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                                   FORM 10-K
                                        
                      SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C.  20549
(Mark One)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
               EXCHANGE ACT OF 1934 (NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996)
               For the fiscal year ended December 31, 1998
                                      OR
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
               EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
               For the transition period from __________ to __________
                        Commission file number 0-15578
                               DAVOX CORPORATION
            (Exact name of registrant as specified in its charter)

               Delaware                                 02-0364368
  (State or other jurisdiction of                     (IRS Employer
  incorporation or organization)                    Identification No.)

        6 Technology Park Drive
        Westford, Massachusetts                           01886
 (Address of principal executive offices)               (Zip Code)

        Registrant's telephone number, including area code:  (978) 952-0200
       Securities registered pursuant to Section 12(b) of the Act:  None
          Securities registered pursuant to Section 12(g) of the Act:
                         Common Stock,  $.10 Par Value

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 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. [ ]

Aggregate market value, as of March 1, 1999 of Common Stock held by non-
affiliates of the registrant:   $106,619,745 based on the last reported sale
price on the National Market System as reported by Nasdaq on that date.

Number of shares of Common Stock outstanding at March 1, 1999: 14,379,418

                      DOCUMENTS INCORPORATED BY REFERENCE

The registrant intends to file a definitive Proxy Statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
1998.  Portions of such Proxy Statement are incorporated by reference in Part
III.

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                                     PART I

CAUTIONARY STATEMENTS

     The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements.  Statements set forth herein may
contain "forward-looking" information that involves risks and uncertainties.
Actual future financial or operating results may differ materially from such
forward-looking statements.  Statements indicating that the Company "expects,"
"estimates," "believes," "is planning," or "plans to" are forward looking, as
are other statements concerning future financial or operating results, product
offerings or other events that have not yet occurred.  There are several
important factors that could cause actual results or events to differ materially
from those anticipated by the forward-looking statements. Such factors are
described in greater detail under Management's Discussion and Analysis of
Financial Condition and Results of Operations--Certain Factors That May Affect
Future Results. Although the Company has sought to identify the most significant
risks to its business, the Company cannot predict whether, or to what extent,
any of such risks may be realized nor can there be any assurance that the
Company has identified all possible issues that the Company may face.

ITEM. 1  BUSINESS

GENERAL

     Davox Corporation ("Davox" or the "Company") is principally a software and
systems integration company that develops, markets, implements, supports, and
services management systems for call center operations. These call center
operations are engaged in a variety of business applications including
credit/collections, customer service, telephone sales, and fund raising. Davox
/(R)/ solutions assist call center operations, integrate customers' existing
voice and data systems, manage outbound, inbound and combined outbound/inbound
calling applications and focus on improving the quality of each customer
contact, as well as the volume of calls handled. This increased productivity and
efficiency, as documented by Davox users, has resulted in lower labor costs,
increased revenue and/or increased transaction capacity for the user
organization and improved service levels.

     Davox, through its direct sales force and third-party distribution
channels, has provided unified call center solutions to various industries,
including financial services, retailers, entertainment companies, telemarketing
organizations, telecommunications companies and utilities. The Company's current
customers include: AT&T, Bell Atlantic, British Telecom, General Electric
Capital Corporation, Chase Bank, Household International, May Companies,
NationsBank, Precision Response Corporation, Prudential Insurance Company of
America, Superstar Satellite Entertainment, TeleTech Holding, USAA Federal
Savings Bank, Unitel Corporation, and WGBH Television.

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     The Company was incorporated in Massachusetts in 1981 and reorganized in
Delaware in 1982. The Company's principal offices are located at 6 Technology
Park Drive, Westford, Massachusetts 01886 and its telephone number is (978) 952-
0200.

OVERVIEW

     Today's businesses understand that their most important asset and source
for additional business is their customers; therefore, within most corporations,
several departments are in almost constant contact with buyers or users of their
goods or services. These departments, or call centers place and/or receive phone
calls, email and faxes supplying information to or receiving information from
the customer and process account information from a database. The mission of
call center management is to increase the productivity of telephone agents,
improve the efficiency of the calling operation, and enhance the quality of
customer service.

     To achieve the mission of the call center, businesses have invested in
different types of technology to accommodate different types of customer
contact, such as incoming and outgoing calls. However, these discrete
proprietary systems result in an environment characterized as "islands of
technology" which limit the productivity and efficiency of the call center and
may degrade customer service. The majority of today's businesses are under
economic and competitive pressure to protect their investment in technology and
require a method for integrating its existing disparate technologies. By
integrating these technologies, a business can fully utilize its resources and
provide its customers a higher quality of service.

     Davox recognized the growing demand for systems that would unify these
disparate resources and calling applications. To deliver the level of
integration necessary to unite a business' customer contact applications, Davox
introduced in 1993 the Unison/(R)/ call center management system which
represented a new generation technology for the outbound and call blended call
center market.

     Davox has traditionally focused its call center expertise on outbound
dialing and call blending, and the Company continues to expand in this important
market segment. For the outbound segment, additional market opportunity exists
with companies that maintain inbound call centers and are looking to deliver
proactive outbound customer service during call center agents' idle time. Davox
believes that it is well positioned to deliver its proven outbound capabilities
to these inbound-oriented call centers.

     In May 1998, Davox purchased AnswerSoft, Inc. a Richardson, Texas based
developer of inbound call routing, reporting and agent desktop automation
software tools specifically designed for the needs of the inbound-oriented call
center. With this acquisition, Davox believes that it is well positioned to
deliver a complete suite of inbound, outbound, and blended calling solutions, to
a market that the Company terms the Allbound/(TM)/ market.

     Call centers are emerging as a truly mission-critical component of a
company's business, providing many companies with their primary (if not only)
source of direct customer interaction. This is particularly true for the inbound
call center, which can be attached to virtually any kind of business. According
to an estimate by F.A.C./Equities, Inc., there are seven million agents working
in 70,000 call centers nationwide, with an estimated annual growth rate of up to
20% in call center agent positions. The opportunity for companies to 

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enhance customer loyalty through the effective use of call center technology is
believed to be significant.

     In light of these market factors, Davox has decided to expand its offerings
by the addition of inbound call center software tools. The acquisition of
AnswerSoft's Concerto/(TM)/ suite of inbound software tools provides the Company
with expanded technological capabilities and expertise that it believes are
necessary to enable it to enter and exploit the large inbound call center
market.

Davox believes that the following were key reasons and continue to be expected
benefits from the AnswerSoft acquisition:

     .    The addition of AnswerSoft's inbound-focused products meets an
          increasingly important customer demand in the call center management
          market that was previously not fully met by the Davox product family.

     .    Davox now has a more complete portfolio of integrated best-of-breed
          call center management products, greater resources, and increased
          research and development expertise than Davox previously had. Davox
          believes that it is now better able to compete more effectively with
          competitors having greater resources and broader product and service
          offerings than Davox.

     .    Davox now has the opportunity to expand its market presence through
          AnswerSoft's customer base of telecommunication providers, computer
          and electronics manufacturers, and insurance and financial services
          companies.

     .    Davox is now able to offer its customers a more complete end-to-end
          call center management solution. Davox believes that the broader
          portfolio of products that it now offers will help better position
          Davox to maintain its status as a leading supplier of call center
          solutions.

     .    In the face of an increasingly competitive industry, Davox will
          continue to invest in industry-leading technology. Davox believes that
          it is now in a stronger competitive position than it was prior to the
          acquisition to effectively meet the industry's technology challenges
          and evolving customer demands.

     The acquisition has expanded Davox's ability to support call centers on
three critical levels: Server (system level), Client (agent level), and the
telephony level. AnswerSoft's Concerto/(TM)/ products have expanded Davox's core
system capabilities from primarily supporting outbound/blended call centers to
supporting inbound/blended call centers as well.

     .    At the system level, the Concerto/(TM)/ product suite gives Davox the
          ability to enhance call routing within the call center and provide
          more detailed reporting on inbound call processes.

     .    At the agent level, Concerto/(TM)/ products enhance Davox's ability to
          integrate various database applications in traditional legacy system
          environments.

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     .    At the telephony level, the acquisition of AnswerSoft has enhanced
          Davox's product suite by adding Windows NT-based CTI capabilities to
          the powerful UNIX-based CTI functionality that is integral to
          Unison/(R)/ system performance.

     The integration of a Concerto/(TM)/ agent application, Sixth Sense/(TM)/,
with the Unison/(R)/ system's LYRICall/(TM)/ browser-based scripting software
began in the third quarter of 1998. In 1999, Davox expects to begin to integrate
the functionality of both product lines (at the system level and workstation
level) to enable the seamless management and monitoring of outbound and inbound
calling operations from a single supervisor workstation.

A discussion of how these products work within the call center follows:

UNISON/(R)/ SOLUTIONS FOR OUTBOUND AND CALL BLENDED CALL CENTERS

     Unison/(R)/ technology today is incorporated into systems specifically
designed for call centers with outbound and call blended requirements such as
credit/collections, telemarketing, fundraising, and customer service.
Unison/(R)/ solutions combine open system, client/server, and relational
database technology with sophisticated applications and full customer service
and support. The Company currently markets Unison/(R)/ applications for
credit/collections, telemarketing, fund-raising, and customer service call
centers whose primary mission is outbound focused.

     The concept of Rules-Based/(TM)/ management underlies all Unison/(R)/
software. This designed-in capability is what allows a call center manager to
define, adjust, refine and implement calling strategies in real-time. Using
Rules-Based/(TM)/ management, the Unison/(R)/ system supervisor can target
outbound calling campaigns based on user-defined criteria such as location,
income level, or outstanding balance. This capability also allows call centers
to match specific customers with telephone agents who have the necessary skills
to handle these customer accounts. The call center manager establishes the
rules. The Unison/(R)/ system then executes the calling campaign in accordance
with those rules.

     The Unison/(R)/ system monitors each campaign in real-time, alerting the
call center's supervisors immediately if performance deviates from the
prescribed norm, enabling the supervisor to take immediate corrective action.
This alert capability provides Unison/(R)/ system users with real-time
information to adapt their system "on the fly" to changing priorities within the
call center.

     Unison/(R)/ software provides functionality that supports call center
management in three main areas.

     .    Unison/(R)/ software lets supervisors specify and modify comprehensive
          calling strategies. These include setting the basic who, when, where,
          and how of calling campaigns.

     .    Unison/(R)/ software makes it easy for supervisors to monitor agent
          productivity during individual campaigns and shift resources quickly
          when needed. Automatic system alerts tell the supervisor if a calling
          campaign is exceeding or falling short of established 

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          goals. The supervisor can make adjustments in the campaign in real-
          time, or the Unison/(R)/ system can be programmed to make user-defined
          adjustments automatically.

     .    Unison/(R)/ software streamlines call center operations by allowing
          the supervisor to control the parameters that affect the actual call
          placement, freeing agents to focus on engaging in productive
          conversations with customers. A variety of automated dialing options
          are available to the call center, each designed to meet a specific
          customer contact need.

SMART MANAGEMENT CENTER/(R)/
THE UNISON/(R)/ SYSTEM ENGINE

     The Smart Management Center/(R)/ (SMC/(R)/) console is the central
management engine that executes the Unison/(R)/ system's activities. The
SMC/(R)/ is a UNIX/(R)/ Reduced Instruction Set Computing (RISC)-based
management application that resides on the Sun Microsystems, Inc. Ultra/(R)/
architecture. The SMC manages, monitors, processes, reports on, communicates
with, integrates, and controls a broad range of telephony and data-oriented call
center tasks -- all in real-time and using a friendly, point-and-click graphical
user interface.

RESOURCE & PERFORMANCE MANAGER/(TM)/
NEXT GENERATION SUPERVISOR INTERFACE TO THE SMC/(R)/

     Introduced in September 1998, the Resource & Performance Manager/(TM)/
(RPM)/(TM)/) is the PC-based version of the SMC/(R)/ and enables call center
managers to effectively manage agents in real-time in a Windows/(R)/ 95 or
Windows NT system environment. The RPM/(TM)/ console is designed to run on a PC
utilizing Windows 95 or NT operating systems, providing a lower cost alternative
to the SPARC or Ultra-based SMC/(R)/ console and making the projected cost of
ownership and return on investment even more attractive. The new application can
co-exist in Davox environments that currently utilize the SMC/(R)/ console. The
RPM/(TM)/ graphical user interface is designed to interact like traditional
Windows/(R)/ applications.

LYRICALL/(TM)/
APPLICATION DESIGN AND SCRIPTING SOFTWARE

     Released in March 1998, LYRICall/(TM)/ software incorporates Web-based
browser technology that gives call center management the ability to easily build
and then deploy robust, platform-independent applications. By shortening the
time it takes to develop and deploy new applications, a call center can better
respond to new business opportunities, make agents more productive, and provide
better customer service.

     .    LYRICall/(TM)/ software can be used in dedicated inbound, outbound, or
          blended call center environments. LYRICall/(TM)/ software utilizes
          open Internet standards such as HTML, browser technology and Java
          computing. By incorporating these standards, LYRICall/(TM)/ software
          distinguishes itself as a platform-independent product that enables
          users to create an application once and then run it on most devices
          and operating systems.

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     .    LYRICall/(TM)/ software can run on any device capable of running
          Netscape Navigator or Microsoft Internet Explorer and Java script,
          including PCs, UNIX workstations, and network computers.

     .    LYRICall/(TM)/ software gives non-programmers the ability to build
          applications. Those designing these applications are guided through
          application creation using templates, wizards and intuitive point-and-
          click operations. This highly intuitive browser interface guides
          agents through each call, allowing them to work more productively and
          efficiently.

     .    LYRICall/(TM)/ software offers telemarketing, collections, support and
          other customer service oriented call centers a practical tool for
          meeting a wide range of business requirements.

     .    The intuitive LYRICall/(TM)/ browser-based point and click interface
          puts customer contact information at the agents' fingertips and helps
          guide them quickly and efficiently through each call.

COMPOSE IT/(TM)/
REPORTING SOLUTIONS FOR CALL CENTER PRODUCTIVITY

     Davox understands that running an effective call center requires more than
simply developing calling strategies and automating operations. A call center's
success is based on its ability to obtain and analyze data in a timely fashion.

     Compose It/(TM)/ software, which became commercially available in the first
quarter of 1998, provides a number of pre-designed, standard call center reports
for routine reporting needs. It also features a user-friendly graphical
interface that allows custom report generation with point and click navigation.
Users can create, edit, save, print and export reports - without learning SQL
(Structured Query Language) commands or turning to the Information Technology
department.

     Compose It/(TM)/ software also supports open database connectivity (ODBC)
that allows users to create custom reports (based on Unison/(R)/ system
activity) from any server running ODBC compliant database software (Oracle,
Informix, Sybase, SQL Server, etc.).

UNISON SCALE/(R)/
CALL BLENDING OPTIMIZATION FOR THE UNISON/(R)/ SYSTEM

     Unison SCALE/(R)/ (Seamless Call and Agent Load Equalization) software is
available for call centers that wish to utilize CTI for their call handling.
With Unison SCALE/(R)/ functionality, all designated agents function as both
inbound and outbound agents, and the movement of those agents from inbound to
outbound calls is automatic. The standard Unison/(R)/ system campaign management
capabilities are available to Unison SCALE/(R)/ users. In addition, Unison/(R)/
agent management and real-time voice and data reporting features are available
for inbound as well as outbound agents.

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CONCERTO/(TM)/ PRODUCT LINE FOR INBOUND CALL CENTERS

SIXTH SENSE/(TM)/
Advanced Automation Software

     Sixth Sense/(TM)/ software automatically brings to the agent's computer
screen information about the caller so that the agent can quickly and
efficiently handle the caller's questions or problems. These so-called "screen
pops" are instrumental in improving agent productivity and customer
satisfaction. Sixth Sense/(TM)/ software automates agent processes throughout
the life span of every customer call. From screen pop to the most sophisticated
integration and automation capabilities, Sixth Sense/(TM)/ software gives agents
greater control of the customer relationship while enriching the customer
experience. Key features include:

     .    Sixth Sense/(TM)/ software analyzes every call in real time -- using
          the phone number, Caller ID, number dialed and any digits captured
          from the automated voice response unit -- to determine the caller's
          identity and needs.

