SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended October 31, 1997           Commission File No. 0-14880


                              MICROLOG CORPORATION
             (Exact name of Registrant as specified in its charter)


         VIRGINIA                                         52-0901291
(State or other jurisdiction of                         (I.R.S. Employer
incorporation or organization)                         Identification No.)


         20270 GOLDENROD LANE                             20876-4070
         GERMANTOWN, MARYLAND                             (Zip Code)
(Address of principal executive offices)

                                 (301) 428-9100
              (Registrant's telephone number, including area code)

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

                                      NONE

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

                     COMMON STOCK, PAR VALUE $.01 PER SHARE
                                (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 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 shares of Common  Stock held by  non-affiliates
(based on the January 22, 1998 closing price of these shares) was  approximately
$22.6 million.  The Common Stock is traded  over-the-counter  and quoted through
the Nasdaq National Market.

       As of January 22, 1998, 4,282,810 shares of the Registrant's Common
                            Stock were outstanding.
 ------------------------------------------------------------------------------
<PAGE>
                       DOCUMENTS INCORPORATED BY REFERENCE


Parts I and III  incorporate  information  by  reference  from  portions  of the
Company's  definitive  Proxy Statement to be filed within 120 days after the end
of the  fiscal  year (the  "Proxy  Statement").  Parts I, II and IV  incorporate
information  by  reference  from  portions  of the  Company's  Annual  Report to
Shareholders  for the fiscal year ended  October 31, 1997 attached as an exhibit
hereto (the "Annual Report to Shareholders").


<PAGE>

                                     PART I

ITEM 1.  BUSINESS

GENERAL

Microlog Corporation ("Microlog" or the "Company") designs, assembles,  markets,
and  services  a  variety  of  microprocessor-based  interactive  communications
systems  which allow users to store,  retrieve,  and  transmit  digitized  voice
messages and to access  information  on computer  databases.  In  addition,  the
Company provides performance  analysis and technical and administrative  support
services to the Applied Physics Laboratory (APL), a prime contractor to the U.S.
Navy. Although this segment of its business, historically, has provided a stable
source  of  sales  and  profits,   the  Company   believes  that  its  principal
opportunities for growth are in the interactive  communications  segment and has
been concentrating its efforts on that segment.

The results of the Company's performance during fiscal 1997, 1996, and 1995, are
discussed  in  greater  detail  in  "Management's  Discussion  and  Analysis  of
Financial  Condition and Results of Operations,"  incorporated by reference into
Item 7 of the report. That section should be read in its entirety in conjunction
with the  discussion  of the  Company's  business  in this  Item 1.  Information
concerning the Company's  operations by business segment is hereby  incorporated
by  reference  from Note 1 of the  Notes to  Consolidated  Financial  Statements
incorporated by reference into Item 8 of this Report.

Microlog,  a Virginia  corporation,  was organized in 1969. The Company's wholly
owned  subsidiaries are Microlog  Corporation of Maryland,  Old Dominion Systems
Incorporated of Maryland, and Microlog Europe.


INTERACTIVE COMMUNICATIONS

INTERACTIVE COMMUNICATIONS INDUSTRY

Interactive   communications   systems  are  designed  to  serve  the  needs  of
organizations  which are  searching for an  efficient,  cost-effective  means to
deliver and  communicate  information  and complete  business  transactions in a
timely manner.  These systems use specialized  computer hardware and software to
store, retrieve, and transmit digitized voice messages and to access information
on computer databases. In traditional  Interactive Voice Response,  callers hear
voice  prompts and then use a touch-tone  telephone to enter  information  into,
and/or retrieve information from, a computer database.  Voice processing systems
have evolved to interactive  communications  systems,  which provide information
not only through voice, but through a wide range of additional input devices and
interfaces,  including the Internet, fax, Telecommunications Device for the Deaf
(TDD), Analog Display Services Interface (ADSI), screen phones, and pagers.

Interactive  communications typically connects the voice processing system to an
external computer which contains data of interest to callers. With touch-tone or
voice  commands  (using  speech  recognition  software),   which  often  include
passwords,  codes or account  numbers,  callers can query the  computer and have
data read back to them in voice form.  Depending on the customer's  application,
callers may also change data on the  computer or input new data with  touch-tone
or voice commands.  Interactive communications is widely used for functions such
as reporting account balances,  checking on inventory, or determining the status
of applications or permits in process.  Interactive communications systems range
from small systems with basic voice  processing  features  utilizing a few phone
lines, to larger more complex distributed systems with up to hundreds of lines.


PRODUCTS

The Company's  interactive  communications  products  include the Intela(TM),  a
UNIX-based  platform  product,  which  is  capable  of  running  many  different
applications  simultaneously,  including pre-packaged applications,  such as The
Automated Collector(TM), and numerous productivity enhancement applications. The
Company also offers a Retail Solutions product line that operates under either a
UNIX or DOS  operating  system,  and the VCS 3500  products  which are DOS-based
only.  Microlog  emphasizes the interactive  communications  applications of its
Intela  product,  but also provides much of the same  application  functionality
through the VCS 3500 and Retail Solutions product lines.

<PAGE>
The  following  functionality  is provided  through  the Intela  and/or VCS 3500
products:

         Audiotex  is  used  by   organizations  to  construct  a  "library"  of
         pre-recorded  messages,   which  outside  callers  can  access  through
         touch-tone  or  voice  commands   without  live  operator   assistance.
         Customers can record and change menus and messages  themselves over the
         telephone  at any time.  Libraries of  information  may be presented in
         different languages, and callers with rotary telephones may also access
         menus and information. Up to 50,000 messages may be presented. Audiotex
         software finds wide use by organizations  that receive large volumes of
         highly-repetitive telephone requests for information.  Major advantages
         of audiotex over live information operators include the availability of
         information at every hour of the day and the consistency in information
         disseminated..

         Automated  Attendant  uses  touch-tone  or voice  commands to route and
         connect  inbound calls to extensions  faster and more  accurately  than
         live operators.  Microlog's software allows different phone lines to be
         answered  with  various  greetings  and menus of options  presented  to
         different callers. In the event of a busy or unanswered extension,  the
         software  permits  callers  to  hold,  transfer,  leave  a  message  or
         disconnect.  The system can be  name-based,  in which callers input the
         first three  letters of the party's last name, or  extension-based,  in
         which callers dial an extension number.  For  extension-based  systems,
         the software incorporates a directory of names, allowing callers to use
         touch-tone commands to find extension numbers they do not know.

         Fax software  allows system users to  automatically  receive stored fax
         documents on demand from the voice processing system.  Customer service
         and sales support  operations  are frequent  users of fax  software.  A
         service representative can take a request for documents from the system
         and  designate  faxes  to be  sent  in  response  without  exiting  the
         interactive communications system.

         Interactive  Voice  Response  (IVR)  provides a telephone  interface to
         computer systems.  IVR allows a user to call into a computer and access
         various information systems using a touch-tone telephone.

         Local   Database   provides   similar   functionality   to  interactive
         communications  systems  as IVR,  but allows  the data of  interest  to
         reside on the system  rather than a host mini- or  mainframe  computer.
         This   provides  a   cost-effective   approach  for  many   interactive
         communications   applications.   It  also  allows   large   interactive
         communication  applications  to do local  batch  processing  of data by
         downloading to the system for data manipulation.

         Multiple  Languages  Interface  software  allows system  messages to be
         played in multiple  languages.  It also interfaces TDD terminals to VCS
         3500 systems over telephone lines.  The interface  enables TDD users to
         interact with most VCS 3500  software  modules no  differently  than if
         voice  communications  were being used. Users simply type messages onto
         their TDD terminals and send them to the voice processing system, which
         understands  the input and  responds  with menus,  prompts and messages
         which are  printed on the TDD  terminal.  It has broad  application  in
         areas  where  the  hearing-impaired  must have  access  to  information
         sources.

         Outbound Dialing permits an organization to send messages automatically
         to large lists of external  phone  numbers and to record  responses  to
         those  messages,  if  necessary.  This  flexible  software  can  handle
         multiple  lists with  thousands  of names per list.  It can draw from a
         library of 50,000 messages and send different  combinations of messages
         to individual  phone numbers as directed.  The software also  generates
         management  reports  about the number of  successful  connections,  the
         length of calls, and the content of responses.

         Release Line Trunking  (RLT)  provides the ability to transfer the same
         call several  times.  After the call to each  transfer  destination  is
         completed,  the telephone line to that destination is released.  A call
         may, for example,  initially be transferred to a phone number which can
         provide information  required for the second transfer.  In the Microlog
         applications, RLT is used for long distance transfers.

