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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, 1998

                         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.  / /

    The aggregate market value of the Common Stock held by non-affiliates of 
the registrant, based on the closing price on June 15, 1998, as reported by 
the Nasdaq Stock Market was $38,262,193.(1)

    The number of shares of the registrant's Common Stock outstanding as of 
June 15, 1998, was 4,667,116.

                     DOCUMENTS INCORPORATED BY REFERENCE

    Portions of the registrant's Proxy Statement relating to the registrant's 
1998 Annual Meeting of Shareholders to be held on August 19, 1998, are 
incorporated by reference into Part III of this Report

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(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

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<S>          <C>                                                           <C>
PART I
Item 1.      Business . . . . . . . . . . . . . . . . . . . . . . . . .     1
             Industry . . . . . . . . . . . . . . . . . . . . . . . . .     1
             Strategy . . . . . . . . . . . . . . . . . . . . . . . . .     2
             Products . . . . . . . . . . . . . . . . . . . . . . . . .     4
             Sales and Marketing. . . . . . . . . . . . . . . . . . . .     8
             Product Development. . . . . . . . . . . . . . . . . . . .    10
             Manufacturing. . . . . . . . . . . . . . . . . . . . . . .    11
             Competition. . . . . . . . . . . . . . . . . . . . . . . .    11
             Proprietary Rights . . . . . . . . . . . . . . . . . . . .    13
             Employees. . . . . . . . . . . . . . . . . . . . . . . . .    14

Item 2.      Properties . . . . . . . . . . . . . . . . . . . . . . . .    14
Item 3.      Legal Proceedings. . . . . . . . . . . . . . . . . . . . .    14
Item 4.      Submission of Matters to a Vote of Security Holders. . . .    14
Item 4A.     Executive Officers of the Registrant . . . . . . . . . . .    14

PART II
Item 5.     Market for Registrant's Common Equity and 
              Related Stockholder Matters . . . . . . . . . . . . . . .    16
Item 6.     Selected Financial Data . . . . . . . . . . . . . . . . . .    16
Item 7.     Management's Discussion and Analysis of Financial
              Condition and Results of Operations . . . . . . . . . . .    17
Item 8.     Financial Statements and Supplementary Data . . . . . . . .    29
Item 9.     Changes in and Disagreements with Accountants
              on Accounting and Financial Disclosure. . . . . . . . . .    45

PART III
Item 10.    Directors and Executive Officers of the Registrant. . . . .    45
Item 11.    Executive Compensation. . . . . . . . . . . . . . . . . . .    45
Item 12.    Security Ownership of Certain Beneficial Owners 
               and Management . . . . . . . . . . . . . . . . . . . . .    45
Item 13.    Certain Relationships and Related Transactions. . . . . . .    45

PART IV
Item 14.    Exhibits, Financial Statement Schedules, 
              and Reports on Form 8-K . . . . . . . . . . . . . . . . .    45

            SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . .    51
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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 53,000 installations in over 60 nations. An
international company, 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, 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, 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
products are based upon technology identified at Massachusetts Institute of
Technology's Media Laboratory for Speech and Artificial Intelligence, which it
considers one of its principal competitive advantages. 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 $2.2 billion in 1996
(1997 revenue numbers were not available at June 29, 1998). Manufacturers of
voice processing systems include switch suppliers such as Lucent Technologies,
Inc., Nortel Inc. and Siemens Business Communication Systems, Inc.; independent
manufacturers of proprietary systems such as Centigram Communications
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 Applied Voice Technologies,
Inc. According to preliminary industry statistics for total number of domestic
voice processing systems shipped in 1997, the Company ranked third only behind
Lucent Technologies and Nortel. 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.

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 and replies in a computer. Typical voice
mail features include the ability to record, store, and delete messages, as well
as to direct messages to multiple subscribers. 2) AUTOMATED ATTENDANT- which

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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, two trends 
developed that facilitated the creation of more advanced messaging 
applications. The first trend was a shift from proprietary hardware. As the 
costs of personal computers and their component parts 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 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.

As a result of these developments, voice processing systems can 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. A second example would be the ability to have
the computer read e-mail messages to the recipient 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 have had the effect of making 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, created
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. The Company has responded to this market
demand by developing unified messaging products that store all messages in one
location for access via any application. For example, integrating the telephone
system with computers has allowed the Company to develop a text-to-speech
application that uses a synthesized voice to read e-mail messages over the
telephone. In addition, the Company manufactures a product that allows the user
to use touchtones to route a fax to the nearest facsimile machine for printout,
anywhere, at any time. The connectivity among various means of electronic
communication (the merging of data networks and telephones) is delivering 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 

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servers and PCs, an organization's people 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 and operating systems, like Microsoft NT,
Exchange and BackOffice, 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. The
Company's products are designed to be "people-oriented," with features that can
be used readily without special training or manuals. For example, the Company's
1 for Yes, 2 for No-Registered Trademark- user dialogue gives first time voice
mail users easy and immediate access to all the system's features. 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 original equipment manufacturers (OEMs), also termed "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, health-care, 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 businesses, a target market. 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.

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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, health-care,
governmental, and institutional settings.

The Company offers five products: Repartee-Registered Trademark-, Replay
Plus-TM-, Replay-Registered Trademark- and Lingo-TM-, and a line of In-switch
products manufactured solely for some it is strategic partners. An NT-based
communications server, Unity-TM-, is currently under development.

The Company's voice processing products typically include the following 
principal components: an IBM-compatible PC 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 In-switch 
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 68 different manufacturers. The Company believes this
number of integrations represents approximately 90% of the types of 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.

In addition, all the Company's software except for Lingo, which runs on a
proprietary system, is written to standard PC hardware and operating system
architecture.

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 new 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 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 that want a voice
processing system that can grow in capacity and functionality, as their business
needs change.

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

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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, to provide users with advanced unified
messaging and call control applications. Users with TeLANophy can still access
all their electronic messages from a touchtone telephone, and also have the
ability to access and manage all their messages visually from a personal
computer. (For a more complete discussion, please see the TeLANophy section
below.) The Company sees this multiple user interface as a benefit to consumers,
since it offers the ability to control their messages in the way that is most
convenient for them.

Repartee CTI is scaleable from four to 60 ports and has up to 500 hours of
storage. Repartee CTI also runs on the Company's Large System Platform (LSP),
which adds enhanced computing power and fault-tolerance to Repartee. With up to
60 ports of capacity for an unlimited number of subscribers, the LSP is
advantageous for larger customers.

Currently, Repartee version 7.44 is shipping in the United States and Canada,
and Repartee 7.42 is shipping in all markets outside of the United States and
Canada. The Company plans to release Repartee 7.44 internationally in calendar
year 1998 on a country- by-country basis as prompts become localized for
individual countries. Sales of Repartee accounted for approximately 38% of the
Company's fiscal 1998 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 in all the Company's markets outside the United
States and Canada. Sales of Replay accounted for approximately 15% of the
Company's fiscal 1998 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, and, 
like Repartee, utilizes the AMIS protocol. Replay Plus is currently offered 
in all the Company's markets outside the United States and Canada. Sales of 
Replay Plus accounted for approximately 25% of the Company's fiscal 1998 
revenue.

LINGO -- 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.

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Lingo is sold in the United States, Canada, India, and Hong Kong. The Company
plans to increase the product's distribution on a country-by-country basis
during the calendar year 1998. Sales of Lingo accounted for approximately 3% of
the Company's fiscal 1998 revenue.

IN-SWITCH -- The Company manufactures a line of In-switch products for some of
its strategic partners. An In-switch product is comprised of software and
hardware incorporated directly into the telephone switch. Developing In-switch
products allows the Company to leverage its core competency of software
development to deliver full voice mail functionality. Currently the Company's
In-switch products ship on 65-70% of the NEC telephone systems for which the
Company builds cards. The Company is currently in negotiations with other
manufacturers of telephone systems to supply them with In-switch products. Sales
of In-switch products accounted for approximately 2% of the Company's fiscal
1998 revenue.

TeLANophy

TeLANophy is a suite of computer telephony integration products that includes
client software installed on the desktop personal computer that communicates
with the Repartee CTI voice processing server attached to the LAN. Together,
they offer Repartee CTI users unified messaging and call control functionality,
including: (1) the ability to use a desktop PC on a LAN for real-time control of
multiple incoming and outgoing calls with the drag-and-drop feature of Microsoft
Windows, (2) graphical management of voice mail and facsimile messages, and (3)
the ability to listen and respond to e-mail from a touchtone telephone.
TeLANophy allows the user to use the PC mouse and keyboard to perform on the
personal computer the functions normally done on the telephone keypad. ViewCall
Plus 2.0, ViewMail, ViewMail for Microsoft Messaging, Message Integration for
Novell GroupWise, ViewFax, and E-Mail Integration are all modules of TeLANophy. 

