<PAGE>

                   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, 1997    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 13, 1997, as reported by the
Nasdaq Stock Market was $45,224,768.(1)

The number of shares of the registrant's Common Stock outstanding as of 
June 13, 1997, was 4,611,037.

                         DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Proxy Statement relating to the registrant's 1997
Annual Meeting of Stockholders to be held on August 21, 1997, are incorporated
by reference into Part III of this Report.

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

<PAGE>

                                  TABLE OF CONTENTS
PART I                                                                      PAGE
Item 1.  Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
         Industry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
         Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
         Products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
         Sales and Marketing . . . . . . . . . . . . . . . . . . . . . . . . .5
         Product Development . . . . . . . . . . . . . . . . . . . . . . . . .7
         Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
         Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
         Proprietary Rights. . . . . . . . . . . . . . . . . . . . . . . . . .8
         Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Item 2.  Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Item 3.  Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . .9
Item 4.  Submission of Matters to a Vote of Security Holders . . . . . . . . 10
Item 4A. Executive Officers of the Registrant. . . . . . . . . . . . . . . . 10

PART II
Item 5.  Market for Registrant's Common Equity and Related
          Stockholder Matters. . . . . . . . . . . . . . . . . . . . . . . . 11
Item 6.  Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . 12
Item 7.  Management's Discussion and Analysis of 
          Financial Condition and Results of Operations. . . . . . . . . . . 13
Item 8.  Financial Statements and Supplementary Data . . . . . . . . . . . . 19
Item 9.  Changes in and Disagreements with Accountants 
          on Accounting and Financial Disclosure . . . . . . . . . . . . . . 30
PART III
Item 10. Directors and Executive Officers of the Registrant. . . . . . . . . 30
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . 30
Item 12. Security Ownership of Certain Beneficial Owners and Management. . . 30
Item 13. Certain Relationships and Related Transactions. . . . . . . . . . . 30

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

<PAGE>

PART I.

ITEM 1. BUSINESS

Active Voice Corporation (Active Voice or the Company) is a leading manufacturer
of PC-based voice processing systems and computer-telephone integration (CTI)
products, with more than 41,000 installations in over 60 nations worldwide. The
Company's software products enable people to communicate more effectively by
integrating their traditional office telephone systems with PC technologies, the
local area network (LAN), and the Internet to incorporate telephony functions
and provide complete unified messaging and desktop PC-based call handling.

The Company concentrates its efforts on products that are "people-oriented,"
with features that can be easily and readily used without special training or
manuals. The Company's principal products, Repartee, Replay Plus and Replay,
incorporate Active Voice's "1 FOR YES, 2 FOR NO" user dialogue. The Company's
products use standard, open-architecture PC platforms and operating systems,
thereby facilitating the rapid adoption of new PC-based technologies and
reducing overall product costs. Active Voice concentrates its development
efforts on software rather than hardware because it believes product value is
created most efficiently by emphasizing software solutions to meet customer
needs. 

Founded in 1983, the Company was one of the pioneers of PC-based voice
processing and is now a recognized leader in desktop 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 believes is one of its principal competitive advantages.
A central business purpose of the Company is developing software that empowers
people to communicate using telephones, PCs, the LAN, and the Internet, four of
the most fundamental business tools.

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.
Manufacturers of voice processing systems include switch suppliers (such as
Lucent Technologies, Inc., Northern Telecom, Inc. and Siemens Business
Communication Systems, Inc.); independent manufacturers of proprietary systems
(such as Centigram Communications Corporation, Octel Communications Corporation
and Comverse Technology, Inc.); and independent manufacturers of PC-based,
open-architecture systems (such as Active Voice and Applied Voice Technologies,
Inc.). Although sales of the Company's products in 1996 represented only about
5.7% of domestic end-user revenues for voice processing systems, the Company
ranked third behind only Lucent Technologies and Northern Telecom in total
domestic voice processing systems shipped, according to industry statistics.
(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.)

Voice processing has traditionally encompassed various types of computer
assistance to facilitate interaction over the telephone between a caller, one or
more persons, and a computer. The first voice processing systems performed basic
applications, such as voice messaging and call routing. These systems were
generally offered as stand-alone products by different vendors and distributors
and were based on expensive proprietary hardware and software. With the demand
to integrate all the functions of communication technologies, lower product
costs, and reduce the time to market of new products, as well as with the
significant advances being made in PC hardware and software, system developers
have been able to develop open systems-based products that use standard hardware
and software. As a result, voice processing systems now provide extended
functionality enabling telephone users to utilize voice and touchtones to
manipulate calls, interact with computer databases, and access and respond to
messages or data from voice or other electronic media, thereby making internal
and external communications more efficient. The three most common voice
processing features are:

VOICE MAIL -- allows a caller to store voice messages and replies in a computer,
and thereby conduct a dialogue with any person, potentially anywhere in the
world, without having to be on the same line at the same time. Typical voice
mail features include the ability to record, store and delete messages, and to
direct messages to multiple subscribers.

AUTOMATED ATTENDANT -- allows a caller to direct the computer to switch the call
to a telephone extension different from the one dialed, without the manual
intervention of an operator. A typical automated attendant system gives the
caller the option of directing the call to the extension number of a particular
telephone user in the system (subscriber) or particular department, or holding
for a live operator.

INTERACTIVE VOICE RESPONSE (IVR) -- allows a caller to obtain requested
information in voice form from a local or non-local database. Examples of IVR
range from simply selecting announcements from a list of options stored in the
computer (also known as AUDIOTEXT) to more complex interactive exchanges such as
querying a database for information. 

These basic voice processing functions offer people integrated and simplified
access to various types of communications and 


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information through the traditional telephone system. Over the past decade,
there has been a proliferation of new methods of business communication, such as
facsimile (fax) and electronic mail (e-mail). At the same time, it has become
easier to access communications through pagers, cellular phones and portable
computers with communications capability. As a result, voice processing systems
can now access and interact with a broad variety of communications sources to
offer unified messaging. For example, text-to-speech and other voice processing
technologies permit a subscriber to hear or send e-mail through touchtones or
voice recognition. In addition, integration of telephone-based communications
with the LAN (also known as the Intranet) and the Internet allow people to
manage their telephone no matter where they are. Today the telecommunications
industry is delivering a wide array of CTI products (the merging of data
networks and telephones), dramatically increasing connectivity among the various
means of electronic communication and improving the way people communicate and
the way they work.

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 in its servers and PCs, an organization's
people and customers can communicate anywhere in 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 most convenient and preferred.

The Company's strategy is to develop friendly, easy-to-use, PC-based voice
processing systems. Since the early 1990's, the Company has also focused on CTI
products that offer integrated access to a broad range of communications with
other people and information sources. The Company's strategy is built around
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 rather than
    proprietary computer hardware and operating systems. As a result, the
    Company can rapidly adopt new PC-based technologies and thereby capitalize
    on the substantial expenditures made by third parties who 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 each subscriber, for the system manager and for
    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, a new user need only know the Company's "1 FOR YES, 2 FOR NO"
    user dialogue to begin immediate use of all features. Other examples of
    this product philosophy are the Company's voice mail prompts that encourage
    conversation between callers and subscribers, and its simplified
    installation screens and menus, which allow automatic configuration to over
    120 different PBX, key system and Centrex switches and enable the system
    manager to tailor features to subscriber needs.

-   MINIMIZE DISTRIBUTION OVERHEAD. The Company achieves broad market coverage
    for its products domestically and internationally, without the use of a
    direct sales force, primarily through a nationwide network of more than 700
    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 distribution structure
    enables the Company to limit its selling expense overhead, focus its
    resources on product development, leverage the efforts of its regional
    sales team, pool combined strengths and resources in technology and
    increase exposure to the substantial installed customer bases of these
    organizations. Together, these groups enable the Company to reach a new and
    broader customer base.

-   FOCUS ON SMALL- TO MEDIUM-SIZED OFFICES THROUGH THE DEALER CHANNEL; LARGER
    OFFICES THROUGH THE STRATEGIC PARTNERS. The Company's products are designed
    for use by businesses and offices in a wide range of enterprises, including
    manufacturing, retail, service, health-care, governmental and institutional
    settings. 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.  Recently, the Company is also entering the larger end-user
    market through its relationships with new strategic partners. The Company
    believes its new strategic relationships will play a significant role in
    its strategy to increase market share, as well as provide opportunities for
    the Company to have greater presence in the larger end-user market -- a new 
    market for the Company.