     .    Sixth Sense/(TM)/ software takes action based on user-defined rules.
          It reaches into databases across the enterprise and retrieves data
          while launching and navigating multiple applications that will be
          required by the agent. Agents automatically receive on their desktops
          the data and applications they need to service the caller. They spend
          less time searching and sorting, and more time servicing customers --
          expertly handling more calls per shift.

     .    Because no two call centers are exactly alike, Sixth Sense/(TM)/
          software utilizes a robust, easy-to-use scripting language that
          enables users to tailor automation and make quick modifications as
          changes emerge in policies, programs and product mix.

     .    Sixth Sense/(TM)/ software automatically accesses virtually all data
          sources --PC, server, and mainframe -- and seamlessly integrates with
          existing client and server applications.

SIXTH SENSE/(TM)/ WEB
INTEGRATING CALL CENTERS AND THE WEB

     Sixth Sense/(TM)/ Web software enriches communications with customers and
ties customers more tightly to the enterprise by adding the power of the World
Wide Web to the traditional call center.

     .    Sixth Sense/(TM)/ Web software integrates Web sites and call centers
          with telephony and with databases and systems distributed across the
          enterprise. It makes all information and systems accessible via
          Internet/intranet resources. At the same time, Sixth Sense/(TM)/ Web
          software improves call center performance by automating agent
          workflow. Triggered by a call, it intelligently searches for customer
          information and delivers it to the agent's desktop via the corporate
          intranet and any standard Web browser. This integration Web site,
          agent desktop, PBX, and customer data provides opportunities to build
          customer relationships.

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     .    Sixth Sense/(TM)/ Web software lets call center customers access
          information and perform transactions "instantly," on their own, via
          the Web. Call center agent support is always a click away. In
          combination with SmartRoute/(TM)/ software, a Web user's callback
          request can be routed to the best-suited agent.

     .    Sixth Sense/(TM)/ Web software permits a user to access all of an
          enterprise's knowledge about a given customer, and uses it to
          dynamically drive the activity of Web sites and call center agents.
          Customer loyalty grows because customers get a single, consistent
          experience of the enterprise and a high service level. Also, agents
          get a comprehensive view of the customer, regardless of where and how
          contact occurs.

     .    In the call center, a call event such as an incoming automatic number
          identification (ANI) triggers Sixth Sense/(TM)/ Web software to
          perform customer-specific data mining. As the call is answered, Sixth
          Sense/(TM)/ Web software generates the first Web page (or Java object)
          and delivers it to the agent's desktop via any standard Web browser.
          As the agent selects links or buttons within the page, Sixth
          Sense/(TM)/ Web software generates new pages or objects and delivers
          them in real time. Agents get the information they need without
          performing rote data-gathering tasks, freeing them to focus on the
          customer. Agent productivity rises and delivering faster, more
          efficient service reduces costs.

     .    Sixth Sense/(TM)/ Web software can also deliver dynamic, individually
          customized pages directly to customers. Customers performing
          transactions on the Web enjoy quick, complete, personalized self-
          service, producing high customer satisfaction. At the same time, call
          loads and transaction costs are reduced.

INTUITION/(TM)/
ENTRY LEVEL CTI AUTOMATION SOFTWARE

Intuition/(TM)/ software provides call centers with the cost-saving benefits of
"screen pops" and other sophisticated CTI features available with Sixth
Sense/(TM)/ software, in an easy to set up, simple to use automation package.
Intuition/(TM)/ software offers an upgrade migration path to Sixth Sense systems
for more complex system integration.

SOFTPHONE/(R)/ AGENT
DESKTOP CALL CONTROL SOFTWARE

     SoftPhone/(R)/ Agent software enables call center agents to perform routine
telephone tasks using their computer screens. The intuitive graphical user
interface allows inexperienced users to accurately speed through complex call
control tasks.

     .    Agents can manage multiple inbound/outbound calls simultaneously, can
          dial customers by name, and see incoming callers' names and phone
          numbers. Call log viewer lets users monitor their phone usage,
          displays all inbound and outbound calls for a given device, and
          provides details such as time, duration, phone number, and hold time
          for each call. Point-and-click access to call-options also speeds call
          initiation, response and turnaround.

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     .    SoftPhone/(R)/ Agent software displays Automatic Call Distribution
          (ACD) data such as agent work mode and the number of call-ready
          agents, enabling supervisors to fine-tune call flows by reacting in
          real time to call load imbalances and unexpected program response.
          Call centers can handle call loads more efficiently, enabling shorter
          hold times and fewer dropped calls, especially in peak traffic.
          Existing staffing levels can accommodate higher call volumes.

     .    SoftPhone/(R)/ Agent software is compatible with most major switch
          environments, network infrastructure and telecommunications standards,
          providing open interfaces to current and future enterprise systems.

SMARTROUTE/(TM)/
INTELLIGENT CALL ROUTING SOFTWARE

     SmartRoute/(TM)/ software uses customer records, automatic number
identification (ANI), time of day, and voice response data to route calls to the
best-suited agent or group of agents across multiple call centers. Call center
managers set criteria -- such as agent expertise and customer preferences --
defining the desired match. SmartRoute/(TM)/ software also allows call centers
to modify call flows "on the fly", providing flexibility to service customers
while balancing call loads and improving agent productivity.

     .    SmartRoute/(TM)/ software captures ANI digits or account numbers
          collected from the voice response system and other call data then
          accesses customer records from across the enterprise to make routing
          decisions.

     .    SmartRoute/(TM)/ software uses account information, call history,
          other customer data, agent attributes, agent status, and other
          information to make an intelligent match in real time between a
          customer and the best available agent. Also, the call can be routed to
          the agent who has helped the customer before.

     .    SmartRoute/(TM)/ works with existing ACDs to route calls to the best
          available queue.

     .    Working together with Sixth Sense/(TM)/ software, SmartRoute/(TM)/
          software delivers customer data captured from telephony systems and
          gathered from information systems across the enterprise. Data are
          displayed on the agent's desktop as the call is answered freeing them
          from distracting tasks such as searching and retrieving customer data.
          Automating agent tasks shortens calls and raises the service level as
          the call center agent focuses more on the customer. Also, quickly
          getting customer information lets call center agents both personalize
          the call and increase customer retention.

SHADOW/(TM)/
PERFORMANCE MONITORING SOFTWARE

     Shadow/(TM)/ software tracks and delivers call statistics in real time,
assisting call center managers to improve agent productivity by quickly
adjusting work flows and resources. Using Shadow/(TM)/ software, call statistics
can be combined with flexible historical views and analyses. Managers can spot
trends to improve planning and quickly pinpoint recurring problems -- especially
important where high call volumes magnify the impact of management decisions.

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     .    Shadow/(TM)/ software measures call center performance in real time
          and archives performance data for future comparisons. Shadow/(TM)/
          software monitors Public Branch Exchange (PBX) activity and captures
          large amounts of call detail data. It collects statistics by device,
          queue, and agent, and generates real time and historical reports about
          calls in queue, agents logged in, and many other parameters.

     .    Because Shadow/(TM)/ software archives all captured data in an ODBC-
          compliant database, it is easy to compare current service levels to
          past performance. PBX utilization and agent productivity improves
          because managers get the information and analyses they need to sharpen
          both short- and long-term decision-making. And, the value of
          statistical data grows along with the archived database.

     .    Shadow/(TM)/ software captures the full "call experience" of a caller
          from beginning to end, regardless of transfers or the call's path
          through the enterprise by tracking and recording each call as a single
          transaction. Managers obtain more flexible, accurate, and
          comprehensive tallies on which to fine-tune call center performance.

1999 PRODUCT DEVELOPMENT

Davox is currently developing a combined Unison/(R)/ and Concerto/(TM)/
integrated call center solution called Ensemble/(TM)/. Ensemble is expected to
be available for beta in the second quarter of 1999, with shipments expected
during the third quarter of 1999. Ensemble is based on a modular design that is
expected to allow customers to pick and choose those modules or software
products that best meet their call center needs. This new solution is expected
to be multi-tiered, addressing system architecture, applications, management
tools, and agent process automation. Unison and Concerto software currently
being used by customers are expected to become modules within the new
architecture, thus preserving the customers' original investment and offering
new functionality for future growth.

ENSEMBLE/(TM)/ SYSTEM ARCHITECTURE

The Ensemble/(TM)/ platform is expected to be client/server based on UNIX and NT
operating systems and integrate with other call center technologies such as
PBX/ACDs, IVRs, call recording systems, network routing systems, host databases,
dialers, e-mail systems, web servers, fax servers, and work-force management
systems.  It is also expected that the Ensemble/(TM)/ system architecture will
support the creation of a virtual environment whereby multiple call centers can
be connected through voice and data networks.

ENSEMBLE/(TM)/ SYSTEM MODULES

The Ensemble/(TM)/ platform is expected to incorporate outbound, inbound,
blended, and multi-media call management modules, including:

     .    OUTBOUND CALL MANAGEMENT (UNISON/(R)/) The Unison/(R)/ module is
          expected to provide outbound predictive and preview dialing, campaign
          and call list management, scheduled recalls, automated messaging, 
          real-time filtering, system alerts, and voice/data transfers. A
          graphical management console will monitor critical functions and
          display information about campaigns, agents, and operational
          exceptions.

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     .    INBOUND QUEUE MANAGEMENT (CONCERTO/(TM)/) The Concerto/(TM)/ module is
          expected to support inbound call processing requirements such as
          enhanced call routing to ACD queues or specific agent skills,
          management of telephony captured information for automated "screen
          pops" at the agent workstation, and voice/data transfers. The 
          Concerto/(TM)/ module is also expected to provide the ability to
          capture call-detail information and store this information in a data
          warehouse environment, as well as integrate with central office-based
          network routing solutions.

     .    BLEND MANAGEMENT (UNISON SCALE/(R)/) The Unison SCALE/(R)/ (Seamless
          Call and Agent Load Equalization) module is expected to utilize CTI
          and non-CTI integration to provide a seamless, blended environment to
          enable monitoring of ACD queues based on service thresholds. Agents
          can be made available to outbound campaigns and inbound ACD queues
          based on the call handling priorities set by call center supervisors.

     .    REPORT MANAGEMENT (COMPOSE IT/(TM)/) The Compose It/(TM)/ module is
          expected to provide two robust reporting solutions for call center
          managers. The first option is expected to include a graphical report
          writer that enables call center supervisors to run standard and
          customized reports through a turn-key reporting system. The second
          option is expected to allow data to be exported to a customer database
          environment that is accessed by a customer selected reporting
          solution. Also expected in the data reporting solution will be data
          elements from the telephony and customer data transaction, providing
          "cradle to grave" reporting capabilities.

     .    APPLICATION INTEGRATION MANAGEMENT (LYRICALL/(TM)/ & SIXTH SENSE/(R)/)
          The Application Integration Management module is expected to provide
          client/server products that integrate an agent's desktop into the call
          center's telephony and customer database systems. LYRICall/(TM)/
          provides a screen design and scripting development capability that is
          based on HTML and Java technologies and is accessed through a browser
          on the agent's workstation. Sixth Sense/(R)/ is appropriate for more
          traditional host legacy system environments and distributed server
          applications in which the agent moves between multiple application
          screens and databases. Both products are designed to allow short
          integration timeframes, thereby reducing implementation costs.

     Being a future product offering, Ensemble/(TM)/ features and functions are
subject to change.  Davox intends to be in beta tests at the end of the second
quarter of 1999, with general availability sometime in the third quarter of
1999.  As with all new products, these dates are estimates.

ECONOMICAL RAPID APPLICATION DEVELOPMENT (ERAD)

Because Davox offers both system (Sixth Sense/(R)/) level and workstation 
(LYRICall/(TM)/) level automation tools, the Company's customers can develop and
implement call solutions more quickly and effectively than call centers
utilizing the long application development cycles required by many other call
center technology environments. The system architecture also helps ensure that a
Davox customer's investment in Davox technology is protected over time.

                                       12
<PAGE>
 
SYSTEM PRICING

     Current Unison/(R)/ system pricing begins at approximately $100,000.
Concerto/(TM)/ pricing begins at approximately $20,000. Specific and variable
customer requirements, such as the number of agent positions, extent of
inbound/outbound integration and multi-site connectivity determine actual system
prices.

MARKETS AND APPLICATIONS

     Davox markets its unified call center solutions to corporations that rely
heavily on the telephone to conduct business with their customers. Many of these
corporations have typically made substantial investments in building inbound
and/or outbound calling operations.  The function of these operations is to
place and receive customer calls.  In many cases, these calling operations are
responsible for specific business applications such as collections, customer
service, fund-raising or telephone sales.

     The Company believes that its Ensemble/(TM)/, Unison/(R)/ and
Concerto/(TM)/ solutions can significantly increase productivity in many
applications where repetitive tasks can be automated. Additionally, Davox
believes that its products are well suited to meet evolving CTI standards due to
their multi-protocol capabilities, integrated voice functions, open standards,
and flexible software design.

SIGNIFICANT CUSTOMERS

     In 1998, Lucent Technologies, Inc. (Lucent), a reseller of Davox products,
was the Company's largest single customer, accounting for approximately 13% of
total revenue. In 1997, Datapoint Corporation, a distributor of Davox products,
was the largest single customer, accounting for approximately 10% of total
revenue, and in 1996 GE Capital Corporation was the Company's largest single
customer, accounting for approximately 4% of the Company's total revenue. Total
revenue from the Company's top three customers amounted to approximately 24% of
total revenue in 1998, approximately 18% of total revenue in 1997 and
approximately 12% of total revenue in 1996. The Company believes that its
dependence on any one end user customer is not likely to increase significantly
as the Company continues to penetrate the broader call center market and expand
its alternate distribution channels.

MARKETING AND SALES

     Davox markets and sells its products and services through a combination of
direct sales and third-party distribution channels. Davox takes a solutions-
oriented approach to marketing its Unison/(R)/ and Concerto/(TM)/ systems. The
integration and management capabilities of the systems are presented as tools to
help customers and system integrators meet their business goals and objectives
for customer service and satisfaction.  This approach has two major benefits:

     .    As Davox's relationship with a customer grows, the Company is able to
          increase sales by developing additional call center capabilities for
          the customer.

                                       13
<PAGE>
 
     .    Davox can identify additional applications in other areas of the
          customer's business that can help them achieve their goals and
          objectives while ensuring the customer's satisfaction.

     Additionally, by focusing on common applications and identifying industries
with similar organizational or functional structures, Davox can address new
markets with relatively small incremental development costs and a short training
period for its sales force.

     The Company's direct sales force follows a proven disciplined selling
program that focuses on selling business solutions, rather than stressing the
features of individual products. Having identified business functions in which
Unison/(R)/ and Concerto/(TM)/ systems may provide significant productivity
increases, Davox sales representatives and technical consultants
(system/application specialists) work with the customer (and reseller, if
applicable) to analyze the business and production objectives for its calling
operation. This consultative "team" approach is suited for establishing a long-
term relationship with the customer.

     The Company continues to increase market penetration through its Business
Partners Program. The Company licenses its products through a third-party
distribution channel through referrals, joint marketing, distributor and
reseller relationships. Examples of third-party partners include
telecommunication equipment manufacturers, software vendors, and systems
integrators. The Company plans to continue to expand its Business Partners
Program, with particular emphasis on customer contact software vendors and major
system integrators. In 1998, 26% of total net product revenue was generated
through the Company's Business Partners Program.

NORTH AMERICAN OPERATIONS - In North America, the Company markets its
Unison/(R)/ and Concerto/(TM)/ products primarily through a direct sales force
and its Business Partners Program. A team of marketing professionals based at
the Company's headquarters supports the direct sales and business partners
personnel.

     .    In 1998, Davox expanded its distribution agreement with Lucent to
          include its LYRICall/(TM)/ browser-based application and screen
          builder software and its Intuition/(TM)/ CTI software products in
          North America.

     .    In 1998, Davox became a Premier Software Partner with Siebel Systems,
          the world's leading supplier of enterprise relationship management
          systems for organizations focused on increasing sales, marketing, and
          customer service effectiveness.

