10-K

FORM 10-K

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

	

[X]	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF 
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)

For the fiscal year ended December 31, 1996

	OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) 
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) 

For the transition period from              to           
  

Commission File Number:  0-11551



EXECUTONE Information Systems, Inc.
(Exact name of registrant as specified in its charter)


                 Virginia                        86-0449210
(State or other jurisdiction of          (I.R.S. Employeer     
   incorporation or organization)            Identification No.)


478 Wheelers Farms Road, Milford, Connecticut                 06460 
 (Address of principal executive offices)                   (Zip Code)	


Registrant's telephone number, including area code:  (203)876-7600


Securities registered pursuant to Section 12(b) of the 
Act:

Title of each class     Name of each exchange 
                        on which registered
     N/A                      None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share
72% Convertible Subordinated Debentures, Due March 15, 2011
                                                         
                                                         
        
                                                       
(Title of Class) 

                                                         
                                                         
        

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

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

The aggregate market value of the common stock held by 
non-affiliates of the registrant (assuming for this 
purpose that all executive officers and directors of the registrant 
are affiliates) as of March 24, 1997 was $117,323,737, based on the 
last sale price for the common stock on that date.

The number of shares outstanding of the registrant's only class 
of common stock, $.01 par value per share, as of March 24, 1996, 
was 49,471,481.


DOCUMENTS INCORPORATED BY REFERENCE

The following documents are incorporated by reference 
into the Part of this Form 10-K indicated below:

Part II     1996 Annual Report to Shareholders
Part III    1997 Proxy Statement for Annual Meeting of 
Shareholders scheduled to be held June 10, 1997.




TABLE OF CONTENTS


Item                                                            Page


PART I


1. Business                                                       1
2. Properties                                                    11
3. Legal Proceedings                                             11
4. Submission of Matters to a Vote of Security Holders           12
   Executive Officers of the Registrant                          13


PART II

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


PART III

10. Directors and Executive Officers of the Registrant           17
11. Executive Compensation                                       17
12. Security Ownership of Certain Beneficial Owners
    and Management                                               17
13. Certain Relationships and Related Transactions               17


PART IV

14. Exhibits, Financial Statement Schedules and 
    Reports on Form 8-K                                          18




PART I

ITEM 1.    BUSINESS

General

EXECUTONE Information Systems, Inc. ("EXECUTONE" or the 
"Company") develops, markets and supports voice and data 
communications systems.  Products and services include 
telephone systems, voice mail systems, in-bound and out-bound 
call center systems and specialized healthcare communications 
systems.  The Company, through its Unistar Entertainment 
subsidiary, also has the exclusive right to 
design, develop and manage the National Indian Lottery 
(the "NIL" or the "Lottery").    Products are sold under 
the EXECUTONE'r', INFOSTAR'r', IDS'tm', LIFESAVER'tm', 
INFOSTAR/ILS'tm' and UNISTAR'tm' brand names through a 
worldwide network of direct sales and service employees 
and independent distributors.

EXECUTONE's executive offices are located at 
478 Wheelers Farms Road, Milford, Connecticut 06460, 
telephone (203) 876-7600.  The Common Stock of EXECUTONE 
is traded on the NASDAQ National Market System 
under the symbol "XTON", and its Convertible Subordinated 
Debentures due 2011 trade on the NASDAQ system under the 
symbol "XTONG".


Recent Developments

In  1996, the Company sold its direct sales and service 
organization, including its network services division and the 
national service center, to Clarity Telecom Holdings, Inc. 
d/b/a/ Executone Business Solutions ("Clarity") for consideration 
valued at $69.6 million.  The Company and Clarity also entered  
into a five-year exclusive distributor agreement pursuant to which 
Clarity sells and services EXECUTONE'r' and INFOSTAR'r' 
telephone products to business and commercial locations that 
require up to 400 telephones.

The sale did not include the Pittsburgh direct sales and service 
office, which the Company separately sold to one of its existing 
independent distributors. 

After the sale, the Computer Telephony business consists of 
telephone products sales to independent distributors, of which 
Clarity is the largest distributor, along with the National Accounts 
and Federal Systems marketing groups.  The Company retains its 
Healthcare Communications and Call Center Management businesses 
and the Unistar business.

In April 1996, the Company rescinded its distribution 
agreement with GPT Video Systems due to failures by GPT to 
deliver properly functioning videoconferencing 
products on a timely basis.  The Company has also 
commenced a legal action against GPT to recover its 
damages.  In June 1996, the Company completed the sale 
of its videoconferencing division, including customer 
service contracts and certain inventory.

On December 19, 1995, the Company acquired 100% of the 
common stock of Unistar Gaming Corp., a Delaware 
corporation ("Unistar Gaming").  Unistar Gaming, through 
its subsidiary Unistar Entertainment, Inc. ("Unistar"), has 
an exclusive five-year contract to design, develop, finance, 
and manage the Lottery, a national lottery authorized by 
federal law and by a compact between the State of Idaho and 
the Coeur d'Alene Indian Tribe of Idaho ("Coeur d'Alene Tribe" 
or the "Tribe").  In return for providing these management 
services, Unistar will be paid a fee equal to 30% of the profits 
of the Lottery.

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The Company acquired 100% of Unistar for 3.7 million 
shares of Common Stock, 250,000 shares of its Cumulative 
Convertible Preferred Stock, Series A ("Series A Preferred Stock") 
and 100,000 shares of its Cumulative Contingently Convertible 
Preferred Stock, Series B ("Series B Preferred Stock").

The telephone operations of the Lottery may not begin 
until the resolution of a pending legal proceeding.  
Certain states have attempted to block the NIL by 
filing letters under 18 U.S.C. Section 1084 preventing 
long-distance carriers from providing telephone service 
to the NIL based on allegations that the NIL is not legal.  
The Coeur d'Alene Tribe has initiated legal action to 
argue that the Lottery is authorized by the Indian Gaming 
Regulatory Act ("IGRA") passed in 1988, that IGRA preempts 
state and federal statutes, and that the states lack 
authority to issue the Section 1084 notification letters to any 
carrier.  On February 28, 1996, the Coeur d'Alene Tribal 
Court ruled that all requirements of IGRA have been satisfied, 
that the Section 1084 letters are 
invalid, and that the long distance carrier is obligated 
to provide telephone service for the NIL.  This  ruling and a 
related order dated May 1, 1996 are being appealed to the Tribal 
Appellate  Court and probably will be appealed ultimately to 
United States federal courts as well.  The Company has been 
advised by its outside counsel, Hunton & Williams, that based upon 
such firm's review of the applicable statutes, regulations and case 
law, it believes that the National Indian Lottery is authorized under 
IGRA and that the favorable rulings issued by the Coeur d'Alene Tribal
Court on February 28, and May 1, 1996 should be upheld on appeal.


Overview of Business 

The Company's revenues are derived from both from product 
sales to distributors, direct sales of healthcare 
communications and call center products, and direct 
sales to national accounts and federal government 
customers, as well as installations, additions, changes, 
upgrades or relocation of previously installed systems, 
maintenance contracts, and service charges to the existing 
base of healthcare, call center, national account and federal 
government customers.  The Company's products and 
services are marketed and sold through a national network 
of Company direct sales and service employees and independent 
distributors.

The Computer Telephony business offers value-added 
products and services to the small to medium-sized 
business customer.  The Company's integrated digital 
telephone systems emphasize flexible software 
applications, such as data switching and computer 
telephone interface, designed to enhance the customer's 
ability to communicate, obtain and manage information. 
The Company's telephone systems provide the platform for 
its other voice and data software applications, such as 
automatic call distribution.

The Healthcare Communications business provides to its 
healthcare facility customers integration of voice and 
data between nurse and patient communication systems 
and hospital information systems, resulting in increased 
flexibility and efficiency in hospital operations, and 
improved patient care.  EXECUTONE has been a recognized
name in this market for many years with its LIFESAVER'tm' and 
CARE/COM'r'II-E nurse call systems.  The Company markets software 
applications specific to hospital and nursing homes to help 
resolve other labor intensive tasks.

The Healthcare Communications business also markets the 
INFOSTAR/ILS'tm' locator system, which can improve 
productivity, save time and expense for users and 
eliminate overhead paging by instantly locating staff 
and equipment in a facility.  Each person or piece of 
equipment wears an individually coded badge that 
transmits infrared signals to sensors placed throughout 
the facility, which forward the location information to 
a central processing unit.  The ILS system can be integrated 

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with the Company's telephone systems and nurse call systems 
to provide additional productivity improvements for hospital environments.

The Call Center Management business develops and sells 
sophisticated telephony products that integrate a 
computerized digital telephone system platform with high-volume 
inbound, outbound and internal call processing systems.  Such 
systems include automatic call distribution systems, predictive 
dialing systems, and scripting software to assist agents 
handling calls.  Certain of these systems also provide data interface 
with host or mainframe computers.  These systems are sold to 
call center customers that have a need for systems to efficiently 
and cost-effectively receive or place their customer or prospect calls,
distribute those calls to available live operators, obtain information
from callers, record and distribute messages from callers, 
and produce management reports on call activity.

In 1995, the Company acquired Unistar.  Unistar has an 
exclusive five-year contract with the Coeur d'Alene Tribe 
to design, develop, finance, and manage the Lottery, a national 
lottery authorized by IGRA  and a compact between the State of Idaho 
and the  Tribe. Unistar provides development and management of 
the software, network design and call center applications for 
the Lottery's operations.

The telephone operations of the Lottery may not begin 
until resolution of a pending legal proceeding.  See 
"Legal Proceedings."  Although the Unistar legal 
situation is essentially unchanged, management is 
hopeful that the Tribe will receive a positive decision 
early this year in the Tribal Appellate Court, affirming 
the Tribal Court's rulings last year on the legality of 
the National Indian Lottery, and that such a decision will 
accelerate a federal court decision.  In the meantime, Unistar 
is developing the business and gaming systems needed to conduct 
the Lottery, and plans to test these systems at an Internet test 
site between April and June 1997.  Assuming the successful completion
of these tests, Unistar plans a controlled expanded test from July to 
September, and assuming continued successful results, a 
national launch over the Internet in the fourth quarter of 1997.

Computer Telephony Products

The Company develops and distributes a complete line of 
applications-oriented computer telephony products that are 
easy to install, easy to maintain and easy to use, and that 
create visible value for our customers.  The Company's complete 
portfolio of applications are built upon the Integrated Digital 
System (IDS) family of digital telephone systems.  Products range 
from PBXs to satisfy the basic voice communications needs of small- 
to medium-sized businesses to standards-compliant CT applications, 
standalone and LAN-based applications including voice mail, unified
messaging, Automatic Call Distribution (ACD) and wireless communications.

The Company's telephone systems are characterized by 
flexible software and a hardware design that makes them 
readily adaptable to evolving technology and customer requirements.  
The Company attributes the market acceptance of its systems to 
standards-based, cost-effective design and to the sophistication of its 
software options.  The Company's systems include an 
integrated automated attendant feature to answer and 
transfer calls quickly and efficiently without operator 
intervention. The Integrated Operator Terminal and management 
reports capabilities permit the monitoring of calls and improve 
the efficiency of directing calls to the appropriate extensions.  
The Company's latest achievement in call processing, the Ultimate 
Operator, takes the operator's console to a new level by delivering 
superior call handling and reporting capabilities in a Windows 
environment.  The IDS systems also support sophisticated call center
and healthcare applications in addition to the Company's Integrated
Locator System.  The recent introduction of the Company's LAN card

3


allows users with access to their organization's network to manage
the IDS through their desktop PCs.

The Company has steadily introduced a portfolio of 
products fully compliant with the latest industry 
standards (TAPI, TSAPI, CSTA) and incorporating the 
most advanced elements of computer telephony integration.  
The TAPI telephones support any desktop application using 
the TAPI standard for computer-telephone integration. Unified 
Messaging and Voice Activated Speed Dial further increase 
productivity by speeding the calling process.
 
The Company also offers a voice mail system that can be integrated 
with the IDS telephone systems and with telephone systems 
manufactured by others.  The INFOSTAR/VX2 voice mail system 
receives, records, stores, distributes, transfers and replays 
messages from both external and internal callers and can 
supplement other call center systems.  In 1996 the Company 
introduced the INFOSTAR/VXC Voice Exchange Card, a complete 
voice processing system built on a card that integrates directly 
into the IDS switch, eliminating the need for a standalone voice 
mail system.  In 1997, the Company signed an agreement to distribute 
the Active Voice line of voice processing and unified messaging products.

The Company develops its application-specific software 
options using high-level programming languages to 
facilitate further enhancements and portability.  
enhancements and portability.  
EXECUTONE's software includes remote capabilities built 
into certain systems that enable the Company to customize 
and update selected features continuously, which increases 
the value of such systems and lengthens their useful lives.  
Certain of the Company's systems are capable of having service 
diagnostics, updates and modifications performed on a remote basis.  
The ability to provide such off-site servicing increases the efficiency 
of customer support and service.


Healthcare Communication Products

The Company develops, manufactures, markets and services 
a line of specialized internal communications systems that 
are used primarily in the healthcare industry.  These internal 
ommunications systems are microprocessor-based patient to nurse
communication systems, intercoms, paging and sound equipment, and
room status indicators.

Platform Systems.  Released on January 17, 1997, the Healthcare
Communications Platform (HCP) is the communications solution dedicated to 
a single platform technology for complete systems integration.  The
HCP exemplifies the Company's commitment to provide total communciation
capability.  With the HCP system, the nurse call function is now 
integrated with an IDS phone system to provide the dual function at one master 
control center.  Nurse call, locator, wireless phones, pocket pagers, patient
reports, and management reports can all integrate seamlessly using a single 
platform fully utilizing all product benefits.

Nurse Call Systems.  The Company's LIFESAVER'tm' nurse call system is an
advanced system integrating voice and data communication between nurse and
patient and providing enhanced self-diagnostics.  The LIFESAVER system is
a state-of-the-art communications network that provides routine and 
emergency signaling, voice communications and data transmission.  The 
nurse console offers menu-driven functions and step-by-step user prompts.
The system is highly flexible, offering many programmable features that
allow customization of its operations to the hospital's needs.  A single
system can serve more than 300 patient beds (150 rooms) and up to eight 
nurse control stations, and up to eight systems can be networked for 
centralized operation.  The LIFESAVER integrates with the Company's 
locator system.

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The CARE/COM II-E nurse call system represents the first step in 
EXECUTONE's plan to bring the benefits of a totally integrated 
communications system to the healthcare market on the Company's 
IDS digital platform. The CARE/COM II-E system provides patient-to-staff 
and staff-to-staff communication on an automatic three-level call 
priority basis.  This new system can currently support 72 patient
stations per system, with the ability to integrate three systems
together and support 216 patient stations.  A five-line LCD 
display Nurse Control Station allows simple call processing and system
operation.  The system is highly flexible to meet the individually
defined needs of today's hospitals and long-term care facilities.

Patient Reporting Systems.  The Healthcare Division also markets
the INFOSTAR /PRS patient reporting system, an automated voice 
storage system that allows the efficient transfer of patient 
information between nurses.  Patient reports are password-protected 
for confidentiality and admission, and discharge and transfer 
information are also supported.  The system uses standard telephone 
instruments and provides full voice messaging capability.  The 
INFOSTAR/PRS system reduces report time, provides continuity at shift
changes, and improves report quality.

Locator Systems.  The Company's INFOSTAR/ILS'tm' locator 
system is an integrated system using infrared transmitter badges 
to communicate location data to sensors installed throughout a 
facility.  The badges transmit regularly at user-programmed intervals 
and can be worn by staff personnel or attached to equipment.  The 
location data is collected by the sensors and forwarded to a central 
processing unit that organizes the data so it can be accessed at one 
or more display stations.  The display of staff and equipment location 
information can be in the form of a list or in the form of a map of
the facility using icons.  The display can be filtered to show only
particular staff members, groups of personnel, 
particular pieces of equipment or groups of equipment.  
The system can be integrated with either the IDS telephone systems, 
allowing the activation of features and display of information on the 
telephone set, or the Compaby's nurse call system, allowing the 
activation of features and display of information at the nurse control
station and patient stations.  The INFOSTAR/VLS version of this product
allows outside callers using non-IDS based products to locate personnel
within a facility, find out who the person is with, complete the call,
or leave a voice message.  The ILS and VLS systems can also be integrated
to other manufacturers' PBXs.  Nortel has now made ILS available to its
dealer network for sale by its dealers in conjunction with Nortel PBXs.
The ILS system is also marketed by the Computer Telephony sales channels 
for office environments.

The Events Processing System collects information from the ILS
system and associates the data to logical, workable and productive
real time data for a customer's employees and assets.  Specific
applications include: door monitoring, wandering patient alert, 
staff presence indicators, badge button press (staff assist or
emergency assist), asset management and equipment tracking.  The 
system allows a facility to program events that will trigger alarms,
lock doors, light lights, open elevator doors, and more.  The system
is completely programmable, which allows the customer to determine
which applications will best fit their needs.

Wireless Telephone Systems.  The Healthcare Communications group
also markets the Ericsson Freeset, an in-building wireless
communications system which operates on the 900MHz bandwidth.
Its low power output (.75mW) makes it ideal for the healthcare
environment, which is very sensitive to high power devices such
as cellular telephones and 2-way radios that may interfere with vital
telemetry equipment.  The Freeset system is extremely flexible in 
providing complete coverage over a large area based on its ability 
to add as many base stations as necessary to provide coverage.  The

5



system can grow to support up to 600 handsets, making it the system
of choice for large installations.

The Company also markets the Monarch'tm' 1.9GHz Wireless Telephone
System, which is an in-building wireless communications tool that
provides cellular-like mobility to a facility without expensive
airtime charges.  The Monarch system operates on the 1.9GHz U-PCS
bandwidth set aside by the FCC strictly for personal communications
use which means the signal will not cause interference or be 
interfered with by conventional telemetry equipment.  The Monarch
system can support up to 2 base stations per system, providing a 
coverage area of over 250,000 sqare feet in a typical office 
environment.  In an open warehouse environment, the coverage is 
much greater.  Each base station allows for eight simultaneous
conversations and the Monarch system can support a maximum of up
to 32 handsets.

Other Communication Priducts.  The INFOSTAR'r'/StatLink'tm' 
product is designed to provide call management and 
integration of EXECUTONE nurse call systems to telephone 
numbers, wireless telephones and pager devices.  
INFOSTAR/StatLink has the flexibility to modify patient 
call flow based on the specific requirements of the healthcare 
facility.  Calls can be routed on a 4-level priority basis to 
any extension, telephone or site pager configured in the database.  
The system is a communications solution that can be integrated 
with any PBX.   Patient priorities and requests can be managed 
more efficiently and calls can be managed more efficiently
and calls can be completed on a more timely basis with less
strain on the staff and patients.

The INFOSTAR'r'/InfoSTAT'tm' product is a software package 
intended for use in emergency departments to provide 
complete communication of real time events and data.  
Used as a daily operational tool, the InfoSTAT system 
provides emergency staff with priority data and 
conditions affecting the department.  Staff can check at a 
glance the status of treatment rooms, room and bed assignments, 
hospital staff assignment and location, and patient status and 
location.  InfoSTAT is customized for each hospital and integrates 
with a facility's existing administrative software such as ADT systems.  

Call Center Management Products 

 The Company's call center management products consist of the following 
systems, which can be integrated with the Company's computer telephone 
systems and with each other to provide large-volume inbound, outbound 
and internal call management.  Computer-telephone integration ("CTI") 
technology integrates the IDS'tm' call processing function with information 
in a customer's computer database.  Primarily used by large incoming call 
centers to automatically identify incoming callers and by outbound centers 
to contact and provide records of contacts, CTI limits the amount of time
that an agent spends contacting or identifying the caller, thereby 
providing better customer service, reducing the number of required 
agents and reducing telephone line and transmission expense.

 Predictive Dialers and Scripting Products - The 
INFOSTAR'r'/Predictive Dialer is an automated call system designed 
to boost productivity in outbound call centers.  The system integrates 
telephone, data collection and  transaction processing functions for those 
customers who require high volume contact by telephone to transact 
business, such as sales, credit and collections, blood banks and 
fund-raising.  Working with the host computer and the IDS telephone 
system platform, the dialer automatically dials telephone numbers 
pulled from the host computer data "live" calls.  Available 
representatives receive these calls and, 
through CTI, can view screen information about the 
customer from the database immediately after the customer 
answers the phone.  The system predicts the availability of 
agents in order to reduce abandoned calls and increase agent 
productivity, and reduces agent contact with busy signals, no 

6



answers, wrong numbers and answering machines.  Management reports 
provide instant and historical feedback on call distribution, list 
management, data input integrity and file maintenance.  Scripting 
software allows the call center to create a script to guide its agents 
through various call scenarios and prompt the input of desired information.

Automatic Call Distribution ("ACD") - ACD systems are 
designed to increase responsiveness to inbound callers 
and increase agent productivity.  ACD systems provide the 
capability to distribute or route incoming calls to available 
agents based upon management's specifications,  and allow the 
supervisor of the call processing group to monitor call traffic 
on-line via a computer terminal.  The Company produces ACD software 
for call centers of up to 500 agents in multiple shifts (225 in any 
single shift), in five levels of sophistication, the highest of which 
is "Custom Plus ACD."  Custom Plus ACD provides the capability to
monitor traffic with color screens and graphics, and 
greatly enhance the ability to store and retrieve 
historical call data.


Sales and Marketing

The Company's distribution network consists of (1) 
domestic independent distributors with approximately 
180 locations operating under exclusive and nonexclusive 
agreements throughout the United States and Canada; (2)  
138 direct healthcare and call center sales and service 
employees in the United States; ; (3) a National Accounts 
group that uses the sales, installation, service and support 
capabilities of EXECUTONE's distribution network to serve multiple 
offices and departments of companies; (4) a Government Systems 
group that uses the distribution network to serve offices of
federal, state and local government agencies; and (5) 24 independent
distributors operating in 17 other foreign countries.