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PRODUCTS

The Company has three traditional voice processing products. Its first product,
Repartee, which was introduced in 1986, accounted for 25% of the Company's
revenues in fiscal 1997. In 1991, the Company introduced its most affordable
product, Replay, to segment its target market and appeal to more
price-sensitive, smaller enterprises. Replay accounted for 22% of the Company's
fiscal 1997 revenues. This was followed in 1992 by the introduction of Replay
Plus, which was positioned between Repartee and Replay in terms of price point,
features and capacity. Replay Plus accounted for 36% of the Company's revenues
in fiscal 1997. All of these products offer voice mail, automated attendant,
audiotext and fax mail features, and require the assistance of a dealer or other
trained installer to configure them to the end-user's telephone switch and set
up initial greetings, schedules and other subscriber features. In 1992, the
Company introduced TeLANophy, its CTI product offering that has redefined
business communication. The Company also offers vertical market applications,
switch integrations, fax products, replacement hardware and other miscellaneous
items. The remaining 17% of the Company's fiscal 1997 revenues was comprised of
TeLANophy and the miscellaneous products listed above.

Each of the Company's voice processing products includes 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. The
Company has developed software that enables most of its products to be
integrated with over 120 different PBX, key system and Centrex telephone
switching systems, which the Company believes represent approximately 90% of the
installed switches in the United States.

All of the Company's software is written to standard PC hardware and operating
system architecture. Repartee and Replay Plus also conform to Audio Messaging
Interchange Specification (AMIS) networking standards. Replay and Replay Plus
currently operate on the Microsoft DOS operating system, while Repartee runs on
IBM's OS/2 operating system. The Company is in the process of developing
products to run on the Microsoft Windows NT operating system and is currently
designing a native NT application for a new OEM.

Traditional voice processing products:

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 annotate verbally, collect and store faxes), fax-on-demand (the ability to
request that a certain fax be sent to the caller), call screening, e-mail
messaging using text-to-speech conversion, multi-office networking and easy
message access. Repartee integrates exclusively with the Company's CTI products
to provide unified messaging and complete call control capabilities. The
Company's Hospitality package is available on the Repartee platform. Repartee
includes a computer screen and keyboard that the installer or system manager can
utilize to tailor features to subscriber needs.

In March 1996, the Company released the 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.

REPLAY PLUS -- a mid-priced product that offers most of the features available
on Repartee. Replay Plus is also a popular platform for the Company's
Hospitality package. Replay Plus includes an HTML-based (hypertext markup
language) administrative interface which allows for easier localization and
customization.

REPLAY -- a simple "plug and play" voice processing product intended for small
office settings. Its features are correspondingly reduced, which makes
configuration and installation much simpler. Replay does not require a computer
screen or keyboard, and most of the installation is performed by the end-user.
Replay can be integrated with many telephone switches commonly found in small
office settings. The Company's HTML-based interface has been made available in
Replay for international customers.

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<PAGE>

Certain performance and other characteristics of the Company's principal
products are set forth in the following table:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
 PRODUCT           CURRENT   MAXIMUM             NUMBER OF      HOURS OF            TYPICAL RETAIL
                   VERSION   SUBSCRIBERS (1)     PORTS (2)      MESSAGE STORAGE     PRICE RANGE (3)
-----------------------------------------------------------------------------------------------------
<S>                <C>       <C>                  <C>           <C>                  <C>
 Repartee . . . . . 7.4         Unlimited         4 to 60        85 to 585           $12,000-$150,000
 Replay Plus. . . . 6.7         1,000             2 to 16        85                  $ 7,300-$ 18,000
 Replay . . . . . . 2.5/3.0       100             2 to 6         45                   $ 3,500-$ 5,800
-----------------------------------------------------------------------------------------------------
</TABLE>

(1) Based on the Company's current suggested usage assumptions. The number of
subscribers actually supported may be more or less depending upon specific
customer usage. The Company's products can be upgraded on site, by increasing
the number of ports and disk drive capacity, to accommodate more subscribers up
to the limits shown.

(2) Ports are physical connections of the product to telephone lines. The
number of ports determines the maximum number of telephone calls that can be
managed simultaneously by the voice processing system.

(3) Ranges shown are the Company's estimates based on its observations of
prices commonly quoted by members of its dealer network, exclusive of
maintenance. Prices vary depending upon the size and features of the system
purchased. Additional charges may be added for certain switch integrations.

CTI products: 

TELANOPHY -- a suite of CTI products that includes client software installed at
the desktop PC and a voice processing server attached to the LAN. Together, they
offer Repartee subscribers: (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
remotely. TeLANophy allows the user to utilize the PC mouse and keyboard to
perform all the functions normally done on the telephone keypad. ViewCall,
ViewCall Plus, ViewMail, ViewMail for Microsoft Messaging, Message Integration
for Novell GroupWise, ViewFax, and E-Mail Integration are modules of TeLANophy.
Approximately one-half of all Repartee systems sold by the Company during fiscal
1997 included one or more TeLANophy modules.

-   VIEWCALL -- a call control module for TeLANophy. With ViewCall the user can
    see incoming calls on the PC screen and manage multiple calls as they
    arrive. When Repartee routes a call to an extension, ViewCall instantly
    displays information about the call on the desktop. ViewCall alerts
    subscribers with visual and audio cues and opens the call window. Users
    have the power to take the call, ask the caller to hold, take a message or
    transfer calls to a different extension. ViewCall's monitor feature allows
    the user to listen to a voice message as it is being recorded by the caller
    and if desired, retrieve the call from voice mail. ViewCall does not just
    display calls; it collects data about the call and identifies callers. With
    this information, ViewCall can retrieve records from Personal Information
    Managers (PIMs) and display them on screen automatically before the call is
    answered.

-   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, and, 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 all the benefits of true unified messaging. VMM provides one
    point access for voice, fax and e-mail messages. 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 a an e-mail
    address (even if the recipient does not have a voice mail system) and
    download voice and fax messages and work with them off line. VMM also has
    all the easy-to-use features of ViewMail, making it faster and easier to
    listen and reply to messages than using touchtones on the telephone.

-   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 voice and fax messages in one mailbox
    that can be accessed by telephone or desktop PC. Repartee 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 


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    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 two-way access to e-mail without a
    laptop or modem connection. When users check their universal mailbox, the
    E-Mail Notify/Delivery module includes e-mail with voice and fax messages.
    Information is provided about each message so they can be quickly
    prioritized. The software also provides the option of forwarding e-mail to
    the nearest fax machine. 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.

-   VIEWFAX -- gives a user complete fax handling capabilities. ViewFax also
    enables the user to redirect faxes to other subscribers, managing inbound
    and outbound faxes from any networked PC. ViewFax works with the Active Fax
    module to notify the user, via telephone, when new faxes arrive, and it
    also works with the ViewMail module to show the status of inbound and
    outbound faxes. 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 their desktop.

PHONEMAX -- is the Company's first stand alone CTI software product. It provides
the power of TeLANophy's ViewCall Plus on a stand-alone PC without a voice
processing system and without a LAN. It can be used in any size business, by any
number of people, with a TAPI or TSAPI compliant telephone system. The Company
recently announced a new version of PhoneMax with Visual Basic-based scripting
capabilities. This gives Active Voice the ability to use PhoneBASIC, an enhanced
Visual Basic scripting engine, to link PhoneMax with other desktop applications
such as Microsoft Access, Word and Excel. Because PhoneBASIC supports Object
Linking and Embedding (OLE) drag-and-drop, OLE automation, and Open Database
Connectivity (ODBC), PhoneMax can be configured for virtually any application. 

Other Products and Features: 

ACTIVE FAX gives users of Repartee and Replay Plus complete 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.
Taking advantage of its core product technology, the Company has also developed
a specialized vertical market application for the lodging and hospitality
industry. The Company's HOSPITALITY PACKAGE provides hotel guests with easy,
timely and accurate messaging that is available in several multilingual guest
conversation modules. It increases the efficiency of the hotel office staff by
providing unified messaging and on-screen call management. In the future, the
Company may develop similar applications for other vertical markets. Other
optional features for the Company's products, such as tape backup, disk
redundancy and tool kits, are also 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.