<PAGE>
         Speech  Recognition  allows  the  caller  to speak  responses  that are
         understood by the VCS 3500 and Intela systems.  Continuous and discrete
         speech  recognition  can be combined in a single  system.  The standard
         vocabulary includes digits "0-9",  "yes", and "no" responses.  Microlog
         has incorporated  speech  recognition  technology from several U.S. and
         international based companies. All technologies are speaker independent
         and therefore  require no special  training or development to recognize
         individual voice or speech patterns.

         Text-to-Speech converts typed ASCII data, resident on host computers or
         databases, to computer-generated  synthetic speech on demand. It has an
         extensive  vocabulary,  since it can  pronounce  any  string of letters
         which  are sent to it.  Microlog's  text-to-speech  module is ideal for
         applications  requiring information from large text databases.  Because
         text-to-speech works with external databases, the module works with the
         interactive  voice  response  module that provides the link between the
         VCS 3500 or Intela interactive communications system and the customer's
         database.

         Transaction  Processing  allows  the  inbound  caller to place  orders,
         request information,  respond to surveys or complete other transactions
         without personal  handling by a live operator,  using either touch-tone
         or voice commands. The caller can initiate transactions any hour of any
         day, and the company can process the  transactions at its  convenience,
         including  processing  outside normal business hours. Such transactions
         allow  orders and  requests to be filled  faster and at lower cost than
         traditional methods.

         Voice Mail  provides an  organization  with "voice  mailboxes" in which
         internal or external callers may leave detailed,  confidential messages
         at any  time.  Voice  mail  overcomes  many  limitations  of  telephone
         systems,  allowing people to exchange information and transact business
         without having to be on the phone together. It eliminates paperwork and
         adds  meaning  and  content,  which  written  messages  can't  reflect.
         Benefits   include,   increased  office   productivity   through  fewer
         interruptions,  timely and accurate message delivery, increased message
         detail, and reduced callbacks and "telephone tag." Messages may be left
         for groups of people as well as individuals. Callers may edit messages,
         reviewing and re-recording until satisfied.  Mailbox owners may review,
         save, forward or discard voice messages.

INTELA

The Intela  platform  is an  interactive  communications  product  designed  for
simultaneous  support  of  multiple  applications  and  interactive  information
solutions. Prices for Intela systems are dependent on the number of ports in the
system  (from 4 to over  1000),  the  amount  of  voice  storage,  the  need for
additional  equipment,  and in the case of  direct  sales,  the time  needed  to
develop a customized application.

Microlog has employed  Intela for many  different  customers,  with one of their
largest Intela customers being the Internal Revenue Service (IRS).  Projects for
the IRS included Voice Balance Due (VBD),  which enables  eligible  taxpayers to
check  the  status of their  debt to the U.S.  government  and set up  repayment
plans. The Refund Inquiry  Application enables taxpayers to call the IRS and, by
selecting  the Refund  Inquiry  on Intela,  automatically  obtain  their  refund
status,  including  the amount of the refund.  Microlog also employed the Intela
for call center  solutions in Europe for  companies  such as,  Sykes,  KLM Royal
Dutch Airlines, and Xerox.

Intela  is based on an  Intel  Pentium(R)  hardware  platform  utilizing  a UNIX
operating   system  with  a  Graphical  User  Interface  (GUI)  for  application
development.  The Intela system has a non-proprietary  open  architecture.  User
screens,  voice  prompts,  and  documentation  are  available  in  many  foreign
languages. Intela also supports text-to-speech,  speech recognition,  remote and
local databases, host connectivity, and fax.

Each Intela system contains multiple  microprocessors with hard disk storage and
several  voice cards.  Intela uses  distributed  microprocessors,  each of which
handles a part of the  total  processing  task,  rather  than one large  central
processor. By increasing the number of voice cards and the number of distributed
microprocessors,  the  Company  can  configure  the  interactive  communications
systems with a greater number of ports and hours of message  storage.  Depending
upon customer specifications,  systems are provided as tabletop, floor-standing,
or rack mounted  units.  These units can be networked to create a larger  system
with  thousands of ports,  and they can be configured to run on -48 volt for use
in a Central Office (CO).
<PAGE>
The Intela  architecture  supports a variety of configurations that meet varying
functional,  processing,  and voice port and  storage  needs.  This  platform is
designed for simultaneous support of multiple applications, including both voice
response  and voice  messaging  services.  Within the  architecture,  particular
hardware configurations may be proposed to provide cost-effective solutions to a
wide range of system  requirements.  All systems can be configured with built-in
redundancy so that at least 50% of total system  capacity is  maintained  across
any single  component  failure.  Growth  capability  is  achieved by the modular
upgrade  of  application  servers,  port  servers,   disk  storage,   additional
communications  links,  and additional  voice response units.  The Intela system
includes a monitor, keyboard, and printer. These are used to program the system,
organize the storage of information (which will be accessible to users), produce
reports, and monitor system activity.  Customers that contract for the Company's
system maintenance services also purchase modems so that the Company can perform
remote diagnostic procedures.

The basic Intela  architecture  consists of three major system  components:  the
Application Server(s), the Port Server(s), and the Intelaware software platform.

         Application   Server   defines  the  computing   environment  in  which
         Intelaware  software  resides and provides  centralized  management and
         control,  as well as optional  secure voice  storage.  The  application
         server can be a personal computer, a workstation, or mini-computer.  It
         interfaces to a voice processing peripheral, or Intela port server, via
         a command link on a LAN or a serial communications link.

         Port Server consists of tabletop,  tower,  and rackmount  models,  each
         providing  call  and  speech  processing,  as  well as  voice  storage.
         Interfacing to either a CO- or PBX-based telephone system,  these units
         answer calls, and process and store speech,  all under the direction of
         commands  coming from  Intelaware  software on the  application  server
         across a command link.

         Intelaware   Software  Platform  is  an  application   development  and
         deployment  environment  for interactive  communications  applications,
         supporting  the  on-line  creation  and   administration   of  multiple
         applications.  From an  X-Windows  graphic  terminal  connected  to the
         application  server,  users  access  major  functions  of the  software
         through  several  interfaces:  Application  Editor,  Prompt Loading and
         Management,   System  Administration,   Reports  and  Database  Access,
         Integration Manager, Agency Manager, and Calendar Manager.

Through these  interfaces,  users control the development and operation of their
voice  applications,  using a graphical user interface.  This interface provides
the developer with a set of tools to create voice  applications.  Following is a
description of each of these interfaces.

         Application  Editor  is used to  create  and edit  applications  and is
         oriented towards programmer productivity,  with several developers able
         to  access  different  applications   simultaneously.   The  editor  is
         GUI-based  and  allows  programmers  to  develop  call  flows  using  a
         click-and-place  approach  similar to many standard  drawing  packages.
         Cells from a palette are placed onto a drawing  pane and are  connected
         using a set of mouse actions.  Standard Windows(R)-like pull-down menus
         allow file control,  editing  features (cut,  copy, and paste),  object
         search  (by cell  number,  name,  or type),  and user  preferences  for
         appearance  of the palette.  Applications  can be developed  and tested
         on-line without interrupting those currently running.

         Prompt  Loading and  Management  Facility  provides the  capability for
         prompt  creation,  a major  function  in voice  applications.  With the
         Intelaware prompt loading facility, prompts can be reviewed,  recorded,
         installed,  deleted,  backed  up  to  removable  media,  restored,  and
         distributed over a local or wide-area data network (LAN/WAN).  They can
         be loaded on-line over the telephone, a microphone, or from a tape, and
         the  process  can be semi- or fully-  automatic,  depending  on whether
         dual-tone multifrequency (DTMF) tones are coded on the tape to identify
         the prompts. Users can record individual prompts, a list of prompts, or
         record with DTMF prompt numbers,  and the prompts will be replaced only
         after they've been reviewed and accepted.  New or updated  prompts will
         be phased in automatically while applications remain on-line.
<PAGE>
         Prompt  Manager has a graphical  prompt  manager  that allows  users to
         retrieve a prompt from storage on a port server and have the  graphical
         representation shown in a window. The user can modify the prompt simply
         by clicking on the window and performing any of the following  actions:
         cut, copy, paste, delete, trim silence,  adjust again, convert sections
         of a prompt to silence, and change sampling rate.