For those distributors that have exclusive distribution 
rights for specified products, retention of such rights 
is subject to satisfaction of established criteria for 
sales and service to customers on an ongoing basis. The 
divesting of or acquisition of customer bases to or from 
distributors in specific geographic territories may occur 
in the normal course of the Company's business.

EXECUTONE's National Accounts business provides 
uniformity in pricing, coordination, installation, 
billing and service for National Accounts customers 
such as Electronic Data Systems, Airborne Express, 
Paychex, Inc., W. W. Grainger, Home Quarters Warehouse, 
Inc., Bridgestone/Firestone, Carlson Companies, PetsMart  
and TCI Cable.  The National Accounts group coordinates the 
sales, installation, service and support functions of independent 
sales offices to serve the multiple offices and departments of 
large companies.

The Company's Government Systems group addresses the 
special procurement and administrative requirements of 
federal, state and local government agencies.  Sales are 
made through a combination of master contracts and 
competitively solicited proposals for large or complex 
telecommunications requirements.  Government Systems 
coordinates the installation, service and support 
activities of independent sales offices to provide 
ongoing support to government agency offices nationwide.

Although the Company offers a broad range of products 
through various sales channels nationwide, computer 
telephony product purchases by Clarity, the purchaser 
of the Company's direct sales and service organization 
and the Company's largest distributor, represented a 
significant portion of the Company's total revenues in 
1996 and are expected to continue to represent a large 
portion of the Company's revenues.  The loss of Clarity 
as a customer could have a material adverse effect on the 
Company, assuming the Company could not replace the shipments 
with other alternative distribution.  The Company believes 
that it has the means within a reasonable period of time to 

7




establish alternative distribution channels in most of EBS's 
territory were that to become necessary.  However, the Company 
does not currently believe there is any significant risk of 
losing Clarity as a customer because Clarity is dependent upon a 
continued supply of the Company's proprietary products to service
and upgrade its large existing customer base.

Backlog consists primarily of products that have 
been ordered and that will be shipped or installed 
within 30 to 60 days of the order (other than call center and 
healthcare orders, which have a longer lead time), or 
systems the installation of which is not yet required by 
the customer.  Backlog as of December 31, 1996, was 
$23,159,000 compared to $33,091,000 at December 31, 1995, 
and the Company expects virtually all of such backlog to be 
filled within the current fiscal year.


Product Maintenance

EXECUTONE warrants parts and labor on its systems, 
typically for one year, and provides maintenance and 
service after warranty expiration either on a contract 
or time and materials basis.  Most of the Company's 
products are repaired at its 56,000-square foot repair 
facility located in Poway, California.  


Product Development and Engineering

As of March 1, 1997, EXECUTONE employed approximately 100 
individuals engaged in product design and development.  
The Company's product development program is designed to 
anticipate and respond to customer needs through development 
of new products and enhancement of existing products.  During 
1996, the Company's engineering efforts focused on 
applications-oriented software products, including new releases 
of computer telephone system, call center and healthcare 
communications software.  EXECUTONE continually strives to reduce
production costs by incorporating new technology into its design
and manufacturing operations.  For the years ended December 31, 1996,
1995, and 1994, Company-sponsored product development and engineering
expenditures (including product management and testing) amounted to 
approximately $13.8 million, $14.7 million, and $12.2 million, 
respectively.


Manufacturing

Most of EXECUTONE's telephone products are manufactured 
by Wong's Electronics Company, Ltd. ("Wong's") in 
Malaysia, by Quality Telecommunication Products, also 
referred to as Compania Dominicana de Telefonos 
("Codetel"), in the Dominican Republic, and by the 
Company directly in Poway, California.  Many of the 
printed circuit boards for the Company's products are 
manufactured, and many products are assembled into 
systems and system components, in the United States.
 
The Company's Manufacturing Services Agreement with 
Wong's currently expires in February 1998 but is 
automatically extended each year for an additional 
one-year term unless either party gives notice of 
termination three months prior to expiration of the 
current term.  The contract may be terminated earlier 
by either party in the event of a material breach by the other party.

If the agreement between Wong's and EXECUTONE should be 
terminated for any reason, or if  Wong's is unable to ship 
or has to reduce shipments, or if restrictions are imposed 
materially limiting the importation of products produced by 
foreign manufacturers, the Company could be affected adversely 
until satisfactory alternative sources are in place.  The 
profitability of EXECUTONE's operations could be affected to 
the extent it is unable to reflect the direct and indirect costs 
of products purchased from Wong's in its pricing policies. The 

8


prices for products purchased by EXECUTONE from 
its suppliers are payable in U.S. dollars.

The majority of EXECUTONE's specialized healthcare and 
internal communication systems are produced in the United 
States at the Company's facility in Poway, California or at 
domestic subcontractors.  The functions of repair, warehousing 
and distribution of the Company's products are performed at the 
Company's facilities in Poway.


Trademarks, Patents and Copyrights

Management believes that the continued success of 
EXECUTONE is dependent upon the ability to design, 
develop and market new products and new or enhanced 
applications.  The patentability of such new products or 
applications is evaluated and patent applications are filed 
where necessary to protect unique developments.  The Company 
currently holds ten utility patents, expiring at various times 
between 2007 and 2013, has six U.S. patent applications pending, 
and six patent applications pending in several foreign countries.

The Company has registered or applied to register its 
trademarks when it believes registration to be important 
to its ongoing business operations.  The Company also generally 
claims copyright protection for software, circuit designs, schematics 
and technical documentation used in connection with its products, 
and relies upon trade secret, contract and copyright laws to protect 
its proprietary rights in its software, designs and documentation.

Certain of EXECUTONE's products incorporate technology 
and software licensed from independent third parties.  
Generally, these licenses require payment of a royalty 
for each system sold that incorporates the licensed 
technology or require that the Company purchase the 
product from the licensor.


Government Regulation

Many of the Company's systems are designed to be 
connected to the public telecommunications network 
and as such are required to comply with certain rules 
of the Federal Communications Commission ("FCC") pertaining 
to telecommunications equipment. The Company has not 
experienced any material adverse effect on its business or 
operations as a result of such regulation and compliance.

Certain uses of outbound call processing systems are 
regulated by federal and state law.  Among other things, the 
FCC has adopted rules pursuant to the Federal Telephone Consumer 
Protection Act to protect residential telephone subscribers' privacy 
rights to avoid receiving telephone solicitations to which they object.  
Certain states have enacted similar laws limiting access to 
telephone subscribers who object to receiving solicitations.  
Although compliance with these laws may limit the potential use of 
the Company's predictive dialer systems in some respects, the Company's
systems can be programmed to operate automatically in full compliance 
with these laws through the use of appropriate calling lists and 
calling campaign time parameters.

To the extent the Company markets its products 
internationally, it is required to comply with applicable 
foreign law, including certification of its products by 
appropriate government regulatory organizations.

9



Competition

The market segments in which the Company offers its 
products and services are highly competitive.  The under 
400-desktop voice communications segment in the United 
States, the primary market for the Company's Computer 
Telephony sales channels, is served by many domestic and 
foreign communications equipment and software 
manufacturers and distributors, including Lucent 
Technologies (the former equipment business of AT&T), 
Nortel (formerly named Northern Telecom), Toshiba, 
InterTel and Mitel, as well as numerous specialized 
companies.  The Company believes that it may be fourth in 
telephone system shipments to the under 400-desktop voice 
communications market, after AT&T/Lucent, Nortel, and 
Toshiba, based on industry surveys of 1996 data.  
However, such information may not be sufficient to make 
an exact assessment of the Company's competitive position 
relative to its competitors.  Although the Company can be 
competitive on price compared to several of these 
companies, many of EXECUTONE's competitors have 
substantially more capital, technology and marketing 
resources than the Company.

The Company believes its call center products are in a 
good competitive position although to date it has not 
penetrated a significant portion of this market.  
Principal competitors are EIS, Davox, Mosaix and Melita.

The Company's principal competitors in healthcare 
communications are Hill-Rom Company, DuKane and Rauland-
Borg.  The Company believes it has a strong competitive 
position in nurse call and locator products.

The Company competes by offering a full array of 
integrated telecommunication products and services to its 
customers.  The Company also competes on the basis of the 
quality of its products, its customer service, nationwide 
distribution and installation, and price.


Employees

As of March 1, 1997, EXECUTONE employed approximately 750 
persons, directly and through its subsidiaries.  Less 
than 3% of the employees of the Company and its 
subsidiaries are represented by unions, all of which 
employees are represented by the International 
Brotherhood of Electrical Workers.  Management believes 
that the Company's relations with its employees are good.

10



ITEM 2.    PROPERTIES

EXECUTONE's principal offices are located in a leased 
facility in Milford, Connecticut.  The Company has 
warehouse, manufacturing and distribution facilities in 
Poway, California.  As of December 31, 1996, the Company 
utilized 4 facilities in the United States with an 
aggregate of approximately 273,000 square feet for its 
ongoing operations.

The Company's facilities are occupied under lease 
agreements.  The current annual rent for the Company's 
facilities is approximately $3 million.  The Company also 
subleases from Clarity small areas of 30 former district 
sales offices, aggregating approximately 23,000 square 
feet, for use by sales and technical employees for 
approximately $600,000 per year.  The Company has one 
facility totaling approximately 14,000 square feet of 
space that is no longer used in ongoing operations and is 
subleased.  

The Company believes its facilities are adequate and 
generally suitable for its business requirements at the 
present time and for the immediate future.  The following 
is a brief description of the primary facilities of the 
Company.

Use                           Location                      Approximate Size

Corporate Headquarters        Milford, Connecticut           150,000 
and Research, Development                                    square feet
and Engineering Facility


Distribution, Production &   Poway, California               115,000 
Repair Center and Warehouse                                  square feet


Other, including warehouses  Milford, Connecticut            30,800 
and subleased offices space                                  square feet


ITEM 3.    LEGAL PROCEEDINGS


On October 16, 1996, the Coeur d'Alene Tribe filed an 
action entitled Coeur d'Alene Tribe v.  AT&T Corp. in the 
Tribal Court, located in Plummer, Idaho (Case No. C195-
097), requesting a ruling that the Lottery to be 
developed and managed by the Company's Unistar 
Entertainment subsidiary is legal under IGRA, that IGRA 
preempts state laws on the subject of Indian gaming, and 
the NIL cannot be blocked by state action, and an 
injunction preventing AT&T from refusing to provide 
telephone service to the NIL.   This action was necessary 
because several network carriers have been sent Section 
1084 letters under the Federal Communications Act by 
states opposed to the NIL.  These letters state that the 
NIL is illegal under state and federal laws and prohibit 
the carriers from carrying network traffic for the NIL.  
The telephone operations of the NIL may not begin until 
resolution of this proceeding and agreement of a network 
carrier to carry the network traffic of the NIL.  On 
February 28, 1996, the Tribal Court ruled that all 
requirements of IGRA have been satisfied,  that the 
Section 1084 letters are invalid, and that AT&T is 
obligated to provide telephone service for the NIL.  This 
ruling and a related order dated May 1, 1996 are being 
appealed to the Tribal Appellate Court and probably will 
be appealed to the United States federal courts as well. 


11


 The Company has been advised by its outside counsel, 
Hunton & Williams, that based upon such firm's review of 
the applicable statutes, regulations and case law, it 
believes that the Lottery is authorized under IGRA and 
that the favorable rulings issued by the Coeur d'Alene 
Tribal Court on February 28 and May 1, 1996 should be 
upheld on appeal.  However, this litigation, as well as 
other litigation which could be brought by states opposed 
to the NIL, could delay commencement of operations, and 
it is impossible at this time to predict when the NIL 
will commence telephone operations.  The Company does not 
believe the outcome of this litigation will have a 
material adverse effect on the Company's consolidated 
financial position, results of operations or liquidity.

The Company currently is a named defendant in a number of 
lawsuits and is a party to a number of other proceedings 
that have arisen in the normal course of its business.  
Those lawsuits and proceedings relate primarily to the 
collection of indebtedness owed to the Company, the 
performance of products sold by the Company, and various 
contract disputes.  In the opinion of the Company, these 
proceedings are not expected to have a material adverse 
effect on the consolidated financial position, results of 
operations or liquidity of the Company and, to the extent 
they are not covered by insurance, reserves adequate to 
satisfy such liabilities have been established.


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

No matter was submitted to a vote of security holders in 
the fourth quarter of the fiscal year covered by this 
report.

12



EXECUTIVE OFFICERS OF THE REGISTRANT


The executive officers of the Company are as follows:

Name                         Age               Position With Company

Alan Kessman                 50                Chairman of the Board,   
                                               President and        
                                               Cheif Executive Officer

Michael W. Yacenda           45                Executive Vice President and
                                               President, UniStar     
                                               Entertainment

Barbara C. Anderson          45                Vice President, General 
                                               Counsel and Secretary

James E. Cooke III           48                Vice President, 
                                               National Accounts

Anthony R. Guarascio         43                Vice President, Finance  and  
                                               Chief Financial Officer

Israel J. Hersh              43                Vice President,             
                                               Software Engineering

Elizabeth Hinds              55                Vice President,               
                                               Human Resources

Robert W. Hopwood            53                Vice President and Vice   
                                               President-Operations,        
                                               Unistar Entertainment 

Andrew Kontomerkos           51                Senior Vice President,    
                                               Hardware Engineering and    
                                               Production

Vic Northrup                 40                Vice President, 
                                               Computer Telephony


Frank J. Rotatori            54                Vice President, Healthcare  
                                               Communications

Shlomo Shur                  47                Senior Vice President,     
                                               Advanced Technology


Alan Kessman has served as Chairman and Chief Executive 
Officer of the Company since 1988.  Prior to that, he had 
served as President and Chief Executive Officer of 
ISOETEC Communications, Inc., a predecessor of the 
Company ("ISOETEC"), since 1983.  From 1978 to 1983, Mr. 
Kessman served as President of three operating 
subsidiaries of Rolm Corporation, and from 1981 to 1983, 
he served as a Corporate Vice President of Rolm 
Corporation, responsible for sales and service in the 
eastern United States.

13


Michael W. Yacenda has served as Executive Vice President 
of EXECUTONE since January 1990.  Prior to that time, he 
was Vice President, Finance and Chief Financial Officer 
of the Company from July 1988 to January 1990.  He served 
as a Vice President of ISOETEC from 1983 to 1988.  From 
1974 to 1983, Mr. Yacenda was employed by Arthur Andersen 
& Co., a public accounting firm.  Mr. Yacenda is a 
certified public accountant.

Barbara C. Anderson has been Vice President, General 
Counsel and Secretary since 1990.  From 1985 to 1989, she 
was Corporate Counsel of United States Surgical 
Corporation, a manufacturer of medical devices.

James E. Cooke III has served as Vice President, National 
Accounts since February 1996.  Prior to that time, from 
1992 until 1996, Mr. Cooke served as Division Manager of 
Operations for the Company, and from 1988 through 1991, 
Mr. Cooke was a District Manager for the Company.  From 
1985 until 1988, Mr. Cooke was the President of an 
interconnect company, and from 1981 to 1985, he was a 
General Manager and a Regional Manager of the Jarvis 
Corporation.  For eight years prior to that time, he 
worked at Xerox Corporation in various sales and 
management positions.

Anthony R. Guarascio has been Vice President, Finance and 
Chief Financial Officer since January 1994, and prior 
thereto was Vice President and Corporate Controller since 
January 1990.  From 1984 until 1990, Mr. Guarascio was 
the Corporate Controller of the Company and ISOETEC.

Israel J. Hersh has been Vice President, Software 
Engineering since February 1996.  Mr. Hersh joined the 
Company as Director of Software Development in 1984, and 
was promoted to Senior Director of Software Engineering 
in January 1994.   Prior to his employment with the 
Company, Mr. Hersh was a manager of the software 
development department for T-Bar, Inc.  Mr. Hersh has a 
B.S. in Electrical Engineering from Tel Aviv University 
and a MS in Electrical Engineering from Bridgeport 
University.

Elizabeth Hinds has been Vice President, Human Resources 
since January 1996.  Prior to joining the Company, Ms. 
Hinds was Vice President, Human Resources of Chilton 
Company, a wholly-owned subsidiary of Capital 
Cities/American Broadcasting Company, Inc. ("CC/ABC"), 
from February 1993 until January 1996.  Ms. Hinds was the 
Director of Human Resources for CC/ABC from June 1987 
until February 1993.

Robert W. Hopwood has been Vice President of the Company 
and Vice President-Operations of its Unistar 
Entertainment subsidiary since May 1996, and prior 
thereto served as Vice President, Customer Care of the 
Company from January 1990.  From 1983 until 1990, Mr. 
Hopwood was the Director of Technical Operations of the 
Company and ISOETEC.

Andrew Kontomerkos has been Senior Vice President, 
Hardware Engineering and Production since January 1994, 
and prior thereto was Vice President, Hardware 
Engineering since 1988.  He served as a Vice President of 
ISOETEC since 1983.  From 1982 to 1983, he was a Vice 
President and founder of SAM Communications, Inc., a 
telecommunications research and development company which 
was one of the predecessors to ISOETEC; that corporation 
was merged into ISOETEC in 1983.  From 1979 to 1982, Mr. 
Kontomerkos was Director of Telecommunications Systems 

14



Development of TIE/communications, Inc., a manufacturer 
of telecommunications systems.

	Vic Northrup has been Vice President of the Company 
since February 1997, and President of the Computer 
Telephony business since May 1996.  Prior thereto, he was 
Senior Director of Sales and Operations and a district 
general manager of the Company.

Frank J. Rotatori has been Vice President, Healthcare 
Communications since February 1996.  Prior thereto he was 
Vice President, European Operations since February 1994, 
and prior thereto was Director of Call Center Management 
Products during 1992 and 1993, Vice President-Direct 
Sales from 1990 through 1991 and Vice President-Customer 
Service of the Company from 1988 to 1990.  Mr. Rotatori 
joined ISOETEC in 1986 as a regional manager.  From 1982 
to 1986, he served as General Manager and Eastern 
Regional Manager for Rolm Corporation.  For 13 years 
prior to that time, he worked at Xerox Corporation in 
various manufacturing, accounting, sales and service 
management positions.

Shlomo Shur has been Senior Vice President, Advanced 
Technology since January 1994, and prior thereto was Vice 
President, Software Engineering since 1988.  He served as 
a Vice President of ISOETEC from 1983 to 1988.  From 1982 
to 1983, he was Vice President and a founder of SAM 
Communications, Inc., a telecommunications research and 
development company which was one of the predecessors to 
ISOETEC; that corporation was merged into ISOETEC in 
1983.  From 1978 to 1982, Mr. Shur was Manager, Software 
Development for TIE/communications, Inc., a manufacturer 
of telecommunications systems.

15



PART II

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

Incorporated by reference to "Stock Data" in  the 
Registrant's 1996 Annual Report to Shareholders.


ITEM 6.    SELECTED FINANCIAL DATA

Incorporated by reference to "Selected Financial Data" in 
the Registrant's 1996 Annual Report to Shareholders.


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

Incorporated by reference to "Management's Discussion and 
Analysis of Financial Condition and Results of 
Operations" in the Registrant's 1996 Annual Report to 
Shareholders.


ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Financial Statements are incorporated by reference to 
the Financial Statements in the Registrant's 1996 Annual 
Report to Shareholders.  The Schedule appears at pages S-
1 through S-2 of this report.


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

Not applicable.


16



PART III


ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE 
REGISTRANT

The information regarding directors is incorporated by 
reference to the Company's Proxy Statement for its Annual 
Meeting of Shareholders scheduled to be held June 10, 
1997.


ITEM 11.    EXECUTIVE COMPENSATION

The information required by this item is incorporated by 
reference to the Company's Proxy Statement for its Annual 
Meeting of Shareholders scheduled to be held June 10, 
1997.


ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL 
OWNERS AND MANAGEMENT

The information required by this item is incorporated by 
reference to the Company's Proxy Statement for its Annual 
Meeting of Shareholders scheduled to be held June 10, 
1997.


ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED 
TRANSACTIONS

The information required by this item is incorporated by 
reference to the Company's Proxy Statement for its Annual 
Meeting of Shareholders scheduled to be held June 10, 
1997.


17



PART IV


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

(a)(1), (a)(2) and (d).  The financial statements 
required by this item and incorporated herein by 
reference are as follows:


Report of Independent Public Accountants

Consolidated Balance Sheets - December 31, 1996 and 1995

Consolidated Statements of Operations - Years ended 
December 31, 1996, 1995 and 1994

Consolidated Statements of Changes in Stockholders' 
Equity - Three years ended December 31, 1996

Consolidated Statements of Cash Flows - Years ended 
December 31, 1996, 1995 and 1994

Notes to Consolidated Financial Statements


The schedules to consolidated financial statements 
required by this item and included in this report are as 
follows:

Report of Independent Public Accountants on Schedule

Schedule II - Valuation and Qualifying Accounts


(a)(3) and (c).  The exhibits required by this item and 
included in this report or incorporated herein by 
reference are as follows:


Exhibit No.


2-1        Agreement and Plan of Merger by and among 
EXECUTONE Information Systems, Inc., Executone Newco, 
Inc., and Unistar Gaming Corp., dated as of December 19, 
1995.  Incorporated by reference to the Registrant's 
Current Report on Form 8-K dated January 3, 1996.

2-2        Asset Purchase Agreement among V Technology 
Acquisition Corporation, EXECUTONE Information Systems, 
Inc. and Vodavi, Inc. dated November 5, 1993, and 
Amendment dated February 18, 1994.  Incorporated by 
reference to the Registrant's Annual Report on Form 10-K 
for the year ended December 31, 1993.

2-3        Asset Purchase Agreement by and among Tone 
Holdings, Inc. and Tone Acquisition Corporation, 
EXECUTONE Network Services, Inc. and EXECUTONE 


18


Information Systems, Inc. dated as of April 9, 1996, and 
Amendment No. 1 to Asset Purchase Agreement dated as of 
May 31, 1996, by and among Clarity Telecom Holdings, Inc. 
(formerly known as Tone Holdings, Inc.), Clarity Telecom, 
Inc. (formerly known as Tone Acquisition Corporation), 
EXECUTONE Network Services, Inc. and EXECUTONE 
Information Systems, Inc.  Incorporated by reference to 
the Registrant's Annual Report on Form 10-K/A for the 
year ended December 31, 1995 filed on June 4, 1996.

