AVT CORP, 8-K/A, 1999-06-28

AVT CORP
8-K/A, 1999-06-28
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<PAGE>

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
____________

FORM 8-K/A

CURRENT REPORT

Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

Date of report (Date of earliest event reported): April 14, 1999

AVT CORPORATION
(Exact name of registrant as specified in charter)

Washington 0-25186 91-1190085
(State or other jurisdiction of (Commission File (IRS Employer
incorporation) Number) Identification No.)

11410 N.E. 122nd Way
Kirkland, Washington 98034
(Address of principal executive offices) (Zip Code)

(425) 820-6000
(Registrant's telephone number, including area code)
<PAGE>

This Amendment No. 1 to the Registrant's Current Report on Form 8-K
dated April 14, 1999 (the "Report") is being filed in connection with the
completion of the Registrant's acquisition of MediaTel Corporation, a Delaware
corporation ("MediaTel"), by way of a merger of Goldengate Acquisition Corp., a
Delaware corporation and wholly owned subsidiary of the Registrant, with and
into MediaTel (the "Merger") with MediaTel being the surviving corporation in
the Merger, pursuant to the terms and conditions set forth in the Agreement and
Plan of Merger, dated as of April 13, 1999, and previously filed as Exhibit 10.1
to the Report. The purpose of this Amendment to the Report is (a) to add new
Item 5 to provide for certain supplementary financial information and (b) to
amend Items 7(a) and (b) to indicate that the financial information required by
those Items is not required, because supplementary financial information
relating to the Merger is being provided in Item 5.

Item 5. Other Events

The following supplemental consolidated financial statements of AVT
Corporation (the "Company") reflecting the pooled operations of AVT Corporation
and subsidiaries and MediaTel Corporation, which was acquired by AVT Corporation
on April 14, 1999, are filed as part of this report:

1. Supplemental Consolidated Selected Financial Data.

2. Supplemental Consolidated Management's Discussion and Analysis of
Financial Condition and Results of Operations (for the fiscal
years ended December 31, 1998, 1997 and 1996)

3. Risk Factors

4. Report of Independent Public Accountants (Arthur Andersen LLP).

5. Report of Independent Public Accountants (PricewaterhouseCoopers
LLP).

6. Supplemental Consolidated Balance Sheets as of December 31, 1998
and December 31, 1997.

7. Supplemental Consolidated Statements of Income for the fiscal
years ended December 31, 1998, 1997 and 1996.

8. Supplemental Consolidated Statements of Shareholders' Equity for
the fiscal years ended December 31, 1998, 1997 and 1996.

9. Supplemental Consolidated Statements of Cash Flows for the fiscal
years ended December 31, 1998, 1997 and 1996.

10. Notes to Supplemental Consolidated Financial Statements.

11. Supplemental Consolidated Management's Discussion and Analysis of
Financial Condition and Results of Operations (for the quarterly
periods ended March 31, 1999 and 1998).

12. Supplemental Consolidated Balance Sheets as of March 31, 1999
(unaudited) and December 31, 1998.

13. Supplemental Consolidated Statements of Operations for the three
months ended March 31, 1999 and 1998 (unaudited).

14. Supplemental Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and 1998 (unaudited).

14. Notes to Supplemental Consolidated Financial Statements
(unaudited).

2
<PAGE>

SUPPLEMENTAL CONSOLIDATED SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Supplemental Consolidated Statement of Income Data:
Net sales............................................................ $35,674 $40,950 $58,693 $76,971 $102,977
Cost of sales........................................................ 16,354 18,516 23,749 29,233 37,282
------- ------- ------- ------- --------
Gross profit......................................................... 19,320 22,434 34,944 47,738 65,695
------- ------- ------- ------- --------
Operating expenses:
Research and development.......................................... 2,814 3,054 5,280 7,988 9,474
Selling, general and administrative............................... 10,712 12,178 19,996 26,040 35,035
Non-recurring charges(1).......................................... -- -- 4,140 11,025 287
------- ------- ------- ------- --------
Total operating expenses.......................................... 13,526 15,232 29,416 45,053 44,796
------- ------- ------- ------- --------
Operating income..................................................... 5,794 7,202 5,528 2,685 20,899
Other income, net.................................................... 236 1,038 942 1,104 1,258
------- ------- ------- ------- --------
Income before income tax expense..................................... 6,030 8,240 6,470 3,789 22,157
Income tax expense................................................... 1,570 2,676 3,860 1,470 8,078
------- ------- ------- ------- --------
Net income........................................................... $ 4,460 $ 5,564 $ 2,610 $ 2,319 $ 14,079
======= ======= ======= ======= ========
Diluted earnings per common share(2)................................. $ 0.47 $ 0.48 $ 0.19 $ 0.16 $ 0.94
Net income excluding nonrecurring items(3)........................... $ 4,460 $ 5,564 $ 6,750 $ 9,375 $ 14,262
Diluted earnings per common share excluding nonrecurring
Items(2)(3)......................................................... $ 0.47 $ 0.48 $ 0.50 $ 0.65 $ 0.95
Weighted average common and common equivalent shares
outstanding(2)...................................................... 9,420 11,685 13,557 14,410 15,008

<CAPTION>
December 31,
------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Supplemental Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments.................... $22,756 $26,774 $30,208 $25,432 $42,691
Working capital...................................................... $23,889 $31,815 $33,260 $31,743 $54,249
Total assets......................................................... $32,005 $42,929 $53,151 $62,686 $85,648
Long-term debt, less current portion................................. $ 601 $ 1,573 $ 830 $ 492 $ --
Total shareholders' equity........................................... $25,488 $35,960 $42,633 $48,371 $71,086
</TABLE>

_________________________
(1) Reflects nonrecurring charges of $287,000 related to the withdrawal of the
follow-on stock offering in February 1998 as well as $4,140,000, $3,898,000
and $7,127,000 for the write-off of purchased, in-process research and
development associated with the acquisition of RightFAX in January 1996,
Telcom Technologies in January 1997 and CommercePath in October 1997,
respectively.
(2) Computed on the basis described in Note 1 to the Consolidated Financial
Statements.
(3) Excludes the after-tax effect of the nonrecurring charges in 1996, 1997 and
1998 referred to above.

3
<PAGE>

SUPPLEMENTAL CONSOLIDATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

On April 14, 1999, pursuant to an Agreement and Plan of Merger, dated as of
April 13, 1999, by and among the Company, MediaTel Corporation ("MediaTel"), and
Goldengate Acquisition Corp. ("MediaTel Merger Sub"), the Company acquired all
of the outstanding capital stock of MediaTel and MediaTel Merger Sub merged with
and into MediaTel, with MediaTel as the surviving corporation. MediaTel
provides out-sourced electronic document delivery services to businesses that
frequently send business-critical information to other businesses. The Company
issued 1,609,596 shares of common stock (10% of which was deposited into an
escrow account) and assumed all outstanding options in connection with the
acquisition of MediaTel.

This transaction was accounted for as a pooling of interests. The
supplemental consolidated financial statements and the notes thereto have been
prepared to reflect the restatement of all periods presented to include the
accounts of MediaTel. The historical results of the pooled entities reflect each
of their actual operating cost structures and, as a result, do not necessarily
reflect the cost structure of the newly combined entity. The historical results
do not purport to be indicative of future results. These supplemental
consolidated financial statements will become the historical financial
statements of the Company after financial statements covering the date of
consummation of the business combination are issued.

Set forth below is the Company's Supplemental Consolidated Management's
Discussion and Analysis of Financial Condition and Results of Operations for the
years ended December 31, 1998, 1997 and 1996 restated to give retroactive effect
to the MediaTel Merger.

Overview

The Company is a leading provider of software-based computer-telephony
solutions for medium-sized enterprises. These solutions are designed to enhance
individual and work group productivity, improve customer service, reduce
business-operating costs and simplify access to data and dissemination of
information. The Company's products provide enhanced voice and data integration
through applications such as unified voice and data messaging, Interactive
Voice response (IVR) and document distribution. The Company's key products are
multi-application computer-telephony platforms that run on off-the-shelf
hardware, support Windows NT and OS/2, and interface with a wide variety of
telephony and computer equipment. The Company also offers add-on modules and
software upgrades that provide increased capacity and functionality.

The Company sells its products primarily through an indirect channel of
resellers and distributors, as well as through direct sales and OEM and private
label agreements. The Company expanded its product offerings significantly in
1997 by releasing Windows NT-based products in each of its main product
categories. The Company's product lines serve the needs of two areas of the
computer telephony market - the telephony oriented buyer and the data oriented
buyer of enterprise software and systems. The Company's telephony-oriented
products include: CallXpress for Windows NT and CallXpress3, the Company's
premier multi-application, high capacity computer-telephony product lines;
PhoneXpress, a full-featured voice messaging system for small to medium-sized
enterprises; AgentXpress for Windows NT, a high-performance Windows NT-based
automated call center (ACD) system for medium-sized call centers; the recently
released Automated Agent for Windows NT, an IVR capability for CallXpress for
Windows NT; and Enhanced Agent, a set of interfaces and applications designed to
extend the capabilities of AgentXpress. The Company's data-oriented products
include RightFAX and RightFAX Enterprise, the Company's LAN-based fax server
lines for Windows NT, and CommercePath's line of production document delivery
systems for Windows NT and Unix. At this time the Company's data-oriented
products are focused on the enterprise fax market. The Company significantly
expanded its product offering in the past 24 months by releasing Windows NT-
based products in each of its main product areas.

Since January 1996, the Company has made three strategic acquisitions, each
of which was accounted for as a purchase. The Company acquired RightFAX, a
developer of LAN-based fax server software, in January 1996. In January 1997,
the Company acquired selected assets and liabilities of Telcom Technologies, a
developer of NT-based open-architecture ACD systems. In October 1997, the
Company acquired CommercePath, a developer of high-volume production-oriented
fax servers. In connection with the RightFAX, Telcom Technologies and
CommercePath acquisitions, the Company recorded nonrecurring charges of $4.1
million, $3.9 million and $7.1 million, respectively, in January 1996,

4
<PAGE>

January 1997 and October 1997 for the write-off of purchased, in-process
research and development, and recorded additional amounts of goodwill that are
being amortized over future years. See "--Liquidity and Capital Resources" and
Note 8 to the Supplemental Consolidated Financial Statements.

Supplemental Consolidated Results of Operations

The following table sets forth, for the periods indicated, the percentage
of net sales represented by certain items in the Company's consolidated
statements of income.

