributor, or strategic partner, and the Company believes alliances with local
entities familiar with local telephone systems and local business conditions, as
well as hiring local employees, are important to successful penetration of most
foreign markets. The Company does, however, maintain a Globalization Group to
research and implement localization of its products. The Company's Repartee,
Replay Plus, and Replay products are currently available in 16 conversation-only
languages and dialects. Replay Plus and Replay are fully localized in four
languages. Foreign sales also frequently require governmental approvals of part
or all of the voice processing system, typically relative to electrical safety
and compatibility with that country's public telephone network, and local
telephone systems and equipment. To date, component approvals have been obtained
primarily by the voice board manufacturer.

VALUE-ADDED RESELLERS (VARS)

The greater technical complexity of CTI products and the need for both PC, LAN,
and IP-PBX technical knowledge and support capability has made it advantageous
for the Company to utilize new channels of distribution for these products. The
Company currently has a VAR agreement with Inacom Corporation, a technology
management services company, and an agreement with Ingram Micro, Inc., a
wholesale distributor of technology products and services. Because the Company's
new product, Unity, works in an IP-PBX environment, the Company has begun to
market its products to data VARs that resell those IP-PBX switches. These new
channels offer industry and technical solutions and provide both LAN and
software expertise, the Company believes they have the ability to assist the
Company in selling and distributing its products to a new and much broader
audience.

PRODUCT SUPPORT

The Company's dealers and strategic partner customers are primarily responsible
for supporting end users who purchase one of the Company's products. The Company
does, however, provide a substantial amount of technical and sales support to
its dealers and strategic partner customers. The Company maintains a technical
support staff, devoted to dealer and strategic partner support. Technical
support


                                       9
<PAGE>


can be reached on a toll-free number 12 hours per day on weekdays and
emergency support is available on weekends and holidays. The Company also
provides a limited warranty on elements of its products and permits product
returns, without charge, if within 30 days. The Company offers installation
and maintenance contracts for its Unity offering.

PRODUCT DEVELOPMENT

The Company believes that it has numerous product development opportunities,
which it intends to pursue through the development of new software products, and
enhancements to its existing products. The Company considers its current
products to be competitive with products offered by others in its industry
segment. Nonetheless, it is convinced that it must continue to make substantial
expenditures on research and development in order to maintain its competitive
position. The Company has not to date capitalized any of its software
development costs.

Three engineering groups perform the Company's product development efforts. The
NT Products Group responds to the needs of the high-end product offering, Unity.
The DOS/OS2 Products Group supports Repartee, TeLANophy, Replay Plus, Replay,
Lingo and InSwitch products, as well as switch integrations and vertical market
applications. The Advanced Products and Technology group focuses on the
development of new products and features that the Company believes will be
important on a three to five year horizon.

A separate staff of engineers is devoted to product testing and quality
assurance. Voice processing systems are often considered crucial to an end
user's business. The importance of incoming business calls, coupled with the
real-time nature of voice processing functions, makes system reliability an
important competitive requirement. The Company believes that the ongoing
research within its various business groups assures the continued high
reliability of its current and future products. To date, the Company has not
experienced any significant post-release errors or bugs in its products, but
there can be no assurance that such problems will be avoided in the future,
particularly as its products become more complex and sophisticated.

MANUFACTURING

The Company's product strategy emphasizes the development of software as opposed
to hardware, and the use of standard PC-related hardware components in its
products, in part to limit its manufacturing activity. The Company's
manufacturing operations consist primarily of final assembly and quality control
testing of materials, subassemblies and systems. The Company does not
manufacture or perform significant modifications on any hardware components, and
is therefore dependent upon third-party manufacturers or vendors of certain
critical hardware components such as PCs and voice boards.

The Company's products incorporate a number of commercially available
application cards, fax boards, voice boards, and other circuitboards that enable
integration with certain telephone systems. Voice boards are available in
quantity from very few domestic suppliers. Traditionally, the Company's products
have incorporated only voice boards manufactured by Dialogic Corporation,
primarily because of the cost and effort required to develop telephone switch
integrations for an alternate voice board. Although Dialogic Corporation has
been a reliable and timely source of voice boards, for strategic reasons the
Company also offers some products that incorporate voice boards manufactured by
Bicom, Inc., an alternate supplier. The Company purchases the hardware component
of its Lingo product from Santa Barbara Connected Systems Corporation.

To minimize its manufacturing costs, the Company signed an agreement with Dell
Computer Corporation to ship the Company's turnkey voice processing systems on
Dell computers.

                                        10
<PAGE>

COMPETITION

The voice processing industry, specifically the segment that supplies voice
processing systems to small- and medium-sized businesses and offices, is highly
competitive, and the Company believes that the competitive pressures it faces
will continue to intensify. The Company has, however, been successful in this
competitive environment in the past, ranking third behind only Lucent
Technologies and Nortel Networks Corporation total domestic voice messaging
systems shipped in 1998, according to industry statistics.

According to industry statistics, the domestic market for voice processing
systems comprises more than 50 manufacturers. Manufacturers of voice processing
systems include switch suppliers (such as Lucent Technologies, Inc., Nortel
Networks Corporation, and Siemens Business Communication Systems, Inc.);
manufacturers of proprietary systems (such as BayPoint Innovations, and Comverse
Technology, Inc., which completed its merger with Boston Technology in January
1998); and independent manufacturers of PC-based, open-architecture systems
(such as the Company and AVT Corporation).

The segment of the industry that supplies voice processing systems to small- and
medium-sized businesses and offices has endured intense price competition and
pressure on margins in the past few years. This industry segment has also
experienced several new market entrants and consolidations of smaller
competitors into larger entities.

For interconnect dealers, product pricing, system features, ease of use and
installation, technical and sales support, and product reliability are the
primary bases of competition. Voice processing system manufacturers compete
intensely for the loyalties and attention of these independent telephone system
dealers. For strategic partner and VAR customers, product pricing is important
but other factors such as product quality and reliability, ease of use, and
support are also significant competitive factors.

As the Company's products evolve to further integrate telephones with PCs, the
Company anticipates that it will encounter a broader variety of competitors,
including new entrants from related computer and communications industries, and
added competition as it seeks to augment its distribution network to include
more dealers with PC and LAN expertise. The Company's principal competitors, at
present, fall into two main categories: telephone equipment manufacturers and
independent voice processing system manufacturers. The telephone equipment
manufacturers offer their voice processing products, or a private label
strategic partner system not produced by the Company (for example Lucent
Technologies, Nortel Networks Corporation, Fujitsu Business Communications, and
Toshiba America Information Systems, Inc.), and sell the systems along with
their PBXs. Telephone equipment manufacturers have the benefit of the large
installed-base of their own switches, and they have been able to increase
competition by lowering prices while providing a single source for companies to
secure both their voice processing and telephone systems needs.

Independent voice processing system manufacturers whose products integrate with
multiple telephone systems, and are either based on proprietary hardware (e.g.,
Centigram Communications Corporation, and Comverse Technology, Inc. ), or are
PC-based, (e.g., AVT Corporation), also compete directly with the Company. The
Company believes that it competes successfully in the industry because of the
richness and ease of use of its product features; its dynamic system
applications and capabilities, including leading edge CTI applications; its
strong dealer and strategic partner networks; and its large investments in
research and development.

The same principal competitors are encountered in all the Company's distribution
channels. The Company's strategic partner customers compete with the Company's
dealer network for sales to certain customers. The Company's voice processing
systems also compete indirectly with voice processing services offered by
independent service bureaus and other companies. Such services are offered by
most Regional Bell Operating Companies (RBOCs), which could also become
significant direct competitors if certain existing judicial restrictions on
their business activities were to be relaxed. The Company does not presently
have dealer or strategic partner relationships with any RBOCs.


                                       11
<PAGE>


Since many of the voice processing industry technologies overlap, mergers and
acquisitions have become more prevalent in the industry, particularly in the
last couple of years. There are many advantages to be gained from the synergies
created by these combinations, including the offering of a more complete product
suite to end users, combining research and development budgets and products,
convergence of prior competing sales channels, and consolidation of capital
investments and operating costs. The Company evaluates opportunities to acquire
complementary technologies on an ongoing basis.

PROPRIETARY RIGHTS

The Company currently holds ten patents (nine in the U.S. and one in Canada),
expiring on dates ranging from 2008 to 2016 relating to: (1) detection of
telephone signaling tones; (2) detection of stutter tones for CO-based voice
mail (this patent has also been issued in Canada); (3) a method and apparatus
for processing a live incoming call in a communications system (this covers two
patents, one for the ability to select a greeting that is played to the caller,
and the other for call forwarding capabilities); (4) a configurable telephone
interface for electronic devices; (5) a method for displaying call notification
and allowing choice of greetings to send to a caller; (6) a method for
displaying visual voice mail features and permitting playback of a voice mail
message on a PC sound device; (7) a method for monitoring a caller's name while
using a telephone; and (8) a method for monitoring a message as it is being left
in voice mail.

In general, however, the Company has limited patent protection for its products
and believes that patents generally will not impose significant barriers to
entry into the Company's market, especially by companies with established
technical capabilities and market positions in related technologies. While the
Company's success will depend in part upon its ability to protect its
technology, the Company believes that technological expertise, innovation, and
product value are more critical to its success. The Company has copyrights on
elements of its products, and also attempts to protect its software through a
trade secrets program that involves, among other things, using various forms of
copy protection in its systems as well as obtaining confidentiality agreements.
The Company cannot guarantee that its efforts to protect its intellectual
property will be effective to prevent misappropriation, reverse engineering, or
independent development by competitors.

The Company has initiated actions to enforce certain patent rights against third
parties. To date, the Company has granted four nonexclusive, nontransferable
licenses under its stutter detect patent. The Company does not believe that
licensing revenues will have a material effect on its financial condition;
nevertheless, it considers it important to protect its intellectual property and
assert its position in the highly competitive market.

In the course of its product development efforts the Company periodically
identifies certain technologies owned by third parties that either would be
useful to incorporate in its products or are necessary in order to remain
competitive in light of industry trends. In these cases, the Company has in the
past sought to obtain licenses of such third-party technologies. The Company
expects that it will continue to find it desirable or necessary to obtain
additional technology licenses from third parties, but there can be no assurance
that any particular license will be available at all, or available on acceptable
terms, at any future time.

The voice processing industry is witnessing numerous allegations of patent
infringement among competitors, and considerable related litigation. The Company
has received claims of patent infringement from several parties, including
certain competitors. In response to certain prior infringement claims, the
Company has pursued and obtained nonexclusive licenses entitling the Company to
utilize certain fundamental patented voice mail and automated attendant
functions that are widely licensed and used in the voice processing industry.
The Company's investigation of other claims has been limited by the claims' lack
of specificity, by the limited availability of factual information and
documentation related to the claims, and by the expense of pursuing exhaustive
patent reviews. The Company believes, based in part upon its investigations and
upon discussions and correspondence with its patent counsel, that its systems do
not currently infringe on valid patents. Although the Company believes that it
currently owns or has


                                       12
<PAGE>


adequate rights to utilize all material technologies relating to its
products, as it continues to develop new products and features in the future,
it anticipates that it may receive additional claims of patent infringement.
Such claims could result in the Company's incurring substantial legal
expenses and being required to obtain licenses, pay damages for infringement,
or cease offering products that infringe such patents.

Active Voice, Repartee, Replay, TeLANophy, ViewMail, ViewCall, and ViewFax are
registered trademarks, while Unity, ActiveNet, PhoneBASIC, and Lingo are
trademarks of Active Voice. All other trademarks used herein are the property of
their respective owners. The names of the Company and its products are also
protected or sought to be protected to varying degrees by filings in various
foreign countries.

EMPLOYEES

At March 31, 1999, the Company had 319 full-time employees, including 38 in
finance and administration, 32 in manufacturing, 127 in engineering, product
development, and quality assurance, and 122 in sales, marketing and technical
support, as well as 19 part-time employees. Company employees enter into
agreements containing confidentiality restrictions, as well as provisions
relative to non-competition during employment with the Company and for six
months after termination. The Company has never had a work stoppage and no
employees are represented by a labor organization. The Company considers its
employee relations to be good.

At March 31, 1999, Pronexus Inc. had 25 full-time employees, including 2 in
finance and administration, 12 in engineering and product development, 11 in
sales, marketing and technical support, as well as 1 part-time employee.

ITEM 2            PROPERTIES

The Company's headquarters and administrative, engineering, manufacturing, and
marketing operations are located in leased space in Seattle, Washington under a
lease expiring in July 2009. Sales offices in Australia, The Netherlands and the
United Kingdom are located in leased facilities under leases expiring in May
2003, March 2003 and September 2000, respectively. The Company believes that
these facilities are adequate to meet its current needs and that suitable
additional or alternative space will be available as needed in the future on
commercially reasonable terms. See Note 7 of "Notes to Consolidated Financial
Statements."

ITEM 3            LEGAL PROCEEDINGS

The Company is subject to legal proceedings or claims, either asserted or
unasserted, that arise in the ordinary course of business. While the outcome of
these claims cannot be predicted with certainty, management does not believe
that any pending legal matters will have a material adverse effect on the
Company. See also Note 9 of Notes to Consolidated Financial Statements.


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

None.







                                       13


<PAGE>




ITEM 4A.          EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company are elected annually at the meeting of the
Board of Directors held in conjunction with the annual meeting of stockholders.
The following are the names, ages and current positions of the individuals
serving as executive officers of the Company at March 31, 1999.

