ACTIVE VOICE CORP, 10-K, 1998-06-29

ACTIVE VOICE CORP
10-K, 1998-06-29
TELEPHONE & TELEGRAPH APPARATUS

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

Annual Report Pursuant To Section 13 Or 15(d) Of
The Securities Exchange Act Of 1934

For the Fiscal Year Ended March 31, 1998

Commission file number 0 - 22804

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

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

2901 THIRD AVENUE, SUITE 500, SEATTLE, WASHINGTON 98121-9800
(Address of principal executive offices, Zip Code)

(206) 441-4700
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. / /

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

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

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TABLE OF CONTENTS

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

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

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

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

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

SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . 51
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PART I.

ITEM 1. BUSINESS

Active Voice Corporation (Active Voice or the Company) is a leading manufacturer
of voice processing systems and PC-based computer telephony integration (CTI)
solutions, with more than 53,000 installations in over 60 nations. An
international company, Active Voice corporate headquarters are located in
Seattle, with representatives throughout the United States, as well as offices
in Australia, Canada, China, France, India, the Netherlands, and the United
Kingdom.

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

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

INDUSTRY

According to industry statistics, the domestic market for voice processing
systems comprises more than 50 manufacturers, whose voice messaging products
accounted for aggregate end-user revenues of approximately $2.2 billion in 1996
(1997 revenue numbers were not available at June 29, 1998). Manufacturers of
voice processing systems include switch suppliers such as Lucent Technologies,
Inc., Nortel Inc. and Siemens Business Communication Systems, Inc.; independent
manufacturers of proprietary systems such as Centigram Communications
Corporation, Octel Communications - now a division of Lucent Technologies; and
Comverse Technology, Inc.; and independent manufacturers of PC-based,
open-architecture systems such as Active Voice and Applied Voice Technologies,
Inc. According to preliminary industry statistics for total number of domestic
voice processing systems shipped in 1997, the Company ranked third only behind
Lucent Technologies and Nortel. References in this paragraph, as well as
elsewhere in this Report, to industry statistics concerning sales and shipments
by the Company and its competitors are based on estimates compiled relative to
the U.S. market by Dataquest Corporation, an independent research firm
specializing in high technology.

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

The first voice processing systems performed basic applications. The three most
common of these basic voice processing features are: 1) VOICE MAIL--which
allows a caller to store voice messages and replies in a computer. Typical voice
mail features include the ability to record, store, and delete messages, as well
as to direct messages to multiple subscribers. 2) AUTOMATED ATTENDANT- which

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allows a caller to direct the computer to switch the call automatically to a
telephone extension different from the one dialed. 3) INTERACTIVE VOICE
RESPONSE (IVR) which allows a caller to obtain requested information in voice
form from a local or remote database. An example of IVR is simply selecting
announcements from a list of options stored in the computer (also known as
AUDIOTEXT). These basic voice processing functions offer integrated and
simplified access to various types of communications and information through
the traditional telephone system.

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

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

As a result of these developments, voice processing systems can now provide more
advanced functions that enable users to utilize voice, personal computers, and
touchtone telephones in different ways to manipulate calls, interact with
computer databases, and access and respond to messages or data. Examples of
advanced applications include the ability to visually manage all telephone
traffic from a personal computer. A second example would be the ability to have
the computer read e-mail messages to the recipient over a telephone. The Company
has developed products that take advantage of these trends in the market,
thereby making internal and external communications more efficient.

In addition to developments in computer hardware and software, over the past
decade there has been a proliferation of new methods of business communication,
such as facsimile (fax), electronic mail (e-mail), and Internet telephony (the
ability to make voice phone calls over the Internet). These advances in
technology and communications infrastructure have had the effect of making it
easier to exchange voice and data using pagers, cellular phones, and portable
computers with communications capabilities. As a result, voice processing
systems can now access and interact with a wide range of communications devices,
such as cellular telephones and pagers.

The creation of each new communications device, accompanied by the integration
of telephone systems with computers on an Intranet or the Internet, created
demand for innovative products to streamline the message retrieval process and
allow the user to access all electronic messages using the most convenient
communications device from anywhere. The Company has responded to this market
demand by developing unified messaging products that store all messages in one
location for access via any application. For example, integrating the telephone
system with computers has allowed the Company to develop a text-to-speech
application that uses a synthesized voice to read e-mail messages over the
telephone. In addition, the Company manufactures a product that allows the user
to use touchtones to route a fax to the nearest facsimile machine for printout,
anywhere, at any time. The connectivity among various means of electronic
communication (the merging of data networks and telephones) is delivering people
more choices of how and when they wish to access information.

STRATEGY

MISSION STATEMENT: Active Voice makes products that empower people to
communicate in the easiest, most efficient, and unified way. With Active Voice
open standards-based software running on its

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servers and PCs, an organization's people and customers can communicate all
over the world, at any time, and control multimedia messages (voice mail,
e-mail, or fax mail) with whatever medium (currently desktop and laptop
computers, wired and wireless telephones, and pagers) is the most convenient
and preferred way.

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

The Company's strategy is based on five basic elements:

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

USE STANDARD, OPEN SYSTEMS AND HARDWARE. The Company's products use standard,
open-architecture PC platforms and operating systems, like Microsoft NT,
Exchange and BackOffice, rather than proprietary computer hardware and operating
systems. As a result, the Company can rapidly adopt new PC-based technologies
and capitalize on the substantial expenditures made by third parties that
develop new technologies for the general PC environment. The use of commonly
available hardware components and software minimizes the Company's manufacturing
activity and helps reduce THE OVERALL COST OF ITS PRODUCTS WHILE CONTINUING TO
ADD ENHANCED FUNCTIONALITY.

MAKE PRODUCTS EASY TO USE, INSTALL, AND MODIFY. The Company strives to maximize
ease-of-use for the end user, the system manager, and the installer. The
Company's products are designed to be "people-oriented," with features that can
be used readily without special training or manuals. For example, the Company's
1 for Yes, 2 for No-Registered Trademark- user dialogue gives first time voice
mail users easy and immediate access to all the system's features. Also, the
Company programs into its products installation procedures, screens, and menus
that allow automatic configuration to over 200 different PBX, key system, and
Centrex switches and enable the system manager to modify features to meet user
needs.

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

FOCUS ON SMALL- TO MEDIUM-SIZED OFFICES WITH COST COMPETITIVE SOLUTIONS; LARGER
OFFICES BY LEVERAGING OPEN STANDARDS. The Company's products are designed for
use by businesses and offices in a wide range of enterprises, including
manufacturing, retail, service, health-care, and governmental institutions.
Since 1986, the Company's products have offered many of the features commonly
available in large, proprietary voice processing systems, at price points more
affordable to the small- to medium-sized businesses, a target market. The
Company is also entering the larger end-user market through its relationships
with strategic partners and is seeing interest from larger businesses, including
Fortune 500 companies interested in its strategy for open standards and the
direction the Company is headed with its research and development efforts. The
Company believes its strategic relationships will play a significant role in its
strategy to increase market share, as well as provide opportunities for the
Company to have a greater presence in the larger end-user market.

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PRODUCTS

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

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

The Company's voice processing products typically include the following
principal components: an IBM-compatible PC platform; one or more voice
processing circuitboards (voice boards), which contain signal processors to
compress and digitize voice and detect various tones; and the
Company-designed software. To keep costs down, Lingo runs Company-designed
software on a proprietary platform. In addition, the Company's In-switch
products run Company-designed software on a single board inserted inside the
telephone system.

The Company has developed software that enables most of its products to
integrate with more than 200 different PBX, key system, and Centrex telephone
switching systems from 68 different manufacturers. The Company believes this
number of integrations represents approximately 90% of the types of installed
switches in the United States, and views its ability to integrate with such a
large portion of available telephone systems as one of its key competitive
advantages.

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

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

In February 1998 the Company released Repartee version 7.44. This new release
split the product into two models, Repartee VP and Repartee CTI, and
incorporated the most powerful features of the Company's Replay and Replay Plus
voice messaging platforms. (For a discussion of Replay and Replay Plus, see
below.) Both Repartee VP and CTI run on IBM's OS/2 Warp 4.0 operating system,
use Dialogic voice boards and are available as a turnkey product (already
assembled) or as a kit that the dealer may assemble on site.

Repartee's target market is small- to medium-size businesses that want a voice
processing system that can grow in capacity and functionality, as their business
needs change.

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

To make it quicker and easier for users of the system to add optional software
packages, or to upgrade from Repartee VP to Repartee CTI, all software comes on
one CD-ROM, and is installed by purchasing

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a code from the Company and then inputting it into the server. This seamless
upgrade path from Repartee VP to Repartee CTI, and the simplified process of
adding software packages through the use of upgrade codes, is a strategy the
Company believes increases the product's marketability.

REPARTEE CTI -- offers all the basic communications applications found in
Repartee VP, and also works with the Company's suite of computer telephony
integration software, known as TeLANophy, to provide users with advanced unified
messaging and call control applications. Users with TeLANophy can still access
all their electronic messages from a touchtone telephone, and also have the
ability to access and manage all their messages visually from a personal
computer. (For a more complete discussion, please see the TeLANophy section
below.) The Company sees this multiple user interface as a benefit to consumers,
since it offers the ability to control their messages in the way that is most
convenient for them.

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

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

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

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

Replay is currently offered in all the Company's markets outside the United
States and Canada. Sales of Replay accounted for approximately 15% of the
Company's fiscal 1998 revenue.

REPLAY PLUS -- The release of Replay was followed in 1992 by the introduction
of Replay Plus. Replay Plus offers all the functionality of Replay, including
the HTML system administration interface, as well as support for
fax-on-demand, Hospitality, and the ability to customize nearly all voice
mail features. The product runs on the Microsoft DOS operating system, and,
like Repartee, utilizes the AMIS protocol. Replay Plus is currently offered
in all the Company's markets outside the United States and Canada. Sales of
Replay Plus accounted for approximately 25% of the Company's fiscal 1998
revenue.

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

Lingo is a turnkey product that offers voice mail, automated attendant,
audiotext, and fax detect, route, and notify capabilities from any touchtone
telephone. Lingo is a stand-alone unit that runs on an embedded PC-DOS operating
system. The product comes in two- or four-port configurations with two or four
hours of storage. In addition, Lingo is a solid-state system with no moving
parts; a design the Company believes reduces the possibility of product
malfunction while increasing its marketability.

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

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

TeLANophy

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

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

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

- VIEWMAIL -- makes voice and fax messages available on a desktop PC.
Using a Microsoft Windows interface, ViewMail displays the sender's name,
subject, and the date and time messages were sent. Messages are managed with
a few clicks of ViewMail's easy-to-use buttons, letting the user hear, reply,
redirect, archive, delete, and leave messages, as well as rewind, pause, and
fast forward them during playback. With a sound device on a multimedia PC,
ViewMail allows a user to play and record messages without picking up the
telephone.

- VIEWMAIL FOR MICROSOFT MESSAGING (VMM) -- offers Microsoft Exchange and
Outlook users the benefits of unified messaging, including the ability to access
voice, fax, and e-mail messages from

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within one application. All messages are stored in one inbox, eliminating the
need to check messages in separate applications. A user can save voice and
fax messages indefinitely along with e-mail in Exchange and Outlook folders,
send voice and fax messages to an e-mail address (even if the recipient does
not have a voice mail system), and download voice and fax messages to work
with off line. VMM also has all the easy-to-use features of ViewMail, making
it faster and easier than using touchtones on the telephone to listen and
reply to messages.

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

- MESSAGE INTEGRATION FOR NOVELL GROUPWISE -- offers a universal messaging
center where a user can check GroupWise messages (e-mail, schedules,
appointments, and tasks) and Repartee CTI voice and fax messages in one mailbox
that can be accessed by telephone or desktop PC. Repartee CTI uses the Message
Notify/Delivery module to let a user know when new GroupWise messages arrive, as
well as to allow the user to send GroupWise messages to the nearest fax machine
when out of the office. The Message Reader module reads GroupWise messages in
clear, spoken English, enabling the user to listen and respond to these text
messages from any touchtone telephone.

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

OTHER PRODUCTS AND FEATURES:

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

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

Other optional features for the Company's products, such as tape backup, disk
redundancy and tool kits, are offered with Repartee and Replay Plus, and can be
configured by dealers according to a particular end user's application.

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

PRODUCTS IN DEVELOPMENT

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

<PAGE>

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

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

PRONEXUS INC.

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

SALES AND MARKETING

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

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

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

NORTH AMERICAN DEALER NETWORK

The Company's North American dealer network consists of more than 700
independent telephone system dealers in the United States and Canada. The dealer
network is managed by full-time regional and divisional managers, who often
accompany dealers on sales calls and are compensated through a commission plan
based on quarterly quotas. A typical dealer for the Company's products is a
small

<PAGE>

business operator who primarily sells telephone systems to small- and
medium-sized businesses and relies upon the Company's products to augment
such sales. Most dealers also handle competing voice processing products. The
Company attempts to maintain relationships with a large number of dealers
and, because of the potential for dealer turnover, considers it advantageous
not to become overly dependent upon a few dealers.

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

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

VALUE-ADDED RESELLERS (VARs)

The greater technical complexity of CTI products and the need for both PC and
LAN technical knowledge and support capability has made it advantageous for the
Company to utilize a new channel of distribution for these products. The Company
currently has a VAR agreement with Inacom Corporation, a technology management
services company, and an agreement with Ingram Micro, Inc. a wholesale
distributor of technology products and services. Because VARs offer industry and
technical solutions and provide both LAN and software expertise, the Company
believes they have the ability to assist the Company in selling and distributing
its products to a new and much broader audience.

ORIGINAL EQUIPMENT MANUFACTURERS (OEMs)

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

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

OEMs generally market the Company's products under their own brand name, with
their own literature, and through their own sales and technical support
networks. The Company will, however, supply OEM's with specialized technical
publications featuring the OEM's company and brand names. OEM contracts
typically have a term of one or more years and provide for volume discounts and
initial or minimum sales volumes.

<PAGE>

INTERNATIONAL SALES

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

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

PRODUCT SUPPORT

The Company's dealers and OEM customers are primarily responsible for supporting
end users who purchase one of the Company's products. The Company does, however,
provide a substantial amount of technical and sales support to its dealers and
OEM customers. The Company maintains a technical support staff, devoted to
dealer and OEM support. Technical support can be reached on a toll-free number
12 hours per day on weekdays and emergency support is available on weekends and
holidays. The Company also provides a limited warranty on elements of its
products and permits product returns, without charge, if within 30 days.
Although the Company generally does not offer maintenance contracts for its
systems, dealers often independently sell maintenance contracts to end-users.

PRODUCT DEVELOPMENT

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

Three engineering groups perform the Company's product development efforts. The
Enterprise/Server Products group responds to the needs of the high-end product
offering, Repartee, TeLANophy, and Unity, as well as switch integrations and
vertical market applications. The Small Business Systems

<PAGE>

group works on Replay, Replay Plus, and Lingo. The Advanced Products and
Technology group focuses on the development of new products and features that
the Company believes will be important on a three to five year horizon.

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

MANUFACTURING

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

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

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

COMPETITION

The voice processing industry, specifically the segment that supplies voice
processing systems to small- and medium-sized businesses and offices, is highly
competitive, and the Company believes that the competitive pressures it faces
will continue to intensify. The Company has, however, been successful in this
competitive environment in the past, ranking third behind only Lucent
Technologies and Nortel in total domestic voice messaging systems shipped in
1997, according to preliminary industry statistics.

According to industry statistics, the domestic market for voice processing
systems comprises more than 50 manufacturers. Manufacturers of voice processing
systems include switch suppliers (such as Lucent Technologies, Inc., Nortel
Inc., and Siemens Business Communication Systems, Inc.); manufacturers of
proprietary systems (such as Centigram Communications Corporation, Octel
Communications Corporation, acquired by Lucent in September 1997, and Comverse
Technology, Inc.,
11

<PAGE>

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

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

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

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

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

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

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

<PAGE>

PROPRIETARY RIGHTS

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

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

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

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

The voice processing industry has historically witnessed numerous allegations of
patent infringement among competitors, and considerable related litigation. The
Company has received claims of patent infringement from several parties,
including certain competitors. In response to certain prior infringement claims,
the Company has pursued and obtained nonexclusive licenses entitling the Company
to utilize certain fundamental patented voice mail and automated attendant
functions that are widely licensed and used in the voice processing industry.
The Company's investigation of other claims has been limited by the claims' lack
of specificity, by the limited availability of factual information and
documentation related to the claims, and by the expense of pursuing exhaustive
patent reviews. The Company believes based in part upon its investigations and
upon discussions and correspondence with its patent counsel that its systems do
not currently infringe on valid patents. Although the Company believes that it
currently owns or has adequate rights to utilize all material technologies
relating to its products, as it continues to develop new products and features
in the future, it anticipates that it may receive additional claims of patent
infringement. Such claims could result in the Company's incurring substantial
legal expenses and being required to obtain licenses, pay damages for
infringement, or cease offering products that infringe such patents.

<PAGE>

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

EMPLOYEES

At March 31, 1998, the Company had 288 full-time employees, including 43 in
finance and administration, 20 in manufacturing, 98 in engineering, product
development, and quality assurance, and 127 in sales, marketing and technical
support, as well as 24 part-time employees. Company employees enter into
agreements containing confidentiality restrictions, as well as provisions
relative to non-competition during employment with the Company and for six
months after termination. The Company has never had a work stoppage and no
employees are represented by a labor organization. The Company considers its
employee relations to be good.

At March 31, 1998, Pronexus Inc. had 22 full-time employees, including 2 in
finance and administration, 9 in engineering and product development, 11 in
sales, marketing and technical support, as well as 2 part-time employees.

ITEM 2: PROPERTIES

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

ITEM 3. LEGAL PROCEEDINGS

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

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

None.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company are elected annually at the meeting of the
Board of Directors held in conjunction with the annual meeting of stockholders.
The following are the current executive officers of the Company:

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

Frank J. Costa 45 Chief Operating Officer and President

Jose S. David 41 Chief Financial Officer

Douglass S. Anderson 47 Vice President of Sales

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

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

<PAGE>

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

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

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

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

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

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

<PAGE>

PART II.

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

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

Year ended March 31, 1998 1997
- -------------------- ------------------ ------------------
High Low High Low
------- ------- ------ -------
<S> <C> <C> <C> <C>
First Quarter $13.75 $ 9.63 $16.50 $10.63
Second Quarter 15.25 11.25 13.75 9.50
Third Quarter 15.38 11.63 15.00 11.00
Fourth Quarter $15.25 $11.38 $15.63 $10.00
</TABLE>

The Company has not paid cash dividends on its Common Stock. At present, the
Company intends to retain earnings for the expansion of its business and does
not anticipate declaring a cash dividend in the near future. As of March 31,
1998, there were approximately 100 stockholders of record and approximately
3,500 beneficial owners of the Company's Common Stock.

