When Lighthearted Entertainment, a reality television production company, moved into new offices in Burbank, Calif., everything was in good working order but the telephone system. "My telephone system was driving us nuts," says Howard Schultz, founder of the company which has helped produce such shows as Extreme Makeover (ABC), Love Shack (NBC) and Truth or Dare (NBC). The phone system had been installed by a previous tenant.

"It didn't suit our needs," Schultz recalls. But replacing that system took longer than he expected because he found out what many small and medium-sized business owners have come to realize. Even though a phone system is one of the most crucial tools in business that can help you reach clients, customers and partners, upgrading to a new business telephone system can be a daunting task.

Manufacturers from Panasonic to NEC to Nortel target entrepreneurs with phone system packages that offer multiple outside lines, expandable capacity for additional extensions, and applications such as voicemail, automated attendants with voice prompts and automatic call distribution. Prices can range from $600 to $1,900 to $20,000 and up.

With such an assortment of phone systems on the market, business owners need help cutting through the clutter so that they can figure out the best phone system for their business:

#1. Get a head count of employees that need outside lines. Start by considering the number of employees that need to use the system. Then add up the number of extensions needed for fax machines, modems, credit card terminals, etc. If it's a small office with a staff of fewer than 10 employees, consider off-the-shelf phones systems for considerable savings. But if your business has a staff of more than 40, it's most likely that a Private Branch Exchange (PBX) system is called for. No longer is PBX synonymous for those huge telecom closets you see at large firms. They now come in the small business size and can fit on top of a desk.

#2. Forecast company needs down the road. When considering a system, examine where your company will be a few years from now. Will you increase staff? Will you open branch offices? Is an acquisition or merger likely? Experts suggest doubling the wiring if your company is likely to expand in the not-too-distant future.

#3. Consider VoIP. For phone service, check into Voice over Internet Protocol (VoIP) phone systems. VoIP technology allows businesses to place and receive calls using the Web, offering potential cost savings. Matt Godden, president of Seattle, Wash.-based Xoasis Networks, a provider of small-business VoIP phone systems, says, "If you're a company with branch offices, you can transfer all calls without hangup and pickup and have one operator manage all four offices" with VoIP. There were more than 4.5 million VoIP users in the U.S. last year, and that number will double this year, according to International Data Corp.

#4. Buy second hand or rent. Try leasing or buying used phone equipment. Companies change phones for many reasons -- not just that their phones are outdated -- and your company might be able to benefit from some bargains in the market. Some firms specialize in selling refurbished equipment.

#5. Buy at the close of the quarter. For firms that aren't keen on leasing, keep certain things in mind when buying a new phone system. Purchase at the end of the quarter when sales reps are trying to hit quotas. You may find some bargains. #6. Pick a reputable seller. Who will take your call if the system goes down? Better to deal with a company that will be responsive and help you out of a jam. Most dealers handle not only the sale but installation. It's important to undertake due diligence when choosing a dealer. The first question should be how many installations the dealer has finished using your phone system. #7. Compatibility is key. Remember to consider the other equipment or services you already own or contract for that you're not going to replace. Make sure any new phone systems is compatible with headsets, conferencing tools, voicemail and call forwarding systems that you already have and use.