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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                                   FORM 10-K
 
(MARK ONE)
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF
     1934 [FEE REQUIRED]
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR
[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
             FOR TRANSITION PERIOD FROM                TO
 
                           COMMISSION FILE NUMBER: 0-21761
 
                          GEOTEL COMMUNICATIONS CORPORATION
                (Exact name of registrant as specified in its charter)
 
<TABLE>
<S>                                           <C>
                   DELAWARE                                     04-3194255
       (State or Other Jurisdiction of                       (I.R.S. Employer
        Incorporation or Organization)                     Identification No.)
</TABLE>
 
                                 25 PORTER ROAD
                         LITTLETON, MASSACHUSETTS 01460
                    (Address of principal executive offices)
 
        REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 508-486-1100
 
        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
 
                          COMMON STOCK $.01 PAR VALUE
                                (Title of Class)
 
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes  X   No ____
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of 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. [  ]
 
     As of March 17, 1997 there were 13,089,578 shares outstanding of the
registrant's common stock, $0.01 par value. As of that date, the aggregate
market value of voting stock held by non-affiliates of the registrant was
approximately $51,713,000.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     PART III -- Portions of the definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on May 29, 1997 are incorporated by reference
into Part III (Items 10, 11, 12 and 13).
 
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                                     PART I
 
                             CAUTIONARY STATEMENTS
 
     The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements. From time to time, information
provided by the Company or statements made by its directors, officers or
employees may contain "forward-looking" information which involve risks and
uncertainties. Actual future results may differ materially. Statements
indicating that the Company "expects," "estimates," "believes," "is planning" or
"plans to" are forward-looking, as are other statements concerning future
financial results, product offerings or other events that have not yet occurred.
There are several important factors which could cause actual results or events
to differ materially from those anticipated by the forward-looking statements.
Such factors, some of which are described in greater detail in Item 7 under the
heading "Risk Factors That May Affect Future Results," include, but are not
limited to, the receipt and shipment of new orders, the timely release of
enhancements to the Company's products, which could be subject to software
release delays, the growth rates of certain market segments, the positioning of
the Company's products in those market segments, variations in the demand for
customer service and technical support, pricing pressures and the competitive
environment in the software industry, and the Company's ability to penetrate
international markets and manage its international operations. 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 which the Company might face.
 
ITEM 1:  BUSINESS
 
     GeoTel Communications Corporation ("GeoTel" or the "Company") is a provider
of telecommunications software solutions focused on enhanced call routing
technology that enables customer-oriented companies to deliver responsive and
cost-effective customer service. The Company's software solutions are aimed at
decentralized or service-oriented corporations that use call centers, voice
response units and other answering resources to interact with their customers.
GeoTel's software solution, the Intelligent CallRouter, is designed for
companies that utilize multiple call centers to handle high volumes of inbound
customer calls and regard their effective handling of customer interaction
through call center technology as a key competitive advantage. The Company is
focused on open, standards-based software solutions for enterprise-wide call
distribution in a multi-vendor, multi-carrier, fault-tolerant, distributed
environment. GeoTel's call routing solutions have been deployed by a variety of
companies, including America Online, American Express, Compaq, Continental
Airlines, Delta Airlines, Fidelity, Gateway 2000, GTE, Household Credit
Services, MCI, Matrixx Marketing, Optus Systems, Private Health Care Systems,
Spiegel, Sprint and USAir.
 
INDUSTRY BACKGROUND
 
  Call Center Market
 
     Companies are increasingly recognizing that excellent customer service can
be used as a strategic weapon to differentiate their firms from competitors. In
order to remain competitive, corporations must continually evaluate their
product and service offerings to expand market share, lower costs and meet
customer expectations. To improve service quality, companies have invested in
technologies that enable them to concentrate customer service representatives,
or agents, into groups known as call centers. Many corporations utilize call
centers as the primary method of interacting with their customers. These call
centers are typically deployed in multiple locations and can be utilized to
provide a prioritized level of services for their most valued customers. Call
centers allow businesses to reduce costs and deliver premium customer service.
 
     While call centers have grown both in size and importance, current
technologies have been focused on stand-alone, call center applications, rather
than the customer interaction requirements of the entire corporation. This has
led to a fragmented environment in businesses that have multiple call centers,
branch offices and divisions, with call centers evolving as technology "islands"
within the corporation. As a result, corporations are unable to provide
solutions that utilize all the customer response resources within the
organization whether they are personnel or systems-based. Increasingly,
successful organizations are seeking
 
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solutions to address these strategic business requirements through the
implementation of "virtual call centers." Virtual call centers utilize all the
relevant resources maintained by the corporation in order to achieve a unified,
controllable and adaptable customer service solution. Enterprise-wide
utilization of resources and technology enables the corporation to maximize
levels of customer service while fully utilizing existing investments in
telephony, technology and personnel.
 
  Call Center Technology
 
     In response to customer demand, the telecommunications environment has
changed rapidly with the emergence of new carrier-based, Advanced Intelligent
Network (AIN) services and 800/888 number portability. Most interexchange
carriers (IXCs), including AT&T, MCI and Sprint, have opened network control to
their customers, enabling the development of third party software to control the
routing of customer calls within their networks. Corporations can now shop for
the most competitive carrier rates and implement new network-based services
which are not based on proprietary closed solutions, while retaining their
existing telephone numbers. As the era of "open public networking" evolves,
corporations are seeking business solutions that encompass more than the
limited, non-integrated, proprietary telecommunication products that have been
dominant in the past.
 
     The technology utilized by call centers has evolved dramatically over the
past three years. Historically, due to the closed nature of public networks,
corporations installed premises-based switching systems at the end of long
distance or local exchange telephone lines. Reliance on these switching systems
requires corporations to use proprietary closed solutions offered by service
providers where multi-vendor switching system interoperability was not possible.
Consequently, the call center solutions employed by most corporations have been
designed around the technological limits of premises-based switching systems and
the limitations of carrier networks, which prevent corporations from realizing
the potential benefits of virtual call centers. Virtual call centers draw upon
all of the organization's call response resources and utilize open-systems based
applications to enhance the capabilities of the existing call center
infrastructure by integrating it with existing business applications and data.
 
     The primary providers of call center solutions are IXCs and Automatic Call
Distribution (ACD) switching system vendors. Currently, the major IXCs offer
services that can route inbound toll-free calls to more than one call center,
but they have limited visibility as to why the call is being delivered to that
location. These services attempt to distribute calls among multiple call center
locations by relying on percentage allocations based on historical data or call
counting. Since there is no real-time data, these routing schemes are limited
because the system is not aware of what is actually taking place in the
individual call centers. For example, carriers might route 40% of a business'
incoming calls to Boston, 30% to Dallas and 30% to Denver using a set table
based on time of day and origin of call. While this solution is viable as long
as each site is staffed accordingly to handle the inflow of calls, it cannot
dynamically adjust to variances in agent availability, call handling times, and
calls from non-network sources. Furthermore, the customer is unable to benefit
from a multi-carrier environment. Many ACD switching system vendors provide
private networking options that allow calls to flow from one system to another,
but these systems consume network bandwidth and still do not optimize network
resources. They are also ineffective in a multi-vendor ACD environment.
 
     Due to the migration towards open systems by the IXCs, customers are now
able to control connections across interexchange carrier networks based on
resources, customer profiles and other factors as determined by high-end
enterprise-level software applications. ACDs and other customer premises-based
switching systems have also opened control to computer applications. The
evolution of Computer Telephony Integration (CTI) technology allows computer
applications to interface with and control functions of the ACD or Private
Branch Exchange (PBX). These applications are capable of utilizing business
data, legacy systems and client/server systems and integrating them with
existing telecommunications systems.
 
     To date, few organizations have fully realized the potential benefits
offered by virtual call centers due to the lack of enterprise-wide call
distribution. In particular, the need for enterprise-wide call distribution must
be addressed as a prerequisite for a well-managed customer-focused call center.
Traditional carrier services and ACD products have limited flexibility and are
generally not scaleable to large enterprises. These solutions
 
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do not facilitate enterprise-wide call distribution since they offer only local
routing within a stand-alone ACD, and do not enable a multi-vendor,
multi-carrier solution. As a result, the Company believes that the need exists
for flexible, scaleable, customer premises-based call processing software that
will manage the control of customer-based switching systems, network routing,
call queuing and voice services.
 
GEOTEL SOLUTION
 
     GeoTel's solution allows companies that utilize call center technology to
deliver cost-effective, premium customer service. The Company's Intelligent
CallRouter (ICR) enables enterprise-wide call routing and consolidated real-time
management information at the network level. These capabilities are independent
of the manufacturer of the ACD, PBX or key system to which they are attached.
The ICR also provides interfaces to multiple carrier networks enabling call
routing independent of the toll-free network provider.
 
     The ICR extends a corporation's existing public and private network
solutions with enterprise-wide, intelligent call processing directed at
organizations that utilize call center technologies to interact with their
customers. The ICR allows corporations to blend the logic of both the carrier
network and ACDs as well as business applications required to provide high-level
customer service and customer contact support. By integrating all call center
applications, a corporation can achieve large group efficiencies, such as
utilizing available agents regardless of location, instead of physically adding
staff to a specific call center. To achieve enterprise-wide call control, the
ICR has visibility of all call answering resources, enabling the system to route
calls and associated data transactions to the agent or skill group that best
satisfies the rules established by the corporation. The ICR connects all call
centers into a hierarchical, networked system, so that an enterprise routing
application can receive the real-time status information required to control
call transactions throughout the enterprise.
 
     The Company's solutions offer the following advantages:
 
     Virtual Call Center.  The ICR transforms geographically dispersed agent
groups connected to different ACDs and Voice Response Units (VRUs) into a single
virtual team, reducing the number of agents required for a given service level,
while offering a more uniform level of service to all callers. Since labor is a
significant cost for service-oriented corporations, the ability to utilize agent
resources more effectively provides a significant cost savings for the Company's
customers. In addition, the ICR allows local ACD capabilities to be extended to
the entire network. Sophisticated enterprise-wide call routing routines, such as
those using customer account numbers or Automatic Number Identification (ANI),
can be developed once and deployed at either the network level or in conjunction
with an ACD or VRU at the customer's premises, or both.
 
     Multiple Carrier and Switch Interoperability.  The Company's open solution
does not require the customer to replace its existing premises-based equipment,
switches or carriers, therefore extending their value in a "plug-and-play"
environment. The Company's customers are also able to select among AT&T, MCI or
Sprint, offering them the ability to leverage new features and cost saving
opportunities from the major 800 providers. In addition, the ICR allows
customers to remain vendor independent by supporting the major ACD switches --
Lucent DEFINITY(R), Aspect CallCenter(R), Northern Telecom Meridian(TM),
Rockwell Galaxy(TM) and Rockwell Spectrum(TM).
 
     Real-Time Routing.  The routing of customer calls is a real-time,
mission-critical application. The ICR's Pre-Routing feature is the application
of ACD-like call routing at the network level, before the caller hears ringing
and before the call is sent to a given destination. Unlike any currently
available call routing service offered by carriers, the Pre-Routing feature can
route calls based on real-time knowledge of agent availability and queue status,
not on a fixed percentage or allocation basis. The ICR recognizes where the call
originates, gathers real-time information about the status of all call centers
and agents, and then routes calls based on best available enterprise-wide
capabilities and resources at the moment the call is received. Post-Routing is
the control of calls already connected to an ACD or PBX, such as the intelligent
transfer of calls from VRUs, agent-to-agent transfers and the overflow of calls
between call centers. These capabilities enable the ICR to route calls on an
individual call basis, across different ACDs and multiple carriers.
 
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     Fault Tolerant Open Architecture.  The ICR is designed to be fault tolerant
to hardware component failures, communications network failures, asynchronous
software errors and the catastrophic loss of a site supporting the ICR. The
Company's technology utilizes an open architecture and is based on industry
standard software, such as Windows NT, SQL Server and PowerBuilder. The ICR has
been designed to integrate with existing call center applications and facilitate
support of future applications. The Company has defined and published
application programming interfaces for major call center applications such as
workforce management, interactive VRUs and customer databases.
 
     Consolidated Management Reporting.  The Company's call routing solution
enables customers to manage their distributed call centers with consolidated,
real-time and historical reporting. The ICR provides the ability to access and
combine data from multiple databases, allowing the user to source best-of-class
applications for call volume forecasting, agent scheduling, workflow management
and screen-synchronization while maintaining an enterprise-wide view of the
performance of their call centers.
 
STRATEGY
 
     The Company's primary business objective is to become the leading supplier
of enterprise-wide call distribution software solutions. To achieve this
objective, the Company is pursuing the following strategies:
 
     Extend Technology Leadership.  Capitalizing on the Company's experience in
call centers, communications and software technologies, the Company was the
first to deliver a client/server-based application solely focused on
enterprise-wide call distribution. The Company intends to continue to utilize
and integrate industry available technologies whenever appropriate and focus its
development resources on expanding the value-added call processing features
required by its customers. The Company believes it distinguishes itself through
its portfolio of supported ACDs, multi-carrier connectivity, product
adaptability to business environments, implementation of industry standards,
open systems platforms, scalability and product integration with most call
center applications.
 
     Expand Enterprise Call Distribution.  GeoTel intends to ensure that its
call distribution technology continues to expand to include all of the answering
resources available within a customer's business environment. This will include
high-end production call centers, VRUs and distributed call answering resources
including branch offices, remote agents and professionals, network resources and
desktop applications. In June 1996, GeoTel delivered and installed ICR release
Version 1.4 which includes support for the integration of VRUs. By integrating
VRU systems, the Intelligent CallRouter extends routing control to network and
premise VRUs, allows the corporation to use VRUs as an intelligent call
answering resource in the virtual call center, and provides consolidated
management information of VRU data. Intelligent CallRouter applications have
been implemented in systems supporting as few as 200 and as many as 5,000 call
center agents.
 
     Leverage Open Architecture.  The Company continues to develop interfaces to
both existing and emerging call center technologies provided by the vendors of
market-leading technologies. The Company intends to provide its customers with
the ability to protect their investment in current call center solutions, while
providing value-added services and functionally beyond their existing
infrastructure. This will be accomplished by adhering to open industry standard
interfaces of other vendor products and publishing interfaces to the Company's
call routing software platform for products and services such as ACDs, carrier
networks, interactive VRUs and customer databases.
 
     Utilize Multiple Distribution Channels.  The Company has established a
multi-channel distribution system to cost-effectively address the potential
market for its products. To date, the Company has generated the majority of its
revenues through its direct sales force which maintains frequent customer
contact and knowledge of customer applications. The Company's direct sales force
is complemented by strategic sales channels, including its relationship with
MCI, selected resellers and an international partner. The Company intends to
expand both direct and indirect distribution channels and to penetrate
international markets by expanding its relationships with the market leaders of
toll-free services on a country-by-country basis.
 
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     Ensure Customer Success.  GeoTel believes that superior customer service,
support and training are essential for customer satisfaction and are key to
differentiating its overall product offering. The Company offers consulting and
installation services to assist customers in designing and deploying call
routing applications and also provides training for end-users and distribution
partners. GeoTel intends to expand its own customer service, support and
training activities, as well as to encourage third-party organizations, such as
international partners, to become proficient in deploying the Company's
products.
 
PRODUCTS
 
     The GeoTel Intelligent CallRouter is an advanced call-by-call routing
server that supports multiple call routing clients independent of their
location, ACD, IXC or VRU. The multi-carrier, multi-vendor capabilities of the
ICR allow the user to focus on delivering premium customer service without the
limitations of proprietary or custom-developed solutions. The ICR combines
real-time call routing capabilities with an extensive management reporting
system. Its open architecture enables interoperability with other call
processing and call volume management systems within an enterprise and provides
a means for integrating those various stand-alone solutions. The ICR can be
interfaced to agent scheduling, workflow management and other call center
management tools. The distributed software fault tolerance implemented in the
Intelligent CallRouter provides the mission-critical reliability required for
enterprise-wide call distribution.
 
     The principal function of the ICR is to route telephone calls among
geographically distributed call centers in a way that optimizes the use of
resources across all call centers or other answering locations. In order to
perform these functions, the ICR utilizes network-based information on the
origin of the call and information provided by the caller to match the caller
with the skills of the available answering resources. The primary components of
the ICR are a central routing controller, a database, and interfaces to the
telephone network and call answering devices such as PBXs, ACDs and VRUs.
 
     The ICR is an open systems product that has been deployed on
industry-standard platforms. The Company designed the system to support a broad
range of intelligent telecommunications interfaces, industry standard MIS tools,
computer platforms and a growing number of vertical market applications. The ICR
uses Windows NT as the core multitasking operating environment. Windows NT
allows customers to select from a variety of hardware platforms certified by the
Company on which to deploy the ICR application. The database utilized by the ICR
is Microsoft SQL Server for Windows NT, which provides an advanced,
client/server database management system. The Company provides a monitoring and
reporting system based on PowerBuilder, which is a Windows-based, client-server
application development tool. PowerBuilder allows users to quickly and easily
build sophisticated, graphical applications that can access information stored
in multiple databases. Since the Company utilizes a database technology that is
open database connectivity (ODBC) compliant, the customer may choose a reporting
tool of its preference as an alternative to PowerBuilder. The following diagram
illustrates the principal components of the ICR.
 