         System   Administration   allows  for  the  loading  and  unloading  of
         applications,  and the management of the port servers  connected to the
         application  processor.  If a system has network hardware in the system
         configuration,  administration  can be  performed  through  one central
         point.  Administrators can bring up a new revision of an application or
         move an application to another trunk while the system is on-line.  If a
         caller happens to be on the line at the time, the changes on that trunk
         will take  effect  after the caller  hangs up.  Intelaware  can support
         multiple  Intela systems to expand to larger port and storage  capacity
         by networking systems and clusters of systems together.

         Centralized  System  Management  provides a graphical  means to address
         operation,  administration,  and  maintenance  (OA&M) of a  distributed
         system.  It  provides a  graphical  representation  of the  application
         server and its attached Intela systems, including the command link mode
         used,  Ethernet  or serial  links.  Further,  by clicking on the Intela
         icon, an additional  window is displayed.  In this window, a graphic of
         the Intela display panel,  with active trunk status indicators and disk
         usage indicators,  is shown. Clicking on a trunk status indicator opens
         an  additional  window  that  depicts  information  about  the  running
         application.

         Reports are designed to track significant  statistical  information for
         activities such as billing and to justify services. Intelaware offers a
         choice of reports that can be created and viewed  without  interrupting
         the  operation of an  application.  These reports can then be sent to a
         printer  for a hard copy  print-out.  Available  reports  include  call
         detail,   cell  usage,  trunk  usage,   subscriber   information,   and
         transaction log. Statistical requirements beyond those addressed by the
         standard reports can be met from the raw call data records (CDRs).

         Database  Access allows  interfaces to be built between  Intelaware and
         Standard  Query Language (SQL)  relational  databases,  such as Oracle,
         Sybase,  Informix and Ingress.  The Application  Editor contains an SQL
         cell type,  which allows  information to be extracted from databases to
         support interactive communication  applications.  This cell type allows
         users to delete,  insert,  select,  and update  data.  Intelaware  also
         supports two internal  proprietary  databases:  message and information
         databases.  The  message  database  used in  voice  mail  applications,
         consists  of  mailboxes  associated  with a number,  usually  the phone
         number of the user who will access the box for the  messages  deposited
         in  it.  More  than  one  message  database  can  be  supported  within
         Intelaware  to  accommodate  multiple  applications.  Messages  can  be
         retrieved  either  first  in,  first out  (FIFO) or last in,  first out
         (LIFO), determined on a system basis.

In 1997, the Company delivered Intela System Release 5 (SR5), and completed work
on functional enhancements to the optional features of the product. In addition,
work was completed to support international connectivity and localization.

Intela product options released in conjunction with SR5 included;  IntelaDB(TM),
a relational  database,  which allows Intela to locally access gigabytes of data
without the need of a more costly customer furnished database; IntelaConnect, an
intelligent  "gateway" that seamlessly  connects  Microlog's Intela  interactive
communications  systems to vital  customer  information  residing  on hosts and;
IntelaCTI(TM),  which supports comprehensive call control and monitoring through
links to many popular telephone switches.

Four product  enhancement  applications  for Intela were also  released in 1997.
These  enhancements  are:  IntelaPowerdial(TM),  a dialer  application  that can
initiate  thousands of calls and transfers the called party to an application or
live agent after  connection;  IntelaPay(TM),  an application  that provides the
ability to verify credit card numbers for online  purchases;  IntelaFill(TM),  a
high capacity  messaging  application  that gives the caller the ability to fill
out a "voice-form"  through their touch-tone phone; and  IntelaAttendant(TM),  a
multi-line  attendant  application  designed  to  work  with  the  other  Intela
applications to transfer outside calls to the correct internal extension without
operator intervention.
<PAGE>
THE AUTOMATED COLLECTOR(TM)

During  1997,  the  Company  launched  a new  packaged  application  called  The
Automated Collector.  Microlog created The Automated Collector based on a custom
application  developed  for the Internal  Revenue  Service.  Built on the Intela
platform, the Automated Collector is an interactive communications tool designed
to improve efficiency within the Collections  Industry by automating the process
of collecting promises to pay.

The Automated  Collector is designed to work  alongside  collectors/agents.  The
system  can  work low  balance,  high  volume  campaigns,  as well as early  out
campaigns.  It can handle both inbound and outbound collections calls, including
verifying "right party contact." The system can collect promises to pay in full,
or set up payment  schedules.  It can  accommodate a variety of debt  collection
strategies, and can operate 24 hours a day, 7 days a week, 365 days a year.


RETAIL SOLUTIONS

During 1997, the Company continued to dedicate development efforts to refine its
offerings under the Retail Solutions product line. Retail Solutions  consists of
several  applications  designed  and  manufactured  specifically  for the retail
pharmacy industry.  These applications include the Automated Prescription Refill
System (APRS), Photo Ready(TM), Prescription Ready(TM), and the ProNouncer(R).


AUTOMATED PRESCRIPTION REFILL SYSTEM (APRS(R))

APRS is the primary product  available under Microlog's Retail Solutions product
line.  The APRS product helps  pharmacies  improve  operating  efficiencies  and
customer  service.  Prices for APRS are  dependent on the number of ports in the
system  (from 4 to 16),  the amount of voice  storage,  the need for  additional
equipment,  and the  need for any  customization  of the  application.  Patients
calling  into the APRS can use the  touch-tone  keypad  on their  phone to enter
their  prescription  refill  orders,  inquire about store  location and hours of
operation,  and  request  a  transfer  to a  specific  department.  This  system
processes calls 24 hours a day, 7 days a week,  allowing pharmacy staff to spend
more time consulting with in-store patients. As managed care continues to change
the  way  health  care  is  delivered,  APRS  technology  becomes  a part of the
pharmacist's  newly  evolving  role--that of providing a broad range of pharmacy
care  services by  assisting  pharmacists  with the  traditional  dispensing  of
medications.

APRS is a UNIX-based  system  available  as a  stand-alone  configuration,  or a
"board-and-software" solution. The "board-and-software" solution is designed for
customers who already have an in-store processor with spare capacity. Customized
management  software  allows  selected  control  functions to be executed from a
remote, central location. Such features include loading of new software modules,
running diagnostics,  and implementing system changes.  Enhanced features of the
system   include   more   comprehensive   out-dial   reports,   GUI  for  system
administration, multi-level passwords, and easy expandability of systems through
the use of a variety of voice cards.

A direct link can be  established  between the APRS and the  pharmacy  database,
enabling the automated refill system to access the extensive medical,  customer,
and  marketing  information  stored on the pharmacy  database as a part of every
call.  For  instance,  the APRS can  provide  drug  interaction  information  to
customers   calling   in  to  place   refill   orders,   promote   complementary
over-the-counter  products  available  for  purchase  at the same  store,  alert
patients when they are about to run out of refills, and so on.

The APRS product includes the following features:

         Doctor's  Messaging  - Doctors  can leave  refill  authorizations,  new
         prescription  instructions,  and other  important  messages  on a voice
         mailbox.  Physicians needing to speak with a pharmacist about an urgent
         matter during normal  operating hours can  immediately  transfer out of
         the system to a live pharmacist.

         Caller ID - The APRS can accept  Caller ID  information  from the local
         telephone  company.  This allows  pharmacies to automatically  transfer
         pre-defined patients and doctors directly to pharmacy staff. Pharmacies
         are also able to capture the  caller's  telephone  number and verify it
         against their prescription number for validation purposes.

<PAGE>
         Call Routing - The APRS can answer all incoming calls,  greet customers
         with a  store-specific  recording,  and  then,  based  on call  routing
         transfers to the desired department.

         Release Line Trunking - With Microlog's  patented Release Line Trunking
         capability,  patients calling a particular  pharmacy after hours can be
         forwarded  to the nearest  extended-hour  location  or to a  pharmacist
         on-call.  At the request of a caller,  the APRS  accesses an additional
         available  telephone  line and places an  outgoing  call to the nearest
         24-hour location or to an "on-duty"  pharmacist.  This feature provides
         better customer service at critical  off-peak hours when urgent medical
         needs can arise.

         Speech Recognition - Speech Recognition  enables pharmacy customers who
         have rotary phones to speak their responses into the telephone,  rather
         than pushing  buttons on their telephone  keypad.  This is particularly
         important in regions  where there is still a high  percentage of rotary
         phones--or in areas where a sizable  portion of the  population  may be
         more comfortable speaking into the phone.

         Multi-Language  Capability - Callers of varying  nationalities  can use
         the system at the same time,  and yet hear prompts  spoken in their own
         native  tongue.  The APRS  product  supports  24  different  languages,
         including Mexican and Cuban Spanish, Canadian and Franco-French, Slavic
         languages  including  Ukrainian  and  Polish,  and a  number  of  Asian
         languages.  This enables  pharmacies to better serve ethnically diverse
         customer bases.