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

ITEM 6. SELECTED FINANCIAL DATA

Year Ended March 31, 1998 1997(1) 1996 1995 1994
- -------------------- -------- ------- ------- ------- -------
(Amounts in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales $53,151 $49,515 $45,138 $36,950 $28,121
Operating (loss) income (1,149) 2,569 6,871 6,845 4,984
Net income 142 1,751 5,162 5,110 3,579
Earnings per share:
Basic $ 0.03 $ 0.38 $ 1.14 $ 1.15 $ 1.09
Diluted $ 0.03 $ 0.38 $ 1.11 $ 1.11 $ 0.88

Balance Sheet Data:
Working capital $24,825 $22,489 $20,912 $12,147 $10,409
Total Assets 41,144 38,941 37,400 28,698 25,411
Total debt 0 0 0 0 0
Total stockholders' equity $34,595 $34,084 $31,797 $25,450 $20,944
</TABLE>

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

<PAGE>

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

Active Voice Corporation (the Company) is a leading manufacturer of PC-based
voice processing systems and CTI products. The Company's products are sold
worldwide through a network of independent telecommunications dealers, telephone
equipment manufacturers and computer resellers. The Company currently markets
five principal products: Repartee, Replay Plus, Replay, Lingo and In-switch.
Repartee, the Company's flagship and most feature-rich product, offers the
largest call handling capacity and comes in two models, VP and CTI. In addition,
Repartee serves as the base for TeLANophy, a suite of the Company's CTI modules,
which provides complete call management and unified messaging capabilities.
Replay Plus, the Company's mid-priced product, offers most of the voice
processing features found in Repartee with the exception of the CTI
functionality. The Company's Replay product provides basic voice processing
features at a price point attractive to the small business market. Lingo offers
all basic voice processing features in a single proprietary hardware unit, and
is an affordable solution for small businesses as it does not utilize PC
hardware and requires minimal dealer effort in its installation. In-switch,
available only to the Company's strategic partners, combines Active Voice
software with a board that incorporates directly into the phone switch, offering
a less expensive alternative than a traditional PC-based voice mail system.

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

RESULTS OF OPERATIONS

NET SALES

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

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

FISCAL 1998 COMPARED TO FISCAL 1997

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

<PAGE>

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

Net sales to the Company's North American dealer network during the year ended
March 31, 1998 declined 10% when compared to the previous year. Net sales to the
North American dealer network represented 57.5% and 68.5% of total net sales in
the years ended March 31, 1998 and 1997, respectively. The decrease in sales to
the North American dealer channel as a percentage of total net sales can be
credited to the success of the Company's strategic partner relationships as some
dealers now purchase the Company's products through these corporate sales
customers. The Company feels this transition is a more efficient method of
distributing its lower-end products, as the Company's dealers are more adept at
providing CTI-capable solutions, while the strategic partners' expertise is
selling basic voice mail systems. The decrease can also be attributed to the
delayed release of Repartee VP and CTI in the fourth quarter of fiscal 1998. As
a result, the Company discounted certain interim sales of Replay and Replay Plus
products, which were phased out in this channel with the introduction of
Repartee VP and CTI. The delay also caused customers to defer orders in
anticipation of the new Repartee product offering. It is anticipated that the
standardization of the code base offered by Repartee VP and CTI will simplify
the product offering by establishing a consistent feature set and the ability to
offer more telephone switch integrations. This transition also allows the
Company to offer TeLANophy capability to every Repartee product sold in the
channel. The introduction of Lingo helped to mitigate the overall revenue
decline; of the 236 new dealers the Company added in fiscal 1998, 26 are
specifically devoted to selling Lingo.

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

Net sales to international customers grew 28.7% in the year ended March 31, 1998
when compared to the prior fiscal year. International sales represented 15.6%
and 13.0% of total net sales for fiscal years 1998 and 1997, respectively. The
increase in international sales can be attributed to the evolution of

<PAGE>

the Company's international strategy towards a decentralized approach,
providing the local sales managers the latitude to take advantage of the
unique opportunities in their markets. This strategy is exemplified by the
acquisition of Active Voice B.V., the Company's European distributor. By
eliminating the middleman, the efficiency of this distribution model has
allowed the Company to leverage the responsiveness to its European customers.
To this end, the Company is continuing to invest in product localization
efforts, especially in the German and French markets. The international
channel also experienced an increase in revenue from Replay, offset by
declining unit sales of Repartee systems and kits. The strength of the US
currency, particularly relative to the Australian dollar, mitigated some of
the overall increase in international revenues. Beyond the usual risks
associated with international sales (currency fluctuations and restrictions;
export-import regulations; customs matters; foreign collection problems; and
military, political and transportation risks), the Company's international
sales involve additional governmental regulation, product adaptations to
local languages and switching systems, and uncertainties arising from local
business practices and cultural considerations.

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

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

FISCAL 1997 COMPARED TO FISCAL 1996

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

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

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

<PAGE>

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

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

GROSS PROFIT

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

Gross profit $30,195 4.9% $28,780 2.3% $28,120
Percentage of net sales 56.8% 58.1% 62.3%
</TABLE>

The Company's gross margin varies in part depending upon the mix of
higher-margin voice board-and-software kit sales (offered to all customers) and
software-only sales, such as In-switch (available only to strategic partner
accounts) as opposed to turnkey system sales (which include the cost of a PC and
other related hardware). The proportion of sales contributed from each
distribution channel also affects the overall gross margin, as international
sales have historically had higher gross margins than sales to the other
distribution channels.

FISCAL 1998 COMPARED TO FISCAL 1997

The decline in gross margin between fiscal 1998 and 1997 is attributable to a
variety of factors, particularly product platform changes that required the
Company to increase allowances for surplus and obsolete inventory in the second
and fourth quarters of fiscal 1998. In addition, the Company wrote off the value
of unreturned out-of-warranty items and certain demo units. Also, in the fourth
quarter Replay and Replay Plus units were discounted in preparation for the
Repartee 7.44 transition. The margin decrease related to the transition was
offset by margin gains in the strategic partner channel with the third quarter
release of the In-switch product, as well as a 58% overall increase of TeLANophy

<PAGE>

sales. Other factors mitigating the margin decrease included the settlement of
third-party vendor hardware problems as well as recognition of patent license
fees related to the Company's stutter detect patent.

FISCAL 1997 COMPARED TO FISCAL 1996

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

RESEARCH AND DEVELOPMENT

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

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

FISCAL 1998 COMPARED TO FISCAL 1997

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

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

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

<PAGE>

continue to be necessary to allocate significant resources to the development
of new products. The Company expects the dollar amount of research and
development expenditures to continue to increase for the foreseeable future,
and that these expenses as a percentage of sales will vary from period to
period.

FISCAL 1997 COMPARED TO FISCAL 1996

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

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

SALES AND MARKETING

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

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

FISCAL 1998 COMPARED TO FISCAL 1997

Most of the increase in sales and marketing expense for the year ended March 31,
1998 when compared to the prior year is due to overall increased compensation-
related expenses and the addition of new personnel, particularly technical and
strategic partner support staff. The increase in technical support personnel is
attributable to the demand for network and desktop support resources as a result
of the product shift to Repartee and CTI offerings. A 23% increase in unit
volume has also caused expenses to be higher when compared to the prior year, as
more resources have been devoted to supporting a larger number of systems. Trade
show expenditures and other promotional efforts also increased in an effort to
establish awareness of the new Lingo and Repartee 7.44 products, as well as
Pronexus' Visual Basic application tools. Sales and marketing expenses include
both costs that are essentially fixed as well as costs that vary from period to
period relative to sales volume and thus can be expected to fluctuate both in
dollar amount and as a percentage of net sales from period to period.

<PAGE>

FISCAL 1997 COMPARED TO FISCAL 1996

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

GENERAL AND ADMINISTRATIVE

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

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

FISCAL 1998 COMPARED TO FISCAL 1997

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

FISCAL 1997 COMPARED TO FISCAL 1996

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

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

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

<PAGE>

INTEREST INCOME

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

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

FISCAL 1998 COMPARED TO FISCAL 1997

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

FISCAL 1997 COMPARED TO FISCAL 1996

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

INCOME TAX BENEFIT (PROVISION)

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

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

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

FISCAL 1998 COMPARED TO FISCAL 1997

As a result of the Company's pretax loss, the Company will receive a refund of
income taxes previously paid. The Company's effective tax rate increased to
119.6% (benefit rate as a result of a pretax loss) in fiscal 1998 from 47.9% in
fiscal 1997. The significant increase in the effective tax rate is primarily
attributable to the Company's small pretax loss in fiscal 1998. As the Company's
operating results approach the break-even level as in fiscal 1998, the tax
benefits provided by tax exempt income, the FSC and the research and development
tax credit increase as a percentage of the pretax operating result even though
the absolute dollar value of these benefits has not significantly changed. See
Note 6 to "Notes to Consolidated Financial Statements."

<PAGE>

FISCAL 1997 COMPARED TO FISCAL 1996

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

NET INCOME AND EARNINGS PER SHARE

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

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

FISCAL 1998 COMPARED TO FISCAL 1997

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

FISCAL 1997 COMPARED TO FISCAL 1996

The decreases in net income and earnings per share for the year ended March 31,
1997 compared to the prior year were primarily attributable to a decline in
gross margin to 58.1% in 1997 from 62.3% in 1996 and the non-recurring charge
for purchased, in-process research and development associated with the Pronexus
acquisition, as discussed above. In addition, operating expenses as a percent of
net sales (excluding the non-recurring charge) increased to 49.4% of net sales
compared to 47.1% of net sales in the prior fiscal year. The average number of
common and dilutive common equivalent shares outstanding during the two periods
was comparable.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash, cash equivalents, and marketable securities decreased to
$8.6 million, or 21.0% of total assets, at March 31, 1998 from $15.3 million, or
39.3% of total assets, at March 31, 1997. The majority of the decrease is due to
increases in inventory levels and vendor prepayments, as well as purchases of
hardware and software equipment to augment the Company's management information
systems. The Company had working capital of $24.8 million at March 31, 1998.

<PAGE>

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

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

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

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

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

IMPACT OF THE YEAR 2000 ISSUE

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

<PAGE>

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

FACTORS AFFECTING FUTURE OPERATING RESULTS

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

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

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

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

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

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

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

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

<PAGE>

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

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

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ACTIVE VOICE CORPORATION

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

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

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

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

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

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

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

<PAGE>

ACTIVE VOICE CORPORATION

CONSOLIDATED BALANCE SHEETS
(In thousands, except shares)

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

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

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 3,931 $ 2,342
Accrued compensation and benefits 1,256 1,682
Other accrued expenses 1,493 933
Income taxes payable 4
------- -------
Total current liabilities 6,680 4,961
------- -------
------- -------
Commitments
Minority interest (131) (104)
Stockholders' equity:
Preferred stock, no par value:
Authorized shares--2 million--none outstanding
Common stock, no par value:
Authorized shares--10 million
Issued shares, including repurchased shares
--4,976,933 17,262 17,003
Retained earnings 18,996 19,026
Unrealized gain (loss) on marketable securities 33 3
Accumulated translation adjustments 7 4
Less 313,067 repurchased shares (358,859 in 1997),
at cost (1,703) (1,952)
------- -------
Total stockholders' equity 34,595 34,084
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $41,144 $38,941
------- -------
------- -------
</TABLE>

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

<PAGE>

ACTIVE VOICE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

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

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

<PAGE>

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

Unrealized
Common Stock Gain
------------ (Loss) on Accumulated Total
Net Shares Retained Marketable Translation Repurchased Stockholders'
Outstanding Amount Earnings Securities Adjustments Shares Equity
----------- ------- -------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1995 4,469,897 $16,105 $12,499 $(120) $(3,034) $25,450
Issuance of shares upon
exercise of stock options 85,798 150 (342) 758 566
Tax benefit related
to employee stock plans 536 536
Repurchase of common
stock (750) (21) (21)
Net unrealized gain on
marketable securities 104 104
Net income 5,162 5,162
--------- ------- ------- ------ --- ------- -------
Balance at March 31, 1996 4,554,945 16,791 17,319 (16) (2,297) 31,797
Issuance of shares upon
exercise of stock options 46,833 17 (44) 256 229
Issuance of shares to
Employee Stock
Purchase Plan 16,296 64 89 153
Tax benefit related to
employee stock plans 131 131
Net unrealized gain on
marketable securities 19 19
Translation adjustment $ 4 4
Net income 1,751 1,751
--------- ------- ------- ------ --- ------- -------
Balance at March 31, 1997 4,618,074 17,003 19,026 3 4 (1,952) 34,084
Issuance of shares upon
exercise of stock options 53,713 27 (160) 451 318
Issuance of shares to
Employee Stock
Purchase Plan 32,079 124 (12) 214 326
Tax benefit related to
employee stock plans 108 108
Repurchase of common
stock (40,000) (416) (416)
Net unrealized gain on
marketable securities 30 30
Translation adjustment 3 3
Net income 142 142
--------- ------- ------- ------ --- ------- -------
Balance at March 31, 1998 4,663,866 $17,262 $18,996 $ 33 $ 7 $(1,703) $34,595
--------- ------- ------- ------ --- ------- -------
--------- ------- ------- ------ --- ------- -------
</TABLE>

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

<PAGE>

ACTIVE VOICE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY

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

PRINCIPLES OF CONSOLIDATION

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

FOREIGN CURRENCY TRANSLATION

The local currency is considered the functional currency of the Company's
foreign operations. Financial statements of foreign subsidiaries are
translated into U.S. dollars using the exchange rate at each balance sheet
date for assets and liabilities and a weighted average exchange rate for each
period for revenues and expenses. Resulting translation adjustments are
recorded as a separate component of stockholders' equity.

USE OF ESTIMATES

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

CASH AND CASH EQUIVALENTS

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

MARKETABLE SECURITIES

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

INVENTORIES

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

<PAGE>

The Company currently purchases the majority of its voice boards, a
significant component of its products, from one supplier. Although there are
a limited number of manufacturers of voice boards, management believes that
other suppliers could provide similar product on comparable terms. A change
in suppliers, however, could cause a delay in manufacturing and a possible
loss of sales, which would affect operating results adversely.

FURNITURE AND EQUIPMENT

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

GOODWILL

Goodwill represents costs in excess of net assets of acquired businesses.
Goodwill is being amortized over periods ranging from three to five years,
using the straight-line method. The Company periodically assesses the
carrying value of its goodwill to determine if impairment has resulted in an
excess of carrying value over fair value.

REVENUE RECOGNITION

Revenue is recognized upon shipment of product to customers, with allowances
made for estimated returns. The Company accrues estimated costs of technical
support to customers, as the related revenues are recognized.

SOFTWARE DEVELOPMENT COSTS

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

ADVERTISING EXPENSE

The cost of advertising is expensed as incurred. The Company incurred
$172,000, $71,000, and $292,000 in advertising costs during the years ended
March 31, 1998, 1997 and 1996, respectively.

STOCK-BASED COMPENSATION

The Company has elected to apply the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, the Company accounts for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Compensation cost for stock options is measured as the
excess, if any, of the fair value of the Company's common stock at the date
of the grant, over the stock option price.

<PAGE>

INCOME TAXES

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

EARNINGS PER SHARE

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

RECENT ACCOUNTING STANDARDS

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

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

<PAGE>

NOTE 2. MARKETABLE SECURITIES

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

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

Gross Gross
Amortized Unrealized Unrealized Estimated
1998 Cost Gains Losses Fair Value
---- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Municipal bonds:
Due in one year or less $ 3,396 $11 $ 3,407
Due after one year through
three years 2,586 26 2,612
Due after three years 1,055 13 1,068
------- --- ---- -------
$ 7,037 $50 $ 0 $ 7,087
</TABLE>

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

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

NOTE 3. INVENTORIES

Inventories are comprised of the following (in thousands):

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

<PAGE>

NOTE 4. FURNITURE AND EQUIPMENT

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

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

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

NOTE 5. LINE OF CREDIT

The Company has an unsecured $10 million revolving line of credit from a bank.
Borrowings under this agreement bear interest at the bank's prime rate less .25%
or at LIBOR plus 1.5%, at the election of the Company. At March 31, 1998 and
1997 there were no borrowings outstanding under this agreement. This agreement
contains financial covenants that require the Company to maintain certain
financial ratios. Borrowings under this agreement are payable on demand if these
covenants are not met, or upon the expiration of the agreement in November 1998.
As a result of the current year operating loss, the Company was not in
compliance with its EBITDA covenant at March 31, 1998, even though there were
no outstanding borrowings at that date. The Company has obtained a waiver of
this covenant from the bank through June 30, 1998.

NOTE 6. INCOME TAXES

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

Year ended March 31,
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Tax at U.S. statutory rate 34.0% 34.0% 34.0%
Research and development credit 46.2 (4.5) (0.4)
Tax exempt income 30.7 (6.6) (2.9)
Foreign sales corporation benefit 18.9 (2.5) (1.0)
Non-recurring charge for
purchased, in-process research
and development 18.1
Other items, net (10.2) 9.4 2.1
------ ----- -----
119.6% 47.9% 31.8%
------ ----- -----
------ ----- -----
</TABLE>

<PAGE>

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

Year ended March 31,
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Current taxes on income $342 $(1,582) $(2,886)
Deferred income taxes 347 (5) 476
----- ------- -------
$689 $(1,587) $(2,410)
----- ------- -------
----- ------- -------
</TABLE>

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

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

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

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

NOTE 7. LEASE COMMITMENTS

The Company leases its facilities under operating leases with initial terms
of 5 to 12 years. Certain leases contain renewal and escalation clauses and
space expansion provisions. The Company incurred $1.7 million, $1.5 million
and $1.2 million, of rent expense for the fiscal years ended March 31, 1998,
1997 and 1996, respectively.

Future minimum rental payments required per fiscal year under leases with
non-cancelable lease terms in excess of one year at March 31, 1998 are as
follows (in thousands):

<TABLE>
<S> <C>
1999 $ 2,270
2000 3,032
2001 3,040
2002 3,035
2003 3,269
Thereafter 21,805
-------
$36,451
-------
-------
</TABLE>

<PAGE>

In connection with the execution of a lease and related amendments, the
Company effectively prepaid rent by paying certain architectural and real
estate fees and costs on behalf of the lessor in exchange for reduced future
lease payments. The prepayments of $762,000 and $275,000 at March 31, 1998
and 1997, respectively, bear interest at the prime rate plus 2% and are
included in prepaid expenses in the accompanying consolidated balance sheets.
The prepayments are used to offset rent payments.