     - 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.

     With specific telephone systems, ViewCall Plus 2.0 also has the capability
to collect data about the call and identify callers. With this information,
ViewCall Plus 2.0 can retrieve records from Personal Information Managers (PIMs)
and automatically display the records on screen before the call is answered.
Moreover, when used with a TAPI- or TSAPI-compliant telephone system, ViewCall
Plus 2.0 works in enhanced mode, and provides additional functionality. For
example, the product has been embedded with the Company's PhoneBASIC telephony
scripting tool, based on Microsoft's Visual Basic. With this tool, ViewCall Plus
2.0 can be configured to interact with databases, work with spreadsheets and
direct calls according to a set of predictive dialing functions. In addition,
ViewCall Plus 2.0 supports Object Linking and Embedding (OLE) drag-and-drop and
OLE automations, as well as Open Database Connectivity (ODBC), so it can
interact with any other application that supports ODBC.

     - 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. With a sound device on a multimedia PC, 
ViewMail allows a user to play and record messages without picking up the 
telephone.

     - 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 

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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. VMM also has all the easy-to-use features of ViewMail, making 
it faster and easier than using touchtones on the telephone to listen and 
reply to messages.

     - VIEWFAX -- gives a user graphical fax handling capabilities. With 
ViewFax, users can send, receive, and manipulate faxes from any networked 
personal computer. ViewFax works with the Company's Active Fax facsimile 
detect, route, and notify software, and with ViewMail and VMM to deliver 
incoming faxes to a personal computer. ViewFax displays the fax on the 
computer screen, gives the user the power to copy all or portions of the fax 
into Microsoft Word documents, and allows the user to redirect faxes to any 
other subscriber. Using Print-to-Fax, ViewFax also integrates with personal 
database applications, so each user can deliver faxes to any contact or 
several contacts at once, in just a few seconds right from his or her desktop 
PC.

     - 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. Repartee CTI uses the Message
Notify/Delivery module to let a user know when new GroupWise messages arrive, as
well as to allow the user to send GroupWise messages to the nearest fax machine
when out of the office. The Message Reader module reads GroupWise messages in
clear, spoken English, enabling the user to listen and respond to these text
messages from any touchtone telephone.

     - E-MAIL INTEGRATION -- provides 24-hour e-mail access over a touchtone
telephone. When users check their universal mailbox, the E-Mail Notify/Delivery
module includes notification of e-mail receipt with voice and fax messages.
Information is provided about each e-mail message so it can be quickly
prioritized. The software also provides the option of forwarding e-mail to the
nearest fax machine for printing. With the E-Mail Reader module, users can
listen to any e-mail message using text-to-speech conversion, and then record a
reply that is sent as a voice mail message or an e-mail attachment.

OTHER PRODUCTS AND FEATURES:

ACTIVE FAX -- 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 multilingual 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.

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

PRODUCTS IN DEVELOPMENT

The Company is in the process of developing Unity, an NT-based communications
server. The product will feature voice mail, unified communications, desktop
call management, and facsimile features, as well as an HTML system
administration interface. The Company has reached an agreement with 

                                       7


<PAGE>

Omtool, Ltd. to offer Omtool's Fax Sr. fax server with the product. The 
Company's subsidiary, Pronexus Inc.  will provide IVR software. Designed from 
the ground up to integrate with the Microsoft Exchange server, Unity will use 
native 32-bit architecture, streaming media, and LDAP (lightweight directory 
access protocol) directory services to give its product a competitive 
advantage in the marketplace.

Unity is scheduled for release in 1998. There is no assurance that introduction
of Unity will not be delayed, allowing competitors to gain a market share
advantage, or that such products will be successful in the marketplace.

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.

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 OEM arrangements with various manufacturers of telephone systems
and business equipment. While the Company supports its dealers and OEMs 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, OEM, 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 OEM support activities. The Company has sales
representatives in Australia, Canada, China, France, Germany, India, the
Netherlands, and the United Kingdom, and has distribution relationships with
dealers, distributors, or OEMs in 42 other foreign countries.

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. 

NORTH AMERICAN DEALER NETWORK

The Company's North American dealer network consists of more than 700
independent telephone system dealers in the United States and Canada. The dealer
network is managed by full-time 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 

                                       8


<PAGE>

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 TeLANophy, it has been necessary to
augment advanced training for its dealer network because the sale and
installation of 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 carry competing products and are terminable by either party
on short notice.

VALUE-ADDED RESELLERS (VARs)

The greater technical complexity of CTI products and the need for both PC and
LAN technical knowledge and support capability has made it advantageous for the
Company to utilize a new channel 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 VARs 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.

ORIGINAL EQUIPMENT MANUFACTURERS (OEMs)

The next major channel of distributing the Company's products is through 11
domestic and international OEMs, also known as strategic partners, who are
typically manufacturers of telephone systems, including NEC Corporation and its
subsidiaries; Siemens Business Communication Systems, Inc.; Executone
Information Systems, Inc.; Comdial Corporation; Tadiran Telecommunications,
Ltd.; Harris Corporation; Philips Communication Systems, B.V.; Crane
Telecommunications, Ltd. and Grupo Delta Telecom. NEC Corporation and its 
subsidiaries accounted for approximately 11% of the Companies fiscal 1998 
revenues.

The Company has had long term relationships with a number of these
manufacturers. It believes that its OEM relationships enable it to develop 
up-to-date switch integrations with broader features for the OEM's switches, to
develop exclusive in-switch 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 OEM 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.

OEMs 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 OEM's with specialized technical
publications featuring the OEM's company and brand names. OEM contracts
typically have a term of one or more years and provide for volume discounts and
initial or minimum sales volumes.

                                       9


<PAGE>

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 OEM, 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 and Replay
products are currently available in six system-wide languages and nine hotel
guest conversation-only languages (available in the Company's Hospitality
package). 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.

PRODUCT SUPPORT

The Company's dealers and OEM 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
OEM customers. The Company maintains a technical support staff, devoted to
dealer and OEM support. Technical support 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.
Although the Company generally does not offer maintenance contracts for its
systems, dealers often independently sell maintenance contracts to end-users.

PRODUCT DEVELOPMENT

The Company believes that it has numerous product development opportunities,
which it intends to pursue through the development of new software products,
enhancements to its existing products, and investments in NT-based 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
Enterprise/Server Products group responds to the needs of the high-end product
offering, Repartee, TeLANophy, and Unity, as well as switch integrations and
vertical market applications. The Small Business Systems 

                                      10


<PAGE>

group works on Replay, Replay Plus, and Lingo. 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 and is
currently evaluating an alternate supplier.

To minimize its manufacturing costs, the Company recently signed an agreement
with Dell Computer Corporation to ship the Company's turnkey Repartee voice
processing systems on Dell computers. Dealers provide installation and post-sale
customer service, and often sell maintenance contracts along with the Company's
products.

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 in total domestic voice messaging systems shipped in
1997, according to preliminary 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
Inc., and Siemens Business Communication Systems, Inc.); manufacturers of
proprietary systems (such as Centigram Communications Corporation, Octel
Communications Corporation, acquired by Lucent in September 1997, and Comverse
Technology, Inc., 
                                      11


<PAGE>

which completed its merger with Boston Technology in January 1998); and 
independent manufacturers of PC-based, open-architecture systems (such as 
Active Voice and Applied Voice Technologies, Inc.).

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.

In the North American dealer channel, 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 OEM 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 OEM
system not produced by the Company (for example Lucent Technologies, Nortel
Limited, 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, Comverse Technology, Inc. and Octel
Communications - now a division of Lucent Technologies), or are PC-based, (like
the Company and Applied Voice Technology, Inc.), 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 OEM 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 OEM 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 OEM
relationships with any RBOCs.

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.

                                      12


<PAGE>

PROPRIETARY RIGHTS

The Company currently holds ten patents (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 three 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 has historically witnessed 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.