     The major components of the ICR are as follows:
 
     CallRouter.  The core of the Intelligent CallRouter is a suite of software
processes called the CallRouter that provides the central intelligence by which
customers translate business goals into call routing decisions. The CallRouter
receives and responds to routing requests from the routing clients (Network
Interface Controllers and Peripheral Gateways), collects call center event
activity from the Peripheral Gateways and communicates with users through
desktop Admin Workstations. The CallRouter provides all the routing choices
available in today's ACDs and applies them at the network level. The
implementation of routing services on an enterprise basis creates a call center
management model where geographically distributed call centers appear as if they
were at one location. The ICR utilizes real-time, event-driven data such as
agent status, queue status, and incoming call volume in making its call-by-call
routing decisions. It allows customers to establish routing decisions for a wide
range of agent and service performance metrics, including agent availability,
the ratio of calls in progress to logged-in/ready agents, and the ratio of calls
in queue to staffed/scheduled agents. The CallRouter makes routing decisions
through user-defined call routing scripts.
 
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The logic required to segment callers, identify their reason for calling, and
then forward those requests for service to the appropriate agent(s) is defined
in call routing objects. Having determined these routing guidelines, business
rules are defined to arbitrate between routing options where the demand for a
given skill or service resource exceeds availability. Threshold parameters can
be input to allow for the use of backup agents under certain circumstances or to
prioritize call handling of a given class of caller.
 
     Network Interface Controller (NIC).  The NIC is the software interface
between the Intelligent CallRouter and the interexchange carrier network. It
communicates with the IXC network through the intelligent network control
interfaces that have recently been made available by the carriers. The NIC
receives call routing requests from the network, forwards them to the
CallRouter, and returns responses to the carrier network. In effect, the NIC
transforms the network into a routing client. This approach allows customers to
control routing decisions at the network level and gain greater flexibility as
they seek to further deploy advanced intelligent network services.
 
     Peripheral Gateway (PG).  The PG software provides the interface between
the CallRouter and the call center system (ACD, PBX, or VRU) that is being
monitored and/or controlled by the ICR. The PG connects to the CTI link and/or
ACD's management reporting system and obtains information regarding agent
availability, agent performance, the number of calls in progress, and how they
are being handled. To facilitate Post-Routing, the PG can also exert control
over the ACD, PBX or VRU and instruct it where to route calls.
 
     Database Server.  GeoTel's database technology reduces the performance
constraints normally associated with ACD and network data aggregation. Operating
in conjunction with the CallRouter, the ICR's Database Server stores and manages
historical information, including Pre-Routing and Post-Routing records, routing
scripts, and ICR configuration data. The ICR Database Server is a relational
database that can collect and process large amounts of call and transaction
data, including call handling, planning and performance data.
 
     Admin Workstation.  The Intelligent CallRouter records call activity on an
enterprise-wide basis and reports on this activity on a real-time basis
utilizing the Admin Workstation. In addition to providing real-time call
handling statistics, the ICR provides consolidated, historical reporting for all
calls across all attached networks, ACDs, PBXs, and VRUs. Using any desktop
workstation within the network, customers can mix and match data in virtually
any combination, allowing analysis of real-time data with historical data. For
example, customers may want to compare current performance to past performance
over the last few minutes, days, or weeks.
 
     Software license fees for the Intelligent CallRouter vary significantly
based on a number of factors, including the functionality of the system, the
number of sites, the number of agents at each site and the level of redundancy
required. The customer list price for software license fees for the Intelligent
CallRouter software typically range from approximately $420,000 for a three site
configuration with some redundancy to approximately $1,000,000 for an eight site
configuration with extensive redundancy. The Company typically provides
discounts based on volume purchases. The Company and its customers generally
enter into maintenance agreements providing for ongoing service and product
upgrades for a fixed annual fee. Maintenance services and installation services,
which are not included in the license fee, amount to an additional 15% and 10%,
respectively, of the list price license fee. Maintenance contracts are renewable
on an annual basis.
 
TECHNOLOGY
 
     The Company has developed a number of innovative technologies to support
its open strategy:
 
     Real-Time Routing.  The ICR's real-time delivery of enterprise-wide call
center data makes use of innovative Local and Wide Area Network (LAN/WAN)
solutions to efficiently distribute information and facilitate connectivity. A
mixed LAN/WAN environment is supplemented by dial capabilities for both casual
access of data from remote premises as well as alarm notification and paging.
All clients are configured with redundant data paths to central services for
both configuring and monitoring the enterprise. The system is designed to run on
single or multiple Windows NT server-class machines. Interprocess communication
is
 
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efficient based on native capabilities within Windows NT integrated with the
Company's processes. The architecture can scale to support very large numbers of
agents, small offices, and home agents.
 
     Fault Tolerance.  To meet rigorous requirements for system reliability in
the call processing market, the Company has developed innovative industry
standard fault tolerant software solutions to provide not only tolerance of
hardware, software and communications failures, but also for the loss of an
entire site. The Company's software technology relating to virtual time
synchronization provides fault tolerance at the process level and includes
protection against single-point hardware failures. Detection of failures is
immediate and the Company has augmented standard TCP/IP protocols with features
designed to minimize outages due to communications failures.
 
     Remote Support and Diagnostics Technology.  The ICR incorporates extensive
system management capabilities, including alarming with automatic "phone home"
and paging capabilities; symmetric database replication; intelligent PC Server
node management; and tools to provide graphical representations of system
status. Consistent with an open architecture, the system will export Simple
Network Management Protocol (SNMP) "traps" to management systems. Fully
redundant communications paths are enhanced with real-time detection of
communications failures with near instantaneous switch-over to redundant links.
 
     Carrier Connectivity.  The ICR meets the certification standards of all
three of the major U.S. interexchange carrier networks, AT&T, MCI and Sprint, by
interfacing with the SS7, UDP/IP, and X.25 networks, respectively, using the
proprietary protocols of each carrier. The ICR architecture is designed to
support the introduction of other network interfaces as the Telecommunications
Act of 1996 enables the entry of other providers into the toll-free marketplace.
In addition, the Company is developing interfaces for several international
carriers.
 
     Premises-based Switching/Call Processing lnterfaces.  The Company has
developed event-based interfaces to all of the major ACDs. The ICR currently
supports five switches: Lucent DEFINITY, Aspect CallCenter, NTI Meridian,
Rockwell Galaxy and Rockwell Spectrum. By developing event-based tracking of the
ACDs (detecting when any event of interest happens at the ACD), the ICR has the
capability to report accurate enterprise-wide statistics and know accurately
which agents are available and skilled to handle incoming calls. The ICR can
also control, via Post-Routing, how calls directed to or from the switch are
subsequently routed and has the ability to deliver CTI information. By designing
the ICR to have the capability to interface to all ACDs, PBXs, VRUs, and other
premises-based equipment, the ICR enables customers to utilize equipment from
multiple vendors allowing effective use of a multi-vendor switching environment.
In contrast, proprietary solutions require all switches to be purchased from the
same vendor.
 
     Visual Script Editor.  The ICR uses visual/object-based call routing
scripts controlled and defined by the customer. The Visual Script Editor is used
to describe how calls are to be routed on a call-by-call basis. Each dialed
number can have a unique treatment or can be handled with a collection of other
dialed numbers. Many scripting objects are defined to assist the script designer
in choosing an appropriate algorithm. The Database Lookup and Application
Gateway objects enable the Script editor to import, in real-time, external
database information or arbitrary data that can be used in subsequent script
objects.
 
SALES AND MARKETING
 
     The Company's distribution strategy is to sell its software products and
services to major corporations who are significant users of inbound toll-free
services, and have multiple locations with resources that respond to incoming
calls. The Company uses a direct sales force in the United States as its primary
distribution channel to market to these companies. There are currently nine
direct sales representatives located in eight offices throughout the U.S. Each
sales representative carries a quota for a defined geographic territory and is
compensated for all sales within the territory. The Company's sales strategy is
based on a consultative sales process, working closely with customers to
understand and define their needs and determine how they can be addressed by the
Company's products. This strategy continues after the initial sale. The Company,
through ongoing sales, support, training, and maintenance, maintains close
contact with its existing customers in order to determine the customers'
evolving requirements for updates and enhancements.
 
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     In addition to the direct sales organization, the Company has signed
agreements with MCI and Optus to complement direct sales and provide
international distribution. MCI has signed a three-year renewable agreement with
the Company to offer its products as a service to customers on a worldwide
basis. Optus is a distributor of the Company's products in the Australian and
New Zealand markets. To complement its domestic sales strategy, the Company
intends to develop its sales channels for its products in the international
markets. The Company plans to continue to address international markets by using
its direct sales force and expects to add several other distribution partners.
 
     The Company supports its distribution strategy with a variety of focused
marketing activities designed to identify qualified prospects and expand the
Company's reputation. The Company attends several industry trade shows, conducts
numerous informational seminars in different cities, regularly speaks at
industry events, publishes articles and white papers, and uses direct mail. In
addition, the telecommunications marketplace is heavily influenced by reference
accounts and, as such, the Company is dependent upon its existing customers for
favorable references.
 
     As part of its marketing and product strategy, the Company cultivates
relationships with the major ACD/PBX vendors and VRU vendors, as well as the
interexchange carriers. Equipment from each of the ACD/PBX vendors is maintained
at the Company's facilities and technical discussions are ongoing to ensure
tight integration with the various switches. The Company intends to continue to
expand the range and number of products it supports based on customer requests
and market opportunities.
 
     The Company currently derives substantially all of its revenues from
licenses of the Intelligent CallRouter and related services. A significant
portion of the Company's revenues to date has been derived from a limited number
of customers. International sales represented 15.3% of revenues in 1996. More
information regarding the Company's revenues is included under the heading "Risk
Factors That May Affect Future Results," and Footnote J in Item 8 under "Notes
to Consolidated Financial Statements."
 
CUSTOMER SERVICE AND SUPPORT
 
     The Company believes that high quality customer service and support are
integral components of the solutions it offers. The Company's customer service
and support organization provides customers with technical support, training,
consulting and implementation/installation services. The Company believes that
in order to meet its customers' support expectations it must invest in and
leverage technology to build its service infrastructure. As of December 31,
1996, the Company had 16 employees in its customer service and support
organization. All of the Company's customers currently have software maintenance
agreements with the Company that provide for one or more of the following
services:
 
     Software Maintenance and Support.  The Company's support organization
offers a variety of support services to its customers including telephone,
electronic mail and facsimile customer support through its support services
staff. In addition, the product provides a "call home" application which allows
customers to request service on-line. Initial product license fees do not cover
software maintenance. Through its standard customer support package, the Company
provides its customers with 12-hour weekday telephone support and 24-hour
monitoring and quick response through use of the Company's remote support
technology. Periodic product updates and maintenance releases are included with
the annual support fees for the Company's standard support package, which is 15%
of the then-current list price of the licensed products.
 
     Documentation and Training.  The Company provides each customer with
product design, documentation and training. The product includes an easy-to-use
graphical user applications interface with on-line help. A complete library of
end-user documentation is also provided with each system. The Company offers
comprehensive training courses in all aspects of the product at its facility in
Littleton, Massachusetts, and at the customer's option, provides on-site
customer training upon request. Fees for education and training services, beyond
those services provided as a part of installation services, are in addition to
and separate from the license fees charged for the Company's software products
and are charged per student, per class or on a time and materials basis.
 
                                        8
<PAGE>   10
 
     Consulting.  The Company's application consultants are available to work
closely with customers to provide assistance concerning application design and
report customization. Fees for consulting services are charged separately from
the Company's software products on a time and materials basis. In addition, the
Company intends to continue to develop relationships with third-party consulting
organizations in order to support its customer base.
 
     Installation Services.  The Company provides customers with comprehensive
installation services, including initial application design, implementation
planning, system design support, project management, initial education and
training, and coordination of third-party software and hardware acquisition. The
Company's fee for installation services is charged separately from the Company's
licensing fees and is based on a percentage of the current list price of the
products being installed. Fees for the Company's standard installation services
are typically 10% of the then-current list price of the licensed products.
 
PRODUCT DEVELOPMENT
 
     Since its inception, the Company has made substantial investments in
product development. The Company's development organization was built upon a
base of software professionals with extensive experience in operating systems,
communications, fault tolerance, and software quality processes. Customer
experience and direct input to the product planning process is reflected in all
products designed and delivered by the Company.
 
     The Company announced the Intelligent CallRouter in August 1994 and began
customer shipments in May 1995. The Company plans to introduce enhancements to
the Intelligent CallRouter and new products that can be sold to existing and new
customers. The Company is currently working on several strategic projects that
will enhance the ICR product in the areas of desktop integration, computer
telephony integration, and the use of the Internet and Intranets. There is also
a significant emphasis on enhancing the product to work in international
markets.
 
     The Company intends to expand its existing product offerings and introduce
new products for the call processing software market. Although the Company
expects that most of its new products will be developed internally, the Company
may, based on timing and cost considerations, acquire technology and products
from third parties and evaluate third-party applications for inclusion within
its products on an ongoing basis. The Company believes that its future
performance will depend, in large part, on its ability to maintain and enhance
its current product line, develop new products that achieve market acceptance,
maintain technological competitiveness, meet an expanding range of customer
requirements and continue to recruit highly-skilled and qualified software
professionals.
 
     As of December 31, 1996, the Company's product development, quality
assurance and technical writing staff consisted of 28 employees. The Company's
total expenses for research and development for 1996, 1995 and 1994 were
$3,086,000, $2,322,000 and $1,879,000, respectively. The Company anticipates
that it will continue to commit substantial resources to research and
development in the future and that product development expenses may increase in
absolute dollars in future periods.
 
COMPETITION
 
     The market for telecommunications software products is intensely
competitive and is subject to rapid technological change. Although to date the
Company has experienced limited competition, the Company expects competition to
increase significantly in the future. Currently, the Company's principal
competitors are the interexchange carriers, particularly AT&T, and to a lesser
extent MCI and Sprint, which provide proprietary call routing solutions as part
of their service offerings. In addition, a number of other companies have
introduced or announced their intention to introduce products that could be
competitive with the Company's products, including Genesys Telecommunications
Laboratories and IEX Corporation. Additional competitors, including traditional
ACD providers, such as Lucent Technologies, Aspect Telecommunications
Corporation, Northern Telecommunications, Inc. and Rockwell International
Corporation, may enter the market by enhancing their proprietary private network
solutions or by entering into arrangements with the interexchange carriers. The
Company believes that, to date, approximately one-half of the Company's
 
                                        9
<PAGE>   11
 
customers have purchased the Company's products to replace or enhance existing
call routing solutions offered by the interexchange carriers. The Company's
other customers have purchased the Company's products in order to implement a
virtual call center solution for the first time. This additional competition
could adversely affect the Company's sales and profitability through price
reductions, reduced gross margins and loss of market share. In particular,
should one or more interexchange carriers, including MCI, Optus and Sprint which
are customers of the Company, choose to provide or distribute competitive
products and services, the Company's business could be materially adversely
affected. Many of the Company's current and potential competitors have
substantially greater financial, marketing and technical resources than the
Company.
 
     The Company believes that the principal competitive factors affecting its
market include product performance and functionality, customer service and
support, product reputation, company reputation, carrier support, ACD support,
fault tolerance, adaptability to individual customer call routing requirements,
scalability, ability to integrate with third party products, ease-of-use, price,
and effectiveness of sales and marketing efforts. Although the Company believes
that it currently competes favorably with respect to such factors, there can be
no assurance that the Company can maintain its competitive position against
current and potential competitors, especially those with greater financial,
marketing, service, support, technical, and other resources than the Company.
 
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
 
     The Company relies primarily on a combination of patent, copyright,
trademark and trade secrets laws, as well as confidentiality agreements to
protect its proprietary rights. The Company has been issued one patent relating
to the architecture, operating methodologies and interfaces of the Company's
Intelligent CallRouter. The Company also has one patent application pending in
the United States and internationally. While the Company believes that its
pending patent application relates to a patentable invention, there can be no
assurance that such patent application or any future patent application will be
granted or that any patent relied upon by the Company will not be challenged,
invalidated or circumvented, or that rights granted thereunder will provide
competitive advantages to the Company. Moreover, despite the Company's efforts
to protect its proprietary rights, unauthorized parties may attempt to copy
aspects of the Company's products or to obtain the use of information that the
Company regards as proprietary. In addition, the laws of some foreign countries
do not protect the Company's proprietary rights to as great an extent as do the
laws of the United States. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar technology.
 