INTERNATIONAL OPERATIONS - Davox manages international activities world wide
through a combination of direct sales representation and distribution
agreements. Davox has fully staffed marketing and support offices in greater
London to serve its European customers and in Mexico City to support its Latin
American customers.

     .    In 1998, Davox signed an agreement with Lucent Technologies UK Limited
          under which Lucent markets and distributes Davox's Unison/(R)/ system
          and LYRICall software throughout the United Kingdom and Ireland.

                                       14
<PAGE>
 
     .    Davox products are currently sold in various countries in Europe by
          Datapoint Corporation, which acts as a sales agent for the Company.

     .    In 1999, Davox plans to broaden its product distribution and customer
          support in Europe by partnering with premier distributors of call
          center products and integration services. The Company may also
          establish a direct sales presence in certain European countries as
          well as a technical support center strategically located to support
          its distributors, resellers, and users on the continent.

     In connection with sales outside the United States, some Davox products are
subject to regulation by foreign governments, which requires the Company to
follow certain telecommunications and safety certification procedures for some
countries. Failure to obtain necessary local country approvals or certifications
will restrict Davox's ability to sell into some countries. International product
revenue was approximately $9.7 million, $14.7 million and $7.7 million or 11%,
18% and 14% of total revenue in 1998, 1997, and 1996, respectively.

CONTINUUM/(R)/ CUSTOMER SUPPORT AND SERVICE - Davox offers a broad array of
technical support services that include user training, comprehensive user
documentation, maintenance and systems integration services, and professional
services. Davox's customer support varies by country and may be either direct or
delivered through the Company's resellers. Davox's customer support consists of:

     .    Support teams responsible for ongoing account management and
          maintenance of the installed base.

     .    On-site hardware support, and either on-site or remote software
          support as required. These services are provided either directly or
          subcontracted to approved third parties.

     .    A Worldwide Support Center located in the Company's corporate offices
          in Westford, Massachusetts, provides centralized access to hardware
          and software support as required to end-users and distributors. To
          bring customer service closer to the Company's European customers, the
          information resident on the Westford-based system is replicated on a
          system located at Davox's European headquarters in Slough, United
          Kingdom.

     .    Specialists who deliver consulting and customized project services as
          required.

     .    Education specialists who deliver customer and distributor training at
          Davox's Acton, Massachusetts, Richardson, Texas, and Slough, United
          Kingdom training facilities, and at customer sites.

PROFESSIONAL SERVICES ADDS TO ITS OFFERINGS - As call center technologies
continue to evolve, many customers are finding that they lack the internal
resources needed to properly implement these technologies. In 1998, Davox
continued to broaden and expand its Professional Services 

                                       15
<PAGE>
 
program, which is staffed by qualified personnel with the requisite integration,
networking, hardware, and software skills. During the year, the Company expanded
its professional service offerings and services in the general areas of call
center operations, productivity enhancements, software solutions, and call
center operations.

HARDWARE SUPPORT - Under the terms of an agreement with Grumman Systems Support
Corporation (GSSC), a wholly-owned subsidiary of Northrop Grumman Corp., GSSC
delivers hardware support services for the Unison/(R)/ system within the
continental United States and Canada while Davox continues to deliver software
support services. In addition, GSSC provides network design and systems
integration services allowing Davox to focus its expertise on customizing
advanced calling center solutions for its clients. Similar services are provided
in the United Kingdom by G&A Business Solutions, Ltd., and in Mexico by
TECOcibernetica.

     In early 1994, Davox discontinued its Computerized Automated Dialing System
(CAS/(R)/) and Communications Resource Server/(R)//controller workstation
(CRS/(R)/) products from its product line. Each of these products has now
matured to the end of its "useful life." Accordingly, Davox notified its CAS and
CRS customers in writing that the Company will no longer offer maintenance and
support services for these products after December 31, 1999. However, Davox will
continue to honor its existing contractual obligations to support such products
prior to that date, and will consider renewing or entering into new support
services agreements with respect to those products, where the terms of such
agreements would not extend beyond December 31, 1999.

     This information may have particular significance for those customers in
light of the likelihood that the CAS and CRS product lines will experience
operability problems with respect to time-sensitive data containing dates that
fall on or after January 1, 2000. Davox does not warrant, guarantee or represent
that the CAS and CRS product lines are "Year 2000 Compliant" in any sense of
that term as it has currently come to be used in the software community.  Davox
recommends that its CAS/CRS customers take this into consideration as they plan
for their future call center management needs. To assist CAS and CRS product
line customers in upgrading their call center technology, Davox's direct sales
force will offer an attractively priced upgrade program to enable CAS/CRS users
to transition to the Unison/(R)/ line of call center management products.

SERVICE REVENUE - Service revenue accounted for $35.1 million or 39.5% of the
Company's total revenue in 1998. This is an increase of $9.9 million from $25.3
million or 30.2% of the Company's total revenue in 1997 and an increase of $7.9
million from $17.4 million or 30.4% of the Company's total revenue in 1996.

RESEARCH, DEVELOPMENT AND ENGINEERING - The Company employs an open system,
client/server, and relational database approach in developing its unified call
center solutions. The platform selected for its Unison/(R)/ product line is the
Sun Ultra family of workstations
                                      16
<PAGE>
 
from Sun Microsystems Inc. as well as workstations capable of running Windows 95
and NT. The Concerto/(TM)/ product line has been developed for Windows NT.
Davox's new Ensemble/(TM)/ solution is expected to be developed for these
platforms. The Company's development efforts, located at development
laboratories in Westford, Massachusetts and Richardson, Texas, are focused on
enhancing and expanding the functionality of both product lines. Davox currently
anticipates that areas of potential product development may include integration
links to additional call center telephony components and the development of
additional telephone management and reporting capabilities.

     The Company's continued success depends on, among other factors,
maintaining close working relationships with its customers and resellers and
anticipating and responding to their evolving applications needs. The Company is
committed to the development of new products, the improvement of existing
products, and the continued evaluation of new technologies.

     During 1998, 1997, and 1996, the Company's research, development, and
engineering costs were approximately $12.1 million, $10.4 million, and $6.7
million, respectively, representing approximately 14%, 12%, and 12%,
respectively, of total revenue during these periods. In the future, the Company
expects to incur approximately the same level of research, development and
engineering expenditures as a percentage of total revenue as it did during 1998.
In addition, the Company did not capitalize any of its software development
costs in 1998, 1997 or 1996 as the additional development costs incurred to
bring the Company's products to a commercially acceptable level after
technological feasibility has been established are not significant.

OPERATIONS

     While the majority of the Company's hardware needs are met by readily
available off-the-shelf technology, a small portion remains proprietary. Third-
party contractors manufacture these proprietary hardware components and the
Company believes there are many qualified vendors for these services. The
Company's production process consists primarily of final test, quality
assurance, and systems integration which occurs at its Westford facility.

     The Company attempts to maintain multiple sources of supply for key items
and believes it has adequate sources of supply for its expected needs. While any
of these sources could be replaced if necessary, the Company might face
significant delays in establishing replacement sources or in modifying its
products to incorporate replacement components or software code. There can be no
assurance that the Company will not suffer delays resulting from non-performance
by its vendors or cost increases due to a variety of factors, including
component shortages or changes in laws or tariffs applicable to items imported
by the Company.

COMPETITION

     Davox systems compete against various outbound, inbound, and blended
calling systems, including companies such as Aspect Telecommunications
Corporation, Mosaix Inc. (formerly Digital Systems International, Inc.), Melita
International Corporation, EIS International, Inc., Genesys Telecommunication
Laboratories, Inc., and smaller PC-based dialer companies. Each company offers
products with varying levels of functionality in terms of system management,
integration and workstation support. The Company believes that the

                                       17
<PAGE>
 
principal factors affecting competition are ease of use and range of
functionality, reliability, performance, price and customer service, and that
the Company competes favorably as to these factors.

     Certain of the Company's current and potential competitors are larger
companies that have greater financial, technical and marketing resources. It is
possible that competitors could produce products that perform the same or
similar functions as those performed by the Company's products. In addition,
current and potential competitors have established and may in the future
establish cooperative relationships among themselves or with third parties to
increase the ability of their products to address the needs of the Company's
current or prospective customers. Accordingly, it is likely that new competitors
or alliances among such competitors will emerge and may rapidly acquire
significant market share, which would have a material adverse effect on the
Company's business, financial condition and results of operations. In order to
be successful in the future, the Company must respond promptly and effectively
to the challenges of technological change, changing customer requirements and
competitive pressures. Increased competition could make it more difficult for
the Company to maintain its market presence.



RELIANCE ON INTELLECTUAL PROPERTY

     The Company relies on a combination of patent, copyright, trademark,
contract and trade secret laws to establish and protect its proprietary rights
in its technology. The Company owns and licenses a number of patents relating to
predictive dialing, real-time telecommunication management, client/server
computer telephony software, and user interfaces. Software products are
furnished under software license agreements that grant customers licenses to
use, rather than to own, the products. The license agreements contain provisions
protecting the Company's ownership of the underlying technology. Upon
commencement of employment, employees execute an agreement under which
inventions developed during the course of employment will, at the election of
the Company, be assigned to the Company, and which further prohibits disclosure
of confidential Company information. In addition, effective protection of
intellectual property rights may be limited or unavailable in certain foreign
countries. There can be no assurances that the steps taken by the Company in
this regard will be adequate to prevent misappropriation or infringement of its
technology or that Davox's competitors will not independently develop
technologies that are substantially equivalent or superior to Davox's
technology. See also Item 3-Legal Proceedings.

EMPLOYEES

     As of December 31, 1998, the Company had 398 full-time employees, of whom
27 were engaged in operations, 259 in sales, marketing and customer support, 76
in research, development and engineering and 36 in general and administrative
functions. The Company's ability to attract and retain qualified personnel is
essential to its continued success. None of the Company's employees is
represented by a collective bargaining agreement, nor has the Company ever
experienced any work stoppage. The Company believes that its employee relations
are good.

                                       18
<PAGE>
 
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

     From time to time, information provided by the Company, statements made by
its employees or information included in its filings with the Securities and
Exchange Commission (including this Form 10-K) may contain statements which are
not historical facts, so-called "forward-looking statements". Such forward-
looking statements involve risks and uncertainties which may adversely impact
whether or not such forward-looking statements come true. In particular, but
without limitation, statements in "Item 1. Business", relating to the size or
growth of call centers, the key reasons for the acquisition of AnswerSoft, the
expectation to tightly integrate Davox and AnswerSoft products, the "1999
Product Development" subsection, the plan to broaden its product distribution
and customer support in Europe, potential product development, and statements
relating to expansion of the Business Partners Program, and in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" relating to the Company's intent to broaden its customer base and
decrease reliance on its largest customers and the sufficiency of working
capital, may be forward-looking statements. The Company's actual future results
may differ significantly from those stated in any forward-looking statements.
Factors that may cause such differences include, but are not limited to, the
factors discussed below. Each of these factors, and others, are discussed from
time to time in the Company's filings with the Securities and Exchange
Commission.

     The Company's future results may be subject to substantial risks and
uncertainties. The Company purchases certain equipment for its products from
third-party suppliers and licenses certain components of its software code from
a number of third-party vendors. While the Company believes that third-party
equipment and software vendors could be replaced if necessary, the Company might
face significant delays in establishing replacement sources or in modifying its
products to incorporate replacement components or software code. There can be no
assurance that the Company will not suffer delays resulting from non-performance
by its vendors or cost increases due to a variety of factors, including
component shortages. The Company uses third party service providers to fulfill
its hardware support obligations with its customers. Additionally, the Company
relies on co-providers to assist its Professional Services organization. While
the Company believes that its currently contracted service providers and co-
providers are adequate at this time, the Company may face significant delays in
establishing replacement providers for such services.

     The Company relies on certain intellectual property protections to preserve
its intellectual property rights. Any invalidation of the Company's intellectual
property rights or lengthy and expensive defense of those rights could have a
material adverse affect on the financial position and results of operations of
the Company.

     The development of new products, the improvement of existing products and
the continuing evaluation of new technologies is critical to the Company's
success. Successful product development and introduction depends upon a number
of factors, including anticipating and responding to the evolving applications
needs of customers and resellers, timely completion and introduction of new
products, and market acceptance of the Company's products.

     The call center management industry is extremely competitive. Certain
current and potential competitors of the Company are more established, benefit
from greater market

                                       19
<PAGE>
 
recognition and have substantially greater financial, development and marketing
resources than the Company.

     Additionally, the Company's quarterly and annual financial and operating
results are affected by a wide variety of factors that could materially
adversely affect revenue and profitability, including: the timing of customer
orders; the Company's ability to introduce new products on a timely basis;
introduction of products and technologies by the Company's competitors; and
market acceptance of the Company's and its competitors' products; effects of
litigation described in Item 3 Legal Proceedings; the ability to hire and retain
key personnel; the ability to efficiently and effectively integrate the
AnswerSoft and Davox products; and difficulties of any nature as a result of the
impact of the Year 2000 on Davox, its customers, its vendors or its
distributors.

     International sales are expected to continue to account for a significant
portion of Davox's net sales in future periods. International sales are subject
to certain inherent risks, including, but not limited to those risks discussed
in this section and elsewhere in the Form 10-K, unexpected changes in regulatory
requirements and tariffs, difficulties in staffing and managing foreign
operations, longer payment cycles, problems in collecting accounts receivable,
potentially adverse tax treatment, and the inability to expand distribution
channels. As a result of the foregoing and other factors, the Company may
experience material fluctuations in future financial and operating results on a
quarterly or annual basis, which could materially and adversely affect its
business, financial condition, results of operations and stock price.


ITEM 2  PROPERTIES

     The Company's administrative offices and its operations and development
facilities are located at a 60,000 square foot, two-story building in Westford,
Massachusetts. The facility is occupied under a lease that expires in September
2000. In addition, the Company leases facilities for district and regional sales
and service offices in ten states as well as in the U.K. and Mexico. In
addition, the Company also leases a Richardson, Texas facility of approximately
26,000 square feet, which expires in January 2002. The current aggregate annual
rental payments for all of the Company's facilities are approximately $1.8
million. The Company believes that its existing facilities are adequate for its
current needs and that additional space will be available as needed.


ITEM 3  LEGAL PROCEEDINGS

     In 1998, a customer of Davox was sued for patent infringement by
Manufacturing Administration and Management Systems, Inc. (MAMS) alleging that
the customer's use of a computer driven automated dialer infringes MAMS's
patent. Under Davox's contract with this customer, Davox is obligated to defend
and indemnify such customer against any such claims. In the third quarter of
1998, Davox sued MAMS in federal court in the Eastern District of New York in an
action entitled "Davox Corporation v. Manufacturing Administration and
Management Systems, Inc." In the lawsuit, Davox is seeking a declaratory
judgment that its products do not infringe the MAMS patent or, in the
alternative, that the MAMS patent is

                                       20
<PAGE>
 
invalid. Davox believes that MAMS's assertions of patent infringement are
without merit, and Davox will vigorously pursue this action against MAMS. While
the outcome of this litigation cannot be predicted with certainty at this time,
management does not believe that the outcome will have a material adverse effect
on the Company's business, financial condition or results of operations.

     The Company is from time to time subject to claims arising in the ordinary
course of business. While the outcome of the claims cannot be predicted with
certainty, management does not expect these matters to have a material adverse
effect on the results of operations and financial condition of the Company.


ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1998.


ITEM 4A  EXECUTIVE OFFICERS OF THE REGISTRANT

     The executive officers of the Company, the age of each, and the period
during which each has served in his present office are as follows:

Mr. Alphonse M. Lucchese (63) has served as Chairman and Chief Executive Officer
since July 1994 and also served as President from July 1994 until January of
1998. Mr. Lucchese joined Davox following seven years as President and Chief
Executive Officer at Iris Graphics, a manufacturer of high quality color
printers. Prior to joining Iris, Mr. Lucchese had served as Vice President of
Sales at Xyvision, Inc., a manufacturer of computer-integrated publishing
systems sold to Fortune 500 companies, commercial printers and typesetters, and
government agencies. Mr. Lucchese was Vice President of Sales for Davox
Corporation from 1983 until 1984. Earlier, he had spent six years at Raytheon
Data Systems, where he attained the position of Vice President and General
Manager of Northeastern Operations. Following service in the U.S. Army during
the mid-1950s, Mr. Lucchese began his professional career at IBM as a systems
engineer, later moving into the position of marketing representative.