         TDD Access - The APRS  product  provides  TDD  access  for the  hearing
         impaired,   helping  pharmacies  to  comply  with  the  Americans  with
         Disabilities Act.  Microlog's  technical approach allows dynamic use of
         TDD on all incoming  lines without the need to provide a dedicated line
         for the hearing impaired.

         In-Store  Paging - When calls are  transferred,  pages can be made over
         the store public  address  system (PA) or the  dedicated  APRS pharmacy
         paging  subsystem.  This allows physicians to quickly reach pharmacists
         regarding urgent patient matters and expedites customer and staff calls
         to the manager, among other functions.

         In-store  Patient  Notification  - APRS in-store  notification  enables
         patients waiting for their prescription  refills to shop throughout the
         rest of the store.  When the  prescription  is ready,  the  customer is
         paged by their prescription number.

         Voice Mail - Each  pharmacy  employee can be assigned a voice  mailbox,
         enabling  better   communication   among  employees  as  well  as  with
         management.  The system can also be designed to enable outside  callers
         to  leave  messages  for  employees.   This  level  of  flexibility  is
         particularly  valuable  in  supporting  communication  across  multiple
         shifts and between part-time and full-time workers.

         Prescription  Pick-up  Time - The APRS can  prompt  callers  for  their
         preferred  pick-up  time,  and then confirm for the patient the time by
         which their  refill will be ready for pick-up.  This can help  pharmacy
         staff in scheduling personnel workloads.

         Prescription  Status Check - Prescription Status Check enables patients
         to call and  directly  query the pharmacy  system to determine  whether
         their  prescription  has been filled and what time it will be ready for
         pick-up.

         Prescription  Ready(TM)  Out-Dial  - The  Prescription  Ready  Out-Dial
         capability enhances a pharmacy's compliance program by placing reminder
         calls to those  patients  who have  not used all  their  refills.  This
         capability  also  reduces   restocking  costs  and  increases  pharmacy
         revenue.  Pharmacy  staff can either create the lists of patients to be
         called,  or the lists can be automatically  generated  through a direct
         link to the pharmacy database.

         Text-to-Speech - Through Text-to-Speech technology,  callers can hear a
         text file "read to them" over the phone. Names, addresses,  drug names,
         and any  other  text-based  information  stored  in a  database  can be
         converted into speech.  This can be used,  for example,  in conjunction
         with  a   compliance   out-dial   program--voicing   the  name  of  the
         prescription holder as it reminds them to pick up their refill.
<PAGE>
         System Performance Reports - The product's  reporting  functionality is
         designed to help pharmacies  gauge how well the system is operating and
         to measure performance  activity.  Reports can be printed automatically
         on a daily  basis and can also be  generated  on  demand by the  system
         administrator.

OTHER RETAIL SOLUTIONS PRODUCTS

Photo Ready(TM)  Out-Dial - The Photo Ready Out-Dial  feature calls customers to
remind them to pick up their film development  order(s).  Photo department staff
prepare the list of customers to be called,  or a direct link can be established
with the photo database for automatic generation of calling lists.

ProNouncer(R)  -  Pharmacies  and  grocery  stores  can  complement   their  own
store-specific  or  chain-wide  advertising  efforts  with  Microlog's  patented
automated digital in-store  announcement system. The ProNouncer guides customers
to specific  promotional  items,  giving an added  boost to sales of  perishable
and/or  high-margin  products,  and helping to promote  impulse  purchases.  The
ProNouncer can also automate a store's closing messages or holiday greetings and
can be used to make repetitive public service messages.

KeyStar(TM)  -  In  1997,  Microlog  developed  and  introduced  KeyStar(TM),  a
telecommunication  switch.  KeyStar is a separate  hardware device that connects
directly to a set of incoming  telephone lines, the APRS, and the store/pharmacy
telephone system.  KeyStar provides all the necessary interface and switching to
receive and transfer calls to the in-store telephone system. KeyStar provides an
interface  to a PA  system  amplifier  for  in-store  paging,  a  music  on hold
interface for an external music source,  and a system  administration  telephone
interface.

KeyStar offers a number of key benefits designed for the retail pharmacy market.
It allows APRS to interface to any existing  telephone  system,  supports Caller
ID, and minimizes telephone system add on/upgrade  expenses.  KeyStar provides a
direct modem  connection to the APRS for remote system access,  alleviating  the
need to  reallocate or purchase  additional  telephone  lines.  Automated/bypass
routing of all incoming  telephone  lines under failure  conditions - KeyStar is
available in two configurations:  all-in-one  packaging with Microlog's APRS and
software, or as a stand-alone device.


VCS 3500

The Microlog  VoiceConnect  System 3500 (VCS 3500) line of systems consists of a
microprocessor-based  hardware platform which can accommodate varying numbers of
ports  and,  due to its  proprietary  software  modules,  can  support  up to 12
separate voice  response or voice  messaging  applications.  Prices for VCS 3500
systems range from $10,000 to over $250,000.  Prices are dependent upon, (i) the
number of ports in the system  (from 2 ports to 96 or more),  (ii) the number of
voice processing  applications desired,  (iii) the amount of voice storage, (iv)
the need for additional  equipment (in the case of large or unique  systems) and
(v) the extent to which the product must be adapted to the  customer's  specific
needs.

The Company's VCS 3500 has a flexible system  architecture.  All of the VCS 3500
systems use similar  hardware  platforms  and the Company  activates one or more
software  modules to enable a system to perform  the  desired  voice  processing
applications.  In the  case of  complex  systems  performing  extra  or  unusual
applications  as requested by a particular  user,  the Company can customize the
voice processing systems' architecture.

Many VCS 3500 systems contain  multiple  microprocessors  with hard disk storage
and several voice cards. The VCS 3500 uses distributed microprocessors,  each of
which handles a part of the total processing task, rather than one large central
processor. By increasing the number of voice cards and the number of distributed
microprocessors,  the Company can configure the voice processing  systems with a
greater  number of ports and hours of message  storage.  Depending upon customer
specifications, systems are provided as tabletop, floor-standing or rack-mounted
units.  These units can be networked to create a larger system with more than 48
ports.

The VCS 3500  includes  a  monitor,  keyboard,  and  printer,  which are used to
program the system, organize the storage of information which will be accessible
to users, produce reports, and monitor system activity. Modems are also provided
so that the Company can perform remote  diagnostic  procedures for customers who
contract for system maintenance services.
<PAGE>
The VCS  3500  voice  response  applications  can be  used  with  most  customer
telephone  systems.  When  used  in  connection  with a PBX,  Centrex  or  other
telephone  system having a switch capable of transferring  calls  automatically,
the system can provide a direct connection between the caller and the customer's
telephone  system.  The system can also be designed to allow callers to transfer
their calls to a live operator on the customer's telephone system.

Due to the greater  versatility of the UNIX System (Intela),  as compared to the
DOS  operating  system (VCS 3500),  there has been a shift in sales from the VCS
3500 to Intela.


CALLSTAR(R)

Due to declining  requirements  for simple voice mail equipment,  as compared to
the more  sophisticated  products  offered by the Company,  the CallStar product
line was  discontinued  in  April,  1997.  Some  customer  support,  parts,  and
materials  will  continue to be  provided  through  April 1998,  but this is not
expected to result in significant revenue for the Company.


SALES AND MARKETING

The Company's Retail  Solutions and VCS 3500 systems are sold primarily  through
direct sales.  The Intela product is sold through a combination of direct sales,
value added  resellers  (VAR),  original  equipment  manufacturers  (OEMs),  and
government contract vehicles.

Direct  Sales Force.  The direct sales force has a general  manager in charge of
North America,  sales managers,  sales  personnel,  sales  engineers,  marketing
manager,  and sales  support  personnel.  The  Company's  direct  sales force is
presently  based in the  Washington-Baltimore  metropolitan  area with satellite
offices  in  Southampton,   Pennsylvania,  and  Belair,  Maryland.  The  Company
compensates its direct and  distribution  sales personnel  through a base salary
plus  commissions,  which generally  represent a percentage of the net sales for
which they are responsible.

The Company's direct sales personnel will continue to focus on national accounts
assigned to them and on certain vertical markets, including retail, health care,
debt  collection,  wagering,  and  Federal,  state  and  local  government.  The
principal  potential  customers  for the  Company's  interactive  communications
applications  and products in these  vertical  markets are  organizations  which
receive or make a large volume of telephone  calls that primarily are repetitive
in nature,  and the caller desires  information stored on the organizations data
system.