     The Company is not aware that any of its products infringes the proprietary
rights of third parties. There can be no assurance, however, that third parties
will not claim infringement by the Company with respect to current or future
products. The Company expects that software product developers will increasingly
be subject to infringement claims as the number of products and competitors in
the Company's industry segment grows and the functionality of products in
different industry segments overlaps. Any such claims, with or without merit,
could be time-consuming, resulting in costly litigation, cause product shipment
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on terms
acceptable to the Company, if at all, which could have a material adverse effect
upon the Company's business, operating results and financial condition.
 
     The software and network adapter necessary to enable the Company's
Intelligent CallRouter to interface with the AT&T network is licensed by the
Company from a single vendor under a perpetual, fully-paid license. Although the
Company has access to the source code underlying this software and rights to
manufacture the network adapter, if for any reason the vendor does not make the
software or network adapter available to the Company, there can be no assurance
that the Company will be able to develop these products on a timely basis.
 
     Intelligent CallRouter, Pre-Routing and Post-Routing are registered
trademarks of the Company and GeoTel is a trademark of the Company. All other
trademarks and tradenames referred to in this Annual Report are the property of
their respective owners.
 
                                       10
<PAGE>   12
 
EMPLOYEES
 
     As of December 31, 1996, the Company had a total of 74 employees, all of
whom are based in the United States. Of the total, 31 were in research and
development, 16 were in support and support services, 19 were in sales and
marketing and 8 were in administration and finance. The Company's future
performance depends in significant part upon the continued service of its key
technical, sales and marketing, and senior management personnel and its
continuing ability to attract and retain highly qualified technical, sales and
marketing, and managerial personnel. Competition for such personnel is intense
and there can be no assurance that the Company will be successful in attracting
or retaining such personnel in the future. None of the Company's employees are
represented by a labor union or are subject to a collective bargaining
agreement. The Company has not experienced any work stoppages and considers its
relations with its employees to be good.
 
ITEM 2:  PROPERTIES
 
     The Company's executive office is located in Littleton, Massachusetts in a
facility consisting of 14,356 square feet, under a lease which expires in
December 1998. In addition, the Company leases office space in the metropolitan
areas of Atlanta, Chicago, Dallas, Philadelphia, Phoenix and Washington, D.C.
The Company entered into a sublease agreement in February 1997 for office space
for its new executive office in Lowell, Massachusetts. Initially, the Company
will have the use of 31,770 square feet which will increase by an additional
15,885 square feet on January 1, 1998 and by a further addition of 15,885 square
feet on January 1, 1999. Annual operating sublease payments during the sublease
term will range from $302,000 in the first year to $731,000 beginning in 1999
and through the remainder of the lease term. The Company has the right, with
proper notice, to terminate this sublease at the end of the sixth year of the
sublease. Management believes that its new facilities will meet its needs for
the next twelve months and that it will be able to negotiate a termination of
its current lease or sublease the space.
 
ITEM 3:  LEGAL PROCEEDINGS
 
     On January 31, 1997 the Company filed suit for patent infringement against
Genesys Telecommunications Laboratories, Inc. ("Genesys"), of San Francisco,
Calif., in the U.S. District Court for the District of Massachusetts. In the
action, the Company, owner of U.S. Patent No. 5,546,452, alleges that certain of
Genesys' products infringe the Company's patent. The Company is seeking damages
and injunctive relief.
 
ITEM 4:  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     The Company became subject to the reporting requirements of the Securities
Exchange Act of 1934 on November 20, 1996. There were no matters submitted to a
vote of the Company's shareholders during the fourth quarter of the fiscal year
ended December 31, 1996.
 
ITEM 4A:  EXECUTIVE OFFICERS OF THE REGISTRANT
 
     Information required by Item 10 of Form 10-K with respect to executive
officers of the Company is set forth below. Executive officers of the Company
are elected by the Board of Directors on an annual basis and service until their
successors have been duly elected and qualified. There are no family
relationships among any of the executive officers or directors of the Company.
 
     The executive officers of the Company, and their ages as of December 31,
1996, are as follows:
 
<TABLE>
<CAPTION>
              NAME                 AGE                     POSITION
---------------------------------  ---   --------------------------------------------
<S>                                <C>   <C>
John C. Thibault.................  43    President, Chief Executive Officer and
                                         Director
Louis J. Volpe...................  47    Senior Vice President of Sales and Marketing
Timothy J. Allen.................  47    Vice President of Finance, Chief Financial
                                         Officer, Treasurer and Assistant Secretary
G. Wayne Andrews.................  45    Vice President, Chief Technology Officer and
                                         Director
Steven H. Webber.................  52    Vice President of Engineering
</TABLE>
 
---------------
 
                                       11
<PAGE>   13
 
     John C. Thibault has served as President, Chief Executive Officer and
Director of the Company since January 1994. From April 1991 to October 1993, Mr.
Thibault served as President, Chief Executive Officer and Director of Coral
Network Corporation. From April 1988 to April 1991, Mr. Thibault served as an
officer of Motorola, Inc. and Senior Vice President and General Manager of
Motorola's Codex product division. From May 1986 to April 1988, Mr. Thibault was
President and Chief Executive Officer of PBX manufacturer Intecom, Inc., a
subsidiary of Wang Laboratories. Prior to his position at Intecom, he held
several senior management positions over an 11-year period with Wang.
 
     Louis J. Volpe has served as Senior Vice President of Sales and Marketing
of the Company since May 1996. From February 1995 to April 1996, Mr. Volpe
served as Vice President of Marketing of the Company. Mr. Volpe served as Senior
Vice President of Marketing and Operations of Parametric Technology Corporation
from May 1993 to January 1995 and as Vice President of Marketing and Operations
from September 1989 to May 1993. Prior to Parametric, Mr. Volpe was an executive
at Prime Computer. Mr. Volpe is a director of Pure Atria, Inc. and Softdesk
Inc., each of which is a publicly-traded company.
 
     Timothy J. Allen has served as Vice President of Finance, Chief Financial
Officer, Treasurer and Assistant Secretary of the Company since February 1995.
From March 1990 to September 1994, Mr. Allen served as Vice President and Chief
Financial Officer of Object Design, Inc. From July 1988 to October 1989, Mr.
Allen served as Vice President of Finance and Chief Accounting Officer for
Xyvision Inc. From January 1983 to June 1988, Mr. Allen served as Xyvision's
corporate controller. Prior to joining Xyvision, Mr. Allen was Corporate
Controller at Nixdorf Computer Corporation.
 
     G. Wayne Andrews a co-founder of the Company, has served as a Director of
the Company since June 1993 and as Vice President and Chief Technical Officer of
the Company since January 1994 and served as President of the Company from June
1993 to December 1993. From October 1989 to December 1992, Mr. Andrews was
co-founder and Vice President of Teloquent Communications Corporation. At
Teloquent, Mr. Andrews held positions as Vice President Product Management, Vice
President Engineering and Vice President Customer Support. Prior to co-founding
Teloquent, Mr. Andrews was Director, International Development Center, and
Director, Advanced Switching Systems at Teknekron Infoswitch Corp.
 
     Steven H. Webber a co-founder of the Company, has served as Vice President
of Engineering of the Company since October 1993. Prior to joining the Company,
Mr. Webber held a number of key technical and management positions with Stratus
Computer Inc., including Chief Technical Advisor and Director of Strategic
Planning. Prior to Stratus, Mr. Webber held a number of key technical positions
at Honeywell Information Systems, Inc. and Massachusetts Institute of
Technology.
 
                                    PART II
 
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
 
     The Company's common stock trades on the Nasdaq National Market tier of the
Nasdaq Stock Market under the Symbol: "GEOC". The following table sets forth,
for the periods indicated, the range of high and low bid prices for the
Company's common stock as reported by the Nasdaq Stock Market.
 
<TABLE>
<CAPTION>
                                                                      YEAR ENDED
                                                                  DECEMBER 31, 1996
                                                                  ------------------
                                                                   HIGH        LOW
                                                                  -------     ------
          <S>                                                     <C>         <C>
          Fourth Quarter (Commencing on November 20, 1996) .....  $18.125     $12.00
</TABLE>
 
     The Company has not declared or paid cash dividends on its common stock and
does not plan to pay cash dividends to its shareholders in the near future. The
Company presently intends to retain its earnings to finance further growth of
its business. As of March 14, 1997, the Company's common stock was held by
approximately 104 shareholders of record. This does not reflect persons or
entities who hold their stock in nominee or street name accounts through various
brokerage firms. The Company estimates that there are over 1,000 shareholders
who hold their stock in nominee or street name accounts.
 
                                       12
<PAGE>   14
 
ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA
 
     The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the Notes thereto
appearing elsewhere in this report.
 
<TABLE>
<CAPTION>
                                             INCEPTION
                                           (JUNE 4, 1993)
                                              THROUGH                YEAR ENDED DECEMBER 31,
                                            DECEMBER 31,     ----------------------------------------
                                                1993            1994          1995           1996
                                           --------------    ----------    -----------    -----------
                                                       (IN THOUSANDS, EXCEPT SHARE DATA)
<S>                                        <C>               <C>           <C>            <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
     Software license....................                                  $     1,360    $     7,880
     Services and other..................                                          174          1,167
                                             ----------      ----------    -----------    -----------
     Total revenues......................                                        1,534          9,047
Cost of Revenues:
     Cost of software license............                                          264            297
     Cost of services and other..........                                          611          1,414
                                             ----------      ----------    -----------    -----------
     Total cost of revenues..............                                          875          1,711
                                             ----------      ----------    -----------    -----------
Gross profit.............................                                          659          7,336
                                             ----------      ----------    -----------    -----------
Operating Expenses:
     Research and development............    $      140      $    1,879          2,322          3,086
     Sales and marketing.................            --             570          1,476          2,760
     General and administrative..........           261             641            887          1,052
                                             ----------      ----------    -----------    -----------
     Total operating costs...............           401           3,090          4,685          6,898
                                             ----------      ----------    -----------    -----------
Income (loss) from operations............          (401)         (3,090)        (4,026)           438
Interest income, net.....................            24             124            164            316
                                             ----------      ----------    -----------    -----------
Net income (loss)........................          (377)         (2,966)        (3,862)           754
Accretion of convertible preferred stock
  to redemption value....................            (4)            (35)           (77)           (97)
                                             ----------      ----------    -----------    -----------
Net income (loss) available
  (attributable) to common
  stockholders...........................    $     (381)     $   (3,001)   $    (3,939)   $       657
                                             ==========      ==========    ===========    ===========
Net income (loss) available
  (attributable) to common
  stockholders...........................    $    (0.20)     $    (1.10)   $     (1.25)   $      0.06
                                             ==========      ==========    ===========    ===========
Weighted average number of common and
  common equivalent shares...............     1,950,088       2,724,895      3,154,729     11,730,906
                                             ==========      ==========    ===========    ===========
Supplemental Basis (See Note B):
Net income (loss) per common and common
  equivalent share.......................    $    (0.11)     $    (0.40)   $     (0.37)   $      0.06
                                             ==========      ==========    ===========    ===========
Weighted average number of common and
  common equivalent shares...............     3,509,584       7,476,726     10,365,465     11,730,906
                                             ==========      ==========    ===========    ===========
</TABLE>
 
<TABLE>
<CAPTION>
                                                                 AT DECEMBER 31,
                                                 ------------------------------------------------
                                                  1993         1994          1995          1996
                                                 ------       -------       -------       -------
<S>                                              <C>          <C>           <C>           <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................    $  451       $ 3,793       $ 4,537       $33,263
Working capital..............................     2,841         4,249         4,292        31,421
Total assets.................................     3,020         5,483         6,449        36,924
Long-term debt, less current portion.........        --           338           408            --
Convertible preferred stock..................     3,267         7,937        11,986            --
Total stockholders' equity (deficit).........    $ (370)      $(3,357)      $(7,312)      $32,437
</TABLE>
 
                                       13
<PAGE>   15
 
ITEM 7.  MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 
OVERVIEW
 
     The Company was incorporated in June 1993 to develop telecommunications
software solutions that enable enhanced call center applications. From inception
through the first half of 1995, the Company was engaged principally in research
and product development of its Intelligent CallRouter product. The Company's
first customer installation of the Intelligent CallRouter occurred in May 1995
and the Company recognized its first revenue from customer shipments in the
fourth quarter of 1995. The Company initially achieved profitability in the
first quarter of 1996. Unit shipments have grown due to increasing market
acceptance of the Company's product and increases in the size of the Company's
direct sales force. The Company expects that the Intelligent CallRouter product
will account for substantially all of its revenue for the foreseeable future.
The Company believes that its future performance will depend in large part on
its ability to maintain and enhance its current Intelligent CallRouter product
line, develop new products that achieve market acceptance, maintain
technological competitiveness, meet an expanding range of customer requirements
and continue to recruit highly skilled and qualified software professionals. The
Company primarily markets its products in the United States through a direct
sales force which is complemented by strategic sales channels, selected
resellers and international partners.
 
     The Company's revenue is derived from two sources: software licenses and
services. Software license revenue, which has historically represented the
majority of the Company's total revenue, is generally payable within thirty days
of product acceptance. The Company recognizes software license fee revenues upon
shipment unless there are significant post-delivery obligations. When
significant post-delivery obligations exist, revenues are deferred until such
obligations have been satisfied. Service revenues consist primarily of
maintenance, installation and training revenues. Maintenance revenues are
recognized ratably over the term of the support period, which is typically
twelve months. Installation and training revenues are recognized when the
services are performed.
 
     A significant portion of the Company's revenues to date has been derived
from a limited number of customers. Revenues attributable to the Company's five
largest customers accounted for approximately 94.4% and 49.1% of the Company's
total revenues in 1995 and 1996, respectively. The Company expects that it will
continue to be dependent upon a limited number of customers for a significant
portion of its revenues in future periods.
 
     The Company has experienced substantial revenue growth since product
introduction and first achieved profitability in the first quarter of 1996.
However, due to the Company's limited operating history there can be no
assurance that such revenue growth and profitability will continue in the future
on a quarterly or annual basis. Future operating results will depend on many
factors, including the demand for the Company's products, the level of product
and price competition, the Company's success in expanding its direct sales force
and indirect distribution channels and the ability of the Company to develop and
market new products and control costs. In order to support the growth of its
business, the Company plans to significantly expand its level of operations. Due
to the anticipated increase in the Company's operating expenses caused by this
expansion, the Company's operating results will be adversely affected if
revenues do not increase. Although demand for the Intelligent CallRouter has
grown in recent quarters, the call center market is still an emerging market.
The Company's future financial performance will depend in large part on
continued growth in the number of organizations adopting software applications
to enhance their responsiveness to customers and the number of applications
developed for use in these environments.
 
     The Company's quarterly operating results may in the future vary
significantly depending on factors such as increased competition, the timing of
new product announcements and changes in pricing policies by the Company and its
competitors, market acceptance of new and enhanced versions of the Company's
products, the size and timing of significant orders, order cancellations by
customers, changes in operating expenses, changes in Company strategy, personnel
changes, and general economic factors. The Company's expense
 
                                       14
<PAGE>   16
 
levels are based, in part, on its expectations of future revenues and to a large
extent are fixed in the short-term. If revenue levels are below expectations,
the Company's business, operating results and financial condition are likely to
be materially adversely affected. Net income may be disproportionately affected
by a reduction in revenues because a proportionately smaller amount of the
Company's expenses varies with its revenues. As a result, the Company believes
that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance.
 
                                       15
<PAGE>   17
 
OPERATING RESULTS
 
     The following table presents selected unaudited financial information for
the Company's last five quarters (since the Company began recognizing revenue),
as well as the percentage of the Company's total revenues represented by each
item. The Company has not included quarterly financial information for any
quarter prior to the quarter ended December 31, 1995 as the Company was a
development stage enterprise and expenses in those quarters related primarily to
the research and development of the Company's products and initial marketing
efforts. In the opinion of the Company's management, this unaudited information
reflects all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly this information when read in conjunction with the
Consolidated Financial Statements and Notes thereto. The Company's operating
results for any one quarter are not necessarily indicative of results for any
future period.
 