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, 


                                          5
<PAGE>

India, the Netherlands and the United Kingdom and has distribution relationships
with dealers, distributors or OEMs in 42 other foreign countries.

The Company's marketing effort is focused on small- to medium-sized businesses,
as well as small or local offices of larger companies. In international markets,
the Company has been experiencing a demand for larger systems, and therefore has
had to expand its marketing and sales efforts to meet these demands. The
Company's products are utilized by a broad variety of enterprises in
manufacturing, retail, service, health-care, governmental and institutional
settings. The Company markets its products principally by attending trade shows
and advertising in periodicals oriented toward dealers and end users.

Domestic Dealer Network

The Company's domestic dealer network consists of more than 700 independent
telephone system dealers in the United States and Canada. A typical dealer for
the Company's products is a small business operator who primarily sells
telephone systems to small- and medium-sized businesses and relies upon the
Company's products to augment such sales. Most dealers also handle competing
voice processing products. The Company attempts to maintain relationships with a
large number of dealers and, because of the potential for dealer turnover,
considers it advantageous not to become overly dependent upon a few dealers. 

The Company believes that the loyalty of its dealers is dependent upon
maintaining and enhancing the value inherent in its products and the quality of
its dealer support. Dealers are required 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. The sale and installation of
TeLANophy requires both telephony and computer networking expertise. The greater
technical complexity of these products requires a level of PC and LAN technical
knowledge and support capability that only a small portion of independent
telephone system dealers presently have. The Company maintains a staff of
technical and sales support personnel who are available to assist dealers, free
of charge. 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.

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 provide installation and post-sale customer
service, and often sell maintenance contracts along with the Company's products.
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.

Original Equipment Manufacturers (OEMs)

The second major channel of distributing the Company's products is through
domestic and international OEMs, also known as strategic partners, who are
typically manufacturers of telephone systems, including NEC Corporation and its
wholly owned subsidiaries, Siemens Business Communication Systems, Inc.,
Executone Information Systems, Inc., Comdial Corporation, Tadiran
Telecommunications, Ltd., Harris Corporation, Phillips Communication Systems,
B.V., Crane Telecommunications, Ltd. and Grupo Delta Delta Telecom. The Company
has had long term relationships with a number of these manufacturers, and
believes that its OEM relationships enable it to develop up-to-date switch
integrations, with broader features for the OEM's switches, to combine strengths
in technology, sales and support 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. OEM contracts typically have a term of one or more years and provide
for volume discounts and initial or minimum sales volumes.

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 necessary 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. Because VARs offer industry and technical solutions and
provide both LAN and software expertise, they have the ability to assist the
Company in selling and distributing its products to a new and much broader
audience.

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. Although there are several foreign manufacturers of
PC-based and proprietary voice processing systems, foreign markets are generally
not as competitive as the U.S. market.  Competition has increased over the last
few years, 


                                          6
<PAGE>

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 three to five 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. The Company,
however, believes that 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.

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. However, in the last few
years, the Company has increased its research and development efforts to
localize its core products. The Company's 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 the 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 support to its dealers and OEM
customers, at no additional cost to them. The Company maintains a technical
support staff, devoted to dealer and OEM support. Technical support is available
on a toll-free basis 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, permitting product returns, without charge, if
within 30 days. Although the Company 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 principally through the development of new software
products and enhancements to its existing products, with very little effort or
expense devoted to hardware development or modification. 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.

The Company's product development efforts are performed by three engineering
groups. The Enterprise/Server Products group, which has recently merged with the
Desktop/Client Products group because of the inter-related focus on
client/server development, responds to the needs of the high end product
offering, Repartee and TeLANophy, as well as switch integrations and vertical
market applications. The Small Business Systems group works on solutions for
that segment, specifically Replay and Replay Plus. 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.

Voice processing systems are often considered "mission critical" 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. A separate staff of engineers is devoted to
product testing and quality assurance. 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.


                                          7
<PAGE>

The Company's products incorporate a number of commercially available
application cards, fax boards, voice boards and other circuitboards that enable
integrations with certain telephone switches. Voice boards are available in
quantity from very few domestic suppliers. Until recently, 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 has begun offering products that incorporate voice boards
manufactured by Bicom, Inc., an alternate supplier. 

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 Northern Telecom in total domestic voice messaging systems
shipped in 1996, according to industry statistics.

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. The Company anticipates intensified
competition from larger companies having substantially greater technical,
financial and marketing resources than the Company, as well as larger customer
bases and greater name recognition than the Company. In the domestic dealer
channel of distribution, 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. In the OEM channel, product pricing is important but other factors such
as product quality and reliability, ease of use and OEM 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, Northern
Telecom Limited, Fujitsu Business Communications and Toshiba America Information
Systems, Inc.), and sell the systems along with their PBXs. Telephone equipment
manufactures have the benefit of the large installed-base of their own switches,
and by doing this, 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
manufactures whose products integrate with multi-telephone systems and either
are based on proprietary hardware (for example: Centigram Communications
Corporation, Comverse Technology, Inc. and Octel Communications Corporation), 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 its rich product features and ease of
use, dynamic system applications and capabilities, including leading edge CTI
applications, as well as its strong dealer and OEM networks and 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.

PROPRIETARY RIGHTS

The Company currently holds nine 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; and (7) a method and apparatus for monitoring a caller's name
while using a telephone. 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 


                                          8
<PAGE>

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 and
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 recently initiated actions to enforce certain patent rights
against third parties. To date, the Company has obtained three non-exclusive,
non-transferable licenses under its stutter detect patent. The Company does not
believe that the licenses it obtains will have a material effect on its
financial condition; nevertheless it is 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 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 itself had received claims of patent infringement from several parties,
including certain competitors, such as Dytel Corporation (a subsidiary of
Syntellect Inc.) and VMX, Inc., (a subsidiary of Octel Communications
Corporation), both of whom have since licensed patented technology to the
Company. Although the Company's investigation of some of these 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 valid patents of any of such
claimants. In response to 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. 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.

Active Voice, Repartee, Replay, TeLANophy, ViewMail, ViewCall, PhoneMax
PhoneBasic and Resource are registered trademarks, and Replay Plus, ViewCall
Plus, ViewFax, E-Mail Reader, and ActiveNet 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, 1997, the Company had 221 full-time employees, including 24 in
finance and administration, 20 in manufacturing, 70 in engineering, product
development, and quality assurance, and 107 in sales, marketing and technical
support, as well as 26 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, 1997, Pronexus, Inc. had 18 full-time employees, including 1 in
finance, 1 in manufacturing, 9 in engineering and product development, 7 in
sales, marketing and technical support, 1 part-time employee, as well as 3
contractors.

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 and the United Kingdom
are located in leased facilities under leases expiring in August 1997 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 6 of Notes to Consolidated Financial Statements.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any material pending legal proceedings.


                                          9
<PAGE>

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:

 NAME                        AGE  POSITION
--------------------------------------------------------------------------------
 Robert L. Richmond          46   Chief Executive Officer and 
                                  Chairman of the Board
 Frank J. Costa              43   Chief Operating Officer and President
 Robert C. Greco             42   Chief Technology Officer,
                                  Secretary, Treasurer and Director
 Jose S. David               40   Chief Financial Officer
 Edward F. Masters           38   Vice President - Product Development
 Douglass S. Anderson        47   Vice President - Sales and Marketing
--------------------------------------------------------------------------------

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. Prior to joining Active Voice, 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.  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. 

Robert C. Greco, a co-founder of the Company, has been a director of the Company
since its inception in 1983 and was named Chief Technology Officer in December
1996. From 1983 to 1996, Mr. Greco served as Vice President - Product
Development of the Company. From 1977 to 1983, Mr. Greco worked as an
independent software consultant for such firms as The Boeing Company,
Scandinavian Airlines System (Denmark) and General Electric Company. Mr. Greco
holds a Bachelor of Arts, Mathematics, from City University of New York , and a
Masters of Science, General Systems Science, from the State University of New
York. Mr. Greco was a director of the Washington Software Association from 1992
to 1994.

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, 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.

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 and a
Project Engineer at Flow Systems. Mr. Masters holds a Bachelor of Science in
Industrial Technology from Western Washington University and a Masters of
Business Administration from Seattle University.