International  Sales.  The  international  sales force  currently  has a general
manager in charge of international sales, sales personnel,  sales engineers, and
sales support personnel.  The sales force and support group is presently located
in the  Washington-Baltimore  metropolitan area, and in Neunen, The Netherlands.
During fiscal 1996,  the Company  acquired  Phonatic  International  B.V. of the
Netherlands,  to strengthen its presence in the European voice response  market.
During 1997, Phonatic International B.V. took on the name Microlog Europe.

The  Company  has  entered  into  non-exclusive   distribution  agreements  with
international companies,  including Philips Communication Systems B.V. (Philips)
of The  Netherlands,  and Jebson and Jessen in Singapore,  along with five other
companies in Europe, Asia, and the Middle East, to market and support the Intela
product line worldwide.  Philips markets the Intela  interactive  communications
system as the VoiceManager  800 series.  In 1997, the Company signed PTT Telecom
of The  Netherlands  to a five-year  distribution  agreement to sell  Microlog's
Intela product within the Dutch interactive  communications  market. PTT Telecom
is  a  full  service   telecommunications  company  providing  a  wide-range  of
communication   products  to  businesses  and  consumers  both   nationally  and
internationally.

Marketing  - The  marketing  organization  currently  has a vice  president  who
manages the Company's product,  engineering,  and marketing-related  activities.
Marketing  consists of a director,  product managers,  marketing  communications
personnel,  channel marketing manager, system release manager, and the technical
training & publications  group.  This  organization  interfaces  with direct and
international  sales  in  developing,   marketing,  and  selling  the  Company's
products, applications, and services.
<PAGE>
Promotional  Activities - The Company's  promotional  efforts during fiscal 1997
included  advertising  in industry  trade  publications,  direct  mail,  product
presentations  at trade  shows and similar  events,  and public  relations.  The
Company  conducted  seminars  for  potential  customers  in  certain  industries
worldwide.  The Company expects to continue these promotional  activities during
fiscal 1998.


SERVICES

The Company  provides  limited  warranties  for parts and labor on its  products
ranging from 90 days to two years,  from the date of delivery.  The Company also
offers its  customers  annual  maintenance  contracts  under  which the  Company
maintains  and  services  the  systems.   Microlog  charges  an  annual  fee  of
approximately  10% to 16% of the purchase  price of its systems for  maintenance
contracts  covering normal  business  hours.  The fee is highest for maintenance
contracts providing for 24-hour or weekend assistance.

The Company generally  performs  maintenance for its interactive  communications
systems in the Washington, D.C. metropolitan area from its Germantown,  Maryland
headquarters, where an inventory of spare parts is maintained. Microlog also has
an  agreement  with  a  subcontractor  to  perform  on-site  maintenance  on its
interactive  communications  systems nationwide.  The Company operates a hotline
which customers with maintenance  contracts may use to request  assistance or to
ask questions concerning operation of the Company's  interactive  communications
systems.   Microlog  can  perform  many  diagnostic   procedures  remotely  and,
historically,  has been able to correct many of the difficulties  experienced by
its customers  through  telephone  consultation.  International  maintenance  is
performed by the third party  distributor  and is supported by Microlog  service
personnel  in  Neunen,  The  Netherlands,   and  Microlog's  service  center  in
Germantown, Maryland.

Microlog also offers a variety of other services to its customers. Microlog will
customize interactive  communications  systems to a customer's specific needs by
using the application  software matrix in the VCS 3500 or the GUI in its Intela,
or by  making  appropriate  changes  in the  underlying  source  code  in all of
Microlog's  products.  The  Company  may charge  for this  service on a time and
materials  basis,  or may include  the service in the price of the system  being
sold.  Training on system operations also is offered to customers.  In addition,
the Company generally provides certain improvements to its software modules free
of charge to customers who contract for its system maintenance services.


BACKLOG

As of  October  31,  1997,  the  Company  had a backlog of  existing  orders for
interactive  communications  systems totaling $2.9 million.  The backlog,  as of
October 31, 1996, was $4.9 million. The Company has experienced  fluctuations in
its backlog at various  times during the past three  fiscal  years  attributable
primarily to the seasonality of governmental purchases.  The Company anticipates
that all of the outstanding  orders at October 31, 1997, will be shipped and the
sales  recognized  during  fiscal 1998.  Although the Company  believes that its
entire backlog of orders consists of firm orders,  because of the possibility of
customer  changes in delivery  schedules and delays  inherent in the  government
contracting  process, the Company's backlog as of any particular date may not be
indicative of actual sales for any future period.


COMPETITION

The interactive  communications  industry is highly  competitive and the Company
believes that  competition  will  intensify.  The Company  competes with a large
number of companies which produce interactive  communications  products offering
one or more of the 12  major  voice  processing  applications  performed  by the
Company's  products.  Microlog's  competitors  include  companies  such  as IBM,
InterVoice,  Inc.,  Lucent,  Periphonics,  and Syntellect,  that have emphasized
sales  of  systems  with  interactive   voice  response   applications.   Direct
competition with the Company's  interactive  communications  systems also arises
from a substantial number of companies, such as Centigram and Active Voice, that
focus on the market for small or  medium-size  voice  messaging  (voice  mail or
automated  attendant)  systems.  In  addition,  the Company also  competes  with
dealers  and   distributors   that  sell  voice  products  of  these  and  other
competitors.
<PAGE>
New or enhanced products can be expected from the Company's  competitors.  It is
also likely that there will be new entrants into the interactive  communications
industry because of the absence of any major technological barriers to entry.

Competition for the sale of interactive communications systems has been based in
part on the  application  required by the customer.  In marketing its Intela and
VCS 3500  products,  the Company  places  emphasis  on the 12 major  interactive
communications functions (refer to "Products" section) that can be performed and
the  ability  of  these  systems  to  be  expanded  to  incorporate   additional
applications.  As a result of this emphasis on openness and  expandability,  the
Company believes that many of its competitors'  products cannot be customized as
easily to the user's specific needs as the Intela and VCS 3500.

In marketing its Retail  Solution,  the Company places  emphasis on the suite of
applications and solutions that these applications  offer.  Potential  customers
have the ability to add additional  solutions as the need arises. The Company is
also able to customize these  applications to meet the user's needs. The Company
is  actively  developing  additional  features  to the Retail  Solution  and new
solutions for release in fiscal 1998.

Marketing and product  recognition  also play a substantial  role in competition
within the interactive  communications  industry and within particular  vertical
markets.  Most of the Company's competitors have considerably greater financial,
marketing,  and sales resources than Microlog.  Many of these  competitors  have
concentrated on one or two voice  applications or on specific  vertical  markets
and may enjoy advantages in selling to customers seeking only those applications
or to companies in those  markets.  The Company  believes that it has advantages
over some  competitors  in sales to  government  and retail  pharmacy  customers
because of its  experience  in  marketing  products  to these  customers  and in
participating in competitive procurements.

The Company believes that the other principal factors  affecting  competition in
the interactive  communications  market are product  applications  and features,
quality and reliability,  customer  support and service,  and price. The Company
believes that it competes favorably with respect to these factors.


RESEARCH AND DEVELOPMENT AND PRODUCT ENGINEERING

The Company  believes that both the  development of new voice  applications  and
features  for its  existing  products  and the  development  of new products are
necessary   to   remain   competitive   in  the   rapidly-changing   interactive
communications  market.  In order to  maintain  its  competitive  position,  the
Company continues to improve its interactive communications product lines and is
currently developing new products and enhancements to its existing products.

During 1997,  the Company  completed a new release for its Intela  product line,
System  Release 5. This release adds  optional  features  such as enhanced  host
connectivity,  a CTI  server,  and  local and  remote  database  support  to the
product.  In 1997, the Company  completed a number of  productivity  enhancement
applications  for Intela,  including a power  dialer,  a  transaction  messaging
application,   a   credit   card   verification   module,   and  an   integrated
auto-attendant.  These  applications,  in turn,  were  used as  modules  for the
Company's   Automated   Collector  release,  a  packaged   application  for  the
collections  industry.  For the APRS product, the Company developed a UNIX-based
system  which  is  available  as  a  stand-alone  configuration  as  well  as  a
"board-and-software" solution. The "board and software" solution is designed for
customers who already have an in-store processor with spare capacity.