<TABLE>
<CAPTION>
                                                                    QUARTER ENDED
                                          ------------------------------------------------------------------
                                          DECEMBER 31,   MARCH 31,   JUNE 30,   SEPTEMBER 30,   DECEMBER 31,
                                              1995         1996        1996         1996            1996
                                          ------------   ---------   --------   -------------   ------------
                                                                    (IN THOUSANDS)
<S>                                       <C>            <C>         <C>        <C>             <C>
Revenues:
     Software license...................     $1,360       $ 1,705     $1,837       $ 2,076         $2,262
     Services and other.................        174           134        212           320            501
                                             ------       -------     ------       -------         ------
     Total revenues.....................      1,534         1,839      2,049         2,396          2,763
                                             ------       -------     ------       -------         ------
Cost of Revenues:
     Cost of software license...........        264            75        108            52             62
     Cost of services and other.........        240           278        338           372            426
                                             ------       -------     ------       -------         ------
     Total cost of revenues.............        504           353        446           424            488
                                             ------       -------     ------       -------         ------
Gross Profit............................      1,030         1,486      1,603         1,972          2,275
                                             ------       -------     ------       -------         ------
Operating Expenses:
     Research and development...........        601           656        734           820            876
     Sales and marketing................        479           621        575           773            791
     General and administrative.........        386           204        242           259            347
                                             ------       -------     ------       -------         ------
     Total operating costs..............      1,466         1,481      1,551         1,852          2,014
                                             ------       -------     ------       -------         ------
Income (loss) from operations...........       (436)            5         52           120            261
Interest income, net....................         52            40         45            46            185
                                             ------       -------     ------       -------         ------
Net income (loss).......................     $ (384)      $    45     $   97       $   166         $  446
                                             ======       =======     ======       =======         ======
</TABLE>
 
<TABLE>
<CAPTION>
                                                                    QUARTER ENDED
                                          ------------------------------------------------------------------
                                          DECEMBER 31,   MARCH 31,   JUNE 30,   SEPTEMBER 30,   DECEMBER 31,
                                              1995         1996        1996         1996            1996
                                          ------------   ---------   --------   -------------   ------------
                                                               (PERCENTAGE OF REVENUES)
<S>                                       <C>            <C>         <C>        <C>             <C>
Revenues:
     Software license...................       88.6%        92.7%       89.7%        86.7%           81.9%
     Services and other.................       11.4          7.3        10.3         13.3            18.1
                                             ------        -----       -----        -----           -----
     Total revenues.....................      100.0        100.0       100.0        100.0           100.0
                                             ------        -----       -----        -----           -----
Cost of Revenues:
     Cost of software license...........       17.2          4.1         5.3          2.2             2.2
     Cost of services and other.........       15.6         15.6        16.5         15.5            15.4
                                             ------        -----       -----        -----           -----
     Total cost of revenues.............       32.8         19.2        21.8         17.7            17.6
                                             ------        -----       -----        -----           -----
Gross Profit............................       67.2         80.8        78.2         82.3            82.4
                                             ------        -----       -----        -----           -----
Operating Expenses:
     Research and development...........       39.2         35.7        35.8         34.2            31.7
     Sales and marketing................       31.2         33.8        28.1         32.3            28.6
     General and administrative.........       25.2         11.1        11.8         10.8            12.6
                                             ------        -----       -----        -----           -----
     Total operating costs..............       95.6         80.6        75.7         77.3            72.9
                                             ------        -----       -----        -----           -----
Income (loss) from operations...........     (28.4)          0.2         2.5          5.0             9.5
Interest income, net....................        3.4          2.2         2.2          1.9             6.6
                                             ------        -----       -----        -----           -----
Net income (loss).......................      (25.0)%        2.4%        4.7%         6.9%           16.1%
                                             ======        =====       =====        =====           =====
</TABLE>
 
                                       16
<PAGE>   18
 
REVENUES
 
     Revenues consist of software license fees and services. The Company
recorded no revenues until the fourth quarter of 1995. Since the fourth quarter
of 1995, the Company's quarterly revenues have increased sequentially by 19.9%,
11.4%, 16.9% and 15.3% for the first, second, third and fourth quarters of 1996,
respectively. The increases were due to increases in unit sales. The Company did
not record any revenues from international sales until the first quarter of
1996. International sales represented 15.3% of revenues for the year ended
December 31, 1996. The Company believes that it will continue to derive a
significant portion of its revenues from international sales and that
international revenue will comprise a larger percentage of total revenue in
future years. To date, the Company's international sales have been denominated
in U.S. currency. Most of the Company's revenues have been from software license
and installation revenues. The Company anticipates that maintenance revenues
will increase as a percentage of revenues as the Company's customer base
increases. Service and other revenues for the fourth quarter of 1995 were
derived solely from installation services. Installation, maintenance services
and other revenue represented 58.9%, 31.4% and 9.7%, respectively, of total
service and other revenues for the year ended December 31, 1996. Service and
other revenues increased as a percentage of total revenue during 1996 due to the
increase in maintenance revenue. Maintenance revenue has increased as a result
of the increase in Company's customer base. Installation services are one time
sales. Maintenance contracts are generally twelve months in duration and are
subject to customer renewal.
 
COST OF REVENUES
 
     To date, cost of software licenses consists principally of product warranty
costs and costs attributable to a discontinued marketing program offered to the
Company's first five customers. Cost of software licenses as a percentage of
software license revenue were 19.4%, 4.4%, 5.9%, 2.5% and 2.7% for the fourth
quarter of 1995 and the first, second, third and fourth quarter of 1996,
respectively. The decreases in percentage from the fourth quarter of 1995
resulted from a decrease in hardware costs. As part of the initial introduction
of the Company's software products, the Company purchased and resold certain
hardware required by customers in order to implement the Company's products.
This program was discontinued as the Company's general practice in September
1995. The Company does not anticipate that hardware costs will represent a
significant portion of cost of revenues in the future. The increase in dollars
and as a percentage of software license revenue in the second quarter of 1996 as
compared to any other quarter in 1996, was the result of an increase in the
provision for warranty expense. The Company believes that in future periods, the
percentage of cost of software licenses will approximate the percentages
realized in the third and fourth quarters of 1996.
 
     Cost of services consists principally of the costs incurred to provide
installation, consulting, maintenance and training services. The expenses
incurred to provide these services are comprised primarily of personnel costs,
travel and facility costs. Cost of services as a percentage of services and
other revenues were 137.9%, 207.5%, 159.4%, 116.3% and 85.0% for the fourth
quarter of 1995 and the first, second, third and fourth quarter of 1996,
respectively. The dollar increases were a result of start-up costs associated
with building a customer support infrastructure to handle the anticipated future
growth in customers. The Company anticipates that the cost of services will
increase in absolute dollars, while decreasing as a percentage of services and
other revenues in the foreseeable future. In the fourth quarter of 1996,
revenues from services and other revenue exceeded the related costs of services
and other expenses. The Company believes this trend will continue in the future
as the Company continues to experience the anticipated efficiencies from a
growing customer base and as maintenance customer renewals increase.
 
OPERATING EXPENSES
 
     Research and Development.  Research and development expenses consist
principally of personnel and facility costs. Research and development expenses
as a percentage of total revenues were 39.2%, 35.7%, 35.8%, 34.2% and 31.7% for
the fourth quarter of 1995 and the first, second, third and fourth quarter of
1996, respectively. The decrease in percentage from the fourth quarter of 1995
to the first quarter in 1996 was the result of expenses remaining relatively
constant during the period while the Company experienced significant revenue
growth. The increase in absolute dollars from the fourth quarter of 1995 through
the fourth quarter of
 
                                       17
<PAGE>   19
 
1996 was the result of an increase in employees and the associated hiring costs.
The major product development efforts in 1996 related to the development of
significant enhancements to the Company's ICR product such as expanding the
products interface compatibility through the addition of new ACD interfaces,
interfaces to Voice Response Units ("VRU's"), engineering the product to operate
in a service bureau environment (i.e. one system supporting several customers)
and improvements in the existing graphical user interface and security features
of the product. The Company anticipates that research and development expenses
will continue to increase in absolute dollars, while decreasing as a percentage
of total revenues in the foreseeable future.
 
     Sales and Marketing.  Sales and marketing expenses consist principally of
personnel costs, travel, promotional expenses and facility costs. Sales and
marketing expenses as a percentage of total revenues were 31.2%, 33.8%, 28.1%,
32.3% and 28.6% for the fourth quarter of 1995 and the first, second, third and
fourth quarter of 1996, respectively. The Company recorded a charge associated
with the termination of an employee in the first quarter of 1996. Excluding this
charge, the Company would have experienced an increase in sales and marketing
expenses in absolute dollars but a decrease as a percentage of total revenues
from the preceding quarter because of the increase in revenue during the
periods. The decrease in the percentage of sales and marketing expenses in the
fourth quarter from the third quarter of 1996 was the result of the increase in
revenue in the fourth quarter while the Company maintained spending at the same
level as the third quarter of 1996. The increase in sales and marketing expenses
was the result of adding sales personnel to the direct sales force and an
increase in commission expense attributable to higher sales. The Company
anticipates that sales and marketing expenses will increase in absolute dollars
and as a percentage of total revenues in the foreseeable future.
 
     General and Administrative.  General and administrative expenses consist
principally of personnel costs for administrative, finance, information systems,
human resources and general management personnel, as well as legal expenses and
facility costs. General and administrative expenses as a percentage of total
revenues were 25.2%, 11.1%, 11.8%, 10.8% and 12.6% for the fourth quarter of
1995 and the first, second, third and fourth quarter of 1996, respectively.
General and administrative expenses in the fourth quarter of 1995 were higher
than in any of the quarters in 1996 principally due to the settlement of
litigation for approximately $127,000. General and administrative expenses have
been increasing in absolute dollars since the first quarter of 1996 due to an
increase in employees and travel. The significant increase in absolute dollars
in the fourth quarter of 1996 compared to the prior quarters of 1996, was the
result of the Company recognizing an expense of approximately $69,000 relating
to the forgiveness of a note receivable and compensation to offset the
associated officer's income taxes. Excluding this charge, the Company would have
experienced an increase in general and administrative expenses in absolute
dollars but a decrease as a percentage of total revenues from the prior quarters
in 1996. The Company anticipates that general and administrative expenses will
increase in absolute dollars, while decreasing as a percentage of total revenues
for the foreseeable future.
 
INTEREST INCOME, NET
 
     Interest income, net, of $52,000, $40,000, $45,000, $46,000 and $185,000
for the fourth quarter of 1995 and the first, second, third and fourth quarter
of 1996, respectively, resulted from investments of the Company's cash balances,
net of interest expense incurred on bank term notes. In the fourth quarter 1996,
the Company raised approximately $26,669,000 in cash from its initial public
offering. The Company used a portion of the proceeds from the offering to repay
in full the Company's outstanding debt and invested the remainder of the
proceeds. Interest income increased significantly in the fourth quarter due to
the increase in cash invested.
 
PROVISION FOR INCOME TAXES
 
     No income tax provision was recorded for federal income tax purposes for
the years ended December 31, 1996, 1995 and 1994 as the Company has not reported
taxable income in those periods. As of December 31, 1996, the Company had
capitalized start-up costs of approximately $4,800,000 that are amortized to
offset taxable income over the five year period beginning in 1994 and net
operating loss carryforwards of approximately $1,111,000 for federal and state
income tax purposes that may be used to offset future federal
 
                                       18
<PAGE>   20
 
income tax, if any. The Company also has $223,000 of federal research and
development tax credits which expire beginning in the year 2009 if not utilized.
An ownership change, as defined in the Tax Reform Act of 1986, may restrict the
utilization of certain tax attributes. A valuation allowance has been recorded
for the entire deferred tax asset as a result of uncertainties regarding the
realization of the asset due to the limited history of operating profits. See
the Consolidated Financial Statements and Notes thereto.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     The Company, prior to its initial public offering on November 20, 1996, had
financed its operations since inception primarily by the private sales of equity
securities pursuant to which the Company received approximately $12,123,000 and
by bank term notes to finance purchases of equipment. The principal uses of cash
have been to fund research and development of the Company's products and initial
marketing of the products and to purchase capital equipment. On November 20,
1996, the Company completed its initial public offering of common stock, which
generated net proceeds of $26,669,000. The Company used approximately $756,000
of the proceeds to repay borrowings under its outstanding equipment lines of
credit. At December 31, 1996, the Company had cash and cash equivalents of
$33,263,000. As of December 31, 1996, the Company had $2,121,000 in accounts
receivable. The Company's working capital increased to $31,421,000 at December
31, 1996 from $4,292,000 at December 31, 1995.
 
     The Company's operating activities provided cash of $3,306,000 in 1996 and
used cash of $3,940.000 and 2,511,000 in 1995 and 1994, respectively. The
Company was in the development stage up until the fourth quarter of 1995 which
resulted in a negative cash flow from operations. In 1996, the Company
experienced significant positive cash flow as a result of achieving
profitability of $754,000 in its first full year of revenues and due to the
increase in deferred revenue of $2,017,000 partially offset by an increase in
receivables of $1,106,000.
 
     Cash used in investing activities in 1996 was $743,000 for capital
expenditures. Cash provided from investing activities was $472,000 and $752,000
in 1995 and 1994, respectively. The positive cash flow in those years was the
result of the sale and maturity of marketable securities partially offset by
capital expenditures.
 
     Cash provided by financing activities was $26,163,000, $4,212,000 and
$5,101,000 in 1996, 1995 and 1994, respectively. In 1996, the positive cash flow
was primarily the result of the Company's initial public offering of common
stock. In 1995 and 1994, the financing activities consisted primarily of the
sale of Convertible Preferred Stock.
 
     As of December 31, 1996, the Company had no material commitments for
capital expenditures.
 
     The Company believes that existing cash balances, funds available under the
equipment line and funds generated by operations, will be sufficient to meet its
anticipated liquidity and working capital requirements for at least the next
twelve months.
 
                  RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
 
     The Company operates in a highly competitive and changing environment that
involve a number of risks, some of which are beyond the Company's control. The
following discussion highlights a number of these risks.
 
     These discussions involve forward looking statements that involve a number
of risks and uncertainties that could cause future results to differ materially.
Among these risk factors are continuing acceptance of GeoTel's products in the
marketplace, the Company's ability to grow from the sales of these products,
general competitive pressures in the marketplace, and the continued overall
growth in the market for telecommunications software products.
 
     Limited Operating History; Future Operating Results Uncertain.  The Company
was incorporated in June 1993 and did not begin shipping products until May
1995. As of December 31, 1996, the Company had an accumulated deficit of
$6,455,000. The Company has experienced substantial revenue growth since product
introduction, and first achieved profitability in the first quarter of 1996.
However, due to the Company's limited operating history there can be no
assurance that such revenue growth and profitability will continue on
 
                                       19
<PAGE>   21
 
a quarterly or annual basis in the future. Future operating results will depend
on many factors, including the demand for the Company's products, the level of
product and price competition, the Company's success in expanding its direct
sales force and indirect distribution channels and the ability of the Company to
develop and market new products and control costs. In order to support the
growth of its business, the Company plans to significantly expand its level of
operations. Due to the anticipated increase in the Company's operating expenses
caused by this expansion, the Company's operating results will be adversely
affected if revenues do not increase.
 
     Potential Fluctuations in Quarterly Operating Results.  The Company's
quarterly operating results may in the future vary significantly depending on
factors such as increased competition, the timing of new product announcements
and changes in pricing policies by the Company and its competitors, market
acceptance of new and enhanced versions of the Company's products, the size and
timing of significant orders, order cancellations by customers, the lengthy
sales cycles of the Company's products, changes in operating expenses, changes
in Company strategy, personnel changes and general economic factors. Product
revenues are also difficult to forecast because the market for the Company's
software products is rapidly evolving, and the Company's sales cycle varies
substantially from customer to customer. A significant portion of the Company's
revenues and operating income has been, and is expected to continue to be,
derived from software licensing fees from a limited number of customers.
Variability in the timing of such license fees may cause material fluctuations
in the Company's business, operating results and financial condition. The
Company's products and services generally require capital expenditures by
customers as well as the commitment of resources to implement the Company's
products. Accordingly, the Company is substantially dependent on its customers'
decisions as to the timing and level of such expenditures and resource
commitments. In addition, the Company typically realizes a significant portion
of license revenues in the last month of a quarter. As a result, the magnitude
of quarterly fluctuations may not become evident until late in, or after the
close of, a particular quarter. The Company's expenses are based in part on the
Company's expectations as to future revenue levels and to a large extent are
fixed in the short-term. If revenues do not meet expectations, the Company's
business, operating results and financial condition are likely to be materially
adversely affected. In particular, because only a small portion of the Company's
expenses varies with revenues, net income may be disproportionately affected by
a reduction in revenues. As a result, the Company believes that period-to-period
comparisons of its operating results are not necessarily meaningful and should
not be relied upon as indications of future performance. Due to the foregoing
factors, it is likely that in some future quarter the Company's revenue or
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock could be
materially adversely affected.
 
     Potential Volatility of Stock Price.  The market price of the Company's
Common Stock may be volatile and may be significantly affected by factors such
as actual or anticipated fluctuations in the Company's quarterly operating
results, announcements of new products by the Company or its competitors,
developments with respect to conditions and trends in the telecommunications
industry, government regulation, changes in estimates by securities analysts of
the Company's future performance, general market conditions and other factors.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have adversely affected the market prices of
securities of companies for reasons unrelated to their operating performance. In
the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted against
such a company. Such litigation could result in substantial costs and a
diversion of management's attention and resources, which would have a material
adverse effect on the Company's business, financial condition and results of
operations. These broad market fluctuations may adversely affect the market
price of the Common Stock.
 