Mr. Jeffrey E. Anderholm (42) serves as Vice President of Marketing. He has
overall responsibility for product marketing, product management, and marketing
communications worldwide. Mr. Anderholm, who joined Davox in January 1999, was
most recently Vice President of Marketing for Art Technology Group from 1997 to
1998, a Boston-based Internet company delivering applications and services for
personalized content and e-commerce. Prior to joining Art Technology Group, Mr.
Anderholm was Vice President, Electronic Channel Development at Fidelity
Investments from 1996 to 1997.  While there he helped lead the effort to develop
online channels, focusing on the Internet.  He was responsible for strategic
market planning and the direction of marketing programs across many functional
groups within Fidelity. From 1984 to 1995, Mr. Anderholm served in a variety of
marketing roles of increasing responsibility at Lotus Development Corporation
where he managed development 

                                       21
<PAGE>
 
and execution of worldwide marketing strategy, positioning, and marketing
programs for Lotus 1-2-3 and Freelance product lines.

Mr. John E. Cambray (43) has served as Vice President, Product Development since
August 1993. Mr. Cambray has been with Davox since 1982 and has held various
software development and engineering management positions during this time.
Prior to joining Davox, Mr. Cambray held various design and management positions
with FASFAX Corporation and Sanders Associates.

Mr. Joseph R. (Rusty) Coleman (43) serves as Vice President of North American
Sales. In this position, Mr. Coleman oversees all direct Davox sales activities
in the United States and Canada, as well as Davox's channel relationships with
Lucent Technologies and Siemens Business Communications. He also is responsible
for technical sales support and sales administration. In his most recent
position as senior director for inbound products, Mr. Coleman was instrumental
in leading the company-wide effort to integrate the AnswerSoft Concerto(TM)
product line with the Davox Unison(R) suite of call center products. In addition
to his new responsibilities, Mr. Coleman continues to direct this integration
effort. Prior to joining Davox in 1993, Mr. Coleman held management positions of
increasing responsibility at such technology companies as XL Datacomp, Picture
Data, Inc., and TRACS, Inc.

Mr. John J. Connolly (42) has served as Vice President, Finance and Chief
Financial Officer since August 1, 1994, and was elected Treasurer in January
1997. Mr. Connolly joined Davox from Iris Graphics where he had been Vice
President of Finance since 1989. Prior to joining Iris, Mr. Connolly held
finance and accounting positions of increasing responsibilities at
Instrumentation Laboratory, a manufacturer of medical equipment. On March 4,
1999, the Company announced the resignation of Mr. Connolly, which will be
effective March 31, 1999. Mr. Connolly is leaving the Company to pursue a senior
financial management opportunity with a privately held company.

Mr. Mark Donovan (44) serves as Senior Vice President, Operations and Customer
Services. Since joining Davox in 1983, Mr. Donovan has held management positions
of increasing responsibility, including Vice President, Customer Service. He has
also held various materials and manufacturing management positions within the
Company. Prior to joining Davox, Mr. Donovan held various management positions
with Applicon, Inc. and Raytheon Corporation.

Mr. James F. Mitchell (52) is a founder of the Company and has served as Senior
Vice President and Chief Technical Officer since 1983. In 1998, Mr. Mitchell was
appointed chairperson of the Company's Year 2000 Readiness Committee. From
September 1993 to August 1994, Mr. Mitchell managed the domestic sales
operations of the Company. From 1981 to 1983, he was Vice President, Engineering
of the Company. Prior to joining Davox in 1981, Mr. Mitchell served as Manager
of Systems Development at Applicon, Inc., a producer of CAD/CAM products.

Mr. Douglas W. Smith (56) serves as Senior Vice President of International
Operations and Strategic Business Development. He is responsible for the
Company's international sales and distribution channels worldwide, and he also
directs the Company's strategic business development initiatives which have
resulted in business partnerships with Lucent Technologies, Siemens Business
Communications, and Siebel Systems. Mr. Smith joined the Company as Vice
President of Sales and Marketing in September 1994, following seven years at
Iris Graphics where he contributed to that company's extraordinary growth. Prior
to joining Iris, Mr. Smith worked for nearly 20 years in sales, managerial, and
executive-level capacities for 

                                       22

<PAGE>
 
General Electric Information Systems, Honeywell Information Systems, Raytheon 
Data Systems, and Phoenix Data Systems.

Officers are elected by and serve at the discretion of the Board of Directors.

                                       23
<PAGE>
 
                                    PART II

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

     Davox's Common Stock has been traded on the Nasdaq stock market under the
symbol "DAVX" since its initial public offering on April 28, 1987. Prior to that
date there was no public market for Davox's Common Stock. The following table
sets forth the range of high and low sale prices per share of Common Stock on
the National Market System for each quarter of the years ended December 31, 1998
and 1997 as reported by the National Association of Securities Dealers Automated
Quotation System (NASDAQ). On April 24, 1997, the Company effected a three for
two stock split through the issuance of a 50% stock dividend payable on May 28,
1997 to shareholders of record on May 13, 1997. All share and per share amounts
affected by this split, that are contained in this report on Form 10-K have been
retroactively adjusted for all periods presented.

 
                                 Fiscal 1998
                              High          Low
                              ----          ---
 
       First Quarter         34-7/8       24-1/2
       Second Quarter        29-7/8       16-9/16
       Third Quarter         22-1/4        9-3/16
       Fourth Quarter         9-1/8        5-3/8
 
 
                                 Fiscal 1997
                              High          Low
                              ----          ---
 
       First Quarter         30-1/6       16-2/3
       Second Quarter        35-7/8       20
       Third Quarter         38-5/8       27-3/4
       Fourth Quarter        39-3/4       25-1/8
 

     As of March 1, 1999, there were approximately 444 holders of record of the
Company's Common Stock and approximately 7,204 beneficial shareholders of the
Company's Common Stock.

     In January 1999, the Board of Directors authorized, effective February 1,
1999, the purchase of up to 3,000,000 shares of the Company's common stock, at
such times when the Company deems such purchases to be an effective use of cash.
Shares that are repurchased may be used for various purposes including the
issuance of shares pursuant to the Company's stock option plans. Under the stock
repurchase program, shares may be repurchased, at management's discretion, from
time to time at prevailing prices in the open market. The repurchase program of
three million shares represents approximately 21% of the Company's currently
issued and outstanding shares. As of March 1, 1999, the Company had repurchased
80,000 shares under this repurchase program.

                                       24
<PAGE>
 
     The Company has never paid cash dividends on its Common Stock and has no
present intentions to pay cash dividends in the future. The Company intends to
retain any future earnings to finance the growth of the Company.

     The Company has not sold any equity securities during the period covered by
this report that were not registered under the Securities Act of 1933, as
amended.

                                       25
<PAGE>
 
ITEM 6    SELECTED FINANCIAL DATA

The following  table sets forth certain  condensed  consolidated  financial data
with respect to the Company for each of the five years in the period ended
December 31, 1998:
<TABLE>
<CAPTION>

                                                                           Years Ended December 31,
                                             --------------------------------------------------------------------------------------
                                               1998 (a)          1997 (a)           1996 (a)          1995 (a)         1994 (a)
                                               --------          --------           --------          --------         --------
                                                                   (In Thousands, Except Per Share Amounts)
<S>                                          <C>              <C>                <C>               <C>               <C>    

Condensed Consolidated Statement of Operations Data:
    Total revenue                                  $88,948            $83,554           $57,098           $38,597          $30,083
    Cost of revenue                                 30,114             28,029            22,230            17,164           16,234
                                             --------------   ----------------   ---------------   ---------------   --------------
         Gross profit                               58,834             55,525            34,868            21,433           13,849
    Research, development and
        engineering expenses                        12,086             10,418             6,734             4,901            4,860
    Selling, general and
        administrative expenses                     34,841             29,710            19,704            13,967           14,709
    Non-recurring merger costs                       1,926                --                --                --               -- 
    Restructuring costs                                --                 --                --                --             3,379
                                             --------------   ----------------   ---------------   ---------------   --------------
     Income (loss) from operations                   9,981             15,397             8,430             2,565           (9,099)
     Other income, net                               2,941              2,031             1,217               629               44
                                             --------------   ----------------   ---------------   ---------------   --------------
     Income (loss) before provision                                                                                   
         for income taxes                           12,922             17,428             9,647             3,194           (9,055)
      Provision for income taxes                     4,393              2,507             1,014               559              -- 
                                             --------------   ----------------   ---------------   ---------------   --------------
         Net income (loss)                          $8,529            $14,921            $8,633            $2,635          ($9,055)
                                             ==============   ================   ===============   ===============   ==============

Earnings per share:
         Basic                                        $.60              $1.15              $.72              $.23           ($1.01)
                                             ==============   ================   ===============   ===============   ==============
         Diluted                                      $.58              $1.05              $.64              $.21           ($1.01)
                                             ==============   ================   ===============   ===============   ==============

Weighted average shares outstanding:
         Basic                                      14,130             12,940            11,947            11,280            8,951
                                             ==============   ================   ===============   ===============   ==============
         Diluted                                    14,822             14,270            13,593            12,846            8,951
                                             ==============   ================   ===============   ===============   ==============

<CAPTION>
                                                                                 December 31,
                                             --------------------------------------------------------------------------------------
                                                      1998               1997              1996              1995             1994
                                             --------------------------------------------------------------------------------------
                                                                                (In Thousands)
<S>                                               <C>                <C>                <C>              <C>                <C>

Condensed Consolidated Balance Sheet Data:
    Working capital                                $62,756            $52,847           $21,129           $11,299           $6,813
    Total assets                                    89,423             81,560            44,478            24,115           20,276
    Long-term obligations                              --                 297               --                 50              155
    Redeemable Preferred Stock                         --              13,911             8,480             8,480            8,480
    Stockholders' equity                            69,327             44,464            16,890             5,445            2,191
</TABLE>

(a) Historical financial information has been restated to reflect the
combination of Davox and AnswerSoft accounted for as a pooling of interests, and
the 3-for-2 stock split effected in the form of a stock dividend payable to
shareholders of record on May 13, 1997.

                                       26
<PAGE>
 
Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

All statements contained herein that are not historical facts, including, but
not limited to, statements regarding anticipated future capital requirements,
the Company's future development plans, the Company's ability to obtain debt,
equity or other financing, and the Company's ability to generate cash from
operations, are based on current expectations. These statements are forward
looking in nature and involve a number of risks and uncertainties, as more fully
described under "Certain Factors That May Affect Future Results." Actual results
may differ materially.

The following table sets forth, for the periods indicated, the percentage of
revenue represented by items as shown in the Company's Consolidated Statements
of Operations. This table should be read in conjunction with the Selected
Financial Data, Consolidated Financial Statements and Notes to Consolidated
Financial Statements contained elsewhere herein.

                       Percentage of Total Revenue For The
                            Years Ended December 31,

---------------------------------------------------------------------------
                                     1998           1997            1996

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

Product revenue                      60.5%          69.8%           69.6%
Service revenue                      39.5           30.2            30.4

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

Total revenue                       100.0          100.0           100.0

Cost of revenue                      33.8           33.5            38.9

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

Gross profit                         66.2           66.5            61.1

Research, development                                          
and engineering expenses             13.6           12.5            11.8

Selling, general and
administrative expenses              39.2           35.6            34.5

Non-recurring merger 
related expenses                      2.2            --              --

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

Income from operations               11.2           18.4            14.8

Other income, net                     3.3            2.4             2.1

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

Income before provision
for income taxes                     14.5           20.8            16.9  

Provision for income taxes            4.9            3.0             1.8

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

Net income                            9.6%          17.8%           15.1%

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

                                       27
<PAGE>
 
     Total revenue was approximately $88.9 million, $83.6 million and $57.1
million for the fiscal years ended December 31, 1998, 1997 and 1996,
respectively. Total revenue increased 6.5% for the year ended December 31, 1998
compared to the same period in 1997 and increased 46.3% in fiscal year 1997
compared to fiscal year 1996. Total cost of revenue as a percentage of total
revenue was 33.8% in fiscal year 1998, 33.5% in fiscal year 1997 and 38.9% in
fiscal year 1996.

     Product revenue was approximately $53.8 million, $58.3 million and $39.7
million in fiscal years 1998, 1997 and 1996, respectively. Product revenue
decreased by 7.7% in 1998 and increased 46.7% in 1997. The decrease in 1998 was
due to lower product sales in the international market, which was only partially
offset by a slight increase in domestic sales. The increase in 1997 was caused
by increased worldwide demand for the Unison/(R)/ call center management system,
especially the telemarketing and collections applications.

     Cost of product revenue as a percentage of product revenue was 19.5%,
20.7%, and 27.6% in fiscal years 1998, 1997 and 1996, respectively. The decrease
as a percentage of product revenue in 1998 was due to the continued decrease in
the hardware content of the Company's products. The decrease as a percentage of
product revenue in 1997 was due to the increase in the volume of product sales
relative to fixed costs.

     Service revenue was approximately $35.1 million, $25.3 million, and $17.4
million in fiscal years 1998, 1997 and 1996, respectively. Service revenue
increased 39.1% and 45.5% in 1998 and 1997, respectively. These increases in
1998 and 1997 were due to an increase in maintenance revenue related to the
growth in the installed base of the Company's products in recent years and
increased implementation and professional services revenue.

     Cost of service revenue as a percentage of service revenue was 55.8%, 63.3%
and 64.9% in 1998, 1997 and 1996, respectively. These decreases as a percentage
of service revenue were attributable to the growth in service revenue in 1998
and 1997, which exceeded the associated increases in the costs of servicing a
larger installed base of products.

     Revenue from the Company's largest single customer in each of 1998, 1997
and 1996 was approximately 13%, 10%, and 4% of total revenue, respectively.
Revenue from the Company's three largest customers amounted to 24%, 18% and 12%
of total revenue in 1998, 1997 and 1996, respectively. The Company intends to
broaden its base of existing and new customers by penetrating new markets,
expanding its direct international sales force and using alternate channels of
distribution, thereby decreasing its dependence on its largest end user
customers.

     Research, development and engineering expenses were approximately $12.1
million, $10.4 million and $6.7 million, representing 13.6%, 12.5% and 11.8% of
total revenue during 1998, 1997 and 1996, respectively. These increases were
primarily attributable to higher payroll expenses in 1998 compared to 1997, and
to higher payroll and consulting expenses in 1997 compared to 1996.

     Selling, general and administrative (SG&A) expenses were approximately
$34.8 million, $29.7 million and $19.7 million, representing 39.2%, 35.6% and
34.5% of total revenue during 1998, 1997 and 1996, respectively. The increases
in 1998 were primarily 

                                       28
<PAGE>
 
attributable to increased payroll and related expenses, increased travel and
related sales expenses, and increased consulting fees. The increases in 1997
were mostly attributable to increased payroll and related expenses, increased
travel and related sales expenses, and increased commission expense.

     In connection with the merger with AnswerSoft, Inc., the Company incurred
non-recurring merger transaction costs, primarily professional fees, of $1.3
million. In addition, the Company incurred non-recurring costs, primarily
severance and lease termination costs, of $597,000 related to the integration of
the two businesses.

     Other income, derived primarily from investments in Eurodollar bonds,
commercial paper, and money market instruments, increased 44.8% in 1998 and
66.9% in 1997. These increases were due primarily to the significant increases
in the average investible cash and cash equivalent and marketable securities
balances over the past three fiscal years.


INCOME TAXES

     In 1998, the Company provided for income taxes at an estimated annual
effective tax rate of 34%. This is lower than the combined federal and state
statutory tax rates due primarily to the utilization of net operating loss and
tax credit carryforwards and benefits derived from the Company's foreign sales
corporation. The Company provided for income taxes in 1997 and 1996 using
estimated annual effective tax rates of 14.4% and 10.5% respectively, due
primarily to the utilization of net operating loss carryforwards.