Additive to either the stand-alone or  board-and-software  APRS  solutions,  the
Company also developed the KeyStar product.  KeyStar is a front-end  integration
hardware  module,   software  controlled  by  the  APRS,  that  facilitates  the
integration  of the APRS into existing  store  systems,  including  many diverse
telephone systems,  PBXs, and key systems,  without requiring potentially costly
upgrades by the store.  The Company's  engineering  staff is also engaged in the
development  of special  product  features for current or  potential  customers.
Unless  prohibited by government  regulation or customer  contract,  the Company
retains ownership of all software applications and features that it develops.
<PAGE>
The following table sets forth for the periods indicated the Company's  research
and development  expenditures  and the percentage of interactive  communications
net sales represented by these expenditures.

                      Research and Development Expenditures

                    (In thousands, except percentage amounts)

                                              Year Ended October 31,
                                              ----------------------
                                         1995           1996           1997
                                         ----           ----           ----

Research and development expense       $1,592         $2,093           $3,579

    Percentage of voice
      processing net sales                11%            13%             19%


Costs incurred in basic research and development  are expensed as incurred.  The
Company  has  determined   that  the  process  of   establishing   technological
feasibility with its new products is completed approximately upon the release of
the  products to its  customers.  Accordingly,  software  development  costs are
expensed as incurred.


MANUFACTURING AND OPERATIONS

The Company  assembles  its own equipment  using  standard  parts  obtained from
outside sources.  The proprietary aspects of the Company's systems are primarily
in the software  provided with the  equipment  and in the specific  applications
development  designed for the customer.  Systems are built to order as they vary
in size and sophistication of software modules.  Equipment assembly,  along with
testing  and  quality  control,  are  performed  at its  Gaithersburg,  Maryland
facility.  The Company leases a manufacturing  and training  facility located in
Gaithersburg,  Maryland which expires in September, 1999. Microlog currently has
11 employees in its  manufacturing  group.  The Company  generally uses standard
parts and components  obtained from a variety of computer  vendors and specially
configures  these  components  to produce the hardware for its systems.  Certain
components used in the Company's  products are presently  available from limited
sources.  To  date,  the  Company  has been  able to  obtain  supplies  of these
components in a timely manner from these sources.


SOFTWARE PROTECTION, TECHNOLOGY LICENSES, AND TRADEMARKS

The Company regards its software as proprietary  and has implemented  protective
measures  both of a legal and a  practical  nature to ensure  that the  software
retains  that  status.  The  Company  derives  protection  for its  software  by
licensing  only the  object  code to  customers  and  keeping  the  source  code
confidential.  Like  many  other  companies  in the  interactive  communications
industry,  Microlog does not have patent  protection for its software  (although
some  of  the  inventions  for  which  Microlog  has  received  patents  can  be
implemented  in software).  It,  therefore,  relies upon the  copyright  laws to
protect  against  unauthorized  copying of the object code of its software,  and
upon  copyright  and trade secret laws for the  protection of the source code of
its software. Despite this protection, competitors could copy certain aspects of
the  Company's  software  or hardware  or obtain  information  which the Company
regards as a trade secret.

The Company  has  patents on an  Interactive  Audio  Telecommunications  Message
Storage,  Forwarding and Retrieval  System,  Software Switch for Digitized Audio
Signals, Automated Telephone System Using Multiple Languages, Telecommunications
System for Transferring  Calls without a Private Branch  Exchange,  Detection of
TDD Signals in an Automated  Telephone System,  Automated  Telephone System with
TDD Capabilities,  Automated  Announcement System, and Methods for Communicating
with a  Telecommunications  Device for the Deaf (TDD).  The  Company  also has a
pending patent  application on an Apparatus and Method for Coupling an Automated
Attendant to a Telecommunications System. EVR, Microlog, Call Installer, Truant,
CINDI,  ProNouncer,   CallStar,  CallStar  FXD,  and  APRS  are  all  registered
trademarks owned by the Company.  Intela,  Intelaware,  Intelaview,  VCS Intela,
Intelapowerdial,  KeyStar, Connecting People to a World of Information,  and The
Automated Collector are all trademarks or service marks which are the subject of
applications  for  registration  owned by the  Company  which are pending in the
United  States  Patent  and  Trademark  Office.   INTEL  Corporation  has  filed
oppositions  with the U.S.  Trademark  Trial and

<PAGE>
Appeal Board to  registration  by the Company of the marks  Intela,  VCS Intela,
Intelaware, and Intelaview.  Discovery is currently ongoing in this consolidated
opposition  proceeding.  The Company is currently  using,  and claims common law
rights in the following additional,  unregistered marks: Voice Connect, Genesis,
Voice Path,  VCS 3500,  Retail  Solution,  RLT,  and Release Line  Trunking.  In
addition, the Company enters into confidentiality agreements with its employees,
distributors,  and  customers  and  limits  access  to and  distribution  of its
software,  documentation,  and other  proprietary  information.  There can be no
assurance that the steps taken by the Company to protect its proprietary  rights
will be adequate to deter misappropriation of its technology. Further, there can
be no assurance that any patent issued or that its registered  copyrights can be
successfully  defended.  In any event, the Company believes that factors such as
technological  innovation  and  expertise  and  market  responsiveness  are more
important than the legal protections described above.


PERFORMANCE ANALYSIS AND SUPPORT SERVICES

GENERAL

Since the early  1970s,  the Company and its  subsidiaries  have been  providing
performance   analysis  and  technical  and   administrative   support  services
(principally  in the  form of data  processing  and  analysis,  engineering  and
scientific  analysis,  and  computer  services)  to  government  and  commercial
customers.  These  services,  which comprised the Company's  original  business,
presently are provided  through the Company's  subsidiary,  Old Dominion Systems
Incorporated of Maryland. The Company believes that its performance analysis and
support  services  business  will  continue to provide a stable stream of sales,
although its interactive  communications  business offers greater  potential for
growth.

The principal customer for the Company's  performance analysis and technical and
administrative  support  services  is The  Johns  Hopkins  University's  Applied
Physics Laboratory (APL), a United States Navy contractor, for which the Company
or its  subsidiaries  have been  performing  services  since  1972.  Sales  from
contracts with APL accounted for 37%, 38% and 39% of the Company's net sales for
fiscal 1995, 1996, and 1997, respectively.

The Company's  performance  analysis and support  services  personnel  perform a
variety  of  analytical  and  science-related  support  services  under  several
contracts. These services usually are performed on the customer's premises or at
test-site  locations.  The  Company's  technical  staff works  jointly  with the
customer's  scientists and engineers in the acquisition,  processing,  analysis,
and  management of certain major weapon  systems data.  This work is directed to
quantifying  and reducing the impact of current and future threats to the United
States'  submarine fleet through the use of ocean sensor systems.  The technical
support rendered by the Company  includes  real-time data  acquisition,  digital
signal  processing,   software  development  and  systems   applications,   data
management, and data analysis.

In addition,  the Company supports naval strategic  programs through its role as
an independent evaluator of the performance of submarine-based strategic missile
systems.  This is  accomplished  through  extensive data  processing,  technical
evaluation,  and  data  analysis  relating  to  sonar,  fire  control,  missile,
launcher, and navigation subsystems.

The Company's performance analysis and support services employees also engage in
communications   testing  and  evaluation  for  mobile  communications   network
exercises.   The   Company's   communications   analysts   assist  in  preparing
presentations  to the  Navy and in  designing  and  implementing  communications
analysis software.

The Company's employees perform various technical support services in connection
with several  Ballistic  Missile Defense  Organization  (BMDO)  projects.  These
include   advanced   technical   support  in  the   design,   development,   and
implementation of space-qualified equipment, systems analysis, and the operation
of a VAX computer-based mission control center for the MSX mission.


CONTRACTS

The Company's  contracts are  generally  one-year in duration,  and many of such
contracts  contain two one-year  extension  options,  with a fixed level of work
authorized  under the contract.  Several of the Company's  larger contracts with
APL have been renewed or  re-awarded to the Company  annually,  and the level of
work  authorized  at the time of  contract  renewal  has  provided  for,  in the
aggregate, the same or a greater level of services.
<PAGE>
The Company  provides  services under three types of contracts.  The majority of
contracts  are on a  time-and-materials  basis,  pursuant  to which the  Company
receives a pre-set fee for all services  provided  under the  contract,  without
regard to the Company's cost of supplying these services, and is reimbursed only
for the cost of materials.  Other  contracts are on a purchase order basis which
operates similar to a time and materials contract,  and on a cost plus fixed fee
basis. Occasionally, the Company experiences delays in contract awards, contract
funding,  and payment,  which the Company  believes is customary under contracts
which involve performance of services for Federal Government agencies.