     Risks Associated with Customer Concentration and One-Time License Fees.  A
significant portion of the Company's revenues to date has been derived from a
limited number of customers. Revenues attributable to the Company's five largest
customers accounted for approximately 94.4% and 49.1% of the Company's total
revenues in 1995 and 1996, respectively. Fidelity, Sprint and America Online
accounted for approximately 38.3%, 25.9% and 20.0%, respectively, of the
Company's total revenues in 1995, and Fidelity, Optus, Delta, American Express,
and GTE accounted for approximately 14.1%, 11.4%, 8.9%, 7.6% and 7.3%,
respectively, of the Company's total revenues for 1996. The Company expects that
it will continue to be dependent upon a
 
                                       20
<PAGE>   22
 
limited number of customers for a significant portion of its revenues in future
periods. None of the Company's customers, other than MCI and Optus, is
contractually obligated to license or purchase additional products or services
from the Company and these customers generally have acquired fully-paid licenses
to the installed product. As a result of this customer concentration, the
Company's business, operating results and financial condition could be
materially adversely affected by the failure of anticipated orders to
materialize or by deferrals or cancellations of orders. In addition, a
significant portion of the Company's revenues to date has been derived from
initial license fees from customers who have acquired fully-paid licenses to the
installed product. There can be no assurance that any of the Company's customers
will continue to purchase the Company's products and services in amounts similar
to previous periods or that revenues from customers that have accounted for
significant revenues in past periods, individually or as a group, will continue
or, if continued, will reach or exceed historical levels in any future period.
The Company's operating results may in the future be subject to substantial
period-to-period fluctuations as a consequence of such customer concentration.
 
     Lengthy Sales and Implementation Cycles.  The Company's products are
typically intended for use in applications that may be critical to a customer's
business. The license and implementation of the Company's software products
generally involves a significant commitment of resources by prospective
customers. As a result, the Company's sales process is often subject to delays
associated with lengthy approval processes that typically accompany significant
capital expenditures. For these and other reasons, the sales cycle associated
with the license of the Company's products is often lengthy (recently averaging
approximately six months) and subject to a number of significant delays over
which the Company has little or no control. In addition, the Company does not
recognize license revenues until all significant post-delivery obligations have
been satisfied, including the development of specific product features which, in
certain cases, can take several quarters. The time required to implement the
Company's products can vary significantly with the needs of its customers and is
generally a process that extends for several months. There can be no assurance
that the Company will not experience delays in the future, particularly if the
Company receives orders for large, complex installations.
 
     Product Concentration; Dependence on Growth in Call Center Market.  The
Company currently derives substantially all of its revenues from licenses of the
Intelligent CallRouter and related services. Broad market acceptance of the
Company's product is critical to the Company's future success. As a result, a
decline in demand for or failure to achieve broad market acceptance of the
Intelligent CallRouter as a result of competition, technological change or
otherwise, would have a material adverse effect on the business, operating
results and financial condition of the Company. A decline in sales of the
Intelligent CallRouter could also have a material adverse effect on sales of
other Company products that may be sold to Intelligent CallRouter customers. The
Company's future financial performance will depend in part on the successful
development, introduction and customer acceptance of new and enhanced versions
of the Intelligent CallRouter and other products. There can be no assurance that
the Company will continue to be successful in marketing the Intelligent
CallRouter or any new or enhanced products.
 
     The Intelligent CallRouter is utilized in call centers maintained by
companies in a variety of industries. This product is currently expected to
account for substantially all of the Company's future revenues. Although demand
for the Intelligent CallRouter has grown in recent quarters, the call center
market is still an emerging market. The Company's future financial performance
will depend in large part on continued growth in the number of organizations
adopting software applications to enhance their responsiveness to customers and
the number of applications developed for use in those environments. There can be
no assurance that the market for the Company's products will continue to grow.
In addition, changes in the business or pricing strategies of the interexchange
carriers or ACD vendors could adversely affect demand for the Company's
products. If the call center market fails to grow or grows more slowly than the
Company currently anticipates, the Company's business, operating results and
financial condition would be materially adversely affected. During recent years,
segments of the telecommunications industry have experienced significant
economic downturns characterized by decreased product demand, price erosion,
work slowdowns and layoffs. The Company's operations may in the future
experience substantial fluctuations from period to period as a consequence of
such industry patterns, general economic conditions affecting the timing of
orders from major customers, and other factors affecting
 
                                       21
<PAGE>   23
 
capital spending. There can be no assurance that such factors will not have a
material adverse effect on the Company's business, operating results and
financial condition.
 
     Competition.  The market for telecommunications software products is
intensely competitive and is subject to rapid technological change. Although to
date the Company has experienced limited competition, the Company expects
competition to increase significantly in the future. Currently, the Company's
principal competitors are the interexchange carriers, particularly AT&T, and to
a lesser extent MCI and Sprint, which provide proprietary call routing solutions
as part of their service offerings. In addition, a number of other companies
have introduced or announced their intention to introduce products that could be
competitive with the Company's products, including Genesys Telecommunications
Laboratories and IEX Corporation. Additional competitors, including traditional
ACD providers, such as Lucent Technologies, Aspect Telecommunications
Corporation, Northern Telecommunications, Inc. and Rockwell International
Corporation, may enter the market by enhancing their proprietary private network
solutions or by entering into arrangements with the interexchange carriers. The
Company believes that, to date, approximately one-half of the Company's
customers have purchased the Company's products to replace or enhance existing
call routing solutions offered by the interexchange carriers. The Company's
other customers have purchased the Company's products in order to implement a
virtual call center solution for the first time. Increased competition is likely
to result in price reductions, reduced gross margins and loss of market share,
any of which could materially adversely affect the Company's business, operating
results and financial condition. Some of the Company's current, and many of the
Company's potential, competitors have significantly greater financial,
technical, marketing and other resources than the Company. As a result, they may
be able to respond more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the development,
promotion and sale of their products than the Company. In addition, one or more
interexchange carriers, including MCI, Optus and Sprint which are customers of
the Company, could choose to provide or distribute competitive products and
services. Accordingly, there can be no assurance that the Company will be able
to compete successfully against current and future competitors or that
competitive pressures faced by the Company will not materially adversely affect
its business, operating results and financial condition. Moreover, the Company
may be subject to potential conflicts of interest from time to time if a
customer, such as MCI, Optus or Sprint, provides or distributes competitive
products or services. In this regard, a customer which elects to provide or
distribute competitive products or services could make strategic decisions with
respect to pricing and other matters relating to products provided or
distributed by it which could adversely affect the Company's business, operating
results and financial condition.
 
     Dependence on New Products and Rapid Technological Change.  The market for
the Company's products is characterized by rapid technological change, frequent
new product introductions and evolving industry standards. The introduction of
products embodying new technologies and the emergence of new industry standards
can render existing products obsolete and unmarketable. The life cycles of the
Company's products are difficult to estimate. The Company's future success will
depend upon its ability to enhance its current products and to develop and
introduce new products on a timely basis that keep pace with technological
developments and emerging industry standards and address the increasingly
sophisticated needs of its customers. There can be no assurance that the Company
will be successful in developing and marketing product enhancements or new
products that respond to technological change or evolving industry standards,
that the Company will not experience difficulties that could delay or prevent
the successful development, introduction and marketing of these products, or
that its new products and product enhancements will adequately meet the
requirements of the marketplace and achieve market acceptance. If the Company is
unable, for technological or other reasons, to develop and introduce new
products or enhancements of existing products in a timely manner in response to
changing market conditions or customer requirements, the Company's business,
operating results and financial condition will be materially adversely affected.
In June 1996, the Company released a new version of its Intelligent CallRouter
and the Company plans to introduce additional enhancements in the near term.
These enhancements are subject to significant technical risks. If these
enhancements are delayed or if they do not achieve market acceptance, the
Company's business, operating results and financial condition will be materially
adversely affected.
 
                                       22
<PAGE>   24
 
     Risk of Product Defects or Development Delays.  Software products as
complex as those offered by the Company frequently contain errors or failures,
especially when first introduced or when new versions are released. Although the
Company conducts extensive product testing, new products and enhancements could
contain software errors and, as a result, the Company could experience delays in
recognizing revenues during the period required to correct these errors. The
Company could in the future lose revenues as a result of software errors or
defects. The Company's products are typically intended for use in applications
that may be critical to a customer's business. As a result, the Company believes
that its current customers and potential customers have a greater sensitivity to
product defects than the market for software products generally. Although the
Company has not experienced material adverse effects resulting from any such
errors to date, there can be no assurance that, despite testing by the Company
and by current and potential customers, errors will not be found in new products
or releases after commencement of commercial shipments, resulting in the loss of
revenue or delay in market acceptance, diversion of development resources,
damage to the Company's reputation, or increased service and warranty costs, any
of which could have a material adverse effect upon the Company's business,
operating results and financial condition.
 
     Management of Growth; Dependence Upon Key Personnel.  The Company has
recently experienced a period of rapid growth in revenues that has placed a
significant strain upon its management systems and resources. The Company's
ability to compete effectively and to manage future growth, if any, will require
the Company to continue to improve its financial and management controls,
reporting systems and procedures on a timely basis and expand, train and manage
its employee work force. There can be no assurance that the Company will be able
to do so successfully. The Company's failure to do so could have a material
adverse effect upon the Company's business, operating results and financial
condition. The Company's future performance depends in significant part upon the
continued service of its key technical, sales and senior management personnel,
none of whom is bound by an employment agreement. The loss of the services of
one or more of the Company's executive officers could have a material adverse
effect on the Company's business, operating results and financial condition. The
Company's future success also depends on its continuing ability to attract and
retain highly qualified technical, sales and managerial personnel. Competition
for such personnel is intense, and there can be no assurance that the Company
can retain its key technical, sales and managerial employees or that it can
attract, assimilate or retain other highly qualified technical, sales and
managerial personnel in the future.
 
     Risks Associated with International Expansion.  International sales
accounted for approximately 15.3% of the Company's revenues for 1996. As part of
its business strategy, the Company is seeking opportunities to expand its
products into international markets. The Company believes that such expansion is
important to the Company's ability to continue to grow and to market its
products and services. In marketing its products and services internationally,
however, the Company will face new competitors, some of whom may have
established strong relationships with carriers. In addition, the ability of the
Company to enter the international markets will be dependent upon the Company's
ability to integrate its products with local proprietary networks in foreign
countries. There can be no assurance that the Company will be successful in
integrating its products with these proprietary networks or marketing or
distributing its products abroad or that, if the Company is successful, its
international revenues will be adequate to offset the expense of establishing
and maintaining international operations. To date, the Company has limited
experience in marketing and distributing its products internationally. In
addition to the uncertainty as to the Company's ability to establish an
international presence, there are certain difficulties and risks inherent in
doing business on an international level, such as compliance with regulatory
requirements and changes in these requirements, export restrictions, export
controls relating to technology, tariffs and other trade barriers, protection of
intellectual property rights, difficulties in staffing and managing
international operations, longer payment cycles, problems in collecting accounts
receivable, political instability, fluctuations in currency exchange rates and
potentially adverse tax consequences. There can be no assurance that one or more
of such factors will not have a material adverse effect on any international
operations established by the Company and, consequently, on the Company's
business, operating results and financial condition.
 
     Dependence on Proprietary Technology; Risks of Infringement.  The Company
is dependent upon its ability to protect its proprietary technology. To protect
its proprietary rights, the Company relies on a
 
                                       23
<PAGE>   25
 
combination of patents, copyrights, trademarks, trade secret laws and
confidentiality procedures. The Company has been issued one United States patent
and also has one patent application pending in the United States and
internationally. There can be no assurance that patents will be issued with
respect to the pending or future patent applications or that the Company's
existing or future patents will be upheld as valid or will prevent the
development of competitive products. In addition, existing patent, copyright,
trademark and trade secret laws afford only limited protection, and many
countries' laws do not protect the Company's proprietary rights to the same
extent as do the laws of the United States. Accordingly, there can be no
assurance that the Company will be able to protect its proprietary rights
against unauthorized third-party copying, use or exploitation, any of which
could have a material adverse effect on the Company's business, operating
results and financial condition. Attempts may be made to copy or reverse
engineer aspects of the Company's products, or to obtain, use or exploit
information or methods which the Company deems proprietary. Additionally, there
can be no assurance that the Company's customers and others will not develop
products which infringe upon the Company's rights, or that compete with the
Company's products. Policing the use of the Company's products is difficult and
expensive, and there is no assurance that such efforts would prove effective.
Litigation or other action may be necessary in the future to enforce the
Company's proprietary rights, to seek and confirm patent protection for the
Company's technologies, or to determine the validity and scope of the
proprietary rights of others. Any litigation could be time-consuming and result
in significant costs. The Company expects that its software products may
increasingly be subject to claims as the number of products and competitors in
the Company's markets grows and the functionality of such products overlaps. Any
such claims, with or without merit, could result in substantial costs and
diversions of resources and management's attention, and could cause product
shipment delays or require the Company to enter into royalty or licensing
agreements, any of which could have a material adverse impact on the Company's
business, operating results and financial condition. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company, if at all, which could have a material adverse effect upon the
Company's business, operating results and financial condition.
 
     Dependence on a Single Supplier for a Certain Product.  The software and
network adapter necessary to enable the Company's Intelligent CallRouter to
interface with the AT&T network is licensed by the Company from a single vendor
under a perpetual, fully-paid license. Although the Company has access to the
source code underlying this software and rights to manufacture the network
adapter, if for any reason the vendor does not make the software or network
adapter available to the Company, there can be no assurance that the Company
will be able to develop these products on a timely basis.
 
     Product Liability.  The Company's license agreements with its customers
generally contain provisions designed to limit the Company's exposure to
potential product liability claims. However, it is possible that the limitation
of liability provisions contained in the Company's license agreements may not be
effective under the laws of certain jurisdictions. Although the Company has not
experienced any product liability claims to date, the sale and support of
products by the Company may entail the risk of such claims, and there can be no
assurance that the Company will not be subject to such claims in the future. A
successful product liability claim brought against the Company could have a
material adverse effect upon the Company's business, operating results and
financial condition.
 
                                       24
<PAGE>   26
 
ITEM 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                                  PAGE
                                                                                  ----
        <S>                                                                       <C>
        Consolidated Balance Sheets as of December 31, 1996 and 1995............   26
        Consolidated Statements of Operations for the years ended December 31,
          1996, 1995, and 1994..................................................   27
        Consolidated Statements of Stockholders' Equity (Deficit) for the years
          ended December 31, 1996, 1995 and 1994................................   28
        Consolidated Statements of Cash Flows for the years ended December 31,
          1996, 1995, and 1994..................................................   29
        Notes to Consolidated Financial Statements..............................   30
        Reports of Independent Accountants......................................   40
</TABLE>
 
                                       25
<PAGE>   27
 
                       GEOTEL COMMUNICATIONS CORPORATION
 
                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                              DECEMBER 31,
                                                                           -------------------
                                                                            1996        1995
                                                                           -------     -------
<S>                                                                        <C>         <C>
                                            ASSETS
Current assets:
     Cash and cash equivalents...........................................  $33,263     $ 4,537
     Accounts receivable.................................................    2,121         749
     Accounts receivable -- related party................................       --         266
     Prepaid expenses and other current assets...........................      524         107
                                                                           -------     -------
          Total current assets...........................................   35,908       5,659
                                                                           -------     -------
Property and equipment, net..............................................    1,016         790
                                                                           -------     -------
          Total assets...................................................  $36,924     $ 6,449
                                                                           =======     =======
                        LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
     Accounts payable....................................................  $   656     $   160
     Accrued expenses....................................................      857         310
     Accrued compensation and related accruals...........................      685         324
     Current portion of long-term debt...................................       --         301
     Deferred revenue....................................................    2,080         242
     Deferred revenue -- related party...................................      209          30
                                                                           -------     -------
          Total current liabilities......................................    4,487       1,367
                                                                           -------     -------
Long-term debt...........................................................       --         408
                                                                           -------     -------
Commitments (Notes E and I)
Convertible preferred stock, $.01 par value, authorized, issued and
  outstanding none and 7,718,615 shares in 1996 and 1995, respectively...       --      11,986
                                                                           -------     -------
Stockholders' equity (deficit):
     Preferred stock, $.01 par value, authorized 5,000,000 shares, none
      issued.............................................................       --          --
     Common stock, $.01 par value, authorized 40,000,000 shares, issued
      13,358,296 and 2,572,580 shares; outstanding 13,083,553 and
      2,329,094 shares in 1996 and 1995, respectively....................      134          26
     Additional paid-in capital..........................................   39,967          74
     Accumulated deficit.................................................   (6,455)     (7,209)
     Notes receivable from stockholders..................................     (116)       (180)
     Unearned compensation...............................................   (1,051)         --
                                                                           -------     -------
                                                                            32,479      (7,289)
     Less treasury stock, at cost, 274,743 and 243,486 shares in 1996 and
      1995, respectively.................................................      (42)        (23)
                                                                           -------     -------
          Total stockholders' equity (deficit)...........................   32,437      (7,312)
                                                                           -------     -------
          Total liabilities and stockholders' equity (deficit)...........  $36,924     $ 6,449
                                                                           =======     =======
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       26
<PAGE>   28
 