<TABLE>
<CAPTION>

NAME                      AGE  POSITION
--------------------------------------------------------------------------------------------------
<S>                       <C>  <C>
Robert L. Richmond         48  Chairman of the Board
Frank J. Costa             46  Chief Executive Officer and President
Jose S. David              42  Chief Financial Officer
Douglass S. Anderson       48  Vice President of Sales
Kevin L. Chestnut          44  Chief Technology Officer and Vice President -- Advanced Products
                               and Technology
Edward F. Masters          40  Vice President of Product Development
--------------------------------------------------------------------------------------------------

</TABLE>

Robert L. Richmond, a co-founder of the Company, has been Chairman of the Board
of the Company since its inception in 1983. Until June 1999, he also served as
its Chief Executive Officer. From 1971 to 1980, Mr. Richmond was a consultant,
and from 1980 to 1983 he was a project manager for Intermetrics Incorporated, a
public software company, performing software validation for NASA and The Boeing
Company, and creating new products for the airline industry. Mr. Richmond holds
a Bachelor of Computer Science and Engineering from Massachusetts Institute of
Technology.

Frank J. Costa joined the Company in December 1996 as Chief Operating Officer
and President and was appointed Chief Executive Officer on June 1, 1999. From
June 1994 to November 1996, Mr. Costa was the President and Chief Executive
Officer of his own consulting firm, Concept One, Inc. Mr. Costa has also served
as the General Manager and Product Group Vice President of Mentor Graphics
Corporation from January 1993 to June 1994. Mr. Costa has a Bachelor of Science
degree in Electrical Engineering from Massachusetts Institute of Technology and
a Masters of Business Administration in Finance, Business Policy and
International Business from the University of Chicago.

Jose S. David joined the Company in 1989 as Controller and Manager of Operations
and was named Chief Financial Officer in July 1992. Mr. David serves on the
board of directors of its subsidiaries. From 1984 to 1989, Mr. David was Manager
of Finance for Wang Laboratories, Inc., a computer manufacturer. Prior to that,
he was employed by Price Waterhouse LLP, an independent public accounting firm.
Mr. David is a Certified Public Accountant and holds a Bachelor of Arts in
Business Administration, Accounting, from the University of Washington.

Douglass S. Anderson joined the Company in 1989 as National Sales Manager and
was appointed Vice President of Sales in July 1995. Mr. Anderson was Vice
President-Sales and Marketing at Automation Electronics Corporation between 1986
and 1989. Prior to that, he served as Western Regional Sales Manager for
Code-A-Phone. Mr. Anderson holds a Bachelor of Science in Marketing from the
University of Southern California and a Master of Business Administration from
Arizona State University.

Kevin L. Chestnut joined the Company in 1991 as a Technical Writer and was
appointed Chief Technology Officer and Vice President - Advanced Products and
Technology in December 1997. From 1981 to 1990, Mr. Chestnut was Director of
Software Development of Real Estate Software Company, Inc., a software startup
company that he founded. Mr. Chestnut attended Georgia Institute of Technology,
majoring in chemistry.

Edward F. Masters joined the Company in 1991 as Manager of Customer Engineering
and was appointed Vice President of Product Development in December 1996. Prior
to that, he served as a Product Marketing Engineer at TeleCalc from 1988 to 1991
and a Project Engineer at Flow Systems from 1982 to 1991. Mr. Masters holds a
Bachelor of Science in Industrial Technology from Western Washington University
and a Masters of Business Administration from Seattle University.


                                       14
<PAGE>

PART II.

     ITEM 5.       MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
                   MATTERS

The following table shows for the periods indicated, the market sales price
range for the Company's Common Stock as reported by The Nasdaq Stock Market
(Nasdaq symbol ACVC).

<TABLE>
<CAPTION>

Year Ended March 31,                            1999                               1998
-------------------------------------------------------------------------------------------------
                                          High             Low            High               Low
<S>                                     <C>             <C>             <C>               <C>
First Quarter                           $14.00          $10.00          $13.75            $ 9.63
Second Quarter                           10.88            6.50           15.25             11.25
Third Quarter                             8.38            4.38           15.38             11.63
Fourth Quarter                          $11.38          $ 7.75          $15.25            $11.38
-------------------------------------------------------------------------------------------------

</TABLE>

The Company has not paid cash dividends on its Common Stock. At present, the
Company intends to retain earnings for the expansion of its business and does
not anticipate declaring a cash dividend in the near future. As of March 31,
1999, there were approximately 100 stockholders of record and approximately
4,000 beneficial owners of the Company's Common Stock.

At December 31, 1998, the Company had remaining net proceeds from its December
1993 initial public offering of $2,077,000. During the quarter ended March 31,
1999, the Company used $1,164,000 to fund its operating loss, leaving remaining
net proceeds of $913,000.


ITEM 6.           SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>

Year Ended March 31,                   1999        1998        1997(1)      1996        1995
-------------------------------------------------------------------------------------------------
                                         (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                     <C>         <C>         <C>          <C>         <C>
Statement of Operations Data:
Net sales                               $62,217     $53,151     $49,515      $45,138     $36,950
Operating income (loss)                 (6,522)     (1,149)       2,569        6,871       6,845
Net income (loss)                       (4,969)         142       1,751        5,162       5,110
Earnings (loss) per share:
   Basic                                $(1.07)      $ 0.03      $ 0.38       $ 1.14      $ 1.15
   Diluted                              $(1.07)      $ 0.03      $ 0.38       $ 1.11      $ 1.11

Balance Sheet Data:
Working capital                         $18,246     $24,825     $22,489      $20,912     $12,147
Total assets                             38,582      41,144      38,941       37,400      28,698
Total debt
Total stockholders' equity              $28,968     $34,595     $34,084      $31,797     $25,450
-------------------------------------------------------------------------------------------------

</TABLE>

(1) Includes the impact of a $1,769,000 non-recurring charge for purchased,
in-process research and development in connection with the acquisition of a
majority interest in Pronexus Inc. that reduced earnings per share by $0.38.


                                       15
<PAGE>


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


Active Voice Corporation (the Company) is a leading manufacturer of PC-based
voice processing systems and computer-telephone integration (CTI) products. The
Company's products are sold worldwide through a network of independent
telecommunications dealers, telephone equipment manufacturers and computer
resellers. The Company currently markets six principal products: Unity,
Repartee, Replay Plus, Replay, Lingo and InSwitch. Unity, the Company's most
recent product introduction, offers fully unified messaging, including single
point administration for e-mail, voice mail and fax mail user accounts, address
and distribution lists, and network configuration for the Microsoft Exchange
Server. Repartee, the Company's well established mid-market product comes in two
versions, CTI and VP. Repartee serves as the base for TeLANophy, a suite of CTI
application modules which provides complete call management and integrated
messaging capabilities. Replay Plus, the Company's mid-priced product, offers
most of the voice processing features found in Repartee with the exception of
the CTI functionality. The Company's Replay product provides basic voice
processing features at a price point attractive to the small business market.
Lingo offers all basic voice processing features in a single proprietary
hardware unit, and is an affordable solution for small businesses as it does not
utilize PC hardware and requires minimal dealer effort in its installation.
InSwitch, available only to the Company's strategic partners, combines Active
Voice software with a board that incorporates directly into the phone switch,
offering a less expensive alternative than a traditional PC-based voice mail
system.

CERTAIN STATEMENTS IN THIS ANNUAL REPORT (FOR EXAMPLE, STATEMENTS USING THE
EXPRESSIONS, "THE COMPANY BELIEVES" OR "THE COMPANY ANTICIPATES" AND OTHER
SIMILAR STATEMENTS) CONTAIN "FORWARD LOOKING" INFORMATION (AS DEFINED IN THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995) INVOLVING RISKS AND
UNCERTAINTIES, INCLUDING WITHOUT LIMITATION, PROJECTIONS FOR SALES AND
EXPENDITURES, TREND PROJECTIONS AND DEVELOPMENT SCHEDULES. ACTUAL FUTURE RESULTS
AND TRENDS MAY DIFFER MATERIALLY DEPENDING ON A VARIETY OF FACTORS, INCLUDING,
BUT NOT LIMITED TO, THE RISKS DISCUSSED IN DOCUMENTS FILED BY THE COMPANY WITH
THE SECURITIES AND EXCHANGE COMMISSION. INVESTORS ARE ENCOURAGED TO CONSIDER THE
RISKS DETAILED IN THOSE FILINGS. THE COMPANY ASSUMES NO OBLIGATION TO RELEASE
PUBLICLY ANY CHANGES TO THESE "FORWARD LOOKING STATEMENTS" THAT MAY ARISE FROM
THE DEVELOPMENT OF UNANTICIPATED EVENTS OR CIRCUMSTANCES THAT OCCUR AFTER THE
DATE OF THE ORIGINAL PROJECTION. (REFER TO THE SECTION ENTITLED "FACTORS
AFFECTING FUTURE OPERATING RESULTS" FOR A FURTHER DISCUSSION ON SOME OF THE
INVOLVED RISKS AND UNCERTAINTIES.)

RESULTS OF OPERATIONS

<TABLE>
<CAPTION>

NET SALES
                                 1999      Change      1998     Change      1997
------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                            <C>         <C>       <C>         <C>      <C>
Net sales                      $62,217     17.1%     $53,151     7.3%     $49,515
------------------------------------------------------------------------------------

</TABLE>

FISCAL 1999 COMPARED TO FISCAL 1998


Net sales to the Company's Americas dealer network during the year ended March
31, 1999 increased 2.5% when compared to the previous year. Net sales to the
Americas dealer network represented 50.9% and 58.1% of total net sales in the
years ended March 31, 1999 and 1998, respectively. The decrease in net sales in
the Americas dealer channel as a percentage of total net sales is attributable
to the continued success of the Company's strategic partner relationships as
some dealers purchase the Company's products through these partners rather than
directly from the Company. The Company feels this is an efficient method of
distributing its basic voice mail products, due to lower distribution and
product support costs. The increase in overall revenue in the dealer channel
when compared to the prior year is attributable to the incremental sales
provided by the Company's Year 2000 (Y2K) program, which provides discounts to
dealers who upgrade their customers' non-Y2K compliant systems. To a lesser
extent, the introduction of new switch integrations and additional features for
Repartee, and the first full


                                       16
<PAGE>


year of sales of the Lingo product, also contributed to the revenue increase
in the channel. During the fourth quarter of the fiscal year ended March 31,
1999 the Company released Unity 2.0 to general availability for all
customers. Revenues from Unity were not material for the year ended March 31,
1999.

Net sales to the Company's corporate sales channel increased 55.9% during the
year ended March 31, 1999 over the comparable period in the prior fiscal year.
Net sales to corporate sales customers represented 30.9% and 23.2% of total net
sales for the fiscal years 1999 and 1998, respectively. InSwitch and
Repartee/Replay Plus product revenues accounted for the majority of the increase
in net sales to corporate sales customers. InSwitch was introduced during the
second half of fiscal year 1998 and the benefit of a full year's sales in fiscal
1999 resulted in a five-fold increase in InSwitch revenue. Sales of the InSwitch
product benefited from the success of NEC's ElectraElite switch sales, a high
percentage of which are now sold with voice mail. In fiscal 1999, the corporate
sales channel also experienced growth in Replay/Lingo product revenue, and year
over year revenue from all major strategic partners increased. The Company
reached an agreement with Alcatel in the quarter ended March 31, 1999 to jointly
develop and deliver a fully customized Unity-based product to Alcatel customers.
As of March 31, 1999 the Company had 8 significant strategic partner
relationships. The largest corporate customer represented 65% of total corporate
sales, and 20% of total Company net sales.

Net sales to international customers grew 11.2% in the year ended March 31, 1999
when compared to the prior fiscal year. International sales represented 14.2%
and 14.9% of total net sales for fiscal years 1999 and 1998, respectively. The
increase in international sales can be partially attributed to the success of
the international rollout of the company's Lingo product, particularly in the
United Kingdom and Australia/Pacific markets. In addition, the Company has
continued to successfully supply Replay systems to Crane in the United Kingdom.
The Company's sales in the Asia/Pacific region continued to struggle due to the
effects of the weak Asian economy in the first half of the year but began to
improve during the second half of fiscal 1999. The Company continues to see the
positive results of its product localization efforts for various European
countries, as evidenced by the increase in Replay and Replay Plus units shipped
there. The Company continues to increase its volume of business with Phillips,
and anticipates further development of this relationship with the release of an
InSwitch product to Phillips in fiscal 2000. Recent developments in the
international channel include the opening of new sales offices in South Africa
and Sweden. Beyond the usual risks associated with international sales (currency
fluctuations and restrictions; export-import regulations; customs matters;
foreign collection problems; and military, political and transportation risks),
the Company's international sales involve additional governmental regulation,
product adaptations to local languages and switching systems, and uncertainties
arising from local business practices and cultural considerations.

Other revenue comprised 4.1% of the Company's fiscal 1999 net sales, compared to
3.8% in fiscal 1998. This increase primarily represents revenue contributed from
the Company's Pronexus subsidiary, which grew 50% in fiscal 1999 compared to the
prior fiscal year.

The Company experiences significant quarterly variability in the level of sales
through its three distinct distribution channels. The diversification provided
by these three channels has in the past reduced the quarterly volatility of
aggregate net sales.

FISCAL 1998 COMPARED TO FISCAL 1997

Effective April 1, 1998, the Company's South and Central American customers,
which were previously under the umbrella of international sales, joined with the
North American dealer channel to create the "Americas" dealer channel. Due to
the rearrangement of the sales channels and the desire to offer consistent data
when compared to the prior year's Form 10-K, the 1997 figures are not directly
comparable to the 1999 figures. However, the 1998 numbers have been restated to
reflect the change in the Americas channel in the "Fiscal 1999 Compared to
Fiscal 1998" narrative, but the 1998 numbers were not restated in the "Fiscal
1998 Compared to Fiscal 1997" discussion. This allows the relationships to be
examined by comparing fiscal 1999 to 1998, and fiscal 1998 to 1997.