NOTE 8. STOCKHOLDERS' EQUITY

STOCK OPTIONS

The Company has stock option plans under which employees, officers and
directors may be granted options to purchase the Company's common stock. The
majority of the stock options are granted at or above fair market value,
typically vest over three to four years and expire ten years from the date of
grant. At March 31, 1998 there were 1,352,702 shares of common stock reserved
for future issuance under existing stock option plans of which 536,911 shares
represent options available for future grant. These include 43,500 shares
reserved for issuance upon exercise of options granted under the 1984
Incentive Stock Option Plan (1984 Plan) and the 1988 Nonqualified Stock
Option Plan (1988 Plan); 1,236,077 shares reserved for issuance under the
1993 Stock Option Plan (1993 Plan), the 1996 Stock Option Plan (1996 Plan)
and the 1998 Stock Option Plan (1998 Plan), under which options for 717,632
shares have been granted; 60,000 shares reserved for issuance under the
Directors' Stock Option Plan and the 1997 Director Stock Option Plan, under
which options for 41,534 shares have been granted; and 13,125 shares reserved
for options granted outside of these plans. Options which expire or are
terminated revert back to shares available for future grant except that no
further stock option grants will be made under the 1984 Plan or the 1988 Plan.

The Company accounts for these stock option plans under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," under which
compensation cost has been recognized based on the difference between the
exercise price and fair market value at the date of grant, if any. Had
compensation cost for stock option grants made in 1998, 1997 and 1996 been
determined using the fair value method consistent with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the
Company's net income and earnings per share would have been reduced to the
following pro forma amounts (in thousands, except per share data):

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

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

Diluted earnings per share -- as reported $ 0.03 $ 0.38 $ 1.11
Diluted earnings (loss) per share
-- pro forma $ (0.24) $ 0.21 $ 1.03
</TABLE>

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996: risk free interest rates
of 6.0%, 6.5% and 6.0%, respectively; expected volatility of 55%; expected
life of 5 years; and no dividends. Because the Statement No. 123 method of
accounting has not been

<PAGE>

applied to options granted prior to April 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.

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

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

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

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

EMPLOYEE STOCK PURCHASE PLAN

On August 30, 1996, the stockholders approved the 1996 Employee Stock
Purchase Plan (ESPP). The ESPP allows employees the right to purchase the
Company's common stock on a quarterly basis at 85% of the lower of the market
price at the beginning or end of each three-month offering period. Employee
contributions to the ESPP totaled $326,000 and $153,000 for the fiscal years
ended March 31, 1998 and 1997, respectively. Shares issued pursuant to the
ESPP totaled 32,079 and 16,296 for

<PAGE>

the fiscal years ended March 31, 1998 and 1997, respectively. At March 31,
1998, 101,625 shares were reserved for future issuance.

SHARE REPURCHASE

On March 18, 1997, the Company's Board of Directors authorized the repurchase
of up to 100,000 shares of the Company's common stock. During the fiscal year
ended March 31, 1998, 40,000 shares were repurchased at a total price of
$416,000.

CERTAIN TRANSACTIONS WITH CORPORATE OFFICERS AND OTHERS

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

NOTE 9. TECHNOLOGY LICENSES

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

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

NOTE 10. EMPLOYEE BENEFIT PLAN

The Company provides a defined contribution 401(k) profit-sharing plan
covering employees meeting certain eligibility requirements (generally, 21
years of age and six months of service). Company contributions are
discretionary based on annual declarations by the Company's Board of
Directors. The Company made contributions of $96,000, $52,000 and $82,000 for
the years ended March 31, 1998, 1997 and 1996, respectively.

NOTE 11. CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of accounts receivable. The Company
distributes its products through a global network of independent
telecommunications dealers, telephone equipment manufacturers and computer
resellers.

<PAGE>

The Company's largest customer accounted for approximately 11% of net sales
for the fiscal year ending March 31, 1998 and approximately 12% of gross
accounts receivable at March 31, 1998. Net sales to customers outside North
America accounted for approximately 16% of total net sales for the fiscal
year ended March 31, 1998. Accounts receivable denominated in currencies
other than the US Dollar (primarily the Australian Dollar, Canadian Dollar,
Dutch Guilder and British Pound Sterling) comprised approximately 14% of
gross accounts receivable at March 31, 1998. The Company is not currently
engaged in any significant foreign currency hedging activities. The Company
performs ongoing credit evaluations of its customers' financial condition,
and generally does not require collateral, but may require alternative
payment terms such as cash in advance, cash on delivery (COD) or letters of
credit, when necessary. The Company maintains reserves for credit losses and
such losses have historically been within management's expectations.

NOTE 12. ACQUISITION OF PRONEXUS INC.

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

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

NOTE 13. EARNINGS PER SHARE

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

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

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

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

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

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

</TABLE>

42
<PAGE>

NOTE 14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

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

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

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

43
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

TO THE STOCKHOLDERS AND BOARD OF DIRECTORS

ACTIVE VOICE CORPORATION

We have audited the accompanying consolidated balance sheets of Active Voice
Corporation as of March 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 1998. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Active Voice Corporation at March 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended March 31, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set
forth therein.

ERNST & YOUNG LLP

Seattle, Washington
May 18, 1998

44
<PAGE>

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

NOT APPLICABLE.

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item is contained in part in the sections
captioned "Board of Directors-Nominees for Director" and "Section 16(a)
Beneficial Ownership Reporting" in the Proxy Statement for the Company's
Annual Meeting of Shareholders scheduled to be held on August 19, 1998, and
such information is incorporated herein by reference.

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

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference to the
information contained in the section captioned "Compensation and Benefits" of
the Proxy Statement for the Company's Annual Meeting of Shareholders
scheduled to be held on August 19, 1998.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is incorporated by reference to the
information contained in the section captioned "Voting Securities and
Principal Holders" of the Proxy Statement for the Company's Annual Meeting of
Shareholders scheduled to be held on August 19, 1998.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

PART IV.

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

(a)(1) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

Consolidated Balance Sheets -- March 31, 1998 and 1997

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

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

Notes to Consolidated Financial Statements

Report of Ernst & Young LLP, Independent Auditors

45
<PAGE>

(a)(2) FINANCIAL STATEMENT SCHEDULES

SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS.

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

(b) REPORTS ON FORM 8-K

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

The following exhibits are filed with this report:

EXHIBIT NO. 3: ARTICLES OF INCORPORATION AND BYLAWS

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

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

EXHIBIT NO. 10: MATERIAL CONTRACTS

EXECUTIVE COMPENSATION PLANS AND AGREEMENTS

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

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

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

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

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

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

46
<PAGE>

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

10.8 Second Amendment to the 1996 Employee Stock Purchase Plan (filed
herewith)

10.9 1996 Stock Option Plan (incorporated by reference from Exhibit 99.1 to
the Registrant's Registration Statement on Form S-8 filed with the
Securities and Exchange Commission on February 13, 1997 (File No.
333-21739))

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

10.11 1997 Director Stock Option Plan (filed herewith)

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

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

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

10.15 1998 Stock Option Plan (incorporated by reference from Exhibit 10 to
the Registrant's Quarterly Report on Form 10-Q for its fiscal quarter
ended December 31, 1997 (File No. 0-22804))

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

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

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

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

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

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

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

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

47
<PAGE>

OTHER MATERIAL CONTRACTS

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

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

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

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

10.28 Amendment to Office Lease dated December 12, 1997 between Registrant
and Martin Selig (filed herewith)

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

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

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

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

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

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

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

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

48
<PAGE>

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

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

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

EXHIBIT NO. 21: SUBSIDIARIES OF THE REGISTRANT

21.1 Subsidiaries of Registrant

EXHIBIT NO. 23: CONSENT OF EXPERTS AND COUNSEL

23.1 Consent of Ernst & Young LLP, Independent Auditors

EXHIBIT NO. 27: FINANCIAL DATA SCHEDULE

27.1 Financial Data Schedule

49
<PAGE>

SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS
ACTIVE VOICE CORPORATION
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
(IN THOUSANDS)

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

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

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

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

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

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

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

(A) Uncollectable accounts written off, net of recoveries

(B) Reduction of estimated future sales returns

50
<PAGE>

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned; thereunto duly authorized, in the City of
Seattle, State of Washington, on June 29, 1998.

ACTIVE VOICE CORPORATION

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

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

<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>

/s/ Robert L. Richmond Chief Executive Officer and June 29, 1998
- ----------------------- Chairman of the Board
Robert L. Richmond Principal Executive Officer

/s/ Jose S. David Chief Financial Officer June 29, 1998
- ----------------------- Secretary and Treasurer
Jose S. David (Principal Financial and
Accounting Officer)

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

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

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

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

</TABLE>
51

<PAGE>
SECOND AMENDMENT
TO
ACTIVE VOICE CORPORATION
1996 EMPLOYEE STOCK PURCHASE PLAN

THIS SECOND AMENDMENT is adopted effective as of June 1, 1998 (the
"Amendment Date"), by ACTIVE VOICE CORPORATION, a Washington corporation (the
"Company").

RECITALS

A. The Company has adopted the Active Voice Corporation 1996 Employee
Stock Purchase Plan (the "Plan").

B. The Company desires to amend the Plan in certain respects.

NOW, THEREFORE, the Plan is hereby amended as follows:

1. Article 3 of the Plan is hereby amended and restated in its entirety as
follows:

As used in the Plan, the term "Eligible Employees" means all
common law employees of the Company and its subsidiaries, except
the following: (a) employees whose customary employment is 10
hours or less per week; (b) employees whose customary employment
is for not more than 5 months in any calendar year; and (c) any
person performing services for the Company who is not
contemporaneously treated as a common law employee on the
Company's payroll and personnel records, including but not
limited to a person treated as a third party contractor or who
is paid through a third party business entity's payroll,
regardless of whether the relationship between the Company and
the person subsequently is determined to be an employer/common
law employee relationship. Except as otherwise expressly
provided in the Plan and permitted by Section 423 of the Code,
all Eligible Employees shall have the same rights and
obligations under the Plan.

Notwithstanding the foregoing provisions of this Article 3, an
employee will not be an Eligible Employee for purposes of the
Plan if the employee owns stock possessing 5% or more of the
total combined voting power or value of all classes of stock of
the Company. For purposes of this 5% limitation, an employee
shall be treated as owning any stock the ownership of which is
attributed to him or her under the rules of Section 424(d) of
the Code, as well as any stock that, in the absence of this
paragraph, the employee could purchase under the Plan with his
or her payroll deductions held pursuant to Article 6 but not yet
applied to the purchase of shares of Common Stock under the
Plan.

<PAGE>

2. Except as amended hereby, the Plan shall remain in full force and effect.

IN WITNESS WHEREOF, this Second Amendment has been executed as of the
Amendment Date.

ACTIVE VOICE CORPORATION

By /s/ Robert L. Richmond
-------------------------
Robert L. Richmond,
Chief Executive Officer

<PAGE>
FIRST AMENDMENT
TO
ACTIVE VOICE CORPORATION
1996 STOCK OPTION PLAN

THIS FIRST AMENDMENT is adopted effective as of June 22, 1998 (the
"Amendment Date"), by ACTIVE VOICE CORPORATION, a Washington corporation (the
"Company").

RECITALS

A. The Company has adopted the Active Voice Corporation 1996 Stock
Option Plan (the "Plan").

B. The Company desires to amend the Plan in certain respects.

NOW, THEREFORE, the Plan is hereby amended as follows:

1. The first sentence of Section 4.1 of the Plan is amended to read as
follows:

Subject to the provisions of this Article 4, the maximum number of
shares of Common Stock for which Options may be granted during the
term of the Plan shall be four hundred thousand (400,000).

2. Section 4.1 of the Plan is amended by adding the following at the end
thereof:

The maximum number of shares of Common Stock with respect to which
Options may be granted during any calendar year to any one person
shall be one hundred fifty thousand (150,000).

3. Except as amended hereby, the Plan shall remain in full force and
effect.

IN WITNESS WHEREOF, this First Amendment has been executed as of the
Amendment Date.

ACTIVE VOICE CORPORATION

By /s/ Robert L. Richmond
--------------------------
Robert L. Richmond
Chairman of the Board and
Chief Executive Officer

<PAGE>
ACTIVE VOICE CORPORATION

1997 DIRECTOR STOCK OPTION PLAN

ACTIVE VOICE CORPORATION, a Washington corporation (the "Company"),
hereby establishes and sets forth the terms of the Active Voice Corporation
1997 Director Stock Option Plan (the "Plan"). The Plan was originally adopted
effective as of September 30, 1997 (the "Effective Date"), and was amended
and restated effective as of June 22, 1998.

1. DEFINITIONS. Capitalized terms used in the Plan have the meanings
given those terms in the attached Appendix A or in the section of the Plan
referenced therein.

2. PURPOSE OF PLAN. The purpose of the Plan is to assist the Company
in attracting and retaining outside directors of the highest caliber to serve
on the Board. The Plan seeks to achieve this purpose by providing for
automatic grants of Options to certain outside directors on each Annual
Meeting Date and at certain other times.

3. ADMINISTRATION OF THE PLAN. The Board shall have full power and
authority, subject only to the provisions of the Plan (a) to administer or
supervise the administration of the Plan; (b) to interpret the provisions of
the Plan and the agreements evidencing Options; (c) to correct any defect,
supply any information and reconcile any inconsistency in such manner and to
such extent as it determines to be necessary or advisable to carry out the
purpose of the Plan; and (d) to take such other actions in connection with
the Plan as it determines to be necessary or advisable. The Board is
authorized to adopt, amend and rescind such rules, regulations and procedures
not inconsistent with the provisions of the Plan as it determines to be
necessary or advisable for the proper administration of the Plan, and each
Option shall be subject to all such rules, regulations and procedures
(whether the Option was granted before or after adoption thereof). Each
action and determination made or taken by the Board, including but not
limited to any interpretation of the Plan and the agreements evidencing
Options, shall be final, conclusive and binding for all purposes and upon all
persons. The Board shall have all powers necessary or appropriate to
accomplish its duties under the Plan.

4. SHARES AVAILABLE FOR OPTIONS. The aggregate number of shares of
Common Stock reserved for issuance upon exercise of Options granted under the
Plan will be sixty thousand (60,000) (subject to any adjustment required or
permitted under Section 9 or Section 10), and Options may be granted under
this Plan only with respect to the shares so reserved. If an Option
terminates for any reason without having been exercised in full, the shares
of Common Stock for which the Option has not been exercised shall again be
available for purposes of the Plan.

-1-
<PAGE>

5. GRANTS OF OPTIONS

5.1 Effective October 1, 1997, each individual who has been an
Eligible Director for at least six (6) months will receive an Option (a
"Continuing Director Option") to acquire two thousand five hundred (2,500)
shares of Common Stock.

5.2 Effective on the date an individual first takes office as an
Eligible Director on the Board (an "Initial Grant Date"), the individual will
receive an Option (an "Initial Option") to acquire either (a) fifteen
thousand (15,000) shares of Common Stock, if six (6) months or less have
elapsed since the Annual Meeting Date next preceding the Initial Grant Date,
or (b) ten thousand (10,000) shares of Common Stock, if more than six (6)
months have elapsed since that Annual Meeting Date or if the individual first
takes office as an Eligible Director on an Annual Meeting Date; PROVIDED,
HOWEVER, if there are insufficient Available Shares for the grant of the
Initial Option as provided above, the individual shall instead receive an
Initial Option to acquire the remaining Available Shares.

5.3 On the Annual Meeting Date in 1998 and in each subsequent year
so long as Available Shares remain under this Plan (each such date will be
referred to as an "Annual Grant Date"), each individual who is an Eligible
Director on the Annual Grant Date will receive an Option (an "Annual Option")
to acquire five thousand (5,000) shares of Common Stock; PROVIDED, HOWEVER,
if there are insufficient Available Shares for the grant of the Annual
Options as provided above, each such Eligible Director shall instead receive
an Annual Option to acquire the largest whole number of shares of Common
Stock as can then be granted without exceeding the Available Shares.

5.4 Each grant of an Option shall occur automatically without
further action of the Board other than, to the extent necessary, its
determination of (a) the Fair Market Value on the Grant Date, and (b) any
provisions that are to be included in the agreement evidencing the Option
pursuant to Section 8.1.

6. PURCHASE PRICE. The price at which each share of Common Stock may
be purchased upon exercise of an Option shall be the Fair Market Value of the
Common Stock on the Grant Date. The purchase price shall be paid in full at
the time of exercise (a) in cash, (b) by means of a transfer to the Company
of shares of Common Stock that have been outstanding for at least one (1)
year and that have a Fair Market Value equal to the purchase price to be
paid, or (c) a combination of cash and shares of Common Stock.

7. OTHER TERMS OF OPTIONS

7.1 Each Initial Option granted to an Eligible Director will
become exercisable --

(a) for one-third (1/3) of the shares of Common Stock covered
thereby (rounded down to the nearest whole number, if necessary to eliminate
a fractional share) on the first (1st) anniversary of its Grant Date;

-2-
<PAGE>

(b) for an additional one-third (1/3) of the shares of Common
Stock covered thereby (rounded down to the nearest whole number, if necessary
to eliminate a fractional share) on the second (2nd) anniversary of its Grant
Date; and

PROVIDED, HOWEVER, the Option will not become exercisable for shares for
which it is scheduled to become exercisable on a particular anniversary date
under clause (a), (b) or (c) above if (i) more than sixty (60) days prior to
the date when the Option is scheduled to become exercisable, the Eligible
Director ceases to be a director of the Company for any reason; or (ii)
during the period from its Grant Date to the first (1st) anniversary thereof
(in the case of clause (a)), or from the preceding anniversary date to that
particular anniversary date (in the case of clause (b) or (c)) (or such
portion of that period during which the Eligible Director is serving as a
director of the Company), the Eligible Director does not attend at least
seventy-five percent (75%) of the combined number of meetings of the full
Board and any committee(s) of the Board of which the Eligible Director is a
member, or does not attend at least fifty percent (50%) of such combined
number of meetings in person.

7.2 A Continuing Director Option or an Annual Option granted to an
Eligible Director will become exercisable for all of the shares of Common
Stock covered thereby on the first (1st) anniversary of its Grant Date;
PROVIDED, HOWEVER, the Option will not become exercisable if (a) more than
sixty (60) days prior to that anniversary date, the Eligible Director ceases
to be a director of the Company for any reason other than his or her death;
or (b) during the period from its Grant Date to such anniversary date (or
such portion of that period during which the Eligible Director is serving as
a director of the Company), the Eligible Director does not attend at least
seventy-five percent (75%) of the combined number of meetings of the full
Board and any committee(s) of the Board of which the Eligible Director is a
member, or does not attend at least fifty percent (50%) of such combined
number of meetings in person.

7.3 If an Option does not become exercisable for shares for which
it is scheduled to become exercisable on a particular anniversary of its
Grant Date, the Option shall automatically terminate as to such shares. After
an Option becomes exercisable for any shares of Common Stock, the Option may
be exercised for such shares in whole or in part at any time and from time to
time prior to its termination pursuant to Section 7.5.