                       GEOTEL COMMUNICATIONS CORPORATION
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                             ----------------------------------
                                                              1996         1995          1994
                                                             ------       -------       -------
<S>                                                          <C>          <C>           <C>
Revenues:
     Software license...................................     $6,850       $   821
     Services and other.................................        921           126
     Related party licenses and services (Note J).......      1,276           587
                                                             ------       -------
     Total revenues.....................................      9,047         1,534
                                                             ------       -------
Cost of Revenues:
     Cost of software license...........................        297           264
     Cost of services and other.........................      1,414           611
                                                             ------       -------
     Total cost of revenues.............................      1,711           875
                                                             ------       -------
Gross profit............................................      7,336           659
                                                             ------       -------
Operating Expenses:
     Research and development...........................      3,086         2,322       $ 1,879
     Sales and marketing................................      2,760         1,476           570
     General and administrative.........................      1,052           887           641
                                                             ------       -------       -------
     Total operating costs..............................      6,898         4,685         3,090
                                                             ------       -------       -------
Income (loss) from operations...........................        438        (4,026)       (3,090)
Interest income.........................................        386           225           141
Interest expense........................................        (70)          (61)          (17)
                                                             ------       -------       -------
Net income (loss).......................................        754        (3,862)       (2,966)
Accretion of convertible preferred stock to redemption
  value.................................................        (97)          (77)          (35)
                                                             ------       -------       -------
Net income (loss) available (attributable) to common
  stockholders..........................................     $  657       $(3,939)      $(3,001)
                                                             ======       =======       =======
Net income (loss) per common and common equivalent share
  -- Supplemental Basis (Note B)
Net income (loss) available (attributable) to common
  stockholders..........................................     $ 0.06       $ (1.25)      $ (1.10)
                                                             ======       =======       =======
Weighted average number of common and common equivalent
  shares................................................     11,730,906   3,154,729     2,724,895
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       27
<PAGE>   29
 
                       GEOTEL COMMUNICATIONS CORPORATION
 
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
                                            COMMON STOCK                                                           TREASURY STOCK
                                         ------------------                              NOTES                    ----------------
                                           NUMBER            ADDITIONAL                RECEIVABLE                  NUMBER
                                             OF               PAID-IN    ACCUMULATED      FROM        UNEARNED       OF
                                           SHARES    AMOUNT   CAPITAL      DEFICIT    STOCKHOLDERS  COMPENSATION   SHARES   AMOUNT
                                         ----------  ------  ----------  -----------  ------------  ------------  --------  ------
<S>                                      <C>         <C>     <C>         <C>          <C>           <C>           <C>       <C>
Balance Dec. 31, 1993...................  1,034,028   $ 10    $      1     $  (381)
Sale of common stock for cash and notes
  receivable............................  1,038,560     11         100                   $  (94)
Acquisition of treasury stock...........                                                                           163,211   $ (3)
Net loss................................                                    (2,966)
Accretion of Convertible preferred stock
  to redemption value...................                           (35)
                                                                                                                            -----
                                                                                                                              ---
                                         ----------   ----    --------     -------       ------                        ---
Balance Dec. 31, 1994...................  2,072,588     21          66      (3,347)         (94)                   163,211     (3)
Sale of common stock for cash, services
  and notes receivable..................    499,992      5          85                      (86)
Acquisition of treasury stock...........                                                                            80,275    (20)
Net loss................................                                    (3,862)
Accretion of Convertible preferred stock
  to redemption value...................                           (77)
                                                                                                                            -----
                                                                                                                              ---
                                         ----------   ----    --------     -------       ------                        ---
Balance Dec. 31, 1995...................  2,572,580     26          74      (7,209)        (180)                   243,486    (23)
Sale of common stock and exercise of
  stock options.........................     27,000                 34                                            (101,222)     1
Accretion of Convertible preferred stock
  to redemption value...................                           (97)
Issuance of common stock from initial
  public offering, net..................  2,465,000     25      26,644
Conversion of preferred stock into
  common stock..........................  8,293,716     83      12,161
Acquisition of treasury stock and
  forgiveness of note receivable........                                                     64                    132,479    (20)
Stock options granted below fair
  value.................................                         1,151                                $ (1,151)
Amortization of unearned compensation...                                                                   100
Net income..............................                                       754
                                                                                                                            -----
                                                                                                                              ---
                                         ----------   ----    --------     -------       ------       --------         ---
Balance December 31, 1996............... 13,358,296   $134    $ 39,967     $(6,455)      $ (116)      $ (1,051)    274,743   $(42)
                                         ==========   ====    ========     =======       ======       ========         ===  ========
 
<CAPTION>
 
                                             TOTAL
                                          STOCKHOLDERS'
                                             EQUITY
                                           (DEFICIT)
                                          ------------
<S>                                      <C>
Balance Dec. 31, 1993...................    $   (370)
Sale of common stock for cash and notes
  receivable............................          17
Acquisition of treasury stock...........          (3)
Net loss................................      (2,966)
Accretion of Convertible preferred stock
  to redemption value...................         (35)
 
                                                ----
Balance Dec. 31, 1994...................      (3,357)
Sale of common stock for cash, services
  and notes receivable..................           4
Acquisition of treasury stock...........         (20)
Net loss................................      (3,862)
Accretion of Convertible preferred stock
  to redemption value...................         (77)
 
                                                ----
Balance Dec. 31, 1995...................      (7,312)
Sale of common stock and exercise of
  stock options.........................          35
Accretion of Convertible preferred stock
  to redemption value...................         (97)
Issuance of common stock from initial
  public offering, net..................      26,669
Conversion of preferred stock into
  common stock..........................      12,244
Acquisition of treasury stock and
  forgiveness of note receivable........          44
Stock options granted below fair
  value.................................          --
Amortization of unearned compensation...         100
Net income..............................         754
 
                                                ----
Balance December 31, 1996...............    $ 32,437
                                                ====
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       28
<PAGE>   30
 
                       GEOTEL COMMUNICATIONS CORPORATION
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                              ---------------------------------
                                                               1996         1995         1994
                                                              -------      -------      -------
<S>                                                           <C>          <C>          <C>
Cash flows from operating activities:
Net income (loss)...........................................  $   754      $(3,862)     $(2,966)
Adjustments to reconcile net income (loss) to net cash
  provided by (used for) operating activities
     Depreciation and amortization..........................      517          359          159
     Equity compensation....................................      137            1           --
     Changes in operating assets and liabilities
          Accounts receivable and accounts receivable --
            related party...................................   (1,106)      (1,015)          --
          Prepaid expenses and other current assets.........     (417)         (38)         (17)
          Accounts payable..................................      496           51           59
          Accrued expenses and accrued compensation.........      908          292          254
          Deferred revenue and deferred revenue -- related
            party...........................................    2,017          272           --
                                                              -------      -------      -------
Net cash provided by (used for) operating activities........    3,306       (3,940)      (2,511)
                                                              -------      -------      -------
Cash flows from investing activities:
Proceeds from sales and maturities of marketable
  securities................................................       --          952        3,384
Purchases of marketable securities..........................       --           --       (1,875)
Purchases of property and equipment.........................     (743)        (480)        (757)
                                                              -------      -------      -------
Net cash provided by (used for) investing activities........     (743)         472          752
                                                              -------      -------      -------
Cash flows from financing activities:
Proceeds from sale of common stock -- net...................   26,704            3           17
Proceeds from notes receivable for common stock.............        7           --           --
Proceeds from sale of convertible preferred stock -- net....      161        3,972        4,635
Proceeds from long-term debt................................      358          418          467
Principal payments under long-term debt.....................   (1,067)        (161)         (15)
Acquisition of treasury stock...............................       --          (20)          (3)
                                                              -------      -------      -------
Net cash provided by financing activities:..................   26,163        4,212        5,101
                                                              -------      -------      -------
Net change in cash and cash equivalents.....................   28,726          744        3,342
Cash and cash equivalents, beginning of year................    4,537        3,793          451
                                                              -------      -------      -------
Cash and cash equivalents, end of year......................  $33,263      $ 4,537      $ 3,793
                                                              =======      =======      =======
Supplemental disclosures of noncash financing activities:
Notes received in exchange for common stock.................  $    --      $    86      $    94
                                                              =======      =======      =======
Supplemental cash flow information:
Interest paid...............................................  $    66      $    60      $    13
                                                              =======      =======      =======
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       29
<PAGE>   31
 
                       GEOTEL COMMUNICATIONS CORPORATION
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
A.  NATURE OF BUSINESS:
 
     GeoTel Communications Corporation (the "Company") develops and markets
telecommunications software solutions, consisting primarily of one product, that
enable enhanced call center applications. Principal operations of the Company
commenced during 1995. The Company currently derives substantially all of its
revenues from licenses of the Intelligent CallRouter and related services.
 
B.  SIGNIFICANT ACCOUNTING POLICIES:
 
  Basis of Consolidation
 
     The consolidated financial statements include the accounts of GeoTel
Communications Corporation and its wholly owned subsidiary. All intercompany
balances and transactions have been eliminated.
 
  Use of Accounting Estimates
 
     The preparation of the 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 the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
  Cash, Cash Equivalents and Investments
 
     The Company considers all highly liquid investments with an original
maturity of 90 days or less to be cash equivalents. The Company classifies its
investments as available-for-sale and states them at amortized cost plus accrued
interest which approximates fair market value. Cash equivalents consist of the
following (in thousands):
 
<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                                  ------------------
                                                                   1996        1995
                                                                  -------     ------
          <S>                                                     <C>         <C>
          Commercial paper......................................  $31,216     $3,986
          Money market instruments..............................    1,415        340
                                                                  -------     ------
          Total cash equivalents................................  $32,631     $4,326
                                                                  =======     ======
</TABLE>
 
  Income Taxes
 
     The Company provides for income taxes under the liability method, which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax liabilities and assets are determined
based on the difference between the financial statement basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Under this method, a valuation allowance is
required against net deferred tax assets if, based upon the available evidence,
it is more likely than not that some or all of the deferred tax assets will not
be realized.
 
     Management evaluates on a quarterly basis the recoverability of the
deferred tax assets and the level of the valuation allowance. At such time as it
is determined that it is more likely than not that deferred tax assets are
realizable, the valuation allowance will be appropriately reduced.
 
                                       30
<PAGE>   32
 
                       GEOTEL COMMUNICATIONS CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Property and Equipment
 
     Property and equipment are stated at cost. The Company provides for
depreciation and amortization using the straight-line method over their
estimated useful lives as follows:
 
<TABLE>
<CAPTION>
                        ASSET CLASSIFICATION                    ESTIMATED USEFUL LIFE
          -------------------------------------------------   -------------------------
          <S>                                                 <C>
          Computer and lab equipment.......................   3 years
          Furniture and fixtures...........................   3 years
          Leasehold improvements...........................   Shorter of lease term or
                                                              estimated useful life
</TABLE>
 
     Repairs and maintenance are charged to expense as incurred. Significant
improvements are capitalized and depreciated. Upon retirement or sale, the cost
of the assets disposed of and the related accumulated depreciation are removed
from the accounts and any resulting gain or loss is included in the results of
operations.
 
  Revenue Recognition
 
     The Company recognizes license fee revenues upon shipment unless there are
significant post-delivery obligations. When significant post-delivery
obligations exist, typically, customer acceptance criteria, revenues are
deferred until no such significant obligations remain. Service and other
revenues have consisted primarily of maintenance, installation and training
revenues. Maintenance revenues are recognized ratably over the term of the
support period, which is typically twelve months. Installation and training
revenues generally are recognized when the services are performed. Amounts
received prior to revenue recognition and for prepaid maintenance revenue are
classified as deferred revenue.
 
  Product Warranty Costs
 
     The Company provides a ninety day warranty and provides for estimated
direct labor and associated indirect costs. Provision for estimated warranty
costs is recorded at the time of sale and periodically adjusted to reflect
actual experience.
 
  Financial Instruments and Concentrations of Credit Risk
 
     Carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, trade accounts receivable, accounts
payable, accrued expenses and other liabilities approximate fair value due to
their short maturities. The Company invests its excess cash primarily in highly
rated commercial paper and financial institutions.
 
     Accounts receivable at December 31, 1996 and 1995 consist principally of
ten and three customer balances, respectively (See Note J). To reduce risk, the
Company routinely assesses the financial strength of its customers and, as a
consequence believes that its trade accounts receivable credit risk exposure is
limited. The Company generally does not require collateral and historically has
not experienced significant losses on trade receivables.
 
  Research and Development
 
     Research and development costs are charged to operations as incurred. The
Company capitalizes eligible software costs incurred after technological
feasibility of the product has been established. The Company achieves
technological feasibility when a working model has been established. To date,
costs eligible for capitalization have been immaterial and no costs have been
capitalized.
 
                                       31
<PAGE>   33
 
                       GEOTEL COMMUNICATIONS CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Computation of Net Income (Loss) Per Common and Common Equivalent Share
 
     Net income (loss) per common share and common equivalent share is computed
based upon the weighted average number of common and common equivalent shares
outstanding (using the treasury stock method) after certain adjustments
described below. Common equivalent shares consist of the Company's Series A, B
and C Convertible Participating Preferred Stock (collectively, the "Convertible
Preferred Stock") and common stock options outstanding. Common equivalent shares
from Convertible Preferred Stock and options are excluded from the computation
when their effect is antidilutive, except that, pursuant to the Securities and
Exchange Commission Staff Accounting Bulletin No. 83 (SAB No. 83), all
Convertible Preferred Stock, common and common equivalent shares issued during
the twelve month period prior to the initial public offering ("IPO") have been
included in the calculation as if they were outstanding for all periods prior to
the IPO, using the treasury stock method at the IPO price of $12.00 per share.
Fully diluted net income (loss) per share is not presented as it is the same as
the amounts disclosed in primary net income (loss) per share for the years ended
December 31, 1996, 1995 and 1994.
 
     Supplementary net income (loss) per common share has been computed in the
same manner, except that all outstanding shares of Convertible Preferred Stock
converted into common stock upon the closing of the IPO are treated as having
been converted into common stock at the date of original issuance.
 
     Net income (loss) per share on a supplementary basis is as follows:
 
<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                       -----------------------------------
                                                          1996         1995        1994
                                                       ----------   ----------   ---------
        <S>                                            <C>          <C>          <C>
        Net income (loss) per common and common
          equivalent share...........................       $0.06       $(0.37)     $(0.40)
                                                       ==========   ==========   =========
        Weighted average number of common and common
          equivalent shares outstanding..............  11,730,906   10,365,465   7,476,726
                                                       ==========   ==========   =========
</TABLE>
 
C.  PROPERTY AND EQUIPMENT:
 
     Property and equipment consisted of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
                                                                       ----------------
                                                                        1996      1995
                                                                       ------    ------
        <S>                                                            <C>       <C>
        Computer and lab equipment..................................   $1,934    $1,218
        Furniture and fixtures......................................       86        67
        Leasehold improvements......................................       32        24
                                                                       ------    ------
                                                                        2,052     1,309
        Less accumulated depreciation and amortization..............   (1,036)     (519)
                                                                       ------    ------
                                                                       $1,016    $  790
                                                                       ======    ======
</TABLE>
 
D.  INCOME TAXES:
 
     The difference between the statutory federal income tax rate and the
Company's effective tax rate for the year ended December 31, 1996 is principally
due to the utilization of net operating losses, capitalized start-up costs
including capitalized research and development cost carryforwards. No income tax
provision was recorded for federal income tax purposes for the years ended
December 31, 1996, 1995 and 1994 as the Company had not reported taxable income
in those periods. The Company elected to capitalize start-up costs and research
and development costs for income tax purposes and amortize them over five and
ten years, respectively, for the period prior to recording product revenue in
1995.
 
                                       32
<PAGE>   34
 
                       GEOTEL COMMUNICATIONS CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
The components of deferred taxes were as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
                                                                        ---------------
                                                                         1996     1995
                                                                        ------   ------
        <S>                                                             <C>      <C>
        Deferred tax assets:
          Depreciation................................................  $  171   $  110
          Capitalized start-up costs..................................   1,762    2,151
          Accrued expenses............................................     179       37
          Tax credits.................................................     223      245
          Net operating losses........................................     443      574
                                                                        -------  -------
        Net deferred tax assets.......................................   2,778    3,117
        Valuation allowance...........................................  (2,778)  (3,117)
                                                                        -------  -------
        Total net deferred tax asset..................................  $   --   $   --
                                                                        =======  =======
</TABLE>
 
     Valuation allowances have been recorded to offset the entire net deferred
tax assets as a result of the uncertainties regarding the realization of the
asset due to the limited history of operating profits.
 