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1997 1998
-------------- ------------ ------------
<S> <C> <C> <C>
Net sales......................................................................... 100.0% 100.0% 100.0%
Cost of sales..................................................................... 40.5 38.0 36.2
----- ----- -----
Gross profit...................................................................... 59.5 62.0 63.8
Operating expenses:
Research and development..................................................... 9.0 10.4 9.2
Selling, general and administrative.......................................... 34.1 33.8 34.0
Non-recurring charges........................................................ 7.0 14.3 0.3
----- ----- -----
Total operating expenses..................................................... 50.1 58.5 43.5
Operating income.................................................................. 9.4 3.5 20.3
Other income, net................................................................. 1.6 1.4 1.2
----- ----- -----
Income before income tax expense.................................................. 11.0 4.9 21.5
Income tax expense................................................................ 6.6 1.9 7.8
----- ----- -----
Net income........................................................................ 4.4% 3.0% 13.7%
===== ===== =====
</TABLE>

Net Sales

The Company derives net sales primarily from initial sales of software kits
and licenses and fully integrated systems, document delivery services as well as
follow-on sales of add-on software modules and product upgrades. Sales to
dealers and distributors are recognized when the products are shipped. The sales
mix among the Company's product categories and between software kits and fully
integrated systems affects both net sales and gross margin. Because of their
hardware components, fully integrated systems generate higher revenue per unit
and lower margins than comparable software kits. Advanced CTI application
systems generally are sold at a higher unit price and with a higher gross margin
than basic messaging systems due to the additional software modules purchased
and the higher mix of software kits and software licenses as compared to fully
integrated systems. Over the past three years, sales have shifted toward higher-
margin advanced CTI products and software kits from lower-margin CTI-ready
systems and basic messaging products, but there can be no assurance that this
trend will continue.

Years ended December 31, 1998 and 1997. Net sales increased 34% to $103
million in 1998 from $77 million in 1997. This increase resulted primarily from
increased sales of enhanced fax products and services, and a full year of sales
from our CommercePath business unit, which on a combined basis increased 59% in
1998, and represented 66% of net sales, as compared to 56% of net sales in 1997.
Sales of advanced messaging and call center systems continued to strengthen
during 1998 and constituted 27% of total product sales in 1998. The lower-
margin basic messaging market continued to be affected by price pressures from
competitive offerings. Basic messaging sales declined 33% in 1998 from 1997, and
represented 6% of net sales in 1998 compared to 12% of net sales in 1997.
International sales for 1998 increased 23% from 1997, and represented 15% of net
sales.

Years ended December 31, 1997 and 1996. Net sales increased 31% to $77
million in 1997 from $58.7 million in 1996. The increase resulted primarily from
sales of enhanced fax products and services, which increased 53% in 1997, and
represented 56% of net sales, as compared to 48% of net sales in 1996. The
Company introduced new, Windows NT-based, advanced CTI-oriented product lines in
the first half of 1997 and included CommercePath's results of operations
beginning in November 1997. The lower-margin basic messaging market continued to
be affected by price pressures from competitive offerings. Basic messaging sales
declined 18% in 1997 from 1996, and represented 12% of net sales in 1997
compared to 20% of net sales in 1996.

5
<PAGE>

Gross Profit

Years ended December 31, 1998 and 1997. Gross profit as a percentage of net
sales increased to 63.8% in 1998, as compared to 62.0% in 1997, due primarily to
the favorable sales mix of enterprise fax products and advanced CTI applications
and the declining sales of basic messaging systems.

Years ended December 31, 1997 and 1996. Gross profit as a percentage of net
sales improved to 62.0% in 1997, as compared to 59.5% in 1996, due primarily to
the favorable sales mix of advanced CTI applications as compared to basic
messaging systems. Gross profit on basic messaging system sales in 1997
continued to be negatively affected by price erosion and a higher ratio of fully
integrated systems as compared to advanced CTI application systems.

Research and Development

Years ended December 31, 1998 and 1997. Research and development expenses
increased 18.6% to $9.5 million in 1998 from $8.0 million in 1997, due primarily
to increased personnel costs relating to acceleration of certain development
projects, and a full year of research and development expenses associated with
CommercePath. As a percentage of net sales, research and development expenses
represented 9.2% in 1998, as compared to 10.4% in 1997.

Years ended December 31, 1997 and 1996. Research and development expenses
increased 51.3% to $8.0 million in 1997 from $5.3 million in 1996, due primarily
to increased personnel costs relating to acceleration of certain development
projects, the inclusion of the recently formed call center development group,
which was acquired from Telcom Technologies, and research and development
expenses associated with CommercePath. As a percentage of net sales, research
and development expenses represented 10.4% in 1997, as compared to 9.0% in 1996.

Selling, General and Administrative

Years ended December 31, 1998 and 1997. Selling, general and administrative
expenses increased 34.5% to $35.0 million in 1998 from $26.0 million in 1997,
due primarily to the inclusion of CommercePath expenses for the entire year as
well as increased personnel-related costs of domestic and international
development of both the telephony-oriented and computer-oriented distribution
channels. Selling, general and administrative expenses for 1998 included
amortization of $1.1 million of goodwill relating to acquisitions compared to
$0.7 million in 1997. Selling, general and administrative expenses represented
34.0% of net sales in 1998, as compared to 33.8% in 1997.

Years ended December 31, 1997 and 1996. Selling, general and administrative
expenses increased 30.2% to $26.0 million in 1997 from $20.0 million in 1996,
due primarily to increased personnel-related costs of domestic and international
development of both the telephony-oriented and computer-oriented distribution
channels, the new product launches of CallXpress for Windows NT and AgentXpress
for Windows NT, and the inclusion of CommercePath expenses for the last two
months of 1997. Selling, general and administrative expenses for 1997 included
amortization of $0.7 million of goodwill relating to acquisitions. Selling,
general and administrative expenses represented 33.8% of net sales in 1997, as
compared to 34.1% in 1996.

Non-recurring Charges

In February, 1998 the Company withdrew a follow-on stock offering originally
filed in October 1997 and wrote-off the costs of $287,000 in connection with the
canceled offering. In connection with the acquisitions of Telcom Technologies
and CommercePath, the Company recognized nonrecurring charges of $3.9 million
and $7.1 million in the first and fourth quarters of 1997, respectively, for the
write-off of purchased, in-process research and development. The Company
recognized a nonrecurring charge of $4.1 million in the first quarter of 1996
for the write-off of purchased, in-process research and development associated
with the acquisition of RightFAX.

6
<PAGE>

Other Income, Net

For the years ended December 31, 1998 and 1997, other income increased from
$1.1 million in 1997 to $1.3 million in 1998 due to increasing cash and
investment balances. Other income increased to $1.1 million in 1997 from $0.9
million in 1996 due to increased cash and investment balances.

Income Tax Expense

The effective income tax rates excluding acquisition-related charges in 1998,
1997 and 1996 were 36.5%, 38.8% and 37.9% respectively. The acquisitions of
Telcom Technologies and CommercePath in 1997 were taxable transactions, and,
therefore, the resulting excess of purchase price over net tangible assets
acquired is deductible for income tax purposes. By contrast, the excess of the
purchase price over net tangible assets acquired associated with the acquisition
of RightFAX in 1996 is not tax deductible. Primarily as a result of the
differing tax treatment of these acquisitions, the Company recognized an income
tax expense of $8.1 million in 1998 and $1.5 million in 1997, as compared to an
income tax expense of $3.9 million in 1996.

Net Income and Net Income Per Share

Years ended December 31, 1998 and 1997. The Company recognized net income in
1998 of $14.1 million as compared to $2.3 million in 1997. Excluding the
nonrecurring charges related to the cancellation of the follow-on stock offering
in 1998, net income would have increased to $14.3 million compared to the 1997
net income excluding non-recurring charges of $9.4 million. Diluted net income
per share, excluding the nonrecurring charges, increased to $.95 per share in
1998 from $.65 per share in 1997.

Years ended December 31, 1997 and 1996. The Company recognized net income in
1997 of $2.3 million as compared to $2.6 million in 1996. Excluding the
nonrecurring charges related to the RightFAX, Telcom Technologies and
CommercePath transactions discussed above, net income for 1997 would have
increased 39% to $9.4 million, from $6.8 million in 1996. Diluted net income per
share, excluding the nonrecurring charges, increased to $.65 per share in 1997
from $.50 per share in 1996.

Liquidity and Capital Resources

Cash and cash equivalents and short-term investments increased to $42.7
million at December 31, 1998 from $25.4 million at December 31, 1997 and from
$30.2 million at December 31, 1996, due primarily from operations. The decline
from December 31, 1996 to December 31, 1997 was due to the acquisitions of
Telcom Technologies and CommercePath. Cash flow generated from operating
activities was $18.3 million, $12.1 million and $9.9 million in the years ended
December 31, 1998, 1997 and 1996, respectively. The increases resulted primarily
from profitable operations.

The Company is exposed to market risk related to changes in interest rates and
foreign currency exchange rates, each of which could adversely affect the value
of the Company's investments. The Company does not currently use derivative
financial instruments.

The Company maintains a short-term investment portfolio consisting of interest
bearing securities with an average maturity of less than one year. These
securities are classified as "available for sale" securities. The interest
bearing securities are subject to interest rate risk and will fall in value if
market interest rates increase. If market interest rates were to increase
immediately and uniformly by 10% from levels at December 31, 1998, the fair
value of the portfolio would decline by an immaterial amount. Because the
Company has the ability to hold its fixed income investments until maturity, it
does not expect its operating results or cash flows to be affected to any
significant degree by a sudden change in market interest rates on its securities
portfolio.

7
<PAGE>

The Company has assets and liabilities denominated in certain foreign
currencies related to the Company's international sales operations. The Company
has not hedged its translation risk on these currencies as the Company has the
ability to hold its foreign-currency denominated assets indefinitely and does
not expect that a sudden or significant change in foreign exchange rates would
have a material impact on future net income or cash flows.

In February 1995, the Company prepaid the remaining balance due under a
royalty agreement associated with a 1989 business combination. See Note 6 to the
Supplemental Consolidated Financial Statements. The cash disbursement, which
amounted to $1.8 million, was recorded as an intangible asset and has been
amortized over the remaining term of the original royalty agreement,
approximately six years. In addition, the Company amended a license agreement in
September 1995, prepaying its remaining royalty obligation by issuing a note in
the amount of $1.9 million payable in 12 equal quarterly installments of
$161,417 each, including imputed interest at 8.75% per annum. The Company
amended an additional license agreement in July 1996, prepaying its remaining
royalty obligation by issuing a non-interest-bearing note for $450,000 that was
fully paid prior to December 31, 1996. For each of these license agreement
amendments, the related intangible asset is being amortized on a straight-line
basis over the average remaining lives of the patents, which are approximately
12 years in the case of the license amended in September 1995 and approximately
seven years in the case of the license amended in July 1996.