                                      13


<PAGE>

Active Voice, Repartee, Replay, TeLANophy, ViewMail, ViewCall, and ViewFax are
registered trademarks, while ActiveNet, PhoneBASIC, Unity, 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, 1998, the Company had 288 full-time employees, including 43 in
finance and administration, 20 in manufacturing, 98 in engineering, product
development, and quality assurance, and 127 in sales, marketing and technical
support, as well as 24 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, 1998, Pronexus Inc. had 22 full-time employees, including 2 in
finance and administration, 9 in engineering and product development, 11 in
sales, marketing and technical support, as well as 2 part-time employees.

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 not a party to any material pending legal proceedings.

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

None. 

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 current executive officers of the Company:

<TABLE>
<CAPTION>


Name                         Age      Position
-----                        ---      --------
<S>                          <C>      <C>
Robert L. Richmond           47       Chief Executive Officer and 
                                      Chairman of the Board

Frank J. Costa               45       Chief Operating Officer and President

Jose S. David                41       Chief Financial Officer

Douglass S. Anderson         47       Vice President of Sales

Kevin L. Chestnut            43       Chief Technology Officer and Vice President-
                                      Advanced Products and Technology

Edward F. Masters            39       Vice President of Product Development
</TABLE>

                                      14


<PAGE>

Robert L. Richmond, a co-founder of the Company, has been Chief Executive
Officer and Chairman of the Board of the Company since its inception in 1983.
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. 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. 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-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.

                                      15


<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,                  1998                  1997
--------------------         ------------------     ------------------
                              High        Low        High        Low
                             -------    -------     ------     -------
<S>                          <C>        <C>         <C>        <C>
First Quarter                $13.75     $  9.63     $16.50     $10.63
Second Quarter                15.25       11.25      13.75       9.50
Third Quarter                 15.38       11.63      15.00      11.00
Fourth Quarter               $15.25      $11.38     $15.63     $10.00
</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,
1998, there were approximately 100 stockholders of record and approximately
3,500 beneficial owners of the Company's Common Stock.

At March 31, 1998, the Company had remaining net proceeds from its December 1993
initial public offering of $5,882,000.

ITEM 6.   SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>

Year Ended March 31,                     1998      1997(1)      1996       1995       1994 
--------------------                   --------    -------    -------    -------    -------
                                         (Amounts in thousands, except per share amounts)
<S>                                    <C>         <C>        <C>        <C>        <C>
Statement of Income Data:
Net sales                              $53,151     $49,515    $45,138    $36,950    $28,121
Operating (loss) income                 (1,149)      2,569      6,871      6,845      4,984
Net income                                 142       1,751      5,162      5,110      3,579
Earnings per share:
  Basic                                $  0.03     $  0.38    $  1.14    $  1.15    $  1.09
  Diluted                              $  0.03     $  0.38    $  1.11    $  1.11    $  0.88
 
Balance Sheet Data:
Working capital                        $24,825     $22,489    $20,912    $12,147    $10,409
Total Assets                            41,144      38,941     37,400     28,698     25,411
Total debt                                   0           0          0          0          0
Total stockholders' equity             $34,595     $34,084    $31,797    $25,450    $20,944
</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.

                                      16

<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 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
five principal products: Repartee, Replay Plus, Replay, Lingo and In-switch.
Repartee, the Company's flagship and most feature-rich product, offers the
largest call handling capacity and comes in two models, VP and CTI. In addition,
Repartee serves as the base for TeLANophy, a suite of the Company's CTI modules,
which provides complete call management and unified 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. In-switch,
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 THIS AND OTHER 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

NET SALES

<TABLE>
<CAPTION>
                                       1998     Change     1997     Change     1996
                                      ------    ------    -------   ------    -------
<S>                                   <C>        <C>      <C>        <C>      <C>
(Dollars in thousands)

Net sales                             $53,151    7.3%     $49,515    9.7%     $45,138
</TABLE>

FISCAL 1998 COMPARED TO FISCAL 1997

Effective April 1, 1997, the Company rearranged its domestic and international
distribution channels and certain sales personnel who support them. The
Company's Canadian customers, who were previously under the umbrella of
international sales, joined with the U.S. dealer channel to create the North
American dealer channel. The new corporate sales channel replaces the OEM
channel and 

                                      17


<PAGE>

includes value-added resellers (VARs) which were previously included in the 
domestic dealer channel. The Company made this adjustment to better focus its 
resources on meeting the unique product and service needs of its diverse 
customer base.  Furthermore, in order to provide better information as to the 
Company's core product revenue, the Company has added a fourth revenue 
segment to the following analysis, denoted "Other". This section includes 
revenue from the Company's Pronexus subsidiary as well as other ancillary 
items not directly related to sales of the Company's primary products, such 
as royalties on patents. For comparison purposes, the following discussion 
assumes these adjustments have been made on April 1, 1996.

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 can be
credited to the success of the Company's strategic partner relationships as some
dealers now purchase the Company's products through these corporate sales
customers. The Company feels this transition is a more efficient method of
distributing its lower-end products, as the Company's dealers are more adept at
providing CTI-capable solutions, while the strategic partners' expertise is
selling basic voice mail systems. 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 are
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 In-switch 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 11
significant strategic partner relationships. The largest corporate customer
represented 50% of the channel's sales, and 11% of total Company revenue.

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 

                                      18


<PAGE>

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. This strategy is exemplified by the 
acquisition of Active Voice B.V., the Company's European distributor. By 
eliminating the middleman, the efficiency of this distribution model has 
allowed the Company to leverage the responsiveness to its European customers. 
To this end, the Company is continuing 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. 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 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.

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

FISCAL 1997 COMPARED TO FISCAL 1996

Due to the rearrangement of the sales channels and the complications in
obtaining the transactional history necessary to restate fiscal 1996 results
under the new reporting model, the 1996 figures are not directly comparable to
the 1998 figures. However, the 1997 numbers, which have been restated in the
"Fiscal 1998 Compared to Fiscal 1997" narrative, but not in the "Fiscal 1997
Compared to Fiscal 1996" discussion, serve as a bridge between the two years so
that the relationships may be inferred by comparing fiscal 1998 to 1997, and
fiscal 1997 to 1996.

Net sales to the Company's domestic dealer network during the year ended March
31, 1997 were essentially unchanged from the previous year. Net sales to the
domestic dealer network represented 67.4% and 73.3% of total net sales in the
years ended March 31, 1997 and 1996, respectively. Increases of approximately
30% in unit sales of both the Repartee and Replay product lines were offset by
an approximate 10% decrease in unit sales of Replay Plus, which contributed the
largest percentage of the Company's total net sales. A majority of the decrease
in unit sales of Replay Plus was attributable to a large one-time sale to a new
customer in fiscal 1996 and the absence of such a sale in fiscal 1997.

Net sales to strategic partners increased by 46.4% during the year ended March
31, 1997. Net sales to these customers represented 16.7% of total net sales for
the year ended March 31, 1997, compared to 12.5% of total net sales for the year
ended March 31, 1996. The aggregate increase in net sales in the strategic
partner channel was principally attributable to approximately 315% and 280%
increases in 

                                      19


<PAGE>

unit sales of Replay and Replay Plus, respectively, due to the successful 
introduction of new products for corporate customers. The increases in unit 
sales of Replay and Replay Plus were partially offset by a decline in unit 
sales of Repartee kits, primarily to a single customer. During December 1996, 
the Company announced an agreement with Tadiran Telecommunications, Ltd. to 
integrate the Repartee voice processing system with Tadiran's Coral telephone 
systems. The agreement also provides for Tadiran to market TeLANophy. In 
January 1997, Active Voice announced a joint development agreement with 
Executone Information Systems, Inc. to integrate Active Voice products with 
Executone's Integrated Digital System and future Executone telephony 
products. An agreement also provides for Executone to distribute Repartee and 
TeLANophy unified messaging products. In March 1997, the Company announced 
the formation of a strategic relationship with Siemens Business Communication 
Systems, Inc. to jointly develop multimedia messaging solutions for Siemens' 
highly integrated global communications platform. The jointly developed 
Windows NT-based multimedia messaging platform will be distributed worldwide 
by Siemens. As of March 31, 1997, the Company had six domestic strategic 
partner relationships. The largest partner accounted for approximately 48% of 
total strategic partner sales and approximately 8% of total Company sales 
during fiscal 1997.

Net sales to international customers increased by 23.2% during the year ended
March 31, 1997, reflecting increased penetration of international voice mail
markets. International sales represented 16.0% of total net sales for the year
ended March 31, 1997, compared to 14.2% of total net sales for the prior year.
All product lines experienced growth in the international sales channel in both
units and net sales over the prior fiscal year. The Company attributes the
increased unit sales to well received product localization and continued
strength in the Australia and United Kingdom markets. 