3-1        Articles of Incorporation, as amended through 
December 18, 1995.  Incorporated by reference to the 
Registrant's Annual Report on Form 10-K  for the year 
ended December 31, 1995 filed on April 15, 1996.

3-2        Articles of Amendment dated and filed December 
19, 1995, amending the Company's Articles of 
Incorporation.  Incorporated by reference to the 
Registrant's Current Report on Form 8-K dated January 3, 
1996.

3-3        Bylaws, as amended.  Incorporated by reference 
to the Registrant's Registration Statement on Form S-3 
(File No. 33-62257) filed August 30, 1995.

4-1        Second Amended and Restated Loan and Security 
Agreement dated as of August 30, 1994 and First Amendment 
thereto dated January 1, 1995, between EXECUTONE 
Information Systems, Inc., Continental Bank N.A. and the 
other Lenders named therein.  Incorporated by reference 
to the Registrant's Annual Report on Form 10-K for the 
year ended December 31, 1994.

4-2        Loan Agreement dated as of August 30, 1994, 
between EXECUTONE Information Systems, Inc., certain 
employees thereof, and the Lenders named therein.  
Incorporated by reference to the Registrant's Annual 
Report on Form 10-K for the year ended December 31, 1994.

4-3        First Amendment dated January 1, 1995, Second 
Amendment dated September 29, 1995, and Third Amendment 
dated December 29, 1995, to the Second Amended and 
Restated Loan and Security Agreement by and among 
EXECUTONE Information Systems, Inc., the Financial 
Institutions Listed on the Signature Page Thereof, and 
Bank of America Illinois.  Incorporated by reference to 
the Registrant's Annual Report on Form 10-K for the year 
ended December 31, 1995 filed on April 15, 1996.

4-10      Indenture dated March 1, 1986 with United 
States Trust Company of New York relating to 7 1/2% 
Convertible Subordinated Debentures of Vodavi Technology 
Corporation due March 15, 2011.  Incorporated by 
reference to Vodavi Technology Corporation's Registration 
Statement on Form S-1 (as amended) (Registration No. 33-
3827) filed on March 9, 1986 and amended April 1, 1986.

4-11      First Supplemental Indenture dated August 4, 
1989 with United States Trust Company of New York 
relating to 7 1/2% Convertible Subordinated Debentures due 
March 15, 2011.  Incorporated by reference to the 
Registrant's Annual Report on Form 10-K for the year 
ended December 31, 1989.

4-12     Specimen Certificate representing 7 1/2% 
Convertible Subordinated Debentures.  Incorporated by 
reference to the Registrant's Annual Report on Form 10-K 
for the year ended December 31, 1989.

10-1      1984 Employee Stock Purchase Plan of EXECUTONE 
Information Systems, Inc.  Incorporated by reference to 
the Registrant's Registration Statement on Form S-8 (File 
No. 33-23294) declared effective by the Commission on 
August 23, 1988.

10-2      1986 Stock Option Plan of EXECUTONE Information 
Systems, Inc.  Incorporated by reference to the 
Registrant's Registration Statement on Form S-8 (File No. 
33-23294) declared effective by the Commission on August 
23, 1988.

19



10-3      1984 Stock Option Plan of EXECUTONE Information 
Systems, Inc.  Incorporated by reference to the 
Registrant's Annual Report on Form 10-K for the year 
ended December 31, 1990, as amended by Form 8 filed on 
August 20, 1991.

10-4      401(k) Savings Plan of Vodavi Technology 
Corporation dated December 27, 1985.  Incorporated by 
reference to the Registrant's Annual Report  on Form 10-K 
for the year ended December 31, 1989.

10-5      Stock Option Bonus Credit Plan of EXECUTONE 
Information Systems, Inc. dated December 31, 1988.  
Incorporated by reference to the Registrant's Annual 
Report  on Form 10-K for the year ended December 31, 
1989.

10-6      1990 Directors' Stock Option Plan as amended 
July 30, 1996.  Filed herewith. 

10-7      1994 Executive Stock Incentive Plan.  
Incorporated by reference to the Registrant's Annual 
Report on Form 10-K for the year ended December 31, 1994.

10-9      Volume Purchase Agreement dated January 31, 
1992,  between U. S. Sprint Communications Company 
Limited Partnership and EXECUTONE Information Systems, 
Inc.  Incorporated by reference to the Registrant's 
Annual Report on Form 10-K for the year ended December 
31, 1991, as amended by Form 8 filed on June 12, 1992.

10-10     Amendments dated as of April 1, 1995, and 1993 
to Volume Purchase Agreement dated January 31, 1992, 
between U. S. Sprint Communications Company Limited 
Partnership and EXECUTONE Information Systems, Inc.  
Incorporated by reference to the Registrant's Annual 
Report on Form 10-K/A for the year ended December 31, 
1995 filed on August 29, 1996.

10-16    Manufacturing Services Agreement dated as of 
January 10, 1995, between EXECUTONE Information Systems, 
Inc. and Compania Dominicana de Telefonos, C por A 
(Codetel).  Incorporated by reference to the Registrant's 
Annual Report on Form 10-K  for the year ended December 
31, 1995 filed on April 15, 1996.

10-17    Manufacturing Services Agreement dated February 
9, 1990 between Wong's Electronics Co., Ltd. and 
EXECUTONE Information Systems, Inc.  Incorporated by 
reference to the Registrant's Annual Report on Form 10-K 
for the year ended December 31, 1990, as amended by Form 
8 filed on August 20, 1991.

10-19    Warrant to Purchase 25,000 Shares of Common 
Stock of EXECUTONE Information Systems, Inc. in favor of 
Richard S. Rosenbloom dated June 23, 1992.  Incorporated 
by reference to the Registrant's Annual Report on Form 
10-K for the year ended December 31, 1992.

10-21     Management Agreement for the National Indian 
Lottery dated January 16,1995.  Incorporated by reference 
to the Registrant's Annual Report on Form 10-K for the 
year ended December 31, 1995 filed on April 15, 1996.

10-22    Distributor Agreement dated as of May 31, 1996, 
between EXECUTONE Information Systems, Inc. and Clarity 
Telecom, Inc.  Incorporated by reference to the 
Registrant's Annual Report on Form 10-K/A for the year 
ended December 31, 1995 filed on June 4, 1996.

20



11    Statement regarding computation of per share 
      earnings.  Filed herewith.

13    1996 Annual Report to Shareholders of 
      EXECUTONE Information Systems, Inc.  Filed herewith.

21    Subsidiaries of EXECUTONE Information Systems, 
      Inc.  Filed herewith.

23.1  Consent of Arthur Andersen LLP. Filed herewith.

23.2  Consent of Hunton & Williams.  Filed herewith.

27    Financial Data Schedule.  Filed herewith.


Undertakings


For the purposes of complying with the rules governing 
Form S-8 under the Securities Act of 1933, the 
undersigned registrant hereby undertakes as follows, 
which undertaking shall be incorporated by reference into 
registrant's Registration Statements on the following 
Form S-8 filings:

S-8 Reg. No. 2-91008 filed May 9, 1984 on 1983 Employee 
Stock Purchase Plan (650,000 shares)

S-8 Reg. No. 33-959 filed October 17, 1985 on 1984 Stock 
Option Plan (390,000 shares)

S-8 Reg. No. 33-6604 filed June 19, 1986 on 1983 Stock 
Option Plan (350,000 shares)

S-8 Reg. No. 33-16585 filed August 24, 1987 on 1986 and 
1983 Stock Option Plans (800,000 shares)

S-8 Reg. No. 33-23294 filed August 3, 1988 on 1986 Stock 
Option Plan (7,000,000 shares) and Employee Stock 
Purchase Plan (500,000 shares)

S-8 Reg. No. 33-42561 filed September 4, 1991 on 1984 
Employee Stock Purchase Plan (350,000 shares) and 
Directors' Stock Option Plan (100,000 shares)

S-8 Reg. No. 33-45015 filed January 2, 1992 on 1984 
Employee Stock Purchase Plan (400,000 shares)

S-8 Reg. No. 33-57519 filed January 31, 1995 on 1984 
Employee Stock Purchase Plan (1,000,000 shares).

Insofar as indemnification arising under the Securities 
Act of 1933 (the "Act") may be permitted to directors, 
officers and controlling persons of the registrant 
pursuant to the foregoing provisions, or otherwise, the 
registrant has been advised that in the opinion of the 
Securities and Exchange Commission such indemnification 
is against public policy as expressed in the Securities 
Act of 1933 and is, therefore, unenforceable.  In the 
event that a claim for indemnification against such 
liabilities (other than the payment by the registrant of 
expenses incurred or paid by a director, officer or 
controlling person of the registrant in the successful 
defense of any action, suit or proceeding) is asserted by 
such director, officer or controlling person in 
connection with the securities being registered, the 
registrant will, unless in the opinion of its counsel the 
matter has been settled by controlling precedent, submit 

21



to the court of appropriate jurisdiction the question 
whether such indemnification by it is against public 
policy as expressed in the Act and will be governed by 
the final adjudication of such issue.

Reports on Form 8-K

The Registrant filed no reports on Form 8-K during the 
quarter ended December 31, 1996.

22


                                               
SIGNATURES


Pursuant to the requirements of Section 13 or 
15(d) of the Securities Exchange Act of 1934, the 
Registrant has duly caused this Report to be 
signed on its behalf by the undersigned thereunto 
duly authorized.

EXECUTONE Information Systems, Inc.

By: _____________________________ 
      Alan Kessman, Chairman, President 
      and Chief Executive Officer

March 28, 1997
Milford, Connecticut


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


March 28, 1997                
______________________________
Alan Kessman
Chairman, President and Chief 	             
Executive Officer 
                                         
(Principal Executive Officer)

March 28, 1997               
______________________________
Stanley M. Blau
Director

March 28, 1997                
______________________________
Anthony R. Guarascio
Vice President-Finance, and Chief                      
Financial Officer 
                                          
(Principal Financial and Accounting Officer)


March 28, 1997                 
______________________________                   
Thurston R. Moore
Director

March 28, 1997                 
______________________________                   
Richard S. Rosenbloom
                                          
Director

March 28, 1997                
______________________________                   
Jerry M. Seslowe
Director

23



	REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Stockholders of
EXECUTONE Information Systems, Inc.:



We have audited in accordance with generally 
accepted auditing standards, the financial 
statements included in EXECUTONE Information 
Systems, Inc. and subsidiaries' annual report to 
stockholders incorporated by reference in this 
Form 10-K, and have issued our report thereon 
dated January 31, 1997.  Our audit was made for 
the purpose of forming an opinion on those 
statements taken as a whole.  The schedule listed 
in Item 14 is the responsibility of the Company's 
management and is presented for purposes of 
complying with the Securities and Exchange 
Commission's rules and are not part of the basic 
financial statements.  This schedule has been 
subjected to the auditing procedures applied in 
the audit of the basic financial statements and, 
in our opinion, fairly states in all material 
respects the financial data required to be set 
forth therein in relation to the basic financial 
statements taken as a whole.



ARTHUR ANDERSEN LLP



Stamford, Connecticut
January 31, 1997




S-1




SCHEDULE II



VALUATION AND QUALIFYING ACCOUNTS
(Amounts in Thousands)


             					          Additions                         Deductions
 
	     		                             Charged    Charged    Net
                        Balance at  (Credited) (Credited)  Writeoffs   Balance at
                        Beginning    to Costs   to         of          End
                        of           and        Other      Uncollect.  of
Description	            Period       Expenses   Accounts   Accounts    Period
                                                         
Year ended December 31, 1996
  Deducted from asset accounts:
  Allowance for doubtful 
     accounts	             $1,715 	  $1,921	     $(551)*	   $(979)     $2,106
  Allowance for uncollectible 
     notes receivable	        259	     (82)	      2,039*	     ---	      2,216

Year ended December 31, 1995
  Deducted from asset accounts:
  Allowance for doubtful 
    accounts	               1,335	    1,872	       ---	     (1,492)     1,715
  Allowance for uncollectible 
    notes receivable	         691 	    (432)	      ---	       ---         259

Year ended December 31, 1994
  Deducted from asset accounts:
  Allowance for doubtful 
     accounts	              1,017     1,381        ---      (1,063)     1,335
  Allowance for uncollectible 
     notes receivable       1,084     (393)        ---         ---        691



*	Adjustments related to sale of direct sales 
organization 











S-2




             EXECUTONE INFORMATION SYSTEMS, INC.
          EXHIBITS TO 1996 ANNUAL REPORT ON FORM 10-K


Exhibit No.


2-1    Agreement and Plan of Merger by and among 
EXECUTONE Information Systems, Inc., Executone Newco, 
Inc., and Unistar Gaming Corp., dated as of December 19, 
1995.  Incorporated by reference to the Registrant's 
Current Report on Form 8-K dated January 3, 1996.

2-2    Asset Purchase Agreement among V Technology 
Acquisition Corporation, EXECUTONE Information Systems, 
Inc. and Vodavi, Inc. dated November 5, 1993, and 
Amendment dated February 18, 1994.  Incorporated by 
reference to the Registrant's Annual Report on Form 10-K 
for the year ended December 31, 1993.

2-3        Asset Purchase Agreement by and among Tone 
Holdings, Inc. and Tone Acquisition Corporation, 
EXECUTONE Network Services, Inc. and EXECUTONE 
Information Systems, Inc. dated as of April 9, 1996, and 
Amendment No. 1 to Asset Purchase Agreement dated as of 
May 31, 1996, by and among Clarity Telecom Holdings, Inc. 
(formerly known as Tone Holdings, Inc.), Clarity Telecom, 
Inc. (formerly known as Tone Acquisition Corporation), 
EXECUTONE Network Services, Inc. and EXECUTONE 
Information Systems, Inc.  Incorporated by reference to 
the Registrant's Annual Report on Form 10-K/A for the 
year ended December 31, 1995 filed on June 4, 1996.

3-1        Articles of Incorporation, as amended through 
December 18, 1995.  Incorporated by reference to the 
Registrant's Annual Report on Form 10-K for the year 
ended December 31, 1995 filed on April 15, 1996.


3-2         Articles of Amendment dated and filed 
December 19, 1995, amending the Company's Articles of 
Incorporation.  Incorporated by reference to the 
Registrant's Current Report on Form 8-K dated January 3, 
1996.

3-3        Bylaws, as amended.  Incorporated by reference 
to the Registrant's Registration Statement on Form S-3 
(File No. 33-62257) filed August 30, 1995.

4-1        Second Amended and Restated Loan and Security 
Agreement dated as of August 30, 1994 and First Amendment 
thereto dated January 1, 1995, between EXECUTONE 
Information Systems, Inc., Continental Bank N.A. and the 
other Lenders named therein.  Incorporated by reference 
to the Registrant's Annual Report on Form 10-K for the 
year ended December 31, 1994.

4-2        Loan Agreement dated as of August 30, 1994, 
between EXECUTONE Information Systems, Inc., certain 
employees thereof, and the Lenders named therein.  
Incorporated by reference to the Registrant's Annual 
Report on Form 10-K for the year ended December 31, 1994.

4-3        First Amendment dated January 1, 1995, Second 
Amendment dated September 29, 1995, and Third Amendment 
dated December 29, 1995, to the Second Amended and 
Restated Loan and Security Agreement by and among 
EXECUTONE Information Systems, Inc., the Financial 
Institutions Listed on the Signature Page Thereof, and 
Bank of America Illinois. Incorporated by reference to 
the Registrant's Annual Report on Form 10-K for the year 
ended December 31, 1995 filed on April 15, 1996.

E-1



4-10      Indenture dated March 1, 1986 with United 
States Trust Company of New York relating to 7 1/2% 
Convertible Subordinated Debentures of Vodavi Technology 
Corporation due March 15, 2011.   Incorporated by 
reference to Vodavi Technology Corporation's Registration 
Statement on Form S-1 (as amended) (Registration No. 33-
3827) filed on March 9, 1986 and amended April 1, 1986.

4-11      First Supplemental Indenture dated August 4, 
1989 with United States Trust Company of New York 
relating to 7 1/2% Convertible Subordinated Debentures due 
March 15, 2011.   Incorporated by reference to the 
Registrant's Annual Report on Form 10-K for the year 
ended December 31, 1989.

4-12      Specimen Certificate representing 7 1/2% 
Convertible Subordinated Debentures.  Incorporated by 
reference to the Registrant's Annual Report on Form 10-K 
for the year ended December 31, 1989.

10-1      1984 Employee Stock Purchase Plan of EXECUTONE 
Information Systems, Inc.  Incorporated by reference to 
the Registrant's Registration Statement on Form S-8 (File 
No. 33-23294) declared effective by the Commission on 
August 23, 1988.

10-2      1986 Stock Option Plan of EXECUTONE Information 
Systems, Inc.   Incorporated by reference to the 
Registrant's Registration Statement on Form S-8 (File No. 
33-23294) declared effective by the Commission on August 
23, 1988.

10-3      1984 Stock Option Plan of EXECUTONE Information 
Systems, Inc.  Incorporated by reference to the 
Registrant's Annual Report on Form 10-K for the year 
ended December 31, 1990, as amended by Form 8 filed on 
August 20, 1991.

10-4     401(k) Savings Plan of Vodavi Technology 
Corporation dated December 27, 1985.  Incorporated by 
reference to the Registrant's Annual Report  on Form 10-K 
for the year ended December 31, 1989.

10-5     Stock Option Bonus Credit Plan of EXECUTONE 
Information Systems, Inc. dated December 31, 1988.  
Incorporated by reference to the Registrant's Annual 
Report  on Form 10-K for the year ended December 31, 
1989.

10-6      1990 Directors' Stock Option Plan as amended on 
July 30, 1996.  Filed herewith.

10-7      1994 Executive Stock Incentive Plan.  
Incorporated by reference to the Registrant's Annual 
Report on Form 10-K for the year ended December 31, 1994.

10-9     Volume Purchase Agreement dated January 31, 
1992,  between U. S. Sprint Communications Company 
Limited Partnership and EXECUTONE Information Systems, 
Inc.  Incorporated by reference to the Registrant's 
Annual Report on Form 10-K for the year ended December 
31, 1991, as amended by Form 8 filed on June 12, 1992.

10-10    Amendments dated as of April 1, 1995, and 1993 
to Volume Purchase Agreement dated January 31, 1992, 
between U. S. Sprint Communications Company Limited 
Partnership and EXECUTONE Information Systems, Inc. 
Incorporated by reference to the Registrant's Annual 
Report on Form 10-K/A for the year ended December 31, 
1995 filed on August 29, 1996.

E-2


10-16    Manufacturing Services Agreement dated as of 
January 10, 1996, between EXECUTONE Information Systems, 
Inc. and Compania Dominicana de Telefonos, C por A 
(Codetel).  Incorporated by reference to the Registrant's 
Annual Report on Form 10-K for the year ended December 
31, 1995 filed on April 15, 1996.

10-17    Manufacturing Services Agreement dated February 
9, 1990 between Wong's Electronics Co., Ltd. and 
EXECUTONE Information Systems, Inc.  Incorporated by 
reference to the Registrant's Annual Report on Form 10-K 
for the year ended December 31, 1990, as amended by Form 
8 filed on August 20, 1991.

10-19    Warrant to Purchase 25,000 Shares of Common 
Stock of EXECUTONE Information Systems, Inc. in favor of 
Richard S. Rosenbloom dated June 23, 1992.  Incorporated 
by reference to the Registrant's Annual Report on Form 
10-K for the year ended December 31, 1992.

10-21    Management Agreement for the National Indian 
Lottery dated January 16,1995.  Incorporated by reference 
to the Registrant's Annual Report on Form 10-K for the 
year ended December 31, 1995 filed on April 15, 1996.

10-22    Distributor Agreement dated as of May 31, 1996, 
between EXECUTONE Information Systems, Inc. and Clarity 
Telecom, Inc.  Incorporated by reference to the 
Registrant's Annual Report on Form 10-K/A for the year 
ended December 31, 1995 filed on June 4, 1996.

11         Statement regarding computation of per share 
earnings.  Filed herewith.

13         1996 Annual Report to Shareholders of 
EXECUTONE Information Systems, Inc.  Filed herewith.

21         Subsidiaries of EXECUTONE Information Systems, 
Inc.  Filed herewith.

23.1      Consent of Arthur Andersen LLP.  Filed 
herewith.

23.2      Consent of Hunton & Williams.  Filed herewith.

27         Financial Data Schedule.  Filed herewith.

E-3

EX-10

EXHIBIT 10-6

	EXECUTONE Information Systems, Inc.
	1990 DIRECTORS STOCK OPTION PLAN
	(As Amended July 30,1996)



1.  Purposes of the Plan.  The purposes of this 
Directors' Stock Option Plan are to attract and retain 
the best available personnel for service as Directors of 
the Company, to provide additional incentive to the 
Outside Directors of the Company to serve as Directors 
and to encourage their continued service on the Board.

All options granted hereunder shall be "nonstatutory 
stock options."

2.  Definitions.  As used herein, the following 
definitions shall apply: 

(a)  "Board" shall mean the Board of Directors of the 
Company.

(b)  "Code" shall mean the Internal Revenue Code of 1986, 
as amended.

(c)  "Common Stock" shall mean the Common Stock of the 
Company.

(d)  "Company" shall mean EXECUTONE Information Systems, 
Inc., a Virginia corporation.

(e)  "Continuous Status as a Director" shall mean the 
absence of any interruption or termination of service as 
a Director.

(f)  "Director"  shall mean a member of the Board.  

(g)  "Employee"  shall mean any person, including 
officers and Directors, employed by the Company or any 
Parent or Subsidiary of the Company.  The payment of a 
Director's fee by the Company shall not be sufficient in 
and of itself to constitute "employment" by the Company.

(h)  "Exchange Act" shall mean the Securities Exchange 
Act of 1934, as amended.

(i)  "Option" shall mean a stock option granted pursuant 
to the Plan.