In January 1996, the Company acquired RightFAX for $4.2 million in cash plus
326,000 shares of Common Stock. The business combination was accounted for as a
purchase. Approximately $4.1 million of the purchase price was recognized as a
nonrecurring charge in the first quarter of 1996, representing the value of
purchased, in-process research and development. The remaining intangible assets
are being amortized over seven years from the date of acquisition. As a result
of the earn out and guaranteed value of the stock issued in the acquisition of
RightFAX, the Company made payments in January 1999, 1998 and 1997 of $250,000,
$668,000 and $1,408,000, respectively, and also issued 9,800, 52,000 and 190,000
additional shares of common stock, respectively. This earn out resulted in
additional goodwill being recorded in December 1998, 1997 and 1996 of $0.5
million, $1.3 million and $2.0 million, respectively. No further earn out
amounts are payable.

In January 1997, the Company acquired selected assets and liabilities of
Telcom Technologies. The purchase price for the acquisition was $3.5 million in
cash, plus warrants to purchase 200,000 shares of Common Stock exercisable at
$6.68 per share, which may be exercised any time prior to January 3, 2002. The
Company accounted for the business combination as a purchase and recognized a
nonrecurring charge of $3.9 million in the first quarter of 1997, representing
the value of the purchased, in-process research and development.

In October 1997, the Company acquired all the outstanding capital stock of
CommercePath from Forest City Trading Group, Inc. for $10.4 million in cash.
The Company accounted for the acquisition as a purchase and recorded a
nonrecurring charge of $7.1 million for the write-off of purchased, in-process
research and development. In addition, the Company recorded $1.8 million of
goodwill that will be amortized over seven years. See Note 8 to the Supplemental
Consolidated Financial Statements.

At December 31, 1998, the Company had a $4.0 million unsecured revolving line
of credit, none of which was outstanding. The Company's line of credit expires
in July 1999 and contains certain financial covenants and restrictions as to
various matters. The Company is currently in compliance with all such covenants
and restrictions. Borrowings under the line of credit bear interest at the
bank's prime rate or its interbank offering rate plus 1.50%, at the Company's
option.

The Company invested $3.5 million, $2.3 million and $2.1 million in equipment
and leasehold improvements in the years ended December 31, 1998, 1997 and 1996,
respectively. Equipment purchases in such years consisted primarily of computer
hardware and software.

The Company expects that its current cash, cash flow from operations and
available bank line of credit, will provide sufficient working capital for
operations for the foreseeable future.

Impact of the Year 2000 Issue

The "Year 2000 Issue" is pervasive and complex as virtually every computer
operation will be affected in some way by the rollover of the two-digit year
value to 00. Systems that do not properly recognize date sensitive information
when

8
<PAGE>

the year changes to 2000, or interact with systems or components that fail to do
so, could generate erroneous data or otherwise fail to function properly, or at
all. There is speculation that a significant amount of litigation will arise out
of Year 2000 compliance issues, and the Company is aware of a growing number of
lawsuits against other software vendors. Because of the unprecedented nature of
such litigation, it is uncertain whether or to what extent the Company may be
affected by it.

The Company has developed a plan to ensure its internal systems and products
are Year 2000 compliant, and to mitigate its risks in the event that its vendors
or other third-parties with whom it has material relationships are not Year 2000
compliant on a timely basis. The Company has potential exposure relating to the
Year 2000 issue in four areas: (1) the Company's internal software and hardware
systems, including non-information technology systems; (2) suppliers of hardware
and software the Company resells as part of its products; (3) internally
developed software the Company sells; and (4) other third-parties with whom the
Company has material relationships. The following information explains how the
Company is addressing each of these potential risk areas:

1. With respect to internal software and hardware systems, the Company
reviewed all its material systems to determine which systems were not
Year 2000 compliant. The Company is currently in the process of
completing all necessary upgrades, modifications and conversions to its
programs and equipment to ensure they will continue to be effective in
the year 2000, and expects to complete this process not later than July
31, 1999. All of such upgrades have been or are being done as part of a
normal upgrade cycle and accordingly no additional costs are being
incurred as a result of Year 2000 issues. The Company expects that the
only expense it will incur to make its internal software and hardware
systems Year 2000 compliant is approximately $5,000 to update an alarm
system.

2. The Company has tested and will continue to test computer components,
including fax and voice cards and software it purchases from third
parties, for Year 2000 compliance. The Company has verified that all such
components and software currently in use are Year 2000 complaint. The
Company, however, has identified alternate sources for critical
components in the event that a supplier's business is disrupted by the
advent of the year 2000.

3. Since June 1998, all of the Company's products available for sale to
customers have been Year 2000 compliant. The Company has offered free or
reduced cost upgrades to certain purchasers of the Company's products
that were not Year 2000 compliant when sold. The cost of developing and
providing such upgrades was approximately $100,000. The Company does not
intend to offer upgrades for certain of its older products.

4. The Company has implemented a process to contact third parties with which
it has material relationships, including its vendors, distributors,
banks, and transfer agent, to attempt to determine their preparedness
with respect to Year 2000 issues and to analyze the risks to the Company
in the event any such third parties experience significant business
interruptions as a result of Year 2000 noncompliance. At March 31, 1999,
the Company had substantially completed this review..

The Company believes that it is taking the necessary steps regarding Year
2000 compliance with respect to matters within its control to ensure that the
Year 2000 issue will not materially impact the Company. However, the Company may
be materially adversely affected if important distributors or customers of the
Company experience significant disruptions in their systems or business due to
the advent of the Year 2000. In addition, the costs of the Year 2000 project and
the date on which the Company plans to complete Year 2000 modifications are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third party modification plans and other factors. There can be no
guarantee that these assumptions will prove to be correct and actual results
could differ materially from those expected. The Company intends to complete its
contingency plan to address unexpected Year 2000 issues by September 30, 1999.

Certain Trends and Uncertainties

When used in this discussion, the words "believes," "anticipates" and similar
expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties that could cause
actual results to

9
<PAGE>

differ materially from those projected. Factors which could affect the Company's
financial results are described below under "Risk Factors" and in Item 1
(Business) of the Company's Annual Report on Form 10-K for the year ended
December 31, 1998. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrences of
unanticipated events.

10
<PAGE>

RISK FACTORS

Our operating results fluctuate from quarter to quarter, which could cause our
operating results to fall below expectations of securities analysts and
investors.

We expect our operating results to fluctuate significantly from quarter to
quarter in the future. Because of these fluctuations, our operating results for
a particular quarter may fall below the expectations of securities analysts and
investors. If this occurs, the trading price of our stock may decline.

We believe period-to-period comparisons of our operating results are not
meaningful. Numerous factors contribute to the unpredictability of our operating
results, including

. the timing of customer orders;

. changes in our mix of products and distribution channels;

. the announcement or introduction of new products by us or our competitors;

. pricing pressures; and

. general economic conditions.

The timing of customer orders can cause significant variations in quarterly
results of operations. Historically, we have operated with little or no backlog.
We earn almost all our revenues in each quarter from orders received in that
quarter. We base product development and other operating expenses on our
expected revenues. Because our expenses are relatively fixed in the short term,
we may be unable to adjust our spending in time to compensate for any unexpected
shortfall in quarterly revenues.

Changes in the mix of products we sell can also cause our operating results to
fluctuate from quarter to quarter. For example, shifts between fully integrated
systems and software kits result in fluctuations in gross margins because fully
integrated systems generate higher revenue per unit but have lower margins due
to their hardware component.

Our operating results may vary by season, which could cause our operating
results to fall below expectations of securities analysts and investors.

Our results of operations may fluctuate as a result of seasonal factors, and
this may cause our operating results to fall below expectations of securities
analysts and investors for a particular quarter. Specifically, due to typical
year-end dealer sales patterns and end-user buying patterns, net sales in our
first quarter, without taking into account the effect of acquisitions, have in
the past declined from the fourth quarter of the previous year.

We rely heavily on independent equipment dealers and value-added resellers.

A substantial majority of our net sales depends on a network of independent
telephone equipment dealers and computer-oriented value-added resellers. There
is intense competition for the attention of these independent dealers and
resellers from our competitors and from providers of other products distributed
through these channels. Many of these dealers and resellers do not have the
financial resources to withstand a downturn in their businesses. We may not be
able to maintain or expand our network of dealers and resellers in the future.
Moreover, our dealers and resellers may not maintain or expand their present
level of efforts to sell our products. If we lose a major dealer or reseller, or
if our dealers and resellers lose interest in selling our products, our
business, results of operations and financial condition may suffer.

The integration of recent and any future acquisitions may be difficult and
disruptive.

We frequently evaluate potential acquisitions of products, technologies and
businesses. Since January 1996, we have made four strategic acquisitions. Our
recent and any future acquisitions may direct management's attention away from
the day-to-day operations of our business and may pose numerous other risks. For
instance, we may not be able to successfully integrate any technologies,
products, personnel or operations of companies that we may acquire.

In making acquisitions, we may need to make dilutive issuances of our equity
securities, incur debt, write off purchased, in-process research and development
and amortize expenses related to goodwill and other intangible assets.

11
<PAGE>

Technology and customer needs change rapidly in our industry.

In our industry, technology and customer demands change rapidly, and we and
our competitors frequently introduce new products and features. To succeed, we
must identify, develop and market new products and features that satisfy those
changing customer needs and keep pace with those technological developments. To
do this, we must spend substantial funds on product development. We have already
devoted significant resources to technologies that we anticipate will be widely
adopted, such as Windows NT. However, we may not be able to develop new products
or product enhancements on a timely basis. Even if we do, the market may not
accept the new products or product enhancements that we develop.

Our market is highly competitive.

The computer-telephony market is highly competitive. Moreover, we believe the
competitive pressures we face are likely to intensify, particularly as our
competitors make new offerings based on the Windows NT operating system.

In the telephony-oriented market for messaging systems, our principal
competitors are independent suppliers such as the Octel Messaging Division of
Lucent Technologies, Inc., Mitel Corporation, Active Voice Corporation, Voysys
Corporation and Callware Technologies, Inc. In the call center systems market,
our principal competitors are manufacturers such as Aspect Telecommunications
Corporation and Rockwell International Corporation.