Douglass S. Anderson joined the Company in 1989 as National Sales Manager and
was appointed Vice President--Sales and Marketing 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.

                                          10
<PAGE>

PART II.

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

QUARTERLY FINANCIAL DATA AND MARKET INFORMATION (UNAUDITED)
 


<TABLE>
<CAPTION>
                                            First       Second        Third       Fourth
Year ended March 31, 1997                 Quarter      Quarter      Quarter      Quarter
------------------------------------------------------------------------------------------------
                                                (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 
<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
Research and development expense            1,559        1,650        1,743        1,805
Sales and marketing expense                 3,113        3,168        3,289        3,731
General and administrative expense          1,050        1,130        1,159        1,045
Non-recurring charge for purchased,
  in-process research and development
  related to the Pronexus acquisition                                              1,769
Operating income (loss)                       937        1,155        1,501       (1,024)
Net income (loss)                             771          912        1,159       (1,091)
Net income (loss) per common share       $   0.17     $   0.20     $   0.25     $  (0.24)
Shares used in per share calculations       4,628        4,620        4,643        4,602

Stock price range
  High                                   $  16.50     $  13.75     $  15.00     $  15.63
  Low                                    $  10.63     $   9.50     $  11.00     $  10.00

<CAPTION>
                                            First       Second        Third      Fourth 
Year ended March 31, 1996                 Quarter      Quarter      Quarter     Quarter 
------------------------------------------------------------------------------------------
                                               (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 
<S>                                      <C>          <C>          <C>          <C>     

Net sales                                 $10,407      $11,292      $12,437      $11,002
Gross profit                                6,606        7,221        7,714        6,579
Research and development expense            1,232        1,322        1,462        1,690
Sales and marketing expense                 2,486        2,720        3,094        3,191
General and administrative expense            957        1,127        1,093          875
Operating income                            1,931        2,053        2,066          821
Net income                                  1,428        1,522        1,543          669
Net income per common share               $  0.31      $  0.33      $  0.33      $  0.14
Shares used in per share calculations       4,629        4,654        4,652        4,639

Stock price range
  High                                   $  29.50     $  33.00     $  30.50     $  28.50
  Low                                    $  24.50     $  25.75     $  24.25     $  11.00

</TABLE>
 
--------------------------------------------------------------------------------
The stock price range reflects the range of trading prices for each period, as
reported by the Nasdaq Stock Market. 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, 1997, there were approximately 100 stockholders
of record and approximately 3,000 beneficial owners of the Company's common
stock.

                                          11
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
 YEAR ENDED MARCH 31,                     1997 (1)       1996         1995         1994         1993
--------------------------------------------------------------------------------------------------------
                                                (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                      <C>          <C>         <C>          <C>            <C>
 STATEMENT OF INCOME DATA
 Net sales                                $49,515      $45,138      $36,950      $28,121      $18,548
 Operating income                           2,569        6,871        6,845        4,984        2,187
 Net income                                 1,751        5,162        5,110        3,579        1,587
 Net income per common share              $  0.38      $  1.11      $  1.11      $  0.88      $  0.42
 Average number of common and dilutive
 common equivalent shares outstanding       4,623        4,644        4,603       4,062         3,778
 
 BALANCE SHEET DATA
 Working capital                          $22,489      $20,912      $12,147      $10,409     $  6,220
 Total assets                              38,941       37,400       28,698       25,411       10,768
 Total debt                                     0            0            0            0            0
 Series A Convertible preferred stock           0            0            0            0        3,965
 Total stockholders' equity               $34,084      $31,797      $25,450      $20,944     $  3,404
--------------------------------------------------------------------------------------------------------
</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. which reduced earnings per share by $0.38.


                                          12
<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 and
computer resellers. The Company markets three principal products: Repartee,
Replay Plus and Replay. Repartee, the Company's flagship and most feature-rich
product, offers the largest call handling capacity. 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.

Certain statements in this 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, and various business environment and trend projections. Actual
future results and trends may differ materially depending on a variety of
factors, including, but not limited to, the risks discussed in documents filed
by the Company with the Securities and Exchange Commission. Investors are
encouraged to consider the risks detailed in those filings. The Company assumes
no obligation to release publicly any changes to these "forward looking
statements" that may arise from the development of unanticipated events or
circumstances that occur after the date of the original projection. (Refer to
the section entitled "Factors Affecting Future Operating Results" for a further
discussion on some of the involved risks and uncertainties.)

Results of Operations

NET SALES
--------------------------------------------------------------------------------
                   1997         Change       1996         Change       1995
--------------------------------------------------------------------------------
(Dollars in thousands)

Net sales          $49,515      9.7%         $45,138      22.2%        $36,950
--------------------------------------------------------------------------------

Fiscal 1997 Compared to Fiscal 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 contributes the
largest percentage of the Company's total net sales. A majority of the decrease
in unit sales of Replay Plus is attributable to a large one-time sale (refer to
"Gross Profit--Fiscal 1996 compared to Fiscal 1995") to a new customer in the
prior fiscal year and the absence of such a sale in the current year. During the
year ended March 31, 1997, the Company added approximately 260 new dealers to
its domestic distribution channel with essentially no growth in sales personnel,
thus leveraging its domestic sales force.

Net sales to original equipment manufacturers (OEMs) increased by 46.4% during
the year ended March 31, 1997. Net sales to OEM 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 OEM channel was principally attributable to approximately 315% and 280%
increases in unit sales of Replay and Replay Plus, respectively, due to the
successful introduction of new products for OEM 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 (refer to "Fiscal 1996 compared
to Fiscal 1995"). 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 exclusively by Siemens. As of March 31, 1997, the Company
had six domestic OEM relationships. The largest OEM customer accounted for
approximately 48% of total OEM 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. Beyond the usual risks
associated with foreign 


                                          13
<PAGE>

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.

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

Fiscal 1996 Compared to Fiscal 1995

Net sales to the Company's domestic dealer network increased 17.0% during the
year ended March 31, 1996, reflecting continued increased customer demand for
PC-based voice processing systems. Net sales to the domestic dealer network
represented 73.3% and 76.5% of total net sales in the years ended March 31, 1996
and 1995, respectively. Of the aggregate increase in net sales to the domestic
dealer channel, approximately 30% was attributable to increased unit sales of
Replay, partially offset by lower average selling prices of the systems (during
the third quarter of fiscal 1996, the Company announced a 25% reduction in the
selling price of the Replay product line.) In addition, approximately 25% of the
aggregate increase in net sales to the domestic dealer network was attributable
to increased unit sales of Replay Plus systems, and approximately 25% was
attributable to increased sales of TeLANophy software, hospitality and fax
products and switch integration packages. During the year ended March 31, 1996,
the Company added approximately 170 new dealers to its domestic distribution
channel and expanded its domestic sales force by approximately 10% to support
them.

Net sales to original equipment manufacturers (OEMs) increased by 24.3% during
the year ended March 31, 1996. Net sales to OEM customers represented 12.5% of
total net sales for the year ended March 31, 1996, compared to 12.3% of total
net sales for the year ended March 31, 1995. The aggregate increase in net sales
in the OEM channel was principally attributable to an approximately 300%
increase in unit sales of Replay, primarily to a single new OEM customer. The
increase in unit sales of Replay was partially offset by a decline in unit sales
of Repartee kits, particularly during the fourth quarter of fiscal 1996, as the
Company's largest OEM customer, Comdial, purchased the manufacturer of a
competing product line. As of March 31, 1996, the Company had six domestic OEM
relationships. The largest OEM customer accounted for approximately 43% of total
OEM sales, and approximately 5% of total Company sales during fiscal 1996, which
declined from prior year amounts.

Net sales to international customers increased by 55.1% during the year ended
March 31, 1996, reflecting increased penetration of international voice mail
markets and the successful launch of new products for international OEM
customers. International sales represented 14.2% of total net sales for the year
ended March 31, 1996, compared to 11.2% of total net sales for the prior year.
Approximately 50% of the aggregate increase was due to increased unit sales of
Replay Plus. An additional 15% of the aggregate increase in net sales to
international customers was attributable to Repartee kits, due to both increased
unit sales and a shift to larger average port sizes. During fiscal 1996, the
Company significantly expanded its UK operations and signed an agreement with
Crane Telecommunications Ltd. to provide a fully integrated voice processing
system for the growing British market. In January 1996, the Company announced an
OEM agreement with Grupo Delta of Mexico whereby the entire line of Active Voice
products will be marketed under the Grupo Delta label. Beyond the usual risks
associated with foreign 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.