GROSS PROFIT 

<TABLE>
<CAPTION>
                                       1998     Change     1997     Change     1996
                                      ------    ------    -------   ------    -------
<S>                                   <C>        <C>      <C>        <C>      <C>
(Dollars in thousands)

Gross profit                          $30,195    4.9%     $28,780    2.3%     $28,120
Percentage of net sales                 56.8%               58.1%               62.3%
</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 In-switch (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 to the other
distribution channels.

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 surplus 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 In-switch product, as well as a 58% overall increase of TeLANophy

                                      20


<PAGE>

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.

FISCAL 1997 COMPARED TO FISCAL 1996

The decline in gross margin between fiscal 1997 and 1996 was due to the
continued shift in the product sales mix toward the lower margin Replay product
line, particularly in the strategic partner sales channel. A 25% price reduction
on Replay implemented during the third quarter of fiscal 1996 contributed to the
shift in sales mix and reduced the gross margin on Replay units, as did the
success of Replay products released for two of the Company's newer partners.
Lower unit sales of Repartee kits in the strategic partner channel, primarily to
a single customer also contributed to the decline in gross margin. The decline
in gross margin was partially offset by an increase in the percentage of net
sales to the higher margin international sales channel and increased sales of
high margin TeLANophy and fax-related software.

RESEARCH AND DEVELOPMENT

<TABLE>
<CAPTION>
                                       1998     Change     1997     Change     1996
                                      ------    ------    -------   ------    -------
<S>                                   <C>        <C>      <C>        <C>      <C>
(Dollars in thousands)

Research and development              $9,752     44.3%    $6,757     18.4%    $5,706
Percentage of net sales                18.3%               13.6%               12.6%
</TABLE>

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 In-switch
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 View Call Plus, which takes advantage of a powerful new
scripting tool, PhoneBASIC. With PhoneBASIC, View Call Plus 2.0 can be
integrated to work with a variety of general business applications.

The Company believes that the international market for voice processing
equipment has significant growth opportunities, but that localization of
products will be necessary to successfully penetrate this market. The Company
continues to allocate resources to the localization of products for the
international markets and customization of products for strategic partner
accounts. The Company also believes that in order to remain competitive in a
rapidly changing technological environment, it will 

                                      21


<PAGE>

continue to be necessary to allocate significant resources to the development 
of new products. 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 1997 COMPARED TO FISCAL 1996

The increase in research and development expenses was primarily attributable to
increased use of project-based contract development resources and increases in
engineering and development personnel. The increase in contract development
staff and engineering personnel was attributable to the Company's continuing
effort to localize products for new international markets, as well as
customization of products for new strategic partners and new product
development, particularly CTI-related products. 

During 1997, the Company made several significant product announcements
including the introduction of Message Integration for the Novell GroupWise
client/server e-mail system, ViewMail for Microsoft Messaging and multilingual
TeLANophy products for the desktop. The Company also completed development and
began shipping the industry's first commercially available voice processing
systems with an HTML-based (hypertext markup language) interface. The new Replay
3.0 and Replay Plus 6.7 graphical HTML interfaces enable system managers to
administer voice mail using Microsoft Explorer or Netscape Navigator web
browsers. The HTML interface also greatly simplifies product localization for
global markets.

SALES AND MARKETING

<TABLE>
<CAPTION>
                                       1998     Change     1997     Change     1996
                                      ------    ------    -------   ------    -------
<S>                                   <C>        <C>      <C>        <C>      <C>
(Dollars in thousands)

Sales and marketing                   $15,421    15.9%    $13,301    15.8%    $11,491
Percentage of net sales                 29.0%               26.9%               25.5%
</TABLE>

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

                                      22


<PAGE>

FISCAL 1997 COMPARED TO FISCAL 1996

The increase in sales and marketing expense for the year ended March 31, 1997
from the prior year was attributable to increased compensation-related expenses
associated with growth in sales and marketing personnel and increased commission
expense due to higher sales levels. The increase in sales and marketing
personnel primarily reflected additions to the Company's international sales
force, and to a lesser extent, additional product support representatives.
Increased promotional costs, including promotional literature, trade show
attendance and related travel costs, regional marketing presentations, and a
targeted incentive program for customer sales representatives, also contributed
to the increase in sales and marketing expenses.

GENERAL AND ADMINISTRATIVE

<TABLE>
<CAPTION>
                                       1998     Change     1997     Change     1996
                                      ------    ------    -------   ------    -------
<S>                                   <C>        <C>      <C>        <C>      <C>
(Dollars in thousands)

General and administrative            $6,171     40.8%    $4,384     8.2%     $4,052
Percentage of net sales                11.6%                8.9%                9.0%
</TABLE>


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. General and administrative
expenses can be expected to fluctuate as a percentage of net sales from period
to period.

FISCAL 1997 COMPARED TO FISCAL 1996

The increase in general and administrative expenses during the year ended March
31, 1997 was attributable to higher compensation-related expenses due to an
approximate 10% increase in administrative personnel and due to increased usage
of temporary staffing and consulting services. General and administrative
expenses, being relatively fixed in nature, decreased as a percentage of net
sales due to the Company's ability to leverage these costs over a growing
revenue base.

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."

                                      23


<PAGE>

INTEREST INCOME

<TABLE>
<CAPTION>
                                       1998     Change     1997     Change     1996
                                      ------    ------    -------   ------    -------
<S>                                    <C>      <C>        <C>       <C>       <C>
(Dollars in thousands)

Interest Income                        $573     (23.1%)     $745     6.3%      $701
</TABLE>

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. Refer to "Liquidity and
Capital Resources" below.

FISCAL 1997 COMPARED TO FISCAL 1996

Interest income increased during fiscal 1997 primarily due to higher average
cash and marketable securities balances during the year and to a lesser extent,
higher average yields earned on investments due to increasing market interest
rates. Average cash and marketable securities balances declined in the fourth
quarter, primarily as a result of the Pronexus acquisition.

INCOME TAX BENEFIT (PROVISION)
       
<TABLE>
<CAPTION>
                                       1998     Change     1997     Change     1996
                                      ------    ------    -------   ------    -------
<S>                                   <C>        <C>      <C>       <C>       <C>
(Dollars in thousands)

Income tax                              $689     (143.4%)  $(1,587)  (34.1%)   $(2,410)
Effective tax rate                    119.6%                  47.9%               31.8%
</TABLE>

Variations in the customary relationship between the income tax benefit
(provision) and the statutory income tax rate of 34% result from tax exempt
investment income, research and development tax credits, the benefit provided by
the Company's foreign sales corporation (FSC) and certain nondeductible
expenses. 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 1998 COMPARED TO FISCAL 1997

As a result of the Company's pretax loss, the Company will receive a refund of
income taxes previously paid. 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 is 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. See
Note 6 to "Notes to Consolidated Financial Statements."

                                      24


<PAGE>

FISCAL 1997 COMPARED TO FISCAL 1996

The Company's effective tax rate for fiscal 1997 increased to 47.9% from 31.8%
in fiscal 1996. The increase in the effective tax rate was primarily
attributable to the non-recurring charge for purchased, in-process research and
development associated with the Pronexus transaction, which is not deductible
for income tax purposes. The effect of the non-recurring charge was partially
offset by increases in non-taxable income and research credits as a percentage
of taxable income.

NET INCOME AND EARNINGS PER SHARE

<TABLE>
<CAPTION>
                                       1998     Change     1997     Change     1996
                                      ------    ------    -------   ------    -------
<S>                                    <C>      <C>       <C>       <C>       <C>
(Dollars in thousands, except per share data)

Net income                             $ 142    (91.9%)   $1,751    (66.1%)   $5,162
Percentage of net sales                 0.3%                3.5%               11.4%
Earnings per share:
  Basic                                $0.03    (92.1%)   $0.38     (66.7%)   $ 1.14
  Diluted                              $0.03    (92.1%)   $0.38     (65.8%)   $ 1.11
</TABLE>

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.

FISCAL 1997 COMPARED TO FISCAL 1996

The decreases in net income and earnings per share for the year ended March 31,
1997 compared to the prior year were primarily attributable to a decline in
gross margin to 58.1% in 1997 from 62.3% in 1996 and the non-recurring charge
for purchased, in-process research and development associated with the Pronexus
acquisition, as discussed above. In addition, operating expenses as a percent of
net sales (excluding the non-recurring charge) increased to 49.4% of net sales
compared to 47.1% of net sales in the prior fiscal year. 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
$8.6 million, or 21.0% of total assets, at March 31, 1998 from $15.3 million, or
39.3% of total assets, at March 31, 1997. The majority of the decrease is due to
increases in inventory levels and vendor prepayments, as well as purchases of
hardware and software equipment to augment the Company's management information
systems. The Company had working capital of $24.8 million at March 31, 1998.