                                       17

<PAGE>

Net sales to the Company's North American dealer network during the year ended
March 31, 1998 declined 10% when compared to the previous year. Net sales to the
North American dealer network represented 57.5% and 68.5% of total net sales in
the years ended March 31, 1998 and 1997, respectively. The decrease in sales to
the North American dealer channel as a percentage of total net sales is
partially attributable to a shift in the distribution of the Company's low end
products to the corporate sales channel. The decrease can also be attributed to
the delayed release of Repartee VP and CTI in the fourth quarter of fiscal 1998.
As a result, the Company discounted certain interim sales of Replay and Replay
Plus products, which were phased out in this channel with the introduction of
Repartee VP and CTI. The delay also caused customers to defer orders in
anticipation of the new Repartee product offering. It is anticipated that the
standardization of the code base offered by Repartee VP and CTI will simplify
the product offering by establishing a consistent feature set and the ability to
offer more telephone switch integrations. This transition also allows the
Company to offer TeLANophy capability to every Repartee product sold in the
channel. The introduction of Lingo helped to mitigate the overall revenue
decline; of the 236 new dealers the Company added in fiscal 1998, 26 were
specifically devoted to selling Lingo.

Net sales to the Company's corporate sales channel increased 38.5% during the
year ended March 31, 1998 over the prior fiscal year. Net sales to corporate
sales customers represented 23.2% and 18.0% of total net sales for the fiscal
years 1998 and 1997, respectively. A greater than 270% increase in the unit
sales of Repartee was a significant factor in this year over year change. The
release of the high unit volume InSwitch product during the third quarter of
fiscal 1998 more than offset the year over year decline in Replay systems
revenue. In the fourth quarter of fiscal 1998, the Company successfully launched
Lingo to a strategic partner, broadening the product offerings in the channel
and contributing to the increase in revenue. The Company also reached an
agreement with Ingram Micro in the quarter ended March 31, 1998 to distribute
Repartee and Lingo, and to develop a sales channel for the release of the
Company's forthcoming NT-based product. As of March 31, 1998 the Company had 9
significant strategic partner relationships. The largest corporate customer
represented 50% of the channel's sales, and 11% of total Company revenue during
the year ended March 31, 1998.

Net sales to international customers grew 28.7% in the year ended March 31, 1998
when compared to the prior fiscal year. International sales represented 15.6%
and 13.0% of total net sales for fiscal years 1998 and 1997, respectively. The
increase in international sales can be attributed to the evolution of the
Company's international strategy towards a decentralized approach, providing the
local sales managers the latitude to take advantage of the unique opportunities
in their markets. The acquisition of Active Voice B.V., the Company's European
distributor, in September 1997 allowed the Company to improve its responsiveness
to its European customers. The Company continued to invest in product
localization efforts, especially in the German and French markets. The
international channel also experienced an increase in revenue from Replay,
offset by declining unit sales of Repartee systems and kits. The strength of the
US currency, particularly relative to the Australian dollar, mitigated some of
the overall increase in international revenues.

Other revenue comprised 3.7% of the Company's fiscal 1998 net sales, compared to
0.5% in fiscal 1997. This increase primarily represents revenue contributed from
the Company's Pronexus subsidiary, acquired in January 1997. The Company also
recognized revenues for the receipt of patent license fees related to the
Company's stutter detect patent.

<TABLE>
<CAPTION>

GROSS PROFIT
                                     1999       Change       1998      Change       1997
---------------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                 <C>         <C>        <C>         <C>         <C>
Gross profit                        $33,382      10.6%     $30,195      4.9%       $28,780
Percentage of net sales              53.7%                  56.8%                   58.1%
---------------------------------------------------------------------------------------------

</TABLE>

The Company's gross margin varies in part depending upon the mix of
higher-margin voice board-and-software kit sales (offered to all customers) and
software-only sales, such as InSwitch


                                       18
<PAGE>


(available only to strategic partner accounts) as opposed to turnkey system
sales (which include the cost of a PC and other related hardware). The
proportion of sales contributed from each distribution channel also affects
the overall gross margin, as international sales have historically had higher
gross margins than sales through the other distribution channels.

FISCAL 1999 COMPARED TO FISCAL 1998

Revenue from the Company's Y2K upgrade program has contributed to the reduction
of the overall gross margin percentage in comparison to the prior fiscal year.
The PC hardware components of the Company's products carry a lower gross margin
percentage, and the PC hardware component is greater under the Y2K program than
in the Company's non-Y2K business. Another factor contributing to the decline is
the continuing shift of a larger portion of the Company's revenue through the
strategic partner channel, which has resulted in increased unit volume at the
expense of higher margin percentages. Specifically, the Company's Lingo sales,
which contributed a higher proportion of margin dollars in fiscal 1999 than the
prior fiscal year, but at a lower gross margin percentage, also accounted for
the decline in gross margin percentage between the comparable periods. The
overall decline has been partially offset by the Company's InSwitch product,
which carries a higher software component than traditional turnkey system sales.

FISCAL 1998 COMPARED TO FISCAL 1997

The decline in gross margin between fiscal 1998 and 1997 is attributable to a
variety of factors, particularly product platform changes that required the
Company to increase allowances for excess and obsolete inventory in the second
and fourth quarters of fiscal 1998. In addition, the Company wrote off the value
of unreturned out-of-warranty items and certain demo units. Also, in the fourth
quarter Replay and Replay Plus units were discounted in preparation for the
Repartee 7.44 transition. The margin decrease related to the transition was
offset by margin gains in the strategic partner channel with the third quarter
release of the InSwitch product, as well as a 58% overall increase of TeLANophy
sales. Other factors mitigating the margin decrease included the settlement of
third-party vendor hardware problems as well as recognition of patent license
fees related to the Company's stutter detect patent.

<TABLE>
<CAPTION>

RESEARCH AND DEVELOPMENT
                                     1999       Change       1998      Change       1997
---------------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                 <C>         <C>         <C>        <C>         <C>
Research and development            $14,450      48.2%      $9,752      44.3%      $6,757
Percentage of net sales              23.2%                  18.3%                   13.6%
---------------------------------------------------------------------------------------------

</TABLE>

FISCAL 1999 COMPARED TO FISCAL 1998

The acceleration of the development effort associated with the Company's Windows
NT-based product, Unity, resulted in the majority of the fiscal year 1999
increase in research and development expenses over the prior fiscal year. The
substantial development resources required to build a native NT unified
messaging product from the ground up necessitated the dollar growth in research
and development expenses. The Company does not capitalize software development
costs. As the development expenditures associated with Unity, which was released
at the end of the fourth quarter of fiscal 1999, were in advance of actual
product revenues, the research and development expenses as a percentage of sales
also increased. Contract development staff and employee compensation-related
expenses were the largest components of the increase. A one-time bonus in the
fourth quarter of fiscal 1999 was awarded to the Unity development staff for
meeting the product's targeted release date, and accounted for approximately 9%
of the incremental expenses. The customization of products for the Company's
strategic partners and the ongoing globalization of products for international
markets also contributed to the increase. In addition, the competitive nature of
the labor market and the Company's effort to attract and retain skilled
employees has led to an overall increase in engineering salaries.


                                       19
<PAGE>


The Company believes that in order to remain competitive in a rapidly changing
technological environment, it will continue to be necessary to allocate
significant resources to the development of new products, globalization of
products for international markets and customization of products for strategic
partners. The Company expects the dollar amount of research and development
expenditures to continue to increase for the foreseeable future, and that these
expenses as a percentage of sales will vary from period to period.

FISCAL 1998 COMPARED TO FISCAL 1997

The increases in research and development expenses, both in dollar amount and as
a percentage of net sales between the fiscal years ending 1998 and 1997 were
primarily attributable to an increase in compensation-related costs associated
with additional engineering and development personnel and project-based contract
development staff and associated recruiting costs. The increase in engineering
personnel is attributable to the Company's development of new Windows NT-based
products as well as to the addition of Pronexus Inc. development staff. In
addition, engineering salaries have increased due to the competitive nature of
the labor market and the Company's effort to attract and retain skilled
employees.

Significant releases during fiscal 1998 included the Lingo and InSwitch
products, described above. The introduction of Repartee 7.44 in the fourth
quarter to the North American dealer network offers TeLANophy capability with
every Repartee system sold within the channel. The Company also developed and
announced version 2.0 of ViewCall-Registered Trademark- Plus, which takes
advantage of a powerful new scripting tool, PhoneBASIC-TM-. With PhoneBASIC,
ViewCall Plus 2.0 can be integrated to work with a variety of general
business applications.

<TABLE>
<CAPTION>

SALES AND MARKETING
                                     1999       Change       1998      Change       1997
---------------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                 <C>          <C>       <C>         <C>         <C>
Sales and marketing                 $17,349      12.5%     $15,421      15.9%      $13,301
Percentage of net sales              27.9%                  29.0%                   26.9%
---------------------------------------------------------------------------------------------

</TABLE>

FISCAL 1999 COMPARED TO FISCAL 1998

The increases in sales and marketing expenses for the fiscal year ended March
31, 1999 over the prior fiscal year were primarily attributable to increased
compensation-related expenses associated with growth in sales and marketing
personnel and higher commissions due to increased sales levels. Leveraging these
additional expenses over a growing revenue base resulted in a decline in sales
and marketing expenses as a percentage of net sales. The increase in unit volume
has also caused expenses to be higher when compared to the prior year, as more
resources have been devoted to supporting a larger number of systems.
Furthermore, in preparation for the release of Unity, training expenses and
additional technical staff were necessary to strengthen the Company's product
support infrastructure. Sales and marketing expenses include both costs that are
essentially fixed as well as costs that vary from period to period relative to
sales volume and thus can be expected to fluctuate both in dollar amount and as
a percentage of net sales from period to period.

FISCAL 1998 COMPARED TO FISCAL 1997

Most of the increase in sales and marketing expense for the year ended March 31,
1998 when compared to the prior year is due to overall increased
compensation-related expenses and the addition of new personnel, particularly
technical and strategic partner support staff. The increase in technical support
personnel is attributable to the demand for network and desktop support
resources as a result of the product shift to Repartee and CTI offerings. A 23%
increase in unit volume has also caused expenses to be higher when compared to
the prior year, as more resources have been devoted to supporting a larger
number of systems. Trade show expenditures and other promotional efforts also
increased in an effort to


                                       20
<PAGE>


establish awareness of the new Lingo and Repartee 7.44 products, as well as
Pronexus' Visual Basic application tools.

<TABLE>
<CAPTION>

GENERAL AND ADMINISTRATIVE
                                     1999       Change       1998      Change       1997
---------------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                 <C>         <C>         <C>        <C>         <C>
General and administrative          $8,105       31.3%      $6,171      40.8%      $4,384
Percentage of net sales              13.0%                  11.6%                   8.9%
---------------------------------------------------------------------------------------------

</TABLE>

FISCAL 1999 COMPARED TO FISCAL 1998

The majority of the increase in general and administrative expenses for the year
ended March 31, 1999 is attributable to higher compensation-related expenses.
Specifically, the Company added information system staff and devoted more
resources to internal workstation and network support. Depreciation associated
with the Company's continued investment in its management information system
infrastructure as well as higher software costs also contributed to the
increase. The Company's international general and administrative expenses also
increased when compared to the prior year, due to the acquisition of its
European distributor in mid-fiscal 1998, and to the conversion of its Australian
and UK offices from branch to subsidiary operations. General and administrative
expenses can be expected to fluctuate as a percentage of net sales from period
to period.

FISCAL 1998 COMPARED TO FISCAL 1997

Approximately two-thirds of the increase in general and administrative expenses
during the year ended March 31, 1998 can be attributed to increased headcount
and additional compensation-related expenses, and one-fourth the result of
increased consulting services. These additional expenses are primarily
associated with the Company's continued investment in its management information
systems infrastructure. Specifically, in fiscal 1998 the Company upgraded and
standardized many of its in-house computer systems and network equipment, as
well as implemented a new customer management software program. These increases
were partially offset by a reduction in the provision for doubtful accounts
receivable due to improved collection statistics.

NON-RECURRING CHARGE FOR PURCHASED, IN-PROCESS RESEARCH AND DEVELOPMENT

During January 1997, the Company recognized a non-recurring charge of $1.8
million for purchased, in-process research and development as a result of the
acquisition of a majority interest in Pronexus, Inc. See Note 12 of Notes to
Consolidated Financial Statements.

<TABLE>
<CAPTION>

INTEREST EXPENSE AND INTEREST INCOME
                                     1999       Change      1998       Change       1997
---------------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                 <C>        <C>          <C>        <C>          <C>
Interest expense                    ($103)     100.0%
Interest income                      $419      (26.8%)      $573       (23.1%)      $745
---------------------------------------------------------------------------------------------

</TABLE>

FISCAL 1999 COMPARED TO FISCAL 1998

The Company incurred interest expense in fiscal year ended March 31, 1999 as it
borrowed against its line of credit to fund operations. The decrease in interest
income in the current year compared to fiscal 1998 was primarily due to lower
average invested cash and marketable security balances as the Company allowed
its investments to mature without reinvesting the proceeds. Average cash and
marketable security balances decreased due primarily to the Company's net loss.
See "Liquidity and Capital Resources."


                                       21
<PAGE>


FISCAL 1998 COMPARED TO FISCAL 1997

The decrease in interest income during fiscal 1998 was primarily attributable to
lower average invested cash and marketable security balances. Average cash and
marketable security balances decreased due to increased inventory holdings,
vendor prepayments and certain business combinations.