LIQUIDITY AND CAPITAL RESOURCES
 
     As of December 31, 1998, the Company's principal sources of liquidity were
its cash and cash equivalent balances of approximately $31.8 million, and its
marketable securities of approximately $27.7 million. As of the end of fiscal
1997, the Company's cash and cash equivalent balances were approximately $28.6
million, and its marketable securities were approximately $23.8 million. The
overall increase in cash and cash equivalents and marketable securities was due
primarily to favorable operating results and proceeds from exercises of stock
options. In addition, the Company has an agreement for a working capital line of
credit with a bank for up to $2.0 million based on eligible receivables, as
defined. There were no outstanding balances as of December 31, 1998 or 1997
under this line of credit.

     The Company's primary investing activities were purchases of property and
equipment, and purchases and sales of marketable securities. Property and
equipment purchases were approximately $3.4 million in 1998 compared to
approximately $4.6 million and $4.2 million in 1997 and 1996 respectively.
Purchases and sales of marketable securities generated a net cash outflow of
approximately $3.9 million in 1998 compared to a net cash outflow of
approximately $14.0 million and $9.8 million in 1997 and 1996, respectively.

     Cash provided by financing activities in 1998 and 1996 was approximately
$1.9 million and $1.9 million, respectively, which was generated primarily from
proceeds from exercises of stock options. Cash provided by financing activities
in 1997 was approximately $7.7 million, 

                                       29
<PAGE>
 
and was generated primarily from the issuance of $5.1 million of AnswerSoft
preferred stock and from proceeds from the exercise of stock options.

     Working capital as of December 31, 1998 was approximately $62.8 million as
compared to approximately $52.8 million and $21.1 million as of December 31,
1997 and 1996, respectively. Total assets as of December 31, 1998 were
approximately $89.4 million compared to approximately $81.6 million and $44.5
million as of December 31, 1997 and 1996, respectively. These increases were
primarily attributable to increases in cash and cash equivalents, marketable
securities and accounts receivable due to the Company's favorable operating
results.
 
     Management believes, based on its current operating plan, that the
Company's existing cash and cash equivalents, marketable securities, cash
generated from operations and amounts available under its working capital line
of credit will be sufficient to meet the Company's cash requirements for the
next twelve months.

 
IMPACT OF INFLATION

     The Company believes that inflation did not have a material effect on the
results of operations in 1998, 1997 and 1996.


NEW ACCOUNTING STANDARDS

     In 1998, the Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 supersedes SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise, replacing the
"industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas, and major customers. The Company's
adoption of SFAS No. 131 did not affect its results of operations or financial
position, but did affect the disclosure of segment information.

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Company is required to adopt this for its fiscal
year 2000. Management does not believe that the adoption of SFAS No. 133 in
fiscal year 2000 will have a material effect on the financial condition and
operating results of the Company.

 
YEAR 2000 READINESS DISCLOSURE - made pursuant to the Year 2000 Information and
Readiness Disclosure Act, Pub. L. No. 105-271 (1998)

     The Year 2000 presents potential concerns and issues for the Company as
well as other companies in the information technology industry. In general, Year
2000 readiness issues typically arise in computer software and hardware systems
that use two digit date formats, 

                                       30
<PAGE>
 
instead of four digit dates, to represent a particular year. Users must test
their unique combination of hardware, system software (including databases,
transaction processors, and operating systems) and application software in order
to achieve Year 2000 readiness.


YEAR 2000 COMMITTEE

     The Company has established a Year 2000 steering committee under the
auspices of the Company's senior technical executive to evaluate, plan and
implement policies and practices, including contingency planning, and to address
the impact of the Year 2000 on the Company and its products. The Company's Year
2000 readiness preparations fall into three categories: (1) product readiness,
addressing product functionality; (2) internal readiness, addressing the Year
2000 operability of internal information technology ("IT") systems and mission
critical non-IT systems; and (3) third party readiness, addressing the
preparedness of relevant third parties and the Year 2000 operability of products
furnished for internal use and resale. After reviewing these areas, the
committee has reported to the Board of Directors specific areas of concern and a
plan for resolving and further testing of any remaining Year 2000 issues. The
committee will also formulate a contingency plan in the event that the committee
reasonably determines that certain Year 2000 issues may not be resolved by the
end of 1999 or if unforeseen problems arise.


STATUS OF INVESTIGATION - PRODUCT READINESS

     The Company has established Year 2000 date operability standards against
which the most current versions of its software products are being tested. The
Company has completed testing of its current line of Unison/(R)/ software
products and believes the most current versions conform to these standards and
are Year 2000 ready. In connection with the acquisition of AnswerSoft, Inc. in
May 1998, the Company acquired the Concerto/(TM)/ line of software tool
products. The Company has completed testing of the current releases of
Concerto/(TM)/ software products and believes them to be Year 2000 ready, except
IIR. All versions of IIR are believed to be not Year 2000 ready. All customers
have been told to upgrade to SmartRoute/(TM)/, which is Year 2000 ready. Despite
the Company's testing, there can be no assurance that the Company's products do
not contain undetected errors or defects related to Year 2000 operability that
may result in material costs to the Company or that the Company's products
contain all features and functionality considered necessary by customers, end
users and distributors to be Year 2000 ready.

     In early 1994, the Company discontinued its Computerized Automated Dialing
System ("CAS") and Communications Resource Server ("CRS") product lines and
introduced the Unison brand line of software products. Support of the CAS and
CRS products will be discontinued as of December 31, 1999. The Company has not
tested the CAS and CRS product lines and believes they do not conform to its
test standards and are not Year 2000 ready. The Company has actively been
notifying known users of these products that support is being discontinued and
that users may experience Year 2000 related operability issues. Users of these
discontinued or "legacy" products are being encouraged to migrate to the Unison
product line. The Company's exposure arising from its legacy products is not
known. The

                                       31
<PAGE>
 
Company does expect to incur additional costs associated with migrating users of
legacy products, but does not believe these costs will be material.

     While the Company believes that most of its current releases of products
are Year 2000 ready, other factors may result in an application created using
the Company's products not being Year 2000 ready. Some of these factors include
improper programming techniques used by third parties in creating the
application, customization, or non-compliance of hardware, software or firmware
not provided by the Company with which the products operate. The Company does
not believe that it would be liable in such an event. However, due to the
unprecedented nature of the potential litigation related to Year 2000 readiness
as discussed in the industry and popular press, the most likely worst case
scenario is that the Company would be subject to litigation. It is uncertain
whether or to what extent the Company may be affected by such litigation.

     The Company has tested only the current versions of its products, and does
not plan to test earlier versions of products. The Company believes a
substantial number of the Company's customers are running product versions which
have not been tested and may experience Year 2000 date related operability
issues. The Company is in the process of identifying these customers and
encouraging them to migrate to current versions of the products. Further, the
Company cautions users of such products to conduct their own Year 2000
operability testing to determine if continued use of the products allows them to
meet their own Year 2000 readiness objectives. While many customers will be
upgraded to Year 2000 ready versions of products under maintenance coverage, if
eligible, in the normal course the Company expects to incur some increased
expenses associated with the furnishing of upgrades and modifications. In
addition, the ability of the Company to implement upgrades in time to meet
customer's Year 2000 readiness requirements requires the continued availability
of qualified technical personnel and the Company may incur additional costs to
attract and retain such personnel as the Year 2000 draws closer. At this time
the Company does not believe that the cost of potential upgrades or
modifications will have a material effect on the Company's business, financial
condition and operating results.


STATUS OF INVESTIGATION - INTERNAL READINESS

     The Company is engaged in conducting a Year 2000 readiness audit of its
internal IT systems (including telecommunication, facilities management, safety
and security systems). Although the Company is not presently aware of any
material operational issues or costs associated with preparing its internal IT
and non-IT systems for the Year 2000, the Company is continuing its
investigation and there can be no assurance that the Company will not experience
unanticipated negative consequences or material costs caused by undetected
errors or defects in the technology used in its internal systems, which include
third party hardware, firmware, and software. The Company anticipates finalizing
its testing of internal systems on or about June 30, 1999.

STATUS OF INVESTIGATION - THIRD PARTY READINESS

     The Company is continuing to assess the Year 2000 readiness of material
third parties, such as public utilities and key clients or suppliers, who
provide external services to the 

                                       32
<PAGE>
 
Company. The Company expects to substantially complete these assessments and
testing by the middle of 1999. The Company has certain key relationships with
suppliers which furnish components and software used by the Company in its
products. If these suppliers fail to adequately address the Year 2000 issue for
the products they supply the Company, this could have a material adverse effect
on the Company's operations, reputation, and financial results. Certain of the
Company's products contain third party components and software that is integral
to its operation for which the cost and time to integrate alternative components
or software into these products would be material.

CONTINGENCY PLANS AND WORST CASE SCENARIO

     At the present time, the Company is in the process of outlining contingency
plans to operate in the event that its products, systems, or business partners
are not Year 2000 ready. If the Company's investigations suggest that there is a
significant risk that certain products, systems, or business partners might not
be Year 2000 ready, the Company will modify its contingency plans accordingly.


COSTS, SOURCE OF FUNDS AND ACCOUNTING TREATMENT

     The Company's policy is to expense all costs related to its Year 2000
compliance program unless the useful life of the technological asset is extended
or increased. The expenses incurred to date have not had a material impact on
the Company's results of operations or financial condition. At this time, the
Company intends to fund Year 2000 expenses through cash flows from operations.
The impact of the Year 2000 is difficult to discern, but is a risk to be
considered when evaluating future growth and performance of the Company.


ITEM 7(A).  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Derivative Financial Instruments, Other Financial Instruments, and Derivative
Commodity Instruments.

     As of December 31, 1998, the Company did not participate in any derivative
financial instruments or other financial and commodity instruments for which
fair value disclosure would be required under SFAS No. 107. All of the Company's
investments are short-term, Euro dollar bonds, investment-grade commercial
paper, and money market accounts that are carried on the Company's books at
amortized cost, which approximates fair market value. Accordingly, the Company
has no quantitative information concerning the market risk of participating in
such investments.

                                       33
<PAGE>
 
Primary Market Risk Exposures.

     The Company's primary market risk exposures are in the areas of interest
rate risk and foreign currency exchange rate risk. The Company's investment
portfolio of cash equivalent and short-term investments is subject to interest
rate fluctuations, but the Company believes this risk is immaterial due to the
short-term nature of these investments.

     The Company's exposure to currency exchange rate fluctuations has been and
is expected to continue to be modest due to the fact that the operations of its
international subsidiaries are almost exclusively conducted in their respective
local currencies. International subsidiary operating results are translated into
U.S. dollars and consolidated for reporting purposes. The impact of currency
exchange rate movements on intercompany transactions was immaterial for the year
ended December 31, 1998. Currently the Company does not engage in foreign
currency hedging activities.


ITEM 8   CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements and Financial Statement Schedule
 
                                                         Page
                                                         ----
Report of Independent Public Accountants                   35
 
Report of Independent Public Accountants                   36
 
Consolidated Balance Sheets as of December 31,
  1998 and 1997                                            37
 
Consolidated Statements of Income for the Years
  Ended December 31, 1998, 1997 and 1996                   38
 
Consolidated Statements of Stockholders' Equity
  for the Years Ended December 31, 1998, 1997
  and 1996                                                 39
 
Consolidated Statements of Cash Flows for the Years
  Ended December 31, 1998, 1997 and 1996                   40
 
Notes to Consolidated Financial Statements                 41
 
Report of Independent Public Accountants on Financial
  Statement Schedule                                       59
 
Schedule II - Valuation and Qualifying Accounts            60

                                       34
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To Davox Corporation:

     We have audited the accompanying consolidated balance sheets of Davox
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1998
and 1997 and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
AnswerSoft, Inc., a company acquired during 1998 in a transaction accounted for
as a pooling of interests, as discussed in Note 2. Such statements are included
in the consolidated financial statements of Davox Corporation and reflect total
assets of $6,392,000 at December 31, 1997 and total revenues of $6,738,000 and
$3,456,000 for the years ended December 31, 1997 and 1996, respectively, of the
related consolidated totals. These statements were audited by other auditors
whose report has been furnished to us. Our opinion expressed herein, insofar as
it relates to amounts included for AnswerSoft, Inc., is based solely upon the
report of the other auditors.

     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 and the report of the other auditors provide a
reasonable basis for our opinion.

     In our opinion, based on our audit and the report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Davox Corporation and subsidiaries as of
December 31, 1998 and 1997 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.


                                                          ARTHUR ANDERSEN LLP


Boston, Massachusetts
January 26, 1999

                                       35
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To Board of Directors and Stockholders of AnswerSoft, Inc.:

     We have audited the accompanying consolidated balance sheets of AnswerSoft,
Inc., as of December 31, 1997 and 1996 and the related consolidated statements
of operations, stockholders' equity and cash flows for the years then ended (not
presented herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of AnswerSoft Inc.
at December 31, 1997 and 1996, and the consolidated results of its operations
and its cash flows for the years then ended, in conformity with generally
accepted accounting principles.

                                                             ERNST & YOUNG LLP


Dallas, Texas
February 28, 1998

                                       36
<PAGE>
 
                       DAVOX CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                 (In Thousands)


                                                       December 31, December 31,
                     ASSETS                                1998         1997
                                                       -----------  -----------
Current assets:
     Cash and cash equivalents                          $ 31,759      $ 28,639
     Marketable securities                                27,711        23,802
     Accounts receivable, net of reserves of       
       $1,175 and $1,134 in 1998 and           
       1997, respectively                                 15,959        12,599
     Interest receivable                                     739           --
     Deferred tax assets                                   4,887         9,319
     Prepaid expenses and other current assets             1,776         1,123
                                               
                                                       ----------   -----------
        Total current assets                              82,831        75,482
                                                       ----------   -----------

Property and equipment, net                                5,298         5,248
Other assets                                               1,294           830
                                                       ----------   -----------

                                                        $ 89,423      $ 81,560
                                                       ==========   ===========

                     LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable                                    $ 4,965       $ 5,247
     Accrued expenses                                      9,461        10,837
     Customer deposits                                     1,892         2,018
     Deferred revenue                                      3,757         4,355
     Current portion of long-term obligations                --            178
                                                        ---------     ---------
        Total current liabilities                         20,075        22,635
                                                        ---------     ---------
                                                  
Deferred revenue, less current portion                        21           253
Long-term obligations, less current portion                  --            297
                                                        ---------     ---------
               Total long-term liabilities                    21           550
                                                        ---------     ---------

Commitments and Contingencies (Note 7)

Redeemable preferred stock, $.01 par value -
     Authorized - 25,000 shares at December 31, 1997
     Outstanding - 1,836 shares at December 31, 1997         --         13,911

Stockholders' equity:
     Common stock, $.10 par value  -                
        Authorized - 30,000 shares                  
        Issued - 14,349 and 12,040                  
         shares in 1998 and 1997, respectively             1,435         1,204
     Additional paid-in capital                           73,555        57,870
     Accumulated foreign currency translation       
      adjustment                                              11             7
     Accumulated deficit                                  (5,650)      (14,179)
     Note receivable due from officer                        --           (414)
                                                       ----------    ----------
                                                          69,351        44,488
        Less - Treasury stock, 3 shares at cost              (24)          (24)
                                                       ----------    ----------
        Total stockholders' equity                        69,327        44,464
                                                       ----------    ----------
                                                        $ 89,423      $ 81,560
                                                       ==========    ==========

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

                                       37
<PAGE>
 
                       DAVOX CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                    (In Thousands, Except Per Share Amounts)



<TABLE>
<CAPTION>
                                                                          For the Years
                                                                        Ended December 31,
                                                                  ----------------------------
                                                                    1998       1997       1996
                                                                  -------    -------   -------
<S>                                                               <C>        <C>       <C>

Product revenue                                                   $53,818    $58,300   $39,743
Service revenue                                                    35,130     25,254    17,355
                                                                  -------    -------   -------
      Total revenue                                                88,948     83,554    57,098
                                                                  -------    -------   -------

Cost of product revenue                                            10,510     12,045    10,973
Cost of service revenue                                            19,604     15,984    11,257
                                                                  -------    -------   -------
      Total cost of revenue                                        30,114     28,029    22,230
                                                                  -------    -------   -------