(j)  "Optioned Stock" shall mean the Common Stock subject 
to an Option.

(k)  "Optionee" shall mean an Outside Director who 
receives an Option.

(l)  "Outside Director" shall mean a Director who is not 
an Employee.

(m)  "Parent" shall mean a "parent corporation", whether 
now or hereafter existing, as defined in Section 424 (a) 
of the Code.

(n)  "Plan" shall mean this 1990 Director's Stock Option 
Plan.

(o)  "Share" shall mean a share of Common Stock, as 
adjusted in accordance with Section 11 of the Plan.

(p)  "Subsidiary" shall mean a "subsidiary corporation", 
whether now or hereafter existing, as defined in Section 
425(f) of the Code.

1


3.  Stock Subject to the Plan.  Subject to the provisions 
of Section 11 of the Plan, the maximum aggregate number 
of Shares which may be optioned and sold under the Plan 
is 250,000 Shares of Common Stock.  The Shares may be 
authorized, or reacquired Common Stock. 

If an Option should expire or become unexercisable for 
any reason without having been exercised in full, the 
unpurchased Shares which were subject thereto shall, 
unless the Plan shall have been terminated, become 
available for future grant under the Plan.  If Shares 
which were acquired under exercise of an Option are 
subsequently repurchased by the Company, such Shares 
shall not in any event be returned to the Plan and shall 
not become available for future grant under the Plan.

4.  Administration of and Grants of Options under the 
Plan.

(a)  Administrator.  Except  as otherwise required 
herein, the Plan shall be administered by the Board.

(b)  Procedures for Grants.  All grants of Options 
hereunder shall be automatic and nondiscretionary and 
shall be made strictly in accordance with the following 
provisions:

(i)  No person shall have any discretion to select which 
Outside Directors shall be granted Options or to 
determine the number of Shares to be covered by Options 
granted to Outside Directors.

(ii)  Each Outside Director shall be automatically 
granted an Option upon the effective date of this Plan or 
such later date on which such person became a Director, 
whether through election by the Shareholders of the 
Company or appointment by the Board of Directors to fill 
a vacancy.

(iii)  Each Outside Director shall automatically receive, 
upon his reelection each year, an additional Option.

(iv)  The number of Shares to be subject to any Option 
granted pursuant to the Plan shall be an amount necessary 
to make such Option equal in value to $10,000 for each 
Outside Director, and shall be determined using the 
Black-Scholes Option valuation model.  For this purpose 
the Company's "Sigma" shall be the mean (rounded to the 
nearest 5%) of the "Sigma's" of the following six 
companies as of the date of grant:  Pitney Bowes, AT&T, 
Aspect, Harris, Nortel and Octel Communications; and the 
per Share value shall be the fair market value per Share 
on the date of grant.  The number of Shares resulting 
from this calculation shall be rounded to the nearest 
hundred.

(v)  The terms of an Option granted hereunder shall be as 
follows:

(A)  the term of the Option shall be five (5) years; 
provided, however, if the Outside Director ceases to 
serve as a Director, the Option may be exercised for 
seven (7) months as provided in Section 9(b) and (c) 
below.

(B)  the Option shall be exercisable only while the 
Outside Director remains a Director of the Company, 
except as set forth in Section 9 hereof.

(C)  the exercise price per Share shall be 120% of the 
fair market value per Share on the date of grant of the 
Option.

(D)  any Option granted pursuant to subsection 4(b)(ii) 
or (iv) above shall become exercisable in full 
immediately upon grant, except that any Option granted to 
an Outside Director upon his initial election or 
appointment to the Board of Directors shall become 
exercisable in full one year after the date of grant.

2



(c)  Powers of the Board.  Subject to the provisions and 
restrictions of the Plan, the Board shall have the 
authority, in its discretion: (i) to determine, upon 
review of relevant information and in accordance with 
Section 8(b) of the Plan, the fair market value of the 
Common Stock; (ii) to determine the exercise price per 
Share of Options to be granted, which exercise price 
shall be determined in accordance with Section 8(a) of 
the Plan; (iii) to interpret the Plan; (iv) to prescribe, 
amend and rescind rules and regulations relating to the 
Plan; (v) to authorize any person to execute on behalf of 
the Company any instrument required to effectuate the 
grant of an Option previously granted hereunder; and (vi) 
to make all other determinations deemed necessary or 
available for the administration of the Plan.

(d)  Effect of Board's Decision.  All decisions, 
determinations and interpretations of the Board shall be 
final and binding on all Optionees and any other holder 
of any Options granted under the Plan.

(e)  Suspension or Termination of Option.  If the Chief 
Executive Officer of the Company or his designee 
reasonably believes that an Optionee has committed an act 
of misconduct, the Chief Executive Officer may suspend 
the Optionee's right to exercise any Option pending a 
determination of the Board of Directors (excluding the 
Outside Director accused of such misconduct).  If the 
Board of Directors (excluding the Outside Director 
accused of such misconduct) determines an Optionee has 
committed an act of embezzlement, fraud, dishonesty, 
nonpayment of an obligation owed to the Company, breach 
of fiduciary duty or deliberate disregard of the Company 
rules resulting in loss, damage or injury to the Company, 
or if an Optionee makes an unauthorized disclosure of any 
Company trade secret or confidential information, engages 
in any conduct constituting unfair competition, induces 
any Company customer to breach a contract with the 
Company or induces any principal for whom the Company 
acts as agent to terminate such agency relationship, 
neither the Optionee nor his estate shall be entitled to 
exercise any Option whatsoever.  In making such 
determination, the Board of Directors (excluding the 
Outside Director accused of such misconduct) shall act 
fairly and shall give the Optionee an opportunity to 
appear and present evidence on Optionee's behalf at a 
hearing before a committee of the Board.

5.  Eligibility.  Options may be granted only to Outside 
Directors.  All Options shall be automatically granted in 
accordance with the terms set forth in Section 4(b) 
hereof.

The Plan shall not confer upon any Optionee any rights 
with respect to continuation of service as a Director or 
nomination to serve as a Director, nor shall it interfere 
in any way with any rights which the Director or the 
Company may have to terminate his directorship at any 
time.

6.  Term of Plan.  The Plan shall become effective upon 
the earlier of (i) its adoption by the Board or (ii) its 
approval by the Shareholders of the Company as described 
in Section 17 of the Plan.  It shall continue in effect 
for a term of ten (10) years unless sooner terminated 
under Section 13 of the Plan.

7.  Term of Option.  The term of each Option shall be 
five (5) years from the date of grant thereof; provided, 
however, if the Outside Director ceases to serve as a 
Director, the Option may be exercised for seven (7) 
months as provided in Section 9(b) and (c) below.

8.  Exercise Price and Consideration.

(a)  Exercise Price.  The per Share exercise price for 
the Shares to be issued pursuant to exercise of an Option 
shall be 120% of the fair market value per Share on the 
date of the grant of the Option.

3



(b)  Fair Market Value.  The fair market value shall be 
determined by the Board in its discretion; provided, 
however, that where there is a public market for the 
Common Stock, the fair market value per Share shall be 
the closing bid price of the Common Stock in the over-
the-counter market on the date of grant, as reported in 
The Wall Street Journal (or, if not so reported, as 
otherwise reported by the National Association of 
Securities Dealers Automated Quotation ("NASDAQ") System) 
or, in the event the Common Stock is traded on the NASDAQ 
National Market System or listed on a stock exchange, the 
fair market value per Share shall be the closing price on 
such system or exchange on the date of grant of the 
Option, as reported in the Wall Street Journal.

(c)  Form of Consideration.  The consideration to be paid 
for the Shares to be issued upon exercise of an Option 
shall consist entirely of cash, check, other Shares of 
Common Stock having a fair market value on the date of 
surrender equal to the aggregate exercise price of the 
Shares as to which said Option shall be exercised, which, 
if acquired from the Company, shall have been held for at 
least six months, or any combination of such methods of 
payment.

9.  Exercise of Option.

(a)  Procedure for Exercising Rights as a Shareholder.  
Any Option granted hereunder shall be exercisable at such 
times as are set forth in Section 4(b) hereof; provided, 
however, that no Options shall be exercisable until 
Shareholder approval of the Plan in accordance with 
Section 17 hereof has been obtained.

An Option may not be exercised for a fraction of a Share.

An Option shall be deemed to be exercised when written 
notice of such exercise has been given to the Company in 
accordance with the terms of the Options by the persons 
entitled to exercise the Option and full payment for the 
Shares with respect to which the Option is exercised has 
been received by the Company.  Full payment may consist 
of any consideration and method of payment allowable 
under Section 8(c) of the Plan.  Until the issuance (as 
evidenced by the appropriate entry on the books of the 
Company or of a duly authorized transfer agent of the 
Company) of the Stock Certificate evidencing such Shares, 
no right to vote or receive dividends or any other rights 
as a Shareholder shall exist with respect to the Optioned 
Stock, notwithstanding the exercise of the Option.  A 
share certificate for the number of Shares so acquired 
shall be issued to the Optionee as soon as practicable 
after exercise of the Option.  No adjustment will be made 
for a dividend or other right for which the record date is 
prior to the date the Stock Certificate is issued, except 
as provided in Section 11 of the Plan.

Exercise of an Option in any manner shall result in a 
decrease in the number of Shares which thereafter may be 
available, both for the purpose of the Plan and for sale 
under the Option, by the number of Shares as to which the 
Option is exercised.

(b)  Termination of Status as a  Director.  If an Outside 
Director ceases to serve as a Director, for any reason 
other than death, he may, but only within seven (7) 
months after the date he ceases to be a Director of the 
Company, exercise his Option to the extent that he was 
entitled to exercise it at the date of such termination. 
To the extent that he was not entitled to exercise an 
Option at the date of such termination, or if he does not 
exercise such Option (which he was entitled to exercise) 
within the time specified herein, the Option shall 
terminate.

(c)  Death of Optionee.  Notwithstanding the provisions 
of Section 9(b) above, in the event of the death of an 
Optionee:

4



(i) during the term of the Option who is at the time of 
his death a Director of the Company and who shall have 
been in Continuous Status as a Director since the date of 
grant of the Option, the Option may be exercised, at any 
time within seven (7) months following the date of death, 
by the Optionee's estate or by a person who acquired the 
right to exercise the Option by bequest or inheritance, 
but only to the extent of the right to exercise that 
would have accrued had the Optionee continued living and 
remained in Continuous Status as a Director for six (6) 
months after the date of death or

(ii)  within thirty (30) days after the termination of 
Continuous Status as a Director, the Option may be 
exercised, at any time within seven (7) months following 
the date of death, by the Optionee's estate or by a 
person who acquired the right to exercise the Option by 
bequest or inheritance, but only to the extent of the 
right to exercise that has been accrued at the date of 
termination.

10.  Nontransferability of Options.  The Option may not 
be sold, pledged, assigned, hypothecated, transferred, or 
disposed of in any manner other than by will or by the 
laws of descent or distribution and may be exercised, 
during the lifetime of the Optionee only by the Optionee.

11.  Adjustments Upon Changes in Capitalization or 
Merger.  Subject to any required action by the 
Shareholders of the Company, the number of Shares of 
Common Stock covered by such outstanding Option, and the 
number  of Shares of Common Stock which have been 
authorized for issuance under the Plan but as to which no 
Options have yet been granted or which have been returned 
to the Plan upon cancellation or expiration of an Option, 
as well as the price per Share of Common Stock covered by 
each such outstanding Option, shall be proportionately 
adjusted for any increase or decrease in the number of 
issued Shares of Common Stock resulting from a stock 
split, reverse stock split, stock dividend, 
recapitalization or reclassification of the Common Stock, 
or any other increase or decrease in the number of issued 
Shares of Common Stock affected without receipt of 
consideration by the Company.  Such adjustment shall be 
made by the Board, whose determination in that respect 
shall be final, binding and conclusive; provided, 
however, that conversion of any convertible securities of 
the Company shall not be deemed to have been "effected 
without receipt of consideration."  Except as expressly 
provided herein, no issuance by the Company of Shares of 
stock of any class or securities convertible into Shares 
of stock of any class, shall affect, and no adjustment by 
reason thereof shall be made with respect to, the number 
or price of Shares of Common Stock subject to an Option.

In the event of the proposed dissolution or liquidation 
of the Company, the Option will terminate immediately 
prior to the consummation of such proposed action, unless 
otherwise provided by the Board.  The Board may, in the 
exercise of its sole discretion in such instances, 
declare that any Option shall terminate as of the date 
fixed by the Board and give such Optionee the right to 
exercise his Option as to all or any part of the Optioned 
Stock, including Shares as to which the Option would not 
otherwise be exercisable.  In the event of a proposed 
sale of all or substantially all of the assets of the 
Company, or the merger of the Company with or into 
another corporation, the Option shall be assumed or, an 
equivalent Option (with the same number and kind of 
shares of stock or the same amount of property, cash or 
securities as he would have been entitled to receive upon 
the happening of any such corporate event as if he had 
been, immediately prior to such event, the holder of the 
number of shares covered by his Option) shall be 
substituted by such successor corporation or a parent or 
subsidiary of such successor corporation.  In the event 
that such successor corporation refuses to assume the 
Option or to substitute an equivalent Option, the Board 
shall, in lieu of such assumption or substitution, 
provide that the Optionee shall have the right to 
exercise the Option as to all of the Optioned Stock, 

5



including Shares as to which the Option would not 
otherwise be exercisable.  If the Board makes an Option 
fully exercisable in lieu of assumption or substitution 
in the event of a merger or sale of assets, the Board 
shall notify the Optionee that the Option shall be fully 
exercisable for a period of fifteen (15) days from the 
date of such notice, and the Option will terminate upon 
the expiration of such period.

12.  Time of Granting Options.  The date of grant of an 
Option shall, for all purposes, be the date determined in 
accordance with Section 4(b) hereof.  Notice of the 
determination shall be given to each Outside Director to 
whom an Option is so granted within a reasonable time 
after the date of such grant.

13.  Amendment and Termination of the Plan.

(a)  Amendment and Termination.  The Board may amend or 
terminate the Plan from time to time in such respects as 
the Board may deem advisable; provided that, any 
revisions or amendments requiring approval of the 
Shareholders of the Company under the Code or Rule 16b-3 
promulgated under the Securities Act of 1933 shall be 
approved by such Shareholders in the manner described in 
Section 17 of the Plan.

(b)  Stockholder Approval.  Stockholder approval of any 
amendment requiring stockholder approval under Section 
13(a) of the Plan shall be solicited as described in 
Section 17(b) of the Plan.

(c)  Effect of Amendment or Termination.  Except as 
provided in Section 11, any such amendment or termination 
of the Plan shall not affect Options already granted, and 
such Options shall remain in full force and effect as if 
this Plan had not been amended or terminated, unless 
mutually agreed otherwise between the Optionee and the 
Board, which agreement must be in writing and signed by 
the Optionee and the Company.

14.  Conditions Upon Issuance of Shares.  Shares shall 
not be issued pursuant to the exercise of an Option 
unless the exercise of such Option and the issuance and 
delivery of such Shares pursuant thereto shall comply 
with all relevant provisions of law, including, without 
limitation, the Securities Act of 1993, as amended, the 
Exchange Act, the rules and regulations promulgated 
thereunder, state securities laws, and the requirements 
of any stock exchange upon which the Shares may then be 
listed, and shall be further subject to the approval of 
counsel for the Company with respect to such compliance.

As a condition to the exercise of an Option, the Company 
may require the person exercising such Option to 
represent and warrant at the time of any such exercise 
that the Shares are being purchased only for an 
investment and without any present intention to sell or 
distribute such Shares, if, in the opinion of counsel for 
the Company, such a representation is required by any of 
the aforementioned relevant provisions of law.

Inability of the Company to obtain authority from any 
regulatory body having jurisdiction, which authority is 
deemed by the Company's counsel to be necessary to the 
lawful issuance and sale of any Shares hereunder, shall 
relieve the Company of any liability in respect of the 
failure to issue or sell such Shares as to which such 
requisite authority shall not have been obtained.

15.  Reservation of Shares.  The Company, during the term 
of this Plan, will at all times reserve and keep 
available such number of Shares as shall be sufficient to 
satisfy the requirements of the Plan.

16.  Option Agreement.  Options shall be evidenced by 
written option agreements in such form as the Board shall 
approve.

6



17.  Shareholder Approval.

(a)  Adoption of the Plan shall be subject to approval by 
the Shareholders of the Company within one year of Board 
approval of the Plan.  If such Shareholder approval is 
obtained by written consent, it may be obtained by the 
written consent of the holders of a majority of the 
outstanding shares of the Company.  If such Shareholder 
approval is obtained at a duly held Shareholder's 
meeting, it may be obtained by the affirmative vote of 
the holders of a majority of the outstanding shares of 
the Company present or represented and entitled to vote 
thereon. 

(b)  Any required approval of the Shareholders of the 
Company shall be solicited substantially in accordance 
with Section 14(a) of the Exchange Act and the rules and 
regulations promulgated thereunder.

18.  Information to Optionees.  The Company shall provide 
each Optionee, during the period for which such Optionee 
has one or more Options outstanding, copies of all annual 
reports to Shareholders, proxy statements and other 
information provided to all Shareholders of the Company.
                                                            
7

EX-11

EXHIBIT 11
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(In Thousands, Except Per Share Amounts)


                                                   		Years Ended December 31,	
	                                                   	1996	 	 	1995		  	1994	

                                                               
Income (Loss) From Continuing Operations
	Before Extraordinary Item                       	$ 24,162 	$(36,934) 	$6,734
Discontinued Operations:
	Income From Operations, Net of Taxes                	---     	---	      153
	Gain on Disposal, Net of Taxes	                      ---     	---	      604
Extraordinary Item, Net of Taxes	                    (355)	    ---	      ---

Net Income (Loss)                                 $ 23,807	 $(36,934)  $7,491 

Weighted Average Number of Common
	Shares Outstanding	                                51,712	   46,919	  43,705 


Common Stock Equivalent Shares Assumed
	to be Issued for Dilutive Stock Options and
	Warrants	                                          $ 539    	$ ---	   $3,992

Total Weighted Average Common and
	Common Equivalent Shares Outstanding	              52,251	   46,919	  47,697

Earnings (Loss) per Common Share:
	Continuing Operations	                             $ 0.46	   $(0.79)  $ 0.14
	Discontinuing Operations	                            0.00	     0.00	    0.02
	Extraordinary Item	                                 (0.01)     0.00	    0.00

	Net Income (Loss)                                 	$ 0.45	   $(0.79)  $ 0.16


 

EX-13

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


INTRODUCTION

The Company develops, markets and supports voice and 
data communications systems.  Products and services 
include telephone systems, voice mail systems, 
inbound and outbound call center systems and 
specialized healthcare communications systems.  The 
Company, through its Unistar Entertainment subsidiary, 
also has the exclusive right to design, develop and 
manage the National Indian Lottery (NIL).  Products 
are sold under the EXECUTONE, INFOSTAR, IDS, 
LIFESAVER, INFOSTAR/ILS and UNISTAR brand names 
through a worldwide network of direct sales and 
service employees and independent distributors.

Revenues are derived from product sales to 
distributors, direct sales of healthcare and call 
center products, and direct sales to national accounts 
and federal government customers, as well as 
installations, additions, changes, upgrades or 
relocation of previously installed systems, 
maintenance contracts, and service charges to the 
existing base of healthcare, call center, national 
account and federal government customers.


1996 COMPARED TO 1995

Results of Operations

1996 was a year of change for the Company.  On May 31, 
1996, the Company sold substantially all of its direct 
sales and services organization, including its long-
distance reseller business (the DSOs), for 
consideration valued at $69.6 million to Clarity 
Telecom Holdings, Inc. d/b/a Executone Business 
Solutions (Clarity).  With the sale of the DSOs  and 
the sale of the Videoconferencing division, the year 
as a whole is not comparable to 1995 other than on 
overall measures of profitability such as operating or 
net income.  In addition, with the timing of the sale, 
the first half of 1996 is not comparable to the second 
half of 1996 either on a financial or operational 
basis.  For the first six months of 1996, the primary 
mission of the Company was to complete the sale of the 
direct sales and service organization while 
transitioning  the Company.  For the first six months 
of the year, the management resources of the Company 
were directed toward the completion of the sale 
transaction, adversely affecting operating results.  
For the second six months of 1996, the Company 
operated on a post-sale standalone basis and has made 
significant progress.  The Company was able to achieve 
its forecasted revenue and profit and has effectively 
managed the transitional issues inherent in a 
transaction of this magnitude.  The following table 
illustrates the financial highlights of 1996, 
comparing the six-month period ended June 30, 1996 to 
the six-month period ended December 31, 1996:



                             Six-Month	     Six-Month      Gain on    Full
	                         Period Ended   Period Ended      Sale of    Year
	                             6/30/96*	     12/31/96*	    Business    1996
                                                           
Revenues	                    $118,948	     $93,074        $  ---	   $212,022
Gross Profit	                  45,488       34,024           ---	     79,512
Operating Income (Loss)	     (10,736)        7,295        	  ---	    (3,441)
Net Income (Loss)	            (7,071)        4,442          26,436	    23,807
Earnings (Loss) Per Share    $ (0.14)      $  0.09        $  0.50	   $  0.45

	* Excluding gain on sale of businesses


1

If the Company's operating performance for the last 
six months of 1996 were annualized, operating income 
would have been $14.6 million, compared to $7.6 
million in 1995 (excluding the provision for 
restructuring).  Net income for 1996 (excluding the 
gain on the sale of businesses) would have been $8.9 
million (or $0.17 per common share) versus $2.9 
million (or $0.06 per common share) for 1995 
(excluding the provision for restructuring).

The Company believes that the sale of the DSOs to new 
ownership, with its increased resources and dedicated 
focus on sales and service, will grow and increase the 
market share of the sales and service business, 
resulting in increased Company equipment sales to the 
former direct sales offices.  The sale of the DSOs 
related primarily to the retail distribution channel 
of the Computer Telephony division and also included 
the entire Network Services division.  After the sale, 
the Computer Telephony division consists of telephony 
product sales to independent distributors, of which 
Clarity is the largest distributor, along with the 
National Accounts and Federal Systems marketing 
channels.  The Company retains its Healthcare 
Communications and Call Center Management (CCM) 
businesses.  The Company also retains its Unistar 
business.