GROSS PROFIT 
--------------------------------------------------------------------------------
                        1997        Change      1996        Change      1995
--------------------------------------------------------------------------------
(Dollars in thousands)
Gross profit            $28,780      2.3%       $28,120     17.1%       $24,011 
Percentage of 
  net sales              58.1%                   62.3%                   65.0%
--------------------------------------------------------------------------------

The Company's gross margin varies in part depending upon the mix of
higher-margin voice board-and-software kit sales (offered in all sales channels)
and software-only sales (available only to OEM customers) 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 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 OEM 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 OEM customers. Lower
unit sales of Repartee kits in the OEM channel, primarily to a single OEM
customer also contributed to the decline 


                                          14
<PAGE>

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. 

Fiscal 1996 Compared to Fiscal 1995

The most significant factor contributing to the decline in gross margin between
fiscal 1996 and 1995 was a shift in the sales mix to the lower margin Replay
product line. 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. During the third quarter of fiscal 1996, the
Company made a large one-time sale to a new customer which was replacing
unsatisfactory competing products at its own end-user sites. The sale was
competitively priced to introduce Active Voice products to the new customer and
encourage a long-term relationship. The competitive pricing also contributed to
the decline in gross margin. Other factors leading to the decrease in gross
margin were a reduction in unit sales of OEM kits, as discussed under "Net
Sales", price promotion on the TeLANophy product line and usage of higher
quality PC platforms with increased memory capacity. Offsetting the decline in
gross margin was 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
--------------------------------------------------------------------------------
                        1997        Change      1996        Change      1995
--------------------------------------------------------------------------------
(Dollars in thousands)

Research and 
  development           $6,757      18.4%       $5,706      30.8%       $4,363 
Percentage of 
  net sales              13.6%                   12.6%                   11.8%
--------------------------------------------------------------------------------

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 OEM customers and 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 Exchange 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.

The Company believes that the international market for voice processing
equipment has significant growth opportunities, but that localization of
products will be necessary in order to successfully penetrate this market. The
Company continues to allocate significant resources to the development of
products for the international market. The Company also believes that in order
to remain competitive in a rapidly changing technological environment, it will
continue to be necessary to allocate significant resources to the development of
new products.  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 1996 Compared to Fiscal 1995

The increase in research and development expenses, both in dollar amount and as
a percentage of net sales between comparable periods, was primarily attributable
to an increase of approximately 25% in engineering and development personnel.
The increase in personnel was primarily due to the Company's effort to localize
products for new international markets, as well as customization of products for
new OEM customers, and increasing emphasis on developing new products,
particularly CTI-related products. During fiscal 1996, the Company announced
several significant product releases including a new fault-tolerant Large System
Platform (LSP) with hot-swappable components and the ability to handle up to 60
ports of voice processing; E-Mail Integration which provides access to e-mail
messages by telephone and fax; and PhoneMax which provides incoming and outgoing
call management and the ability to set up conference calls using the drag and
drop features of a Windows-based desktop PC.

SALES AND MARKETING
--------------------------------------------------------------------------------
                        1997        Change      1996        Change      1995
--------------------------------------------------------------------------------
(Dollars in thousands)
Sales and 
  marketing             $13,301     15.8%       $11,491     25.7%       $9,142 
Percentage of 
  net sales               26.9%                   25.5%                  24.7%
--------------------------------------------------------------------------------

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 


                                          15
<PAGE>

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.

Fiscal 1996 Compared to Fiscal 1995

Approximately 45% of the aggregate increase in sales and marketing expenses was
due to increased compensation-related expenses associated with approximately 25%
growth in sales and marketing personnel and increased commission expense due to
higher sales levels. Of the total increase in sales and marketing personnel,
approximately one-half represented additional international and domestic sales
representatives and approximately one-half represented additional support
personnel directly associated with service to the Company's growing base of
independent dealers. An additional 20% of the aggregate increase in sales and
marketing expenses was attributable to added promotional and advertising costs,
including trade show-related expenses and associated travel costs. Sales and
marketing expense as a percentage of net sales increased during fiscal 1996 as
growth in personnel exceeded growth in net sales due to lower than anticipated
revenues in the fourth quarter.

GENERAL AND ADMINISTRATIVE
--------------------------------------------------------------------------------
                        1997        Change      1996        Change      1995
--------------------------------------------------------------------------------
(Dollars in thousands)

General and 
  administrative        $4,384      8.2%        $4,052      10.7%       $3,661 
Percentage of 
  net sales               8.9%                    9.0%                    9.9%
--------------------------------------------------------------------------------

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.

Fiscal 1996 Compared to Fiscal 1995

Of the aggregate increase in general and administrative expenses during the year
ended March 31, 1996, approximately 70% was attributable to higher compensation-
related expenses due to an approximate 25% increase in administrative personnel.
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 11 of Notes to
Consolidated Financial Statements.

INTEREST INCOME
--------------------------------------------------------------------------------
                        1997        Change      1996        Change      1995
--------------------------------------------------------------------------------
(Dollars in thousands)

Interest income         $745        6.3%        $701        31.3%       $534 
--------------------------------------------------------------------------------

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.

Fiscal 1996 Compared to Fiscal 1995

Interest income increased during fiscal 1996 primarily due to higher average
cash and marketable securities balances and to a lesser extent, higher average
yields earned on investments. The increase in cash and marketable securities
balances was due to positive cash flow generated from operations.

INCOME TAX PROVISION
--------------------------------------------------------------------------------
                        1997        Change      1996        Change      1995
--------------------------------------------------------------------------------
(Dollars in thousands)

Income tax 
  provision             $1,587      (34.1%)     $2,410      6.2%        $2,269 
Effective tax rate       47.9%                   31.8%                   30.8%
--------------------------------------------------------------------------------

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


                                          16
<PAGE>

authorities as its operations continue to expand into new geographical areas.

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.

Fiscal 1996 Compared to Fiscal 1995

The Company's effective tax rate for fiscal 1996 increased to 31.8% from 30.8%
in fiscal 1995. The increase in the effective tax rate was primarily
attributable to the expiration of the research and development tax credit in
June 1995, partially offset by increased tax exempt income from municipal
securities.

NET INCOME AND NET INCOME PER COMMON SHARE
--------------------------------------------------------------------------------
                        1997        Change      1996        Change      1995
--------------------------------------------------------------------------------
(Dollars in thousands, except per share data)

Net income              $1,751      (66.1%)     $5,162      1.0%        $5,110 
Percentage of 
  net sales               3.5%                   11.4%                   13.8%
Net income per 
  common share           $0.38      (65.8%)      $1.11      0.0%         $1.11 
--------------------------------------------------------------------------------

Fiscal 1997 Compared to Fiscal 1996

The decreases in net income and net income per common 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 aquisition, 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 common equivalent shares
outstanding during the two periods were comparable.

Fiscal 1996 Compared to Fiscal 1995

Net Income and net income per common share for the year ended March 31, 1996
remained essentially even with the prior year despite a 22% increase in net
sales. The decline in net income as a percentage of net sales was primarily
attributable to lower than anticipated revenues in the fourth quarter, as
previously discussed, coupled with a 2.7% decline in gross margin and gradually
increasing operating expenses during fiscal 1996.

Liquidity and Capital Resources

The Company's cash, cash equivalents, and marketable securities decreased to
$15.3 million, or 39.3% of total assets, at March 31, 1997 from $19.1 million,
or 51.0% of total assets, at March 31, 1996. Approximately one-half of the
decrease in cash and marketable security balances was attributable to the $1.9
million paid in conjunction with the Pronexus transaction. The Company had net
working capital of $22.5 million at March 31, 1997.

Accounts receivable, net of allowances, increased to $10.4 million at March 31,
1997 from $8.6 million at March 31, 1996, due to higher sales levels and an
approximate increase of 15% in days sales outstanding. Inventory levels
increased to $7.0 million at March 31, 1997 from $5.5 million at March 31, 1996
to meet the increasing raw material stocking requirements due to a growing sales
base and an increased number of available hardware platform options.