                                      25


<PAGE>

Accounts receivable, net of allowances, increased to $11.3 million at March 31,
1998 from $10.4 million at March 31, 1997, due to higher sales levels and an
approximate increase of 8% in days sales outstanding. The increase in inventory
levels to $10.1 million at March 31, 1998 from $7.0 million at March 31, 1997 is
attributable to lower than expected fourth quarter sales due to the delay in
releasing Repartee 7.44, as well as an initial stocking order for the Lingo
product.

In fiscal 1998, the Company made a one-time vendor prepayment of approximately
$827,000 to secure future inventory deliveries at a favorable discount price.
Also, to accommodate increased development personnel, the Company effectively
incurred approximately $700,000 of prepaid rent by paying certain architectural
fees and costs on behalf of the lessor in exchange for reduced future lease
payments on new office space.

The Company made $2.5 million in capital expenditures during fiscal 1998,
compared to $1.3 million during fiscal 1997. The majority of the capital
expenditures during fiscal 1998 consisted of the aforementioned investment in
management information system hardware, which includes new workstations and
equipment, as well as a customer management software program. During September
1997, the Company acquired its European distributor Active Voice B.V. based in
The Netherlands. The purchase price of $467,000 was paid in cash and the
acquisition was recorded under the purchase method of accounting. The Company
currently has no specific commitments with respect to additional capital
expenditures during fiscal 1998, but expects to spend an aggregate of
approximately $3.0 million for the year.

The Company has a $10,000,000 revolving credit line from a bank for financing
working capital. As a result of the current year operating loss, the Company 
was not in compliance with its EBITDA covenant at March 31, 1998, even though 
there were no outstanding borrowings at that date. The Company has obtained a 
waiver of this covenant from the bank through June 30, 1998.

The Company believes that ongoing maturity of securities in its investment
portfolio, together with cash flow from operations will provide sufficient 
working capital for use in operations for at least the next year.

IMPACT OF THE YEAR 2000 ISSUE

The Company has developed plans to make its systems and products year 2000
compliant. The Company has and will continue to make certain investments to
modify or convert its internal operational software and hardware systems and
applications to ensure that the Company's systems are year 2000 compliant.
Although the Company expects some costs associated with the modifications and
conversions, the financial impact to the Company has not been and is not
anticipated to be material to its financial position or results of operations in
any given year. The Company also is implementing programs for assisting
customers to obtain year 2000 compliance either by making software upgrades
available or offering programs for migrations to current product versions. The
costs incurred in connection with these programs are not expected to be
material. However, if any necessary modifications, conversions, migrations or
upgrades are not made, or not made in a timely or cost effective manner, the
Company or its customers may be unable to implement appropriate year 2000
solutions, which could have a material adverse effect on the Company's business,
financial condition or results of operations. Additionally, if other companies
with which the Company does business do not 

                                      26


<PAGE>

address year 2000 issues on a timely basis, it could have an adverse effect on 
the Company's systems or business transactions.

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.

- 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.

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

- 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.

                                      27


<PAGE>

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

- 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 risks associated with governmental regulation, product 
  adaptation to local languages and switching systems, and uncertainties 
  arising from local business practices and cultural considerations.

                                      28

<PAGE>

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                          ACTIVE VOICE CORPORATION

                      CONSOLIDATED STATEMENTS OF INCOME
                   (In thousands, except per share amounts)

<TABLE>
<CAPTION>

                                                                        Year Ended March 31,
                                                                --------------------------------------
                                                                  1998           1997           1996
                                                                --------       -------         -------
<S>                                                             <C>            <C>             <C>
Net sales                                                       $53,151        $49,515         $45,138
Cost of goods sold                                               22,956         20,735          17,018
                                                                --------       -------         -------
Gross profit                                                     30,195         28,780          28,120

Operating expenses:
  Research and development                                        9,752          6,757           5,706
  Sales and marketing                                            15,421         13,301          11,491
  General and administrative                                      6,171          4,384           4,052
  Non-recurring charge for purchased, in-process
     research and development                                                    1,769
                                                                --------       -------         -------
  Total operating expenses                                       31,344         26,211          21,249
                                                                --------       -------         -------
Operating income (loss)                                          (1,149)         2,569           6,871

Interest income                                                     573            745            701
                                                                --------       -------         -------
Income (loss) before income taxes 
 and minority interest                                             (576)         3,314           7,572
Income tax benefit (provision)                                      689         (1,587)         (2,410)
Minority interest in loss of 
 consolidated subsidiary                                             29             24               
                                                                --------       -------         -------

Net income                                                      $   142        $ 1,751         $ 5,162
                                                                --------       -------         -------
                                                                --------       -------         -------

Earnings per share:
  Basic                                                          $0.03          $0.38           $1.14
  Diluted                                                        $0.03          $0.38           $1.11
                                                                --------       -------         -------
                                                                --------       -------         -------
</TABLE>

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

                                      29


<PAGE>

                          ACTIVE VOICE CORPORATION

                         CONSOLIDATED BALANCE SHEETS
                        (In thousands, except shares)

<TABLE>
<CAPTION>

                                                               March 31,
                                                          -------------------
                                                           1998        1997
                                                          -------     -------
<S>                                                       <C>         <C>
                           ASSETS

Current assets:
  Cash and cash equivalents                               $ 1,550     $ 1,542
  Marketable securities                                     3,407       6,223
  Accounts receivable, less allowances of $1,515 
    ($1,670 in 1997)                                       11,331      10,410
  Inventories                                              10,122       7,009
  Income taxes receivable                                     652
  Deferred tax asset                                        1,340       1,008
  Prepaid expenses and other assets                         3,103       1,258
                                                          -------     -------
    Total current assets                                   31,505      27,450
                                                          -------     -------
Marketable securities                                       3,680       7,531
Furniture and equipment, net                                3,539       2,408
Other assets                                                2,420       1,552
                                                          -------     -------
      TOTAL ASSETS                                        $41,144     $38,941
                                                          -------     -------
                                                          -------     -------


                LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable                                        $ 3,931     $ 2,342
  Accrued compensation and benefits                         1,256       1,682
  Other accrued expenses                                    1,493         933
  Income taxes payable                                                      4
                                                          -------     -------
    Total current liabilities                               6,680       4,961
                                                          -------     -------
                                                          -------     -------
Commitments
Minority interest                                            (131)       (104)
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                                            17,262      17,003
  Retained earnings                                        18,996      19,026
  Unrealized gain (loss) on marketable securities              33           3
  Accumulated translation adjustments                           7           4
Less 313,067 repurchased shares (358,859 in 1997), 
    at cost                                                (1,703)     (1,952)
                                                          -------     -------
Total stockholders' equity                                 34,595      34,084
                                                          -------     -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                $41,144     $38,941
                                                          -------     -------
                                                          -------     -------
</TABLE>

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

                                      30


<PAGE>

                          ACTIVE VOICE CORPORATION

                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (In thousands)

<TABLE>
<CAPTION>

                                                                        Year Ended March 31,
                                                                --------------------------------------
                                                                  1998           1997         1996
                                                                --------       --------       --------
<S>                                                             <C>            <C>            <C>
Operating activities
Net income                                                      $   142        $ 1,751        $ 5,162
Adjustments to reconcile net income to net
  cash provided by operating activities:
    Depreciation and amortization                                 1,494            966            897
    Provisions for accounts receivable                             (155)           305            431
    Deferred income taxes                                          (347)             5           (476)
    Loss on disposal of equipment                                    49             39             46
    Minority interest in loss of consolidated subsidiary            (29)           (24)
    Non-recurring charge for purchased,
      in-process research and development                                        1,769
    Changes in operating assets and liabilities:
      Increase in accounts receivable                              (766)        (2,087)        (2,598)
      Increase in inventories                                    (3,113)        (1,526)        (2,052)
      (Increase) decrease in prepaid expenses
        and other assets                                         (2,428)        (1,643)            86
      Increase in accounts payable                                1,589            204            928
      (Decrease) increase in other liabilities                     (414)          (715)         1,963
                                                                -------        -------        -------
    Net cash (used in) provided by operating activities          (3,978)          (956)         4,387
                                                                -------        -------        -------
Investing activities
Purchases of marketable securities                               (2,294)        (5,072)        (4,583)
Proceeds from sales of marketable securities                      9,006          7,026          3,521
Acquisition of business                                            (467)        (1,941)
Purchases of furniture and equipment                             (2,492)        (1,295)        (1,130)
                                                                -------        -------        -------
    Net cash provided by (used in) investing activities           3,753         (1,282)        (2,192)
                                                                -------        -------        -------
Financing activities
Proceeds from employee stock option
  and stock purchase plans                                          644            382            566
Repurchase of common stock                                         (416)                          (21)
                                                                -------        -------        -------
    Net cash provided by financing activities                       228            382            545
                                                                -------        -------        -------
Effect of exchange rate changes 
  on cash and cash equivalents                                        5              8               
                                                                -------        -------        -------
Increase (decrease) in cash and cash equivalents                      8         (1,848)         2,740
Cash and cash equivalents at beginning of year                    1,542          3,390            650
                                                                -------        -------        -------
Cash and cash equivalents at end of year                         $1,550         $1,542         $3,390
                                                                -------        -------        -------
                                                                -------        -------        -------
</TABLE>