      Gross profit                                                 58,834     55,525    34,868
                                                                  -------    -------   -------
Operating expenses:
Research, development and engineering                              12,086     10,418     6,734
Selling, general and administrative                                34,841     29,710    19,704
Non-recurring merger related transaction costs                      1,329        --        --
Non-recurring merger related integration costs                        597        --        --
                                                                  -------    -------   -------
      Total operating expenses                                     48,853     40,128    26,438
                                                                  -------    -------   -------

      Income from operations                                        9,981     15,397     8,430
Other income (primarily interest), net                              2,941      2,031     1,217
                                                                  -------    -------   -------

      Income before provision for income taxes                     12,922     17,428     9,647
Provision for income taxes                                          4,393      2,507     1,014
                                                                  -------    -------   -------
      Net income                                                  $ 8,529    $14,921   $ 8,633
                                                                  =======    =======   =======
Earnings per share:
        Basic                                                      $ 0.60     $ 1.15     $0.72
                                                                  =======    =======   =======
        Diluted                                                    $ 0.58     $ 1.05     $0.64
                                                                  =======    =======   =======
Weighted average shares outstanding:
        Basic                                                      14,130     12,940    11,947
                                                                  =======    =======   =======
        Diluted                                                    14,822     14,270    13,593
                                                                  =======    =======   =======

   The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
                                       38
<PAGE>
 
                       DAVOX CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (In Thousands)
<TABLE>
<CAPTION>
                                                        Accumulated                                           
                                 Common Stock    Addi-   Foreign                Note                   Total         
                               ---------------- tional   Currency    Accumu- Receivable Treasury Stock Stock-  Compre-        
                                        $.10    Paid-in Translation   lated   Due From  -------------- holders hensive
                               Shares Par Value Capital Adjustment   Deficit  Officer   Shares  Amount Equity  Income
                               ------ --------- ------- -----------  ------- ---------- ------  ------ ------- -------
<S>                            <C>    <C>       <C>     <C>          <C>     <C>        <C>     <C>    <C>     <C>
BALANCE, December 31, 1995     10,342  $1,034   $42,168    $ --     $(37,733) $  --       $ 3    $(24) $ 5,445     -- 
Proceeds from exercise of                                                                       
 stock options, including                                                                       
 related tax benefit              805      80     2,641      --          --      --       --      --     2,721     -- 
Proceeds from purchases under                                                                   
 employee stock purchase plan      15       2        89      --          --      --       --      --        91     -- 
  Net income                      --      --        --       --        8,633     --       --      --     8,633   8,633
                                                                                                               -------
Comprehensive income for the                                                                    
 year ended December 31, 1996     --      --        --       --          --      --       --      --      --     8,633
                               ------  ------   -------      ---    --------  ------      ---   -----  ------- -------
BALANCE, December 31, 1996     11,162   1,116    44,898      --      (29,100)    --         3     (24)  16,890     -- 
Proceeds from exercise of                                                                       
 stock options, including                                                                       
 related tax benefit              848      85    12,694      --          --      (58)     --      --    12,721     -- 
Proceeds from purchases under                                                                   
 employee stock purchase plan      12       1       244      --          --      --       --      --       245     -- 
Common stock issued for                                                                         
 services rendered                 18       2        34      --          --      --       --      --        36     -- 
Issuance of note receivable                                                                     
 for preferred stock              --      --        --       --          --     (356)     --      --      (356)    -- 
Translation adjustment            --      --        --         7         --      --       --      --         7       7
  Net income                      --      --        --       --       14,921     --       --      --    14,921  14,921
                                                                                                               ------- 
Comprehensive income for the                                                                    
 year ended December 31, 1997     --      --        --       --          --      --       --      --       --   14,928
                               ------  ------   -------      ---    --------  ------      ---   -----  ------- -------
BALANCE, December 31, 1997     12,040   1,204    57,870        7     (14,179)   (414)       3     (24)  44,464     -- 
Proceeds from exercise of                                                                       
 stock options, including                                                                       
 related tax benefit              452      45     1,507      --          --      --       --      --     1,552     -- 
Proceeds from purchases under                                                                   
 employee stock purchase plan      21       2       451      --          --      --       --      --       453     -- 
Conversion of preferred stock                                                                   
 into common stock              1,836     184    13,727      --          --      --       --      --    13,911     -- 
Repayment of note receivable      --      --        --       --          --      414      --      --       414     -- 
Translation adjustment            --      --        --         4         --      --       --      --         4       4
  Net income                      --      --        --       --        8,529     --       --      --     8,529   8,529
                                                                                                               -------
Comprehensive income for the                                                                    
 year ended December 31, 1998     --      --        --       --          --      --       --      --       --    8,533
                               ------  ------   -------      ---    --------  ------      ---   -----  ------- -------
BALANCE, December 31, 1998     14,349  $1,435   $73,555      $11    $ (5,650) $  --       $ 3   $ (24) $69,327 $   --
                               ======  ======   =======      ===    ========  ======      ===   =====  ======= =======
                                                                                               
                The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
                                       39
<PAGE>
 
                       DAVOX CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                                                       For the Years Ended
                                                                                           December 31,
                                                                             -------------------------------------
                                                                               1998           1997          1996
                                                                             --------      ---------     ---------
<S>                                                                          <C>           <C>           <C>
Cash Flows From Operating Activities:                                                                    
  Net income                                                                 $ 8,529       $ 14,921       $ 8,633
  Adjustments to reconcile net income to net cash
   provided by operating activities -
     Depreciation and amortization                                             3,356          3,677         2,472
     Changes in current assets and liabilities -
         Accounts receivable                                                  (3,360)        (8,235)          397
         Interest receivable                                                    (739)           --            --   
         Deferred tax asset, prepaid expenses and
           other current assets                                                3,779            381          (409)
         Accounts payable                                                       (282)           119         2,092
         Accrued expenses                                                     (1,376)         5,156         3,259
         Customer deposits                                                      (126)        (1,396)        2,121
         Deferred revenue                                                       (830)           622         2,342
                                                                             --------      ---------     ---------
               Net cash provided by operating activities                       8,951         15,245        20,907
                                                                             --------      ---------     ---------
                                                                                                         
Cash Flows From Investing Activities:
        Purchases of property and equipment                                   (3,406)        (4,602)       (4,198)
        (Increase) decrease in other assets                                     (464)            77          (153)
        Purchases of marketable securities                                   (82,400)       (39,025)      (10,865)
        Sales of marketable securities                                        78,491         25,003         1,085
                                                                             --------      ---------     ---------
               Net cash used in investing activities                          (7,779)       (18,547)      (14,131)
                                                                             --------      ---------     ---------
                                                                                                         
Cash Flows From Financing Activities:
        Principal borrowings of long-term obligations                            --             475           --   
        Principal payments of long-term obligations                             (475)            (5)          (10)
        Payment of note receivable due from officer                              414            --            --   
        Proceeds from issuance of preferred stock                                --           5,075           --   
        Proceeds from exercise of stock options                                1,552          1,869         1,834
        Proceeds from purchases under the employee stock
        purchase plan                                                            453            245            91
                                                                             --------      ---------     ---------
               Net cash provided by financing activities                       1,944          7,659         1,915
                                                                             --------      ---------     ---------
                                                                                                         
               Effect of exchange rate differences on cash                         4              7           --   
                                                                             --------      ---------     ---------

               Net increase in cash and cash equivalents                       3,120          4,364         8,691

Cash and cash equivalents, beginning of year                                  28,639         24,275        15,584
                                                                             --------      ---------     ---------
                                                                                                         
Cash and cash equivalents, end of year                                       $31,759       $ 28,639      $ 24,275
                                                                             ========      =========     =========

Supplemental Disclosure of Cash Flow Information:
                                                                                                         
  Cash paid during the year-
               Income taxes                                                  $ 1,487       $    265      $    429
                                                                             ========      =========     =========
               Interest                                                      $    21       $     23      $     12
                                                                             ========      =========     =========

Supplemental Disclosure of Non-Cash Investing and Financing Activities:

Conversion of redeemable preferred stock into
 common stock                                                                $13,911       $    --       $    --   
                                                                             ========      =========     =========
Preferred stock issued in exchange for note receivable
 due from officer                                                            $   --        $    414      $    --   
                                                                             ========      =========     =========

             The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
                                       40
<PAGE>
 
                      DAVOX CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               DECEMBER 31, 1998


(1)  Operations and Significant Accounting Policies

     Davox Corporation (the Company) is a software and systems integration
company that develops, markets, implements, supports and services management
systems for call center operations located throughout the world. These systems
are marketed directly, through joint marketing relationships and distribution
agreements. The Company markets its systems to banks, consumer finance
organizations, retailers, entertainment companies, telemarketing organizations,
telecommunications companies, and utilities.

     These consolidated financial statements reflect the application of certain
significant accounting policies as described below and elsewhere in the
accompanying consolidated financial statements.

     (a)  Principles of Consolidation

     The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.

     (b)  Management Estimates

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.

     (c)  Revenue Recognition

     In 1997 and 1996, the Company recognized revenue in accordance with the
provisions of Statement of Position (SOP) No. 91-1, Software Revenue
Recognition. In October 1997, the American Institute of Certified Public
Accountants issued SOP No. 97-2 Software Revenue Recognition, which supercedes
SOP No. 91-1.  In 1998 the Company adopted SOP No. 97-2, which generally
requires revenue earned on software arrangements involving multiple elements to
be allocated to each element based on the relative fair values of the elements.
The fair value of an element must be based on evidence that is specific to the
vendor.  If a vendor does not have evidence of the fair value for all the
elements in a multiple-element arrangement, all revenue from the arrangement is
deferred until such evidence exists or until all elements are delivered.  The
Company generates software revenue from licensing the rights to use its software
products.  The Company also generates service revenues from the sale of product
maintenance contracts and consulting services.

                                       41
<PAGE>
 
                      DAVOX CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               DECEMBER 31, 1998

                                  (Continued)

     Revenue from software license fees are generally recognized upon delivery,
net of estimated returns, provided there are no significant postdelivery
obligations, payment is due within one year and is probable of collection. If
acceptance is required, software license revenue is recognized upon customer
acceptance. Fees for consulting services are recognized upon customer
acceptances or over the period in which services are provided if customer
acceptance is not required, and the revenue is fixed and determinable.
Maintenance revenue is deferred at the time of software license shipment and is
recognized ratably over the term of the support period, which is typically one
year.

     (d)  Warranty Costs

     The Company warrants its products for 90 days and provides for estimated
warranty costs upon shipment of such products. Warranty costs have not been and
are not anticipated to be significant.

     (e)  Postretirement Benefits

     The Company has no pension plan or other obligations for postretirement
benefits.

     (f)  Cash, Cash Equivalents and Marketable Securities

     The Company considers all highly liquid investments with original
maturities of three months or less at the time of purchase to be cash
equivalents. Cash equivalents consist mainly of commercial paper.

     The Company accounts for investments in accordance with Statement of
Financial Accounting Standard (SFAS) No. 115, Accounting for Certain Investments
in Debt and Equity Securities. Under SFAS No. 115, securities that the Company
has the positive intent and ability to hold to maturity are reported at
amortized cost and are classified as held-to-maturity. The Company's investments
consist of held-to-maturity securities that are investments in Euro dollar bonds
and high grade commercial paper instruments at December 31, 1998 and 1997. All
of these investments are classified as current as they mature within one year.

                                       42
<PAGE>
 
                       DAVOX CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               DECEMBER 31, 1998

                                  (Continued)

At December 31, 1998 and 1997, held to maturity marketable securities consisted
of the following (in thousands):
<TABLE>
<CAPTION>
                                                                1998                        1997
                                                          Market   Amortized           Market  Amortized
                                                           Value      Cost              Value     Cost
                                                          -----------------------------------------------
<S>                                                      <C>        <C>               <C>       <C>
  Euro dollar bonds.................................      $11,479      $11,484         $11,326   $11,334
  (maturity 3-7 months)
  Commercial paper obligations......................       12,353       12,352           7,082     7,040
  (maturity 3-6 months)
  Corporate bonds...................................        2,685        2,675           3,447     3,448
  (maturity 3-6 months)
  Short-term note...................................        1,201        1,200          ------    ------
  (maturity 4 months)
  Federal agency issues.............................       ------       ------           2,010     1,980
  (maturity 6 months)                                     -------      -------         -------   -------
                                                          $27,718      $27,711         $23,865   $23,802
                                                          =======      =======         =======  ========
</TABLE>

     (g)  Property and Equipment

     The Company provides for depreciation and amortization of property and
equipment using the straight-line and declining-balance methods by charges to
operations in amounts to allocate the cost of the property and equipment over
their estimated useful lives.  The cost of property and equipment and their
useful lives are summarized as follows (in thousands):
<TABLE>
<CAPTION>
                                                            December 31,
                                                   -------------------------------
                                                     Estimated
Asset Classification                                Useful Life      1998     1997
-------------------------------------------------  -------------    -------  -------
<S>                                                <C>            <C>      <C>
Office equipment and software....................    2-3 Years      $13,789  $10,590
Rental and demonstration
  equipment......................................    2-3 Years          311      331
Furniture and fixtures...........................      5 Years          698      534
Leasehold improvements...........................  Life of Lease        286      222
                                                                    -------  -------
                                                                     15,084   11,677
Less-Accumulated depreciation
  and amortization...............................                     9,786    6,429
                                                                    -------  -------
                                                                    $ 5,298  $ 5,248
                                                                    =======  =======
</TABLE>

                                       43
<PAGE>
 
                       DAVOX CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               DECEMBER 31, 1998

                                  (Continued)


     (h)  Research and Development and Software Development Costs

     Research and development costs have been charged to operations as incurred.
SFAS No. 86, Accounting for the Costs of Computer Software To Be Leased, Sold,
or Otherwise Marketed, requires the capitalization of certain computer software
development costs incurred after technological feasibility is established.  The
Company believes that once technological feasibility of a software product has
been established, the additional development costs incurred to bring the product
to a commercially acceptable level are not significant.

     (i)  Foreign Currency Translation

     The Company considers the functional currency of its foreign subsidiaries
to be the local currency, and accordingly, their financial information is
translated into U.S. dollars using exchange rates in effect at period end for
assets and liabilities and average exchange rates during each reporting period
for the results of operations. Adjustments resulting from translation of foreign
subsidiary financial statements are included in stockholders' equity, and are
not material.

     (j)  Earnings Per Share

     Basic earnings per share was determined by dividing net income by the
weighted average shares of common stock outstanding during the year. Diluted
earnings per share reflects the dilution of the potentially dilutive securities,
primarily stock options based on the treasury stock method.

     A reconciliation of basic and diluted weighted averages shares outstanding
is as follows (in thousands):
<TABLE>
<CAPTION>
                                                 1998    1997    1996
                                                ------  ------  ------
<S>                                            <C>     <C>     <C>

 Basic weighted average shares outstanding....  14,130  12,940  11,947
 Potentially dilutive shares..................     692   1,330   1,646
                                                ------  ------  ------
 Diluted weighted average shares outstanding..  14,822  14,270  13,593
                                                ======  ======  ======
 </TABLE>

                                       44
<PAGE>
 
                       DAVOX CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               DECEMBER 31, 1998

                                  (Continued)

 
     In 1998 and 1997, 1,483,807 and 55,042 weighted average common equivalent
shares, respectively, were not included in the diluted weighted average shares
outstanding as they were antidilutive.  There were no antidilutive shares in
1996.

     (k)  Concentration of Credit Risk

     SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance sheet and credit risk
concentrations. Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
short-term investments and trade accounts receivable. The Company places its
temporary cash investments in several financial institutions. The Company has
not experienced significant losses related to receivables from any individual
customers or groups of customers in any specific industry or by geographic area.
Due to these factors, no additional credit risk beyond amounts provided for
collection losses is believed by management to be inherent in the Company's
accounts receivable. The Company had one customer with amounts due to the
Company of approximately 12% and 21% of total accounts receivable as of December
31, 1998 and 1997, respectively.

     (l)  Derivative Financial Instruments and Fair Value of Financial
Instruments

     The Company does not have any derivatives or other financial instruments as
defined by SFAS No. 119, Disclosures About Derivative Financial Instruments and
Fair Value of Financial Instruments.

     SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure of an estimate of the fair value of certain financial
instruments. The Company's financial instruments consist of cash equivalents,
marketable securities, accounts receivable and accounts payable. The estimated
fair value of these financial instruments approximates their carrying value at
December 31, 1998 and 1997 due to the short-term nature of these instruments.

                                       45
<PAGE>
 
                       DAVOX CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               DECEMBER 31, 1998

                                  (Continued)

     (m)  Comprehensive Income
 
     In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 requires disclosure of all components of comprehensive income on an
annual and interim basis. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. The Company adopted SFAS No.
130, effective January 1, 1998, and has disclosed comprehensive income for all
periods presented in the accompanying consolidated statements of stockholders'
equity.

 
(2)  Acquisition of AnswerSoft, Inc.

     In May 1998, the Company acquired AnswerSoft, Inc. (AnswerSoft), a
Richardson, Texas developer of inbound call center software solutions, in
exchange for the issuance of an aggregate of 2,384,452 shares of Davox common
stock, including shares which were subject to outstanding AnswerSoft, Inc. stock
options and warrants.  The acquisition was accounted for as a pooling of
interests under Accounting Principles Board Opinion No. 16.  Accordingly, the
historical consolidated financial statements for the period prior to the merger
have been restated in the accompanying consolidated financial statements to
include the financial position, results of operations and cash flows of
AnswerSoft.  In connection with the merger with AnswerSoft, the Company incurred
non-recurring merger transaction costs (primarily professional fees) of
$1,329,000.  In addition, the Company incurred non-recurring costs (primarily
severance and lease termination costs) of $597,000 related to the integration of
the two businesses.

                                       46
<PAGE>
 
                       DAVOX CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               DECEMBER 31, 1998

                                  (Continued)

     Separate and combined results of Davox and AnswerSoft during the periods
preceding the merger were as follows:
<TABLE>
<CAPTION>
 
                                                   Davox    AnswerSoft   Combined
<S>                                               <C>       <C>          <C>
Three months ended March 31, 1998 (unaudited):
     Total revenue.............................   $23,160     $ 1,260    $24,420
                                                  =======     =======    =======
     Net income (loss).........................   $ 4,433     $(1,173)   $ 3,260
                                                  =======     =======    =======
Year ended December 31, 1997:
     Total revenue.............................   $76,816     $ 6,738    $83,554
                                                  =======     =======    =======
     Net income (loss).........................   $18,380     $(3,459)   $14,921
                                                  =======     =======    =======
Year ended December 31, 1996:
     Total revenue.............................   $53,642     $ 3,456    $57,098
                                                  =======     =======    =======
     Net income (loss).........................   $ 9,115     $  (482)   $ 8,633
                                                  =======     =======    =======
</TABLE>

(3)  Line of Credit

     The Company has a working capital line of credit with a bank that expires
August 31, 1999, if not renewed, pursuant to which the Company may borrow up to
the lesser of $2.0 million or a percentage of accounts receivable, as defined.
Borrowings under the line of credit bear interest at the bank's prime rate
(7.75% at December 31, 1998).  There were no borrowings outstanding under the
line of credit at December 31, 1998 and 1997.

(4)  Accrued Expenses

     Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
                                                       December 31,
                                             ------------------------------
                                                  1998             1997
                                             ------------------------------
<S>                                          <C>                <C>          
Payroll and Payroll related ...........          $3,926            $3,606
Income taxes ..........................             515             2,230  
Accrued cost of sales..................           1,680             1,411  
Sales and property taxes...............             986               858
Other..................................           2,354             2,732
                                                 ------            ------
                                                 $9,461           $10,837
                                                 ======           =======
</TABLE>

                                       47
<PAGE>
 
                       DAVOX CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               DECEMBER 31, 1998

                                  (Continued)

(5)  401(k) Plan

     The Company maintains The Davox Corporation 401(k) Retirement Plan (the
Plan), which is a deferred contribution plan that covers all full-time employees
over 21 years of age. Employees may join the plan in the next quarterly
enrollment period following their date of hire. The participants may make pretax
deferred contributions to the Plan of up to 15% of the annual compensation, as
defined. Contributions to the Plan by the Company are discretionary and are
determined by the Board of Directors. The Company made discretionary
contributions to the Plan of approximately $315,000, $235,000 and $161,000 for
the years 1998, 1997 and 1996, respectively.

(6)  Income Taxes

     The Company accounts for income taxes using the liability method in
accordance with SFAS No. 109, Accounting for Income Taxes. Under the liability
method specified by SFAS No.109, a deferred tax asset or liability is determined
based on the difference between the financial statement and tax bases of assets
and liabilities, as measured by the enacted tax rates assumed to be in effect
when these differences are expected to reverse.

The components of the provision for income taxes consist of the following (in
thousands):
<TABLE>
<CAPTION>
 
                                                  Years Ended December 31,
                                                 -------------------------
                                                   1998      1997    1996
                                                  -----     -----   -----
  Current:
<S>                                              <C>     <C>       <C>     
  Federal.....................................    $3,199  $ 5,701   $  204  
  State.......................................       994    1,606      810                                  
                                                   -----    -----    -----  
    Total current.............................     4,193    7,307    1,014
                                                  ------  -------   ------
  Deferred:
  Federal.....................................       153   (4,300)  -----
  State.......................................        47     (500)  -----
                                                  ------  -------   ------
    Total deferred............................       200   (4,800)  -----
                                                  ------  -------   ------
                                                  $4,393  $ 2,507   $1,014
                                                  ======  =======   ======
</TABLE>

                                       48
<PAGE>
 
                       DAVOX CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               DECEMBER 31, 1998

                                  (Continued)


     The provision for income taxes that is currently payable for the years
ended December 31, 1998, 1997 and 1996 does not reflect approximately $394,000,
$10,887,000 and $888,000, respectively, of tax benefits included in additional
paid-in capital related to disqualifying dispositions and the exercise of non-
qualified stock options.

     The approximate income tax effect of each type of temporary difference
comprising the deferred tax asset is approximately as follows (in thousands):
<TABLE>
<CAPTION>
 
                                                     1998       1997
                                                    ------     ------
<S>                                               <C>        <C>
Net operating loss carryforwards.................  $ 2,687    $ 7,846
Depreciation.....................................    1,029        807
Inventory reserves...............................    1,702      1,442
Tax credit carryforwards.........................    1,701        888
Other temporary differences......................    2,517      2,687
                                                   -------     ------
                                                     9,636     13,670  
Less-valuation allowance.........................    3,892      3,682   
                                                   -------     ------
                                                   $ 5,744    $ 9,988
                                                   =======    =======
</TABLE>

     Approximately $4,887,000 and $9,319,000 of the deferred tax asset are
classified as current at December 31, 1998 and 1997, respectively. Approximately
$857,000 and $830,000 of the deferred tax asset are classified as long-term as
of December 31, 1998 and 1997, respectively.

     At December 31, 1998, the Company has available net operating loss
carryforwards and tax credit carryforwards of approximately $7,903,000 and
$1,701,000, respectively.  The operating loss carryforwards and tax credit
carryforwards begin to expire in the years 2008 and 1999, respectively.

     In accordance with SFAS No. 109, the Company records a valuation allowance
against its deferred tax asset to the extent management believes it is more
likely than not that the asset will be realized. As of December 31, 1998, the
Company has provided a full valuation allowance against the net operating loss
carryforwards related to its wholly-owned subsidiary, AnswerSoft, Inc., and
certain of the Company's tax credit carryforwards due to the uncertainty of
their realizability as a result of limitations on their utilization in
accordance with certain tax laws and regulations.

                                       49
<PAGE>
 
                       DAVOX CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               DECEMBER 31, 1998

                                  (Continued)

A reconciliation of the federal statutory tax rate to the Company's effective
tax rate is as follows:
<TABLE>
<CAPTION>
 
                                                                          Years Ended December 31,
                                                                          ------------------------
                                                                           1998     1997     1996
                                                                          ---------------   ------
<S>                                                                       <C>      <C>      <C>
Federal statutory tax rate..............................................   34.0%    34.0%    34.0%
 
State income taxes, net of federal income tax benefit...................    3.3      5.0      6.3
 
AnswerSoft, Inc. merger expenses not deductible for
tax purposes............................................................    2.6      ---      ---
 
Change in valuation allowance/utilization of net
operating loss and tax credit carryforwards.............................   (3.8)   (25.6)   (28.4)
 
Foreign sales corporation benefit.......................................   (1.0)    (1.0)     ---
 
Other...................................................................   (1.1)     2.0     (1.4)
                                                                           ----     ----     ----
                                                                           34.0%    14.4%    10.5%
                                                                           ====     ====     ====
</TABLE>

(7)  Commitments and Contingencies

     (a)  Operating Lease Commitments

     The Company leases its facilities and sales offices under operating leases
that expire at various dates through September 2003. The Company's lease for its
corporate headquarters expires in September 2000. Pursuant to the lease
agreements, the Company is responsible for maintenance costs and real estate
taxes. Total rental expense for all operating leases for the years ended
December 31, 1998, 1997 and 1996 amounted to approximately $1,771,000,
$1,306,000, and $597,000, respectively.

                                       50
<PAGE>
 
                      DAVOX CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               DECEMBER 31, 1998

                                  (Continued)

Future minimum lease payments are approximately as follows at December 31, 1998
(in thousands):

<TABLE>
<CAPTION>
 
          Years Ending December 31,      Amount
         ---------------------------     ------
        <S>                            <C>
          1999.......................    $1,579
          2000.......................     1,284
          2001.......................       759
          2002.......................       308
          2003.......................       167
                                         ------
                                         $4,097
                                         ======
 </TABLE>

     (b)  Employment and Severance Agreements

     The Company has entered into employment and severance agreements with
certain officers and key employees whereby the Company may be required to pay
the officers and employees a total of approximately $1,225,000 upon termination
of employment by the Company under certain circumstances, as defined.

     (c)  Litigation

     The Company is presently engaged in various legal actions and its ultimate
liability, if any, cannot be determined at the present time.  However,
management has consulted with legal counsel, and management believes that any
such liability will not have a material adverse effect on the Company's
financial position or its results of operations.

(8)  Preferred Stock

     In 1997, AnswerSoft, Inc. had two issues of preferred stock outstanding,
Series A Preferred Stock ("Series A") and Series B Preferred Stock ("Series B")
or collectively referred to as "Preferred Stock."  AnswerSoft issued 8,480,000
shares of Series A in 1994 at $1.00 per share, resulting in net proceeds of
approximately $8,480,000, and issued an additional 75,000 shares of Series A in
1997 at $1.00 per share, resulting in net proceeds of approximately $75,000.  On
July 16, 1997 AnswerSoft issued 1,923,077 shares of Series B at $2.60 per share,
raising gross proceeds of approximately $5,000,000.

                                       51
<PAGE>
 
                      DAVOX CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               DECEMBER 31, 1998

                                  (Continued)

(8)  Preferred Stock (continued)

     Prior to May 1, 2001, holders of Preferred Stock had the right to require
the Company to redeem such shares if redemption was elected by holders of at
least 67% of the outstanding Preferred Stock.  Holders of Series A and Series B
Preferred Stock were entitled to liquidation preferences of $1.00 and $2.60 per
share for Series A and Series B, respectively, plus accrued and unpaid dividends
in the event of liquidation, dissolution of winding up of the Company including
the merger of AnswerSoft or the sale of AnswerSoft including the sale of
substantially all of its assets.  All shares of outstanding Preferred Stock were
converted to shares of Davox Common Stock upon approval of the merger between
the two companies.

(9)  Stockholders' Equity

     (a)  Stock Split
 
     On April 24, 1997, the Company effected a three-for-two stock split through
the issuance of a 50% stock dividend payable on May 28, 1997 to shareholders of
record on May 13, 1997. All share and per share amounts have been retroactively
adjusted for all periods presented.

     (b)  Note receivable due from Officer

     On November 3, 1997 AnswerSoft, Inc. granted options for 222,576 common
shares with an exercise price of $0.26 and 136,970 shares of Series B shares
with an exercise price of $2.60 to an officer of the Company as part of his
employment with the Company.  The options were exercised on November 3, 1997 and
December 4, 1997, respectively in exchange for a non-recourse promissory note
from the officer.  This note was repaid in full by the officer during 1998.

     (c)  1986 Stock Plan

     The Company's 1986 Stock Plan (the 1986 Plan), administered by the Board of
Directors authorizes the issuance of a maximum of 3,696,429 shares of common
stock for the exercise of options in connection with awards or direct purchases
of stock. Options granted under the 1986 Plan may be either nonstatutory stock
options or options intended to constitute incentive stock options under the
Internal Revenue Code. Stock options may be granted to employees, officers,
employee-directors or consultants of the Company and are exercisable in such
installments as the Board of Directors may specify. The options granted
currently vest over a four-year period and expire ten years from the date of
grant. The 1986 Plan terminated pursuant to its terms in September 1996.

                                       52
<PAGE>
 
                      DAVOX CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               DECEMBER 31, 1998

                                  (Continued)

     (d)  1994 Stock Plan

     In 1994, AnswerSoft Inc.'s Board of Directors approved the adoption of an
employee stock option plan, as amended, (the Plan) which authorized the grant of
options up to 4,200,000 of AnswerSoft's Common Stock.  The Plan provided for the
granting of options to eligible employees to purchase the Company's Common Stock
at an exercise price of not less than 100% of the fair market value per share on
the date of grant as determined by the Board of Directors.  The plan was
administered by the Board of Directors who determined the number of shares for
which options will be granted, the effective dates of the grants, the option
price and vesting schedules.  All options under the plan have a ten year term.
They typically vested over four years for the effective date of the grant.  All
outstanding options became immediately and fully vested upon completion of the
merger with Davox.  The Company no longer grants options under this plan.


     (e)  1996 Stock Plan

     The Company's 1996 Stock Plan (the 1996 Plan) administered by the Board of
Directors authorizes the issuance of a maximum of 1,950,000 shares of common
stock for the exercise of options in connection with awards or direct purchases
of stock. Options granted under the 1996 Plan may be either nonstatutory stock
options or options intended to constitute incentive stock options under the
Internal Revenue Code. Stock options may be granted to employees, officers,
employee-directors or consultants of the Company and are exercisable in such
installments as the Board of Directors may specify. The options currently vest
over a four-year period. There were 314,375 shares available for future grants
under the 1996 Plan at December 31, 1998.

     (f)  Stock Options to Directors

          The Company's 1988 Non-employee Director Stock Option Plan (the 1988
Plan), as amended, is administered by the Board of Directors and authorizes the
issuance of a maximum of 600,000 shares of common stock for the exercise of
options.  The 1988 Plan provides for the automatic grant of options for 60,000
shares to each newly elected non-employee director and additional grants of
15,000 options  per biennial anniversary of election to the Board of Directors.
Options granted under the 1988 Plan vest 25% per year beginning one year from
the date of grant and expire five years from the date of grant.  There are
296,250 shares available for future grants under the 1988 Plan at December 31,
1998.