7.4 For purposes of Section 7.1 and Section 7.2, if the Board
takes action by unanimous written consent, such consent shall be deemed to be
a meeting of the Board that all directors have attended in person.

7.5 Unless it terminates earlier under other provisions of this
Plan, an Option granted to an Eligible Director will terminate ten (10) years
after its Grant Date or one (1) year after the date of death of the Eligible
Director, whichever occurs first.

-3-
<PAGE>

8. OPTION AGREEMENT; NONTRANSFERABILITY OF OPTIONS; CERTIFICATES

8.1 Each Option will be evidenced by a written agreement executed
by the Company and the Eligible Director. Such agreement shall contain the
terms of the Option as specified in this Plan, together with such other
provisions not inconsistent with such terms as the Board deems advisable.

8.2 An Option will not be transferable by an Eligible Director
other than by will or by the laws of descent and distribution, will not be
involuntarily alienable by legal process or otherwise by operation of law,
and will be exercisable during the Eligible Director's lifetime only by the
Eligible Director. If an Eligible Director dies prior to full exercise of an
Option, the Option may be exercised, to the extent it does not thereby
terminate, by the person or persons to whom the rights of the Eligible
Director under the Option pass by will or by applicable laws of descent and
distribution. The Company may at any time, by written notice to the Eligible
Director or to the then holder of an Option, release in whole or in part the
restrictions under this Section 8.2).

8.3 Each certificate evidencing Common Stock issued upon exercise
of an Option shall bear such legends as the Company, upon advice of legal
counsel, determines to be necessary or appropriate.

9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. If the outstanding
shares of Common Stock are increased or decreased, or changed into or
exchanged for a different number or kind of shares or securities of the
Company through a reorganization, merger, recapitalization, reclassification,
share exchange or other material alteration in the capital structure of the
Company, an appropriate and proportionate adjustment shall be made to the
number and/or kind of shares or securities as to which Options will
thereafter automatically be granted. A corresponding adjustment shall be made
to the number and/or kind of shares or securities allocated to each Option
outstanding at the time of such event and to the purchase price of such
shares or securities; PROVIDED, HOWEVER, that such adjustment shall be made
without changing the total purchase price applicable to the unexercised
portion of the Option. For purposes of this Section 9, neither (a) the
issuance of additional shares of Common Stock or other securities of the
Company in exchange for adequate consideration (including services), nor (b)
the conversion into Common Stock of any securities of the Company now or
hereafter outstanding, shall be deemed material alterations in the capital
structure of the Company. If the Board determines that the nature of a
material alteration in the capital structure of the Company is such that it
is not feasible or advisable to make adjustments to this Plan or to the
Options granted under the Plan, such event shall be subject to Section 10.

10. OTHER SIGNIFICANT EVENTS. In the event of (a) a reorganization,
merger, recapitalization, reclassification, share exchange or other similar
event affecting the Company and one or more other corporations following
which the Company is not a surviving corporation, (b) the acquisition by any
person, partnership, or corporation of more than twenty-five percent (25%) of
the outstanding shares of Common Stock, (c) a sale of substantially all of
the assets of the Company, (d) the dissolution or liquidation of the

-4-
<PAGE>

Company, or (e) a material change in the capital structure of the Company
that is subject to this Section 10 in accordance with the last sentence of
Section 9, the Board shall have the power to determine what effect, if any,
such event shall have upon Options outstanding under the Plan, including but
not limited to the power to cause Options to be surrendered and canceled and
payments to be made to the holders in exchange therefor and to cause
adjustments to be made in the number and/or kind of shares or securities with
respect to which such Options may be exercised and/or in the purchase prices
and other terms and conditions thereof. Upon such event, the Plan and all
Options outstanding under the Plan shall terminate, except to the extent the
Board, pursuant to its authority under this Section 10, has made provision
for the continuation of the Plan and outstanding Options or the substitution
for outstanding Options of new options or awards covering the stock or
securities of a successor entity, in which event the Plan and outstanding
Options shall be subject to the terms so provided.

11. AMENDMENT; TERMINATION

11.1 The Board may from time to time amend the Plan in any respect
whatsoever; PROVIDED, HOWEVER, that no amendment may have any material
adverse effect on the rights of any director or former director with respect
to any Option granted prior to the amendment, unless the director consents
thereto.

11.2 The Board may terminate the Plan at any time. No Options shall
be granted following termination of the Plan, but the provisions of the Plan
shall continue in effect until all Options terminate or are exercised in full
and all rights of all persons with any interest in the Plan expire.

12. GOVERNING LAW. All determinations made and actions taken pursuant
hereto shall be governed by the laws of the State of Washington and construed
accordingly.

-5-
<PAGE>
APPENDIX A

DEFINITIONS

"Annual Grant Date" is defined in Section 5.3.

"Annual Option" is defined in Section 5.3.

"Annual Meeting" means an annual meeting of shareholders of the Company.

"Annual Meeting Date" means the date of an Annual Meeting.

"Available Shares" means the number of shares of Common Stock from time to
time available under Section 4 for the grant of Options under this Plan.

"Board" means the Board of Directors of the Company.

"Common Stock" means the Common Stock, no par value, of the Company.

"Company" is defined in the preamble of the Plan.

"Continuing Director Option" is defined in Section 5.1.

"Effective Date" is defined in the preamble of the Plan.

"Eligible Director" means each individual who on a Grant Date meets the
following requirements:

(a) The individual is a member of the Board at the close of
business on the Grant Date; and

(b) At no time during the calendar year in which the Grant Date
falls has the individual been an employee of the Company or any of its
direct or indirect subsidiaries.

"Fair Market Value" for the Common Stock (or any other security) on any
day means, if the Common Stock (or other security) is publicly traded, the
last sales price (or, if no last sales price is reported, the average of the
high bid and low asked prices) for a share of Common Stock (or unit of the
other security) on that day (or, if that day is not a trading day, on the
next preceding trading day), as reported by the principal exchange on which
the Common Stock (or other security) is listed, or, if the Common Stock (or
other security) is publicly traded but not listed on an exchange, as reported
by The Nasdaq Stock Market, or, if such prices or quotations are not reported
by The Nasdaq Stock Market, as reported by any other available source of
prices or quotations selected by the Committee. If the Common Stock (or other
security) is not publicly traded, or if the Fair Market Value is not
determinable by any of the foregoing means, the Fair Market Value on any day
shall be determined in good faith by the Board on the basis of such
considerations as the Board deems appropriate.

"Grant Date" means October 1, 1997, in the case of a Continuing Director
Option, and any Annual Grant Date or Initial Grant Date, in the case of an
Annual Option or an Initial Option, respectively.

"Initial Grant Date" is defined in Section 5.2.

"Initial Option" is defined in Section 5.2.

"Option" means an Annual Option, a Continuing Director Option or an
Initial Option.

"Plan" is defined in the preamble hereof.

<PAGE>

EXHIBIT 10.16

FIRST AMENDMENT
TO
ACTIVE VOICE CORPORATION
1998 STOCK OPTION PLAN

THIS FIRST AMENDMENT is adopted effective as of June 22, 1998 (the
"Amendment Date"), by ACTIVE VOICE CORPORATION, a Washington corporation (the
"Company").

RECITALS

A. The Company has adopted the Active Voice Corporation 1998 Stock Option
Plan (the "Plan").

B. The Company desires to amend the Plan in certain respects.

NOW, THEREFORE, the Plan is hereby amended as follows:

1. The definition of "Applicable Percentage" in Article 2 of the
Plan is hereby deleted in its entirety.

2. Section 6.1 of the Plan is amended by deleting the following phrase
therefrom:

(i) the Committee shall not grant an Option if, following the grant of
the Option, the Applicable Percentage would exceed twenty-two percent
(22%), and (ii)

3. Except as amended hereby, the Plan shall remain in full force and
effect.

IN WITNESS WHEREOF, this First Amendment has been executed as of the
Amendment Date.

ACTIVE VOICE CORPORATION

By /s/ Robert L. Richmond
---------------------------------------
Robert L. Richmond
Chairman of the Board and
Chief Executive Officer

<PAGE>

EXHIBIT 10.22
EMPLOYMENT AGREEMENT

Agreement entered into this 24th day of January, 1991 by and
between Active Voice, Inc., a Washington corporation (hereinafter "Employer")
and Kevin Chestnut (hereinafter "Employee"). The terms of this Employment
Agreement are set out below as agreed upon between the parties hereto.

Therefore, it is agreed as follows:

1. EMPLOYMENT AND TITLE. The Employer hereby employs the Employee,
and the Employee hereby accepts employment as under the terms and conditions
hereinafter set forth.

2. TERM. This Agreement shall remain in effect for an initial term of
one year, and shall be automatically renewed for succeeding terms of one year,
unless terminated pursuant to Paragraph 10 hereof. During the term of this
Agreement, Employee shall devote his/her full time and attention and his/her
best efforts to the conduct of business of the Employer. Full time shall be
defined as at least forty (40) hours per week.

3. COMPENSATION. For all services rendered by the Employee under this
Agreement, the Employer shall pay the employee a salary of $33,340.00 per year.
The compensation paid to the Employee, including commissions, incentives, or
other benefits, may be increased by the President only. Any such additional
compensation must be specifically agreed to in writing.

4. DUTIES. The Employee will perform all Technical Writer duties as
requested by the Employer.

5. EXPENSES. Subject to the written consent of the Employer, the
Employee is authorized to incur reasonable expenses for promoting the business
of the Employer, including expenses for entertainment, travel, and similar
items. The written consent of the Employer shall not be required with regard to
incidental expenses of a minor nature incurred by the Employee in the course of
his/her duties for the Employer, in which case oral consent shall be sufficient.
The Employer will reimburse the Employee for all such expenses upon the
presentation by the Employee from time to time of an itemized account of all
such expenditures.

6. DISCLOSURE OF INFORMATION. As a condition of employment, the
Employee agrees to sign and be governed by the Nondisclosure Agreement attached
hereto as Attachment A.

7. RESTRICTIVE COVENANT. During the term of his/her employment and
for a period of six (6) months after termination of his/her employment under
this Agreement, the Employee will not, without written consent of the Employer,
directly or in- directly own, manage, operate, control by employed by,
participate in, or be connected with the ownership, management, operation, or
control of any business which is engaged in the business of producing/marketing
substantially similar product to those of the Employer at the time of
termination. Furthermore, and during such period, the Employee will not either
individually or through other employment, solicit, contact or accept orders on
behalf of businesses producing/marketing substantially similar products to that
of the Employer and/or any of the Employer's customers.

1
<PAGE>

In the event of an actual or threatened breach by the Employee of the
provisions of this paragraph, the Employer shall be entitled to an injunction
restraining the Employee from engaging in any such violation. Nothing herein
stated shall be construed as prohibiting the Employer for pursuing other
remedies available to the Employer for such breach or threatened breach,
including the recovery of damages from the Employee.

8. INVENTIONS. Ownership of any designs, inventions or products
developed or invented by the Employee during the term of this Agreement, and
which relate to the business of the Employer, shall be the property of the
Employer.

9. MEDICAL AND DENTAL INSURANCE. The Employee shall be entitled to
coverage under the Employer's group medical and dental insurance policies. To
the extent that the Employee is not covered under such policies, the Employer
shall pay an equivalent amount to a plan selected by the Employee.

10. TERMINATION OF AGREEMENT. This Agreement shall be terminated
upon the occurrence of any one or more of the following events:

10.1 the death of the Employee;

10.2 mutual agreement to termination in writing between the
Employer and the Employee;

10.3 forty-five (45) days' written notice of termination given
by the Employee to the Employer;

10.4 the determination by the Employer's President to terminate
the Employee, with or without cause, giving the Employee not less than thirty
(30) days' written notice if without cause.

In the event of such a termination, the Employee shall continue to render
services to the Employer and shall be paid his/her regular compensation up to
the date of termination.

11. VENUE AND JURISDICTION. This Agreement has been entered into for
employment in the State of Washington, and shall be governed by the laws of the
State of Washington. In the event that any dispute arises between the parties,
the parties agree that venue and jurisdiction shall be in King County,
Washington and that the prevailing party shall be entitled to all costs and
actual attorney's fees, including those incurred on appeal.

12. WAIVER OF BREACH. The waiver by the Employer of a breach of any
provision of the Agreement by the Employee shall not operate or be construed as
a waiver of any subsequent breach by the Employee.

13. SEVERABILITY. The invalidity or unenforceability of any provision
herein shall in no way affect the validity or enforceability of any other
provision.

14. NOTICES. Any demand, request or notice that either party hereto
desires or may be required to make or deliver to the other shall be in writing
and shall be deemed delivered when personally delivered or three (3) days after
being deposited in the United States mail, postage

2
<PAGE>

prepaid, in registered or certified form, addressed 1) in the case of the
Employee, to his/her last known address, and 2) in the case of the Employer, to
its principal place of business.

15. SPECIFIC PERFORMANCE. The parties declare that it may be
impossible to measure in money the damages which will accrue to a party hereto
by reason of the failure to perform any of the obligations under this Agreement.
If either party hereto shall institute any action or proceeding to specifically
enforce the provision of this Agreement, the party against whom such action or
proceeding is brought hereby waives the claim or defense of any adequate remedy
at law.

16. BINDING EFFECT. This Agreement shall bind the parties hereto and
their heirs, executors, officers, administrators, successors, and assigns.

17. COMPLETE AGREEMENT. This Agreement contains the entire agreement
between the parties relating to the subject matter hereof and no modification of
this agreement shall be valid unless made in writing and signed by the parties
hereto.

EMPLOYER
--------
ACTIVE VOICE INC.

BY /s/ R. L. Richmond
------------------------------------
President

January 31, 1991
-----------------------------------------
Date

EMPLOYEE
--------

/s/ Kevin Chestnut
-----------------------------------------
January 28, 1991
-----------------------------------------
Date

3
<PAGE>

NON-DISCLOSURE AGREEMENT

Active Voice, Inc.
Seattle, Washington

Gentlemen:

The following confirms an agreement between me and Active Voice, Inc., a
Washington corporation (the "Company"), which is a material part of the
consideration for my employment by the Company:

1. I recognize that the Company is engaged in a continuous program of
research, development and production respecting its business, present and
future, including fields generally related to its business and that the Company
possesses and will continue to possess information that has been created,
discovered, developed or otherwise become known to the Company (including
without limitation information created by, discovered or developed by, or made
known to, me during the period of or arising out of my employment at the
Company) and/or in which property rights have been assigned or otherwise
conveyed to the Company, which information has commercial value in the business
in which the Company is engaged. All of the aforementioned information is
hereinafter called "Proprietary Information." By way of illustration, but not
limitation, Proprietary Information includes trade secrets, processes, formulas,
designs, inventions, techniques, new products, marketing plans, tactics,
strategies, forecasts, customer and supplier lists, business plans and other
information valuable to the running of the Company's business.

2. I understand that my employment created a relationship of confidence
and trust between me and the company with respect to any information:

(i) applicable to the business of the Company; or

(ii) applicable to the business of any client or customer of the
Company, which may be known to me by the Company or by any client or customer of
the Company, or learned by me during the period of my employment.

3. In consideration of the compensation received by me from the Company
from time to time, I hereby agree as follows:

(a) All Proprietary Information shall be the sole property of the Company
and its assigns, and the Company and its assigns shall be the sole owner of all
patents, copyrights and other rights in connection therewith. I hereby assign
to the company any rights I may have or acquire in such Proprietary Information.
At all times, both during my employment by the Company and after my termination,
I will not disclose but will keep in confidence and trust all Proprietary
Information or anything relating to it without the written consent of the
Company, except as may be necessary in the ordinary course of performing my
duties to the Company.

(b) All documents, records, apparatus, equipment and other physical
property, whether or not pertaining to Proprietary Information, furnished to me
by the Company or

4
<PAGE>

produced by myself or others relating to the Company's business shall be and
remain the sole property of the Company and shall be returned to it immediately
as and when requested by the Company.

4. This Agreement shall be effective as of the first day of my employment
by the Company.

5. This Agreement shall be binding upon me, my heirs, executors, assigns,
and administrators and shall inure to the benefit of the Company, its successors
and assigns.

6. The parties acknowledge that the provisions of this Agreement create
rights and remedies which are in addition to those rights and remedies the
Company may have under the Uniform Trade Secrets Act, Chapter 19.108 of the
Revised Code of Washington.

Dated: January 28, 1991
----------------

Signed: /s/ Kevin L. Chestnut
------------------------

Accepted and Agreed to:

ACTIVE VOICE, INC.

BY /s/ Robert L. Richmond
----------------------

DATE January 31, 1991
----------------

<PAGE>
EXHIBIT 10.28

M A R T I N S E L I G
REAL ESTATE

December 12, 1997

Ms. Debbie Faulkner
ACTIVE VOICE CORPORATION
Third and Broad Building
2901 Third Avenue, Suite 500
Seattle, Washington 98121

Dear Debbie:

Kindly refer to the Lease dated January 31, 1991, between Active Voice, Inc. and
Martin Selig (hereinafter referred to as "Active Voice" and "Martin Selig",
respectively) and all amendments attached thereto (collectively, the "Lease").
Consider this an additional Lease Amendment (the "Amendment").

Effective February 1, 1998, and continuing until the Lease expires on July 10,
2009, Active Voice will expand into a space recently vacated on the northeast
portion of the third floor within the Third & Broad Building. Currently, the
space is comprised of approximately 20,304 square feet. It is acknowledged that
Ben Bridge Jewelers, another tenant within the Third and Broad Building,
anticipates expanding into a portion of the space as well. Ben Bridge
anticipates occupying approximately 5,000 feet. Active Voice will then lease
the remainder, anticipated to be approximately 15,000 square feet, or whatever
that evolves to be. Such premises are more specifically outlined in the
attached floor plan marked Exhibit "A".

Once final working drawings are available, Active Voice and Martin Selig will
jointly measure these additional premises and agree on the total rentable square
footage and exact location (the "Additional Premises"). Such footage shall be
measured according to the Building Owners and Managers ("BOMA") standard method
of measurement.

Active Voice has the right to space pocket up to 5,000 square feet of the
Additional Premises for a maximum of 24 months commencing February 1, 1998.
More specifically, "space pockets" is a designated portion of the Additional
Premises that is fully improved, but not physically occupied. Space pockets
will not accrue rent as long as they are not used. Rent will accrue, however,
commencing February 1, 2000, or upon their usage as office space, whichever
occurs first. These space pockets can be relocated from time to time with a

<PAGE>

Ms. Debbie Faulkner
ACTIVE VOICE CORPORATION
December 12, 1997
Page 2

reasonable amount of prior notice to Martin Selig. Active Voice may also place
furniture in the space pockets without causing rent to accrue.

The rental rate of the Additional Premises, including the space pockets, upon
either expiration or absorption shall be $22.00 per square foot per year.