The Company  monitors  performance  under  existing  contracts  and requests for
proposal (RFPs) for performance  analysis and support services by contractors or
government  agencies.  The Company has received a number of blanket contracts by
responding  to RFPs.  In order to increase the new  contracts,  the Company must
locate skilled programmers and other technical personnel with the qualifications
specified  by the open  requisitions.  The Company  uses  agencies  and internal
resources to locate these personnel. The Company believes that its reputation in
the industry  enables it to attract  qualified  individuals for inclusion in the
Company's proposals.


COMPETITION

The Company's  Government  contracts can be opened to  competitive  bidding upon
their  expiration  at the  discretion  of the  contractor  or  agency.  Although
contracts presently  comprising a substantial  percentage of the Company's sales
have  been  renewed  annually,  these  contracts  may  and  have  been  open  to
competitive  bidding.  There can be no assurance  that these  contracts  will be
awarded to the Company if competitive bidding occurs.

The  Company  encounters  substantial  competition  in  its  procurements.   The
Company's competitors include,  Allied Signal,  Comsys, EISI, Orbital, SAIC, and
Sachs/Freeman  Associates.  The Company has  instituted  policies and procedures
designed  to maintain a low  overhead  to enhance  its  ability to compete  with
respect to new  contracts  and to existing  contracts  that are to be renewed or
extended. During the last three years, the contracts that have been lost through
competitive  bidding or otherwise have not been material to the Company,  either
individually or in the aggregate. During this three-year period, the Company has
received several new contracts as a result of competitive  procurements and also
increases  in the  level of work  authorized  under  contracts  which  have been
renewed or re-awarded to the Company.

The Company has had no success in obtaining  contracts with government  agencies
or contractors other than APL or AT&T. Many of these contracts have been renewed
with the incumbent on a sole source basis,  rather than being competitively bid.
In the case of  contracts  that have been  opened to  competitive  bidding,  the
contract  incumbents  generally  have had  advantages  because  of  their  prior
relationships  with  the  agencies  and the  experience  of their  personnel  in
performing the requested services. In addition,  incumbents or other competitors
often have substantially greater financial and other resources than the Company.


BACKLOG

As of October  31,  1997,  the  Company  had a backlog  of  funding on  existing
contracts for performance  analysis and support services  totaling $2.9 million.
By comparison,  the backlog as of October 31, 1996 was $5.5 million. The Company
estimates  that the entire  $2.9  million of backlog at October 31, 1997 will be
recognized  as sales in fiscal  1998.  Because  of the  delays  inherent  in the
government  contracting  process or possible  changes in defense  priorities  or
spending,  the Company's backlog as of any particular date may not be indicative
of actual sales for any future  period.  Although the Company  believes that its
backlog of funding on existing  contracts is firm, the  possibility  exists that
funding for some  contracts on which the Company is  continuing  to work, in the
expectation of renewal,  may not be authorized (and the Government has the right
to cancel contracts at any time), although to date this has not occurred.


GOVERNMENT REGULATION

In order to maintain  contracts  with  contractors or Government  agencies,  the
Company  must comply with a variety of  regulations  and  Department  of Defense
guidelines,  including  regulations  or  guidelines  covering  security,  record
keeping, and employment practices. The majority of the employees assigned to the
Company's  contracts with  contractors or agencies are required to have security
clearances.  The  Company  historically  has  not  experienced  any 
<PAGE>
significant  difficulty  in obtaining  the necessary  security  clearances.  The
Company's  sales  under  these  contracts  are  subject to audit by the  Defense
Contract Audit Agency (the DCAA).  The DCAA has completed  audits through fiscal
1992, and any adjustments  required as a result of these audits have been minor.
The implementation by the Federal  Government of spending cutbacks,  or a change
in national defense priorities, could reduce the Company's sales.


EMPLOYEES

At January 16, 1998,  the Company and its  subsidiaries  employed a total of 300
persons,  including  three  part-time  employees.  Of these  personnel,  107 are
engaged  principally  in  the  Company's  interactive   communications   systems
operations,  186 are engaged in performance  analysis and support services,  and
seven serve as officers or managers or perform  administrative  services for the
Company and all of its subsidiaries.

The Company  believes that its success will continue to depend,  in part, on its
ability to attract  and  retain  skilled  sales and  marketing,  technical,  and
management  personnel.  Because of the high turnover rate  typically  associated
with sales and marketing personnel, the Company anticipates that it will need to
replace some of the sales and marketing  personnel who do not meet the Company's
performance  expectations.  The  Company  has not  experienced  any  significant
difficulty in hiring qualified technical personnel.  Neither the Company nor any
of its  subsidiaries is a party to a collective  bargaining  agreement,  and the
Company considers its employee relations to be satisfactory.


ITEM 2.  PROPERTIES

The  Company  owns and  occupies a 24,000  square foot  building in  Germantown,
Maryland,  which it uses for its principal executive offices and its interactive
communications  operations center. The Company also leases 22,700 square feet of
office space in Rancho Cordova, California which was the headquarters of Genesis
Electronics,  which was acquired by the Company in 1991,  under a 10 year lease,
and 12,000 square feet in Gaithersburg,  Maryland,  which it uses for production
and warehousing of its interactive  communications  products.  In February 1993,
the  Company  entered  into a sublease  for its  Rancho  Cordova  facility.  The
sublease is for a five-year term and expires in 1998.


ITEM 3.  LEGAL PROCEEDINGS

The  Company  is  subject  to  litigation  from  time to time  arising  from its
operations and receives  occasional  letters  alleging  infringement  of patents
owned by third parties.  Management believes that such litigation and claims are
without  merit and will not have a material  effect on the  Company's  financial
position or results of operations.


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

None.
                                     PART II

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

The information  required by this item is incorporated  herein by reference from
"Price Range of Common Stock" and "Dividend  Policy" on page 31 of the Company's
Annual Report to Shareholders.


ITEM 6.    SELECTED FINANCIAL DATA

The information  required by this item is incorporated  herein by reference from
"Selected Consolidated Financial Data" on page 32 of the Company's Annual Report
to Shareholders.


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

The information  required by this item is incorporated  herein by reference from
pages 28 through 32 of the Company's Annual Report to Shareholders.

<PAGE>
ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

None.


ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated  Financial  Statements of the Company,  including  Consolidated
Statements of Operations  for the years ended October 31, 1995,  1996, and 1997,
Consolidated  Balance  Sheets as of  October  31,  1996 and  1997,  Consolidated
Statements  of Changes in  Stockholders'  Equity for the years ended October 31,
1995, 1996, and 1997,  Consolidated Statements of Cash Flows for the years ended
October 31, 1995, 1996, and 1997 and Notes to Consolidated Financial Statements,
together  with the report  thereon of Price  Waterhouse  LLP dated  December 18,
1997,  are  incorporated  by reference from pages 16 through 27 of the Company's
Annual Report to Shareholders.


ITEM 9.    DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information  concerning  directors and certain executive officers of the Company
under the  caption  "Election  of  Directors"  and the  caption  "Section  16(a)
Disclosure"  is  incorporated  herein  by  reference  from the  Company's  Proxy
Statement to be filed by the Company within 120 days after the end of its fiscal
year.


ITEM 11.   EXECUTIVE COMPENSATION

The   information   under  the  caption   "Executive   Compensation   and  Other
Information", required by this item is incorporated herein by reference from the
Company's  Proxy  Statement to be filed by the Company within 120 days after the
end  of  its  fiscal  year  (excluding   specifically  the  sections   captioned
"Comparative Company Performance" and "Management  Compensation Committee Report
on Executive Compensation").


ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  information  under the caption  "Stock Owned by  Management  and  Principal
Stockholders" required by this item is incorporated herein by reference from the
Company's  Proxy  Statement to be filed by the Company within 120 days after the
end of its fiscal year.


ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information under the caption "Compensation Committee Interlocks and Insider
Participation"  required by this item is  incorporated  herein by reference from
the Company's  Proxy  Statement to be filed by the Company within 120 days after
the end of its fiscal year.


                                     PART IV

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

(a)(1)  Financial Statements

The following  financial  statements  are included on pages 16 through 27 of the
Company's  printed Annual Report to Shareholders and are incorporated  herein by
reference.