In addition to independent suppliers of computer-telephony solutions, we also
compete with private branch exchange and key telephone systems manufacturers.
Those manufacturers offer integrated voice messaging systems, unified messaging
systems and automatic call distribution systems of their own design or under
various OEM agreements. Competitors in this category include Lucent
Technologies, Inc., Northern Telecom Ltd., Siemens Business Communication
Systems, Inc., Executone Information Systems, Inc., Panasonic Communications and
Systems Co., NEC America, Inc. and Toshiba America Information Systems, Inc.

In the market for LAN-based facsimile systems, our principal competitors are
Omtool, Ltd., Optus Software, Inc., Esker, S.A. and Computer Associates
International, Inc. Our fax server products also compete with vendors offering a
range of alternative facsimile solutions, including operating systems containing
facsimile and document transmission features, low-end fax modem products,
desktop fax software, single-platform facsimile software products and customized
proprietary software solutions. In the market for production facsimile systems,
our principal competitors are Biscom, Inc., Esker, S.A. and Topcall
International AG. In the market for document distribution products, our
principal competitors include Expedite, Inc. and other telecommunications
providers such as AT&T Corp., MCI WorldCom, Inc. and Cable & Wireless, Inc.

Further acceptance of open systems architectures and the development of
industry standards in the call processing market may eliminate some of the
technical barriers to entry, allowing additional competitors to enter the
market. Many of our existing competitors have larger customer and installed
bases and substantially greater technical, financial and marketing resources
than we do. In addition, some of our competitors have a marketing advantage
because they can sell their call processing equipment or facsimile solutions as
part of their broader product offerings. We expect our competitors will continue
to offer improved product technologies and capabilities. The availability of
these products could cause sales of our existing products to decline. For these
reasons, we may be unable to compete successfully against our current and future
competitors.

Our average sales prices have declined for some of our products.

The average sales prices in our basic voice messaging products have declined
due to competitive pressures. In the future, prices may decline in some of our
other product lines. If the average sales prices of our more significant product
lines fall, our overall gross margins will likely fall. To offset and forestall
declining average sales prices, we must continue to develop product enhancements
and new products with advanced features that are likely to generate higher-
margin incremental revenue. If we are unable to do so in a timely manner or if
our products do not achieve significant customer acceptance, our business,
results of operations and financial condition may suffer.

We may be unable to adequately protect our proprietary rights.

To succeed, we must adequately protect our proprietary technology. We rely on
a combination of patent, copyright, trademark and trade secret laws,
nondisclosure and other agreements and technical measures to protect our
proprietary

12
<PAGE>

technology, but those measures may be insufficient. We have one patent in the
area of unified messaging, but our competitors may challenge or circumvent the
claims in that patent. Our current patent, or any future patents, may never
provide us with any competitive advantages. Other measures that we take to
protect our proprietary technology may not prevent or deter misappropriation of
our technology or the development of technologies with similar characteristics.
Moreover, our use of open systems architecture in the design of our products may
make it easier for competitors to misappropriate or replicate our designs and
developments.

We may face liability for infringement of third-party proprietary rights.

Historically, competitors in the computer-telephony software industry have
filed numerous allegations of patent infringement, resulting in considerable
litigation. We have received claims of patent infringement from several parties
and will probably receive additional claims in the future. While none of those
claims has led to litigation, they may yet result in litigation. Any litigation,
regardless of our success, would probably be costly and require significant time
and attention of our key management and technical personnel. Litigation could
also force us to

. stop or delay selling, or using, products that use the challenged
intellectual property;

. pay damages for infringement;

. obtain licenses, which may be unavailable on acceptable terms; or

. redesign products or services that use the infringing technology.

We face risks from expansion of our international operations.

Our growth depends in part on continued expansion of our international sales.
International sales generated approximately 14%, 16% and 15% of our net sales in
the years ended December 31, 1996, 1997 and 1998, respectively. We have spent
significant management attention and financial resources on our international
operations. A significant portion of our revenues are subject to the risks
associated with international sales, which include

. difficulty adapting products to local languages and telephone system
technology;

. inability to respond to changes in regulatory requirements;

. inability to meet special standards requirements;

. exposure to exchange rate fluctuations;

. tariffs and other trade barriers;

. difficulties in staffing and managing international operations;

. potentially adverse tax consequences; and

. uncertainties arising from local business practices and cultural
considerations.

Currently, substantially all of our international sales are denominated in
U.S. dollars. Increases in the value of the dollar against local currency could
cause our products to become relatively more expensive to customers in a
particular country, leading to reduced sales or profitability in that country.
As we continue to expand our international operations, we expect our non-dollar-
denominated sales and our exposure to gains and losses on international currency
transactions to increase. We do not currently engage in transactions to hedge
against the risk of currency fluctuations, but we may do so in the future.

We depend on certain key employees.

To succeed, we must attract and retain key personnel in engineering, research
and development, marketing, sales, finance and administration. In particular, we
depend to a significant degree on the efforts of our senior management team.
Competition for skilled personnel is intense. The failure to recruit such
personnel or the loss of the services of existing key persons in any functional
area could adversely affect our current operations and new product development
efforts. We do not maintain material key person life insurance.

13
<PAGE>

We may experience difficulties in managing our growth.

Growth in our business has placed, and will continue to place, significant
demands on our management and operations. To succeed, our officers and key
employees must manage growth successfully. We must continue to implement and
improve our operational, financial and management information systems. In
addition, we must expand the number of, train and manage our employees. We may
be unable to timely and successfully accomplish these tasks.

We depend on third parties for certain key components of our products.

We use standard computer hardware for our products. Most of the components we
use are readily available. However, only three domestic suppliers can provide
voice processing circuit boards in the quantities we need. In addition, only two
domestic suppliers can provide our facsimile processing circuit boards in the
quantity we require. Historically, we have relied almost exclusively on Dialogic
Corporation for our voice cards, and on Dialogic and Brooktrout Technologies,
Inc. for our fax cards. We rely on those suppliers primarily because of volume
price discounts and the cost and effort required to develop software for an
alternate voice or fax card. Significant delays, interruptions or reductions in
our supply of voice or fax cards, or unfavorable changes to price and delivery
terms could adversely affect our business.

Our stock price may be highly volatile.

The market price of our common stock has been, and may continue to be, highly
volatile. The future price of the common stock will fluctuate in response to
factors such as

. new product announcements or changes in product pricing policies by us or
our competitors;

. quarterly fluctuations in our operating results;

. announcements of technical innovations;

. announcements relating to strategic relationships or acquisitions;

. changes in earnings estimates by securities analysts; and

. general conditions in the computer-telephony market.

In addition, the market prices of securities issued by many companies,
particularly in high-technology industries, are volatile for reasons unrelated
to the operating performance of the specific companies. These broad market
fluctuations may adversely affect the market price of our common stock.

14
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To AVT Corporation:

We have audited the prepooled consolidated financial statements of AVT
Corporation and subsidiaries as of December 31, 1998 and 1997, and for each of
the three years in the period ended December 31, 1998, as indicated in our
report dated January 29, 1999, and included in the Company's filing on Form 10-
K. We have also audited the supplemental consolidated balance sheets of AVT
Corporation as of December 31, 1998 and 1997, and the related supplemental
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1998. The supplemental
consolidated financial statements give retroactive effect to the merger with
MediaTel Corporation ("MediaLinq Services Group")on April 14, 1999, which has
been accounted for as a pooling of interests as described in Note 1. These
supplemental consolidated financial statements are the responsibility of the
management of AVT Corporation. Our responsibility is to express an opinion on
these supplemental consolidated financial statements based on our audits.

We did not audit the financial statements of MediaLinq Services Group, which
statements reflect total assets constituting approximately 11% for 1998 and
approximately 13% for 1997 of the related supplemental consolidated financial
statement totals, and which statements reflect revenues constituting
approximately 21% for 1998, 25% for 1997 and 25% for 1996 of the related
supplemental consolidated financial statement totals. Those statements were
audited by other auditors whose report has been furnished to us, and our opinion
expressed herein, insofar as it relates to data included for MediaLinq Services
Group, is based solely on the report of the other auditors.

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

In our opinion, based upon our audits and the report of other auditors, the
supplemental consolidated financial statements referred to above present fairly,
in all material respects, the financial position of AVT Corporation and its
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, after giving retroactive effect to the merger with MediaLinq
Services Group as described in Note 1, all in conformity with generally accepted
accounting principles.

/s/ Arthur Andersen LLP

Seattle, Washington,
January 28, 1999, except for paragraphs 2 and 3
of Note 1, as to which the date is April 14, 1999

15
<PAGE>

Report of Independent Accountants

To the Board of Directors and Stockholders of
MediaTel Corporation:

In our opinion, the consolidated balance sheets and the related consolidated
statements of operations, of stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of MediaTel Corporation
(the "Company") at December 31, 1997 and 1998, and results of their operations
and their cash flows for each of the three years ended December 31, 1998 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

/s/ PricewaterhouseCoopers

San Francisco, California
February 19, 1999
<PAGE>

SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

AVT CORPORATION

SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
---------------------
1997 1998
---------- ---------
ASSETS (in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................................................... $11,164 $14,466
Short-term investments........................................................................ 14,268 28,225
Accounts receivable, less allowance of $909,000 and $929,000.................................. 12,908 17,563
Inventories................................................................................... 4,908 5,560
Deferred and prepaid income taxes............................................................. 1,195 1,461
Prepaid expenses and other.................................................................... 1,123 1,536
------- -------
Total current assets....................................................................... 45,566 68,811
Equipment and leasehold improvements, net....................................................... 4,298 5,417
Intangibles, net................................................................................ 8,815 7,677
Deferred income taxes........................................................................... 4,007 3,743
------- -------
$62,686 $85,648
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable.............................................................................. $ 3,928 $ 4,793
Other current liabilities..................................................................... 6,547 9,191
Note payable--current portion................................................................. 511 -
Income taxes payable.......................................................................... 2,837 578
------- -------
Total current liabilities.................................................................. 13,823 14,562

Long-term debt, less current portion............................................................ 492 -
------- -------
Total liabilities.......................................................................... 14,315 14,562
------- -------
Commitments.....................................................................................
Shareholders' equity:
Preferred stock, par value $.01 per share, 2,000,000 shares authorized; none
outstanding................................................................................. -- --
Common stock, par value $.01 per share, 60,000,000 shares authorized;
13,115,786 and 14,230,575 outstanding....................................................... 131 142
Additional paid-in capital.................................................................... 34,188 42,987
Retained earnings............................................................................. 14,052 27,957
------- -------
Total shareholders' equity................................................................. 48,371 71,086
------- -------
$62,686 $85,648
======= =======
</TABLE>

See the accompanying notes to these supplemental consolidated financial
statements.