For purposes of passing through increases in Real Estate taxes, insurance and
operating expenses, the base year for the Additional Premises shall be 1998.

Martin Selig will provide a tenant improvement allowance of $12.00 per square
foot for the entire Additional Premises, including the space pockets. This
allowance will be provided to Active Voice in the form of a credit against the
first rents that become owing to Martin Selig for the Additional Premises.

Martin Selig will provide, at his sole cost and expense, by his in-house staff,
in a timely manner and consistent with applicable professional standards, all
space planning services, and construction drawings, including mechanical,
electrical, structural, and fire protection engineering required to improve this
additional space.

With the lease of the Additional Premises Active Voice gains the right to
utilize twenty (20) additional parking stalls within the Third and Broad
Building at the prevailing market rate, currently $105.00 plus Washington State
Sales Tax, per stall, per month.

Upon full execution of the Lease Amendment, Martin Selig shall pay Active
Voice's real estate agent, Steven C. Johnson & Associates, a fee of $3.50 per
square foot based upon the total square footage leased, anticipated to be 15,000
square feet. Martin Selig shall pay 50% of the total fee upon full execution of
this Amendment. The remaining 50% shall be due upon Active Voice's occupancy of
the Additional Premises, or February 1, 1998, whichever occurs first. If these
amounts are not paid within fifteen (15) days of when due, Active Voice may pay
such amounts directly to Steven C. Johnson & Associates, including an annual
interest rate of 2% over Seafirst National Bank's quoted prime rate, and deduct
such amounts from the rent that is attributable to this additional space.

Except as modified above, all other terms and conditions of the Lease and
Amendments shall remain unchanged and in full force and effect.

<PAGE>

Ms. Debbie Faulkner
ACTIVE VOICE CORPORATION
December 12, 1997
Page 3

Martin Selig shall obtain the consent and approval of CAYSTAR Corp. II to the
Lease as amended by this Amendment.

Martin Selig agrees to consent to a Memorandum of the Lease and this Amendment,
which shall not be unreasonably withheld or delayed, for recording with the King
County Recorder's Office and to deliver the same to Active Voice prior to
December 15, 1997.

If you are in agreement with the preceding, please so acknowledge by signing and
dating on the lines provided below in the presence of a notary and return for
your own files. Thank you.

Sincerely,

/s/ Theresa Groff
- -------------------------
Theresa Groff

active1 10597.doc

Attachment

cc: Steven C. Johnson

AGREED AND ACKNOWLEDGED:

MARTIN SELIG REAL ESTATE ACTIVE VOICE CORPORATION
/s/ Martin Selig /s/ Frank J. Costa
- ------------------------------- -------------------------------
Martin Selig By Frank Costa
Its Chief Operating Officer
-------------------------------
12/17/97 12/16/97
- ------------------------------- -------------------------------
Dated Dated

CAYSTAR CORP. II
/s/ James C. Babbitt
- -------------------------------
By
Its Vice President
- -------------------------------
12/27/97
- -------------------------------
Dated

<PAGE>

STATE OF WASHINGTON )
) ss,
COUNTY OF KING )

On this 17th day of DECEMBER, 1997, before me, a Notary Public in and for
the State of Washington, personally appeared MARTIN SELIG, the individual who
executed the within and foregoing instrument and acknowledged said instrument to
be his free and voluntary act and deed for the uses and purposes therein
mentioned.

IN WITNESS WHEREOF, I have hereunto set my hand and affixed by official
seal, the day and year first above written.

/s/ Jill M. Hayes
----------------------------------------------
(notary )seal here Notary/Public in and for the State of Washington
Residing at: Fall City
----------------------------------
My commission expires: 6/1/98
------------------------

STATE OF )
) ss,
COUNTY OF KING )

On this 16th day of DECEMBER , 1997, before me, a Notary Public in and for
the State of WASHINGTON, personally appeared FRANK J. COSTA, to me known to be
the CHIEF OPERATING OFFICER , respectively, of ACTIVE VOICE CORPORATION, the
corporation that executed the within and foregoing instrument, and acknowledged
said instrument to be the free and voluntary act and deed of said corporation,
for the uses and purposes therein mentioned, and on oath stated that he/she/they
is/are authorized to execute said instrument and that the seal affixed thereto
is the corporate seal of said corporation.

IN WITNESS WHEREOF, I have hereunto set my hand and affixed by official
seal, the day and year first above written.

/s/ De Faulkner
----------------------------------------------
Notary Public in and for the State of WA
--------
Residing at: Seattle
---------------------------------
My commission expires:
-----------------------

<PAGE>
EXHIBIT 10.29

M A R T I N S E L I G
REAL ESTATE

March 27,1998

Ms. Debbie Faulkner
ACTIVE VOICE CORPORATION
Third and Broad Building
2901 Third Avenue, Suite 500
Seattle, Washington 98121

Dear Debbie:

Please refer to the Lease dated January 31, 1991 and all amendments attached
thereto. Consider this an additional Lease Amendment.

Pursuant to the Lease Amendment dated December 12, 1997, Martin Selig and Active
Voice hereby agree and acknowledge the premises Active Voice recently leased on
the third floor comprise of 12,293 usable square feet, plus a six percent (6%)
load factor on the third floor totals 13,053 rentable square feet. The attached
Exhibit "A" more specifically details the areas included in the preceding
footages.

Further, Paragraph 1. in the Lease, entitled DESCRIPTION, specifies the common
area load factor for any Active Voice premises be based upon the actual percent,
however, not to exceed five percent (5%). Martin Selig and Active Voice hereby
agree that henceforward any additional premises Active Voice absorbs will
include the actual percent of load factor, whatever it may be. The load factor
will, in any case, be determined by the Building Owners and Managers Association
"Standard Method for Measuring Floor Area in Offfice Buildings".

Unless modified above, all other lease and amendment terms and conditions will
remain unchanged and in full force and effect.

1000 SECOND AVENUE
SUITE 1800
SEATTLE, WASHINGTON 98104-1046
1206) 467-7600
FAX (206)388-5296
<PAGE>

Ms. Debbie Faulkner
ACTIVE VOICE CORPORATION
March 27, 1998
Page 2

If you are in agreement with the preceding, please so acknowledge by signing and
dating below in the presence of a notary. Return two (2) copies to me,
retaining two (2) for your own files. Thank you.

Sincerely,

/s/ Theresa Groff
- -----------------------------
Theresa Groff

ACTIVE10312.98

Attachment

AGREED AND ACCEPTED:

ACTIVE VOICE CORPORATION
/s/ Martin Selig By /s/ Frank J. Costa
- ------------------------------------- ----------------------------------
Martin Selig Its President
----------------------------------
----------------------------------
3/27/98 4/9/98
- ------------------------------------- ----------------------------------
Dated Dated

<PAGE>

STATE OF WASHINGTON )
) ss,
COUNTY OF KING )

On this 27TH day of MARCH, 1998, before me, a Notary Public in and for the
State of Washington, personally appeared MARTIN SELIG, the individual who
executed the within and foregoing instrument and acknowledged said instrument to
be his free and voluntary act and deed for the uses and purposes therein
mentioned.

IN WITNESS WHEREOF, I have hereunto set my hand and affixed by official
seal, the day and year first above written.

/s/ Jill M. Hayes
-------------------------------------------------
(notary )seal here Notary/Public in and for the State of Washington
Residing at: Fall City
------------------------------------
My commission expires: 6/1/98
--------------------------

STATE OF )
) ss,
COUNTY OF KING )

On this _________ day of ___________, 19__, before me, a Notary Public in
and for the State of _________________, personally appeared ______________, to
me known to be the _________________, respectively, of _________________, the
corporation that executed the within and foregoing instrument, and acknowledged
said instrument to be the free and voluntary act and deed of said corporation,
for the uses and purposes therein mentioned, and on oath stated that he/she/they
is/are authorized to execute said instrument and that the seal affixed thereto
is the corporate seal of said corporation.

IN WITNESS WHEREOF, I have hereunto set my hand and affixed by official
seal, the day and year first above written.

------------------------------------------
Notary Public in and for the State of
----
Residing at:
-----------------------------
My commission expires:
--------------------

<PAGE>
EXHIBIT 10.30

After recording, return to:
David D. Buck, Esq.
Graham & James LLP/Riddell
Williams P.S.
1001 Fourth Avenue, Suite 4500
Seattle, WA 98154- 1065

SUBORDINATION, NON-DISTURBANCE,
AND
ATTORNMENT AGREEMENT

GrantorlSubordinator/Lessee: Active Voice Corporation, a Washington
State business corporation

Grantor/Landlord: Martin Selig

Grantee/Lender: CAYSTAR CORP. II, a Cayman Islands Company,
successor in interest by assignment to The Bank of Nova Scotia, a Canadian
chartered bank acting through its San Francisco Agency

Legal description:

Lots 1, 2, 3, 4, 5, 6, 9, 10, 11, 12, Block X, William N. Bell's
Fourth Addition to the City of Seattle, according to the Plat recorded
in Volume 1 of Plats, Page 167, records of King County, Washington;
together with the vacated alley Iying between lots 9, 10, 11, and 12
and Lots 1, 2, 3, 4, 5, and 6.

Assessor's Tax Parcel Number: 0695000335

1
<PAGE>

SUBORDINATION, NON-DISTURBANCL
AND
ATTORNMENT AGREEMENT

THIS SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT ("Agreement"),
is made and entered into effective the 9th day of April, 1997, by and between
CAYSTAR CORP. II, a Cayman Islands Company ("Lender"), successor in interest by
assignment to The Bank of Nova Scotia, a Canadian chartered bank acting through
its San Francisco Agency ("Lender's Predecessor"), and Active Voice Corporation,
a Washington State business corporation ("Lessee").

RECITALS

Lessee has entered into a certain lease dated January 31, 1991, which
Lessee represents has been amended by amendments, agreements, or letter
agreements dated March 4, 1992, June 22, 1992, July 3, 1992, September 17, 1993,
October 8, 1993, April 27, 1994, August 11, 1994, and December 19, 1996,
(collectively, the "Lease") with Martin Selig ("Lessor"), covering certain space
(the "Premises") located in the real property commonly known as the Third and
Broad Building and legally described in Exhibit "A" to this Agreement (the
"Property").

Lender through Lender's Predecessor (and its predecessor) has made a first
mortgage loan (the "Loan") to Lessor which is secured by a Deed of Trust,
Security Agreement and Assignment of Leases and Rents, and by an Assignment of
Leases and Cash Collateral (together, the "Deed of Trust") covering the
Property.

Lessee has subordinated the Lease to the lien of the Deed of Trust under
and according to the terms of the Lease.

Lessee has also made or proposed to make certain advances or expend certain
funds for or on behalf of Lessor.

As a condition of Lessee making certain advances or expending certain funds
for or on behalf of Lessor under the Lease, Lessee desires to be assured of
continued occupancy of the Premises under the terms of the Lease and of the
continuation of its other rights under the Lease. Lessee has requested that
Lender agree not to disturb Lessee's possessory rights in the Premises and to
recognize the other terms and conditions of the Lease in the event Lender

2
<PAGE>

should foreclose the Deed of Trust, provided that Lessee is not in default under
the Lease.

NOW, THEREFORE, in consideration of the mutual covenants contained in this
Agreement and other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties agree as follows:

AGREEMENT

1. PAYMENTS. Lessee acknowledges receipt of Lease Payment Instructions
to make all payments of rent and other amounts due under the Lease by sending
the same to P.O. Box 3607, Seattle, Washington 98124-3607. Lessor consents to
such payments and directs Lessee to comply with said instructions. Any payment
delivered or directed to any other location shall not be applied to amounts due
under the Lease. These Instructions may not be changed or revoked except in
writing signed by Lender.

2. ACKNOWLEDGMENT OF LEASE. Lender acknowledges that the Lease is in
full force and effect and that Lessee is not in default of any of Lessee's
material obligations under the Lease.

3. CONSENT TO LEASE AMENDMENT. Lessee represents that Lessor and Lessee
have entered into eight prior lease amendments which are part of the Lease.

4. ACKNOWLEDGMENT OF SUBORDINATION. Lessee acknowledges that the Lease
is subordinated to the Deed of Trust pursuant to and in accordance with the
terms of the Lease.

5. NON-DISTURBANCE. Lender agrees that so long as conditions do not
exist entitling Lessor to declare the Lease terminated, Lessee's possession and
enjoyment of the Premises shall not be interfered with by Lender in a
foreclosure action, sale, or other action or proceeding instituted under or in
connection with the Deed of Trust.

In the event of foreclosure of the Deed of Trust, whether by action
pursuant to the power of sale therein contained or otherwise, or delivery of a
deed to the Property or any portion thereof in lieu of foreclosure of the Deed
of Trust, whereby the purchaser upon foreclosure of the Deed of Trust or the
grantee under a deed in lieu of foreclosure of the Deed of Trust has notified
Lessee that it has succeeded to the ownership of all interest in the Property
and the rights of Lessor under the Lease, then the Lease shall continue in full

3
<PAGE>

force and effect as a direct lease between such purchaser or grantee of the
Property and Lessee, upon and subject to the terms, covenants, and conditions of
the Lease, including the power of such purchaser or grantee as landlord
thereunder to terminate the interests of Lessee under and in accordance with the
terms of the Lease. Such purchaser or grantee will not disturb the possession
of Lessee and will be bound by all of Lessor's obligations under the Lease.

6. ATTORNMENT. So long as Lessee has quiet enjoyment of the Premises,
Lessee agrees: (a) to attorn to and recognize as landlord under the Lease and
any amendments (including the Lease Amendment): (i) Lender, when in possession
of the Property following foreclosure of the Deed of Trust or conveyance of the
Property to Lender by deed in lieu of foreclosure of the Deed of Trust, (ii) a
receiver appointed in an action or proceeding to foreclose the Deed of Trust,
(iii) a purchaser upon foreclosure of the Deed of Trust, (iv) a grantee under a
deed in lieu of foreclosure of the Deed of Trust, and (v) any subsequent
purchaser of the Property; (b) upon request, to execute and deliver to said
person or entity any instrument or instruments in recordable form which may be
necessary or appropriate to effect the performance of the agreements contained
in this Agreement, provided that such instruments do not create or risk the
creation of, increased risk of liabilities or obligations of Lessee; and (c) to
be bound to perform all of the obligations imposed by the Lease and any
amendments (including the Lease Amendment) upon the Lessee.

7. NEW LEASE. Upon the written request of either Lender or Lessee to the
other given at or within ninety (90) days after the time of a sheriff's or
trustee's sale, or the delivery of a deed in lieu thereof, the parties agree to
execute a lease of the Premises upon the same terms and conditions as the Lease
between Lessor and Lessee, provided Lessee is not prejudiced thereby. The new
lease shall cover any unexpired term of the Lease existing prior to such
sheriff's or trustee's sale or conveyance in lieu of foreclosure.

8. NOTICE OF DEFAULTS. In the event of any act or omission by Lessor
which would give Lessee the right, either immediately or after the lapse of
time, to terminate the Lease or to claim a partial or total eviction, Lessee
will not exercise any such rights: (i) until it has given written notice of such
default to Lender; and (ii) unless and until Lender shall have failed to cure
such default for the same period of time as is given to Lessor under the Lease
to cure such default.

9. ASSIGNMENT. LESSEE acknowledges that it has notice that the Lease and
the rent and all other sums due under the Lease have been assigned

4
<PAGE>

as security for the obligations secured by the Deed of Trust. In the event that
Lender notifies Lessee of a default under the Deed of Trust and demands that
Lessee pay its rent and all other sums due under the Lease to Lender, Lessee
agrees that it will honor such demand and pay its rent and all other sums due
under the Lease directly to the Lender or as otherwise required pursuant to such
notice. Lessor hereby consents in advance to the demand and notice set forth in
the immediately preceding sentence.

10. NOTICES. All notices under this Agreement shall be deemed to have
been duly given if mailed by United States registered or certified mail, with
return receipt requested, postage prepaid, at the following addresses (or at
such other addresses as shall be given by one party to the other) and shall be
deemed complete upon any such mailing:

If to Lender:

Caystar Corp. II
c/o Maples and Calder
P.O. Box 309-UGLAND HOUSE
South Church Street
Grand Cayman
Cayman Islands B.W.I.
Attn: Henry S. Harford, Esq.
Facsimile No. (809) 949-8080

With carbon copies to:

Rinaldi & Associates
Three Pickwick Plaza, Suite 250
Greenwich, CT 06830
Attn: Ellis Rinaldi, Esq.
Facsimile No. (203) 861-2122

and

Mayer, Brown & Platt
1 675 Broadway
New York, New York 1 0019
Attn: Douglas L. Wisner, Esq.
Facsimile No. (21 2) 262-191 0

5
<PAGE>

If to Lessee:

Active Voice Corporation
2901 Third Avenue, Suite 500
Seattle, WA 98121
Attn: Ms. Debbie Faulkner
Director of Administration

11. BINDING EFFECT. This Agreement shall inure to the benefit of the
parties hereto, their successors and permitted assigns.

12. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Washington.

IN WITNESS WHEREOF, the parties have executed this Agreement on the date
and year first above written.

"LENDER"

CAYSTAR CORP. II, a Cayman Islands
Company

By /s/ Jerome C. Silvey
----------------------------------

Its Senior Vice President
---------------------------

"LESSEE"

ACTIVE VOICE CORPORATION, a
Washington State business corporation

By /s/ Robert L. Richmond
----------------------------------
Its CEO
---------------------------

Consented to by:

/s/ MartinSelig
------------------------------------
MartIn Selig

6
<PAGE>

STATE OF CONNECTICUT )
) ss,
COUNTY OF FAIRFIELD )

On this 20TH day of AUGUST, 1997, before me, the undersigned, a Notary Public in
and for the State of CONNECTICUT, duly commissioned and sworn, personally
appeared JEROME C. SILVEY, to me known to be the SENIOR VICE PRESIDENT of
CAYSTAR CORP. II, the corporation that executed the foregoing instrument, and
acknowledged the said instrument to be the free and voluntary act and deed of
said corporation, for the uses and purposes therein mentioned, and on oath
stated that he/she is authorized to execute said instrument and that the seal
affixed thereto is the corporate seal of said corporation.

WITNESS my hand and official seal hereto affixed the day and year in this
certificate above written.

/s/ Karen B. Murray
------------------------------------------
Notary Signature

------------------------------------------
Print/Type Name
Notary Public in and for the State of
----
Residing at:
------------------------------
My appointment expires:
-------------------

(stamped to right) KAREN B. MURRAY
NOTARY PUBLIC
MY COMMISSION EXPIRES FEB. 28, 2002

7
<PAGE>

STATE OFWASHINGTON )
) ss,
COUNTY OF KING )

On this 29TH day of AUGUST, 1997, before me, the undersigned, a Notary Public in
and for the State of Washington, duly commissioned and sworn, personally
appeared ROBERT L. RICHMOND, to me known to be the CEO of ACTIVE VOICE
CORPORATION, the corporation that executed the foregoing instrument, and
acknowledged the said instrument to be the free and voluntary act and deed of
said corporation, for the uses and purposes therein mentioned, and on oath
stated that he/she is authorized to execute said instrument and that the seal
affixed thereto is the corporate seal of said corporation.