<TABLE>
<CAPTION>

INCOME TAX BENEFIT (PROVISION)
                                     1999       Change       1998      Change       1997
---------------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                 <C>         <C>         <C>       <C>         <C>
Income tax                          $1,308       89.8%       $689     (143.4%)    ($1,587)
Effective tax rate                    21.1%                 119.6%                 (47.9%)
---------------------------------------------------------------------------------------------

</TABLE>

Variations in the customary relationship between the income tax provision and
the statutory income tax rate of 34% result from certain nondeductible expenses,
tax exempt investment income, research and development tax credits, and the
benefit provided by the Company's foreign sales corporation. The Company expects
the effective tax rate to fluctuate in the future due to the impact of changing
research and development tax credits, tax exempt interest income, and foreign
sales corporation benefits as a percentage of taxable income. In addition, the
Company anticipates that its operations may fall under the jurisdiction of
additional taxing authorities as its operations continue to expand into new
geographical areas.

FISCAL 1999 COMPARED TO FISCAL 1998

Under Financial Accounting Standard No. 109, "Accounting for Income Taxes" (FAS
109), a deferred tax asset is recognized for deductible future temporary
differences. A valuation allowance against this asset is recognized if, based
upon the weight of the available evidence, it is more likely than not that some
portion or all of the deferred tax asset will not be realized. FAS 109 requires
an assessment of all available evidence both positive and negative. Management
believes the Company will be able to realize net deferred tax assets in excess
of the valuation allowance because a significant portion of the operating loss
was generated by the deliberate investment in the development of the Unity
product ahead of planned revenues, prior to which the Company had a long and
stable history of earnings. However, there can be no assurance that the Company
will generate taxable income or that all of its deferred tax assets will be
realized.

The Company's effective tax rate decreased to 21.1% (benefit rate as a result of
pretax losses) in the fiscal year ended March 31, 1999. During the year the
Company exhausted all net operating loss (NOL) carrybacks. Any additional NOL's
will be carried forward, resulting in income tax benefits in future periods with
taxable income. As a result of the Company's pretax losses for the year ended
March 31, 1999, the Company will receive a refund of income taxes previously
paid.

FISCAL 1998 COMPARED TO FISCAL 1997

The Company's effective tax rate increased to 119.6% (benefit rate as a result
of a pretax loss) in fiscal 1998 from 47.9% in fiscal 1997. The significant
increase in the effective tax rate was primarily attributable to the Company's
small pretax loss in fiscal 1998. As the Company's operating results approach
the break-even level as in fiscal 1998, the tax benefits provided by tax exempt
income, the FSC and the research and development tax credit increase as a
percentage of the pretax operating result even though the absolute dollar value
of these benefits has not significantly changed.


                                       22

<PAGE>


<TABLE>
<CAPTION>

NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE
                                     1999        Change        1998      Change       1997
-----------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S>                                <C>         <C>            <C>        <C>         <C>
Net income (loss)                  ($4,969)    (3,599.3%)      $142      (91.9%)     $1,751
Percentage of net sales             (8.0%)                     0.3%                   3.5%
Earnings (loss) per share:
   Basic                            ($1.07)    (3,666.7%)     $0.03      (92.1%)      $0.38
   Diluted                          ($1.07)    (3,666.7%)     $0.03      (92.1%)      $0.38
-----------------------------------------------------------------------------------------------

</TABLE>

FISCAL 1999 COMPARED TO FISCAL 1998

Net income (loss) and earnings (loss) per share for the year ended March 31,
1999 in comparison to the corresponding periods in the prior fiscal year were
primarily attributable to the increased operating expenses, as discussed above
under the individual income statement captions. The Company believes these
investments are essential to prepare for new product direction and future
growth. These investments in the development, marketing and support of new
products are expected to continue into the next year. Furthermore, the declines
in gross margin as a percentage of net sales have also contributed to the
decreases in net income and earnings per share. The average number of common and
common equivalent shares outstanding during the two periods was comparable.

FISCAL 1998 COMPARED TO FISCAL 1997

Net income and earnings per share in fiscal 1998 decreased compared to 1997 due
primarily to increased operating expenses, as discussed under the individual
income statement captions. The Company believes these investments are essential
to prepare for new product direction and future growth. This investment in the
development of new offerings and distribution channels, and the individuals that
support them, is expected to continue throughout the next fiscal year.
Furthermore, the decline in gross margin percentage, combined with relatively
modest increases in sales volume to leverage over the added operating expenses,
has contributed to the decrease. The average number of common and dilutive
common equivalent shares outstanding during the two periods was comparable.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash, cash equivalents, and marketable securities decreased to
$4.5 million, or 11.6% of total assets, at March 31, 1999 from $8.6 million, or
21.0% of total assets, at March 31, 1998. The decrease is due primarily to the
net loss. Cash flow used in operations totaled $0.8 million during the twelve
months ended March 31, 1999. The Company had net working capital of $18.2
million at March 31, 1999.

Accounts receivable, net of allowances, increased to $13.6 million at March 31,
1999 from $11.3 million at March 31, 1998. The increase in accounts receivable
balances was due to higher net sales in the fourth quarter of the current fiscal
year compared to net sales in the comparable quarter of the prior fiscal year.
Days' sales outstanding at March 31, 1999 declined approximately 8.5% from March
31, 1998. Inventory decreased to $5.9 million at March 31, 1999 from $10.1
million at March 31, 1998, reflecting the Company's continued efforts to
efficiently manage component stocking levels.

During the fiscal year ended March 31, 1999, the Company repurchased 160,000
shares of its common stock for approximately $1.1 million under previously
announced share repurchase programs. The Company made $2.8 million in capital
expenditures during the fiscal year ended March 31, 1999, compared to $2.5
million during the prior fiscal year. The majority of the capital expenditures
during the current year consisted of computer hardware and software used to
augment the Company's management information systems infrastructure, as well as
additions and upgrades of computer equipment for development personnel. The
Company currently has no specific commitments with respect to future capital
expenditures, but expects to acquire approximately $4.0 million in new capital
additions.


                                       23
<PAGE>


The Company has a $10,000,000 revolving credit line from a bank for financing
working capital. No borrowings were outstanding under this agreement as of March
31, 1999. The agreement expires on June 30, 1999. The Company is currently in
the process of negotiating a new financing agreement. In addition, subsequent to
March 31, 1999, the Company entered into an agreement with its largest customer
that provided a borrowing facility of up to $6.5 million. See Note 15 of Notes
to Consolidated Financial Statements.

The Company believes that ongoing maturity of securities in its investment
portfolio, together with cash flow from operations and the availability of
alternative financing arrangements will provide sufficient resources to finance
operations for at least the next year.

YEAR 2000 (Y2K)

An issue affecting the Company and others is the inability of many computer
systems and applications to correctly process date data in and between the
twentieth and twenty-first centuries. The Company formed task forces to
investigate the year 2000 readiness of its products and of its internal systems.
The Company has completed its assessment of the year 2000 readiness of its
internal business process systems and applications. The Company has received
assurances from the suppliers that the Company's most critical business process
systems and applications are currently or will be year 2000 ready by December
31, 1999. The Company believes that other internal systems are also year 2000
ready. The Company intends to continue monitoring its systems through the year
2000. The Company estimates that the total cost of replacement or upgrade of
internal systems replaced solely to achieve year 2000 readiness will be less
than $100,000, the majority of which has already been incurred.

The Company has also implemented programs to assist customers with older
versions of its products in obtaining year 2000 readiness by making software
upgrades or replacement hardware available and offering programs for migrations
to current product versions. The Company estimates that the costs of creating
software patches and administering its upgrade programs for customers will be
approximately $400,000, the majority of which has already been incurred. The
financial impact to the Company of the development and administration of the
upgrade programs has not been and is not anticipated to be material to its
financial position or results of operations in any given year. However, if any
customers do not make necessary modifications, conversions, migrations, or
upgrades, it could have a material adverse effect on the Company in the form of
legal costs or the loss of customers.

The Company has been served with three class action lawsuits, one in Alabama
state court, one in Indiana state court, and one in Massachusetts state
court, related to the alleged inability of the Company's products prior to
Repartee 7.44 to function properly with respect to the year 2000. The
plaintiffs in the suits seek to require the Company to remedy the alleged
defect in these products and also seek damages. The Company has filed its
answer in the suits in Alabama and Massachusetts. The Company believes that
the claims stated in the cases are without merit, that the cases are not
appropriate for class action, and the Company intends to defend itself
vigorously. However, due to the preliminary status of the proceedings, it is
not possible to predict the ultimate outcome of the cases or their financial
impact on the Company.

The Company has contacted its third-party suppliers to assess and seek
reasonable assurances concerning the year 2000 readiness of their products and
has contacted its primary suppliers concerning the year 2000 readiness of their
internal systems as well. The Company has received assurances from many of its
suppliers that their products and services are year 2000 ready, but has concerns
that some suppliers may be unable to control their supply chain and may
experience year 2000 interruptions. Because the Company has no control over
third parties' products, services or internal operations, the Company cannot
ensure year 2000 readiness by its suppliers. The Company is developing
contingency plans for third-party suppliers it believes may be at risk,
including qualifying alternative suppliers or increasing inventory levels prior
to January 2000. Because some products and services are highly proprietary, the
Company cannot ensure that acceptable substitutes will be available.

The Company has also requested and will assess any available information from
major customers concerning their internal year 2000 readiness. Because the
Company has no control over third parties'


                                       24
<PAGE>


products, services or internal operations, the Company cannot ensure year
2000 readiness by its customers.

The Company has not determined the most likely worst case scenario for the
Company with respect to the year 2000 problem as it is still assessing the year
2000 readiness of its important business partners.

RISK FACTORS AFFECTING FUTURE OPERATING RESULTS

Certain statements contained herein are dependent upon numerous factors,
circumstances and contingencies. The following factors, while not all inclusive,
could cause actual results to differ materially from historical results or those
anticipated:

-    Competitive pressure from new entrants to the CTI market, including large
     software companies and telephone switch manufacturers with greater
     resources, could adversely affect the Company's business. Introduction of
     new products by the Company or its competitors and the extent of their
     success or failure could produce significant fluctuations in market demand
     for the Company's products.

-    Increasing price competition in the Company's marketplace could influence
     the amount and timing of changes in the Company's prices to its customers,
     and therefore negatively impact the Company's gross margins. Gross margins
     may also either increase or decrease as a result of further shifts in
     product mix depending upon the percentage of net sales contributed by
     software only sales in comparison to turnkey system sales.

-    There can be no assurance that new products will not be delayed, resulting
     in lost customers or allowing competitors to gain market share, or that
     such products will be successful in the marketplace.

-    The extent and timing of new product development and the need or desire to
     modify existing products may cause notable increases in research and
     development spending. Increasing international sales may require notable
     increases in development spending associated with localization of products
     for foreign markets.

-    Additional operating losses in excess of management expectations may cause
     the Company's existing cash and marketable security balances to be
     insufficient to fund its operations. As a result, the Company may be
     required to seek alternate sources of financing or may be required to abate
     current expense levels. There can be no assurance that alternate financing
     will be available on acceptable terms, or at all.

-    Risks that the Company, its suppliers, or its customers do not address any
     year 2000 readiness issues in a timely or effective manner. See "Year 2000
     Update" above.

-    If the Company experiences delays in shipments (whether it is due to delays
     from customers or as a result of the timing of new product introductions by
     the Company) in a given quarter, or if new order bookings do not meet
     anticipated levels, substantial fluctuations in operating results will
     occur. Frequently, these developments may not become apparent to the
     Company until near or at the end of the quarter. In addition, changes in
     the product and channel mix, and the timing of customer orders, will
     continue to affect the variability of quarterly results of operations in
     future quarters.

-    Dependence on continued sales to significant customers could have a
     significant impact on the Company's operations as there is no assurance
     that any particular customer will continue to purchase similar volumes of
     the Company's products.

-    Risks associated with the Company's movement into the larger end user
     market, such as product acceptance and demand and failure to attract
     sufficient market share, could affect the Company's future performance.

-    Growth strategies involving acquisitions, strategic relationships, and
     vendor relationships may encounter legal and/or unforeseeable business
     risks beyond the Company's control.


                                       25
<PAGE>


-    Risks associated with foreign operations such as gains and losses on the
     conversion of foreign currencies to U.S. dollars; export-import
     regulations; customs matters; foreign collection problems; and military,
     political and transportation risks may significantly affect the company's
     operating results. In addition, the Company's international sales involve
     additional risks associated with governmental regulation, product
     adaptation to local languages and switching systems, and uncertainties
     arising from local business practices and cultural considerations.


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company does not use or hold any derivative financial instruments. The
Company is exposed to both foreign currency and interest rate risk, either of
which could have an adverse effect on the Company's results of operations,
financial position or cash flows. The Company has assets and liabilities
denominated in certain foreign currencies related to international sales,
distribution and support subsidiaries. The Company has not hedged its
translation risk on these assets and liabilities as the Company has the ability
to hold them for an indefinite period and does not expect that a sudden or
significant change in foreign exchange rates would have a material impact on
results of operations, financial position or cash flows. The Company generally
invests in high-grade commercial paper and municipal securities, which are
classified as available-for-sale, to minimize its exposure to interest rate
risk. The Company believes that the market risk associated with its marketable
security holdings is not material. See Note 2 and Note 11 of Notes to
Consolidated Financial Statements.