The Company recorded a pretax gain of $48.9 million 
net of transaction, severance and other related costs 
of which $47.5 million was recorded during the three-
month period ended June 30, 1996.  An additional $1.4 
million pretax gain was recorded during the three-
month period ended December 31, 1996 reflecting 
purchase price adjustments.  The proceeds were used to 
repay the Company's bank borrowings and the excess was 
invested in short-term cash investments.

Management believes this sale will be good for both 
companies.  Clarity will be able to focus on sales and 
service and the expansion of market share.  The 
Company  should then benefit from that expansion 
through increased product sales.  Telephony product 
sales through existing independent distributors and 
through Clarity will continue to represent a 
substantial portion of the Company's revenues.  The 
sale will also allow the Company to dedicate more of 
its resources to telephony product development, 
particularly relating to the IDS platform, the 
development and marketing of the Healthcare and CCM 
product lines and the Unistar business.

In June 1996, the Company sold its Videoconferencing 
division to BT Visual Images LLC for a $0.2 million 
note, royalties on videoconferencing revenue through 
June 1998 and contingent consideration related to the 
sale of inventory transferred to the buyer as part of 
the sale.  The Company recorded a reserve for loss of 
$3.9 million on the transaction during the three-month 
period ended March 31, 1996.  The Company has filed a 
legal action against  GPT Video Systems, with whom the 
Company terminated its distribution agreement for 
failure to deliver properly functioning 
videoconferencing products on a timely basis.

In April 1996, the Company also sold its Inmate 
Calling business for $0.5 million in cash and notes 
and recorded a pretax loss of $1.0 million.

Recognizing the lack of complete comparative financial 
data, the Company provided forward-looking information 
covering the last six months of 1996 in its filing on 
Form 10-Q for the three-month period ended June 30, 
1996.  A comparison of the six-month period ended 
December 31, 1996 to the forward-looking information 
previously provided is as follows:

	 


                                                    Six-Months
	                           Forward-Looking       Ended 12/31/96
                                                   
	Revenues	                    $92-$96 million         $93,074
	Gross Profit %	                 35%-36%               36.6%
	Product Development
	   (as a % of sales)     	       7%-8%                 6.9%
	Selling, General & Admin.
	   (as a % of sales)	           19%-20%               21.8%
	Operating Income
	   (as a % of sales)	            8%-10%                7.8%

The Company's operating results were as forecast since 
the sale of the DSOs.  Operating results exceeded 
expectations in Computer Telephony and met 
expectations in Healthcare, which more than offset 
unfavorable variances in CCM.

2


Computer Telephony

Computer Telephony develops and distributes telephony 
products that are easy to install, easy to maintain, 
easy to use and create value for its customers.  
Computer Telephony offers a complete portfolio of 
applications built upon the IDS (Integrated Digital 
System) family of digital telephone systems.  Products 
range from PBX's for small to medium-sized businesses 
to standards-compliant computer telephony 
applications, standalone and LAN-based applications, 
including voice mail, unified messaging, automatic 
call distribution (ACD) and wireless communications.  
This business targets the under 400-extension market 
with specific focus on locations having 20-250 
extensions.  Customers range from small companies with 
fewer than ten employees to large national accounts 
and government agencies.

Computer Telephony, including independent 
distribution, National Accounts and Federal Systems, 
remains the Company's largest business.  Revenues for 
1996, excluding revenues derived from the business 
sold, were $122 million, of which $72 million was 
generated during the last six months of 1996.  Sales 
to Clarity totaled $32 million during the seven-month, 
post-sale period.


Healthcare Communications

Healthcare provides a full array of solutions that 
enable healthcare facilities to realize a substantial 
savings in operating costs without compromising the 
quality of patient care.  Integrated on the Healthcare 
Communications Platform, healthcare products are 
designed to improve patient care quality, prevent 
technological obsolescence and increase staff 
productivity.  Products range from traditional nurse 
call systems, intercoms and room status indicators to 
leading-edge patient reporting systems, locating 
systems and wireless technologies.  All of these 
products can be seamlessly integrated to enhance a 
facility's communications and information networking.  
Healthcare specifically targets hospitals, 
surgicenters, nursing homes and assisted living 
centers.

Revenues for 1996 were $30 million, of which $17 
million was generated during the last six months of 
1996.  Selling, general and administrative costs were 
higher than anticipated as the transition of post-sale 
administrative functions such as billing and inventory 
control was more costly than planned.  

The Company recently introduced its new Healthcare 
Communications Platform.  The HCP is a single 
platform for several healthcare products that is based 
on the IDS telephone switch.  It is an integrated 
package of products communicating with each other via 
common equipment.  It can integrate various 
applications and technologies including nurse call, 
locator, telephony and voice mail.  This integrated 
system competes at a substantially lower cost per bed, 
allowing the business to increase margins and 
providing for potential future add-on products.


Call Center Management

CCM develops and sells sophisticated telephony 
products that integrate a computerized digital 
telephone system platform with high-volume inbound, 
outbound and internal call processing systems.  These 
systems are installed in locations where call handling 
and processing is mission-critical to the operation.  
Such systems include automatic call distribution 
systems, predictive dialers and scripting software to 
assist agents handling calls.

CCM had disappointing results for the year and for the 
period following the sale of the DSOs.  Revenues for 
1996 were $7.6 million, of which $4.1 million was 
generated during the last six months of the year.  The 
market for call center products continues to grow and 
pricing margins remain high.  However, the Company was 
unable to develop a sales organization that could 
consistently maintain revenue quotas.  The Company 
believes it has products that are equal to or superior 
to its competitors' products and will provide 
excellent margins.  The Company's challenge is to grow 
sales in 1997 consistent with market opportunities.  
Changes have been made toward improving the sales 
organization in 1997 which include a focus to 
concentrate on inbound and outbound applications that 
have higher margins, with a de-emphasis on interactive 
voice response systems.


3


Unistar

On December 19, 1995, the Company acquired 100% of the 
common stock of Unistar Gaming Corporation (Unistar 
Gaming) for 3.7 million shares of the Company's common 
stock and 350,000 shares of newly issued preferred 
stock.  Unistar Gaming, privately-held prior to the 
acquisition, has an exclusive five-year contract to 
design, develop, finance and manage the NIL through 
its wholly-owned subsidiary, Unistar Entertainment, 
Inc. (Unistar).  See Note L of the Notes to 
Consolidated Financial Statements for the terms of the 
agreement.  

Management believes the Unistar business is a natural 
extension of its telephony and call center businesses.  
The initial goal of this investment was to establish a 
telephone lottery that could be played by any 
individual of majority age, residing in one of the 36 
states or the District of Columbia that currently 
operates a state-run lottery.  In the telephone-based 
lottery of the NIL, calls via an 800 number will be 
processed with interactive voice response equipment or 
live agents located on the Coeur d'Alene Indian Tribe 
of Idaho (CDA) Reservation using ACD software to 
process nationwide lottery sales.  The Company has 
made a significant investment in Unistar, which 
initially created 8% dilution to the Company's 
shareholders.  In 1996, the Company invested $2.1 
million as part of the cost to develop the software 
system, building and other costs related to the 
project.  These costs have been recorded as assets on 
the balance sheet.  The total Unistar investment cost 
on the balance sheet is $17.9 million, including $15.8 
million in goodwill and $2.1 million in other assets.  
In the opinion of the Company's management, this 
investment is justified based upon the potential 
returns.

In an attempt to block the NIL, certain states filed 
letters under 18 U.S.C. Section 1084 to prevent the 
long-distance carriers from providing telephone 
service to the NIL.  The CDA initiated legal action to 
compel the long-distance carriers to provide telephone 
service to the NIL.  The CDA's position is that the 
lottery is authorized by the Indian Gaming Regulatory 
Act (IGRA) passed by Congress in 1988, that IGRA 
preempts state and federal statutes, and that the 
states lack authority to issue the Section 1084 
notification letters to any carrier.  On February 28, 
1996, the NIL was ruled lawful by the CDA Tribal 
Court.  The CDA Tribal Court found that all 
requirements of IGRA have been satisfied and that the 
Section 1084 letters issued by certain state attorneys 
general in an effort to interfere with the lawful 
operation of the NIL are invalid.  In addition, the 
Court found that the long-distance carriers cannot 
refuse to provide the service requested in the action 
based upon 18 U.S.C. Section 1084.  The ruling is 
being appealed and a hearing has been scheduled for 
March 24, 1997 in Tribal Appellate Court.  The Company 
remains hopeful that a positive decision in Tribal 
Appellate Court will accelerate a federal court decision 
on the telephone-based lottery allowing the telephone 
lottery to be operational by early 1998.

In February 1997, Unistar signed revised agreements 
with CasinoWorld Holdings, Ltd.  relating to software 
development, system architecture and proprietary 
technology and a revised agreement providing for an 
equity investment in Virtual Gaming Technologies 
(formerly Internet Gaming Technologies).  See Note L 
for the terms of these agreements.  The development of 
these systems is a critical step in the process of 
developing the telephone lottery, enabling the 
telephone lottery to begin as soon as the legal issues 
are resolved.  The NIL is scheduled to have a beta 
site operating for a limited number of users playing 
on the Internet by the end of March 1997.  The Company 
plans to expand the beta users during the second and 
third quarters of 1997 and, depending on the results 
of the beta tests, move toward a targeted national 
launch during the fourth quarter of 1997.  To 
accomplish this, the Company expects to spend 
approximately $7.4 million in 1997, prior to the 
national launch.  The Company will be capitalizing 
costs relating to the development of the systems 
required to operate the lottery.  In addition, it will 
defer certain costs associated with the lottery that 
will be reimbursable from the lottery proceeds 
pursuant to the Management Agreement with CDA. 

There are market and legal risks associated with the 
development of the NIL.  The Company believes there is 
a national market for the NIL based upon research into 
the experience of other national lotteries and the 
growth of the overall lottery market.  However, there 
is no assurance that there will be acceptance of a 
telephone lottery.  Based upon opinions from outside 
legal counsel, the Company also believes that the 
legal decision rendered by the CDA Tribal Court will 
ultimately be upheld on appeal.  However, there is no 
assurance of such a legal outcome.  In the event that 
a telephone lottery does not attain the level of 
market acceptance anticipated by the Company or if the 
CDA Tribal Court decision is not upheld on appeal, the 
Company would have to reevaluate the viability of the 
Unistar subsidiary to determine if the Company's 
investment has been impaired.


4



Other Matters

Interest expense decreased to $2.7 million in 1996 
from $3.9 million in 1995 due to the use of a portion 
of the cash proceeds resulting from the sale of the 
DSOs to repay the entire outstanding balance on the 
Company's revolving credit facility.

The Company accounts for income taxes in accordance 
with FAS No. 109, "Accounting for Income Taxes".  For 
the year ended December 31, 1996, the Company recorded 
a tax provision of $15.6 million.  The tax provision 
for the year decreased the deferred tax asset 
reflecting a reduction in tax benefits to be utilized 
in the future.  As of December 31, 1996, the deferred 
tax asset of $18.4 million represents the expected 
benefits to be received from the utilization of tax 
benefit carryforwards.  The Company believes that the 
deferred tax asset will more likely than not be 
recognized in the carryforward periods.  The Company 
has accrued approximately $3.0 million in 1996 taxes, 
relating primarily to the gain on the sale of the 
DSOs, which is expected to be paid during 1997.

During 1996, the Company adopted FAS No. 123, 
"Accounting for Stock-Based Compensation".  In 
compliance with the provisions of the new statement, 
the Company has elected to continue to apply APB 
Opinion 25 in accounting for its stock compensation 
plans and, accordingly, has not recognized 
compensation expense for its plans.  If compensation 
cost had been determined in accordance with FAS No. 
123, net income would have been reduced by $0.1 
million and $0.3 million for 1996 and 1995, 
respectively.  Earnings per share would have been 
unchanged for both years (see Note H).

On February 20, 1997, the Company announced that its 
Board of Directors has approved and will be 
recommending to its shareholders a reverse 1-for-3 
stock split.  This action will be voted on at the 
Company's annual meeting of shareholders.  Subject to 
shareholder approval of the reverse stock split, the 
Board of Directors also approved a $10 million, two-
year stock repurchase program.  The full or partial 
execution of this program is dependent on the price of 
the Company's common stock and prevailing market 
conditions over that two-year period.


1995 COMPARED TO 1994

Results of Operations

Total revenues for the year ended December 31, 1995 
were $296.4 million, a $4.4 million increase over the 
comparable 1994 period.  Revenues increased 2% 
compared to 1994, primarily due to increases in system 
upgrades and expansions, increased revenue from 
maintenance contracts, increases in new installations 
of healthcare products and in shipments to the 
independent sales and service offices, partially 
offset by lower volume generated by the network 
services division  and decreases in new telephony 
installations.

Cost of revenues consists of direct manufacturing 
costs, indirect installation and service costs and 
other costs such as warehousing, software 
manufacturing and quality inspection.  Direct 
manufacturing costs are the primary component of cost 
of revenues and are accounted for as direct costs 
related to specific revenues.  Those costs other than 
direct manufacturing costs are treated as fixed cost 
overhead and are not allocated specifically to 
revenues.  Therefore, changes in gross profit can be 
measured based upon the pricing margin (revenue less 
direct manufacturing costs) on a product line basis 
and by the overall level of fixed cost overhead 
relative to total revenue.   Gross profit, as a 
percentage of revenues, decreased slightly from 41.9% 
during 1994 to 41.5% during 1995 due to a combination 
of factors including product mix, higher introductory 
manufacturing costs for the healthcare products and a 
lower absorption of fixed cost overhead.

Operating income, excluding the provision for 
restructuring, decreased $4.9 million compared to 1994 
and, as a percentage of revenues, was 2.6% compared to 
4.3% in 1994.  The decrease in operating income is 
primarily due to increased operating expenses during 
1995.  Product development and engineering increased 
$2.5 million during 1995 as the Company continued to 
accelerate its investment in engineering for new 
product development and application-specific software 
products.  Selling, general and administrative 
expenses increased $2.8 million during the year, 
primarily representing the full year cost impact of 
the divisional supporting management and sales 
structure.


5



Interest expense increased during 1995 due to higher 
average borrowing levels on the revolving credit 
facility and increases in the Company's prime 
borrowing rate during 1995.  Other income, net 
increased primarily as a result of the 1995 gains on 
the sales of the customer bases in Wisconsin and Iowa 
and the related direct sales offices, totaling $1.2 
million.

During the first quarter of 1995, the Company was 
involved in extensive negotiations to acquire the 
Dictaphone division of Pitney Bowes (Dictaphone).  In 
April 1995, the acquisition was awarded to another 
bidder.  The Company incurred approximately $1 million 
in fees and expenses related to the attempted 
acquisition which were recognized in the second and 
third quarters of 1995.

For the year ended December 31, 1995, the Company 
recorded a net tax benefit of $2.3 million.  This is 
comprised of $4.2 million of tax benefit recognized as 
a result of the non-goodwill related portion of the 
restructuring provision, partially offset by the $1.9 
million tax provision on earnings, excluding the 
restructuring provision.  No tax benefit was 
recognized on the goodwill portion of the provision 
for restructuring since it is not deductible for tax 
purposes.  The net tax benefit for the year was 
recorded as an increase to the deferred tax asset 
reflecting additional tax benefits to be utilized in 
the future.

As of March 31, 1994, the Company sold its Vodavi 
Communications Systems Division (VCS), which sold 
telephone equipment to supply houses and dealers, a 
different class of customer from continuing 
operations, under the brand names STARPLUS and 
INFINITE, for approximately $10.9 million.  Proceeds 
of the sale consisted of approximately $9.7 million in 
cash, received in April 1994, and a $1.2 million note, 
the proceeds of which were received in September 1995.  
The proceeds were used to reduce borrowings under the 
Company's revolving credit facility.  The sale 
resulted in an after-tax gain of $604,000 (net of 
income tax provision of $403,000).  Consolidated 
financial statements for the year ended December 31, 
1994 present VCS as a discontinued operation.  Net 
revenues of the discontinued operation for 1994, 
through the date of sale, were $8.6 million.

Provision for Restructuring

In July 1995, the Company reorganized its then-
existing businesses into five divisions:  Computer 
Telephony, Healthcare Communications Systems, Call 
Center Management, Videoconferencing Products and 
Network Services, and changed its business strategy in 
the Computer Telephony division to focus on software 
applications in the communications market.  The 
Videoconferencing and Network Services divisions have 
since been sold (see Note B).  The business that was 
acquired in 1988 was a telephone equipment hardware 
company focused on customers with small systems, with 
an emphasis on selling additional hardware and service 
to generate add-on revenue.  As a result of the change 
in strategy, that business was de-emphasized. The 
Company adopted FAS No. 121, "Accounting for the 
Impairment of Long-Lived Assets" which was issued in 
March 1995, requiring impairment to be measured by 
projecting the lowest level of identifiable future 
cash flows.  The Company concluded there was an 
impairment.  As a result, the Company recorded a $44.0 
million provision for restructuring consisting of a 
$33.5 million goodwill impairment, an $8.8 million 
writedown of inventory, primarily service stock 
relating to the impaired assets and other non- 
recurring inventory adjustments, $0.9 million related 
to the shutdown of the Company's Scottsdale, Arizona 
facility and $0.8 million of other unusual items.

In accordance with the provisions of FAS No. 121, the 
Company prepared projections of future operating cash 
flows relating to the telephony business acquired in 
1988 based upon the Company's new strategic direction.  
These projections indicated that this business would 
not generate sufficient operating cash flows to 
realize goodwill and the related service stock.  The 
amount of impairment of the telephony goodwill was 
$33.5 million as of June 30, 1995.

The write-off of inventory, primarily service stock, 
consisted of $1.3 million of raw materials inventory 
and $7.5 million of finished goods inventory.  These 
amounts were determined based upon a review of 
specific inventory parts along with current and 
projected usage, incorporating the strategic direction 
of the Company.


6




LIQUIDITY AND CAPITAL RESOURCES

The Company's liquidity is represented by cash, cash 
equivalents and cash availability under its existing 
credit facilities.  The Company's liquidity was 
approximately $50 million, $23 million and $30 million 
as of December 31, 1996, 1995 and 1994, respectively.

At December 31, 1996 and 1995, cash and cash 
equivalents amounted to $27.7 million and $8.1 
million, respectively, or 32% and 9% of current 
assets, respectively.  The $19.6 million increase in 
cash and cash equivalents was generated primarily by 
$56.9 million in cash proceeds for the sale of the 
Company's DSOs.  During 1996, cash was used to repay 
$16.6 million of debt, including all of the Company's 
bank borrowings, repurchase $4.6 million of the 
Company's common stock, fund $13.1 million in 
operating activities, purchase $2.6 million in capital 
equipment and fund $2.1 million relating to the 
Company's investment in Unistar.  Cash used by 
operating activities was $13.1 million compared to 
$3.9 million in 1995.  The increase in cash used by 
operating activities is primarily due to operating 
losses generated during the transition period through 
June 30, 1996 and a one-time growth in trade 
receivables of $14.0 million due to the 60-day terms 
extended to Clarity under its distributor agreement.

Total debt at December 31, 1996 was $14.7 million, a 
decrease of $16.1 million from $30.8 million at 
December 31, 1995.  The decrease in debt is due to the 
repayment of $15.4 million in bank borrowings and $1.2 
million in other borrowings, partially offset by a 
$0.3 million capital lease obligation incurred in 
connection with equipment acquisitions and an increase 
to the carrying value of the convertible subordinated 
debentures of $0.3 million due to accretion.

Proceeds from the sale of the DSOs included $5.0 
million of cash held in escrow and reported on the 
consolidated balance sheet as restricted cash.  These 
funds will be released to the Company in April 1998, 
subject to potential indemnity claims by Clarity.

The Company's secured credit facility (the Credit 
Facility) was amended in December 1995.  The $45 
million Credit Facility expires in August 1999 and 
consists of a revolving line of credit providing for 
direct borrowings and up to $15 million in letters of 
credit.  Direct borrowings and letter of credit 
advances are made available pursuant to a formula 
based on the levels of eligible accounts receivable 
and inventories.  The Credit Facility agreement 
contains certain 
restrictive covenants which include, among other 
things, a prohibition on the declaration or payment of 
any cash dividends on common stock, minimum ratios of 
operating income to interest and fixed charges, and a 
maximum ratio of total liabilities to net worth as 
well as certain restrictions on start-up expenditures 
relating to Unistar and the NIL, if direct borrowings 
are used.  Interest rates are also subject to 
adjustment based upon certain financial ratios.  
During 1996, the Company was in compliance with all 
such financial covenants.  The Credit Facility is 
secured by substantially all of the assets of the 
Company.  Refer to Note D of the Notes to Consolidated 
Financial Statements.

As of February 21, 1997, there were no direct 
borrowings, $13.1 million of letters of credit 
outstanding and $19.9 million of additional borrowings 
available under the Credit Facility.  Required 
principal payments for debt in 1997 are $0.9 million.  
The Company believes that borrowings under the Credit 
Facility and cash flow from operations will be 
sufficient to meet working capital and other 
requirements for 1997.






7






SELECTED FINANCIAL DATA

The following is selected financial data for EXECUTONE 
for the five years ended December 31, 1996.