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

                                      31


<PAGE>

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

<TABLE>
<CAPTION>


                                                                          Unrealized
                                     Common Stock                            Gain
                                     ------------                         (Loss) on     Accumulated                     Total
                                     Net Shares               Retained    Marketable    Translation    Repurchased   Stockholders'
                                     Outstanding    Amount    Earnings    Securities    Adjustments      Shares         Equity
                                     -----------   -------    --------    -----------   -----------    -----------   ------------
<S>                                   <C>          <C>        <C>           <C>             <C>          <C>
Balance at April 1, 1995              4,469,897    $16,105    $12,499       $(120)                       $(3,034)       $25,450
  Issuance of shares upon
    exercise of stock options            85,798        150       (342)                                       758            566
  Tax benefit related 
    to employee stock plans                            536                                                                  536
  Repurchase of common
    stock                                  (750)                                                             (21)           (21)
  Net unrealized gain on
    marketable securities                                                     104                                           104
  Net income                                                    5,162                                                     5,162
                                      ---------    -------    -------       ------          ---          -------        -------
Balance at March 31, 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
  Net unrealized gain on
    marketable securities                                                      19                                            19
  Translation adjustment                                                                    $ 4                               4
  Net income                                                    1,751                                                     1,751
                                      ---------    -------    -------       ------          ---          -------        -------
Balance at March 31, 1997             4,618,074     17,003     19,026           3             4           (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)
  Net unrealized gain on
    marketable securities                                                      30                                            30
  Translation adjustment                                                                      3                               3
  Net income                                                      142                                                       142
                                      ---------    -------    -------       ------          ---          -------        -------
Balance at March 31, 1998             4,663,866    $17,262    $18,996       $  33           $ 7          $(1,703)       $34,595
                                      ---------    -------    -------       ------          ---          -------        -------
                                      ---------    -------    -------       ------          ---          -------        -------
</TABLE>

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

                                      32


<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 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 
recorded as a separate component of stockholders' equity.

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, which consist primarily of municipal securities, are 
carried at market value. Market values are determined based on quoted prices. 
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.

                                      33


<PAGE>

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 
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 and depreciation is computed 
using accelerated methods over estimated useful lives. Estimated useful lives 
are as follows: furniture and fixtures, seven years; office and computer 
equipment, 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.

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.

REVENUE RECOGNITION 

Revenue is recognized upon shipment of product to customers, with allowances 
made for estimated returns. 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 
$172,000, $71,000, and $292,000 in advertising costs during the years ended 
March 31, 1998, 1997 and 1996, 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 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.

                                      34


<PAGE>

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. Deferred income taxes have been 
recorded using the liability method in recognition of these temporary 
differences.

EARNINGS PER SHARE

The Company adopted Statement of Financial Accounting Standard No. 128, 
"Earnings Per Share," during the third quarter of fiscal year 1998. Statement 
No. 128 replaced the calculation of primary and fully diluted earnings per 
share with basic and diluted earnings per share. Unlike primary earnings per 
share, basic earnings per share exclude any dilutive effect of options, 
warrants and convertible securities. Diluted earnings per share is very 
similar to the previously reported primary earnings per share. All earnings 
per share amounts for all periods have been presented, and where appropriate, 
restated to conform to the Statement No. 128 requirements.

RECENT ACCOUNTING STANDARDS

In June 1997, The Financial Accounting Standards Board (FASB) issued 
Statement No. 130, "Reporting Comprehensive Income," and Statement No. 131, 
"Disclosures about Segments of an Enterprise and Related Information." 
Statement No. 130 establishes standards for reporting comprehensive income in 
annual and interim financial statements. Statement No. 131 establishes 
standards for the way that public business enterprises report information 
about operating segments in annual financial statements and requires that 
those enterprises report selected information about operating segments in 
interim financial reports issued to shareholders. It also establishes 
standards for related disclosures about products and services, geographic 
areas and major customers. The Company will adopt Statement No. 130 and 
Statement No. 131 in the fiscal year ending March 31, 1999 and does not 
anticipate any impact on the Company's consolidated results of operations, 
financial position or cash flows.

In October 1997, the AICPA issued SOP 97-2, "Software Revenue Recognition," 
which changes the requirements for revenue recognition effective for 
transactions that the Company will enter into beginning April 1, 1998. The 
Company believes that adoption of SOP 97-2 will not result in a material 
impact to the Company's consolidated results of operations, financial 
position or cash flows.

                                      35


<PAGE>

NOTE 2. MARKETABLE SECURITIES

Management determines the appropriate classification of 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 as an adjustment to stockholders' equity. 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         Gross
                                       Amortized     Unrealized    Unrealized     Estimated
          1998                           Cost          Gains         Losses       Fair 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>

<TABLE>
<CAPTION>


                                                       Gross         Gross
                                       Amortized     Unrealized    Unrealized     Estimated
          1997                           Cost          Gains         Losses       Fair Value
          ----                         ---------     ----------    ----------     ----------
<S>                                    <C>              <C>           <C>           <C>
Municipal bonds:
  Due in one year or less              $ 6,219          $ 8           $(4)          $ 6,223
  Due after one year through 
    three years                          5,444           20            (8)            5,456
  Due after three years                  2,086                        (11)            2,075
                                       -------          ---          -----          -------
                                       $13,749          $28          $(23)          $13,754
</TABLE>

Net unrealized holding gains of $30,000 and $19,000, net of federal income 
taxes were recorded in a separate component of stockholders' equity, during 
the years ended March 31, 1998 and 1997, respectively.

NOTE 3. INVENTORIES

Inventories are comprised of the following (in thousands):

<TABLE>
<CAPTION>
                                                                      March 31,
                                                                 ---------------------
                                                                   1998           1997
                                                                 --------        ------
<S>                                                               <C>            <C>
Computer equipment                                                $ 5,494        $3,602
Custom component parts                                              3,907         2,730
Supplies                                                              721           677
                                                                  -------        ------
                                                                  $10,122        $7,009
                                                                  -------        ------
                                                                  -------        ------
</TABLE>

                                      36


<PAGE>

NOTE 4. FURNITURE AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                                      March 31,
                                                                 ---------------------
                                                                   1998           1997
                                                                 --------        ------
<S>                                                               <C>            <C>
Office and computer equipment                                     $ 5,725        $3,844
Furniture and fixtures                                              2,064         1,674
Leasehold improvements                                                331           331
                                                                  -------        ------
                                                                    8,120         5,849

Accumulated depreciation                                           (4,581)       (3,441)
                                                                  -------        ------
                                                                  $ 3,539        $2,408
                                                                  -------        ------
                                                                  -------        ------
</TABLE>

NOTE 5. LINE OF CREDIT

The Company has an unsecured $10 million revolving line of credit from a bank.
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, 1998 and
1997 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 November 1998.
As a result of the current year operating loss, the Company  was not in 
compliance with its EBITDA covenant at March 31, 1998, even though there were 
no outstanding borrowings at that date. The Company has obtained a waiver of 
this covenant from the bank through June 30, 1998.