     At December 31, 1996, the Company had net operating loss carryforwards of
$1,111,000 for federal and state income tax purposes that may be used to offset
future federal income tax, if any. The net operating loss carryforwards expire
at various dates beginning in 2009. Similarly, research and development and
state investment tax credit carryforwards aggregating $223,000 and $245,000 were
available at December 31, 1996 and 1995, respectively, which expire at various
dates beginning in 2009. An ownership change, as defined in the Tax Reform Act
of 1986, may restrict the utilization of certain tax attributes. The difference
between the federal net operating loss carryforwards and the amount of the
accumulated deficit results primarily from certain start-up costs and research
and development expenses, which have been capitalized for tax purposes.
 
E.  LONG-TERM DEBT:
 
     As of December 31, 1995, the Company had outstanding loans which aggregated
to $709,000 under several equipment lines of credit with a bank. All of the
outstanding debt was repaid in November 1996 from a portion of the proceeds from
the Company received from its IPO.
 
     At December 31, 1996, the Company's existing equipment line of credit
allowed the Company to borrow the lesser of $800,000 or a 90% advance rate
against the invoice price of approved equipment purchased after May 31, 1996, as
defined. The borrowing period ends on June 30, 1997. Borrowings under this
agreement bear interest at the bank's prime rate (8.25% at December 31, 1996).
Any borrowings will be collateralized by substantially all of the Company's
assets. This agreement contains restrictive covenants that require certain
levels of equity and liquidity and prohibit the payment of cash dividends
without the bank's consent. At December 31, 1996, the Company was in compliance
with all related covenants.
 
                                       33
<PAGE>   35
 
                       GEOTEL COMMUNICATIONS CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
F.  CONVERTIBLE PREFERRED STOCK:
 
     The following table reflects Convertible Preferred Stock activity, from
December 31, 1993 through December 31, 1996:
 
<TABLE>
<CAPTION>
                                                                                 AMOUNT
                                                                SHARES       --------------
                                                              ----------     (IN THOUSANDS)
        <S>                                                   <C>            <C>
        Balance at December 31, 1993........................   3,302,000           3,267
        Shares of Series A issued, July 1994................     100,000             100
        Shares of Series B issued, July 1994................   2,604,286           4,535
        Accretion to redemption value.......................          --              35
                                                              ----------        --------
        Balance at December 31, 1994........................   6,006,286           7,937
        Shares of Series C issued, August 1995..............   1,712,329           3,972
        Accretion to redemption value.......................          --              77
                                                              ----------        --------
        Balance at December 31, 1995........................   7,718,615          11,986
        Shares of Series C issued, February 1996............      70,000             161
        Accretion to redemption value.......................          --              97
        Conversion to common stock..........................  (7,788,615)        (12,244)
                                                              ----------        --------
        Balance at December 31, 1996........................          --        $     --
                                                              ==========        ========
</TABLE>
 
     All outstanding shares of Convertible Preferred Stock were converted into
common stock upon the closing of the Company's IPO on November 20, 1996.
 
     Shares of Convertible Preferred Stock, while outstanding, were subject to
the following rights and privileges:
 
  Dividends
 
     Preferred stockholders were entitled to receive dividends at the same rate
as dividends paid with respect to the common stock. Such preferred dividends
would have been determined by the number of shares of common stock into which
each share of preferred stock could have been converted, as defined. The Company
is prohibited from paying cash dividends under the outstanding equipment lines
unless the Company receives the bank's consent. The Company has not paid any
dividends to the preferred or common stockholders.
 
  Liquidation
 
     In certain events, including liquidation, dissolution or the winding up of
the Company, the holders of the Series A, B and C Convertible Preferred Stock
were entitled to receive an amount equal to $1.00, $1.75 and $2.336 per share,
respectively, plus declared but unpaid dividends, before any payment would be
made to the common stockholders. The holders of the Convertible Preferred Stock
would then share ratably with the common stockholders in the distribution of the
remaining assets distributable to the stockholders as if each share of
Convertible Preferred Stock had been converted, as defined.
 
  Voting
 
     Preferred stockholders were entitled to the number of votes equal to the
number of shares of common stock into which each share of Convertible Preferred
Stock was convertible.
 
  Conversion and Redemption
 
     The holders of a majority of the outstanding shares of Convertible
Preferred Stock were entitled, at any time after July 31, 2000, to cause all
such shares to be converted into common stock on a share-for-share basis, as
defined and to receive from the Company their liquidation amount in three equal,
annual
 
                                       34
<PAGE>   36
 
                       GEOTEL COMMUNICATIONS CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
installments. In September 1996, the Company's Board of Directors adopted and
the stockholders approved an amendment to the terms of the Company's Convertible
Preferred Stock to provide that, in lieu of any cash payment in connection with
the automatic conversion of the Convertible Preferred Stock upon the IPO, the
Convertible Preferred Stock will be converted into an additional number of
shares of common stock determined by dividing fifty percent of the original
purchase price of the Convertible Preferred Stock by the IPO price. At the IPO
price of $12.00 per share, the Convertible Preferred Stock was converted into an
additional 505,101 shares of Common Stock. Since the holders of the Convertible
Preferred Stock have voting control, such conversion resulted in an increase in
common stock and additional paid-in capital with no impact on net income or
earnings per share.
 
     The Convertible Preferred Stock was being accreted to approximately
$12,756,000 which is equal to the sum of (i) the price per share paid for each
share of Convertible Preferred Stock and (ii) the fair value of the common
stock, at the date of the original issuance of the Convertible Preferred Stock,
for which such Convertible Preferred Stock will be converted. The Company has
provided for periodic accretion of the fair value of the common stock using the
effective interest method.
 
G.  STOCKHOLDERS' EQUITY (DEFICIT):
 
  Initial Public Offering
 
     The Company completed its IPO on November 20, 1996 and sold 2,465,000
shares of common stock at $12.00 per share, resulting in net proceeds, after
deducting underwriting discounts and expenses, of $26,669,000. In addition, the
Company's Board of Directors adopted and the stockholders approved an increase
in the number of authorized shares of capital stock from 21,788,615 shares to
45,000,000 shares, of which 40,000,000 shares have been designated as common
stock and 5,000,000 shares have been designated as preferred stock.
 
  Common Stock
 
     Each share of common stock has full voting rights. The terms of the
Company's existing borrowing arrangements with a bank prohibit the payment of
cash dividends without the prior consent of the bank.
 
  Preferred Stock
 
     The Company authorized to issue an aggregate 5,000,000 shares of preferred
stock. The Company's Board of Directors has the authority, without further
stockholder approval, to issue in one or more series and to fix the relative
rights, preferences, privileges, qualifications, limitations and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting any series or the designation of such series.
 
  Stock Restriction Agreements
 
     The Company entered into Stock Restriction Agreements (the "Stock
Restriction Agreements") with certain employees pursuant to which such employees
purchased an aggregate of 1,444,278 shares of common stock, of which 1,034,028
were purchased for $0.01 per share in 1993 and 410,250 were purchased for $0.10
per share in 1994. In connection with the 1994 sale of common stock described
above, the Company received a full recourse note receivable totaling
approximately $37,000 from an officer of the Company. This note bears interest
at 5.25% and is required to be paid in full upon the earlier to occur of the
tenth anniversary date of issuance or the first anniversary of an IPO or other
liquidity event, as defined. This note and related interest were forgiven in
December 1996. All shares purchased under the Stock Restriction Agreements were
subject to repurchase by the Company at the original purchase price for up to a
period of five years from the date of purchase, unless the shares become vested.
An employee vests in twenty percent of the shares on the first anniversary of
the date of purchase and, thereafter, the remaining shares become vested on a
monthly basis
 
                                       35
<PAGE>   37
 
                       GEOTEL COMMUNICATIONS CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
through the fifth anniversary of the date of purchase or upon a qualified IPO.
In accordance with the terms of a Stock Restriction Agreement, the Company
repurchased 148,211 unvested shares in 1994 at a price of $0.01 per share from
an employee whose employment with the Company terminated. In addition, the
Company repurchased 58,595 shares from this employee in 1995 at a price of $0.30
per share. Upon the IPO, the Stock Restriction Agreements terminated and all the
shares of common stock purchased under the Stock Restriction Agreements became
fully vested.
 
  Restricted Stock Purchase Plan
 
     The Company has adopted, and subsequently amended, a 1993 Restricted Stock
Purchase Plan (the "1993 Plan"), which provides for the issuance of common stock
to directors, officers, consultants and other key personnel at prices determined
by a Committee selected by the Board of Directors. Participants' shares are
subject to repurchase by the Company at the original purchase price for up to
five years after the beginning of the vesting period. A participant vests in
twenty percent of the shares on the first anniversary of the date of purchase
and, thereafter, the remaining shares become vested on a monthly basis through
the fifth anniversary date of purchase. At December 31, 1996, the Company may
repurchase up to 486,672 unvested shares. Such shares are to be repurchased at
the original purchase price ranging from $0.10 to $0.18 per share. There are no
shares available for further grant under the 1993 Plan. The shares outstanding
at December 31, 1996 under the 1993 Plan have a weighted average repurchase
price of $0.14 per share.
 
     Information related to the 1993 Plan is as follows:
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                  ---------------------------------------------------------------------------
                                           1996                      1995                      1994
                                  -----------------------   -----------------------   -----------------------
                                               WEIGHTED                  WEIGHTED                  WEIGHTED
                                  NUMBER OF     AVERAGE     NUMBER OF     AVERAGE     NUMBER OF     AVERAGE
                                   SHARES     SHARE PRICE    SHARES     SHARE PRICE    SHARES     SHARE PRICE
                                  ---------   -----------   ---------   -----------   ---------   -----------
<S>                               <C>         <C>           <C>         <C>           <C>         <C>
Outstanding at beginning of
  year..........................  1,091,622      $0.14        613,310      $0.14            --          --
Issued..........................     27,000       0.18        499,992       0.18       628,310       $0.14
Repurchased.....................   (132,479)      0.14        (21,680)      0.10       (15,000)       0.10
                                  ---------                 ---------                  -------
Outstanding at end of year......    986,143      $0.14      1,091,622      $0.14       613,310       $0.14
                                  =========                 =========                  =======
</TABLE>
 
     In connection with the sale of common stock under the 1993 Plan described
above, the Company received full recourse notes receivable totaling
approximately $86,000 and $57,000 from certain employees during the years ended
December 31, 1995 and 1994, respectively. These notes bear interest at 5.25% and
are required to be paid in full upon the one year anniversary of the Company's
initial public offering. The interest is payable at the date of maturity. Such
notes are collateralized by the common stock purchased and accordingly are
included in stockholders' equity (deficit).
 
  Stock Option Plan
 
     In 1995, the Board of Directors adopted and the stockholders subsequently
approved the Company's 1995 stock option plan (the "1995 Plan"), which provides
for the issuance of incentive stock options and nonqualified stock options to
eligible employees, officers and consultants to the Company. The options can be
granted for periods of up to ten years and generally vest ratably over a
five-year period with initial vesting occurring on the first anniversary from
the grant date and then monthly thereafter. In 1996 and 1995, certain options
were granted in conjunction with a management incentive program approved by the
board of directors. Under this program, options were granted at the beginning of
the year at fair market value with vesting occurring at the end of five years
subject to immediate full vesting if certain annual performance criteria were
attained. The performance criteria was met in both years and vesting was
accelerated. In 1996, the Board of Directors adopted and stockholders approved
an increase in the 1995 Plan of 1,000,000 shares of common stock. In addition,
the Board of Directors adopted and stockholders approved the number of shares of
common
 
                                       36
<PAGE>   38
 
                       GEOTEL COMMUNICATIONS CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
stock available for grants under the 1995 Plan to be increased by the number of
shares repurchased by the Company from time to time under the 1993 Plan. The
maximum number of shares will increase effective January 1, 1997 and each
January 1 thereafter during the term of the 1995 Plan, by an amount equal to
four percent of the total number of shares of common stock issued and
outstanding as of the close of business on December 31, of the preceding year,
not exceeding 6,000,000 shares. At December 31, 1996, 1,474,726 shares were
authorized for issuance under the 1995 Plan. Effective January 1, 1997, the
number of authorized shares was increased to 2,009,057 shares.
 
     The option price for stock options granted under the 1995 Plan is
determined by a Committee consisting of two or more members of the Company's
Board of Directors. The option price for incentive stock options shall be the
fair value at the time the option is granted. In the case of options granted to
a shareholder who at the time of grant owns, directly or indirectly, stock
possessing more than 10% of total combined voting power of any class of stock of
the Company, the exercise price of the options shall not be less than 110% of
the fair value of the common stock as of the date of grant.
 
     Information related to the 1995 Plan is as follows:
 
<TABLE>
<CAPTION>
                                                      DECEMBER 31, 1996            DECEMBER 31, 1995
                                                  --------------------------    ------------------------
                                                                 WEIGHTED                    WEIGHTED
                                                                 AVERAGE                     AVERAGE
                                                   SHARES     EXERCISE PRICE    SHARES    EXERCISE PRICE
                                                  --------    --------------    ------    --------------
<S>                                               <C>         <C>               <C>       <C>
Outstanding at beginning of year................    64,500        $ 0.24            --            --
Granted.........................................   982,018          2.62        64,500        $ 0.24
Cancelled.......................................   (37,500)         2.47            --            --
Exercised.......................................  (101,222)         0.30            --            --
                                                  --------                      ------
Outstanding at end of year......................   907,796        $ 2.72        64,500        $ 0.24
                                                  ========                      ======
</TABLE>
 
     The following information summarizes information concerning currently
outstanding and exercisable options:
 
<TABLE>
<CAPTION>
                                            WEIGHTED AVERAGE                                    WEIGHTED AVERAGE
                                NUMBER         REMAINING       WEIGHTED AVERAGE     NUMBER          EXERCISE
  RANGE OF EXERCISE PRICES    OUTSTANDING   CONTRACTUAL LIFE    EXERCISE PRICE    EXERCISABLE        PRICE
----------------------------  -----------   ----------------   ----------------   -----------   ----------------
<S>                           <C>           <C>                <C>                <C>           <C>
$0.18 to $0.30..............    628,716           9.32              $ 0.29           20,208          $ 0.25
$3.00 to $8.00..............    222,580           9.73                6.94               --              --
$12.00 to $14.75............     56,500           9.89               13.03               --              --
                                -------                                              ------
Total.......................    907,796           9.45              $ 2.72           20,208          $ 0.25
                                =======                                              ======
</TABLE>
 
     No options were exercisable as of December 31, 1995. The 101,222 options
exercised during the year ended December 31, 1996, related to merit grants which
included immediate vesting provisions. As of December 31, 1996 and 1995, the
Company had 465,708 and 361,551, respectively, shares available for future
option grants under the 1995 Plan.
 
  Employee Stock Purchase Plan
 
     In September 1996, the Company's Board of Directors adopted and the
stockholders approved the 1996 Employee Stock Purchase Plan (the "1996 Purchase
Plan"). The Company has reserved 250,000 shares of common stock for issuance
under the 1996 Purchase Plan. The 1996 Purchase Plan will enable employees,
subject to a defined maximum percentage of base compensation and number of
shares, to purchase common stock at 85% of the lower of the fair market value of
the Company's common stock on the first or last day of each six-month purchase
period. The first offering period began in January 1997 and will end in July
1997.
 
                                       37
<PAGE>   39
 
                       GEOTEL COMMUNICATIONS CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Stock-Based Compensation Plans
 
     The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
the 1995 Plan. Accordingly, compensation expense has been recognized for its
stock-based compensation plan for any options granted below fair value of the
common stock. In the year ended December 31, 1996, the Company recorded
approximately $1,151,000 in unearned compensation for options to purchase
674,580 shares granted at exercise prices below the fair value of the common
stock. The weighted average fair value of options granted at fair value during
1996 and 1995 were $0.30 and $0.24, respectively. The weighted average fair
value of options granted below fair value at date of grant during 1996 was
$4.21. There were no options granted below fair value at date of grant for 1995.
Had compensation cost for the 1995 Plan been determined based upon the fair
value at the grant date as calculated in accordance with Financial Accounting
Standards No. 123 ("SFAS 123") "Accounting for Stock-Based Compensation," the
Company's net income would have decreased by approximately $97,000 in 1996 and
the net loss for 1995 would have increased by approximately $9,000. The pro
forma effect of adopting SFAS 123 would have reduced net income per share by
$0.01 in 1996 and no effect on the Company's net loss per share in 1995. In
computing these pro forma amounts the Company has assumed a risk-free interest
rate equal to 8.25% and 8.75%, for 1996 and 1995, respectively, expected
volatility of 60% for post-IPO grants and no volatility (minimum value method)
for pre-IPO grants, expected life of five years and no dividends. The effects of
applying SFAS 123 in this disclosure are not indicative of future amounts. SFAS
123 does not apply to awards prior to 1995, and additional awards in future
years are anticipated.
 