                                       26
<PAGE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                         ACTIVE VOICE CORPORATION
                                  CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                         Year Ended March 31,
                                                             ----------------------------------------------
                                                                 1999            1998            1997
                                                             --------------  --------------  --------------
<S>                                                          <C>             <C>             <C>
Net sales                                                        $62,217         $53,151         $49,515
Cost of goods sold                                                28,835          22,956          20,735
                                                             --------------  --------------  --------------
Gross profit                                                      33,382          30,195          28,780

Operating expenses:
  Research and development                                        14,450           9,752           6,757
  Sales and marketing                                             17,349          15,421          13,301
  General and administrative                                       8,105           6,171           4,384
  Non-recurring charge for purchased,
    In-process research and development                                                            1,769
                                                             --------------  --------------  --------------
    Total operating expenses                                      39,904          31,344          26,211
                                                             --------------  --------------  --------------
Operating income (loss)                                           (6,522)         (1,149)          2,569

Interest expense                                                    (103)
Interest income                                                      419             573             745
                                                             --------------  --------------  --------------
Income (loss) before income taxes and
  minority interest                                               (6,206)           (576)          3,314

Income tax benefit (provision)                                     1,308             689          (1,587)
Minority interest in (earnings) loss
  of consolidated subsidiary                                         (71)             29              24
                                                             --------------  --------------  --------------

NET INCOME (LOSS)                                                $(4,969)          $ 142         $ 1,751
                                                             --------------  --------------  --------------
                                                             --------------  --------------  --------------
EARNINGS (LOSS) PER SHARE:
  Basic                                                           $(1.07)          $0.03           $0.38
                                                             --------------  --------------  --------------
                                                             --------------  --------------  --------------
  Diluted                                                         $(1.07)          $0.03           $0.38
                                                             --------------  --------------  --------------
                                                             --------------  --------------  --------------

</TABLE>

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



                                       27
<PAGE>


                                         ACTIVE VOICE CORPORATION
                                       CONSOLIDATED BALANCE SHEETS
                                      (In thousands, except shares)

<TABLE>
<CAPTION>

                                                                                 March 31,
                                                                   ---------------------------------------
                                                                         1999                  1998
                                                                   ---------------------------------------
<S>                                                                <C>                       <C>
ASSETS
Current assets:
  Cash and cash equivalents                                                 $ 1,650              $ 1,550
  Marketable securities                                                       1,113                3,407
  Accounts receivable, less allowances
    of $1,700 ($1,515 in 1998)                                               13,622               11,331
  Inventories                                                                 5,924               10,122
  Income taxes receivable                                                       741                  652
  Deferred tax asset                                                          1,650                1,340
  Prepaid expenses and other assets                                           3,215                3,103
                                                                   ------------------    -----------------
      Total current assets                                                   27,915               31,505

Marketable securities                                                         1,701                3,680
Furniture and equipment, net                                                  4,589                3,539
Other assets                                                                  4,377                2,420
                                                                   ------------------    -----------------
      TOTAL ASSETS                                                          $38,582              $41,144
                                                                   ------------------    -----------------
                                                                   ------------------    -----------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                                           $4,983              $ 3,931
  Accrued compensation and benefits                                           2,500                1,256
  Other accrued expenses                                                      2,186                1,493
                                                                   ------------------    -----------------
      Total current liabilities                                               9,669                6,680

Commitments

Minority interest                                                               (55)                (131)

Stockholders' equity:
  Preferred stock, no par value:
    Authorized shares - 2 million - none outstanding
  Common stock, no par value:
    Authorized shares - 10 million
    Issued shares, including repurchased shares - 4,976,933                  17,314               17,262
  Retained earnings                                                          13,907               18,996
  Accumulated other comprehensive income                                         20                   40
  Less 395,153 repurchased shares (313,067 at 1998)                          (2,273)              (1,703)
                                                                   ------------------    -----------------
Total stockholders' equity                                                   28,968               34,595

      TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                            $38,582              $41,144
                                                                   ------------------    -----------------
                                                                   ------------------    -----------------

</TABLE>

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


                                       28
<PAGE>


                                         ACTIVE VOICE CORPORATION
                                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                                              (In thousands)

<TABLE>
<CAPTION>
                                                                         Year Ended March 31,
                                                             ----------------------------------------------
                                                                 1999            1998            1997
                                                             ----------------------------------------------
<S>                                                          <C>             <C>            <C>
OPERATING ACTIVITIES
Net income (loss)                                                $(4,969)          $ 142          $1,751
Adjustments to reconcile net income (loss) to net
    cash used in operating activities:
        Depreciation and amortization                              1,882           1,494             966
        Provisions for accounts receivable                           287            (155)            305
        Deferred income taxes                                       (306)           (347)              5
        Loss on disposal of equipment                                 60              49              39
        Minority interest in earnings (loss) of
            consolidated subsidiary                                   71             (29)            (24)
        Non-recurring charge for purchased,
            in-process research and development                                                    1,769
        Changes in operating assets and liabilities:
            Increase in accounts receivable                       (2,578)           (766)         (2,087)
            Decrease (increase) in inventories                     4,198          (3,113)         (1,526)
            Increase in prepaid expenses and other assets         (2,394)         (2,428)         (1,643)
            Increase in accounts payable                           1,052           1,589             204
            Increase (decrease) in other liabilities               1,946            (414)           (715)
                                                             --------------  --------------  --------------
NET CASH USED IN OPERATING ACTIVITIES                               (751)         (3,978)           (956)

INVESTING ACTIVITIES
Purchases of marketable securities                                                (2,294)         (5,072)
Proceeds from sales of marketable securities                       4,258           9,006           7,026
Acquisition of business                                                             (467)         (1,941)
Purchases of furniture and equipment                              (2,756)         (2,492)         (1,295)
                                                             --------------  --------------  --------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                1,502           3,753          (1,282)

FINANCING ACTIVITIES
Proceeds from employee stock option and stock
    purchase plans                                                   484             644             382
Repurchase of common stock                                        (1,131)           (416)
                                                             --------------  --------------  --------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                 (647)            228             382

Effect of exchange rate changes on cash
    and cash equivalents                                              (4)              5               8
                                                             --------------  --------------  --------------
Increase (decrease) in cash and cash equivalents                     100               8          (1,848)
Cash and cash equivalents at beginning of year                     1,550           1,542           3,390
                                                             --------------  --------------  --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR                          $1,650          $1,550          $1,542
                                                             --------------  --------------  --------------
                                                             --------------  --------------  --------------

</TABLE>

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


                                       29
<PAGE>


                                         ACTIVE VOICE CORPORATION
                             CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                      (In thousands, except shares)

<TABLE>
<CAPTION>

                                    Common Stock                   Accumulated
                               -----------------------                Other                      Total
                                Net Shares             Retained   Comprehensive  Repurchased  Stockholders'
                               Outstanding   Amount    Earnings   Income (Loss)    Shares        Equity
-----------------------------------------------------------------------------------------------------------
<S>                            <C>           <C>       <C>        <C>            <C>          <C>
Balance at April 1, 1996         4,554,945   $16,791     $17,319          $(16)      $(2,297)     $31,797
  Issuance of shares upon
    exercise of stock options       46,833        17         (44)                        256          229
  Issuance of shares to
    employee stock purchase
    plan                            16,296        64                                      89          153
  Tax benefit related to
    employee stock plans                         131                                                  131
  Comprehensive income:
    Net unrealized gain on
      marketable securities                                                 19                         19
    Translation adjustment                                                   4                          4
    Net income                                             1,751                                    1,751
                                                                                              -------------
    Total                                                                                           1,774
-----------------------------------------------------------------------------------------------------------
Balance at March 31, 1997        4,618,074    17,003      19,026             7        (1,952)      34,084
  Issuance of shares upon
    exercise of stock options       53,713        27        (160)                        451          318
  Issuance of shares to
    employee stock purchase
    plan                            32,079       124         (12)                        214          326
  Tax benefit related to
    employee stock plans                         108                                                  108
  Repurchase of common stock       (40,000)                                             (416)        (416)
  Comprehensive income:
    Net unrealized gain on
      marketable securities                                                 30                         30
    Translation adjustment                                                   3                          3
    Net income                                               142                                      142
                                                                                              -------------
    Total                                                                                             175
-----------------------------------------------------------------------------------------------------------
Balance at March 31, 1998        4,663,866    17,262      18,996            40        (1,703)      34,595
  Issuance of shares upon
    exercise of stock options        3,750         1         (11)                         22           12
  Issuance of shares to
    employee stock purchase
    plan                            74,164        42        (109)                        539          472
  Tax benefit related to
    employee stock plans                           9                                                    9
  Repurchase of common stock      (160,000)                                           (1,131)      (1,131)
  Comprehensive loss:
    Net unrealized loss on
      marketable securities                                                (11)                       (11)
    Translation adjustment                                                  (9)                        (9)

</TABLE>


                                       30
<PAGE>


<TABLE>

<S>                            <C>           <C>       <C>        <C>            <C>          <C>
    Net loss                                              (4,969)                                  (4,969)
                                                                                              -------------
    Total                                                                                          (4,989)
-----------------------------------------------------------------------------------------------------------
Balance at March 31, 1999        4,581,780   $17,314     $13,907           $20      $(2,273)      $28,968

</TABLE>


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



                                       31
<PAGE>


                            ACTIVE VOICE CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY

Active Voice Corporation (the Company) is a leading manufacturer of PC-based
voice processing systems and CTI products. The Company's products are sold
worldwide through a global network of independent telecommunications dealers,
telephone equipment manufacturers and computer resellers.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
all majority-owned subsidiaries. Inter-company accounts and transactions have
been eliminated.

FOREIGN CURRENCY TRANSLATION

The local currency in the country of domicile is considered the functional
currency of the Company's foreign operations. Financial statements of foreign
subsidiaries are translated into U.S. dollars using the exchange rate at each
balance sheet date for assets and liabilities and a weighted average exchange
rate for each period for revenues and expenses. Resulting translation
adjustments are excluded from net income and reported in accumulated other
comprehensive income.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

The Company considers highly liquid investments with an original maturity of
three months or less to be cash equivalents. Excess cash is primarily invested
in treasury bills, securities of government agencies, and commercial paper. Cash
equivalents are carried at amortized cost, which approximates fair market value.

MARKETABLE SECURITIES

Marketable securities are carried at market value. Market values are determined
based on quoted market prices on the balance sheet date. Marketable securities
are classified in the balance sheet as current and noncurrent based on maturity
dates and the Company's expectation of sales and redemptions in the following
year.

INVENTORIES

Inventories are stated at the lower of cost or market value. Cost is determined
on a first-in, first-out (FIFO) basis.

The Company currently purchases the majority of its voice boards, a significant
component of its products, from one supplier. Although there are a limited
number of manufacturers of voice boards, management believes that other
suppliers could provide similar product on comparable terms. A change


                                       32
<PAGE>

in suppliers, however, could cause a delay in manufacturing and a possible
loss of sales, which would affect operating results adversely.

FURNITURE AND EQUIPMENT

Furniture and equipment are recorded at cost. Depreciation is computed using
both accelerated and straight-line methods over the estimated useful lives of
the assets. Estimated useful lives are as follows: furniture and fixtures, seven
years; office and computer equipment, three to five years; and leasehold
improvements, the lesser of ten years or the remainder of the lease term.
Repairs and maintenance that do not improve or extend the lives of the
respective assets are expensed in the period incurred.

Effective April 1, 1998, the Company changed its method of depreciation for
furniture and equipment placed in service after March 31, 1998 from an
accelerated method to the straight-line method and shortened the estimated
useful lives of some computer equipment from five years to three years. The
Company changed its method of depreciation based on management's belief that the
straight-line method provides a better matching of revenue and expense and that
it is the predominant industry practice. Estimated useful lives of computer
equipment were shortened due to rapid technological obsolescence associated with
these assets. These changes did not have a material effect on the Company's
results of operations for the year ended March 31, 1999.

GOODWILL

Goodwill represents costs in excess of net assets of acquired businesses.
Goodwill is being amortized over periods ranging from three to five years, using
the straight-line method. The Company periodically assesses the carrying value
of its goodwill to determine if impairment has resulted in an excess of carrying
value over fair value. Amortization expense amounted to $229,000, $182,000 and
$24,000 for the years ended March 31, 1999, 1998 and 1997, respectively.

REVENUE RECOGNITION

On April 1, 1998, the Company adopted AICPA Statement of Position 97-2,
"Software Revenue Recognition." Adoption of this standard did not result in a
material effect on the Company's results of operations, financial position or
cash flows for the year ended March 31, 1999. The Company's revenues primarily
consist of system sales and software licenses. System sales typically include
both software and hardware components. Software licenses consist of software
applications that operate on industry standard hardware that is available from
the Company and other vendors. Revenue from system sales and software licenses
is recognized upon shipment of the product to the customer. The Company accrues
estimated costs of technical support to customers, as the related revenues are
recognized.

SOFTWARE DEVELOPMENT COSTS

No software development costs have been capitalized to date. Under the Company's
current practices of developing new products and enhancements, the technological
feasibility of the underlying software is not established until substantially
all related product development is complete and the product is released for
production.

ADVERTISING EXPENSE

The cost of advertising is expensed as incurred. The Company incurred $263,000,
$172,000 and $71,000 in advertising costs during the years ended March 31, 1999,
1998 and 1997, respectively.

STOCK-BASED COMPENSATION

The Company has elected to apply the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, the Company accounts for


                                       33
<PAGE>


stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Compensation cost for stock options
is measured as the excess, if any, of the fair value of the Company's common
stock at the date of the grant, over the stock option price.

INCOME TAXES

The provision for income taxes includes federal and state taxes currently
payable and deferred taxes arising from temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes as well as operating loss and tax
credit carryforwards. Deferred income taxes have been recorded using the
liability method in recognition of these temporary differences.

EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the year. Diluted
earnings per share is computed by dividing net income by the sum of the weighted
average number of shares of common stock outstanding plus the net effect of
dilutive common stock equivalents outstanding during the period using the
treasury stock method. Common stock equivalents consist of employee stock
options.

COMPREHENSIVE INCOME

As of April 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components in the financial statements. Accordingly, unrealized
gains and losses on available-for-sale securities and foreign currency
translation adjustments are reported as components of other comprehensive
income.

BUSINESS SEGMENTS

As of April 1, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes standards
for reporting information about operating segments in annual financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. Based on the criteria of
SFAS No. 131, the Company has determined that it has a single reportable
segment, computer telephony products.