NOTE 6. INCOME TAXES

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,
                                           --------------------------
                                            1998      1997      1996
                                           ------    ------    ------
<S>                                        <C>       <C>       <C>
Tax at U.S. statutory rate                  34.0%     34.0%     34.0%
Research and development credit             46.2      (4.5)     (0.4)
Tax exempt income                           30.7      (6.6)     (2.9)
Foreign sales corporation benefit           18.9      (2.5)     (1.0)
Non-recurring charge for
  purchased, in-process research
  and development                                     18.1
Other items, net                           (10.2)      9.4       2.1
                                           ------    -----     -----
                                           119.6%     47.9%     31.8%
                                           ------    -----     -----
                                           ------    -----     -----
</TABLE>

                                      37


<PAGE>

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,
                                           --------------------------
                                            1998      1997      1996
                                           ------    ------    ------
<S>                                        <C>       <C>       <C>
Current taxes on income                    $342      $(1,582)  $(2,886)
Deferred income taxes                       347           (5)      476
                                           -----     -------   -------
                                           $689      $(1,587)  $(2,410)
                                           -----     -------   -------
                                           -----     -------   -------
</TABLE>

Deferred taxes result primarily from temporary differences relating to the
accounting for bad debts, inventories, and certain other accruals expensed for
financial reporting purposes, but not currently deductible for income tax
purposes.

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

<TABLE>
<CAPTION>

                                              Year ended March 31,
                                           --------------------------
                                            1998                1997
                                           ------              ------
<S>                                        <C>                 <C>
Accounts receivable allowances             $  515              $  568
Inventory valuation allowance                 128                  61
Accrued compensation and benefits             187                 211
Accrued royalties                             182                  (0)
Other items, net                              328                 168
                                           ------              ------
                                           $1,340              $1,008
                                           ------              ------
                                           ------              ------
</TABLE>

The Company made cash payments of income taxes of $0.2 million, $2.3 million and
$1.5 million during the years ended March 31, 1998, 1997 and 1996, 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 $1.7 million, $1.5 million 
and $1.2 million, of rent expense for the fiscal years ended March 31, 1998, 
1997 and 1996, respectively.

Future minimum rental payments required per fiscal year under leases with 
non-cancelable lease terms in excess of one year at March 31, 1998 are as 
follows (in thousands):
 
<TABLE>
          <S>                          <C>
          1999                         $ 2,270
          2000                           3,032
          2001                           3,040
          2002                           3,035
          2003                           3,269
          Thereafter                    21,805
                                       -------
                                       $36,451
                                       -------
                                       -------
</TABLE>

                                      38


<PAGE>

In connection with the execution of a lease and related amendments, the 
Company effectively prepaid rent by paying certain architectural and real 
estate fees and costs on behalf of the lessor in exchange for reduced future 
lease payments. The prepayments of $762,000 and $275,000 at March 31, 1998 
and 1997, 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 rent 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, 1998 there were 1,352,702 shares of common stock reserved 
for future issuance under existing stock option plans of which 536,911 shares 
represent options available for future grant. These include 43,500 shares 
reserved for issuance upon exercise of options granted under the 1984 
Incentive Stock Option Plan (1984 Plan) and the 1988 Nonqualified Stock 
Option Plan (1988 Plan); 1,236,077 shares reserved for issuance under the 
1993 Stock Option Plan (1993 Plan), the 1996 Stock Option Plan (1996 Plan) 
and the 1998 Stock Option Plan (1998 Plan), under which options for 717,632 
shares have been granted; 60,000 shares reserved for issuance under the 
Directors' Stock Option Plan and the 1997 Director Stock Option Plan, under 
which options for 41,534 shares have been granted; and 13,125 shares reserved 
for options granted outside of these plans. Options which expire or are 
terminated revert back to shares available for future grant except that no 
further stock option grants will be made under the 1984 Plan or the 1988 Plan.

The Company accounts for these stock option plans under Accounting Principles 
Board Opinion No. 25, "Accounting for Stock Issued to Employees," under which 
compensation cost has been recognized based on the difference between the 
exercise price and fair market value at the date of grant, if any. Had 
compensation cost for stock option grants made in 1998, 1997 and 1996 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 and earnings per share would have been reduced to the 
following pro forma amounts (in thousands, except per share data):

<TABLE>
<CAPTION>

Year Ended March 31,                           1998      1997      1996
--------------------                          ------    ------    ------
                                             <C>        <C>       <C>

Net income -- as reported                    $   142    $1,751    $5,162
Net (loss) income -- pro forma               $(1,118)   $  988    $4,786

Diluted earnings per share -- as reported    $  0.03    $ 0.38    $ 1.11
Diluted earnings (loss) per share 
  -- pro forma                               $ (0.24)   $ 0.21    $ 1.03
</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 1998, 1997 and 1996: risk free interest rates 
of 6.0%, 6.5% and 6.0%, respectively; expected volatility of 55%; expected 
life of 5 years; and no dividends. Because the Statement No. 123 method of 
accounting has not been 

                                      39


<PAGE>

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:

<TABLE>
<CAPTION>

                                   1998                        1997                    1996
                            ----------------------     ---------------------    ---------------------
                                          Weighted                  Weighted                 Weighted 
                                          Average                   Average                  Average  
                                          Exercise                  Exercise                 Exercise 
                             Shares        Price        Shares       Price       Shares       Price  
                            --------      --------     --------     --------    --------     --------
<S>                         <C>      <C>   <C>         <C>      <C>  <C>        <C>      <C>  <C>   
Outstanding, April 1        599,863        $13.82      449,464       $13.33      347,080      $ 9.24
  Granted                   341,592         12.12      240,236        11.72      292,886       20.79
  Expired                   (71,951)        15.30      (43,004)       13.03     (104,704)      23.65
  Exercised                 (53,713)         5.92      (46,833)        4.88      (85,798)       6.51
                            --------       ------      -------       ------     --------      ------
Outstanding, March 31       815,791         13.49      599,863        13.82      449,464       13.33
Exercisable, March 31       300,754        $14.51      246,322       $13.37      213,992      $ 9.71
                            --------       ------      -------       ------     --------      ------
                            --------       ------      -------       ------     --------      ------
Weighted average
 fair value of 
 options granted  
 during the year                     $6.56                      $6.42                    $10.28
                                     -----                      -----                    ------
</TABLE>

The following table summarizes information about stock options outstanding at 
March 31, 1998:

<TABLE>
<CAPTION>
 
                                Outstanding                         Exercisable
                   ----------------------------------------  ---------------------
                                 Weighted
                                  Average         Weighted                Weighted
                                 Remaining         Average                Average
   Range of                     Contractual       Exercise                Exercise
Exercise Prices     Options     Life (Years)        Price     Options       Price   
---------------    --------     ------------    ---------    ---------    ---------
<S>                <C>             <C>           <C>         <C>          <C>
$ 1.60--$ 7.99      54,986         5.1           $ 6.56       54,000      $ 6.55
  8.00-- 11.99     416,192         9.2            11.47       58,330       11.13
 12.00-- 15.99     196,817         8.4            13.03       74,128       12.56
$16.00--$28.50     147,796         6.6            22.38      114,296       21.27
                   -------         ---           ------      -------      ------
                   815,791         8.3           $13.49      300,754      $14.51
                   -------         ---           ------      -------      ------
                   -------         ---           ------      -------      ------
</TABLE>

EMPLOYEE STOCK PURCHASE PLAN

On August 30, 1996, the stockholders approved the 1996 Employee Stock 
Purchase Plan (ESPP). The 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 $326,000 and $153,000 for the fiscal years 
ended March 31, 1998 and 1997, respectively. Shares issued pursuant to the 
ESPP totaled 32,079 and 16,296 for 

                                      40

<PAGE>

the fiscal years ended March 31, 1998 and 1997, respectively. At March 31, 
1998, 101,625 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. During the fiscal year 
ended March 31, 1998, 40,000 shares were repurchased at a total price of 
$416,000.

CERTAIN TRANSACTIONS WITH CORPORATE OFFICERS AND OTHERS

The Company and two of its directors and principal shareholders, one who is 
also an executive officer, 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.

NOTE 9. TECHNOLOGY LICENSES

The voice processing industry is characterized by rapid technological change 
and has historically witnessed numerous allegations of patent infringement 
among competitors, and considerable related litigation. Such claims have been 
made against the Company in the past. In response to certain of these claims, 
the Company has pursued and obtained nonexclusive licenses to certain 
fundamental patents. Although the Company believes that it currently owns or 
has adequate rights to use 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 incurring substantial legal expenses 
and being required to obtain licenses, to pay damages, or to cease offering 
products that infringe such patents.

Royalty expense on licensed technology was $395,000, $324,000 and $286,000 
during the fiscal years ended March 31, 1998, 1997 and 1996, respectively.