WITNESS my hand and official seal hereto affixed the day and year in
this certificate above written.

/s/ Carolyn M. Paola
----------------------------------------
Notary Signature
(notary seal here) Carolyn M. Paola
----------------------------------------
Print/Type Name
Notary Public in and for the State of
Washington
Residing at: Seattle
----------------------------
My appointment expires: 1-27-98
-----------------

8
<PAGE>

STATE OF WASHINGTON )
) ss,
COUNTY OF KING )

On this 28TH day of AUGUST, 1997, before me, the undersigned, a Notary
Public in and for the State of Washington, duly commissioned and sworn,
personally appeared MARTIN SELIG, to me known to be the individual who executed
the foregoing instrument as his free and voluntary act.

WITNESS my hand and official seal hereto affixed the day and year in this
certificate above written.

/s/ Ann Marie Fowler
--------------------------------------------
(notary )seal here Notary/Public in and for the State of
Washington
Residing at: Everett
-------------------------------
My commission expires: 08/01/01
---------------------

9
<PAGE>

THIRD AND BROAD BUILDING

2901 THIRD AVENUE
SEATTLE, WASHINGTON 98121

Lots 1, 2, 3, 4, 5, 6, 9, 10, 11, 12, Block X, William N. Bell's
Fourth Addition to the City of Seattle, according to the Plat
recorded in Volume 1 of Plats, Page 167, records of King County,
Washington; together with the vacated alley Iying between lots 9,
10, 11, and 12 and Lots 1, 2, 3, 4, 5, and 6.

EXHIBIT "A"

<PAGE>
EXHIBIT 10.31

November 13, 1997

Active Voice Corporation
Mr. Jose S. David, CFO
2901 3rd Avenue, #500
Seattle, WA 98121

Dear Mr. David:

This letter is to confirm that Wells Fargo Bank, National Association
("Bank"), subject to all terms and conditions contained herein, has agreed to
make available to Active Voice Corporation ("Borrower") the following described
credit accommodations (each, a "Credit" and collectively, the "Credits"):

1. A revolving line of credit under which Bank will make advances to
Borrower from time to time up to and including November 30, 1998, not to exceed
at any time the maximum principal amount of Ten Million Dollars ($10,000,000.00)
("Line of Credit"), the proceeds of which shall be used working capital
requirements.

2. A facility under which Bank will enter into foreign exchange contracts
for the account of Borrower from time to time up to and including November 30,
1998, not to exceed at any time the maximum principal amount of Five Hundred
Thousand United States Dollars (US$500,000.00) ("Foreign Exchange Facility").

I. CREDIT TERMS:

1. LINE OF CREDIT:

(a) LINE OF CREDIT NOTE. Borrower's obligation to repay advances under
the Line of Credit shall be evidenced by a promissory note substantially in the
form of Exhibit A attached hereto ("Line of Credit Note"), all terms of which
are incorporated herein by this reference.

(b) BORROWING AND REPAYMENT. Borrower may from time to time during the
term of the Line of Credit borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all of the limitations, terms and
conditions contained herein or in the Line of Credit Note; provided however,
that the total

<PAGE>

Active Voice Corporation
November 13, 1997
Page 2

outstanding borrowings under the Line of Credit shall not at any time exceed the
maximum principal amount available thereunder, as set forth above.
Notwithstanding the foregoing, Borrower shall maintain a zero balance on
advances under the Line of Credit for a period of at least 30 consecutive days
during the term of the Line of Credit.

2. FOREIGN EXCHANGE FACILITY:

(a) FOREIGN EXCHANGE FACILITY. Bank will enter into foreign exchange
contracts for the account of Borrower under the Foreign Exchange Facility for
the purchase and/or sale by Borrower in United States dollars of foreign
currencies designated by Borrower; provided however, that the aggregate of all
outstanding foreign exchange contracts shall not at any time exceed the maximum
principal amount available under the Foreign Exchange Facility, as set forth
above. No foreign exchange contract shall be executed for a term which extends
beyond November 30, 1998. Borrower shall have a "Delivery Limit" under the
Foreign Exchange Facility not to exceed at any time the aggregate principal
amount of Five Hundred Thousand United States Dollars (US$500,000.00), which
Delivery Limit reflects the maximum principal amount of Borrower's foreign
exchange contracts which may mature during any two (2) day period. All foreign
exchange transactions shall be subject to the additional terms of a Foreign
Exchange Agreement, substantially in the form of Exhibit B attached hereto
("Foreign Exchange Agreement"), all terms of which are incorporated herein by
this reference.

(b) SETTLEMENT. Each foreign exchange contract under the Foreign Exchange
Facility shall be settled on its maturity date by Bank's debit to any demand
deposit account maintained by Borrower with Bank.

II. INTEREST/FEES:

1. INTEREST. The outstanding principal balance of the Line of Credit
shall bear interest at the rate of interest set forth in the Line of Credit
Note.

2. COMPUTATION AND PAYMENT. Interest shall be computed on the basis of a
360-day year, actual days elapsed. Interest shall be payable at the times and
place set forth in the Line of Credit Note.

3. COMMITMENT FEE. Borrower shall pay to Bank a non-refundable
commitment fee for the Line of Credit equal to $2,500.00, which fee shall be due
and payable in full upon execution of this letter.

<PAGE>

Active Voice Corporation
November 13, 1997
Page 3

4. UNUSED COMMITMENT FEE. Borrower shall pay to Bank a fee equal to
nine-hundredth percent (.09%) per annum (computed on the basis of a 360-day
year, actual days elapsed) on the average daily unused amount of the Line of
Credit, which fee shall be calculated on a quarterly basis by Bank and shall be
due and payable by Borrower in arrears within fifteen (15) days after each
billing is sent by Bank.

5. COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect all
interest due under each Credit by charging Borrower's demand deposit account
number 4159-633163 with Bank, or any other demand deposit account maintained by
Borrower with Bank, for the full amount thereof. Should there be insufficient
funds in any such demand deposit account to pay all such sums when due, the full
amount of such deficiency shall be immediately due and payable by Borrower.

III. REPRESENTATIONS AND WARRANTIES:

Borrower makes the following representations and warranties to Bank, which
representations and warranties shall survive the execution of this letter and
shall continue in full force and effect until the full and final payment, and
satisfaction and discharge, of all obligations of Borrower to Bank subject to
this letter.

1. LEGAL STATUS. Borrower is a corporation, duly organized and existing
and in good standing under the laws of the state of Washington, and is qualified
or licensed to do business in all jurisdictions in which such qualification or
licensing is required or in which the failure to so qualify or to be so licensed
could have a material adverse effect on Borrower.

2. AUTHORIZATION AND VALIDITY. This letter, the Line of Credit Note, and
each other document, contract or instrument deemed necessary by Bank to evidence
any extension of credit to Borrower pursuant to the terms and conditions hereof,
or now or at any time hereafter required by or delivered to Bank in connection
with this letter (collectively, the "Loan Documents") have been duly authorized,
and upon their execution and delivery in accordance with the provisions hereof
will constitute legal, valid and binding agreements and obligations of Borrower
or the party which executes the same, enforceable in accordance with their
respective terms.

3. NO VIOLATION. The execution, delivery and performance by Borrower of each
of the Loan Documents do not violate any provision of any law or regulation, or
contravene any provision of the Articles of Incorporation or By-Laws of
Borrower, or

<PAGE>

Active Voice Corporation
November 13, 1997
Page 4

result in a breach of or constitute a default under any contract, obligation,
indenture or other instrument to which Borrower is a party or by which Borrower
may be bound.

4. LITIGATION. There are no pending, or to the best of Borrower's
knowledge, actions, claims, investigations, suits or proceedings by or before
any governmental authority, arbitrator, court or administrative agency which
could have a MATERIAL ADVERSE effect on the financial condition or operation of
Borrower other than those disclosed by Borrower to Bank in writing prior to the
date hereof.

5. CORRECTNESS OF FINANCIAL STATEMENT. The financial statement of
Borrower dated June 30, 1997, a true copy of which has been delivered by
Borrower to Bank prior to the date hereof, (a) is complete and correct and
presents fairly the financial condition of Borrower, (b) discloses all
liabilities of Borrower that are required to be reflected or reserved against
under generally accepted accounting principles, whether liquidated or
unliquidated, fixed or contingent, and (c) has been prepared in accordance with
generally accepted accounting principles consistently applied. Since the date
of such financial statement there has been no material adverse change in the
condition or operation of Borrower, nor has Borrower mortgaged, pledged, granted
a security interest in or otherwise encumbered any of its assets or properties
except in favor of Bank or as otherwise permitted by Bank in writing.

6. INCOME TAX RETURNS. Borrower has no knowledge of any pending
assessments or adjustments of its income tax payable with respect to any year,
except for March 31, 1994 pending assessment of $300,000.00 which Borrower
disclosed to Bank.

7. NO SUBORDINATION. There is no agreement, indenture, contract or
instrument to which Borrower is a party or by which Borrower may be bound that
requires the subordination in right of payment of any of Borrower's obligations
subject to this letter to any other obligation of Borrower.

8. PERMITS, FRANCHISES. Borrower possesses, and will hereafter possess,
all material permits, consents, approvals, franchises and licenses required and
all rights to trademarks, trade names, patents and fictitious names, if any,
necessary to enable it to conduct the business in which it is now engaged in
compliance with applicable law.

9. ERISA. Borrower is in compliance in all material respects with all
applicable provisions of the Employee Retirement Income Security Act of 1974, as
amended or recodified from time to time ("ERISA"); Borrower has not violated any

<PAGE>

Active Voice Corporation
November 13, 1997
Page 5

provision of any defined employee pension benefit plan (as defined in ERISA)
maintained or contributed to by Borrower (each, a "Plan"); no Reportable Event,
as defined in ERISA, has occurred and is continuing with respect to any Plan
initiated by Borrower; Borrower has met its minimum funding requirements under
ERISA with respect to each Plan; and each Plan will be able to fulfill its
benefit obligations as they come due in accordance with the Plan documents and
under generally accepted accounting principles.

10. OTHER OBLIGATIONS. Borrower is not in default on any obligation for
borrowed money, any purchase money obligation or any other material lease,
commitment, contract, instrument or obligation.

11. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to Bank in
writing prior to the date hereof, Borrower is in compliance in all material
respects with all applicable federal or state environmental, hazardous waste,
health and safety statutes, and any rules or regulations adopted pursuant
thereto, which govern or affect any of Borrower's operations and/or properties,
including without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act
of 1976, and the Federal Toxic Substances Control Act, as any of the same may be
amended, modified or supplemented from time to time. None of the operations of
Borrower is the subject of any federal or state investigation evaluating whether
any remedial action involving a material expenditure is needed to respond to a
release of any toxic or hazardous waste or substance into the environment.
Borrower has no material contingent liability in connection with any release of
any toxic or hazardous waste or substance into the environment.

IV. CONDITIONS:

1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of Bank to
grant any of the Credits is subject to fulfillment to Bank's satisfaction of all
of the following conditions:

(a) DOCUMENTATION. Bank shall have received each of the Loan Documents,
duly executed and in form and substance satisfactory to Bank.

(b) FINANCIAL CONDITION. There shall have been no material adverse
change, as determined by Bank, in the financial condition or business of
Borrower, nor any material decline, as determined

<PAGE>

Active Voice Corporation
November 13, 1997
Page 6

by Bank, in the market value of any collateral required hereunder or a
substantial or material portion of the assets of Borrower.

2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of Bank to
make each extension of credit requested by Borrower hereunder shall be subject
to the fulfillment to Bank's satisfaction of each of the following conditions:

(a) COMPLIANCE. The representations and warranties contained herein and
in each of the other Loan Documents shall be true on and as of the date of the
signing of this letter and on the date of each extension of credit by Bank
pursuant hereto, with the same effect as though such representations and
warranties had been made on and as of each such date, and on each such date, no
default hereunder, and no condition, event or act which with the giving of
notice or the passage of time or both would constitute such a default, shall
have occurred and be continuing or shall exist.

(b) DOCUMENTATION. Bank shall have received all additional documents
which may be required in connection with such extension of credit.

V. COVENANTS:

Borrower covenants that so long Bank remains committed to extend credit to
Borrower pursuant hereto, or any liabilities (whether direct or contingent,
liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents
remain outstanding, and until payment in full of all obligations of Borrower
subject hereto, Borrower shall, unless Bank otherwise consents in writing:

1. PUNCTUAL PAYMENT. Punctually pay all principal, interest, fees or
other liabilities due under any of the Loan Documents at the times and place and
in the manner specified therein, and immediately upon demand by Bank, the amount
by which the outstanding principal balance of any of the Credits at any time
exceeds any limitation on borrowings applicable thereto.

2. ACCOUNTING RECORDS. Maintain adequate books and records in accordance
with generally accepted accounting principles consistently applied, and permit
any representative of Bank, at any reasonable time, to inspect, audit and
examine such books and records, to make copies of the same and inspect the
properties of Borrower.

3. FINANCIAL STATEMENTS. Provide to Bank all of the following, in form
and detail satisfactory to Bank:

<PAGE>

Active Voice Corporation
November 13, 1997
Page 7

(a) not later than 120 days after and as of the end of each fiscal year,
an audited financial statement of Borrower, prepared by an independent certified
public accountant acceptable to Bank, to include balance sheet, income
statement, statement of cash flow and all footnotes;

(b) not later than 60 days after and as of the end of each quarter, a
quarterly Form 10Q;

4. COMPLIANCE. Preserve and maintain all licenses, permits, governmental
approvals, rights, privileges and franchises necessary for the conduct of its
business; and comply with the provisions of all documents pursuant to which
Borrower is organized and/or which govern Borrower's continued existence and
with the requirements of all material laws, rules, regulations and orders of a
governmental agency applicable to Borrower and/or its business.

5. INSURANCE. Maintain and keep in force insurance of the types and in
amounts customarily carried in lines of business similar to that of Borrower,
including but not limited to fire, extended coverage, public liability, flood,
property damage and workers' compensation, with all such insurance carried with
companies and in amounts satisfactory to Bank, and deliver to Bank from time to
time at Bank's request schedules setting forth all insurance then in effect.

6. FACILITIES. Keep all properties useful or necessary to Borrower's
business in good repair and condition, and from time to time make necessary
repairs, renewals and replacements thereto so that such properties shall be
fully and efficiently preserved and maintained.

7. TAXES AND OTHER LIABILITIES. Pay and discharge when due any and all
indebtedness, obligations, assessments and taxes, both real or personal,
including without limitation federal and state income taxes and state and local
property taxes and assessments, except (a) such as Borrower may in good faith
contest or as to which a bona fide dispute may arise, and (b) for which Borrower
has made provision, to Bank's satisfaction, for eventual payment thereof in the
event Borrower is obligated to make such payment.

8. LITIGATION. Promptly give notice in writing to Bank of any material
litigation pending against Borrower.

<PAGE>

Active Voice Corporation
November 13, 1997
Page 8

9. FINANCIAL CONDITION. Maintain Borrower's financial condition as
follows using generally accepted accounting principles consistently applied and
used consistently with prior practices (except to the extent modified by the
definitions herein), with compliance determined commencing with Borrower's
financial statements for the period ending October 31, 1997:

(a) Tangible Net Worth not at any time less than $30,000,000.00, with
"Tangible Net Worth" defined as the aggregate of total stockholders' equity plus
subordinated debt less any intangible assets.

(b) Total Liabilities divided by Tangible Net Worth not at any time
greater than .75 to 1.0, with "Total Liabilities" defined as the aggregate of
current liabilities and non-current liabilities less subordinated debt, and with
"Tangible Net Worth" as defined above.

(c) Quick Ratio not at any time less than 2.0 to 1.0, with "Quick Ratio"
defined as the aggregate of unrestricted cash, unrestricted marketable
securities and receivables convertible into cash divided by total current
liabilities.

(d) EBITDA not less than $4,000,000.00 on a four quarter rolling basis,
beginning with quarter ended December 31, 1997, March 31, 1998, June 30, 1998 or
September 30, 1998, with "EBITDA" defined as net profit before tax plus interest
expense (net of capitalized interest expense including adding back non-recurring
charges in any one quarter, due directly to an acquisition), depreciation
expense and amortization expense.

10. OTHER INDEBTEDNESS. Not create, incur, assume or permit to exist any
indebtedness or liabilities resulting from borrowings, loans or advances,
whether secured or unsecured, matured or unmatured, liquidated or unliquidated,
joint or several, except (a) the liabilities of Borrower to Bank, and (b) any
other liabilities of Borrower existing as of, and disclosed to Bank prior to,
the date hereof.

11. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Not merge into any other
entity; nor make any substantial change in the nature of Borrower's business as
conducted as of the date hereof; nor sell, lease, transfer or otherwise dispose
of all or a substantial or material portion of Borrower's assets except in the
ordinary course of its business.

12. GUARANTIES. Not guarantee or become liable in any way as surety,
endorser (other than as endorser of negotiable instruments for deposit or
collection in the ordinary course of business), accommodation endorser or
otherwise for, nor pledge or

<PAGE>

Active Voice Corporation
November 13, 1997
Page 9

hypothecate any assets of Borrower as security for, any liabilities or
obligations of any other person or entity, except any of the foregoing in favor
of Bank.

13. DIVIDENDS, DISTRIBUTIONS. Not declare or pay any dividend or
distribution either in cash, stock or any other property on Borrower's stock now
or hereafter outstanding.

14. PLEDGE OF ASSETS. Not mortgage, pledge, grant or permit to exist a
security interest in, or lien upon, all or any portion of Borrower's assets now
owned or hereafter acquired, except any of the foregoing in favor of Bank or
which are existing as of, and disclosed to Bank in writing prior to, the date
hereof.

15. LIQUIDITY. At all times maintain liquid assets (defined as the
aggregate of cash and equivalents including marketable securities, municipal
bonds, commercial paper, Bankers Acceptance, Noveen 7 day floaters, treasury
bills, notes and bonds, government sponsored enterprises and Money Market Mutual
Funds acceptable to Bank) in excess of $6,000,000.00.