RECENT ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments. The
Statement requires that entities recognize all derivatives as either assets or
liabilities on the balance sheet and measure these derivatives at fair value.
SFAS No. 133 also specifies a new method of accounting for hedging transactions,
prescribes the type of items and transactions that may be hedged, and specifies
detailed criteria to be met to qualify for hedge accounting. This Statement is
effective for financial statements for years beginning after June 15, 2000. The
Company does not expect the adoption of this Statement to have a material impact
on the Company's consolidated results of operations, financial position or cash
flows.

In March 1998, The AICPA issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The SOP will require the
capitalization of certain costs incurred after the date of adoption in
connection with developing or obtaining software for internal use purposes. SOP
98-1 is effective for fiscal years beginning after December 15, 1998. The
Company does not expect the adoption of this Statement to result in a material
impact to the Company's consolidated results of operations, financial position
or cash flows.


                                       34
<PAGE>


NOTE 2.  MARKETABLE SECURITIES

Management determines the appropriate classification of marketable debt
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. Management has classified the Company's marketable
securities as available-for-sale. Accordingly, the securities are carried at
fair value, with unrealized holding gains and losses excluded from net income
and recorded (net of tax) in accumulated other comprehensive income until
realized. Interest, dividends, and realized gains and losses are included in net
income.

The following is a summary of marketable securities at March 31 (in thousands),
all of which are classified as available-for-sale:

<TABLE>
<CAPTION>

                                                           Gross
               1998                  Amortized Cost      Unrealized    Gross Unrealized   Estimated Fair
                                                           Gains            Losses            Value
----------------------------------------------------------------------------------------------------------
<S>                                  <C>              <C>              <C>                <C>
Municipal bonds:
Due in one year or less                        $1,107              $ 6                             $1,113
Due after one year through three
  years                                         1,673               28                              1,701
----------------------------------------------------------------------------------------------------------

                                               $2,780              $34                $0           $2,814
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------

</TABLE>

<TABLE>
<CAPTION>

                                                           Gross
               1998                  Amortized Cost      Unrealized    Gross Unrealized   Estimated Fair
                                                           Gains            Losses            Value
----------------------------------------------------------------------------------------------------------
<S>                                  <C>              <C>              <C>                <C>
Municipal bonds:
Due in one year or less                        $3,396              $11                             $3,407
Due after one year through three
  years                                         2,586               26                              2,612
Due after three years                           1,055               13                              1,068
----------------------------------------------------------------------------------------------------------

                                               $7,037              $50                $0           $7,087
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------

</TABLE>

Net unrealized holding gains (losses) of $(11,000), $30,000 and $19,000, net of
federal income taxes were included in comprehensive income, during the years
ended March 31, 1999, 1998 and 1997, respectively.

NOTE 3. INVENTORIES

Inventories are comprised of the following (in thousands):

<TABLE>
<CAPTION>

March 31,                                                                    1999                  1998
--------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                   <C>
Computer equipment                                                         $3,049                $5,494
Custom component parts                                                      1,918                 3,907
Supplies                                                                      957                   721
--------------------------------------------------------------------------------------------------------
                                                                           $5,924               $10,122
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------

</TABLE>

NOTE 4.  FURNITURE AND EQUIPMENT

Major classes of furniture and equipment are as follows (in thousands):


                                       35
<PAGE>


<TABLE>
<CAPTION>

March 31,                                                                    1999                  1998
--------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                   <C>
Office and computer equipment                                             $7,134                $5,725
Furniture and fixtures                                                     2,390                 2,064
Leasehold improvements                                                       587                   331
--------------------------------------------------------------------------------------------------------
                                                                          10,111                 8,120

Accumulated depreciation                                                  (5,522)               (4,581)
--------------------------------------------------------------------------------------------------------
                                                                          $4,589                $3,539
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------

</TABLE>

NOTE 5. LINE OF CREDIT

The Company has a $10 million revolving line of credit from a bank secured by
the Company's marketable securities portfolio. Borrowings under this agreement
bear interest at the bank's prime rate less .25% or at LIBOR plus 1.5%, at the
election of the Company. At March 31, 1999 and 1998 there were no borrowings
outstanding under this agreement. This agreement contains financial covenants
that require the Company to maintain certain financial ratios. Borrowings under
this agreement are payable on demand if these covenants are not met, or upon the
expiration of the agreement in June 1999.

NOTE 6. INCOME TAXES

Income (loss) before income taxes consisted of (in thousands):

<TABLE>
<CAPTION>

Year ended March 31,                                         1999               1998             1997
------------------------------------------------------------------------------------------------------
<S>                                              <C>               <C>                <C>
Domestic                                                 $(5,571)             $(555)            $3,363
Foreign                                                     (635)               (21)              (49)
------------------------------------------------------------------------------------------------------
                                                         $(6,206)             $(576)            $3,314
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------

</TABLE>

The benefit (provision) for income taxes, primarily related to U.S. federal
income taxes, is as follows (in thousands):

<TABLE>
<CAPTION>

Year ended March 31,                                         1999               1998             1997
------------------------------------------------------------------------------------------------------
<S>                                              <C>               <C>                <C>
Current taxes on income                                    $1,003               $342          $(1,582)
Deferred income taxes                                         305                347               (5)
------------------------------------------------------------------------------------------------------
                                                           $1,308               $689          $(1,587)
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------

</TABLE>

Significant components of the Company's deferred tax asset are as follows (in
thousands):

<TABLE>
<CAPTION>

March 31,                                                                    1999                  1998
-------------------------------------------------------------------------------------------------------
<S>                                                         <C>                    <C>
Accounts receivable allowances                                             $ 578                  $ 515
Inventory valuation allowances                                               233                    128
Accrued compensation and benefits                                            292                    187
Accrued royalties                                                            318                    182
Net operating loss and tax credit carryforward                               885
Other items, net                                                             229                    328
-------------------------------------------------------------------------------------------------------
Total deferred tax asset before valuation allowance                        2,535                  1,340
  Valuation allowance                                                       (885)
-------------------------------------------------------------------------------------------------------
Net deferred tax asset                                                    $1,650                 $1,340
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------

</TABLE>

The Company is required to establish a valuation allowance to reduce deferred
tax assets if, based on the weight of the available evidence, it is more likely
than not that some portion or all of the deferred tax


                                       36
<PAGE>

assets will not be realized. In determining the need for a valuation
allowance, the Company is required to assess all available evidence, both
positive and negative. Management has determined that a valuation allowance
of $885,000 is necessary at March 31, 1999, which represents an increase of
$885,000 for the year ended March 31, 1999, attributable primarily to
uncertainties about the Company's ability to use net operating loss
carryforwards (NOLs) and tax credit carryforwards, including foreign NOLs.

Management believes the Company will be able to realize net deferred tax assets
in excess of the valuation allowance because a significant portion of the
operating loss was generated by the deliberate investment in the development of
the Unity product ahead of planned revenues, prior to which the Company had a
long and stable history of earnings. However, there can be no assurance that the
Company will generate taxable income or that all of its deferred tax assets will
be realized.

The principal reason for variations in the customary relationship between the
provision for income taxes and the statutory tax rate applied to income before
taxes is the effect of certain nondeductible expenses, nontaxable income, and
the utilization of research and development tax credits. Reconciliation from the
U.S. statutory rate to the effective tax rate is as follows:

<TABLE>
<CAPTION>

Year ended March 31,                                  1999               1998              1997
-------------------------------------------------------------------------------------------------------
<S>                                                   <C>                <C>               <C>
Tax at U.S. statutory rate                            34.0%              34.0%             34.0%
Research and development credit                        5.0               46.2              (4.5)
Tax exempt income                                      1.3               30.7              (6.6)
Foreign sales corporation benefit                      2.1               18.9              (2.5)
Valuation allowance change                           (14.3)
Non-recurring charge for
  purchased, in-process research
  and development                                                                          18.1
Foreign losses providing no current
  benefit                                             (6.3)
Other items, net                                      (0.8)             (10.2)              9.4
-------------------------------------------------------------------------------------------------------

                                                      21.1%             119.6%              47.9%
-------------------------------------------------------------------------------------------------------

</TABLE>

Net operating loss and tax credit carryforwards of $860,000 are available to
offset future U.S. federal taxable income through 2019. Foreign net operating
loss carryforwards of $1.1 million are available to offset future foreign
taxable income through 2004. The Company received net refunds of income taxes
previously paid totaling $0.9 million during the year ended March 31, 1999. The
Company made cash payments of income taxes, net of refunds received, of $0.2
million and $2.3 million during the years ended March 31, 1998 and 1997,
respectively.

NOTE 7. LEASE COMMITMENTS

The Company leases its facilities under operating leases with initial terms of 5
to 12 years. Certain leases contain renewal and escalation clauses and space
expansion provisions. The Company incurred $2.5 million, $1.7 million and $1.5
million of rent expense for the fiscal years ended March 31, 1999, 1998 and
1997, respectively.

Future minimum rental payments required per fiscal year under leases with
non-cancelable lease terms in excess of one year at March 31, 1999 are as
follows (in thousands):




                                       37
<PAGE>


<TABLE>

------------------------------------------------
<S>                                     <C>
2000                                    $ 2,807
2001                                      3,109
2002                                      3,065
2003                                      3,300
2004                                      3,353
Thereafter                               18,476
------------------------------------------------

                                        $34,110
------------------------------------------------
------------------------------------------------

</TABLE>

In connection with the execution of a lease and related amendments, the Company
prepaid rent by paying certain architectural and real estate fees and costs on
behalf of the lessor. The prepayments of $562,000 and $762,000 at March 31, 1999
and 1998, respectively, bear interest at the prime rate plus 2% and are included
in prepaid expenses in the accompanying consolidated balance sheets. The
prepayments are used to offset a portion of the monthly lease payments.

NOTE 8.  STOCKHOLDERS' EQUITY

STOCK OPTIONS

The Company has stock option plans under which employees, officers and directors
may be granted options to purchase the Company's common stock. The majority of
the stock options are granted at or above fair market value, typically vest over
three to four years and expire ten years from the date of grant. At March 31,
1999 there were 1,540,702 shares of common stock reserved for future issuance
under existing stock option plans of which 568,472 shares represent options
available for future grant. Options which expire or are terminated revert back
to shares available for future grant with the exception of 49,625 options
outstanding from dormant plans.

Had compensation cost for stock option grants made in 1999, 1998 and 1997 been
determined using the fair value method consistent with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the
Company's net income (loss) and earnings (loss) per share would have been
reduced to the following pro forma amounts (in thousands, except per share
data):

<TABLE>
<CAPTION>

Year Ended March 31,                                               1999             1998              1997
-----------------------------------------------------------------------------------------------------------
<S>                                                    <C>               <C>              <C>
Net income (loss) - as reported                                $(4,969)            $142             $1,751
Net income (loss) - pro forma                                  $(5,957)         $(1,118)             $ 988

Diluted earnings (loss) per share - as reported                 $(1.07)           $0.03              $0.38
Diluted earnings (loss) per share - pro forma                   $(1.29)          $(0.24)             $0.21
-----------------------------------------------------------------------------------------------------------

</TABLE>

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997: risk free interest rates of
5.0%, 6.0% and 6.5%, respectively; expected volatility of 60%, 55% and 55%,
respectively; expected life of 5 years; and no dividends. The weighted average
fair value of options granted during the years ended March 31, 1999, 1998 and
1997 was $5.73, $6.56 and $6.42, respectively. Because the Statement No. 123
method of accounting has not been applied to options granted prior to April 1,
1995, the resulting pro forma compensation cost may not be representative of
that to be expected in future years.


A summary of the activity of the Company's stock options is as follows:


                                       38
<PAGE>


<TABLE>
<CAPTION>

                             1999                         1998                         1997
                 ---------------------------------------------------------------------------------------
                   Shares   Weighted Average    Shares   Weighted Average    Shares   Weighted Average
                             Exercise Price               Exercise Price               Exercise Price
--------------------------------------------------------------------------------------------------------
<S>                <C>       <C>                <C>       <C>                <C>       <C>
Outstanding,
April 1              815,791      $13.49          599,863      $13.82          449,464      $13.33
Granted              282,364      10.24           341,592       12.12          240,236       11.72
Expired             (122,175)      19.23         (71,951)       15.30         (43,004)       13.03
Exercised            (3,750)       3.23          (53,713)         5.92        (46,833)         4.88
--------------------------------------------------------------------------------------------------------

Outstanding,
March 31             972,230      $11.87          815,791      $13.49          599,863      $13.82
--------------------------------------------------------------------------------------------------------
Exercisable,
March 31             433,778      $12.86          300,754      $14.51          246,322      $13.37
--------------------------------------------------------------------------------------------------------

</TABLE>

The following table summarizes information about stock options outstanding at
March 31, 1999:

<TABLE>
<CAPTION>

                                          Outstanding                              Exercisable
                    ------------------------------------------------------------------------------------
                                            Weighted
                                            Average           Weighted                     Weighted
                                           Remaining          Average                      Average
                                          Contractual         Exercise                     Exercise
Exercise Prices           Options         Life (Years)         Price         Options        Price
--------------------------------------------------------------------------------------------------------
<S>                       <C>             <C>                 <C>            <C>           <C>
   $ 5.25 - $ 9.99            150,436         8.0              $ 8.25          47,500      $ 6.82
     10.00 - 11.99            541,931         8.5               11.29         171,359       11.39
     12.00 - 13.99            138,125         7.5               12.41         102,858       12.24
    $14.00 -$28.50            141,738         6.3               17.40         112,061       18.24
                    --------------------                                   -------------

                              972,230         7.9              $11.87         433,778      $12.86
--------------------------------------------------------------------------------------------------------

</TABLE>

EMPLOYEE STOCK PURCHASE PLAN

The 1996 Employee Stock Purchase Plan (ESPP) allows employees the right to
purchase the Company's common stock on a quarterly basis at 85% of the lower of
the market price at the beginning or end of each three-month offering period.
Employee contributions to the ESPP totaled $472,000, $326,000 and $153,000 for
the fiscal years ended March 31, 1999, 1998 and 1997, respectively. Shares
issued pursuant to the ESPP totaled 74,164, 32,079 and 16,296 for the fiscal
years ended March 31, 1999, 1998 and 1997, respectively. At March 31, 1999,
27,461 shares were reserved for future issuance.