H.  RETIREMENT SAVINGS PLAN:
 
     In 1994, the Company adopted a Retirement Savings Plan (the "Savings Plan")
for its employees, which has been qualified under Section 401(k) of the Internal
Revenue Code. Eligible employees are permitted to contribute to the Savings Plan
through payroll deductions within statutory limitations and subject to any
limitations included in the Savings Plan. To date, the Company has made no
contributions to the Plan.
 
I.  OPERATING LEASES:
 
     The Company leases certain equipment and office space under operating
leases that expire through 1998. Future minimum annual lease commitments,
including operating costs, under the operating leases for the years 1997 and
1998 are $158,000 and $145,000, respectively.
 
     The Company entered into a sublease agreement in February 1997 for office
space for its new executive office in Lowell, Massachusetts. Initially, the
Company will have the use of 31,770 square feet which will increase by an
additional 15,885 square feet on January 1, 1998 and by a further addition of
15,885 square feet on January 1, 1999. Annual operating sublease payments during
the sublease term will range from $302,000 in the first year to $731,000
beginning in 1999 and through the remainder of the lease term. The Company has
the right, with proper notice, to terminate this sublease at the end of the
sixth year of the sublease.
 
     Rent expense was approximately $170,000, $124,000, $41,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
 
J.  RELATED PARTY TRANSACTIONS AND SIGNIFICANT CUSTOMERS:
 
     In August 1995, the Company sold 1,048,801 shares of Series C Convertible
Participating Preferred Stock to an investor that subsequently became a customer
of the Company. This customer's purchases from the Company represented 14% and
38% of revenue for the years ended December 31, 1996 and 1995, respectively, and
this customer had no outstanding receivable balance as of December 31, 1996 and
approximately $266,000 at December 31, 1995. Gross profit from related party
transactions approximated those realized in similar transactions with unrelated
parties. Purchases by this customer for the year ended December 31, 1995 were
made through another shareholder of the Company.
 
                                       38
<PAGE>   40
 
                       GEOTEL COMMUNICATIONS CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Revenues attributable to the Company's five largest customers accounted for
49.1% and 94.4% in 1996 and 1995, respectively. The following table summarizes
sales as a percentage of total revenue to significant customers for the year
ended December 31, 1996 and 1995:
 
<TABLE>
<CAPTION>
                                                                         YEAR ENDED
                                                                        DECEMBER 31,
                                                                        -------------
                                                                        1996     1995
                                                                        ----     ----
          <S>                                                           <C>      <C>
          Related Party Customer......................................   14%      38%
          Customer A..................................................   --       20
          Customer B..................................................   --       26
          Customer C..................................................   11       --
                                                                         --       --
          Percentage of total revenue.................................   25%      84%
                                                                         ==       ==
</TABLE>
 
     Export sales to Australia and the United Kingdom in 1996 were approximately
11% and 4% of total revenues, respectively. No export sales occurred in 1995.
 
                                       39
<PAGE>   41
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Stockholders of
  GeoTel Communications Corporation:
 
     We have audited the accompanying consolidated balance sheets of GeoTel
Communications Corporation as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the two years then ended. 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 financial position of GeoTel Communications
Corporation as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for the two years then ended, in conformity with generally
accepted accounting principles.
 
                                            COOPERS & LYBRAND L.L.P.
 
Boston, Massachusetts
January 17, 1997, except as to the
second paragraph in Note I
for which the date is March 20, 1997
 
                                       40
<PAGE>   42
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To GeoTel Communications Corporation:
 
     We have audited the balance sheet (not presented herein) of GeoTel
Communications Corporation (a Delaware corporation in the development stage) as
of December 31, 1994 and the accompanying statements of operations,
stockholders' deficit and cash flows for the year ended December 31, 1994. 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 financial position of GeoTel Communications
Corporation as of December 31, 1994, and the results of its operations and its
cash flows for the year ended December 31, 1994 in conformity with generally
accepted accounting principles.
 
                                            ARTHUR ANDERSEN LLP
 
Boston, Massachusetts
March 21, 1995
 
                                       41
<PAGE>   43
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
     There were no disagreements with accountants on any matter of accounting
principles, financial statement disclosure, or auditing scope or procedures
required to be reported under this item.
 
     The Company's financial statements for the two years ended December 31,
1996 and 1995 were audited by Coopers & Lybrand L.L.P. The financial statements
for the period from inception (June 4, 1993) through December 31, 1993 and for
the year ended December 31, 1994 were audited by Arthur Andersen LLP. The
Company retained Coopers & Lybrand L.L.P. as its independent accountants in
September 1995, after the Company's management, in consultation with the Board
of Directors of the Company, decided to dismiss Arthur Andersen LLP. The audit
reports of Arthur Andersen LLP for the period from inception (June 4, 1993)
through December 31, 1993 and for the year ended December 31, 1994 did not
contain an adverse opinion or a disclaimer of opinion, and were not qualified or
modified as to uncertainty, audit scope or accounting principles. During the
period from inception (June 4, 1993) through December 31, 1994 and through the
date of dismissal, there were no disagreements with Arthur Andersen LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure.
 
                                    PART III
 
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The information regarding executive officers set forth under the caption
"Executive Officers of the Registrant" in Item 4A of this Annual Report is
incorporated herein by reference.
 
     The information regarding directors set forth under the caption "Election
of Directors" appearing in the Company's definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on May 29, 1997, which will be filed
with the Securities and Exchange Commission not later than 120 days after
December 31, 1996, is incorporated herein by reference.
 
ITEM 11.  EXECUTIVE COMPENSATION
 
     The information set forth under the caption "Executive Compensation"
appearing in the Company's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on May 29, 1997, which will be filed with the Securities
and Exchange Commission not later than 120 days after December 31, 1996, is
incorporated herein by reference.
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The information set forth under the caption "Security Ownership of Certain
Holders and Management" appearing in the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders to be held on May 29, 1997, which will be
filed with the Securities and Exchange Commission not later than 120 days after
December 31, 1996, is incorporated herein by reference.
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The information set forth under the caption "Certain Relationships and
Related Transactions" appearing in the Company's definitive Proxy Statement for
the Annual Meeting of Shareholders to be held on May 29, 1997, which will be
filed with the Securities and Exchange Commission not later than 120 days after
December 31, 1996, is incorporated herein by reference.
 
                                       42
<PAGE>   44
 
                                    PART IV
 
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
(1) FINANCIAL STATEMENTS
 
     The following financial statements are filed as part of this Annual Report:
 
          Consolidated Balance Sheets as of December 31, 1996 and 1995
 
          Consolidated Statements of Operations for the years ended December 31,
     1996, 1995, and 1994
 
          Consolidated Statements of Stockholders' Equity (Deficit) for the
     years ended December 31, 1996, 1995 and 1994
 
          Consolidated Statements of Cash Flows for the years ended December 31,
     1996, 1995, and 1994
 
          Notes to Consolidated Financial Statements
 
          Reports of Independent Accountants
 
(2) FINANCIAL STATEMENT SCHEDULE
 
     All schedules are omitted because they are not required.
 
(3) REPORTS ON FORM 8-K
 
     No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1996.
 
(4) EXHIBITS
 
     Documents listed below, except for documents identified by an asterisk, are
being filed as exhibits herewith. Documents identified by parenthetical numbers
are not being filed herewith and, pursuant to Rule 12b-32 of the General Rules
and Regulations promulgated by the Commission under the Securities Exchange Act
of 1934 (the "Act"), reference is made to such documents as previously filed as
exhibits with the Commission.
 
<TABLE>
<CAPTION>
EXHIBIT NO.                                 DESCRIPTION OF EXHIBIT
-----------   ----------------------------------------------------------------------------------
<C>           <S>
     *3.1     Amended and Restated Certificate of Incorporation of the Company.
     *3.2     By-Laws of the Company, as amended and restated.
     *4.1     Specimen of Stock Certificate representing shares of Common Stock.
    *10.1     Stock Purchase Agreement between the Company and the Investors named therein,
              dated August 9, 1995.
    *10.2     Amended and Restated Stockholders Agreement between the Company and certain
              stockholders of the Company, dated August 9, 1995.
    *10.3     Amended and Restated Founders Registration Rights Agreement between the Company,
              G. Wayne Andrews, John C. Thibault and Steven Webber.
    *10.4     Development/License Agreement between the Company and DANAR Corporation, dated
              March 4, 1996.
    *10.5     Software License and Technical Support Agreement between the Company and MCI
              Telecommunications Corporation, dated as of June 17, 1996.
    *10.6     Software License and Distribution Agreement between the Company and Optus Systems
              PTY Ltd. dated as of March 29, 1996.
    *10.7     Office lease by and between Nationwide Life Insurance Company and the Company,
              dated as of November 22, 1996.
    *10.8     Loan Modification Agreement between the Company and Silicon Valley Bank, dated
              September 11, 1996.
    *10.9     Letter Agreement between Silicon Valley Bank and the Company, dated September 11,
              1996.
</TABLE>
 
                                       43
<PAGE>   45
 
<TABLE>
<CAPTION>
EXHIBIT NO.                                 DESCRIPTION OF EXHIBIT
-----------   ----------------------------------------------------------------------------------
<C>           <S>
    *10.10    Letter Agreement between Silicon Valley Bank and the Company, dated May 1, 1995.
    *10.11    Letter Agreement between Silicon Valley Bank and the Company, dated May 18, 1994.
    *10.12    Promissory Note executed by the Company in favor of Silicon Valley Bank, dated
              March 1, 1996.
    *10.13    Executive Change in Control Agreement between the Company and Timothy J. Allen,
              dated September 26, 1996.
    *10.14    Executive Change in Control Agreement between the Company and G. Wayne Andrews,
              dated September 26, 1996.
    *10.15    Executive Change in Control Agreement between the Company and John C. Thibault,
              dated September 26, 1996.
    *10.16    Executive Change in Control Agreement between the Company and Louis J. Volpe,
              dated September 26, 1996.
    *10.17    Executive Change in Control Agreement between the Company and Steven H. Webber,
              dated September 26, 1996.
    *10.18    GeoTel Communications Corporation 1995 Stock Option Plan.
    *10.19    GeoTel Communications Corporation 1993 Restricted Stock Purchase Plan.
    *10.20    GeoTel Communications Corporation 1996 Employee Stock Purchase Plan.
    +10.22    Software Agreement Incorporating Licensing Rights between the Company and Digital
              Equipment Co., Limited, dated December 1, 1996
     10.23    Sublease Agreement between the Company and National Medical Care, Inc. d/b/k
              Fresenius Medical Care-North America dated February 7, 1997.
     11.1     Statement Regarding Computation of Net Income (loss) Per Common and Common
              Equivalent Share.
     23.1     Consent of Coopers & Lybrand L.L.P.
     23.2     Consent of Arthur Andersen LLP.
     24.1     Power of Attorney (included on the signature pages of the Annual Report on Form
              10-K).
</TABLE>
 
---------------
 
* Incorporated by reference to the Company's Registration Statement on Form S-1
  filed with the Securities and Exchange Commission (Reg. No. 333-13263).
 
+ Confidential Treatment Requested.
 
                                       44
<PAGE>   46
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Boston, Commonwealth of Massachusetts on the 27th day of March, 1997.
 
                                            GEOTEL COMMUNICATIONS CORPORATION
 
                                                    /s/ JOHN C. THIBAULT
                                            By: ................................
                                                       JOHN C. THIBAULT
                                              PRESIDENT, CHIEF EXECUTIVE OFFICER
                                                          AND DIRECTOR
 
     KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints John C. Thibault and Timothy J. Allen, and each
of them, with the 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 in his name, place and stead, in any and all capacities to sign any
and all amendments to this Annual Report on Form 10-K, and to file the same,
with all exhibit is thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorney-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agents or either of
them, or their or his substitutes, may lawfully do or cause to be done by virtue
hereof.
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
                SIGNATURE                               TITLE                      DATE
------------------------------------------  ------------------------------    ---------------
<C>                                         <S>                               <C>
           /s/ JOHN C. THIBAULT             President, Chief Executive         March 27, 1997
 ........................................   Officer and Director
             JOHN C. THIBAULT               (Principal Executive Officer)
 
           /s/ TIMOTHY J. ALLEN             Vice President of Finance,         March 27, 1997
 ........................................   Chief Financial Officer
             TIMOTHY J. ALLEN               Treasurer and Assistant
                                            Secretary (principal
                                            accounting and financial
                                            officer)
 
           /s/ G. WAYNE ANDREWS             Director                           March 27, 1997
 ........................................
             G. WAYNE ANDREWS
 
       /s/ ALEXANDER V. D'ARBELOFF          Director                           March 27, 1997
 ........................................
         ALEXANDER V. D'ARBELOFF
 
              /s/ GARY BOWEN                Director                           March 27, 1997
 ........................................
                GARY BOWEN
 
          /s/ GARDNER C. HENDRIE            Director                           March 27, 1997
 ........................................
            GARDNER C. HENDRIE
 
         /s/ W. MICHAEL HUMPHREYS           Director                           March 27, 1997
 ........................................
           W. MICHAEL HUMPHREYS
</TABLE>
 
                                       45
<PAGE>   47
 
================================================================================
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                                    EXHIBITS
 
                                       TO
 
                                   FORM 10-K
 
                                 ANNUAL REPORT
 
                                     UNDER
 
                      THE SECURITIES EXCHANGE ACT OF 1934
 
                       GEOTEL COMMUNICATIONS CORPORATION
             (Exact name of registrant as specified in its charter)
 
================================================================================
<PAGE>   48
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
EXHIBIT NO.                              DESCRIPTION OF EXHIBIT                             PAGE
-----------   ----------------------------------------------------------------------------  ----
<C>           <S>                                                                           <C>
     *3.1     Amended and Restated Certificate of Incorporation of the Company.
     *3.2     By-Laws of the Company, as amended and restated.
     *4.1     Specimen of Stock Certificate representing shares of Common Stock.
    *10.1     Stock Purchase Agreement between the Company and the Investors named
              therein, dated August 9, 1995.
    *10.2     Amended and Restated Stockholders Agreement between the Company and certain
              stockholders of the Company, dated August 9, 1995.
    *10.3     Amended and Restated Founders Registration Rights Agreement between the
              Company, G. Wayne Andrews, John C. Thibault and Steven Webber.
    *10.4     Development/License Agreement between the Company and DANAR Corporation,
              dated March 4, 1996.
    *10.5     Software License and Technical Support Agreement between the Company and MCI
              Telecommunications Corporation, dated as of June 17, 1996.
    *10.6     Software License and Distribution Agreement between the Company and Optus
              Systems PTY Ltd. dated as of March 29, 1996.
    *10.7     Office lease by and between Nationwide Life Insurance Company and the
              Company, dated as of November 22, 1996.
    *10.8     Loan Modification Agreement between the Company and Silicon Valley Bank,
              dated September 11, 1996.
    *10.9     Letter Agreement between Silicon Valley Bank and the Company, dated
              September 11, 1996.
    *10.10    Letter Agreement between Silicon Valley Bank and the Company, dated May 1,
              1995.
    *10.11    Letter Agreement between Silicon Valley Bank and the Company, dated May 18,
              1994.
    *10.12    Promissory Note executed by the Company in favor of Silicon Valley Bank,
              dated March 1, 1996.
    *10.13    Executive Change in Control Agreement between the Company and Timothy J.
              Allen, dated September 26, 1996.
    *10.14    Executive Change in Control Agreement between the Company and G. Wayne
              Andrews, dated September 26, 1996.
    *10.15    Executive Change in Control Agreement between the Company and John C.
              Thibault, dated September 26, 1996.
    *10.16    Executive Change in Control Agreement between the Company and Louis J.
              Volpe, dated September 26, 1996.
    *10.17    Executive Change in Control Agreement between the Company and Steven H.
              Webber, dated September 26, 1996.
    *10.18    GeoTel Communications Corporation 1995 Stock Option Plan.
    *10.19    GeoTel Communications Corporation 1993 Restricted Stock Purchase Plan.
    *10.20    GeoTel Communications Corporation 1996 Employee Stock Purchase Plan.
    +10.22    Software Agreement Incorporating Licensing Rights between the Company and
              Digital Equipment Co., Limited, dated December 1, 1996.
     10.23    Sublease Agreement between the Company and National Medical Care, Inc. d/b/k
              Fresenius Medical Care-North America dated February 7, 1997.
</TABLE>
<PAGE>   49
 
<TABLE>
<CAPTION>
EXHIBIT NO.                              DESCRIPTION OF EXHIBIT                             PAGE
-----------   ----------------------------------------------------------------------------  ----
<C>           <S>                                                                           <C>
     11.1     Statement Regarding Computation of Net Income (loss) Per Common and Common
              Equivalent Share.
     23.1     Consent of Coopers & Lybrand L.L.P.
     23.2     Consent of Arthur Andersen LLP.
     24.1     Power of Attorney (included on the signature pages of the Annual Report on
              Form 10-K).
</TABLE>
 
---------------
 
* Incorporated by reference to the Company's Registration Statement on Form S-1
  filed with the Securities and Exchange Commission (Reg. No. 333-13263).
 
+ Confidential Treatment Requested.