                                       53
<PAGE>
 
                      DAVOX CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               DECEMBER 31, 1998

                                  (Continued)
     (g)  Stock Plans Summary

     The following is a summary of the stock option activity for all plans for
the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
                                                                                      Weighted
                                                     Number of       Exercise         Average                 
                                                      Options       Price Range     Exercise Price            
                                                    -----------    -------------   ---------------
                                                   (in thousands)
<S>                                                  <C>           <C>              <C>     
Outstanding, December 31, 1995                          2,426     $0.08 - $ 8.17       $ 2.33
    Granted.....................................          503      0.77 -  26.33        16.61
    Exercised...................................         (805)     0.08 -  16.17         2.28
    Canceled....................................         (102)     0.08 -   8.17         2.50
                                                        -----     -----   ------       ------
Outstanding, December 31, 1996                          2,022      0.08 -  26.33         5.90
    Granted.....................................        1,389      0.77 -  34.13        19.29
    Exercised...................................         (865)     0.08 -  26.33         3.62
    Canceled....................................          (89)     0.77 -  31.00        10.44
                                                        -----     -----   ------       ------
Outstanding, December 31, 1997                          2,457      0.77 -  34.13        14.11
  Granted.......................................        1,124      2.01 -  34.12        18.48
  Exercised.....................................         (452)     0.77 -  26.33         2.56
  Canceled......................................         (593)     0.77 -  34.13        21.72
                                                        -----     -----   ------       ------
Outstanding December 31, 1998                           2,536     $0.77 - $34.13       $16.33
                                                        =====     =====   ======       ======
Exercisable, December 31, 1998                          1,124     $0.77 - $34.13       $11.09
                                                        =====     =====   ======       ====== 
</TABLE>

The range of exercise prices for options outstanding and options exercisable at
December 31, 1998 are as follows (in thousands, except exercise prices):
<TABLE>
<CAPTION>
                                                 Options Outstanding            Options Exercisable         
                       Weighted Average         ----------------------       ---------------------------    
   Range of         Remaining Contractual              Weighted Average                 Weighted Average    
Exercise Prices        Life (in years)          Number  Exercise Price        Number     Exercise Price     
----------------       ---------------          ------ ----------------      -------     ---------------    
<S>                    <C>                     <C>        <C>                <C>        <C>                     
  $0.77                      7.68                   9      $0.77                 9          $ 0.77          
   1.33 -  1.92              4.89                 363       1.62               363            1.62          
   2.00 -  2.33              5.87                 171       2.32               171            2.32          
   3.25 -  4.75              5.57                  93       3.59                88            3.54          
   6.17 -  8.31              8.72                 270       7.19                44            7.59          
  10.75                      9.61                  15      10.75               ---             ---          
  16.17 - 21.38              8.77                 588      18.59               106           18.28          
  24.33 - 34.13              8.40               1,027      26.33               343           25.90          
                                                -----                        -----                          
                                                2,536                        1,124                          
                                               ======                        =====                           
</TABLE> 

                                       54
<PAGE>
 
                       DAVOX CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               DECEMBER 31, 1998

                                  (Continued)

     (h)  Employee Stock Purchase Plan

     The Company has an Employee Stock Purchase Plan (the Purchase Plan) under
which a maximum of 150,000 shares of common stock may be purchased by eligible
employees.  Substantially all full-time employees of the Company are eligible to
participate in the Purchase Plan. Shares are purchased through accumulation of
payroll deductions (of not less than 0.5% nor more than 10% of compensation, as
defined) for the number of whole shares, determined by dividing the balance in
the employee's account by the purchase price per share which is equal to 85% of
the fair market value of the common stock, as defined.  During 1998, 1997 and
1996, 20,647, 12,153 and 14,979 shares, respectively, were purchased under the
Purchase Plan.


     (i)  Accounting for Stock-Based Compensation

     The Company accounts for its stock-based compensation under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. In
October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which established a fair-value-based method of accounting for
stock-based compensation plans. The Company has adopted the disclosure-only
alternative under SFAS No. 123, which requires the disclosure of the pro forma
effects on earnings and earnings per share as if SFAS No. 123 had been adopted,
as well as certain other information.

     The Company has computed the pro forma disclosures required under SFAS No.
123 for all stock options granted (including shares issued under the employee
stock purchase plan) as of December 31, 1998, 1997 and 1996 using the Black-
Scholes option pricing model prescribed by SFAS No. 123.

     The assumptions used and the weighted average information for the years
ended December 31, 1998, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                               Years ended December 31,
                                                              -------------------------
                                                       1998              1997               1996
                                               ------------------- -----------------  -----------------
<S>                                            <C>                  <C>               <C>
Risk-free interest rates.....................       4.18% - 5.61%     5.71% - 6.83%      5.36% - 6.64%
Expected dividend yield......................          -----             -----              -----
Expected lives...............................        4.85 years        4.78 years         5.50 years
Expected volatility..........................           69%               66%                71%
Weighted average grant-date fair value of
  options granted during the period..........         $11.45            $16.00              $12.80
Weighted-average exercise price..............         $16.33            $14.11              $ 5.90
Weighted-average remaining contractual life
  of options outstanding.....................        7.75 years        7.98 years         7.45 years
</TABLE>

                                       55
<PAGE>
 
                      DAVOX CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               DECEMBER 31, 1998

                                  (Continued)



     The effect of applying SFAS No. 123 would be as follows (in thousands,
except per share data):

<TABLE>
<CAPTION>
                                                                Years ended December 31,
                                                                ------------------------
                                                                 1998    1997    1996
                                                                ------  -------  ------
<S>                                                           <C>      <C>      <C>
Net income as reported.................................         $8,529  $14,921  $8,633            
                                                                ======  =======  ======            
Pro forma net income...................................         $3,674  $11,080  $7,808            
                                                                ======  =======  ======            
                                                                                                   
Earnings per share as reported:                                                                    
   Basic...............................................         $ 0.60  $  1.15  $ 0.72            
                                                                ======  =======  ======            
   Diluted.............................................         $ 0.58  $  1.05  $ 0.64            
                                                                ======  =======  ======            
Pro forma earnings per share:                                                                      
   Basic...............................................         $ 0.23  $  0.84  $ 0.64            
                                                                ======  =======  ======            
   Diluted.............................................         $ 0.22  $  0.76  $ 0.57            
                                                                ======  =======  ======             
</TABLE>


(10) Segment and Geographic Information

     The Company has adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, in the fiscal year ended December 31, 1998.
SFAS No. 131 establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS No. 131 also establishes standards for related disclosures
about products and services and geographic areas. Operating segments are
identified as components of an enterprise about which separate discrete
financial information is available for evaluation by the chief operating
decision maker, or decision making group, in making decisions how to allocate
resources and assess performance. The Company's chief decision-maker, as defined
under SFAS No. 131, is the Chief Executive Officer. To date, the Company has
viewed its operations and manages its business as principally one segment,
software sales and associated services. As a result, the financial information
disclosed herein, represents all of the material financial information related
to the Company's principal operating segment.

                                       56
<PAGE>
 
                      DAVOX CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               DECEMBER 31, 1998

                                  (Continued)

(10) Segment and Geographic Information (continued)

     Product revenues from international sources were approximately $9.7
million, $14.7 million and $7.7 million in 1998, 1997 and 1996, respectively.
The Company's revenues from international sources were primarily generated from
customers located in Europe, Canada, Asia/Pacific, and Latin America. All of the
Company's product sales for the years ended December 31, 1998, 1997 and 1996
were shipped from its headquarters located in the United States.

     The following table represents the percentage of product revenue by
geographic region from customers for 1998, 1997 and 1996:

<TABLE>
<CAPTION>
 
                            1998    1997    1996
                           ------  ------  ------
<S>                        <C>     <C>     <C>
          U.S.              82.0%   74.9%   80.7%
          Europe             8.1    17.1     1.7
          Canada             4.9     3.5     8.4
          Asia/Pacific       3.5     2.3     5.3
          Latin America      1.5     2.2     3.9
                           ------  ------  ------
          Total            100.0%  100.0%  100.0%
                           ======  ======  ======
 
</TABLE>

(11) Significant Customers

     Revenue from the Company's largest single customer was 13%, 10% and 4% of
total revenue in 1998, 1997 and 1996, respectively. Revenue from the Company's
three largest customers amounted to 24%, 18% and 12% of total revenue in 1998,
1997 and 1996, respectively.

                                       57
<PAGE>
 
                       DAVOX CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1998

                                   (Continued)


(12)  Quarterly Results of Operations (Unaudited)

     The following table presents a condensed summary of quarterly results of
operations for the years ended December 31, 1998 and 1997 (in thousands, except
per share data):
                          Year Ended December 31, 1998

<TABLE>
<CAPTION>

                                First                Second                  Third                  Fourth
                               Quarter               Quarter                Quarter                 Quarter
                               -------               -------                -------                 -------
<S>                            <C>                   <C>                    <C>                     <C>   

Total revenue                  $24,420               $24,190                $20,939                $19,399

Gross profit                    16,502                16,597                 13,343                 12,393

Net income                      $3,260                $2,341                 $1,883                 $1,045
                               =======               =======                =======                =======
Earnings per share:         
              Basic              $0.25                 $0.17                  $0.13                  $0.07
                               =======               =======                =======                =======
              Diluted            $0.22                 $0.16                  $0.13                  $0.07
                               =======               =======                =======                =======
<CAPTION>
                                            Year Ended December 31, 1997

                                First                Second                  Third                  Fourth
                               Quarter               Quarter                Quarter                 Quarter
                               -------               -------                -------                 -------
<S>                            <C>                   <C>                    <C>                     <C>  
Total revenue                 $18,995               $19,957                $20,885                 $23,717

Gross profit                   12,334                12,865                 13,890                  16,436

Net income                     $3,492                $3,600                 $3,131                  $4,698
                              =======               =======                =======                 =======

Earnings per share:         
              Basic             $0.28                 $0.28                  $0.24                   $0.37
                              =======               =======                =======                 =======
              Diluted           $0.25                 $0.26                  $0.22                   $0.33
                              =======               =======                =======                 =======
</TABLE>

                                       58
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

                        ON FINANCIAL STATEMENT SCHEDULE


To Davox Corporation:

     We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Davox Corporation and subsidiaries
included in this Form 10-K and have issued our report thereon dated January 26,
1999. Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and regulations
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.



                                       ARTHUR ANDERSEN LLP

Boston, Massachusetts
January 26, 1999

                                       59
<PAGE>
 
                       DAVOX CORPORATION AND SUBSIDIARIES

                                   SCHEDULE II

                        VALUATION AND QUALIFYING ACCOUNTS
                                 (In Thousands)



                        Balance at     Charged to     Deductions     Balance at
                         Beginning     Costs and         from          End of
                          of Year       Expenses       Reserves         Year
                        ----------     ----------     ----------     ----------
Accounts receivable
Reserves:                                                            

December 31, 1998         $1,134          $315           $274          $1,175
December 31, 1997            711           554            131           1,134
December 31, 1996            665           110             64             711

                                       60
<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

Directors

     The information concerning directors of the Company required under this
item is incorporated herein by reference to the Company's definitive proxy
statement pursuant to Regulation 14A, to be filed with the Commission not later
than 120 days after the close of the Company's 1998 fiscal year ended December
31, 1998 under the heading "Election of Directors."

Executive Officers

     See Item 4A.

ITEM 11   EXECUTIVE COMPENSATION

     The information required under this item is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A, to be filed with the Commission not later than 120 days after the close of
the Company's 1998 fiscal year ended December 31, 1998, under the heading
"Compensation and Other Information Concerning Directors and Officers."

ITEM 12   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required under this item is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A, to be filed with the Commission not later than 120 days after the close of
the Company's 1998 fiscal year ended December 31, 1998, under the headings
"Principal Holders of Voting Securities" and "Election of Directors."

ITEM 13   CERTAIN RELATIONSHIPS AND TRANSACTIONS

     The information required under this item is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A, to be filed with the Commission within 120 days after the close of the
Company's 1998 fiscal year ended December 31, 1998, under the headings
"Principal Holders of Voting Securities" and "Election of Directors."

                                       61
<PAGE>
 
                                    PART IV

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

(a)  Financial Statements and Financial Statement Schedules

     1.   Financial Statements

     The following financial information is incorporated in Item 8 above:

     Report of Independent Public Accountants

     Report of Independent Public Accountants

     Consolidated Balance Sheets as of December 31, 1998 and 1997

     Consolidated Statements of Income for the Years Ended December 31, 1998,
     1997 and 1996

     Consolidated Statements of Stockholders' Equity for the Years Ended
     December 31, 1998, 1997 and 1996

     Consolidated Statements of Cash Flows for the Years Ended December 31,
     1998, 1997 and 1996

     Notes to Consolidated Financial Statements

     2.   Financial Statement Schedule

     The following financial information is incorporated in Item 8 above:

     Report of Independent Public Accountants on Financial Statement Schedule
     II - Valuation and Qualifying Accounts.
     
     All other schedules are not submitted because they are not applicable, not
     required or because the information is included in the Consolidated
     Financial Statements or Notes to Consolidated Financial Statements.

(b)  Reports on Form 8-K

     The Company did not file any Current Report on Form 8-K during the fourth
     quarter of the fiscal year ended December 31, 1998.

                                       62
<PAGE>
 
(c)  List of Exhibits

     Exhibit
     Number        Description of Exhibit
     -------       ----------------------

     3.01(3)       Restated Certificate of Incorporation of the Registrant, as
                   amended.

     3.02(3)       By-laws of the Registrant, as amended.

     4.01(3)       Description of Capital Stock contained in the Registrant's
                   Restated Certificate of Incorporation, as amended, filed as
                   Exhibit 3.01.

     10.02(3)      Amended and Restated 1988 Non-Employee Director Stock Option
                   Plan of the Registrant.

     10.03(3)      Form of Option Agreement under the Registrant's 1988
                   Non-Employee Director Stock Option Plan.
 
     10.04(3)(4)   Special support services agreement between Registrant and
                   Datapoint (UK) Ltd., dated August 1, 1997.

     10.05(3)      1991 Employee Stock Purchase Plan, as amended.
 
     10.08(1)(4)   Third party service provider agreement between the Registrant
                   and Grumman Systems Support Corporation.
 
     10.09(2)      1996 Stock Plan of the Registrant, as amended by amendment
                   No. 1.

     10.10(2)      Form of Incentive Stock Option Agreement under the
                   Registrant's 1996 Stock Plan.

     10.11(2)      Form of Non-Qualified Stock Option Agreement under the
                   Registrant's 1996 Stock Plan.
 
     10.12(2)      Executive Compensation Plan.

     10.13(3)      Lease agreement between Registrant and Michelson Farm
                   Westford Technology Park VI Limited Partnership for Westford
                   Technology Park Building Six.
 

                                       63
<PAGE>
 
(c)  List of Exhibits

     10.14(3)(4)   Distribution agreement between Lucent Technologies Inc. (by
                   and through its Business Communications Systems Division) and
                   the Registrant, dated May 2, 1997.
                   
     21.           Subsidiaries of the Registrant.

     24.1          Consent of Arthur Andersen LLP.

     24.3          Consent of Ernst & Young LLP.

     27.           Financial Data Schedule.
 

(1)  Previously filed as an exhibit to Form 10-K for the fiscal year ended
     December 31, 1995.

(2)  Previously filed as an exhibit to Form 10-K for the fiscal year ended
     December 31, 1996.
 
(3)  Previously filed as an exhibit to Form 10-K for the fiscal year ended
     December 31, 1997.

(4)  Confidential treatment granted.  Redacted version previously filed.

                                       64
<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 Town of Westford,
Commonwealth of Massachusetts, on the 5th day of March 1999.

                                       Davox Corporation

                                       By:    /s/ Alphonse M. Lucchese
                                          ----------------------------
                                               Alphonse M. Lucchese
                                             Chief Executive Officer
                                                  and Chairman



                               POWER OF ATTORNEY

Each person whose signature appears below this Annual Report on Form 10-K hereby
constitutes and appoints Alphonse M. Lucchese and Timothy C. Maguire and each of
them, with full power to act without the other, his true and lawful attorney-in-
fact and agent, with full power of substitution and resubstitution, for him or
her and in his or her name, place and stead in any and all capacities (until
revoked in writing) to sign all amendments (including post-effective amendments)
to this Annual Report on Form 10-K of Davox Corporation, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary fully to all intents and purposes as
he might or could do in person thereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his or her substitute,
may lawfully do or cause to be done by virtue hereof.

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<PAGE>
 
SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons in the capacities and on the date
indicated.


     Signature                          Title                       Date
     ---------                          -----                       ----


/s/ Alphonse M. Lucchese           Chief Executive
------------------------         Officer and Chairman              
  Alphonse M. Lucchese           (Principal Executive 
                                       Officer)                 March 5, 1999 
                                                              

/s/ John J. Connolly              Vice President of
--------------------              Finance and Chief
  John J. Connolly                Financial Officer                     
                                 (Principal Financial                   
                                       Officer)                 March 5, 1999 
                                 

/s/ Michael D. Kaufman                 Director                 March 5, 1999
----------------------                                 
  Michael D. Kaufman


/s/ R. Scott Asen                      Director                 March 5, 1999
-----------------                                   
  R. Scott Asen


/s/ Walter J. Levison                  Director                 March 5, 1999
---------------------                                   
  Walter J. Levison

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