SHARE REPURCHASE

On March 18, 1997, the Company's Board of Directors authorized the repurchase of
up to 100,000 shares of the Company's common stock. An additional 200,000 shares
were authorized for repurchase on October 16, 1998. During the fiscal years
ended March 31, 1999 and 1998, 160,000 and 40,000 shares were repurchased at
total prices of $1,131,000 and $416,000, respectively.

CERTAIN TRANSACTIONS WITH CORPORATE OFFICERS AND OTHERS

The Company and two of its directors and principal shareholders, are parties to
an Amended and Restated Buy-Sell Agreement (the "Agreement"). Under the
Agreement, the Company is required to maintain $4.3 million of term insurance on
the life of each shareholder. Upon the death of one of the shareholders, the
Company is required to buy up to one-half of the shareholder's common stock
holdings, but in no event more shares than can be purchased with the life
insurance proceeds. The per share price is determined by a formula set forth in
the Agreement, and is to be paid in cash.


                                       39
<PAGE>


NOTE 9.  LITIGATION AND CONTINGENCIES

The Company is subject to legal proceedings or claims, either asserted or
unasserted, that arise in the ordinary course of business. The voice processing
industry is witnessing numerous allegations of patent infringement among
competitors, and considerable related litigation. The Company has received
claims of patent infringement from several parties, including certain
competitors. In response to certain prior infringement claims, the Company has
pursued and obtained nonexclusive licenses entitling the Company to utilize
certain fundamental patented voice mail and automated attendant functions that
are widely licensed and used in the voice processing industry. The Company's
investigation of other claims has been limited by the claims' lack of
specificity, by the limited availability of factual information and
documentation related to the claims, and by the expense of pursuing exhaustive
patent reviews. The Company believes, based in part upon its investigations and
upon discussions and correspondence with its patent counsel, that its systems do
not currently infringe on valid patents. Although the Company believes that it
currently owns or has adequate rights to utilize all material technologies
relating to its products, as it continues to develop new products and features
in the future, it anticipates that it may receive additional claims of patent
infringement. Such claims could result in the Company's incurring substantial
legal expenses and being required to obtain licenses, pay damages for
infringement, or cease offering products that infringe such patents. Royalty
expense on licensed technology was $360,000, $395,000, and $324,000 during the
fiscal years ended March 31, 1999, 1998 and 1997, respectively.

The Company also faces exposure to claims or potential claims pursuant to other
issues including employment related matters and issues related to the year 2000
readiness of its products. The Company has been served with three class
action lawsuits, one in Alabama state court, one in Indiana state court, and
one in Massachusetts state court, related to the alleged inability of the
Company's products prior to Repartee 7.44 to function properly with respect
to the year 2000. The plaintiffs in the suits seek to require the Company to
remedy the alleged defect in these products and also seek damages. The
Company has filed its answer in the suits in Alabama and Massachusetts. The
Company believes that the claims stated in the cases are without merit, that
the cases are not appropriate for class action, and intends to defend itself
vigorously. However, due to the preliminary status of the proceedings, it is
not possible to predict the ultimate outcome of the cases or their financial
impact on the Company.

In addition, the Company has minority investments in affiliates and suppliers
which are in some cases early stage companies which may or may not be
undercapitalized. The recoverability of these investments in some cases is
dependent upon the future viability of the related affiliate or supplier.

NOTE 10.  EMPLOYEE BENEFIT PLAN

The Company provides a defined contribution 401(k) profit-sharing plan covering
employees meeting certain eligibility requirements (generally, 21 years of age).
The Company made discretionary matching contributions of $193,000, $96,000, and
$52,000 for the years ended March 31, 1999, 1998 and 1997, respectively.

NOTE 11.  CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of accounts receivable. The Company distributes
its products through a global network of independent telecommunications dealers,
telephone equipment manufacturers and computer resellers. The Company's largest
customer accounted for approximately 28% and 12% of gross accounts receivable at
March 31, 1999 and 1998, respectively. Accounts receivable denominated in
currencies other than the US Dollar (primarily the Australian Dollar, Canadian
Dollar, Dutch Guilder and British Pound Sterling) comprised approximately 13%
and 14% of gross accounts receivable at March 31, 1999 and 1998, respectively.
The Company is not currently engaged in any significant foreign currency hedging
activities. The Company performs ongoing credit evaluations of its customers'
financial condition, and generally does not require collateral, but may require
alternative payment terms such as cash in advance,


                                       40
<PAGE>


cash on delivery (COD) or letters of credit, when necessary. The Company
maintains reserves for credit losses and such losses have historically been
within management's expectations.

NOTE 12.  ACQUISITION OF PRONEXUS INC.

On January 17, 1997, the Company acquired a 51% interest in Pronexus Inc.
(Pronexus) for a cash price of $1.9 million. In addition, the Company acquired
an option to purchase the remaining shares of Pronexus within 3.5 years from the
acquisition date. Pronexus, based in Ottawa, Ontario, develops and sells Visual
Basic voice application tools used to create Windows NT-based interactive voice
response applications. The Pronexus acquisition was recorded under the purchase
method of accounting, and accordingly, the results of operations of Pronexus for
the period from January 17, 1997 are included in the accompanying consolidated
financial statements.

In connection with the acquisition, $1,769,000 of the purchase price was
allocated to purchased, in-process research and development and expensed as a
non-recurring cost. Intangible assets associated with the acquisition are
amortized on a straight-line basis over a period of three years.

NOTE 13.  EARNINGS PER SHARE

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

<TABLE>
<CAPTION>

Year Ended March 31,                                              1999             1998            1997
--------------------------------------------------------------------------------------------------------
<S>                                                     <C>             <C>              <C>
Numerator:
Net income (loss)                                             $(4,969)             $142          $1,751
                                                        ------------------------------------------------

Denominator:
Denominator for basic earnings (loss) per share -
  weighted average shares                                    4,634,015        4,628,876       4,580,841

Effect of dilutive securities:
Stock options                                                                    52,872          60,148
                                                        ------------------------------------------------
Denominator for diluted earnings (loss) per share -
  adjusted weighted average shares and assumed
  conversions                                                4,634,015        4,681,748       4,640,989
                                                        ------------------------------------------------
                                                        ------------------------------------------------
Basic earnings (loss) per share:                               $(1.07)            $0.03           $0.38
Diluted earnings (loss) per share:                             $(1.07)            $0.03           $0.38
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------

</TABLE>

The calculation of diluted earnings per share for the year ended March 31, 1999
did not include 14,508 weighted average shares from outstanding stock options as
their inclusion would have been antidilutive.

NOTE 14. BUSINESS SEGMENTS AND RELATED INFORMATION

Significant operations outside the U.S. include wholly-owned sales, technical
support and distribution subsidiaries in the Netherlands, United Kingdom and
Australia, and the Company's majority-owned Pronexus subsidiary in Canada.
Geographic information for the years ended March 31, 1999, 1998 and 1997 is
presented in the table that follows (in thousands):


                                       41
<PAGE>


<TABLE>
<CAPTION>

Year ended March 31,                                      1999              1998             1997
--------------------------------------------------------------------------------------------------
<S>                                                    <C>               <C>              <C>
Net sales:
  United States                                        $50,894           $43,415          $41,551
  Foreign                                               11,323             9,736            7,964
--------------------------------------------------------------------------------------------------
                                                       $62,217           $53,151          $49,515
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------

</TABLE>

Net sales, as shown in the table, are based upon the geographic area into which
the products were sold and delivered to unaffiliated entities. Substantially all
identifiable long-lived assets are located in the United States.

The Company's largest customer accounted for approximately 20% and 11% of total
revenues for the years ended March 31, 1999 and 1998, respectively. No other
single customer accounted for more than 10% of the Company's revenues in the
years ended March 31, 1999, 1998 and 1997.

NOTE 15. SUBSEQUENT EVENTS

On May 5, 1999, the Company entered into an Investment Agreement with its
largest customer which provided up to a $6.5 million borrowing commitment to the
Company in exchange for a stock purchase warrant for 500,000 shares of the
Company's common stock at a price of $13.00 per share. Borrowings under the note
portion of the agreement bear interest at a rate of 7.8% and are due to be
repaid on May 5, 2002.

NOTE 16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following table sets forth the Company's unaudited quarterly financial
information for the fiscal years ending March 31, 1999 and 1998 (in thousands,
except per share data):

<TABLE>
<CAPTION>

                                                                Fiscal Year 1999
                                   -----------------------------------------------------------------------
                                            June 30      September 30       December 31          March 31
----------------------------------------------------------------------------------------------------------
<S>                                        <C>           <C>                <C>                  <C>
Net sales                                  $13,404           $14,301           $16,629           $17,883
Gross profit                                 7,474             7,682             8,502             9,724
Net loss                                    (1,020)           (1,295)           (1,490)           (1,164)
Loss per share:
Basic                                       $(0.22)           $(0.28)           $(0.32)           $(0.25)
Diluted                                     $(0.22)           $(0.28)           $(0.32)           $(0.25)
----------------------------------------------------------------------------------------------------------

</TABLE>


<TABLE>
<CAPTION>

                                                                 Fiscal Year 1998
                                   -----------------------------------------------------------------------
                                            June 30      September 30       December 31          March 31
----------------------------------------------------------------------------------------------------------
<S>                                         <C>          <C>                <C>                  <C>
Net sales                                   $11,779           $14,523           $14,063          $12,786
Gross profit                                  6,958             8,007             8,661            6,569
Net income (loss)                               455               411               618           (1,342)
Earnings (loss) per share:
Basic                                         $0.10             $0.09             $0.13           $(0.29)
Diluted                                       $0.10             $0.09             $0.13           $(0.29)
----------------------------------------------------------------------------------------------------------

</TABLE>


                                       42
<PAGE>


                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


TO THE STOCKHOLDERS AND BOARD OF DIRECTORS

ACTIVE VOICE CORPORATION

We have audited the accompanying consolidated balance sheets of Active Voice
Corporation as of March 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 1999. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Active
Voice Corporation at March 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1999, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.


                                                          /s/ ERNST & YOUNG LLP



Seattle, Washington
May 13, 1999


                                       43
<PAGE>



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

Not applicable.

PART III.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item is contained in part in the sections
captioned "Board of Directors-Nominees for Director" and "Section 16(a)
Beneficial Ownership Reporting" in the Proxy Statement for the Company's Annual
Meeting of Shareholders scheduled to be held on August 19, 1999, and such
information is incorporated herein by reference.

The remaining information required by this Item is set forth as Item 4A in Part
I of this report under the caption "Executive Officers of the Registrant."

ITEM 11.  EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference to the
information contained in the section captioned "Compensation and Benefits" of
the Proxy Statement for the Company's Annual Meeting of Shareholders scheduled
to be held on August 19, 1999.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is incorporated by reference to the
information contained in the section captioned "Voting Securities and Principal
Holders" of the Proxy Statement for the Company's Annual Meeting of Shareholders
scheduled to be held on August 19, 1999.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

PART IV.

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

(a)(1) Index to Consolidated Financial Statements
Consolidated Statements of Operations - Years ended March 31, 1999, 1998 and
1997 Consolidated Balance Sheets - March 31, 1999 and 1998 Consolidated
Statements of Cash Flows - Years ended March 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity - Years ended March 31, 1999,
1998 and 1997 Notes to Consolidated Financial Statements Report of Ernst & Young
LLP, Independent Auditors

(a)(2) Financial Statement Schedules

SCHEDULE II:  VALUATION AND QUALIFYING ACCOUNTS

Schedules not listed above have been omitted because the information required to
be set forth therein is not applicable or is included in the Consolidated
Financial Statements or notes thereto.

                                       44
<PAGE>




(b) Reports on Form 8-K

The Company filed no reports on Form 8-K during the three-month period ended
March 31, 1999.