(In thousands, except for per share amounts)



                                    						Years Ended December 31,			
                    				    1996      1995      1994 (2)   1993 (2)   1992 (2)  
                                                           
Revenues                  $212,022   $296,393   $291,969   $271,765   $253,024

Income (Loss) Before
  Income Taxes From
  Continuing Operations    $39,782   $(39,221) 	$ 10,041   $ 7,580    $ 4,320 

Income (Loss) From 
  Continuing Operations	   $24,162	  $(36,934)	 $ 6,734    $ 4,903    $ 2,222 

Income (Loss) From 
  Discontinued Operations, 
  Net of Taxes	              ---	      ---	       757	        298	     (157)

Extraordinary Item - Gain (Loss) on
  Extinguishment of Debt,
  Net of Taxes (1)	        (355) 	     ---	       ---         ---	     1,267 

Net Income (Loss) 	      $ 23,807   $(36,934)   $ 7,491    $ 5,201    $ 3,332

EARNINGS (LOSS) PER SHARE:
  Continuing Operations   $ 0.46    $ (0.79)    $ 0.14     $  0.10     $ 0.05 
  Discontinued Operations  ---	        ---	       0.02        0.01       ---
  Extraordinary Item	     (0.01)	      ---	       ---         ---        0.03 
  Net Income (Loss)   	  $ 0.45     $ (0.79)	   $ 0.16     $  0.11     $ 0.08 

Total Assets	           $152,009	   $167,844    $189,481    $175,555   $179,294

Long-Term Debt (3)	    $ 13,837 	  $ 29,829	    $24,698     $32,279    $43,752 

Cash Dividends Declared
  Per Share (4)	        $ ---	     $  ---	      $ ---       $ ---       $ --- 


(1)  The 1996 extraordinary item relates to the 
writeoff of deferred debt issue costs associated with 
the Company's 	revolving credit facility repaid in June 
1996.  The 1992 extraordinary item relates to the 
exchange of debentures for 	Preferred Stock and Common 
Stock Purchase 	Warrants.  Refer to Note D (b) of the 
Notes to Consolidated Financial 	Statements.

(2)	Discontinued operations are presented for VCS which 
was sold in March 1994.  Refer to Note M of the Notes 
to 	Consolidated Financial Statements.

(3)  Includes capitalized leases.

(4)  The Company has not declared or paid any cash 
dividends on its Common Stock.  Refer to "Stock Data".

8


EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for per share amounts)




                          						                 Years Ended December 31,
					                                            1996         1995       1994
                                                               
REVENUES	                                      $212,022   	$296,393  $291,969
COST OF REVENUES	                               132,510   	 173,536   169,497 
	Gross Profit	                                   79,512	    122,857   122,472 

OPERATING EXPENSES:
	Product development and engineering	            13,773  	  14,703    12,222
	Selling, general and administrative	            69,180	   100,520    97,755 
	Provision for restructuring and unusual items 
	    (Note N)	                                     ---	     44,042       --- 
		                                               82,953    159,265   109,977 
OPERATING INCOME (LOSS)	                         (3,441)	  (36,408)    12,495 

INTEREST EXPENSE	                                (2,707)   	(3,920)    (3,089)
NET GAIN ON SALE OF BUSINESSES (Note B)          44,060 	     ---	       ---
OTHER INCOME, NET	                                1,870   	  2,129     	 635
ACQUISITION COSTS (Note M)	                        ---  	   (1,022)      --- 
INCOME (LOSS) BEFORE INCOME TAXES 
    FROM CONTINUING OPERATIONS	                  39,782	   (39,221)   10,041

PROVISION (BENEFIT) FOR INCOME TAXES:
	Cash	                                            4,200	      350	      400
	Noncash (Note E)	                               11,420	   (2,637)    2,907 
		                                               15,620  	 (2,287)    3,307 

INCOME (LOSS) FROM CONTINUING 
	OPERATIONS BEFORE EXTRAORDINARY 
	ITEM	                                             24,162	  (36,934)   	6,734

Income from discontinued operations
     (net of income tax provision of $102)	         ---	      ---	        153
Gain on disposal of discontinued operations 
	 (net of income tax provision of $403)	            ---	      ---	        604 
Extraordinary item - loss on extinguishment
	of debt (net of income tax benefit of $238)       (355)	      ---        ---

NET INCOME (LOSS)	                               $ 23,807	 $(36,934)	  $7,491 

EARNINGS (LOSS) PER SHARE:
    CONTINUING OPERATIONS	                          $0.46	  $ (0.79)	  $ 0.14 
    DISCONTINUED OPERATIONS	                         ---	     ---	       0.02 
    EXTRAORDINARY ITEM	                            (0.01)	    ---	       ---
    NET INCOME (LOSS)	                           $  0.45	  $ (0.79)   	$ 0.16 

WEIGHTED AVERAGE NUMBER OF
  SHARES OF COMMON STOCK AND
  EQUIVALENTS OUTSTANDING	                        52,251	    46,919     47,697 

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

9


EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

           
(In thousands)                                      Years Ended December 31,
                                                1996         1995         1994
                                                                  
CASH FLOWS FROM OPERATING ACTIVITIES:
  Income (loss) from continuing operations     $24,162    $(36,934)     $6,734 
  Adjustments to reconcile net income (loss) to net
    cash (used) provided by operating activities:
    Depreciation and amortization	              4,242      	 6,093	      7,463
    Deferred income tax provision (benefit)	   11,420	      (2,637)	     2,907
    Net gain on sale of businesses (Note B    (44,060)     	(1,087)	      ---
    Provision for restructuring and unusual items
	(Note N)	                                       ---	        44,042	      ---
    Provision for losses on accounts receivable 1,921	       1,440	       893 
    Other, net	                                 (706)	       (521)      	1,251 
  Changes in working capital items:
    Accounts receivable	                       (8,754)	     (4,205)    (9,346)
    Inventories	                                1,048	      (3,121)   (13,049)
    Accounts payable and accruals	             (4,719)     	(9,131)    10,497
    Other working capital items, net	           2,375	       2,177      (552) 

NET CASH (USED) PROVIDED BY CONTINUING
  OPERATIONS	                                 (13,071)      (3,884)     6,798 
Cash flows from discontinued operations	         ---	        ---	       (449) 

NET CASH (USED) PROVIDED BY OPERATING
  ACTIVITIES	                                 (13,071)	     (3,884)      6,349 

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment	          (2,534)	     (3,457)    (6,091)
  Dispositions (acquisitions) of businesses     56,948	       125	     (1,298)
  Investment in Unistar	                       (2,079)	       ---	      ---
  Proceeds from sale of VCS	                     ---	        1,200	     9,700
  Other, net	                                    298	         822	      (436) 
NET CASH PROVIDED (USED) BY
  INVESTING ACTIVITIES	                        52,633   	   (1,310)	     1,875  

CASH FLOWS FROM FINANCING ACTIVITIES:
  Borrowings (repayments) under revolving credit 
    facility	                                 (15,445)	      4,478	    (4,199)
  Repayments of term note under credit facility 	---	        ---	    (3,750)
  Repayments of other long-term debt	         (1,134)   	    (622)	    (1,781)
  Repurchase of stock	                        (4,554)	       (810)	    (8,450)
  Proceeds from issuance of stock	              819    	     1,641	    10,399 
  Other borrowings	                             356	          750	       --- 
NET CASH (USED) PROVIDED BY FINANCING 
  ACTIVITIES	                                (19,958)   	    5,437	    (7,781) 
INCREASE IN CASH AND CASH EQUIVALENTS	        19,604	          243	      443
CASH AND CASH EQUIVALENTS - BEGINNING
  OF YEAR	                                     8,092	        7,849	    7,406 
CASH AND CASH EQUIVALENTS - END
  OF YEAR	                                  $ 27,696	     $  8,092	 $  7,849 

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

10


EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS




(In thousands, except for share amounts)         December 31,     December 31,
                                                     1996            1995 	 
                                                            
ASSETS

CURRENT ASSETS:
  Cash and cash equivalents	                     $ 27,696	        $  8,092 
  Accounts receivable, net of allowance
     of $2,106 and $1,715	                         38,992	          48,531
  Inventories (Note N)	                            16,814     	     32,765
  Prepaid expenses and other current assets	        3,099            5,290 
  Total Current Assets	                            86,601	          94,678 

RESTRICTED CASH	                                    5,031      	     ---
PROPERTY AND EQUIPMENT, net	                        7,578      	    18,462
INTANGIBLE ASSETS, net (Notes L and N)	            19,893      	    20,022
DEFERRED TAXES	                                    18,434	          29,616
OTHER ASSETS	                                      14,472	           5,066 
	                                                $152,009	        $167,844

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Current portion of long-term debt	             $   882      	   $   932 
  Accounts payable	                               31,416      	    30,676
  Accrued payroll and related costs	               3,398      	     6,870
  Accrued liabilities	                            13,943	          11,851
  Deferred revenue and customer deposits	          3,164	          19,781 
  Total Current Liabilities	                      52,803	          70,110

LONG-TERM DEBT	                                   13,837      	    29,829
LONG-TERM DEFERRED REVENUE	                           22	           2,805 
    Total Liabilities	                            66,662	         102,744 

STOCKHOLDERS' EQUITY:
  Common stock:  $.01 par value; 80,000,000 shares
     authorized; 51,173,755 and 51,658,492 issued and
     outstanding	                                     512	           517
  Preferred stock:  $.01 par value; Cumulative Convertible
     Preferred Stock (Series A), 250,000 shares authorized,
     issued and outstanding; Cumulative Contingently
     Convertible Preferred Stock (Series B), 100,000 shares
     authorized, issued and outstanding	             7,300	        7,300
  Additional paid-in capital	                       76,113	       79,668
  Retained earnings (deficit) (since July 1, 1988)   1,422	      (22,385) 
  Total Stockholders' Equity	                       85,347	       65,100 
	                                                 $152,009	     $167,844




The accompanying notes are an integral part of these consolidated balance 
sheets.

11



EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY


(In thousands, except for share amounts)
 	


                                                                        Total
	                		                             Additional Retained     Stock
                 Common  Stock   Preferred Stock  Paid-In  Earnings  holder's
                 Shares Amount   Shares   Amount  Capital  (Deficit)   Equity
                                                    
Balance at 
December 31, 1993  
             41,205,498 	$412	    ---	    $ ---  $68,275	  $7,058    $75,745

Proceeds from issuances of stock 
from employee stock plans	
             5,716,651	   57		                   	11,303	            	11,360
Proceeds from common stock purchase warrants exercised
    through bond conversion
           	1,507,000	    15		                    	1,056	             	1,071
Repurchase of stock	
           (2,781,255)  	(28)	                  		(8,422)	           	(8,450)
Amortization of deferred
    compensation				                                	91                		91
Net income						                                           	7,491     	7,491
Balance at December 31, 1994
          	45,647,894	   $456	    ---	    $ ---  	$72,303	 $14,549	   $87,308

Proceeds from issuances of stock	
    from employee stock plans	
         1,934,492	       19		                     	1,613		            1,632
Warrants exercised for common stock
         	363,549         	4		                       	(4)              		---
Common and preferred stock issued 
    to acquire Unistar (Note L)	
        3,700,000	        37    	350,000	   7,300	  5,374             	12,711
Common stock issued for 
    investment in DCC (Note G)	
         353,118	          4		                     	1,100	             	1,104
Repurchase of stock	
        (340,561)        	(3)	                    		(807)	             	(810)
Amortization of deferred 
    compensation				                                	89                 		89
Net loss				                                                 (36,934)	(36,934)
Balance at December 31, 1995	
       51,658,492	       $517	   350,000	   $7,300	$79,668 	$(22,385)	$65,100

Proceeds from issuances of stock
    from employee stock plans	
        810,036	           8			                       839	              	847
Warrants exercised for common stock	
        199,431	           2		                        	7	                	9
Repurchase of stock	
      (1,494,204)       	(15)                    			(4,536)          		(4,551)
Amortization of deferred 
    compensation			                                 		135	              	135
Net Income							                                              23,807	  23,807
Balance at December 31, 1996		
      51,173,755	        $512	    350,000	   $7,300	 $76,113	  $1,422	 $85,347




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


12


EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - NATURE OF THE BUSINESS AND FORMATION OF THE 
COMPANY

EXECUTONE Information Systems, Inc. (the Company) 
develops, markets and supports voice and data 
communications systems.  Products and services include 
telephone systems, voice mail systems, inbound and 
outbound call center systems and specialized 
healthcare communications systems.  The Company, 
through its Unistar Entertainment subsidiary, also has 
an exclusive five-year contract with the Coeur d'Alene 
Tribe of Idaho (CDA) to design, develop, finance and 
manage the National Indian Lottery (NIL).  Products 
and services are sold under the EXECUTONE, 
INFOSTAR, IDS, LIFESAVER, INFOSTAR/ILS and 
UNISTAR brand names through a worldwide network of 
direct sales and service employees and independent distributors.  
The Company's products are manufactured primarily in 
the United States, Malaysia, China and the Dominican 
Republic.

The Company was formed in July 1988 through the merger 
of ISOETEC Communications, Inc. (ISOETEC) with Vodavi 
Technology Corporation (Vodavi).  The merger of 
ISOETEC into Vodavi was accounted for under the 
purchase method of accounting and Vodavi was deemed to 
have undergone a quasi-reorganization for accounting 
purposes.  As of July 1988, Vodavi's accumulated 
deficit of approximately $49.7 million was eliminated.  
Executone, Inc. was acquired in 1988 from Contel 
Corporation (Contel) for promissory notes and cash.


NOTE B - SALE OF BUSINESSES

On May 31, 1996, the Company sold its direct sales and 
service organization, including its Network Services 
division (DSOs) to Clarity Telecom Holdings, Inc. 
d/b/a Executone Business Solutions (Clarity), a new 
acquisition company formed for the acquisition by Bain 
Capital, Inc.  The Company received $61.5 million in 
cash, a $5.9 million junior subordinated note due July 
1, 2004, with interest at 7.5% per year, and warrants 
to purchase 8% of the equity issued as of the closing 
in the new company for $1.1 million, exercisable for 
three years.  After recording the notes and the 
warrants at their fair market value, the total value 
of the consideration received was $69.6 million.  The 
Company and Clarity also entered into a five-year 
exclusive distributor agreement pursuant to which 
Clarity will sell and service EXECUTONE and 
INFOSTAR telephone products to business and 
commercial locations that require up to 400 
telephones.

The sales did not include the Pittsburgh direct sales 
and service office, which the Company sold to one of 
its existing independent distributors for 
approximately $1.3 million in cash and notes in May 
1996, resulting in no gain or loss.  The sale of the 
DSOs (including the separate sale of the Pittsburgh 
office) relates primarily to the retail distribution 
channel of the Computer Telephony division and 
includes the Network Services division.  After the 
sale, the Computer Telephony division consists of 
telephony product sales to independent distributors, 
of which Clarity is the largest distributor, along 
with the National Accounts and Federal Systems 
marketing channels.  The Company retains its Healthcare 
Communications and Call Center Management (CCM) 
businesses and the Unistar business.

The Company recorded a pretax gain of $48.9 million on 
the sale to Clarity net of transaction, severance and 
other costs related to the sale.  The proceeds were 
used to repay the Company's bank borrowings, and the 
excess was invested in short-term cash investments.

The cash proceeds of $61.5 million includes $5.0 
million held in escrow.  These funds are classified as 
restricted cash and will be released to the Company in 
April 1998, subject to potential indemnity claims by 
Clarity.

During the seven-month period after the sale of the 
DSOs, $31.7 million (15%) of the Company's revenues 
represented sales to Clarity.  As of December 31, 
1996, $14.2 million (36%) of the Company's net 
accounts receivables were from Clarity.


13



In June 1996, the Company sold its Videoconferencing 
division to BT Visual Images LLC for a $0.2 million 
note, royalties on videoconferencing revenue through 
June 1998 and contingent consideration related to the 
sale of equipment inventory.  The Company recorded a 
loss of $3.9 million on the transaction.

In April 1996, the Company also sold its Inmate 
Calling business for $0.5 million in cash and notes 
and recorded a pretax loss of $1.0 million.  Neither 
the Pittsburgh direct sales office, the 
Videoconferencing division, nor the Inmate Calling 
business constituted a material portion of the 
Company's assets, revenues or net income prior to 
sale.


NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation.  The accompanying 
consolidated financial statements include the accounts 
of the Company and its subsidiaries.  In consolidating 
the accompanying financial statements, all significant 
intercompany transactions have been eliminated.  
Investments in affiliated companies owned more than 
20%, but not in excess of 50%, are recorded under the 
equity method.  Certain prior year amounts have been 
reclassified to conform to the current year's 
presentation.

Use of Estimates.  The preparation of financial 
statements in conformity with generally accepted 
accounting principles requires management to make 
estimates and assumptions that affect the reported 
amounts of assets and liabilities, 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.

Revenue Recognition.  The Company recognizes revenue 
on equipment sales and software licenses to 
independent sales and service offices when shipped.  
Revenue from equipment, software and installation 
contracts with end-users is recognized when the 
contract or contract phase for major installations is 
substantially completed.  Revenue derived from the 
sale of service contracts is amortized ratably over 
the service contract period on a straight-line basis.

Earnings Per Share.  Earnings per share is based on 
the weighted average number of shares of common stock 
and dilutive common stock equivalents (which include 
stock options and warrants) outstanding during the 
period.  Common stock equivalents, the convertible 
preferred stock and the convertible debentures, which 
are antidilutive have been excluded from the 
computations.

Cash Equivalents.  Cash equivalents include short-term 
investments with original maturities of three months 
or less.

Inventories.  Inventories are stated at the lower of 
first-in, first-out ("FIFO") cost or market and 
consist of the following at December 31, 1996 and 
1995:




(Amounts in thousands)		   1996	          1995
                                   
Raw Material	        		$  3,493       $  4,783
Finished Goods      			  13,321         27,982
			                  		 $16,814	       $32,765


Intangible Assets.  Intangible assets represent the 
excess of the purchase price of the predecessor 
companies acquired over the fair value of the net 
tangible assets acquired.  Effective April 1, 1995, 
the carrying value of intangibles is evaluated 
periodically in accordance with the provisions of FAS 
No. 121, "Accounting for the Impairment of Long-Lived 
Assets", by projecting the lowest level of future 
undiscounted net cash flows of the underlying 
businesses.  If the sum of such cash flows is less 
than the book value of the long-lived assets, 
including intangibles, projected future cash flows are 
discounted and intangibles are adjusted accordingly.  
Prior to April 1, 1995, the carrying value of 
intangibles was evaluated in accordance with the 
provisions of APB 17, and was based upon aggregate 
cash flows of the business as a whole.  Amortization 
is provided over periods ranging from 10 to 40 years.  
Intangible assets at December 31, 1996 and 1995 are 
net of accumulated amortization of $1.0 million and 
$0.8 million, respectively (see Notes L and N).



14


Property and Equipment.  Property and equipment at 
December 31, 1996 and 1995 consist of the following:




(Amounts in thousands)	                1996	         1995	
                                              
Land and building	$                     ---        	$ 1,364	
Furniture and fixtures                	1,992	         7,052 
Leasehold improvements	                1,813    	     2,828 
Machinery and equipment	              20,253         38,093 
 	                                   	24,058   	     49,337 
Accumulated depreciation	            (16,480)       (30,875) 
Property and equipment, net        	$  7,578       $ 18,462 



Depreciation is provided on a straight-line basis over 
the estimated economic useful lives of property and 
equipment which range from three to ten years for 
equipment and thirty years for a building.  
Amortization, principally of leasehold improvements, 
is provided over the life of the respective lease 
terms which range from three to ten years.

Income Taxes.  The Company utilizes the liability 
method of accounting for income taxes as set forth in 
FAS No. 109, "Accounting for Income Taxes".  Under the 
liability method, deferred taxes are determined based 
on the difference between the financial statement and 
tax bases of assets and liabilities using enacted tax 
rates in effect in the years in which the differences 
are expected to reverse.

Product Development and Engineering.  Product 
development and engineering costs are expensed as 
incurred.

Fair Value of Financial Instruments.  The fair value 
of the Company's Convertible Subordinated Debentures 
at December 31, 1996 is approximately $14.3 million, 
based upon market quotes.  The carrying value of all 
other financial instruments included in the 
accompanying financial statements approximate fair 
value as of December 31, 1996 based upon current 
interest rates.

Noncash Investing and Financing Activities.  The 
following noncash investing and financing activities 
took place during the three years ended December 31, 
1996:




(Amounts in thousands)	                        1996	     1995       1994
                                                              
Note Receivable and Warrants for Sale of
  DSOs (Note B)	                              $8,100     $ ---	     $ ---
Restricted Cash Received for Sale of
  DSOs (Note B)	                               5,031      	---	       ---
Common and Preferred Stock issued to
  acquire Unistar (Note L)	                     ---	     12,711       ---
Notes receivable for 1995 disposition of direct sales
  offices (Note M)	                             ---	      1,911	      ---
Equity investment in DCC (Note G)	              ---	      1,505	      ---
Common shares exchanged to exercise options
  and warrants	                                 549	      1,137	      455
Capital leases for equipment acquisitions       302	        437	      686
Note receivable for disposition of VCS
  division (Note M)	                            ---	       ---	     1,200
Common stock purchase warrants exercised
  through bond conversion	                      ---	       ---	     1,071
Utilization of credits under a special
  stock option incentive plan   	               ---	       ---	       737


			
Refer to the consolidated statements of cash flows for 
information on cash-related operating, investing and 
financing activities.

15


NOTE D - DEBT

The Company's debt is summarized below at December 31, 
1996 and 1995:





(Amounts in thousands)			                               1996	          1995
                                                                  
Borrowings Under Revolving Credit Facility (a)	       $  ---	       $15,445
Convertible Subordinated Debentures (b)	              12,317         12,098 
Capital Lease Obligations (c)	                         1,499          2,412 
Other	                                                   903	           806 
Total Debt                                            14,719         30,761 
Less:  Current Portion of Long-Term Debt       	         882	           932 
Total Long-Term Debt	                                $13,837	       $29,829



(a)  The Company's Credit Facility was amended in 
December 1995.  The amended $45 million Credit 
Facility consists of a revolving line of credit 
providing for direct borrowings and up to $15 million 
in letters of credit.   Direct borrowings and letter 
of credit advances are made available pursuant to a 
formula based on the levels of eligible accounts 
receivable and inventories.  To minimize interest on 
the revolving line of credit, the Company has the 
option to borrow money based upon an adjusted prime 
borrowing rate (8.25% at December 31, 1996) or at an 
adjusted eurodollar rate (7.7% at December 31, 1996).  
The Company repaid all amounts outstanding under the 
revolving credit facility in June 1996.  At December 
31, 1995, the Company had $11.0 million outstanding 
subject to the adjusted eurodollar rate with the 
balance at the adjusted prime borrowing rate.  The 
revolving line of credit expires in August 1999.  
Approximately $22 million was available at December 
31, 1996 under the revolving line of credit, including 
approximately $13.1 million which was committed to 
cover outstanding letters of credit.  The unused 
portion of the line of credit has a commitment fee of 
0.375%.  The Company's average outstanding 
indebtedness under the revolving line of credit for 
the years ended December 31, 1996 and 1995 was $6.5 
million and $17.4 million, respectively, and the 
average interest rate on such indebtedness was 7.9% 
and 8.5%, respectively.