VI. DEFAULT, REMEDIES:

1. DEFAULT, REMEDIES. Upon the violation of any term or condition of any
of the Loan Documents, or upon the occurrence of any default or defined event of
default under any of the Loan Documents: (a) all indebtedness of Borrower under
each of the Loan Documents, any term thereof to the contrary notwithstanding,
shall at Bank's option and without notice become immediately due and payable
without presentment, demand, protest or notice of dishonor, all of which are
expressly waived by Borrower; (b) the obligation, if any, of Bank to extend any
further credit under any of the Loan Documents shall immediately cease and
terminate; and (c) Bank shall have all rights, powers and remedies available
under each of the Loan Documents, or accorded by law, including without
limitation the right to resort to any or all security for any of the Credits and
to exercise any or all of the rights of a beneficiary or secured party pursuant
to applicable law. All rights, powers and remedies of Bank may be exercised at
any time by Bank and from time to time after the occurrence of any such breach
or default, are cumulative and not exclusive, and shall be in addition to any
other rights, powers or remedies provided by law or equity.

2. NO WAIVER. No delay, failure or discontinuance of Bank in exercising
any right, power or remedy under any of the Loan Documents shall affect or
operate as a waiver of such right, power or remedy; nor shall any single or
partial exercise of any
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Active Voice Corporation
November 13, 1997
Page 10

such right, power or remedy preclude, waive or otherwise affect any other or
further exercise thereof or the exercise of any other right, power or remedy.
Any waiver, permit, consent or approval of any kind by Bank of any breach of or
default under any of the Loan Documents must be in writing and shall be
effective only to the extent set forth in such writing.

VII. MISCELLANEOUS:

1. NOTICES. All notices, requests and demands which any party is
required or may desire to give to any other party under any provision of this
letter must be in writing delivered to each party at its address first set forth
above, or to such other address as any party may designate by written notice to
all other parties. Each such notice, request and demand shall be deemed given
or made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the earlier of the date of receipt or three (3) days after deposit in
the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy,
upon receipt.

2. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank
immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of Bank's in-house counsel), expended or
incurred by Bank in connection with (a) the negotiation and preparation of this
letter and the other Loan Documents to a maximum of $1,500.00, Bank's continued
administration hereof and thereof, and the preparation of amendments and waivers
hereto and thereto, (b) the enforcement of Bank's rights and/or the collection
of any amounts which become due to Bank under any of the Loan Documents, and
(c) the prosecution or defense of any action in any way related to any of the
Loan Documents, including without limitation, any action for declaratory relief,
whether incurred at the trial or appellate level, in an arbitration proceeding
or otherwise, and including any of the foregoing incurred in connection with any
bankruptcy proceeding (including without limitation, any adversary proceeding,
contested matter or motion brought by Bank or any other person) relating to any
Borrower or any other person or entity.

3. SUCCESSORS, ASSIGNMENT. This letter shall be binding upon and inure
to the benefit of the heirs, executors, administrators, legal representatives,
successors and assigns of the parties; provided however, that Borrower may not
assign or transfer its interest hereunder without Bank's prior written consent.
Bank reserves the right to sell, assign, transfer, negotiate or grant
participations in all or any part of, or any

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Active Voice Corporation
November 13, 1997
Page 11

interest in, Bank's rights and benefits under each of the Loan Documents. In
connection therewith Bank may disclose all documents and information which Bank
now has or hereafter may acquire relating to any of the Credits, Borrower or its
business, or any collateral required hereunder.

4. ENTIRE AGREEMENT; AMENDMENT. This letter and the other Loan Documents
constitute the entire agreement between Borrower and Bank with respect to the
Credits and supersede all prior negotiations, communications, discussions and
correspondence concerning the subject matter hereof. This letter may be amended
or modified only in writing signed by each party hereto.

5. NO THIRD PARTY BENEFICIARIES. This letter is made and entered into
for the sole protection and benefit of the parties hereto and their respective
permitted successors and assigns, and no other person or entity shall be a third
party beneficiary of, or have any direct or indirect cause of action or claim in
connection with, this letter or any other of the Loan Documents to which it is
not a party.

6. SEVERABILITY OF PROVISIONS. If any provision of this letter shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or any remaining provisions of this
letter.

7. GOVERNING LAW. This letter shall be governed by and construed in
accordance with the laws of the State of Washington.

8. ARBITRATION.

(a) ARBITRATION. Upon the demand of any party, any Dispute shall be
resolved by binding arbitration (except as set forth in (e) below) in accordance
with the terms of this letter. A "Dispute" shall mean any action, dispute,
claim or controversy of any kind, whether in contract or tort, statutory or
common law, legal or equitable, now existing or hereafter arising under or in
connection with, or in any way pertaining to, any of the Loan Documents, or any
past, present or future extensions of credit and other activities, transactions
or obligations of any kind related directly or indirectly to any of the Loan
Documents, including without limitation, any of the foregoing arising in
connection with the exercise of any self-help, ancillary or other remedies
pursuant to any of the Loan Documents. Any party may by summary proceedings
bring an action in court to compel arbitration of a Dispute. Any party who
fails or refuses to submit to arbitration following a lawful demand by any other
party shall bear all costs and expenses incurred by such other party in
compelling arbitration of any Dispute.

<PAGE>

Active Voice Corporation
November 13, 1997
Page 12

(b) GOVERNING RULES. Arbitration proceedings shall be administered by the
American Arbitration Association ("AAA") or such other administrator as the
parties shall mutually agree upon in accordance with the AAA Commercial
Arbitration Rules. All Disputes submitted to arbitration shall be resolved in
accordance with the Federal Arbitration Act (Title 9 of the United States Code),
notwithstanding any conflicting choice of law provision in any of the Loan
Documents. The arbitration shall be conducted at a location in Seattle,
Washington selected by the AAA or other administrator. If there is any
inconsistency between the terms hereof and any such rules, the terms and
procedures set forth herein shall control. All statutes of limitation
applicable to any Dispute shall apply to any arbitration proceeding. All
discovery activities shall be expressly limited to matters directly relevant to
the Dispute being arbitrated. Judgment upon any award rendered in an
arbitration may be entered in any court having jurisdiction; provided however,
that nothing contained herein shall be deemed to be a waiver by any party that
is a bank of the protections afforded to it under 12 U.S.C. Section 91 or any
similar applicable state law.

(c) NO WAIVER; PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. No
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary remedies,
including without limitation injunctive relief, sequestration, attachment,
garnishment or the appointment of a receiver, from a court of competent
jurisdiction before, after or during the pendency of any arbitration or other
proceeding. The exercise of any such remedy shall not waive the right of any
party to compel arbitration hereunder.

(d) ARBITRATOR QUALIFICATIONS AND POWERS; AWARDS. Arbitrators must be
active members of the Washington State Bar or retired judges of the state or
federal judiciary of Washington, with expertise in the substantive law
applicable to the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motions filed prior to the
final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of Washington, (ii) may grant
any remedy or relief that a court of the state of Washington could order or
grant within the scope hereof and such ancillary relief as is necessary to make
effective any award, and (iii) shall have the power to award recovery of all
costs and fees, to impose sanctions and to take such other actions as they deem
necessary to the same extent a judge could pursuant to the Federal Rules of
Civil Procedure, the Washington Rules of Civil Procedure or other applicable
law. Any Dispute in which the amount in controversy is $5,000,000 or less

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Active Voice Corporation
November 13, 1997
Page 13

shall be decided by a single arbitrator who shall not render an award of greater
than $5,000,000 (including damages, costs, fees and expenses). By submission to
a single arbitrator, each party expressly waives any right or claim to recover
more than $5,000,000. Any Dispute in which the amount in controversy exceeds
$5,000,000 shall be decided by majority vote of a panel of three arbitrators;
provided however, that all three arbitrators must actively participate in all
hearings and deliberations.

(e) JUDICIAL REVIEW. Notwithstanding anything herein to the contrary, in
any arbitration in which the amount in controversy exceeds $25,000,000, the
arbitrators shall be required to make specific, written findings of fact and
conclusions of law. In such arbitrations (i) the arbitrators shall not have the
power to make any award which is not supported by substantial evidence or which
is based on legal error, (ii) an award shall not be binding upon the parties
unless the findings of fact are supported by substantial evidence and the
conclusions of law are not erroneous under the substantive law of the state of
Washington, and (iii) the parties shall have in addition to the grounds referred
to in the Federal Arbitration Act for vacating, modifying or correcting an award
the right to judicial review of (A) whether the findings of fact rendered by the
arbitrators are supported by substantial evidence, and (B) whether the
conclusions of law are erroneous under the substantive law of the state of
Washington. Judgment confirming an award in such a proceeding may be entered
only if a court determines the award is supported by substantial evidence and
not based on legal error under the substantive law of the state of Washington.

(f) MISCELLANEOUS. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business, by applicable law or
regulation, or to the extent necessary to exercise any judicial review rights
set forth herein. If more than one agreement for arbitration by or between the
parties potentially applies to a Dispute, the arbitration provision most
directly related to the Loan Documents or the subject matter of the Dispute
shall control. This arbitration provision shall survive termination, amendment
or expiration of any of the Loan Documents or any relationship between the
parties.

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Active Voice Corporation
November 13, 1997
Page 14

ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR
ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.

Your acknowledgment of this letter shall constitute acceptance of the
foregoing terms and conditions. Bank's commitment to extend any credit to
Borrower pursuant to the terms of this letter shall terminate on November 30,
1997, unless this letter is acknowledged by Borrower and returned to Bank on or
before that date.

Sincerely,

WELLS FARGO BANK,
NATIONAL ASSOCIATION

By: /s/ Gregory L. Milner, V.P.
--------------------------------------
Greg Milner
Vice President

Acknowledged and accepted as of December 15, 1997:
------------------

ACTIVE VOICE CORPORATION

By: /s/ Jose S. David
---------------------------

Title: CFO
------------------------

<PAGE>

November 13, 1997

Active Voice Corporation
Mr. Jose S. David, CFO
2901 3rd Avenue, #500
Seattle, WA 98121

Dear Mr. David:

It is anticipated that from time to time your company (the "Customer") and
Wells Fargo Bank, National Association ("Bank"), at the request of Customer, may
enter into foreign exchange contracts for either spot or future delivery of
foreign currencies and/or for options to purchase or sell (I.E., trade) foreign
currencies. This letter sets forth the terms and conditions governing such
transactions as follows:

1. CONFIRMATIONS. Bank will send Customer a confirmation of each
transaction duly requested by Customer and agreed to by Bank. Upon Customer's
receipt of each such confirmation, Customer shall promptly sign and return a
copy of such confirmation to Bank; provided however, that Customer's failure
either to sign or to return any confirmation shall not release Customer from any
of its obligations or liabilities hereunder or with respect to the foreign
exchange transaction described therein.

2. PERFORMANCE. Should Customer fail fully to perform its obligations
under any foreign exchange contract entered into by Bank with or for the benefit
of Customer as set forth herein on the due date thereof, or to perform any of
Customer's obligations hereunder, or should Customer breach any representation
or warranty made by Customer to Bank herein, without limiting Bank's rights and
remedies under applicable law: (a) Bank may, in its sole discretion, cancel any
foreign exchange contracts then existing for the benefit of Customer; (b)
Customer shall indemnify Bank for, and defend and hold Bank harmless from and
against, any and all damages, costs, expenses and losses that may arise from any
such failure or breach, and/or from the exercise of Bank's rights as aforesaid,
including without limitation, all losses resulting from the liquidation of
Bank's positions in the relevant currencies, and all reasonable legal fees (to
include outside counsel fees and all allocated costs of Bank's in-house counsel)
incurred by Bank in pursuance of its rights hereunder; and (c) Bank may set off
and apply against Customer's liability

<PAGE>

Active Voice Corporation
November 13, 1997
Page 2

to Bank any deposits or any other liability to Customer, irrespective of the due
date or nature thereof, notwithstanding that such set off may give rise to
penalties for early withdrawal of funds.

3. CANCELLATION. Bank shall evaluate any request for a trade hereunder
individually, and may, in its sole discretion, refuse to enter into or perform
any proposed foreign exchange contract, without prejudice to entering into or
performing any other foreign exchange contract with or for the benefit of
Customer. In the event that (a) Customer shall request that Bank cancel or
extend the term of a foreign exchange contract, and (b) Bank, in its sole
discretion, shall agree to such request, Customer shall forthwith reimburse Bank
for any and all damages, costs, expenses and losses that may arise as a result
thereof, including without limitation, all losses resulting from the liquidation
of Bank's position in the relevant currency.

4. WARRANTIES. Each request by Customer that Bank enter into a foreign
exchange contract with or for the benefit of Customer shall be deemed a
representation and warranty by Customer that such transaction is in conformity
with all applicable laws and regulations. Bank is not an investment advisor,
and Bank expressly disclaims all investment advice with respect to any
transaction ordered by Customer pursuant hereto. Customer agrees to take the
sole risk of any and all market fluctuations in any currency traded pursuant to
the terms hereof.

5. LIABILITY. Bank shall not be liable for any losses or damages in
consequence of any present or future laws, regulations or other directives of
any government or of any other event or circumstances beyond Bank's control, or
due to any other actions performed by Bank pursuant to the terms hereof, all
such risks being expressly assumed by Customer, except for the gross negligence
or willful misconduct of Bank. In no event shall Bank be responsible or liable
for any consequential damages resulting from its actions pursuant to this
agreement. The provisions of this paragraph 5 shall survive any termination
hereof.

6. TERM. The agreements set forth in this letter may be terminated in
writing by either party, at which point the obligations of the parties hereto
shall end, except for closing out existing foreign exchange contracts and except
as otherwise set forth herein.

7. SUCCESSORS AND ASSIGNS. This letter shall be binding upon and inure
to the benefit of the respective heirs, legal representatives, successors and
assigns of the parties; provided

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Active Voice Corporation
November 13, 1997
Page 3

however, that Customer may not assign or otherwise transfer any of its rights or
obligations hereunder or under any foreign exchange contract subject hereto
without Bank's prior written consent.

8. GOVERNING LAW. This letter and all foreign exchange contracts subject
hereto shall be governed by and construed in accordance with the laws of the
State of Washington.

ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR
ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.

Please indicate your acceptance of the terms and conditions contained
herein by signing and dating the enclosed copy of this letter and returning it
to Bank at the above address.

Very truly yours,

WELLS FARGO BANK,
NATIONAL ASSOCIATION

By: /s/ Greg L. Milner, V.P.
------------------------------
Greg Milner
Vice President

Agreed and accepted as of December 15, 1997:
-----------------------

ACTIVE VOICE CORPORATION

By: Jose S. David
------------------

Title: CFO
----------------

<PAGE>

WELLS FARGO BANK REVOLVING LINE OF CREDIT NOTE
- --------------------------------------------------------------------------------

$10,000,000.00 SEATTLE, WASHINGTON
NOVEMBER 13, 1997

FOR VALUE RECEIVED, the undersigned ACTIVE VOICE CORPORATION ("Borrower")
promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank")
at its office at PUGET SOUND RCBO, 999 THIRD AVENUE 11TH FL, SEATTLE, WA 98104,
or at such other place as the holder hereof may designate, in lawful money of
the United States of America and in immediately available funds, the principal
sum of $10,000,000.00, or so much thereof as may be advanced and be outstanding,
with interest thereon, to be computed on each advance from the date of its
disbursement as set forth herein.

DEFINITIONS:

As used herein, the following terms shall have the meanings set forth after
each, and any other term defined in this Note shall have the meaning set forth
at the place defined:

(a) "Business Day" means any day except a Saturday, Sunday or any other
day on which commercial banks in Washington are authorized or required by law to
close.

(b) "Fixed Rate Term" means a period commencing on a Business Day and
continuing for 1, 2, 3 OR 6 MONTHS, as designated by Borrower, during which all
or a portion of the outstanding principal balance of this Note bears interest
determined in relation to LIBOR; provided however, that no Fixed Rate Term may
be selected for a principal amount less than $500,000.00; and provided further,
that no Fixed Rate Term shall extend beyond the scheduled maturity date hereof.
If any Fixed Rate Term would end on a day which is not a Business Day, then such
Fixed Rate Term shall be extended to the next succeeding Business Day.

(c) "LIBOR" means the rate per annum (rounded upward, if necessary, to the
nearest whole 1/8 of 1%) determined by dividing Base LIBOR by a percentage equal
to 100% less any LIBOR Reserve Percentage.

(i) "Base LIBOR" means the rate per annum for United States dollar deposits
quoted by Bank as the Inter-Bank Market Offered Rate, with the understanding
that such rate is quoted by Bank for the purpose of calculating effective rates
of interest for loans making reference thereto, on the first day of a Fixed Rate
Term for delivery of funds on said date for a period of time approximately equal
to the number of days in such Fixed Rate Term and in an amount approximately
equal to the principal amount to which such Fixed Rate Term applies. Borrower
understands and agrees that Bank may base its quotation of the Inter-Bank Market
Offered Rate upon such offers or other market indicators of the Inter-Bank
Market as Bank in its discretion deems appropriate including, but not limited
to, the rate offered for U.S. dollar deposits on the London Inter-Bank Market.

(ii) "LIBOR Reserve Percentage" means the reserve percentage prescribed by
the Board of Governors of the Federal Reserve System (or any successor) for
"Eurocurrency Liabilities" (as defined in Regulation D of the Federal Reserve
Board, as amended), adjusted by Bank for expected changes in such reserve
percentage during the applicable Fixed Rate Term.

(d) "Prime Rate" means at any time the rate of interest most recently
announced within Bank at its principal office as its Prime Rate, with the
understanding that the Prime Rate is one of Bank's base rates and serves as the
basis upon which effective rates of interest are calculated for those loans
making reference thereto, and is evidenced by the recording thereof after its
announcement in such internal publication or publications as Bank may designate.

INTEREST:

(a) INTEREST. The outstanding principal balance of this Note shall bear
interest (computed on the basis of a 360-day year, actual days elapsed) either
(i) at a fluctuating rate per annum .25000% below the Prime Rate in effect from
time to time, or (ii) at a fixed rate per annum determined by Bank to be
1.50000% above LIBOR in effect on the first day of the applicable Fixed Rate
Term. When interest is determined in relation to the Prime Rate, each change in
the rate of interest hereunder shall become effective on the date each Prime
Rate change is announced within Bank. With respect to each LIBOR selection
option selected hereunder, Bank is hereby authorized to note the date, principal
amount, interest rate and Fixed Rate Term applicable thereto and any payments
made thereon on Bank's books and records (either manually or by electronic entry
and/or on any schedule attached to this Note, which notations shall be prima
facie evidence of the accuracy of the information noted.