(c) Exhibits

The following exhibits are filed with this report:

EXHIBIT NO. 3:  ARTICLES OF INCORPORATION AND BYLAWS

<TABLE>

<S>      <C>
3.1      Restated Articles of Incorporation of Registrant (incorporated by
         reference from Exhibit 3.1 to the Registrant's Registration Statement
         on Form S-1 filed with the Securities and Exchange Commission on
         October 29, 1993 (File No. 33-71024))

3.2      Restated Bylaws of Registrant (incorporated by reference from Exhibit 3
         to the Registrant's Quarterly Report on Form 10-Q for its fiscal
         quarter ended September 30, 1997 (File No. 0-22804))

</TABLE>

EXHIBIT NO. 10:  MATERIAL CONTRACTS

EXECUTIVE COMPENSATION PLANS AND AGREEMENTS

<TABLE>

<S>      <C>
10.1     Incentive Stock Option Plan (incorporated by reference from Exhibit
         10.1 to the Registrant's Registration Statement on Form S-1 filed with
         the Securities and Exchange Commission on October 29, 1993 (File No.
         33-71024))

10.2     1988 Nonqualified Stock Option Plan (incorporated by reference from
         Exhibit 10.2 to the Registrant's Registration Statement on Form S-1
         filed with the Securities and Exchange Commission on October 29, 1993
         (File No. 33-71024))

10.3     1993 Stock Option Plan (incorporated by reference from Exhibit 10.3 to
         the Registrant's Registration Statement on Form S-1 filed with the
         Securities and Exchange Commission on October 29, 1993 (File No.
         33-71024))

10.4     Amendment to 1993 Stock Option Plan (incorporated by reference from
         Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for its
         fiscal quarter ended December 31, 1995 (File No. 0-22804))

10.5     Directors Stock Option Plan (incorporated by reference from Exhibit
         10.4 to the Registrant's Registration Statement on Form S-1 filed with
         the Securities and Exchange Commission on October 29, 1993 (File No.
         33-71024))

10.6     1996 Employee Stock Purchase Plan (incorporated by reference from
         Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for its
         fiscal year ended March 31, 1996 (File No. 0-22804))

10.7     First Amendment to the 1996 Employee Stock Purchase Plan (incorporated
         by reference from Exhibit 10.7 to the Registrant's Annual Report on
         Form 10-K for its fiscal year ended March 31, 1997 (File No. 0-22804))

10.8     Second Amendment to the 1996 Employee Stock Purchase Plan (incorporated
         by reference from Exhibit 10.8 to the Registrant's Annual Report on
         Form 10-K for its fiscal year ended March 31, 1998 (File No. 0-22804))

10.9     Third Amendment to the 1996 Employee Stock Purchase Plan (filed
         herewith)

</TABLE>


                                       45
<PAGE>

<TABLE>

<S>      <C>
10.10    1996 Stock Option Plan (incorporated by reference from Exhibit 99.1 to
         the Registrant's Registration Statement on Form S-8 filed with the
         Securities and Exchange Commission on February 13, 1997 (File No.
         333-21739))

10.11    First Amendment to the 1996 Stock Option Plan (incorporated by
         reference from Exhibit 10.10 to the Registrant's Annual Report on Form
         10-K for its fiscal year ended March 31, 1998 (File No. 0-22804))

10.12    1997 Director Stock Option Plan (incorporated by reference from Exhibit
         10.11 to the Registrant's Annual Report on Form 10-K for its fiscal
         year ended March 31, 1998 (File No. 0-22804))

10.13    Form of Continuing Director Option under the 1997 Director Stock Option
         Plan (incorporated by reference from Exhibit 10.1 to the Registrant's
         Quarterly Report on Form 10-Q for its fiscal quarter ended September
         30, 1997 (File No. 0-22804))

10.14    Form of Initial Option under the 1997 Director Stock Option Plan
         (incorporated by reference from Exhibit 10.2 to the Registrant's
         Quarterly Report on Form 10-Q for its fiscal quarter ended September
         30, 1997 (File No. 0-22804))

10.15    Form of Annual Option under the 1997 Director Stock Option Plan
         (incorporated by reference from Exhibit 10.3 to the Registrant's
         Quarterly Report on Form 10-Q for its fiscal quarter ended September
         30, 1997 (File No. 0-22804))

10.16    First Amendment to the 1997 Director Stock Option Plan (filed herewith)

10.17    1998 Stock Option Plan (incorporated by reference from Exhibit 10 to
         the Registrant's Quarterly Report on Form 10-Q for its fiscal quarter
         ended December 31, 1997 (File No. 0-22804))

10.18    First Amendment to the 1998 Stock Option Plan (incorporated by
         reference from Exhibit 10.16 to the Registrant's Annual Report on Form
         10-K for its fiscal year ended March 31, 1998 (File No. 0-22804))

10.19    Employment Agreement and Nondisclosure Agreement dated April 17, 1989
         between Registrant and Douglass S. Anderson (incorporated by reference
         from Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for
         its fiscal year ended March 31, 1996 (File No. 0-22804))

10.20    Employment Agreement and Nondisclosure Agreement dated July 6, 1989
         between Registrant and Jose S. David (incorporated by reference from
         Exhibit 10.15 to the Registrant's Registration Statement on Form S-1
         filed with the Securities and Exchange Commission on October 29, 1993
         (File No. 33-71024))

10.21    Employment Agreement and Nondisclosure Agreement dated October 2, 1990
         between Registrant and Robert L. Richmond (incorporated by reference
         from Exhibit 10.16 to the Registrant's Registration Statement on Form
         S-1 filed with the Securities and Exchange Commission on October 29,
         1993 (File No. 33-71024))

10.22    Employee Agreement and Nondisclosure Agreement dated December 10, 1996
         between Registrant and Frank C. Costa (incorporated by reference from
         Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for its
         fiscal year ended March 31, 1997 (File No. 0-22804))

10.23    Employee Agreement and Nondisclosure Agreement dated March 22, 1991
         between Registrant and Edward F. Masters (incorporated by reference
         from Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for
         its fiscal year ended March 31, 1997 (File No. 0-22804))

</TABLE>


                                       46
<PAGE>

<TABLE>

<S>      <C>
10.24    Employee Agreement and Nondisclosure Agreement dated January 24, 1991
         between Registrant and Kevin L. Chestnut (incorporated by reference
         from Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for
         its fiscal year ended March 31, 1998 (File No. 0-22804))

10.25    Employee Agreement and Proprietary Rights Agreement dated May 18, 1999
         between Registrant and Ken Myer (filed herewith)

10.26    Split Dollar Agreement/Assignment dated as of April 11, 1994, between
         Registrant and Robert L. Richmond (incorporated by reference from
         Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for its
         fiscal year ended March 31, 1995 (File No. 0-22804))

</TABLE>

OTHER MATERIAL CONTRACTS

<TABLE>

<S>      <C>
10.24    Office Lease dated January 31, 1991 between Registrant and Martin
         Selig, as amended (incorporated by reference from Exhibit 10.6 to the
         Registrant's Registration Statement on Form S-1 filed with the
         Securities and Exchange Commission on October 29, 1993 (File No.
         33-71024))

10.25    Amendment to Office Lease dated April 27, 1994, between Registrant and
         Martin Selig (incorporated by reference from Exhibit 10.2 to the
         Registrant's Quarterly Report on Form 10-Q for its fiscal quarter ended
         June 30, 1994 (File No. 0-22804))

10.26    Amendment to Office Lease dated August 11, 1994, between Registrant and
         Martin Selig (incorporated by reference from Exhibit 10.22 to the
         Registrant's Annual Report on Form 10-K for its fiscal year ended March
         31, 1995 (File No.0-22804))

10.27    Amendment to Office Lease dated December 19, 1996 between Registrant
         and Martin Selig (incorporated by reference from Exhibit 10.19 to the
         Registrant's Annual Report on Form 10-K for its fiscal year ended March
         31, 1997 (File No. 0-22804))

10.28    Amendment to Office Lease dated December 12, 1997 between Registrant
         and Martin Selig (incorporated by reference from Exhibit 10.28 to the
         Registrant's Annual Report on Form 10-K for its fiscal year ended March
         31, 1998 (File No. 0-22804))

10.29    Amendment to Office Lease dated March 27, 1998 between Registrant and
         Martin Selig (incorporated by reference from Exhibit 10.29 to the
         Registrant's Annual Report on Form 10-K for its fiscal year ended March
         31, 1998 (File No. 0-22804))

10.30    Subordination, Non-Disturbance and Attornment Agreement dated April 9,
         1997, between Registrant and Caystar Corp. II (incorporated by
         reference from Exhibit 10.30 to the Registrant's Annual Report on Form
         10-K for its fiscal year ended March 31, 1998 (File No. 0-22804))

10.31    Line of Credit Agreement between Registrant and Wells Fargo Bank, N.A.
         dated November 13, 1997 (incorporated by reference from Exhibit 10.31
         to the Registrant's Annual Report on Form 10-K for its fiscal year
         ended March 31, 1998 (File No. 0-22804))

10.32    Amendment to Line of Credit Agreement between Registrant and Wells
         Fargo Bank, N.A. dated August 1, 1998 (incorporated by reference from
         Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for its
         fiscal quarter ended June 30, 1998 (File No. 0-22804))

10.33    Amended and Restated Buy-Sell Agreement dated August 8, 1994, among
         Registrant, Robert L. Richmond and Robert C. Greco (incorporated by
         reference from the Registrant's Current Report on Form 8-K filed with
         the Securities and Exchange Commission on November 14, 1994 (File No.
         0-22804))

10.34    Investment Agreement between Registrant and NEC Corporation dated May
         5, 1999 (filed herewith)

</TABLE>


                                       47
<PAGE>

<TABLE>

<S>      <C>
10.35    Master Purchase Agreement between Registrant and NEC Corporation dated
         May 5, 1999 (filed herewith)

10.36    Patent License Agreement dated March 2, 1990, between Registrant and
         Dytel Corporation (Confidential treatment has been granted for portions
         of this document) (incorporated by reference from Exhibit 10.9 to
         Amendment No. 2 to the Registrant's Registration Statement on Form S-1
         filed with the Securities and Exchange Commission on December 2, 1993
         (File No. 33-71024))

10.37    Automated Attendant Patent License Agreement between Registrant and
         VMX, Inc. (Confidential treatment has been granted for portions of this
         document) (incorporated by reference from Exhibit 10.10 to Amendment
         No. 2 to the Registrant's Registration Statement on Form S-1 filed with
         the Securities and Exchange Commission on December 2, 1993 (File No.
         33-71024))

10.38    Voice Mail Patent License Agreement between Registrant and VMX, Inc.
         (Confidential treatment has been granted for portions of this document)
         (incorporated by reference from Exhibit 10.11 to Amendment No. 2 to the
         Registrant's Registration Statement on Form S-1 filed with the
         Securities and Exchange Commission on December 2, 1993 (File No.
         33-71024))

10.39    Assignment of Rights Under Patent Application dated October 22, 1990 by
         Robert L. Richmond and Michael J. Robinson (incorporated by reference
         from Exhibit 10.12 to the Registrant's Registration Statement on Form
         S-1 filed with the Securities and Exchange Commission on October 29,
         1993 (File No. 33-71024))

10.40    Acknowledgment and Assignment of Proprietary Rights dated October 22,
         1990 by Robert C. Greco and Michael J. Robinson (incorporated by
         reference from Exhibit 10.13 to the Registrant's Registration Statement
         on Form S-1 filed with the Securities and Exchange Commission on
         October 29, 1993 (File No. 33-71024))

</TABLE>

EXHIBIT NO. 11:  STATEMENT RE COMPUTATION OF PER SHARE EARNINGS

         The required information is included in Note 13 of "Notes to
         Consolidated Financial Statements."

EXHIBIT NO. 21:  SUBSIDIARIES OF THE REGISTRANT

<TABLE>

<S>      <C>
21.1     Subsidiaries of Registrant (incorporated by reference from Exhibit 21.1
         to the Registrant's Annual Report on Form 10-K for its fiscal year
         ended March 31, 1998 (File No. 0-22804))

</TABLE>

EXHIBIT NO. 23:  CONSENT OF EXPERTS AND COUNSEL

<TABLE>

<S>      <C>
23.1     Consent of Ernst & Young LLP, Independent Auditors

</TABLE>

EXHIBIT NO. 27:  FINANCIAL DATA SCHEDULE

<TABLE>

<S>      <C>
27.1     Financial Data Schedule

</TABLE>


                                       48
<PAGE>

                 SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS
                            ACTIVE VOICE CORPORATION
                    YEARS ENDED MARCH 31, 1999, 1998 AND 1997
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
             Column A                    Column B     Column C    Column D       Column E      Column F
--------------------------------------------------------------------------------------------------------
                                                          Additions
                                                     ---------------------
           Description                  Balance at   Charged to   Charged      Deductions     Balance at
                                       Beginning of   Costs and   to Other                      End of
                                          Period      Expenses    Accounts                      Period
<S>                                    <C>           <C>          <C>          <C>            <C>
Year ended March 31, 1999
Deducted from asset accounts:

     Allowance for doubtful               $1,215        $237        -0-          (a)$252        $1,200
     accounts

     Allowance for sales                     300         200        -0-             -0-            500
     returns
--------------------------------------------------------------------------------------------------------
     Totals                               $1,515        $437        -0-             $252        $1,700
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------

Year ended March 31, 1998
Deducted from asset accounts:

     Allowance for doubtful               $1,326        $275        -0-          (a)$386        $1,215
     accounts

     Allowance for sales                     344         -0-        -0-           (b) 44           300
     returns
--------------------------------------------------------------------------------------------------------
     Totals                               $1,670        $275        -0-             $430        $1,515
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------

Year ended March 31, 1997
Deducted from asset accounts:

     Allowance for doubtful               $1,086        $698        -0-          (a)$458        $1,326
     accounts

     Allowance for sales                     279          65        -0-             -0-            344
     returns
--------------------------------------------------------------------------------------------------------
     Totals                               $1,365        $763        -0-             $458        $1,670

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

</TABLE>

(a)Uncollectable accounts written off, net of recoveries

(b)Reduction of estimated future sales returns


                                       49
<PAGE>


                                   SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned; thereunto duly authorized, in the City of Seattle,
State of Washington, on June 28, 1999.

                                                    ACTIVE VOICE CORPORATION


                                                By /s/ Jose S. David
                                                   -------------------------
                                                   Jose S. David
                                                   CHIEF FINANCIAL OFFICER


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

<TABLE>
<CAPTION>

            Signature                      Title                    Date

<S>                          <C>                               <C>
/s/ Frank J. Costa           Chief Executive Officer and       June 28, 1999
---------------------------- Principal Executive Officer
Frank J. Costa

/s/ Jose S. David            Chief Financial Officer           June 28, 1999
---------------------------- Secretary and Treasurer
Jose S. David                (Principal Financial and
                             Accounting Officer)

/s/ Robert L. Richmond      Chairman of the Board              June 28, 1999
----------------------------
Robert L. Richmond

/s/ Tom A. Alberg           Director                           June 28, 1999
----------------------------
Tom A. Alberg

/s/ Douglas P. Beighle      Director                           June 28, 1999
----------------------------
Douglas P. Beighle

/s/ Robert C. Greco         Director                           June 28, 1999
----------------------------
Robert C. Greco

/s/ Harold H. Kawaguchi     Director                           June 28, 1999
----------------------------
Harold H. Kawaguchi

</TABLE>



                                       50