The Company made $1.3 million in capital expenditures during fiscal 1997,
compared to $1.1 million during fiscal 1996. The majority of the capital
expenditures during fiscal 1997 consisted of computer equipment and related
hardware for new employees, and expansion of the Company's research
laboratories. The Company currently has no specific commitments with respect to
additional capital expenditures during fiscal 1998, but expects to spend an
aggregate of approximately $1.5 million for the year.

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. The shares are to be
repurchased in the open market.

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.

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.

-   Increasing price competition in the Company's marketplace could influence
    the timing and amount of change in the 


                                          17
<PAGE>

    Company's prices to its customers, and therefore significantly influence
    the Company's operating position.

-   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.

-   Gross margins may continue to decline as a result of price competition and
    may 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.

-   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.

-   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.

-   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.

-   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 may significantly affect
    the company's operating results.

-   Increasing international sales may require notable increases in development
    spending associated with localization of products.

                                          18
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                               ACTIVE VOICE CORPORATION

                          CONSOLIDATED STATEMENTS OF INCOME

                 (In thousands, except shares and per share amounts)
 

<TABLE>
<CAPTION>
                                                                  Year Ended March 31,
                                                    -------------------------------------------
                                                            1997           1996           1995
-------------------------------------------------------------------------------------------------
<S>                                                     <C>            <C>            <C>     

Net sales                                                $49,515        $45,138        $36,950
Cost of goods sold                                        20,735         17,018         12,939
-------------------------------------------------------------------------------------------------
Gross profit                                              28,780         28,120         24,011

Operating expenses:
    Research and development                               6,757          5,706          4,363
    Sales and marketing                                   13,301         11,491          9,142
    General and administrative                             4,384          4,052          3,661
    Non-recurring charge for purchased, in-process
      research and development                             1,769
-------------------------------------------------------------------------------------------------
    Total operating expenses                              26,211         21,249         17,166
-------------------------------------------------------------------------------------------------
Operating income                                           2,569          6,871          6,845

Interest income                                              745            701            534
-------------------------------------------------------------------------------------------------
Income before income taxes and 
    minority interest                                      3,314          7,572          7,378

Income tax provision                                      (1,587)        (2,410)        (2,269)
Minority interest in loss of 
    consolidated subsidiary                                   24
-------------------------------------------------------------------------------------------------

Net income                                              $  1,751       $  5,162       $  5,110
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------

Net income per common share                                $0.38          $1.11          $1.11
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------

Average number of common and
    dilutive common equivalent shares
    outstanding                                        4,623,140      4,643,744      4,603,461
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
</TABLE>
 

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

                                          19
<PAGE>

                               ACTIVE VOICE CORPORATION

                             CONSOLIDATED BALANCE SHEETS

                            (In thousands, except shares)

<TABLE>
<CAPTION>

                                                                                March 31,
                                                                        -------------------------
                                                                           1997           1996
-------------------------------------------------------------------------------------------------
<S>                                                                  <C>            <C>       
ASSETS

Current assets:
    Cash and cash equivalents                                          $  1,542       $  3,390
    Marketable securities                                                 6,223          7,217
    Accounts receivable, less allowances of $1,670
     ($1,365 in 1996)                                                    10,410          8,628
    Inventories                                                           7,009          5,483
    Deferred tax asset                                                    1,008          1,023
    Prepaid expenses and other assets                                     1,258            774
-------------------------------------------------------------------------------------------------
    Total current assets                                                 27,450         26,515

Marketable securities                                                     7,531          8,462
Furniture and equipment, net                                              2,408          2,094
Other assets                                                              1,552            329
-------------------------------------------------------------------------------------------------
    TOTAL ASSETS                                                        $38,941        $37,400
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable                                                   $  2,342       $  2,138
    Accrued compensation and benefits                                     1,682          1,872
    Other accrued expenses                                                  933            762
    Income taxes payable                                                      4            831
-------------------------------------------------------------------------------------------------
    Total current liabilities                                             4,961          5,603

Commitments

Minority interest                                                          (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            17,003         16,791
    Retained earnings                                                    19,026         17,319
    Unrealized gain (loss) on marketable securities                           3            (16)
    Accumulated translation adjustments                                       4
    Less 358,859 repurchased shares (421,988 in 1996), at cost           (1,952)        (2,297)
-------------------------------------------------------------------------------------------------
Total stockholders' equity                                               34,084         31,797
-------------------------------------------------------------------------------------------------
    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                          $38,941        $37,400
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
</TABLE>
 

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

                                          20
<PAGE>

                               ACTIVE VOICE CORPORATION

                        CONSOLIDATED STATEMENTS OF CASH FLOWS

                                    (In thousands)
 

<TABLE>
<CAPTION>
                                                                                 Year Ended March 31,
                                                                     ------------------------------------------
                                                                           1997           1996           1995
----------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>            <C>             <C>      

Operating activities
Net income                                                               $1,751         $5,162         $5,110
Adjustments to reconcile net income to net
  cash provided by operating activities:
    Depreciation                                                            966            897            748
    Provisions for accounts receivable                                      305            431            209
    Deferred income taxes                                                     5           (476)           145
    Loss on disposal of equipment                                            39             46             33
    Minority interest in loss of consolidated subsidiary                    (24)
    Non-recurring charge for purchased, in-process
         research and development                                         1,769
    Changes in operating assets and liabilities:
         Increase in accounts receivable                                 (2,087)        (2,598)        (2,321)
         Increase in inventories                                         (1,526)        (2,052)          (233)
         Decrease (increase) in prepaid expenses
              and other assets                                           (1,643)            86           (735)
         Increase (decrease) in accounts payable                            204            928           (373)
         Increase (decrease) in other liabilities                          (715)         1,963            191
----------------------------------------------------------------------------------------------------------------
         Net cash provided by (used in) operating activities               (956)         4,387          2,774

Investing activities
Purchases of marketable securities                                       (5,072)        (4,583)        (7,350)
Proceeds from sales of marketable securities                              7,026          3,521          7,077
Acquisition of business                                                  (1,941)
Purchases of furniture and equipment                                     (1,295)        (1,130)        (1,408)
----------------------------------------------------------------------------------------------------------------
         Net cash used in investing activities                           (1,282)        (2,192)        (1,681)

Financing activities
Proceeds from employee stock option and stock purchase plans                382            566            617
Repurchase of common stock                                                                 (21)        (2,138)
----------------------------------------------------------------------------------------------------------------
         Net cash provided by (used in) financing activities                382            545         (1,521)
----------------------------------------------------------------------------------------------------------------

Effect of exchange rate changes on cash and cash equivalents                  8
Increase (decrease) in cash and cash equivalents                         (1,848)         2,740           (428)
Cash and cash equivalents at beginning of year                            3,390            650          1,078
----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                 $1,542         $3,390         $  650
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------

</TABLE>


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


                                          21
<PAGE>

                               ACTIVE VOICE CORPORATION

                   CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY

                            (In thousands, except shares)
 

<TABLE>
<CAPTION>
                                            Common Stock                    Unrealized
                                       -----------------------            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>           <C>        
Balance at April 1, 1994                 4,417,983    $15,045   $  8,899                                  $(3,000)        $20,944
  Issuance of shares upon exercise of
     stock options                         164,414         97     (1,510)                                   2,104             691
  Tax benefit related to stock options                    963                                                                 963
  Repurchase of common stock              (112,500)                                                        (2,138)         (2,138)
  Net unrealized loss on marketable
     securities                                                                  $(120)                                      (120)
  Net income                                                       5,110                                                    5,110
------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 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 stock options                    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
------------------------------------------------------------------------------------------------------------------------------------

</TABLE>
 

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


                                          22
<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 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.

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.

In March 1995, the Financial Accounting Standards Board (FASB) issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. The Company adopted Statement No. 121
during fiscal year 1997. There was no impact on net income as a result of
adopting Statement No. 121.

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.


                                          23
<PAGE>

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 $71,000,
$292,000 and $258,000 in advertising costs during the years ended March 31,
1997, 1996 and 1995, 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.

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.

Net Income Per Common Share

Net income per common share is based on the weighted average number of shares of
common stock outstanding and dilutive common equivalent shares from stock
options, using the treasury stock method.

Reclassifications

Certain prior-year amounts have been reclassified to conform with the current-
year presentation.