17
<PAGE>

AVT CORPORATION

SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1997 1998
---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C>
Net sales............................................................................ $58,693 $76,971 $102,977
Cost of sales........................................................................ 23,749 29,233 37,282
------- ------- --------
Gross profit....................................................................... 34,944 47,738 65,695
------- ------- --------
Operating expenses:
Research and development........................................................... 5,280 7,988 9,474
Selling, general and administrative................................................ 19,996 26,040 35,035
Non-recurring charges.............................................................. 4,140 11,025 287
------- ------- --------
Total operating expenses........................................................ 29,416 45,053 44,796
------- ------- --------
Operating income..................................................................... 5,528 2,685 20,899
------- ------- --------
Other income:
Interest income.................................................................... 932 842 1,169
Other.............................................................................. 10 262 89
------- ------- --------
Other income.................................................................... 942 1,104 1,258
------- ------- --------
Income before income tax expense..................................................... 6,470 3,789 22,157
Income tax expense................................................................... 3,860 1,470 8,078
------- ------- --------
Net income........................................................................... $ 2,610 $ 2,319 $ 14,079
======= ======= ========
Basic earnings per common share...................................................... $ 0.21 $ 0.18 $ 1.03
Weighted average common shares outstanding........................................... 12,318 12,944 13,722
Diluted earnings per common share.................................................... $ 0.19 $ 0.16 $ 0.94
Weighted average common and common equivalent shares outstanding..................... 13,557 14,410 15,008
</TABLE>

See the accompanying notes to these supplemental consolidated financial
statements.

18
<PAGE>

AVT CORPORATION

SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

Years Ended December 31, 1996, 1997 and 1998

<TABLE>
<CAPTION>
Additional Total
Common Stock paid-in Deferred Retained shareholders'
---------------
Shares Amount capital compensation earnings equity
------ ------ ------- ------------- --------- ------

(in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995....................... 11,852,185 $119 $26,730 $(34) $ 9,145 $35,960
Unrealized loss on investments..................... -- -- -- -- (22) (22)
Stock issued for services 3,132 -- 3 3
Exercise of stock options.......................... 236,748 2 616 -- -- 618
Stock compensation expense......................... -- -- -- 34 -- 34
Stock issued in acquisition........................ 326,598 3 3,427 -- -- 3,430
Net income......................................... -- -- -- -- 2,610 2,610
---------- ---- ------- ---- ------- -------
Balance at December 31, 1996....................... 12,418,663 124 30,776 -- 11,733 42,633
Stock issued in acquisition........................ 191,032 2 666 -- -- 668
Warrants issued in acquisition..................... -- -- 700 -- -- 700
Exercise of stock options.......................... 506,091 5 1,484 -- -- 1,489
Tax benefit of stock options
exercised......................................... -- -- 562 -- -- 562
Net income......................................... -- -- -- -- 2,319 2,319
---------- ---- ------- ---- ------- -------
Balance at December 31, 1997....................... 13,115,786 131 34,188 -- 14,052 48,371
Stock issued in acquisition........................ 52,200 1 249 -- -- 250
Exercise of stock options.......................... 1,062,589 10 3,901 -- -- 3,911
Tax benefit of stock options
exercised......................................... -- -- 4,649 -- -- 4,649
Dividend declared -- -- -- -- (174) (174)
Net income......................................... -- -- -- -- 14,079 14,079
---------- ---- ------- ---- ------- -------
Balance at December 31, 1998....................... 14,230,575 $142 $42,987 $ -- $27,957 $71,086
========== ==== ======= ==== ======= =======
</TABLE>

See the accompanying notes to these supplemental consolidated financial
statements.

19
<PAGE>

AVT CORPORATION

SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1996 1997 1998
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................................................ $ 2,610 $ 2,319 $ 14,079
------- -------- --------

Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization..................................................... 2,332 3,186 4,064
Non-recurring charges............................................................. 4,140 11,025 287
Stock compensation expense........................................................ 37 -- 5
Deferred income taxes............................................................. (151) (3,410) 215
Changes in current assets and liabilities:
Accounts receivable............................................................ (600) (2,321) (4,655)
Inventories.................................................................... (551) (1,239) (652)
Prepaid expenses and other assets.............................................. (225) (453) (700)
Accounts payable............................................................... 566 (251) 865
Accrued compensation and benefits.............................................. 514 21 2,316
Income taxes payable........................................................... 857 2,038 2,171
Other accrued liabilities...................................................... 347 1,221 268
------- -------- --------
Total adjustments.............................................................. 7,266 9,817 4,184
------- -------- --------
Net cash provided by operating activities...................................... 9,876 12,136 18,263
------- -------- --------

Cash flows from investing activities:
Purchase of equipment and leasehold improvements.................................. (2,086) (2,302) (3,550)
Cash paid in acquisition, net of cash acquired.................................... (3,318) (15,426) --
Purchase of short-term investments................................................ (3,309) -- (13,957)
Net proceeds from the sale of investments......................................... -- 1,216 37
Other intangibles and long-term assets............................................ -- (64) (280)
------- -------- --------
Net cash used in investing activities.......................................... (8,713) (16,576) (17,750)
------- -------- --------

Cash flows from financing activities:
Long-term borrowings.............................................................. -- 664 --
Repayment of long-term debt....................................................... (1,347) (1,273) (991)
Proceeds from exercise of common stock options.................................... 331 1,489 3,906
Dividends paid on stock........................................................... -- -- (126)
------- -------- --------
Net cash provided by (used in) financing activities............................ (1,016) 880 2,789
------- -------- --------
Net increase (decrease) in cash................................................ 147 (3,560) 3,302
Cash and cash equivalents at beginning of period.................................... 14,577 14,724 11,164
------- -------- --------
Cash and cash equivalents at end of period.......................................... $14,724 $ 11,164 $ 14,466
======= ======== ========

Cash paid for interest.............................................................. $ 235 $ 118 $ 51
======= ======== ========
</TABLE>

See the accompanying notes to these supplemental consolidated financial
statements.

20
<PAGE>

AVT CORPORATION

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Business and Summary of Significant Accounting Policies

Nature of Business

AVT Corporation (the Company), a Washington corporation, provides software-
based computer-telephony products for medium-sized enterprises. The Company's
products address the voice messaging, call center, fax server and production fax
markets and are distributed primarily through independent distributors and
value-added resellers. The supplemental consolidated financial statements
include the accounts of all subsidiaries, all of which are wholly owned, from
the date of acquisition, including RightFAX, Inc., as of January 2, 1996, and
CommercePath, Inc., as of October 22, 1997. All intercompany accounts have been
eliminated.

This transaction was accounted for as a pooling of interests. These
supplemental consolidated financial statements have been prepared to reflect the
restatement of all periods presented to include the accounts of MediaTel. The
historical results do not purport to be indicative of future results. These
supplemental consolidated financial statements will become the historical
financial statements of the Company after financial statements covering the date
of consummation of the business combination are issued.

Cash and Cash Equivalents

The Company's policy is to invest cash in excess of operating requirements
in income-producing investments. For purposes of the consolidated statements of
cash flows, the Company considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents. Cash and cash
equivalents include all cash balances and highly liquid investments in a money
market fund. Investments are recorded at cost, which approximates market prices.

Inventories

Inventories consist primarily of computer assemblies, components and
related equipment, and are stated at the lower of cost (first-in, first-out) or
market (net realizable value).

Equipment and Leasehold Improvements

Equipment and leasehold improvements are stated at cost and are depreciated
on the straight-line method over the estimated useful lives of the assets, which
range from three to five years. Equipment and leasehold improvements consist of
the following:

<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
---- ----
(in thousands)
<S> <C> <C>

Computers and other equipment...................................................... $10,475 $ 13,533
Leasehold improvements............................................................. 727 950
Furniture and fixtures............................................................. 919 1,150
------- --------
12,121 15,633
Less accumulated depreciation...................................................... (7,823) (10,216)
------- --------
Equipment and leasehold improvements, net.......................................... $ 4,298 $ 5,417
======= ========
</TABLE>

21
<PAGE>

APPLIED VOICE TECHNOLOGY, INC
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS --(Continued)

Intangibles

Goodwill is being amortized using the straight-line method over its
estimated useful life of seven years. License agreements are amortized using the
straight-line method over the remaining lives of the related patents, which
range from approximately 6 to 12 years.

<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
---- ----
<S> <C> <C>
(in thousands)
Goodwill on CommercePath acquisition.................................................... $ 1,793 $ 1,829
Goodwill on RightFAX acquisition........................................................ 5,406 5,906
License agreements...................................................................... 4,516 4,516
------- -------
11,715 12,251
Less accumulated amortization........................................................... (2,900) (4,574)
------- -------
Intangibles, net........................................................................ $ 8,815 $ 7,677
======= =======
</TABLE>

Other Current Liabilities

<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
---- ----
<S> <C> <C>
(in thousands)
Accrued compensation and benefits....................................................... $1,781 $4,097
Acquisition costs....................................................................... 1,336 250
Deferred maintenance revenue............................................................ 1,891 2,210
Other................................................................................... 1,539 2,634
------ ------
Other current liabilities............................................................... $6,547 $9,191
====== ======
</TABLE>

Use of Estimates

The preparation of the Company's consolidated financial statements, in
conformity with generally accepted accounting principles, requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Certain prior period balances have been reclassified to conform with the current
period presentation.

Revenue Recognition

Revenues from sales to dealers are recognized when the products are
shipped. When the Company has an installation obligation, revenues are
recognized when product installation is complete. Revenues from document
delivery services are recognized when services are provided. Revenues from
software maintenance contracts are recognized over the maintenance periods,
generally one year. Revenues from extended warranty agreements are recognized
over the lives of the related service contracts on the straight-line method. The
Company accrues estimated costs of technical support to customers as related
revenues are recognized.

Research and Development Costs

Research and development costs are expensed as incurred. The Company has
not capitalized any software development costs, as technological feasibility is
not generally established until substantially all development is complete.

22
<PAGE>

AVT CORPORATION

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Earnings Per Share

Basic earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
Diluted earnings per common share were computed by dividing net income by the
sum of the weighted average number of shares of common stock outstanding during
the year plus the net additional shares that would have been issued had all
dilutive options been exercised less shares that would be repurchased with the
proceeds from such exercise. Dilutive options are those that have an exercise
price which is less than the average stock price during the year.