The Credit Facility agreement contains certain 
restrictive covenants which include, among other 
things, a prohibition on the declaration or payment of 
any cash dividends on common stock, minimum ratios of 
operating income to interest and fixed charges, and a 
maximum ratio of total liabilities to net worth as 
well as certain restrictions on start-up expenditures 
relating to Unistar and the NIL, if direct borrowings 
are used.  Interest rates are also subject to 
adjustment based upon certain financial ratios.  The 
Company was in compliance with all covenants in 1996.  
The Credit Facility is secured by substantially all of 
the assets of the Company.

(b)  The Company's Convertible Subordinated Debentures 
(the Debentures), issued in April 1986, are due March 
15, 2011 and bear interest at 7 1/2%, payable March 
15th and September 15th.  The face value of the 
outstanding Debentures at December 31, 1996 was $16.5 
million.  The face value of the Debentures was 
adjusted to fair value in connection with the 
Company's 1988 quasi-reorganization.  The Debentures 
are convertible at the option of the holder into 
Common Stock of the Company at any time on or before 
March 15, 2011, unless previously redeemed, at a 
conversion price of $10.625 per share, subject to 
adjustment in certain events.  Subject to certain 
restrictions, the Debentures are redeemable in whole 
or in part, at the option of the Company, at par in 
1996.  The Debentures are also subject to annual 
sinking fund payments of $1.5 million beginning March 
15, 1997.  In January 1992, $15 million principal 
amount of Debentures with a book value of $10.1 
million was exchanged for 674,865 shares of 
Convertible Preferred Stock and 2,999,400 Common Stock 
Purchase Warrants.  Debentures reacquired by the 
Company in the debt-for-equity exchange and in 
connection with Warrant exercises were delivered in 
lieu of cash in satisfying sinking fund requirements.  
Thus, no cash sinking fund payment will be due until 
March 2008.

(c)  The Company has entered into capital lease 
arrangements for office furniture, computer and test 
equipment with a net book value of approximately $1.5 
million and $2.3 million at December 31, 1996 and 
1995, respectively.  Such leases have been capitalized 
using implicit interest rates which range from 2% to 
12%.



16

The following is a schedule of future maturities of 
long-term debt at December 31, 1996:




Years Ending December 31:	(Amounts in thousands)
                           
	1997	                       $     882
	1998                              654
	1999	                             246
	2000	                             170
	2001	                              26
	Thereafter	                    12,741
                               $14,719

(d)  For the years ended December 31, 1996, 1995 and 
1994, the Company made cash payments of approximately 
$2.6 million, $3.6 million and $2.8 million, 
respectively, for interest expense on indebtedness.


NOTE E - INCOME TAXES

The components of the provision (benefit) for income 
taxes applicable to income (loss) from continuing 
operations for the three years ended December 31, 1996 
are as follows:







(Amounts in thousands)		           1996          1995	         1994
                                                       
Current  - Federal              $  1,100	      $  150	        $  200	
	   - State                        3,100	         200	           200 
		                                 4,200	         350	           400

Deferred  - Federal	              11,005	      (1,922)	        2,363 
	    - State	                        415	        (715)     	     544 
		                                11,420	      (2,637)     	   2,907 
		                               $15,620	     $(2,287)     	  $3,307


The deferred tax provision for 1996 was primarily 
offset by the utilization of net operating loss 
carryforwards.  For the year ended December 31, 1996, 
the Company recorded a deferred income tax benefit of 
$238,000 related to an extraordinary loss on the 
extinguishment of debt.

For the year ended December 31, 1994, the Company 
recorded a deferred income tax provision of $505,000 
related to discontinued operations.

A reconciliation of the statutory federal income tax 
provision (benefit) to the reported income tax 
provision (benefit) on income (loss) from continuing 
operations for the three years ended December 31, 1996 
is as follows:





(Amounts in thousands)			                     1996       1995	     	 1994
                                                              
Statutory income tax provision (benefit)    $13,924 	  $(13,335)	     $3,415	
State income taxes, net of
  federal income tax benefit	                 2,364  	     (338)	        676
Impairment of intangible assets                 ---      11,392          ---
Amortization of intangible assets	               44        171	          457
Adjustment of valuation allowance	             ---	        ---	       (1,252)
Research and development credit	               (351)       (148)        (250) 
Other	                                         (361)	       (29)         261 
Reported income tax provision (benefit)	    $15,620	   $ (2,287)      $3,307



17


The components of and changes in the net deferred tax 
asset are as follows:



			                                               Deferred
                     				      December 31,       (Expense)       December 31,
(Amounts in thousands)		           1995	        	  Benefit           1996	
                                                             
Net operating loss and tax 
   credit carryforwards	         $27,544	       $  (7,935)	       $19,609
Inventory reserves	                8,205           (3,231)          4,974
Accrued liabilities and 
   restructuring costs	              582              564           1,146
Debenture revaluation	            (1,625)	             94          (1,531)
Other	                              (346)	           (674) 	       (1,020)
	                                 34,360	         (11,182)	        23,178
Valuation allowance	              (4,744)	           ---	          (4,744)
Deferred tax asset	              $29,616	        $(11,182)	       $18,434



The deferred tax asset represents the benefits 
expected to be realized from the utilization of pre- 
and post-acquisition tax benefit carryforwards, which 
include net operating loss carryforwards (NOLs), tax 
credit carryforwards and the excess of tax bases over 
fair value of the net assets of the Company.  The 
utilization of these tax benefits for financial 
reporting purposes will not be reflected in the 
statement of operations, but will be reflected as a 
reduction of the deferred tax asset.

In order to fully realize the remaining deferred tax 
asset of $18.4 million as of December 31, 1996, the 
Company will need to generate future taxable income of 
approximately $51 million prior to the expiration of 
the NOLs and tax credit carryforwards.  Although the 
Company believes that it is more likely than not that 
the deferred tax asset will be fully realized based on 
current projections of future pre-tax income, a 
valuation allowance has been provided for a portion of 
the deferred tax asset.  There was no significant 
adjustment to the valuation allowance in 1996 and 
1995.  During 1994, the Company adjusted its valuation 
allowance by $6.5 million, $5.2 million of which was a 
reduction of goodwill as it related to pre-acquisition 
tax benefits and $1.3 million of which reduced the 
1994 provision for income taxes.  The basis for the 
adjustment in 1994 was a significant increase in pre-
tax income from $7.6 million in 1993 to $10.0 million 
in 1994.  Accordingly, historical earnings supported 
the realization of the larger deferred tax asset.  The 
amount of the deferred tax asset considered 
realizable, however, could be reduced if estimates of 
future taxable income during the carryforward period 
are reduced.

As of December 31, 1996, the Company has NOLs and tax 
credit carryforwards (subject to review by the 
Internal Revenue Service) available to offset future 
income for tax return purposes of approximately $40.9 
million and $4.5 million, respectively.  A portion of 
the NOLs and tax credit carryforwards were generated 
prior to the formation of the Company and their 
utilization is subject to certain limitations imposed 
by the Internal Revenue Code.  The NOLs expire as 
follows:  $18.9 million in 2004; $9.7 million in 2005; 
$12.3 million in 2006.

A reconciliation of the Company's income (loss) before 
taxes for financial reporting purposes to taxable 
income for the three years ended December 31, 1996 is 
as follows:




(Amounts in thousands)		                           1996       1995       1994
                                                                  
Income (loss) before taxes from continuing 
  operations	                                    $39,782  	$(39,221)  $10,041
Discontinued operations	                             ---   	   ---	    1,262 
Extraordinary Item	                                (592)	      ---   	  --- 
Income (loss) before taxes for financial 
   reporting purposes	                            39,190 	  (39,221)  	11,303
Differences between income (loss) before taxes for
  financial reporting purposes and taxable income:
  Permanent differences	                             105	    28,600	   1,070 
  Book taxable income (loss)	                     39,295	   (10,621)  12,373
  Net changes in temporary differences	           (8,990)	   11,433   (5,016)
Taxable income 	                                 $30,305	   $   812	  $7,357




18


The permanent differences relate to the write-off (in 
1995) and amortization of goodwill, which are not 
deductible.   Changes in temporary differences 
principally relate to the taxable gain on the sale of 
businesses (in 1996), the impairment in service stock 
inventory (in 1995), inventory reserves and other 
costs accrued for book purposes, but not deducted for 
tax purposes until subsequently paid.

For the years ended December 31, 1996, 1995 and 1994, 
the Company made cash payments of approximately $1.5 
million, $0.2 million and $0.5 million, respectively, 
for income taxes.


NOTE F - COMMITMENTS AND CONTINGENCIES

Operating Leases.  The Company conducts its business 
operations in leased premises under noncancellable 
operating lease agreements expiring at various dates 
through 2005.  Rental expense under operating leases 
amounted to $6.3 million, $9.6 million and $10.1 
million for the years ended December 31, 1996, 1995 
and 1994, respectively.

The following represents the future minimum rental 
payments due under noncancellable operating leases 
that have initial or remaining lease terms in excess 
of one year as of December 31, 1996:




Years Ending December 31,	  (Amounts in thousands)
                                 
	1997	                            $  2,973
	1998	                               3,126
	1999	                               3,127
	2000	                               3,127
	2001                  	             3,220
	Thereafter	                        11,011
     		                            $26,584



Litigation.  The Company has various lawsuits, claims 
and contingent liabilities arising from the conduct of 
business; however, in the opinion of management, they 
are not expected to have a material adverse effect on 
the results of operations, cash flow or financial 
position of the Company.


NOTE G - RELATED PARTY TRANSACTIONS

During 1995, the Company acquired 43% of the common 
stock and certain other assets of Dialogic 
Communications Corporation (DCC), a vendor of certain 
call center products, in exchange for 353,118 shares 
of the Company's common stock and $100,000 cash.  This 
investment is included in Other Assets and the related 
equity income is included in Other Income, Net.


NOTE H - STOCK OPTIONS AND WARRANTS

The Company has established stock option plans under 
which it is authorized to grant both incentive stock 
options and non-qualified stock options to officers 
and other key employees.  Options are granted at a 
price not less than the fair market value on the date 
of the grant and generally become exercisable over a 
four-year period and expire after five years.  Shares 
available for granting of future options under these 
plans total 2.3 million as of December 31, 1996.

The Company also has non-plan options outstanding at 
December 31, 1996 including options for 300,000 shares 
granted to a director by a predecessor company at a 
price of $1.13 per share.  Deferred compensation of 
$0.9 million was recorded for the excess of the fair 
value over the exercise price at the date of grant in 
1987 and was fully amortized during 1996.  At December 
31, 1996, all of the non-plan options were 
exercisable.  These options expire at various dates 
through March 2001.  Certain options include 
registration rights for the shares issuable 
thereunder.

19




A summary of the status of the Company's stock option 
plans, including non-plan options, as of December 31, 
1996, 1995 and 1994 is as follows:



               	            	    1996		               1995	       	    	 1994
	                            Weighted	            Weighted	          Weighted
	                             Average          	   Average	           Average
	                            Exercise	            Exercise	          Exercise
                   Shares	      Price	   Shares	     Price	   Shares	   Price	
                                                         
Outstanding 1/1	 2,858,577   	$2.18	    3,977,782  $1.33    6,140,022   $1.18
Granted	           316,875   	$2.65	    1,027,500  $3.05       88,113   $2.80
Exercised	        (761,570)  	$1.28	   (1,970,760) $0.92   (1,979,340)  $0.90
Cancelled	        (441,397)  	$2.46	     (175,945) $2.27     (271,013)  $1.62

Outstanding 12/31 1,972,485  	$2.54	    2,858,577  $2.18     3,977,782 	$1.33

Options exercisable 
	12/31	           1,335,402             1,862,286	          	 2,523,154




Information relative to options outstanding at 
December 31, 1996 is as follows:




	                    	      Options Outstanding		         Options Exercisable	
	                           Weighted   Weighted	                     Weighted
	                 Shares	    Average	   Average          Shares	      Average
Exercises	   Outstanding	  Remaining	  Exercise	    Exercisable	     Exercise
Prices          12/31/96	       Life	     Price        12/31/96	        Price
                                                           
$1.13 - $ 2.00 	 708,736   	  0.8 yrs	    $1.43	          643,736    	$1.38
$2.25 - $ 2.50 	 206,250	     4.5	        $2.42	           15,876    	$2.50
$2.56 - $ 3.00 	 326,969   	  3.4	        $2.87   	       202,760    	$2.90
$3.10 - $20.43   730,530	     3.7	        $3.50     	     473,030    	$3.69
$1.13 - $20.43 1,972,485	     2.7	        $2.54	        1,335,402	    $2.44



The fair value of options granted during 1996 and 1995 
was $1.20 and $1.09 per share, respectively.  Fair 
value was estimated using the Black-Scholes option-
pricing model with the following assumptions used for 
both years:  expected volatility of 66%, risk-free 
interest rate of 6.2%, an expected option life of 5.0 
years and no dividend yield.

The Company applies APB Opinion 25 in accounting for 
its plans.  Accordingly, no compensation cost has been 
recognized for its stock option plans.  If 
compensation cost had been determined in accordance 
with FAS No. 123, "Accounting for Stock-Based 
Compensation," net income would have been reduced by 
$0.1 million and $0.3 million for 1996 and 1995, 
respectively.  Earnings per share would have been 
unchanged for both years.

As of December 31, 1996, the Company has warrants 
outstanding which permit the holders to purchase a 
total of 75,000 shares of Common Stock at prices 
ranging from $1.25 to $2.63 per share, expiring 
through February 2001.  Warrants were exercised during 
the year ended December 31, 1996 for 199,431 shares of 
Common Stock at a weighted average of $0.04 per share.  
Warrants were exercised during the year ended December 
31, 1995 for 488,890 shares of Common Stock for $1.00 
per share.  Warrants were exercised during the year 
ended December 31, 1994 for 860,919 shares of Common 
Stock at prices ranging from $0.01 to $1.00 per share.  
At December 31, 1996, 50,000 warrants were 
exercisable.


20



NOTE I - EMPLOYEE STOCK PURCHASE PLAN

A total of 2,750,000 shares of Common Stock are 
authorized for issuance under the Company's employee 
stock purchase plan (Employee Plan).  The Employee 
Plan permits eligible employees to purchase up to 
1,000 shares of Common Stock at the lower of 85% of 
the fair market value of the Common Stock at the 
beginning or at the end of each six-month offering 
period.  Pursuant to such plan, 216,504, 229,636 and 
209,512 shares were sold to employees during the three 
years ended December 31, 1996, 1995 and 1994, 
respectively.  The weighted average fair value of 
these purchase rights for 1996 and 1995 was $0.81 and 
$0.97 per share, respectively.  Fair value was 
estimated using the Black-Scholes option pricing model 
with the following assumptions used for both years:  
expected volatility of 66%, risk-free interest rate of 
6.0%, an expected term of six months and no dividend 
yield.

The Company applies APB Opinion 25 in accounting for 
the Employee Plan and, accordingly, no compensation 
cost has been recognized.  If compensation cost had 
been determined in accordance with FAS No. 123, the 
impact on net income and earnings per share would have 
been immaterial for 1996 and 1995.

In 1994, the Company's shareholders adopted the 1994 
Executive Stock Incentive Plan (Executive Plan), which 
enabled officers and other key employees to purchase a 
total of up to 3,000,000 shares of the Company's 
Common Stock.  During 1995 and 1994, participants 
purchased 140,000 and 2,745,000 shares of Common 
Stock, respectively, at fair market value, which were 
financed through individual bank borrowings at market 
interest rates by each participant, payable over five 
years.  The Company lends the employee 85% of the 
interest due to the bank, with $980,000 and $759,000 
of such loans outstanding as of December 31, 1996 and 
1995, respectively.  There were no amounts outstanding 
as of December 31, 1994.  The Company guarantees the 
individual borrowings under a $6.7 million letter of 
credit which has a minimal impact on the Company's 
borrowing capability.  Employee loans guaranteed by 
the Company with letters of credit as of December 31, 
1996 and 1995 were $6.5 million and $9.2 million, 
respectively.  These shares are held by the Company as 
security for the guarantees under a loan and pledge 
agreement.  Sales of such shares by participants are 
subject to certain restrictions, and, generally, they 
may not be sold for five years.

During 1996, the Company repurchased 820,000 shares of 
Common Stock from individuals participating in the 
Executive Plan who were no longer employees of the 
Company, primarily due to the sale of the DSOs.  The 
shares were repurchased because, as nonemployees, the 
Company could no longer guarantee the bank loans for 
these individuals or make advances of interest to the 
banks on their behalf.  The Company accepted the stock 
being held as collateral as payment in full for the 
purchase price plus all of the unpaid interest and 
satisfied the indebtedness to the banks on behalf of 
these individuals.  In those instances where the value 
of the stock was not sufficient to cover the purchase 
price plus all of the unpaid interest, the Company 
recorded $110,000 in compensation expense during the 
year.


NOTE J - SAVINGS AND POSTRETIREMENT BENEFIT PLANS

The Company has a 401(k) Savings Plan under which it 
matches employee contributions subject to the 
discretion of the Company's Board of Directors.  The 
Company's matching contribution, consisting of shares 
of its Common Stock purchased in the open market, is 
equal to 25% of each employee's contribution, up to a 
maximum of $660 per employee.  The expense for the 
matching contribution for the years ended December 31, 
1996, 1995 and 1994 was approximately $540,000, 
$687,000 and $500,000, respectively.

The Company has an obligation remaining from the 
acquisition of Executone, Inc. to provide 
postretirement health and life insurance benefits for 
a group of fewer than 75 former Executone, Inc. 
employees, including six current employees of the 
Company.  The Company does not provide postretirement 
health or life insurance benefits to any other 
employees.  Effective January 1, 1993, the Company 
adopted FAS No. 106, "Employers' Accounting For 
Postretirement Benefits Other Than Pensions".  This 
standard requires that the expected cost of these 
benefits must be charged to expense during the years 
that employees render services.  The Company adopted 
the new standard prospectively and is amortizing the 
transition obligation over a 20-year period.



21



Postretirement benefit expense for the three years 
ended December 31, 1996 consists of the following:



(Amounts in thousands)			                        1996	      1995	     1994
                                                              
Interest on accumulated benefit obligation	     $214	      $219	      $217
Amortization of transition obligation	           116	       116	       116
Amortization of unrecognized actuarial loss       20	        20	        23 
                                                $350	      $355	      $356



The status of the plan at December 31, 1996 and 1995 is as follows:



(Amounts in thousands)				                      1996	       1995
                                                       
Accumulated postretirement benefit obligation (APBO):
	Retirees		                                    $2,875	     $2,779
	Active Employees		                               339	        330 
			                                             3,214   	   3,109
Unamortized transition obligation		            (1,861)	    (1,977)
Unrecognized net loss		                          (466)	      (486) 
Accrued liability		                           $   887	     $  646 


In determining the APBO as of December 31, 1996 and 
1995, the weighted average discount rate used was 7%.  
The Company used a healthcare cost trend rate of 
approximately 11%, decreasing through 2006 and 
leveling off at 6% thereafter.  A 1% increase in the 
healthcare trend rate would increase the APBO at 
December 31, 1996 by approximately 2% and increase the 
interest cost component of the postretirement benefit 
expense for 1996 by approximately $10,000.


NOTE K - OTHER INCOME, NET

Other Income, Net consists of the following for the 
three years ended December 31, 1996:



(Amounts in thousands)			                       	1996	      1995	    1994
                                                             
Interest income	                                $1,117     $ 285  	  $ 287
Equity in earnings of DCC (Note G)	                288	      401       ---
Gains on sales of two direct sales offices	        ---     1,213	      ---
Other, net	                                        465       230	      348 
	                                               $1,870    $2,129	    $ 635


NOTE L - UNISTAR

On December 19, 1995, the Company acquired 100% of the 
common stock of Unistar Gaming Corporation (Unistar 
Gaming) for 3.7 million shares of the Company's common 
stock and 350,000 shares of newly issued preferred 
stock.  Unistar Gaming, privately-held prior to the 
acquisition, has an exclusive five-year contract to 
design, develop, finance and manage the National 
Indian Lottery (NIL) through its wholly-owned 
subsidiary, Unistar Entertainment, Inc. (Unistar).  
The NIL will be a national telephone lottery 
authorized by federal law and a compact between the 
State of Idaho and the Coeur d'Alene Indian Tribe of 
Idaho (CDA).  In return for providing these management 
services to the NIL, Unistar will be paid a fee equal 
to 30% of the profits of the NIL.  Unistar did not 
have any assets or operations other than the NIL 
contract prior to its acquisition by the Company.

22


The purchase price was approximately $12.7 million and 
was based upon the determination by an investment 
banking firm of the value assigned to the common and 
preferred stock.  The common stock valuation was based 
upon the value of the shares issued at the closing 
date, discounted for restrictions on the sale of the 
shares, which range from six to twenty-six months.  
The preferred stock was valued based upon the number 
of common shares which it was estimated that the 
preferred shares may be converted into at some future 
date.  The excess of the purchase price over the value 
of the net liabilities assumed has been allocated to 
the management agreement with the CDA, is included in 
intangible assets and will be amortized over the five-
year term of the contract commencing with the first 
significant lottery revenues.