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, in accordance with the provisions of FAS 115. 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: 

                                            1997
                   ------------------------------------------------------------
                                     Gross         Gross         Estimated
                    Amortized     Unrealized     Unrealized         Fair  
                       Cost          Gains         Losses          Value  
--------------------------------------------------------------------------------
 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
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                                                 1996
                     -----------------------------------------------------------
                                       Gross          Gross      Estimated
                    Amortized     Unrealized     Unrealized           Fair
                         Cost          Gains         Losses          Value
--------------------------------------------------------------------------------
 Municipal bonds:
   Due in one year 
     or less         $  7,246           $  6           $(35)      $  7,217
   Due after one 
     year through 
     three years        7,722             29            (32)         7,719
   Due after three 
     years                735             11             (3)           743
--------------------------------------------------------------------------------
                      $15,703            $46           $(70)       $15,679
--------------------------------------------------------------------------------

Net unrealized holding gains of $19,000 and $104,000, net of federal income
taxes were recorded in a separate component of stockholders' equity, during the
years ended March 31, 1997 and 1996, respectively.


                                          24
<PAGE>

NOTE 3. INVENTORIES

Inventories are comprised of the following (in thousands):



March 31,                               1997                          1996
--------------------------------------------------------------------------------

Computer equipment                    $3,602                        $2,544
Custom component parts                 2,730                         2,212
Supplies                                 677                           727
--------------------------------------------------------------------------------

                                      $7,009                        $5,483
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

NOTE 4. FURNITURE AND EQUIPMENT

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

 March 31,                              1997                          1996
--------------------------------------------------------------------------------

Office and computer equipment         $3,844                        $2,923
Furniture and fixtures                 1,674                         1,478
Leasehold improvements                   331                           266
--------------------------------------------------------------------------------
                                       5,849                         4,667

Accumulated depreciation              (3,441)                       (2,573)
--------------------------------------------------------------------------------

                                      $2,408                        $2,094
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

NOTE 5. 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. A reconciliation from
the U.S. statutory rate to the effective tax rate is as follows:



Year ended March 31,                    1997           1996           1995
--------------------------------------------------------------------------------

Tax at U.S. statutory rate             34.0%          34.0%          34.0%
Research and development credit        (4.5)          (0.4)          (2.2)
Tax exempt income                      (6.6)          (2.9)          (2.2)
Foreign sales corporation benefit      (2.5)          (1.0)          (1.3)
Non-recurring charge for
  purchased, in-process research
  and development                       18.1
Other items, net                         9.4            2.1            2.5
--------------------------------------------------------------------------------

                                       47.9%          31.8%          30.8%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

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

 Year ended March 31,                   1997           1996           1995
--------------------------------------------------------------------------------

Current taxes on income               $1,582         $2,886         $2,124
Deferred income taxes                      5           (476)           145
--------------------------------------------------------------------------------
                                      $1,587         $2,410         $2,269
--------------------------------------------------------------------------------

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):

 March 31,                                             1997           1996
--------------------------------------------------------------------------------
Accounts receivable allowances                       $  568         $  464
Accrued compensation and benefits                       211            276
Other items, net                                        229            283
--------------------------------------------------------------------------------

                                                     $1,008         $1,023
--------------------------------------------------------------------------------

The Company made cash payments of income taxes of $2.3 million, $1.5 million and
$1.8 million during the years ended March 31, 1997, 1996 and 1995, respectively.

NOTE 6. 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 $1.5 million, $1.2 million and $1.0
million, of rent expense for the fiscal years ended March 31, 1997, 1996 and
1995, respectively.

Future minimum rental payments required per fiscal year under leases with non-
cancelable lease terms in excess of one year at March 31, 1997 are as follows
(in thousands):

--------------------------------------------------------------------------------
1998                                                              $  1,456
1999                                                                 1,867
2000                                                                 2,332
2001                                                                 2,326
2002                                                                 2,306
Thereafter                                                          18,732
--------------------------------------------------------------------------------

                                                                   $29,019

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

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


                                          25
<PAGE>

the lessor in exchange for reduced future lease payments. The prepayments of 
$275,000 and $458,000 at March 31, 1997 and 1996, 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 7. 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 years and expire ten years from the date of grant. At March 31, 1997 there
were 771,415 shares of common stock reserved for future issuance upon exercise
of outstanding stock options and stock options available for grant under
existing option plans. These include 96,213 shares issuable upon exercise of
options granted under the 1984 Incentive Stock Option Plan (1984 Plan) and the
1988 Nonqualified Stock Option Plan (1988 Plan); 637,077 shares reserved for
issuance under the 1993 Stock Option Plan (1993 Plan) and the 1996 Stock Option
Plan (1996 Plan), under which options for 473,991 shares have been granted;
25,000 shares reserved for issuance under the Directors Stock Option Plan, under
which options for 16,534 shares have been granted; and 13,125 shares reserved
for options granted outside of these plans. 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 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 net income per share would have been reduced to the following pro
forma amounts (in thousands, except per share data):

 Year Ended March 31,                                  1997           1996
--------------------------------------------------------------------------------

Net income - as reported                             $1,751         $5,162
Net income - pro forma                               $  988         $4,786

Net income per share - as reported                    $0.38          $1.11
Net income per share - pro forma                      $0.21          $1.03
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

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 1997 and 1996: risk free interest rates of 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 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:

                                                          Weighted Average
                                           Shares           Exercise Price
--------------------------------------------------------------------------------
Balance, April 1, 1994                    400,460                  $  4.89
Granted                                   115,184                    16.70
Canceled                                   (4,150)                   14.41
Exercised                                (164,414)                    3.75
--------------------------------------------------------------------------------

Balance, March 31, 1995                   347,080                     9.24
Exercisable, March 31, 1995               207,310                     7.24

Granted                                   292,886                    20.79
Canceled                                 (104,704)                   23.65
Exercised                                 (85,798)                    6.51
--------------------------------------------------------------------------------

Balance, March 31, 1996                   449,464                    13.33
Exercisable, March 31, 1996               213,992                     9.71

Granted                                   240,236                    11.72
Canceled                                  (43,004)                   13.03
Exercised                                 (46,833)                    4.88
--------------------------------------------------------------------------------

Balance, March 31, 1997                   599,863                    13.82

Exercisable, March 31, 1997               246,322                   $13.37
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

The following table summarizes information about stock options outstanding at
March 31, 1997:

                            Outstanding                         Exercisable  
                 ---------------------------------------------------------------
                             Weighted
                              Average       Weighted                   Weighted
                             Remaining       Average                    Average
   Range of                 Contractual     Exercise                   Exercise
Exercise Prices  Options    Life (Years)      Price     Options         Price
--------------------------------------------------------------------------------
$  0.98-$  7.00   53,949        1.71         $  5.18    52,463       $  5.13 
    7.01- 14.00  362,200        9.20           11.03    84,085          8.98 
   14.01- 21.00   88,214        7.46           16.64    65,174         16.74 
  $21.01-$28.50   95,500        7.48           26.66    44,600         26.43 
                 ---------------------------------------------------------------
                 599,863        7.99          $13.82   246,322        $13.37 
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

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 


                                          26
<PAGE>

basis at 85% of the lower of the market price at the beginning or end of each
three-month offering period. During 1997, employee contributions to the ESPP
totaled $153,000 and 16,296 shares were issued. At March 31, 1997, 133,704
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. The shares are to be
repurchased in the open market.

Certain Transactions With Corporate Officers and Others

During August 1994, the Company repurchased a total of 112,500 shares of its
common stock from a significant stockholder. The purchase price was $19.00 per
share for a total of $2.1 million, which was less than the closing price of the
stock on the closing date.

On November 7, 1994, the Company and two of its officers and principal
shareholders entered into an Amended and Restated Buy-Sell Agreement (the
"Agreement") which modified the terms of the original agreement dated December
31, 1991. 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 8. 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 $324,000, $286,000 and $216,000
during the fiscal years ended March 31, 1997, 1996 and 1995, respectively.

NOTE 9. 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 $52,000, $82,000 and $100,000 for the years ended March 31,
1997, 1996 and 1995, respectively.