The computation of diluted earnings per common share is as follows:

<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1997 1998
---- ---- ----
(in thousands, except per share amounts)
<S> <C> <C> <C>
Diluted earnings per common share:
Net income............................................................................ $ 2,610 $ 2,319 $14,079
------- ------- -------
Weighted average common shares outstanding............................................ 12,318 12,944 13,722
Plus: dilutive options assumed exercised.............................................. 1,881 3,073 2,652
Less: shares assumed repurchased with proceeds from exercise.......................... (832) (1,675) (1,366)
Plus: other common stock equivalents.................................................. 190 68 -
------- ------- -------
Weighted average common and common equivalent shares outstanding...................... 13,557 14,410 15,008
------- ------- -------
Diluted earnings per common share..................................................... $ 0.19 $ 0.16 $ 0.94
======= ======= =======
</TABLE>

Concentration of Credit Risk; Export Sales

The Company achieves broad U.S. market coverage for its products primarily
through a nationwide network of telephony-oriented dealers and computer-oriented
value-added resellers. For the years ended December 31, 1998, 1997 and 1996, no
customer represented 10% or greater of the Company's net sales. The Company
performs ongoing credit evaluations of its customers' financial conditions and,
generally, no collateral is required.

The Company's export sales were as follows:

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1997 1998
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Canada................................................................................ $2,660 $ 3,395 $ 3,914
Other................................................................................. 5,338 8,757 11,044
------ ------- -------
$7,998 $12,152 $14,958
====== ======= =======
</TABLE>

23
<PAGE>

AVT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Segment Reporting

The Company adopted Statement of Accounting Standard No. 131 "Disclosures
about Segments of an Enterprise and Related Information "(SFAS No. 131) during
1998. SFAS 131 requires companies to disclose certain information about
operating segments. Based on the criteria within SFAS No. 131, the Company has
determined that it has one reportable segment, computer telephony products.

Sales of the Company's product by categories and amount are as follows:

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1997 1998
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Enhanced fax products and services.................................................... $28,146 $43,133 $ 68,383
Advanced messaging and call center products........................................... 18,911 24,276 28,159
Basic messaging products.............................................................. 11,636 9,562 6,435
------- ------- --------
$58,693 $76,971 $102,977
======= ======= ========
</TABLE>

2. Income Taxes

Income taxes are provided for in the consolidated statements of income using
the asset and liability method. The difference between the provision for income
taxes and the statutory tax rate applied to income before income tax expense is
due to certain expenses not being deductible for tax purposes and research and
experimentation credits.

The following is a reconciliation from the U.S. statutory rate to the
effective tax rate:

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1997 1998
---- ---- ----
Amount % Amount % Amount %
-------- ----- -------- ----- -------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rate.................................... $2,200 34.0% $1,288 34.0% $7,533 34.0%
Research and experimentation credit...................... (69) (1.1) (105) (2.8) (150) (0.7)
Write-off of purchased, in-process research and
development............................................. 1,408 21.8 -- -- -- --
Nondeductible goodwill amortization...................... 101 1.6 230 6.1 319 1.5
Nontaxable interest income............................... (217) (3.4) (235) (6.2) (227) (1.0)
State taxes and other.................................... 437 6.8 292 7.7 603 2.7
------ ---- ------ ---- ------ ----
Income tax expense....................................... $3,860 59.7% $1,470 38.8% $8,078 36.5%
====== ==== ====== ==== ====== ====
</TABLE>

24
<PAGE>

AVT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Income tax expense and cash paid for income taxes are as follows:

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
(in thousands)
Current........................................................................... $4,011 $ 5,427 $7,863
Deferred.......................................................................... (151) (3,957) 215
------ ------- ------
Total income tax expense....................................................... $3,860 $ 1,470 $8,078
====== ======= ======
Cash paid for income taxes........................................................ $3,144 $ 2,839 $5,672
====== ======= ======
</TABLE>

Deferred taxes result from temporary differences relating to items that are
expensed for financial reporting, but are not currently deductible for income
tax purposes.

Significant components of the Company's deferred tax asset as of December 31,
1997 and 1998 are as follows:

<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
---- ----
(in thousands)
<S> <C> <C>
Deferred tax assets:
Accounts receivable allowances............................................................. $ 377 $ 409
Inventories................................................................................ 75 85
Depreciation and amortization.............................................................. 165 161
Accrued compensation and benefits.......................................................... 171 192
Purchased research and development......................................................... 3,841 3,549
Deferred Revenue........................................................................... - 468
Other...................................................................................... 573 340
------ ------
Deferred tax assets and prepaid income taxes.................................................. $5,202 $5,204
====== ======
</TABLE>

3. Shareholders' Equity

On April 23, 1998, the Company announced that its Board of Directors
approved a two-for-one stock split of the Common Stock effected in the form of a
stock dividend. Shareholders received an additional share of common stock for
every share held on the record date of May 4, 1998. The additional shares were
payable on May 11, 1998. Accordingly, the accompanying financial statements
have been restated to reflect this stock split.

On April 20, 1998, the Company's Board of Directors approved an increase of
the authorized shares of Common Stock, from 30 million to 60 million and an
increase of the authorized shares of Preferred Stock from one million to two
million, in order to reflect the stock split. Shareholder approval of these
increases was not required.

The Company has stock option plans under which employees, directors, officers
and other agents may be granted options to purchase common stock. The Company
has reserved approximately 5,700,000 shares of common stock for issuance
pursuant to these plans upon exercise of outstanding options and upon exercise
of options to be granted in the future. Options generally vest over three to
four years and expire 10 years from the date of grant. The options are
exercisable at prices determined at the discretion of the Board of Directors.
The Company accounts for these plans under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," under which no compensation
cost has been recognized and is 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 1996, 1997 and 1998 been determined using the
fair value method consistent with Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), the Company's net
income and earnings per share would have been reduced to the following pro forma
amounts:

25
<PAGE>

AVT CORPORATION

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1997 1998
---- ---- ----
(in thousands expect per share data)
<S> <C> <C> <C> <C>
Net Income: As Reported................................................. $2,610 $2,319 $14,079
Pro Forma................................................... $1,469 $1,114 $11,830
Basic EPS: As Reported................................................. $ 0.21 $ 0.18 $ 1.03
Pro Forma................................................... $ 0.12 $ 0.09 $ 0.86
Diluted EPS: As Reported................................................. $ 0.19 $ 0.16 $ 0.94
Pro Forma................................................... $ 0.11 $ 0.08 $ 0.79
</TABLE>

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the year ended December 31, 1998: risk-free
interest rates of 6.25%; expected lives of five years; expected volatility of
44%; and $0 dividends. For 1997 the assumptions were: risk-free interest rates
of 6.85%; expected lives of five years; expected volatility of 49%; and $0
dividends. For 1996 the following assumptions were used: risk-free interest
rates of 6.25%; expected lives of five years; expected volatility of 45%; and $0
dividends.

Stock Option Plans

A summary of the status of the Company's stock option plans at December 31,
1996, 1997 and 1998, and the changes during the years then ended, is presented
in the table and narrative below:

1996 1997 1998
---- ---- ----
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
---------- --------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period..................... 1,496,616 $ 1.51 3,189,547 $ 4.12 3,125,760 $ 5.33
Granted................................................ 2,080,824 $ 5.70 548,317 $ 10.07 903,850 $ 18.50
Exercised.............................................. (236,748) $ 1.41 (506,093) $ 2.94 (1,031,959) $ 3.53
Canceled............................................... (151,145) $ 5.79 (106,011) $ 4.54 (98,664) $ 11.05
---------- ---------- ----------
Outstanding at end of period........................... 3,189,547 $ 4.12 3,125,760 $ 5.33 2,898,987 $ 9.88
========== ========== ==========
Exercisable at end of period........................... 1,262,175 $ 4.25 1,564,231 $ 3.32 1,504,658 $ 5.68
========== ========== ==========
Weighted average fair value of options granted......... $ 2.89 $ 5.26 $ 9.12
</TABLE>

Options outstanding have exercise prices ranging from $0.50 to $23.25 per
share, with weighted average remaining contractual lives of 7.3, 7.1 and 7.4
years at December 31, 1996, 1997 and 1998, respectively. At December 31, 1998,
2,255,225 shares of the Company's common stock were available for future grant
under the Company's stock option plans. Information relating to stock options
outstanding and stock options exercisable at December 31, 1998 is as follows:

26
<PAGE>

AVT CORPORATION

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------- -------------------
Wtd. Avg.
Remaining Wtd. Avg. Wtd. Avg.
Range of Exercise Prices Shares Contractual Life Ex. Price Shares Ex. Price
------------------------ ------ ---------------- --------- ------ ---------

Warrants

At December 31, 1998, there were outstanding warrants to purchase 174,560
shares of the Company's common stock at $6.68 per share. The warrants were
issued in connection with the Telcom Technologies Inc. acquisition discussed in
Note 8 below.

4. Line of Credit

At December 31, 1998, the Company had a $4.0 million unsecured revolving
line of credit, none of which was used during the years ended December 31, 1997
and 1998. The Company's line of credit expires in July 1999, and contains
certain financial covenants and restrictions as to various matters, including
the Company's ability to pay cash dividends without the bank's prior approval.
The Company is currently in compliance with such financial covenants and
restrictions. Borrowings under the line of credit bear interest at the bank's
prime rate or, at the Company's option, its interbank offering rate plus 1.50%.
At December 31, 1998, the bank's prime rate was 7.75%, and its interbank
offering rate was 5.1%.

5. Short-Term Investments

The Company has classified its investments as "available-for-sale" and
recorded these investments at estimated fair value, with unrealized gains and
losses, when material, reported as a component of shareholders' equity.

Interest income is recorded using an effective interest rate, with the
associated premium or discount amortized to interest income over the term of the
investment. The cost of securities sold is based upon the specific
identification method. Available-for-sale securities as of December 31, 1997 and
1998 consisted of municipal notes and bonds whose amortized cost approximates
estimated fair value. As of December 31, 1997 and 1998 average maturity for
these investments was four and eight months respectively.

27
<PAGE>

AVT CORPORATION

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

6. Commitments and Contingencies

Leases

The Company leases its office space under noncancelable operating leases.
Rent expense under the noncancelable leases amounted to $654,000 in 1996,
$1,048,000 in 1997 and $1,290,000 in 1998. Future minimum lease payments under
noncancelable operating leases are as follows (in thousands):

Retirement Savings Plan

The Company offers a 401(k) profit-sharing plan to substantially all of its
employees. Company contributions are determined annually and are at the
discretion of the Board of Directors. Contributions made to the plan were
$54,000 in 1996, $165,000 in 1997and $235,000 in 1998.