(b) SELECTION OF INTEREST RATE OPTIONS. At any time any portion of this
Note bears interest determined in relation to LIBOR, it may be continued by
Borrower at the end of the Fixed Rate Term applicable thereto so that all or a
portion thereof bears interest determined in relation to the Prime Rate or to
LIBOR for a new Fixed Rate Term designated by Borrower. At any time any portion
of this Note bears interest determined in relation to the Prime Rate, Borrower
may convert all or a portion thereof so that it bears interest determined in
relation to LIBOR for a Fixed Rate Term designated by Borrower. At such time as
Borrower requests an advance hereunder or wishes to select a LIBOR option for
all or a portion of the outstanding principal balance hereof, and at the end of
each Fixed Rate Term, Borrower shall give Bank notice specifying: (i) the
interest rate option selected by Borrower; (ii) the

PAGE 1

<PAGE>

principal amount subject thereto; and (iii) for each LIBOR selection, the length
of the applicable Fixed Rate Term. Any such notice may be given by telephone so
long as, with respect to each LIBOR selection, (A) Bank receives written
confirmation from Borrower not later than 3 Business Days after such telephone
notice is given, and (B) such notice is given to Bank prior to 10:00 a.m.,
California time, on the first day of the Fixed Rate Term. For each LIBOR option
requested hereunder, Bank will quote the applicable fixed rate to Borrower at
approximately 10:00 a.m., California time, on the first day of the Fixed Rate
Term. If Borrower does not immediately accept the rate quoted by Bank, any
subsequent acceptance by Borrower shall be subject to a redetermination by Bank
of the applicable fixed rate; provided however, that if Borrower fails to accept
any such rate by 11:00 a.m., California time, on the Business Day such quotation
is given, then the quoted rate shall expire and Bank shall have no obligation to
permit a LIBOR option to be selected on such day. If no specific designation of
interest is made at the time any advance is requested hereunder or at the end of
any Fixed Rate Term, Borrower shall be deemed to have made a Prime Rate interest
selection for such advance or the principal amount to which such Fixed Rate Term
applied.

(i) If Bank at any time shall determine that for any reason adequate and
reasonable means do not exist for ascertaining LIBOR, then Bank shall promptly
give notice thereof to Borrower. If such notice is given and until such notice
has been withdrawn by Bank, then (A) no new LIBOR option may be selected by
Borrower, and (B) any portion of the outstanding principal balance hereof which
bears interest determined in relation to LIBOR, subsequent to the end of the
Fixed Rate Term applicable thereto, shall bear interest determined in relation
to the Prime Rate.

(ii) If any law, treaty, rule, regulation or determination of a court or
governmental authority or any change therein or in the interpretation or
application thereof (each, a "Change in Law") shall make it unlawful for Bank
(A) to make LIBOR options available hereunder, or (B) to maintain interest rates
based on LIBOR, then in the former event, any obligation of Bank to make
available such unlawful LIBOR options shall immediately be cancelled, and in the
latter event, any such unlawful LlBOR-based interest rates then outstanding
shall be converted, at Bank's option, so that interest on the portion of the
outstanding principal balance subject thereto is determined in relation to the
Prime Rate; provided however, that if any such Change in Law shall permit any
LlBOR-based interest rates to remain in effect until the expiration of the Fixed
Rate Term applicable thereto, then such permitted LlBOR-based interest rates
shall continue in effect until the expiration of such Fixed Rate Term. Upon the
occurrence of any of the foregoing events, Borrower shall pay to Bank
immediately upon demand such amounts as may be necessary to compensate Bank for
any fines, fees, charges, penalties or other costs incurred or payable by Bank
as a result thereof and which are attributable to any LIBOR options made
available to Borrower hereunder, and any reasonable allocation made by Bank
among its operations shall be conclusive and binding upon Borrower.

(iii) If any Change in Law or compliance by Bank with any request or
directive (whether or not having the force of law) from any central bank or
other governmental authority shall:

(A) subject Bank to any tax, duty or other charge with respect to any
LIBOR options, or change the basis of taxation of payments to Bank of
principal, interest, fees or any other amount payable hereunder
(except for changes in the rate of tax on the overall net income of
Bank); or

(B) impose, modify or hold applicable any reserve, special deposit,
compulsory loan or similar requirement against assets held by,
deposits or other liabilities in or for the account of, advances or
loans by, or any other acquisition of funds by any office of Bank; or

and the result of any of the foregoing is to increase the cost to Bank of
making, renewing or maintaining any LIBOR options hereunder and/or to reduce any
amount receivable by Bank in connection therewith, then in any such case,
Borrower shall pay to Bank immediately upon demand such amounts as may be
necessary to compensate Bank for any additional costs incurred by Bank and/or
reductions in amounts received by Bank which are attributable to such LIBOR
options. In determining which costs incurred by Bank and/or reductions in
amounts received by Bank are attributable to any LIBOR options made available to
Borrower hereunder, any reasonable allocation made by Bank among its operations
shall be conclusive and binding upon Borrower.

(d) PAYMENT OF INTEREST. Interest accrued on this Note shall be payable on
the LAST day of each MONTH commencing NOVEMBER 30, 1997.

(e) DEFAULT INTEREST. From and after the maturity date of this Note, or
such earlier date as all principal owing hereunder becomes due and payable by
acceleration or otherwise, the outstanding principal balance of this Note shall
bear interest until paid in full at an increased rate per annum (computed on the
basis of a 360-day year, actual days elapsed) equal to 4% above the rate of
interest from time to time applicable to this Note.

BORROWING AND REPAYMENT:

(a) BORROWINQ AND REPAYMENT. Borrower may from time to time during the
term of this Note borrow, partially or wholly repay its outstanding borrowings,
and reborrow, subject to all of the limitations, terms and conditions of this
Note and of any document executed in connection with or governing this Note;
provided however, that the total outstanding borrowings under this Note shall
not at any time exceed the principal amount stated above. The unpaid principal
balance of this obligation at any time shall be the total amounts advanced
hereunder by the holder hereof less the amount of principal payments made hereon
by or for any Borrower, which balance may be endorsed hereon

PAGE 2

<PAGE>

from time to time by the holder. The outstanding principal balance of this Note
shall be due and payable in full on NOVEMBER 30, 1998.

(b) ADVANCES. Advances hereunder, to the total amount of the principal sum
available hereunder, may be made by the holder at the oral or written request of
(i) _____________________________________________________________________,
___________________________________________any one acting alone, who are
authorized to request advances and direct the disposition of any advances until
written notice of the revocation of such authority is received by the holder at
the office designated above, or (ii) any person, with respect to advances
deposited to the credit of any account of any Borrower with the holder, which
advances, when so deposited, shall be conclusively presumed to have been made to
or for the benefit of each Borrower regardless of the fact that persons other
than those authorized to request advances may have authority to draw against
such account. The holder shall have no obligation to determine whether any
person requesting an advance is or has been authorized by any Borrower.

(c) APPLICATION OF PAYMENTS. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof. All payments credited to principal shall be applied
first, to the outstanding principal balance of this Note which bears interest
determined in relation to the Prime Rate, if any, and second, to the outstanding
principal balance of this Note which bears interest determined in relation to
LIBOR, with such payments applied to the oldest Fixed Rate Term first.

PREPAYMENT:

(a) PRIME RATE. Borrower may prepay principal on any portion of this Note
which bears interest determined in relation to the Prime Rate at any time, in
any amount and without penalty.

(b) LIBOR. Borrower may prepay principal on any portion of this Note which
bears interest determined in relation to LIBOR at any time and in the minimum
amount of $500,000.00; provided however, that if the outstanding principal
balance of such portion of this Note is less than said amount, the minimum
prepayment amount shall be the entire outstanding principal balance thereof. In
consideration of Bank providing this prepayment option to Borrower, or if any
such portion of this Note shall become due and payable at any time prior to the
last day of the Fixed Rate Term applicable thereto by acceleration or otherwise,
Borrower shall pay to Bank immediately upon demand a fee which is the sum of the
discounted monthly differences for each month from the month of prepayment
through the month in which such Fixed Rate Term matures, calculated as follows
for each such month:

(i) DETERMINE the amount of interest which would have accrued each month on
the amount prepaid at the interest rate applicable to such amount had it
remained outstanding until the last day of the Fixed Rate Terrn applicable
thereto.

(ii) SUBTRACT from the amount determined in (i) above the amount of interest
which would have accrued for the same month on the amount prepaid for the
remaining term of such Fixed Rate Term at LIBOR in effect on the date of
prepayment for new loans made for such term and in a principal amount equal to
the amount prepaid.

(iii) If the result obtained in (ii) for any month is greater than zero,
discount that difference by LIBOR used in (ii) above.

Each Borrower acknowledges that prepayment of such amount may result in Bank
incurring additional costs, expenses and/or liabilities, and that it is
difficult to ascertain the full extent of such costs, expenses and/or
liabilities. Each Borrower, therefore, agrees to pay the above-described
prepayment fee and agrees that said amount represents a reasonable estimate of
the prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to
pay any prepayment fee when due, the amount of such prepayment fee shall
thereafter bear interest until paid at a rate per annum 2.000% above the Prime
Rate in effect from time to time (computed on the basis of a 360-day year,
actual days elapsed). Each change in the rate of interest on any such past due
prepayment fee shall become effective on the date each Prime Rate change is
announced within Bank.

EVENTS OF DEFAULT:

The occurrence of any of the following shall constitute an "Event of Default"
under this Note:

(a) The failure to pay any principal, interest, fees or other charges when
due hereunder or under an contract, instrument or document executed in
connection with this Note.

(b) The filing of a petition by or against any Borrower, any guarantor of this
Note or any general partner or joint venturer in any Borrower which is a
partnership or a joint venture (with each such guarantor, general partner and/or
joint venturer referred to herein as a "Third Party Obligor") under any
provisions of the Bankruptcy Reform Act, Title 11 of the United States Code, as
amended or recodified from time to time, or under any similar or other law
relating to bankruptcy, insolvency, reorganization or other relief for debtors;
the appointment of a receiver, trustee, custodian or liquidator of or for any
part of the assets or property of any Borrower or Third Party Obligor; any
Borrower or Third Party Obligor becomes insolvent, makes a general assignment
for the benefit of creditors or is generally not paying its debts as they become
due; or any attachment or like levy on any property of any Borrower or Third
Party Obligor.

(c) The death or incapacity of any individual Borrower or Third Party
Obligor, or the dissolution or liquidation of any Borrower or Third Party
Obligor which is a corporation, partnership, joint venture or other type of
entity.

PAGE 3

<PAGE>

(d) Any default in the payment or performance of any obligation, or any
defined event of default, under any provisions of any contract, instrument or
document pursuant to which any Borrower or Third Party Obligor has incurred any
obligation for borrowed money, any purchase obligation, or any other liability
of any kind to any person or entity, including the holder.

(e) Any financial statement provided by Borrower or Third Party Obligor to
Bank proves to incorrect, false or misleading in any material respect.

(f) Any sale or transfer of all or a substantial or material part of the
assets of any Borrower or Third Party Obligor other than in the ordinary course
of its business.

(g) Any violation or breach of any provision of, or any defined event of
default under, any addendum to this Note or any loan agreement, guaranty,
security agreement, deed of trust, mortgage or other document executed in
connection with or securing this Note.

MISCELLANEOUS:

(a) Remedies. Upon the occurrence of any Event of Default, the holder of
this Note, at the holder's option, may declare all sums of principal and
interest outstanding hereunder to be immediately due and payable without
presentment, demand, notice of nonperformance, notice of protest, protest or
notice of dishonor, all of which are expressly waived by each Borrower, and the
obligation, if any, of the holder to extend any further credit hereunder shall
immediately cease and terminate. Each Borrower shall pay to the holder
immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of the holder's in-house counsel), expended
or incurred by the holder in connection with the enforcement of the holder's
rights and/or the collection of any amounts which become due to the holder under
this Note, and the prosecution or defense of any action in any way related to
this Note, including without limitation, any action for declaratory relief,
whether incurred at the trial or appellate level, in an arbitration proceeding
or otherwise, and including any of the foregoing incurred in connection with any
bankruptcy proceeding (including without limitation, any adversary proceeding,
contested matter or motion brought by Bank or any other person) relating to any
Borrower or any other person or entity.

(b) OBIGATIONS JOINT AND SEVERAL. Should more than one person or entity
sign this Note as a Borrower, the obligations of each such Borrower shall be
joint and several.

ORAL AGREEMENT OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR
ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.

IN WITNESS WHEREOF, the undersigned has executed this Note as of the date
first written above.

ACTIVE VOICE CORPORATION

By: Jose S. David
--------------------------

Title: CFO
------------------------

PAGE 4

<PAGE>

WELLS FARGO BANK CORPORATE RESOLUTION: BORROWING
- --------------------------------------------------------------------------------

TO: WELLS FARGO BANK, NATIONAL ASSOCIATION

RESOLVED: That this corporation, ACTIVE VOICE CORPORATION, proposes to obtain
credit from time to time, or has obtained credit, from Wells Fargo Bank,
National Association ("Bank").

BE IT FURTHER RESOLVED, that any ONE of the following officers:

CHIEF EXECUTIVE OFFICER/CHAIRMAN OF THE BOARD, CHIEF FINANCIAL OFFICER, OR
PRESIDENT/CHIEF OPERATING OFFICER

together with any ONE of the following officers:

NONE

of this corporation be and they are hereby authorized and empowered for and on
behalf of and in the name of this corporation and as its corporate act and deed:

(a) To borrow money from Bank and to assume any liabilities of any other
person or entity to Bank, in such form and on such terms and conditions as shall
be agreed upon by those authorized above and Bank, and to sign and deliver to
Bank such promissory notes and other evidences of indebtedness for money
borrowed or advanced and/or for indebtedness assumed as Bank shall require; such
promissory notes or other evidences of indebtedness may provide that advances be
requested by telephone communication and by any officer, employee or agent of
this corporation so long as the advances are deposited into any deposit account
of this corporation with Bank; this corporation shall be bound to Bank by, and
Bank may rely upon, any communication or act, including telephone
communications, purporting to be done by any officer, employee or agent of this
corporation provided that Bank believes, in good faith, that the same is done by
such person.

(b) To contract for the issuance by Bank of letters of credit, to discount
with Bank notes, acceptances and evidences of indebtedness payable to or due
this corporation, to endorse the same and execute such contracts and instruments
for repayment thereof to Bank as Bank shall require, and to enter into foreign
exchange transactions with or through Bank.

(item c is not part of this Agreement - inked out on original)

(d) To perform all acts and to execute and deliver all documents described
above and all other contracts and instruments which Bank deems necessary or
convenient to accomplish the purposes of this resolution and/or to perfect or
continue the rights, remedies and security interests to be given to Bank
pursuant hereto, including without limitation, any modifications, renewals
and/or extensions of any of this corporation's obligations to Bank, however
evidenced; provided that the aggregate principal amount of all sums borrowed and
credits established pursuant to this resolution shall not at any time exceed the
sum of $10,000,000.00 outstanding and unpaid.

Loans made pursuant to a special resolution and loans made by offices of Bank
other than the office to which this resolution is delivered shall be in addition
to foregoing limitation.

BE IT FURTHER RESOLVED, that the authority hereby conferred is in addition to
that conferred by any other resolution heretofore or hereafter delivered by this
corporation to Bank and shall continue in full force and effect until Bank shall
have received notice in writing, certified by the Secretary of this corporation,
of the revocation hereof by a resolution duly adopted by the Board of Directors
of this corporation. Any such revocation shall be

PAGE 1

<PAGE>

effective only as to credit which is extended or committed by Bank, or actions
which are taken by this corporation pursuant to the resolutions contained
herein, subsequent to Bank's receipt of such notice. The authority hereby
conferred shall be deemed retroactive, and any and all acts authorized herein
which were performed prior to the passage of this resolution are hereby approved
and ratified.

CERTIFICATION

I, JOSE DAVID , Secretary of ACTIVE VOICE CORPORATION, a corporation created
and existing under the laws of the state of WASHINGTON, do hereby certify and
declare that the foregoing is a full, true and correct copy of the resolutions
duly passed and adopted by the Board of Directors of said corporation, by
written consent of all Directors of said corporation or at a meeting of said
Board duly and regularly called, noticed and held on ________________________,
at which meeting a quorum of the Board of Directors was present and voted in
favor of said resolutions; that said resolutions are now in full force and
effect; that there is no provision in the Articles of Incorporation or Bylaws of
said corporation, or any shareholder agreement, limiting the power of the Board
of Directors of said corporation to pass the foregoing resolutions and that such
resolutions are in conformity with the provisions of such Articles of
Incorporation and Bylaws; and that no approval by the shareholders of, or of the
outstanding shares of, said corporation is required with respect to the matters
which are the subject of the foregoing resolutions.

IN WITNESS WHEREOF, I have hereunto set my hand and if required by Bank
affixed the corporate seal of said corporation, as of DECEMBER 15, 1997

/s/ Jose S. David
-------------------------------
Jose David, Secretary

(SEAL)

PAGE 2

<PAGE>

EXHIBIT 21.1

ACTIVE VOICE CORPORATION
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>

Name Under Which
Subsidiary is Doing
Name of Subsidiary Jurisdiction Business
------------------ ------------ ----------------------
<S> <C> <C>
Active Voice International Corp. St. Thomas, US. Virgin Island N/A
Active Voice Canada Ltd. Ontario, Canada N/A
Pronexus, Inc. Ontario, Canada N/A
Active Voice B.V. Maarssenbroek, The Netherlands N/A
Active Voice (UK) Limited England N/A
Active Voice Australia Pty Ltd. Victoria, Australia N/A
</TABLE>

<PAGE>

Exhibit 23.1

Consent of Ernst & Young LLP, Independent Auditors

We consent to the incorporation by reference in the Registration Statements on
Form S-8, No. 33-80168 pertaining to the Company's 1984 Incentive Stock Option
Plan, Directors' Stock Option Plan, 1988 Nonqualified Stock Option Plan, and
other Employee Benefit Plans; Forms S-8, No. 33-80168 and No. 333-07545
pertaining to the Company's 1993 Stock Option Plan, as amended; Form S-8, No.
333-07331 pertaining to the Company's 1996 Stock Purchase Plan; Form S-8, No.
333-30451 pertaining to the Company's 401(k) Plan; of our report dated May 18,
1998, with respect to the consolidated financial statements and schedule of
Active Voice Corporation included in this Annual Report (Form 10-K) for the
year ended March 31, 1998 filed with the Securities and Exchange Commission.

ERNST & YOUNG LLP

Seattle, Washington
June 25, 1998

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE YEAR ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,550
<SECURITIES> 3,407
<RECEIVABLES> 12,846
<ALLOWANCES> (1,515)
<INVENTORY> 10,122
<CURRENT-ASSETS> 31,505
<PP&E> 8,120
<DEPRECIATION> (4,581)
<TOTAL-ASSETS> 41,144
<CURRENT-LIABILITIES> 6,680
<BONDS> 0
0
0
<COMMON> 17,262
<OTHER-SE> 17,333
<TOTAL-LIABILITY-AND-EQUITY> 41,144
<SALES> 53,151
<TOTAL-REVENUES> 53,151
<CGS> 22,956
<TOTAL-COSTS> 22,956
<OTHER-EXPENSES> 31,344
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (576)
<INCOME-TAX> 689
<INCOME-CONTINUING> 142
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 142
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03

</TABLE>