NOTE 10. CONCENTRATION OF CREDIT RISK

The Company distributes its products primarily through a worldwide network of
independent telephone system dealers. The Company also distributes its products
through sales to original equipment manufacturers (OEMs) of telephone and other
business systems who often sell through their own dealer networks. Sales through
the Company's domestic dealer network, OEMs, and export sales through various
international distribution channels represented 67%, 17% and 16%, respectively,
of fiscal 1997 revenues; 73%, 13% and 14%, respectively, of fiscal 1996
revenues; and 77%, 12% and 11%, respectively, of fiscal 1995 revenues. Export
sales aggregated $7.9 million, $6.4 million and $4.1 million for the fiscal
years ended March 31, 1997, 1996 and 1995, respectively. The Company performs
ongoing credit evaluations of its customers' financial condition, and generally
no collateral is required. The Company maintains reserves for credit losses and
such losses have historically been within management's expectations.

NOTE 11. 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.


                                          27
<PAGE>

The unaudited pro forma combined results of operations of the Company and
Pronexus on the basis that the acquisition had taken place on April 1, 1995, are
summarized below (in thousands, except per share data):

 Year Ended March 31,                           1997                  1996
--------------------------------------------------------------------------------

Net sales                                    $50,537               $46,175
Net income                                     3,285                 3,452
Net income per share                           $0.71                 $0.74
--------------------------------------------------------------------------------

These unaudited pro forma results of operations have been prepared for
comparative purposes only and include certain adjustments, such as additional
goodwill amortization expense. The pro forma summary is not necessarily
indicative of the results of operations which would have resulted had the
combination been in effect on April 1, 1995, or of future results of operations
for the consolidated entities. 


                                          28
<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, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended March 31, 1997. 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, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1997, 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.



Seattle, Washington                ERNST & YOUNG LLP
May 5, 1997


                                          29
<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 "Voting Securities and
Principal Holders--Exchange Act Compliance" in the Proxy Statement for the
Company's Annual Meeting of Stockholders scheduled to be held on August 21,
1997, 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 Stockholders scheduled
to be held on August 21, 1997.

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 sections captioned "Voting Securities and Principal
Holders" and "Compensation and Benefits--Certain Transactions" of the Proxy
Statement for the Company's Annual Meeting of Stockholders scheduled to be held
on August 21, 1997.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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 Stockholders scheduled
to be held on August 21, 1997.

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, 1997, 1996 and 1995

Consolidated Balance Sheets -- March 31, 1997 and 1996

Consolidated Statements of Cash Flows -- Years ended March 31, 1997, 1996 and
1995

Consolidated Statements of Stockholders' Equity -- Years ended March 31, 1997,
1996 and 1995

Notes to Consolidated Financial Statements

Report of Ernst & Young LLP, Independent Auditors

(a)(2) Financial Statement Schedules

SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS. Schedules not listed above have
been omitted because the information required to be set forth therein is not
applicable or is included in the Consolidated Financial Statements or notes
thereto.

(b) Reports on Form 8-K

None.

(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
3.2       Restated Bylaws of Registrant

    Exhibit No. 10: Material Contracts

Executive Compensation Plans and Agreements

10.1      Incentive Stock Option Plan
10.2      1988 Nonqualified Stock Option Plan
10.3      1993 Stock Option Plan
10.4      Amendment to 1993 Stock Option Plan


                                          30
<PAGE>

    10.5      Directors Stock Option Plan
    10.6      1996 Employee Stock Purchase Plan
    10.7      First Amendment to the 1996 Employee Stock Purchase Plan 
    10.8      1996 Stock Option Plan
    10.9      Employment Agreement and Nondisclosure Agreement dated April 17,
              1989 between Registrant and Douglass S. Anderson
    10.10     Employment Agreement and Nondisclosure Agreement dated July 6,
              1989 between Registrant and Jose S. David
    10.11     Employment Agreement and Nondisclosure Agreement dated October 2,
              1990 between Registrant and Robert L. Richmond
    10.12     Employment Agreement and Nondisclosure Agreement dated October 2,
              1990 between Registrant and Robert C. Greco
    10.13     Employee Agreement and Nondisclosure Agreement dated December 10,
              1996 between Registrant and Frank C. Costa
    10.14     Employee Agreement and Nondisclosure Agreement dated March 22,
              1991 between Registrant and Edward F. Masters
    10.15     Split Dollar Agreement/Assignment dated as of April 11, 1994,
              between Registrant and Robert L. Richmond 

Other Material Contracts
    10.16     Office Lease dated January 31, 1991 between Registrant and Martin
              Selig, as amended
    10.17     Amendment to Office Lease dated April 27, 1994, between
              Registrant and Martin Selig
    10.18     Amendment to Office Lease dated August 11, 1994, between
              Registrant and Martin Selig
    10.19     Amendment to Office Lease dated December 19, 1996 between
              Registrant and Martin Selig
    10.20     Subordination, Non-Disturbance and Attornment Agreement dated
              January 21, 1997, between Registrant and The Bank of Nova Scotia
    10.21     Amended and Restated Buy-Sell Agreement dated August 8, 1994,
              among Registrant Robert L. Richmond and Robert C. Greco
    10.22     Patent License Agreement dated March 2, 1990, between Registrant
              and Dytel Corporation (Confidential treatment has been granted
              for portions of this document)
    10.23     Automated Attendant Patent License Agreement between Registrant
              and VMX, Inc. (Confidential treatment has been granted for
              portions of this document)
    10.24     Voice Mail Patent License Agreement between Registrant and VMX,
              Inc. (Confidential treatment has been granted for portions of
              this document)
    10.25     Assignment of Rights Under Patent Application dated October 22,
              1990 by Robert L. Richmond and Michael J. Robinson
    10.26     Acknowledgment and Assignment of Proprietary Rights dated October
              22, 1990 by Robert C. Greco and Michael J. Robinson

Exhibit No. 11: Statement re Computation of Per Share Earnings
    11.1      Computation of Earnings Per Share

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. 24: Power of Attorney
    24.1      Powers of Attorney

Exhibit No. 27:  Financial Data Schedule
    27.1      Financial Data Schedule

                                          31
<PAGE>

                    SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS
                               ACTIVE VOICE CORPORATION

                      YEARS ENDED MARCH 31, 1997, 1996 AND 1995
                                    (IN THOUSANDS)


 

<TABLE>
<CAPTION>
        COLUMN A                        COLUMN B                 COLUMN C             COLUMN D      COLUMN E
-------------------------------------------------------------------------------------------------------------------
                                                                  ADDITIONS
                                                         ---------------------------
                                       Balance at      Charged to
      Description                      Beginning of    Costs and     Charged to                  Balance at End
                                         Period         Expenses   Other Accounts    Deductions     of Period
                                     <C>              <C>          <C>              <C>          <C>         
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
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------

YEAR ENDED MARCH 31, 1995
Deducted from asset accounts:
  Allowance for doubtful accounts          $  445           $490              0        (A)$210         $  725
  Allowance for sales returns                 280              0              0        (B)  71            209
-------------------------------------------------------------------------------------------------------------------
Totals                                     $  725           $490              0           $281         $  934
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------

</TABLE>

(A) Uncollectible accounts written off, net of recoveries

(B) Reduction of estimated future sales returns


                                          32
<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 27, 1997.

                                                        ACTIVE VOICE CORPORATION

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

                                  POWER OF ATTORNEY

Each person whose signature appears below hereby constitutes and appoints
Robert L. Richmond and Jose S. David, and each of them severally, his true and
lawful attorneys-in-fact and agents, with full power to act without the other
and with full power of substitution and resubstitution, to execute in his name
and on his behalf, individually and in each capacity stated below, any and all
amendments and supplements to this Report, and any and all other instruments
necessary or incidental in connection herewith, and to file the same with the
Commission.

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.

         Signature                Title                           Date


 /s/ Robert L. Richmond      Chief Executive Officer and         June 27, 1997
-------------------------    Chairman of the Board
 Robert L. Richmond          Principal Executive Officer


 /s/ Robert C. Greco         Chief Technology Officer            June 27, 1997
-------------------------    Secretary, Treasurer and
 Robert C. Greco             Director


 /s/ Jose S. David           Chief Financial Officer             June 27, 1997
-------------------------    (Principal Financial and
 Jose s. David               Accounting Officer)


 /s/ Tom A. Alberg           Director                            June 27, 1997
-------------------------
 Tom A. Alberg

 
 /s/ Harold H. Kawaguchi     Director                            June 27, 1997
-------------------------
 Harold H. Kawaguchi


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