License Agreements

In connection with the acquisition of a business in 1989, the Company
agreed to make royalty payments from future sales of the Company's products, up
to a maximum of $2,800,000 in total, payable up to $70,000 per quarter, before
adjustment for increases in the consumer price index. In February 1995, the
Company made a prepayment of $1,808,000 to satisfy this royalty commitment. This
intangible is being amortized over the remainder of the original agreement's
term (67 months). Amounts charged to expense under this agreement were $324,000
in each of 1996, 1997 and 1998.

In addition to the agreement mentioned above, the Company has two
nonexclusive licenses to sell products using patented technology. In exchange
for the licenses, the Company has made quarterly payments equal to 6% of net
revenues from sales of components utilized in the Company's products that use
the licensed technology.

In September 1995, the Company renegotiated its royalty obligation for one
of these licenses by issuing a note in the amount of $1,937,000, payable in 12
equal quarterly installments of $161,417 each, with the first installment paid
upon the signing of the agreement. The Company accrued interest expense at an
imputed rate of 8.75% per annum. This note was satisfied at December 31, 1998.
The Company recorded an intangible for this prepayment in the amount of
$1,725,000. The intangible is being amortized on a straight-line basis over the
remaining average lives of the related patents (approximately 12 years).

In July 1996, the Company renegotiated its royalty obligation for the
second license by issuing a note in the amount of $450,000, payable over two
quarters, with the first installment paid upon the signing of the agreement. The
Company accrued interest expense at an imputed rate of 8.5% per annum. This note
was satisfied at December 31, 1996. The Company recorded an intangible for this
prepayment in the amount of $446,000. The intangible is being amortized on a
straight-line basis over the remaining average lives of the related patents
(approximately seven years). Amounts charged to expense for the two nonexclusive
licenses were $212,000 in each of 1996, 1997 and 1998.

28
<PAGE>

AVT CORPORATION

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Legal Proceedings

In May 1998, CallWare brought suit against AVT in federal court in Salt
Lake City, Utah, alleging various claims relating to purported false advertising
by AVT. (CallWare Technologies, Inc. v. Applied Voice Technology, Inc., Case No.
2:98CV 0329K.) CallWare has claimed $20 million in monetary damages, and an
additional $60 million in punitive damages. The suit is in the discovery phase,
and an initial pretrial conference was held on January 14, 1999 and a trial date
of January 10, 2000 has been set. AVT believes that CallWare's claims are
without merit and is vigorously defending the lawsuit.

7. Supplemental Information--Valuation and Qualifying Accounts

<TABLE>
<CAPTION>
Balance at Charged to Charged Balance
Beginning costs and to other at end
Description of period expenses accounts Deductions(1) of period
----------- --------- -------- --------- ------------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
December 31, 1996..................................... $ 669 402 -- 283 $ 788
December 31, 1997..................................... $ 788 489 97 465 $ 909
December 31, 1998..................................... $ 909 309 -- 289 $ 929
</TABLE>

(1) Amounts include write-offs of accounts receivable deemed uncollectable.

8. Businesses Acquired

On January 3, 1997, the Company acquired selected assets and liabilities of
Telcom Technologies Inc., a developer of NT-based open-architecture automatic
call distribution systems. The purchase price for the acquisition was $3.5
million in cash, plus warrants to purchase 200,000 shares of the Company's
common stock at $6.68 per share, which may be exercised at any time prior to
January 3, 2002. The Company accounted for the business combination as a
purchase and recognized a nonrecurring charge of $3.9 million in the first
quarter of 1997, representing the value of the purchased, in-process research
and development.

On October 22, 1997, the Company acquired all the outstanding capital stock
of CommercePath, Inc. (CommercePath) from Forest City Trading Group, Inc. for
$10.4 million in cash. The Company accounted for the business combination as a
purchase and recorded a nonrecurring charge of $7.1 million in the fourth
quarter of 1997, representing the value of the purchased, in-process research
and development, and recorded $1.8 million of goodwill that it will amortize
over seven years.

The pro forma unaudited consolidated operating results of the Company for
the years ended December 31, 1996 and 1997, assuming the acquisition of
CommercePath had been made as of January 1, 1996 and 1997, respectively, are
summarized below:

<TABLE>
<CAPTION>
1996 1997
----------------------------- ---------------------------
Pro Forma Pro Forma
Actual (unaudited) Actual (unaudited)
------- ----------- ------ -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales.................................................. $58,693 $64,967 $76,971 $82,348
Net income................................................. $ 2,610 $ 2,487 $ 2,319 $ 1,816
Diluted earnings per share................................. $ 0.19 $ 0.18 $ 0.16 $ 0.13
</TABLE>

29
<PAGE>

AVT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

These pro forma results have been prepared for comparative purposes only
and include certain adjustments such as additional amortization resulting from
allocating a portion of the purchase price to goodwill. They do not purport to
be indicative of the results of operations which actually would have resulted
had the combination been in effect on January 1, 1996 or January 1, 1997, as the
case may be, or future results of operations of the consolidated entity.

9. Supplemental Consolidated Quarterly Financial Data and Market Information
(unaudited)

<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1997 1997 1997 1997 1998 1998 1998 1998
---- ---- ---- ---- ---- ---- ---- ----
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>

Net sales................................. $16,213 $18,227 $19,763 $22,769 $22,313 $24,809 $26,448 $29,407
Cost of sales............................. 6,501 6,973 7,598 8,161 8,523 9,442 9,295 10,021
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.............................. 9,712 11,254 12,165 14,608 13,790 15,367 17,153 19,386
Operating expenses:
Research and development................ 1,783 1,835 2,029 2,424 2,339 2,334 2,452 2,350
Selling, general and
administrative......................... 5,947 6,379 6,150 7,481 7,612 8,397 9,178 9,847

Non-recurring charges..................... 3,898 -- -- 7,127 287 -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses................ 11,628 8,214 8,179 17,032 10,238 10,731 11,630 12,197
------- ------- ------- ------- ------- ------- ------- -------

Operating income (loss)................... (1,916) 3,040 3,986 (2,424) 3,552 4,636 5,523 7,189
Other income, net......................... 251 281 270 301 254 346 270 386
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income tax
expense.................................. (1,665) 3,321 4,256 (2,123) 3,806 4,982 5,793 7,575
Income tax expense (benefit).............. (591) 1,225 1,570 (734) 1,401 1,823 2,129 2,725
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)......................... $(1,074) $ 2,096 $ 2,686 $(1,389) $ 2,405 $ 3,159 $ 3,664 $ 4,850
======= ======= ======= ======= ======= ======= ======= =======
Diluted earnings (loss) per common
share (1)................................ $ (0.08) $ 0.15 $ 0.19 $ (0.11) $ 0.16 $ 0.21 $ 0.24 $ 0.31
Net income excluding nonrecurring
Items.................................... $ 1,421 $ 2,096 $ 2,686 $ 3,172 $ 2,589 $ 3,159 $ 3,664 $ 4,850
Diluted earnings per common share
excluding nonrecurring items(1).......... $ 0.10 $ 0.15 $ 0.19 $ 0.21 $ 0.17 $ 0.21 $ 0.24 $ 0.31
Weighted average common and
common equivalent shares
outstanding.............................. 12,781 14,039 14,517 13,113 14,949 15,245 15,489 15,460
Stock price range (2)
High.................................... $ 10.06 $ 9.69 $ 15.06 $ 16.25 $ 20.31 $ 23.50 $ 25.75 $ 29.69
Low..................................... $ 5.88 $ 5.69 $ 8.69 $ 9.50 $ 13.38 $ 17.13 $ 19.63 $ 12.19
</TABLE>

(1) Earnings per common share is computed independently for each of the
quarters presented. Therefore, the sum of the quarterly net income per
share amounts will not necessarily equal the total for the year.
(2) The Company's common stock is traded on the Nasdaq National Market under
the symbol "AVTC." As of December 31, 1998, there were approximately 70
shareholders of record of the Company's common stock. The Company has not
paid any cash dividends on its common stock.

30
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF SUPPLEMENTAL CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Set forth below is the Company's Supplemental Consolidated Management's
Discussion and Analysis of Financial Condition and Results of Operations for the
quarterly periods ended March 31, 1999 and 1998, restated to give retroactive
effect to the MediaTel Merger.

Results of Operations

Net sales. Net sales increased 29.3% to $28,843,000 in the quarter ended
March 31, 1999, from $22,313,000 in the comparable 1998 quarter. This growth was
fueled by enhanced fax sales which increased 30.6% from the comparable prior-
year quarter and represented 66.7% of net sales, and unified messaging and
installed base upgrade sales in our computer telephony group which increased
35.0% and represented 27.7% of total net sales. Sales of low margin basic
messaging product lines were flat when compared to the same quarter in 1998. The
Company expects sales of the lower-margin basic messaging products to continue
to be affected by price pressures from competitive offerings and decline as a
percentage of total sales in the future. International sales for the first
quarter of 1999 increased 62.3% compared to the first quarter of 1998, and
represented 18.6% of total net sales.

Gross profit. Gross profit as a percentage of net sales improved to 64.7% in
the quarter ended March 31, 1999, as compared to 61.8% in the comparable prior-
year quarter, due to the continued sales mix shift toward the higher margin
enhanced fax and NT-based CTG product lines.

Research and development. Research and development expenses increased to
$2,621,000 in the quarter ended March 31, 1999 from $2,339,000 in the comparable
prior-year period, due primarily to increased personnel costs relating to
acceleration of certain development projects. As a percentage of sales, research
and development expenses for the current quarter declined to 9.1% compared with
10.5% of net sales in the comparable prior-year quarter.

Sales, general and administrative. Sales, general and administrative expenses
increased to $10,277,000 in the quarter ended March 31, 1999 from $7,612,000 in
the comparable prior-year quarter, due primarily to increased marketing and
personnel-related costs of developing domestic and international distribution
for both the CTG and Enterprise Fax channels. Sales, general and administrative
costs for the current quarter represented 35.6% of net sales, an increase from
34.1% in the comparable prior-year quarter.

Operating income. Operating income for the quarter ended March 31, 1999
increased to $5,771,000, or 20.0% of net sales, from $3,552,000, or 15.9% of net
sales, in the comparable prior-year quarter. In the first quarter of 1998, the
Company wrote off costs of $287,000 related to the withdrawal in February of the
follow-on stock offering originally filed in October 1997.

Other income, net. Net other income was $427,000 in the quarter ended March
31, 1999, as compared to $254,000 in the comparable prior-year quarter due to
increased interest income on investments.