The preferred stock consists of 250,000 shares of 
Cumulative Convertible Preferred Stock, Series A 
(Series A Preferred Stock) and 100,000 shares of 
Cumulative Contingently Convertible Preferred Stock, 
Series B (Series B Preferred Stock).  The Series A 
Preferred Stock has voting rights equal to one share 
of common stock and will earn dividends equal to 18.5% 
of the consolidated retained earnings of Unistar as of 
the end of a fiscal period, less any dividends paid to 
the holders of the Series A Preferred Stock prior to 
such date.  The Series B Preferred Stock has voting 
rights equal to one share of common stock and will 
earn dividends equal to 31.5% of the consolidated 
retained earnings of Unistar as of the end of a fiscal 
period, less any dividends paid to the holders of the 
Series B Preferred Stock prior to such date.  All 
dividends on Preferred Stock are payable (i) when and 
as declared by the Board of Directors, (ii) upon 
conversion or redemption of the Series A and Series B 
Preferred Stock or (iii) upon liquidation.  The Series 
A and Series B Preferred Stock is redeemable for a 
total of 13.3 million shares of common stock (Series A 
Preferred Stock for 4.925 million shares and Series B 
Preferred Stock for 8.375 million shares) at the 
Company's option.  In the event that Unistar meets 
certain revenue and profit parameters, the Series A 
Preferred Stock is convertible for up to 4.925 million 
shares of common stock and the Series B Preferred 
Stock is contingently convertible for up to 8.375 
million shares of common stock (a total of an 
additional 13.3 million shares of common stock).  
Liquidation preferences for all Series A and Series B 
preferred shares total $7.3 million as of December 31, 
1996.  Liquidation preference is based upon fair 
market value of the Series A and Series B preferred 
shares as determined by the investment banking firm 
engaged by the Company, plus any dividends in arrears.  
As of December 31, 1996, no dividends have accrued to 
the preferred stockholders.  The preferred stock had 
no impact on earnings per share in 1996 and 1995 as it 
is antidilutive.

In an attempt to block the NIL, certain states filed 
letters under 18 U.S.C. Section 1084 to prevent the 
long-distance carriers from providing telephone 
service to the NIL.  The CDA initiated legal action to 
compel the long-distance carriers to provide telephone 
service to the NIL.  The CDA's position is that the 
lottery is authorized by the Indian Gaming Regulatory 
Act (IGRA) passed by Congress in 1988, that IGRA 
preempts state and federal statutes, and that the 
states lack authority to issue the Section 1084 
notification letters to any carrier.  On February 28, 
1996, the NIL was ruled lawful by the CDA Tribal 
Court.  The CDA Tribal Court found that all 
requirements of IGRA have been satisfied and the 
Section 1084 letters issued by certain state attorneys 
general in an effort to interfere with the lawful 
operation of the NIL are invalid.  In addition, the 
Court found that the long-distance carriers cannot 
refuse to provide the service requested in the action 
based upon 18 U.S.C. Section 1084.  This ruling has 
been appealed and a hearing is scheduled for March 24, 
1997 in the Tribal Appellate Court.  Although the 
Company also anticipates an appeal to the U.S. Federal 
District Court, the Company believes, based on 
consultation with and opinions rendered by outside 
legal counsel, that the CDA's position will be upheld 
on appeal.  The Company accrued $1 million in 1995 to 
cover estimated legal costs through the possible 
appeal to the U.S. Federal District Court.  If the 
matter is appealed beyond the U.S. Federal District 
Court or if additional challenges are brought by 
states opposed to the NIL, the Company estimates that 
additional legal costs could be in the range of $1 million to 
$2 million.

Funding for Unistar capital expenditures, including 
the computers and software to build the 
telecommunications system will be capitalized and 
depreciated over the life of the management agreement.  
Funding by Unistar on behalf of the NIL to complete 
the building on the CDA reservation will be deferred 
and amortized over the life of the management 
agreement.  The guaranteed monthly advance to the CDA, 
which began in January 1996,  will be reimbursed when 
the NIL is operational and making profit distributions 
to Unistar.  In addition, the Company has capitalized 
other fundings, consisting primarily of professional 
fees and other expenses, which the Company believes 
are reimbursable in accordance with the terms of the 
management agreement.  In 1996, total funding as 
described above totaled $2.1 million and is reflected 
in non-current other assets. 

Other than legal costs related to an appeal of the CDA 
Tribal Court ruling or other actions by the states, if 
any, the Company estimates that the additional costs 
to become operational may amount to between $7 million 
and $12 million. The costs include capital 
expenditures for computers and software to build the 
telecommunications system, funds to 

23


complete the building on the CDA reservation which 
will be the operations center for the lottery, and 
various start-up expenses including personnel-related 
costs and advertising expenses.  The Company is also 
required to make a guaranteed payment of $300,000 per 
year to the CDA.  The cost estimate does not include a 
$4 million jackpot reserve which could be required 
dependent upon certain conditions.  If the Company 
ultimately must fund a jackpot reserve, it will be 
repaid to Unistar solely from NIL net revenues in 
equal installments over the term of the agreement.  
The Company expects it will be able to obtain 
additional financing for these costs, if necessary.  

In February 1997, the Company signed agreements with 
Virtual Gaming Technologies (formerly Internet Gaming 
Technologies (IGT)) and CasinoWorld Holdings, Ltd. 
(CWH).  The agreements call for the Company to invest 
$700,000 in (IGT) common stock, which was done in 
September 1996 under a previous agreement.  In 
addition, the Company will obtain a 200,000-share, 
five-year option set at 15% more than the price per 
share on the initial investment, or $3.45 per share.  
The Company will acquire all hardware for the system 
without financial obligation by either IGT or CWH.  
The Company estimates that such hardware charges, 
which are included in the cost estimates previously 
noted of $7 million to $12 million, will be approximately $2 
million to $3 million.  CWH is to provide project 
management services overseeing the development of the 
software for the NIL, with the Company contracting 
independently for system software development.  Such 
charges are not to exceed $2 million.  

The investment in IGT will be accounted for under the 
cost method.  All hardware costs incurred will be 
capitalized and depreciated over the useful life of 
the assets, beginning when the assets are placed in 
service.  As of December 31, 1996, $485,000 in 
progress payments have been made toward the software 
system.  Such payments are being deferred until 
completion of the system and will be capitalized and 
depreciated over the term of the management agreement.

There are market and legal risks associated with the 
development of the NIL.  The Company believes there is 
a national market for the NIL based upon research into 
the experience of other national lotteries and the 
growth of the overall lottery market.  However, there 
is no assurance that there will be acceptance of a 
telephone lottery.  Based upon opinions from outside 
legal counsel, the Company also believes that the 
legal decision rendered by the CDA Tribal Court will 
ultimately be upheld on appeal.  However, there is no 
assurance of such a legal outcome.  In the event that 
a telephone lottery does not attain the level of 
market acceptance anticipated by the Company or if the 
CDA Tribal Court decision is not upheld on appeal, the 
Company would have to reevaluate the viability of the 
Unistar subsidiary to determine if the Company's 
investment has been impaired.


NOTE M - OTHER ACQUISITIONS/DISPOSITIONS

During the fourth quarter of 1995, the Company sold 
its customer bases in Wisconsin and Iowa and the net 
assets of the related direct sales offices for a total 
of $2.1 million, consisting of $125,000 cash, a $1.8 
million note, the proceeds of which were received in 
February 1996, and a $150,000 note due in installments 
by November 2001.  These sales generated a gain of 
approximately $1.2 million, which is included in Other 
Income, Net for the year ended December 31, 1995.

During the first quarter of 1995, the Company was 
involved in extensive negotiations to acquire the 
Dictaphone division of Pitney Bowes.  In April 1995, 
the acquisition was awarded to another bidder.  The 
Company incurred approximately $1 million in fees and 
expenses related to the attempted acquisition which 
were recognized during the second and third quarters 
of 1995.

In 1990, the Company acquired all the outstanding 
shares of Isoetec Texas, Inc., an independent 
distributor of the Company's products.  The 
transaction has been accounted for by the purchase 
method.  The purchase price was based upon a multiple 
of 1989 pre-tax earnings of Isoetec Texas, Inc., 
subject to adjustment.  The purchase price originally 
recorded was based on cash payments to the former 
owners of approximately $900,000, $250,000 of notes, 
325,000 shares of common stock and liabilities assumed 
of approximately $900,000.



24



The Company brought an action against the former 
owners of Isoetec Texas, Inc. alleging breach of 
contract and fraud with respect to the calculation of 
1989 pre-tax earnings and the purchase price.  In 
November 1991, pursuant to the purchase contract, an 
arbitrator ruled that 1989 pre-tax earnings should be 
reduced by an amount that resulted in a 
reduction of the purchase price by approximately $2 
million.  This reduction was assumed in the original 
purchase price calculation and, as such, did not 
result in an adjustment to the recorded purchase 
price.  However, the arbitrator also awarded damages 
of approximately $1.2 million to the former owners as 
additional purchase price.  At that time, the Company 
did not adjust its purchase price calculation since it 
believed that the arbitrator went beyond its authority 
and decided to pursue the matter in court.  In 1994, 
after an appeal to the Fifth Circuit U.S. Court of 
Appeals, the Company was required to pay $1.2 million 
as additional purchase price and interest of $400,000.  
In addition, the Company was required to issue an 
additional 78,866 shares of common stock to settle all 
remaining claims.  These payments were adjustments to 
the recorded purchase price.

As of March 31, 1994, the Company sold its Vodavi 
Communications Systems Division ("VCS"), which sold 
telephone equipment to supply houses and dealers, a different 
class of customer from continuing operations, under 
the brand names STARPLUS and INFINITE, for 
approximately $10.9 million.  Proceeds of the sale 
consisted of approximately $9.7 
million in cash, received in April 1994, and a $1.2 
million note, the proceeds of which were received in 
September 1995. The proceeds were used to reduce 
borrowings under the Company's credit facility.  The 
sale resulted in an after-tax gain of $604,000 (net of 
income tax provision of $403,000).  Consolidated 
financial statements for the year ended 
December 31, 1994 present VCS as a discontinued 
operation.  Net revenue of the discontinued operation 
for the year ended December 31, 1994 (through the date 
of sale) was $8.6 million.


NOTE N - PROVISION FOR RESTRUCTURING 

In July 1995, the Company reorganized its then-
existing business into five divisions:  Computer 
Telephony, Healthcare Communications Systems, Call 
Center Management, Videoconferencing Products, and 
Network Services and changed its business strategy in 
the Computer Telephony division to focus on software 
applications in the communications market.  The 
business that was acquired in 1988 was a telephone 
equipment hardware company focused on customers with 
small systems, with an emphasis on selling additional 
hardware and service to generate add-on revenue.  As a 
result of the change in strategy, the business 
acquired in 1988 was de-emphasized.  The Company 
adopted FAS No. 121, requiring impairment to be 
measured by projecting the lowest level of 
identifiable future cash flows.  The Company concluded 
there was an impairment.  As a result, the Company 
recorded a $44.0 million provision for restructuring 
consisting of a $33.5 million goodwill impairment, an 
$8.8 million writedown of inventory, primarily service 
stock relating to the impaired assets and other non-
recurring inventory adjustments, $0.9 million related 
to the shutdown of the Company's Scottsdale, Arizona 
facility and $0.8 million of other unusual items.

In accordance with the provisions of FAS No. 121, the 
Company prepared projections of future operating cash 
flows relating to the telephony business acquired in 
1988 based upon the Company's change in strategic 
direction.  These projections indicated that this 
business would not generate sufficient operating cash 
flows to realize goodwill and the related service 
stock.  The amount of impairment of the telephony 
goodwill was $33.5 million as of June 30, 1995.

The write-off of inventory, primarily service stock, 
consisted of $1.3 million of raw materials inventory 
and $7.5 million of finished goods inventory.  These 
amounts were determined based upon a review of 
specific inventory parts along with projected usage, 
incorporating the strategic direction of the Company. 




25





NOTE O - SELECTED QUARTERLY FINANCIAL DATA

The following is a summary of unaudited selected 
quarterly financial data for the years ended December 
31, 1996 and 1995:



(In thousands, except for per share amounts)
		
              		                                Three Months Ended			
                  				        March 31,  June 30,  September 30,  December 31,
                                 1996      1996        1996  	        1996
                                                           
Revenues	                       $66,966  	$51,982     $44,791	      $48,283
Gross Profit	                    26,520    18,969      16,458	       17,565
Income (Loss) Before Income Taxes
  and Extraordinary Item	        (8,969)	  39,820       3,535	        5,396
Income (Loss) Before 
      Extraordinary Item         (5,358)	  23,860	      2,124         3,536
Net Income (Loss)	               (5,358)	  23,860	      2,124	        3,181
Earnings (Loss) Per Share:
  Income(Loss)Before 
       Extraordinary Item         (0.10)	    0.45	       0.04	         0.07
  Extraordinary Item	              ---	       ---	       ---	         (0.01)


(In thousands, except for per share amounts)



                                   							      Three Months Ended	
						                        March 31,	 June  30, September 30, December 31,
	                                1995       1995         1995  	     1995	   
                                                       
Revenues	                       $70,808	   $78,417     $74,164	   $73,004
Gross Profit	                    28,349	    32,021      30,504     31,983
Income (Loss) Before Income Taxes   200	   (44,225)      2,205	     2,599
Net Income (Loss)	                  120	   (39,936)      1,323	     1,559
Earnings (Loss) Per Share	          ---	     (0.86)	      0.03	      0.03


The three months ended March 31, 1996 includes a loss 
of $4,877 relating to the sale of the 
Videoconferencing and Inmate Calling businesses (see 
Note B).  The three months ended June 30 and December 
31, 1996 include a gain on the sale of businesses (See 
Note B) of $47,495 and $1,442, respectively.

The three months ended June 30, 1995 includes a 
provision for restructuring of $44,042 (see Note N) 
and acquisition expenses of $1.0 million (see Note M).  



26




STOCK DATA

The number of holders of record of the Company's 
Common Stock as of the close of  business on January 
31, 1997 was approximately 2,200.  The Common Stock is 
traded on the NASDAQ National Market System under the 
symbol "XTON".  As reported by NASDAQ on February 24, 
1996, the closing sale price of the Common Stock on 
the NASDAQ National Market System was $2 11/16.  The 
following table reflects in dollars the high and low 
closing sale prices for EXECUTONE's Common Stock as 
reported by the NASDAQ National Market System for the 
periods indicated:




Fiscal Period		 	        High		                    Low
                                             
1996
First Quarter		       $3 7/16                    $2 3/16
Second Quarter	        3 3/4	                     2 5/8
Third Quarter		        3 1/4	                     2 5/16
Fourth Quarter	        3 1/16                	    2 3/8 

1995
First Quarter		       $3 7/16                	   $2 15/16
Second Quarter		       3 3/8	                     2 1/8
Third Quarter		        2 7/8	                     2 1/8
Fourth Quarter		       2 7/8	                     2 1/8




It is the present policy of the Board of Directors to 
retain earnings for use in the business and the 
Company does not anticipate paying any cash dividends 
on the Common Stock in the foreseeable future.  The 
Company's current bank credit agreement contains 
provisions prohibiting the payment of dividends on the 
Common Stock.















27




REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Stockholders of 
EXECUTONE Information Systems, Inc.:

We have audited the accompanying consolidated balance 
sheets of EXECUTONE Information Systems, Inc. (a 
Virginia corporation) and subsidiaries as of December 
31, 1996 and 1995, and the related consolidated 
statements of operations, changes in stockholders' 
equity and cash flows for each of the three years 
ended December 31, 1996.  These financial statements 
are the responsibility of the Company's management.  
Our responsibility is to express an opinion on these 
financial statements based on our audits.

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

In our opinion, the financial statements referred to 
above present fairly, in all material respects, the 
financial position of EXECUTONE Information Systems, 
Inc. and subsidiaries as of December 31, 1996 and 
1995, and the results of their operations and their 
cash flows for each of the three years ended December 
31, 1996, in conformity with generally accepted 
accounting principles.





ARTHUR ANDERSEN LLP




Stamford, Connecticut,
January 31, 1997












28



STOCKHOLDER INFORMATION


CORPORATE HEADQUARTERS	                     		INDEPENDENT PUBLIC ACCOUNTANTS
EXECUTONE Information Systems, Inc.	    	     Arthur Andersen LLP
478 Wheelers Farms Road		                   		Champion Plaza
Milford, Connecticut 06460              			   400 Atlantic Street
(203) 876-7600			                             Stamford, Connecticut 06912-0021
http://www.executone.com
		                                            OUTSIDE COUNSEL
STOCK AND WARRANT TRANSFER AGENT   	    	     Hunton & Williams
American Stock Transfer and Trust Company     Riverfront Plaza
40 Wall Street                         					  951 East Byrd Street
New York, New York 10005	              	      Richmond, Virginia 23219

BOND TRANSFER AGENT	            			           ADDITIONAL INFORMATION
U.S. Trust Company of New York                A copy of EXECUTONE's Annual  
114 West 47th Street                          Report on Form 10-K, which is 
New York, New York 10036-1532        	        filed with the Securities and 
                                              Exchange Commission, is          
                                              available without charge by  
                                              writing to:

                     				                     David Krietzberg 
             				  	                          Treasurer/Investor Relations
					                                         Corporate Headquarters




DIRECTORS AND OFFICERS

BOARD OF DIRECTORS							
Alan Kessman					                             Jerry M. Seslowe   2
Chairman of the Board				                     Managing Director
					                                         Resource Holdings, Ltd.
Stanley M. Blau 1
Vice Chairman						
							
Thurston R. Moore 1					
Partner
Hunton & Williams

Richard S. Rosenbloom  2
David Sarnoff Professor of Business Administration
Harvard Business School

1  Audit committee member
2  Compensation committee member





OFFICERS								
Alan Kessman				                              Anthony R. Guarascio
President and Chief Executive Officer	        Vice President, Finance
			                                           Chief Financial Officer

Andrew Kontomerkos                            Michael W. Yacenda
Senior Vice President, Hardware               Executive Vice President
Engineering and Production                    President, Unistar

Israel J. Hersh                               Vic Northrup
Vice President,                               Vice President,
Software Engineering                          Computer Telephony

Barbara C. Anderson                           Elizabeth Hinds
Vice President, General Counsel               Vice President,
and Secretary                                 Human Resources

Frank J. Rotatori                             James E. Cooke III
Vice President,                               Vice President,
Healthcare Communications                     National Accounts

Robert W. Hopwood                             Shlomo Shur
Vice President, Operations                    Senior Vice President,
Unistar                                       Advanced Technology




29

EX-21

SUBSIDIARIES OF
EXECUTONE INFORMATION SYSTEMS, INC.




                           JURISDICATION OF     %    
NAME                          INCORPORATION    OWNERSHIP   BUSINESS

                                                 
Unistar Gaming Corporation       Delware        100%     478 Wheelers Farms Rd
Holding                                                  Milford, CT  06460

Unistar Entertainment, Inc.      Idaho          100%     478 Wheelers Farms Rd
Management                                               Milford, CT  06460

All listed subsidiaries do business only under their corporte names listed
above.  Certain inactive and immaterial subsidiaries, which if considered
in the aggregate as a single subsidiary would not constitute a "significant
subsidiary" as defined in Rule 1-02(w) of the Commission as of December 31, 
1997, are not listed.

EX-23

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation
of our reports included or incorporated by reference in this Form 10-K into
the Company's previously filed Registration Statements File Nos. 33-45015,
33-42561, 33-23294, 33-16585, 33-6604, 33-959, 2-91008, 33-40623, 33-46874, 
33-46875, 33-50628, 33-57519 and 33-63637, 333-7279 and 33-62257.

ARTHUR ANDERSEN LLP



Stamford, Connecticut
March 28, 1997

EX-23

EXHIBIT 23.2

March 28, 1997



EXECUTONE Information Systems, Inc.
478 Wheelers Farms Road
Milford, CT  06460

Annual Report on Form 10-K for the Fiscal Year
Ended December 31, 1996 (File No. 000-11551)

Gentlemen:

This firm has reviewed the information set forth in the seventh
paragraph under "Recent Developments" under item 1., Business, and
the information set forth in the first paragraph under Item 3., Legal
Proceedings, of the Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 of EXECUTONE Information Systems, Inc. (the "Company").
We understand that the information set forth therein as it relates to 
the issue of the authorization of the National Indian Lottery under 25 U.S.C.
2701 et seg. is based upon the advice provided to the Company by this firm.

We consent to the summarization of such advice and the reference to us 
in the prospectus.

Very truly yours,

HUNTON & WILLIAMS

EX-27

 

<ARTICLE>        5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of Executone Information Systems, Inc. and
subsidiaries as of December 31, 1996 and the related consolidated statement
of operations for the year ended December 31, 1996 and is qualified in its
entirety by reference to such financial statements (see Exhibit 13).

<MULTIPLIER> 1000
       
                             
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                          DEC-31-1996
<PERIOD-END>                               DEC-31-1996
<CASH>                                          27,696
<SECURITIES>                                         0
<RECEIVABLES>                                   41,098
<ALLOWANCES>                                     2,106
<INVENTORY>                                     16,814
<CURRENT-ASSETS>                                86,601
<PP&E>                                          24,058
<DEPRECIATION>                                  16,480
<TOTAL-ASSETS>                                 152,009
<CURRENT-LIABILITIES>                           52,803
<BONDS>                                         13,837
<COMMON>                                           512
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                      7,300
<OTHER-SE>                                      77,535
<TOTAL-LIABILITY-AND-EQUITY>                   152,009
<SALES>                                        212,022
<TOTAL-REVENUES>                               212,022
<CGS>                                          132,510
<TOTAL-COSTS>                                  132,510
<OTHER-EXPENSES>                                82,953
<LOSS-PROVISION>                                 1,921
<INTEREST-EXPENSE>                               2,707
<INCOME-PRETAX>                                 39,782
<INCOME-TAX>                                    15,620
<INCOME-CONTINUING>                             24,162
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                  (355)
<CHANGES>                                            0
<NET-INCOME>                                    23,807
<EPS-PRIMARY>                                     0.45
<EPS-DILUTED>                                     0.45