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 and six months of service). Company contributions are 
discretionary based on annual declarations by the Company's Board of 
Directors. The Company made contributions of $96,000, $52,000 and $82,000 for 
the years ended March 31, 1998, 1997 and 1996, 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. 

                                      41

<PAGE>

The Company's largest customer accounted for approximately 11% of net sales 
for the fiscal year ending March 31, 1998 and approximately 12% of gross 
accounts receivable at March 31, 1998. Net sales to customers outside North 
America accounted for approximately 16% of total net sales for the fiscal 
year ended March 31, 1998. Accounts receivable denominated in currencies 
other than the US Dollar (primarily the Australian Dollar, Canadian Dollar, 
Dutch Guilder and British Pound Sterling) comprised approximately 14% of 
gross accounts receivable at March 31, 1998. 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, 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 
per share (in thousands, except shares and per share data): 

<TABLE>
<CAPTION>

Year Ended March 31,                           1998           1997            1996
--------------------                        ----------     ----------      ----------
<S>                                         <C>            <C>             <C>

Numerator:
Net income                                        $142         $1,751          $5,162
                                            ----------     ----------      ----------

Denominator:
 Denominator for basic earnings per share
  weighted average shares                    4,628,876       4,580,841       4,515,698
Effect of dilutive securities:
  Stock options                                 52,872          60,148         128,046
                                            ----------     ----------      ----------

 Denominator for diluted earnings per share
  adjusted weighted average shares
  and assumed conversions                    4,681,748      4,640,989       4,643,744
                                            ----------     ----------      ----------

Basic earnings per share:                        $0.03          $0.38           $1.14
Diluted earnings per share:                      $0.03          $0.38           $1.11
                                            ----------     ----------      ----------

</TABLE>

                                       42
<PAGE>

NOTE 14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following table sets forth the Company's unaudited quarterly financial 
information for the fiscal years ending March 31, 1998 and 1997 (in 
thousands, except per share data):

<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)
                             --------------    --------------    --------------   --------------

                                                         Fiscal Year 1997
                             -------------------------------------------------------------------
                                 June 30        September 30      December 31        March 31
                             --------------    --------------    --------------   --------------
<S>                          <C>               <C>               <C>              <C>
Net sales                           $11,113           $12,123           $13,355          $12,924
Gross profit                          6,658             7,103             7,693            7,326
Non-recurring charge for
  purchased, in-process
  research and development                                                                 1,769
NET INCOME (LOSS)                       771               912             1,159           (1,091)
Earnings (loss) per share:
  Basic                               $0.17             $0.20             $0.25           $(0.24)
  Diluted                             $0.17             $0.20             $0.25           $(0.24)
                              --------------    --------------    --------------   --------------
</TABLE>

                                       43
<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, 1998 and 1997, and the related consolidated 
statements of income, stockholders' equity, and cash flows for each of the 
three years in the period ended March 31, 1998. 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, 1998 and 1997, and the consolidated 
results of its operations and its cash flows for each of the three years in 
the period ended March 31, 1998, 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.

ERNST & YOUNG LLP

Seattle, Washington   
May 18, 1998

                                       44
<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, 1998, 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, 1998.

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, 1998.

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 Income -- Years ended March 31, 1998, 1997 and 1996

Consolidated Balance Sheets -- March 31, 1998 and 1997

Consolidated Statements of Cash Flows -- Years ended March 31, 1998, 1997 and 
1996

Consolidated Statements of Stockholders' Equity -- Years ended March 31, 
1998, 1997 and 1996

Notes to Consolidated Financial Statements

Report of Ernst & Young LLP, Independent Auditors


                                       45
<PAGE>

(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.

(b) REPORTS ON FORM 8-K

The Company filed no reports on Form 8-K during the three-month period ended 
March 31, 1998.

(c) EXHIBITS

The following exhibits are filed with this report:

EXHIBIT NO. 3: ARTICLES OF INCORPORATION AND BYLAWS

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))

EXHIBIT NO. 10: MATERIAL CONTRACTS

EXECUTIVE COMPENSATION PLANS AND AGREEMENTS

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))

                                       46
<PAGE>

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 (filed 
       herewith)

10.9   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))

10.10  First Amendment to the 1996 Stock Option Plan (filed herewith)

10.11  1997 Director Stock Option Plan (filed herewith)

10.12  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))

10.13  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))

10.14  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))

10.15  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))

10.16  First Amendment to the 1998 Stock Option Plan (filed herewith)

10.17  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))

10.18  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))

10.19  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))

10.20  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))

10.21  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))

10.22  Employee Agreement and Nondisclosure Agreement dated January 24, 1991 
       between Registrant and Kevin L. Chestnut (filed herewith)

10.23  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))

                                       47
<PAGE>

OTHER MATERIAL CONTRACTS

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 (filed herewith)

10.29  Amendment to Office Lease dated March 27, 1998 between Registrant and
       Martin Selig (filed herewith)

10.30  Subordination, Non-Disturbance and Attornment Agreement dated April 9,
       1997, between Registrant and Caystar Corp. II (filed herewith)

10.31  Line of Credit Agreement between Registrant and Wells Fargo Bank, N.A.
       dated November 13, 1997 (filed herewith)

10.32  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))

10.33  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))

10.34  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))

10.35  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))

10.36  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))

                                       48
<PAGE>

10.37  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))

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

21.1   Subsidiaries of Registrant

EXHIBIT NO. 23: CONSENT OF EXPERTS AND COUNSEL

23.1   Consent of Ernst & Young LLP, Independent Auditors

EXHIBIT NO. 27: FINANCIAL DATA SCHEDULE

27.1   Financial Data Schedule

                                       49
<PAGE>

               SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS
                             ACTIVE VOICE CORPORATION
                     YEARS ENDED MARCH 31, 1998, 1997 AND 1996
                                   (IN THOUSANDS)
                                          
<TABLE>
<CAPTION>
          COLUMN A                  COLUMN B     COLUMN C     COLUMN D     COLUMN E     COLUMN F
-------------------------------    ----------   ----------   ----------   ----------   ----------
                                                       ADDITIONS
                                                -----------------------
        Description                Balance at   Charged to    Charged to              Balance at
                                   Beginning     Costs and       Other     Deductions   End of
<S>                                <C>          <C>          <C>          <C>          <C>

Year ended March 31, 1998
Deducted from asset accounts:
  Allowance for doubtful accounts      $1,326         $275            0(A)      $386       $1,215
  Allowance for sales returns             344            0            0(B)        44          300
                                   ----------   ----------   ----------   ----------   ----------

Totals                                 $1,670         $275            0         $430       $1,515
                                   ----------   ----------   ----------   ----------   ----------
                                   ----------   ----------   ----------   ----------   ----------

Year ended March 31, 1997
Deducted from asset accounts:
  Allowance for doubtful accounts      $1,086         $698            0(A)      $458       $1,326
  Allowance for sales returns             279           65            0            0          344
                                   ----------   ----------   ----------   ----------   ----------

Totals                                 $1,365         $763            0         $458       $1,670
                                   ----------   ----------   ----------   ----------   ----------
                                   ----------   ----------   ----------   ----------   ----------

Year ended March 31, 1996
Deducted from asset accounts:
  Allowance for doubtful accounts        $725         $587            0(A)      $226       $1,086
  Allowance for sales returns             209           70            0            0          279
                                   ----------   ----------   ----------   ----------   ----------

Totals                                   $934         $657          0         $226       $1,365
                                   ----------   ----------   ----------   ----------   ----------
                                   ----------   ----------   ----------   ----------   ----------
</TABLE>

 (A)     Uncollectable accounts written off, net of recoveries

 (B)     Reduction of estimated future sales returns


                                       50
<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 29, 1998.                               

                                                     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/ Robert L. Richmond       Chief Executive Officer and     June 29, 1998
-----------------------      Chairman of the Board
Robert L. Richmond           Principal Executive Officer
                                                    
/s/ Jose S. David             Chief Financial Officer         June 29, 1998
-----------------------       Secretary and Treasurer
Jose S. David                 (Principal Financial and    
                              Accounting Officer)                   

/s/ Tom A. Alberg             Director                        June 29, 1998
-----------------------
Tom A. Alberg                                       
                                                    
/s/ Douglas P. Beighle        Director                        June 29, 1998
-----------------------
Douglas P. Beighle                                  

/s/ Robert C. Greco           Director                        June 29, 1998
-----------------------
Robert C. Greco                                     

/s/ Harold H. Kawaguchi       Director                        June 29, 1998
-----------------------
Harold H. Kawaguchi  

</TABLE>
                                       51