Income tax expense. The effective tax rate for the quarter ended March 31,
1999 and 1998 was 36.4%, with income tax expense of $2,256,000 for the quarter
ended March 31, 1999 and $1,401,000 in the comparable prior-year quarter.

Net income. The Company recognized net income of $3,942,000 or $0.25 per
diluted common share for the quarter ended March 31, 1999, as compared to
$2,405,000 or $0.16 per diluted common share for the comparable prior-year
quarter.

Liquidity and Capital Resources

Cash provided by operating activities in the three months ended March 31,
1999 was $8.0 million due primarily to continuing profitable operations. The
average accounts receivable collection period remained favorable at 51 days.
Inventories remained constant at $5.6 million at March 31, 1999 and December 31,
1998.

The Company expects that its current cash, cash flow from operations, and
available bank line of credit will provide sufficient working capital for
operations for the foreseeable future.

31
<PAGE>

SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS

(Unaudited)

<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ------------
ASSETS (in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $18,739 $14,466
Short-term investments 33,369 28,225
Accounts receivable, net 17,345 17,563
Inventories 5,565 5,560
Deferred and prepaid income taxes 2,139 1,461
Prepaid expenses and other 1,406 1,536
------- -------
Total current assets 78,563 68,811

Equipment and leasehold improvements, net 5,733 5,417
Intangibles, net 7,249 7,677
Deferred income taxes 3,679 3,743
------- -------
$95,224 $85,648
======= =======

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,126 $ 4,793
Accrued compensation and benefits 4,061 4,097
Other accrued liabilities 5,722 5,094
Federal income taxes payable 241 578
------- -------
Total current liabilities 15,150 14,562
------- -------

Commitments and contingencies

Shareholders' equity:
Preferred stock, par value $.01 per share, 2,000,000
authorized; none outstanding - -
Common stock, par value $.01 per share, 60,000,000
authorized; 14,703,559 and 14,230,575 shares outstanding 147 142
Additional paid-in capital 48,100 42,987
Retained earnings 31,827 27,957
------- -------
Total shareholders' equity 80,074 71,086
------- -------

$95,224 $85,648
======= =======
</TABLE>

See accompanying notes to consolidated financial statements

32
<PAGE>

AVT CORPORATION

SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

<TABLE>
<CAPTION>
Quarter ended
March 31,
----------------------------------
1999 1998
-------- -------
(in thousands, except per share data)
<S> <C> <C>
Net sales $ 28,843 $ 22,313
Cost of sales 10,174 8,523
-------- --------
Gross profit 18,669 13,790
Operating expenses:
Research and development 2,621 2,339
Sales, general and administrative 10,277 7,612
Non-recurring charges (1) - 287
-------- --------
Total operating expenses 12,898 10,238
-------- --------
Operating income 5,771 3,552
Other income, net 427 254
-------- --------
Income before income taxes 6,198 3,806
Income tax expense 2,256 1,401
-------- --------

Net income $ 3,942 $ 2,405
======== ========

Basic earnings per common share $ 0.27 $ 0.18

Weighted average common shares outstanding 14,402 13,281

Diluted earnings per common share $ 0.25 $ 0.16

Weighted average common and common equivalent
shares outstanding 15,666 14,949
</TABLE>

(1) Non-recurring charges consist of write-off of costs related to the
withdrawal of the follow-on stock offering in February, 1998 (originally
filed in October 1997).

See accompanying notes to consolidated financial statements.

33
<PAGE>

AVT CORPORATION

SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

<TABLE>
<CAPTION>
Quarter ended
March 31,
----------------------------------
1999 1998
-------- -------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,942 $ 2,405
-------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,093 933
Deferred income tax asset (205) -
Changes in current assets and liabilities, net of
effects of acquisition:
Accounts receivable 218 331
Inventories (5) 543
Prepaid expenses and other assets 130 150
Accounts payable 333 5
Accrued compensation and benefits (36) (562)
Other accrued liabilities 306 246
Federal income taxes payable 2,200 1,153
-------- --------
Total adjustments 4,034 2,799
-------- --------
Net cash provided by operating
activities 7,976 5,204
-------- --------
Cash flows from investing activities:
Purchase of equipment and leasehold
improvements (964) (892)
Purchase of short-term investments (5,144) (4,741)
Purchase of intangibles and other long-term
assets (18) (29)
-------- --------

Net cash used by investing activities (6,126) (5,662)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt - (195)
Proceeds from exercise of stock options 2,423 462
-------- --------
Net cash provided by financing
activities 2,423 267
-------- --------
Net increase (decrease) in cash and
cash equivalents 4,273 (191)

Cash and cash equivalents at beginning of period 14,466 11,164
-------- --------
Cash and cash equivalents at end of period $ 18,739 $ 10,973
======== ========

Supplementary disclosures of cash flows:
Cash paid for income taxes $ 407 $ -
</TABLE>

34
<PAGE>

AVT CORPORATION

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)
1. Interim Financial Statements

The accompanying consolidated financial statements of AVT Corporation and
subsidiaries (the Company) are unaudited. In the opinion of the Company's
management, the financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary to state fairly the financial
information set forth therein. Results of operations for the three month period
ended March 31, 1999 are not necessarily indicative of future financial results.

Certain notes and other information have been condensed or omitted from the
interim financial statements presented in this Current Report on Form 8-K/A.
Accordingly, these financial statements should be read in conjunction with the
Supplement Consolidated Financial Statements for the year ended December 31,
1998 included in this Current Report on Form 8-K/A.

2. Earnings Per Share

<TABLE>
<CAPTION>
Quarter ended March 31,
--------------------------------------------------------------
1999 1998
------------------------------ ------------------------------
(in thousands, except per share data)
--------------------------------------------------------------
Basic Diluted Basic Diluted
<S> <C> <C> <C> <C>
Net income $ 3,942 $ 3,942 $ 2,405 $ 2,405
========= ========= ========= ===========

Computation of common and common
equivalent shares outstanding:
Common Stock 14,402 14,402 13,281 13,281
Options 1,264 1,668
--------- --------- --------- -----------
Common and common equivalent shares
used in computing per share amounts 14,402 15,666 13,281 14,949
========= ========= ========= ===========
Net income per share $ 0.27 $ 0.25 $ 0.18 $ 0.16
========= ========= ========= ===========
</TABLE>

3. Shareholders' Equity

On April 20, 1998, the Company's Board of Directors approved an
increase of the authorized shares of Common Stock, from 30 million to 60 million
and an increase of the authorized shares of Preferred Stock from one million to
two million, in order to reflect the stock split. Shareholder approval of these
increases was not required.

35
<PAGE>

AVT CORPORATION

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4. Changes in Shareholders' Equity

<TABLE>
<S> <C>
Beginning balance at December 31, 1998 $ 71,086
Net Income 3,942
Exercise of stock options 2.423
Dividend declared (72)
Tax benefit from exercise of non-qualified stock options 2,695
--------
Ending balance at March 31, 1999 $ 80,074
========
</TABLE>

5. Segment Reporting

The Company has adopted Statement of Accounting Standard No. 131
"Disclosures about Segments of an Enterprise and Related Information" (SFAS No.
131). SFAS No. 131 requires companies to disclose certain information about
operating segments. Based on the criteria within SFAS No. 131, the Company has
determined that it has one reportable segment, computer telephony products.

Sales of the Company's product by categories and amount are as follows:

<TABLE>
<CAPTION>
Quarter Ended
---------------------
March 31,
---------------------
1999 1998
--------- ----------
(in thousands)
<S> <C> <C>
Enhanced fax products and services......................................... $19,224 $14,718
Advanced messaging and call center products................................ 7,982 5,902
Basic messaging products................................................... 1,637 1,693
------- -------
$28,843 $22,313
======= =======
</TABLE>

36
<PAGE>

Item 7. Financial Statements, Pro Forma Financial Information and Exhibits

(a) Financial Statements of Business Acquired
Not applicable

(b) Pro Forma Financial Information
Not applicable

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

10.1 Agreement and Plan of Merger among AVT
Corporation, MediaTel Corporation and Goldengate
Acquisition Corp., dated as of April 13, 1999.*

10.2 Registration Rights Agreement among AVT
Corporation and the shareholder of MediaTel
Corporation, dated as of April 14, 1999.*

10.3 Escrow Agreement and Indemnification Agreement
among AVT Corporation, Sanjeev Malaney, as
Securityholder Agent, and ChaseMellon Shareholder
Services, LLC, as escrow agent, dated as of April
14, 1999.*

23.1 Consent of Arthur Andersen LLP, Independent
Auditors.

23.2 Consent of PricewaterhouseCoopers LLP, Independent
Auditors for MediaTel Corporation.

___________________________
* Previously filed.

37
<PAGE>

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.

AVT CORPORATION

By: /s/ Roger Fukai
-----------------------------------
Roger Fukai, Chief Financial Officer

Dated: June 28, 1999

38
<PAGE>

Exhibit Index

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

10.1 Agreement and Plan of Merger among AVT Corporation, MediaTel
Corporation and Goldengate Acquisition Corp., dated as of
April 13, 1999.*

10.2 Registration Rights Agreement among AVT Corporation and the
shareholder of MediaTel Corporation, dated as of April 14,
1999.*

10.3 Escrow Agreement and Indemnification Agreement among AVT
Corporation, Sanjeev Malaney, as Securityholder Agent, and
ChaseMellon Shareholder Services, LLC, as escrow agent,
dated as of April 14, 1999.*

23.1 Consent of Arthur Andersen LLP, Independent Auditors.

23.2 Consent of PricewaterhouseCoopers, Independent Auditors for
MediaTel Corporation.

______________________
* Previously filed.

<PAGE>

Exhibit 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated January 28, 1999
included in AVT Corporation's Form 10-K for the year ended December 31, 1998,
and our report dated January 28, 1999, except for paragraphs 2 and 3 of Note 1,
as to which the date is April 14, 1999, included in AVT Corporation's June 28,
1999 filing on Form 8-K/A and to all references to our firm included in this
registration statement.

/s/ Arthur Andersen LLP

Seattle, Washington,
June 28, 1999

<PAGE>
EXHIBIT 23.2

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the Registration Statements on
Form S-8 (Nos. 33-92438, 333-11129, 333-38557, 333-42279, 333-71623, 333-77357,
and 333-85452) of AVT Corporation of our report dated February 19, 1999 relating
to the financial statements of MediaTel Corporation, which appears in this
Current Report on Form 8-K of AVT Corporation as amended on June 28, 1999.

/s/ PricewaterhouseCoopers

San Francisco, California
June 25, 1999