         Consolidated Statements of Operations  for the  years ended October 31,
1995, 1996, and 1997
<PAGE>
         Consolidated Balance Sheets as of October 31, 1996 and 1997

         Consolidated  Statements  of  Changes in  Stockholders'  Equity for the
years ended October 31, 1995, 1996, and 1997

         Consolidated  Statements  of Cash Flows for the years ended October 31,
1995, 1996, and 1997

         Notes to Consolidated Financial Statements

         Report of Independent Accountants

(a)(2)  Financial Statement Schedule

Unaudited   supplementary  data  entitled  "Selected  Quarterly  Financial  Data
(unaudited)" is  incorporated  herein by reference in Item 8 (included in "Notes
to Consolidated Financial Statements" as Note 14).

The following  financial  statement  schedule and auditor's report in connection
therewith are attached hereto as pages F-1 and F-2:

F-1          Schedule II          Valuation and Qualifying Accounts and Reserves

F-2          Report of Independent Accountants on Financial Statement Schedule

All other  schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.

(a)(3)  Exhibits


<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                               DESCRIPTION
 
     <S>           <C>
      3.1         Amended and Restated Articles of Incorporation of Registrant, as amended 1/

      3.2         By-laws of Registrant, as amended 1/

      4.1         Specimen Stock Certificate 1/

      10.1        Employment Agreement between the Company and Joe J. Lynn

      10.2        Deferred Compensation Agreement between the Company and Joe J. Lynn 2/

      10.3        Employment Agreement between the Company and Richard A. Thompson

      10.4        Microlog Corporation Medical Reimbursement Plan 3/

      10.5        Microlog Corporation 1989 Non-Employee Director Non-Qualified Stock Option Plan 5/
                                                                                                  -

      10.6        Microlog Corporation 1995 Employee Stock Option Plan 8/

      10.7        Agreements with Farmers & Mechanics National Bank 7/

      10.8        Amendments to Farmers & Mechanics National Bank Agreements

      10.9        Sub-contracting Agreement with Aspect Telecommunications Corporation 4/

      10.10       Sub-contracting Agreement with Applied Physics Laboratory 4/

      10.11       Agreement with Philips Communication Systems B.V.*/ 6/

      13          Annual Report to Shareholders for the fiscal year ended October 31, 1997

      22          Subsidiaries of the Registrant

      24          Consent of Price Waterhouse LLP
</TABLE>

 -------------
*/  Confidential treatment has been granted for portions of this document.

1/  Filed  as an  Exhibit  to  Registration  Statement  on Form  S-1,  File  No.
    33-31710, and incorporated herein by reference.

2/  Filed as an Exhibit to Annual  Report on Form 10-K for the fiscal year ended
    October 31, 1988.

3/  Filed as an Exhibit to Annual  Report on Form 10-K for the fiscal year ended
    October 31, 1991.

4/  Filed as an Exhibit to Annual  Report on Form 10-K for the fiscal year ended
    October 31, 1992.

5/  Filed as an Exhibit to Annual  Report on Form 10-K for the fiscal year ended
    October 31, 1993.

6/  Filed as an Exhibit to Annual  Report on Form 10-K for the fiscal year ended
    October 31, 1994.

7/  Filed as an Exhibit to Annual  Report on Form 10-K for the fiscal year ended
    October 31, 1995.

8/  Filed  as an  Exhibit  to  Registration  Statement  on Form  S-8,  File  No.
    333-07981, and incorporated herein by reference.

     (b)    Reports on Form 8-K

No reports on Form 8-K were filed by the  Company  during the fiscal  year ended
October 31, 1997.

<PAGE>

OTHER MATTERS

For the purposes of complying  with the  amendments to the rules  governing Form
S-8 (effective  July 13, 1990) 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 Form  S-8,  Nos.
33-30965 (filed September 11, 1989) and 33-34094 (filed March 30, 1990):

Insofar as indemnification  for liabilities  arising under the Securities Act of
1933 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  to a  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.

<PAGE>
MICROLOG CORPORATION - CONNECTING PEOPLE TO A WORLD OF INFORMATION(TM)

In today's  competitive  business  environment,  customer  satisfaction is every
company's bottom line. Microlog's interactive  communications solutions give our
clients powerful tools to enhance customer service while maintaining competitive
costs.  Since 1969, we have helped  clients in government  and private  industry
operate more efficiently and profitably.

Microlog  designs and  supports a complete  line of  interactive  communications
systems and applications  for customers  worldwide.  Interactive  communications
defines the myriad of ways users interact with information. Microlog's solutions
take  advantage  of new  technologies  that  provide  information  not  only  by
telephone but also through other media, including facsimile and the Internet.

Microlog's  Intela(TM)  platform is  unparalleled in the industry for supporting
robust features,  enabling rapid application development,  and ensuring reliable
performance.  Intela supports call center  solutions for customers  worldwide as
well as applications for specific industries.  Our Automated Prescription Refill
System (APRS(R)) provides interactive  communications for retail drug chains and
can be adapted to the needs of other  industries.  The  Automated  Collector(TM)
supports the collection  operations of corporations,  government  agencies,  and
service bureaus.

Old Dominion Systems  Incorporated of Maryland (ODSM), a subsidiary of Microlog,
provides  performance  analysis as well as technical and administrative  support
services to prime U.S. government contractors.

The Company holds ISO 9001  certification,  the highest  level of  certification
from  the   International   Organization   for   Standardization,   which   sets
international standards for quality assurance and management.

Microlog   Corporation  is  headquartered  in  Germantown,   Maryland,   outside
Washington,  D.C. Its European  headquarters is in Nuenen,  The  Netherlands.  A
publicly  held  company  since 1986,  Microlog's  stock  trades under the Nasdaq
market, under the symbol MLOG.



<PAGE>
MICROLOG CELEBRATES A BREAKOUT YEAR

For  Microlog,  1997 was a breakout  year in which we  redefined  our  strategy.
Today,  Microlog is a different  company  with a new  perspective  and a broader
focus  than it had just one short  year ago.  We made  breakout  moves in market
penetration,   product   development,   strengthening  and  expanding  strategic
partnerships, and infusing new technology into our products and services.

The year's  financial  performance was the best in the Company's  history,  with
revenues near $32 million, profits at $3.7 million, which includes a tax benefit
of $1.5  million,  and an increase in cash  provided by operating  activities of
$4.9  million.  Our goal for 1997 was to equal or exceed growth rates within our
industry.  I am happy to say that we achieved the latter:  the industry  grew at
approximately 18 percent;  Microlog at 24 percent. In doing so, we have achieved
something that few of our principal competitors have achieved: three consecutive
years of double digit growth.

BREAKOUT PERFORMANCE

The year was marked by breakout opportunities that have made us a different kind
of company.

We made gains in the European market,  which is poised for significant growth in
interactive   communications  solutions.  PTT  Telecom,  a  distributor  of  our
Intela(TM) platform in The Netherlands, developed an Intela-based application to
support  KLM Royal Dutch  Airlines'  frequent  flyer  program.  We believe  this
application has considerable growth potential. Also in The Netherlands, Microlog
is supporting  Xerox  CorporationOs  product service center with an Intela-based
solution that  streamlines  the way Xerox  responds to service  requests.  Sykes
Enterprises,  one of the largest  providers of outsourced call center  services,
selected our Intela system to deploy in each of its European call centers. Other
big  opportunities  are in development  or, on the drawing  board.  The European
market is strong and will get even stronger in 1998.

In North America,  use of interactive  communications  to streamline call center
operations also continues to grow. The U.S. Federal  Government has expanded its
use of this technology to meet its mandate to do more with less. In 1997, Sprint
Communications,   a  company   at  the   forefront   in   providing   integrated
communications  services,  launched an  Intela-based  call center system of over
1,000 lines to provide  higher  value  added  service  levels to its  government
customers. This solution is one of the largest Intela-based systems Microlog has
delivered.

Our commercial business within the U.S. continued to grow in fiscal 1997. Eckerd
Corporation,   which  began  using  our  Automated  Prescription  Refill  System
(APRS(R)) in 1996,  signed a contract to expand its use of APRS to another 1,100
stores. This will bring the total installations to 2,800 retail pharmacies.


<PAGE>

Old Dominion  Systems  Incorporated  of Maryland  (ODSM) enjoyed  another strong
year.  ODSM won a major  contract  renewal  with The  Johns  Hopkins  University
Applied Physics  Laboratory (APL). This award, which was won in competitive bid,
continues  services that ODSM provides to APL in support of the U.S.  Department
of the Navy.  ODSM's  continued  success in winning  contracts  with the Applied
Physics Laboratory provides a solid revenue source for the Company.


BREAKOUT DEVELOPMENT EFFORTS

To  support  our  strategic  business  direction,   Microlog  continued  to  add
enhancements  to its  products  and  develop new  capabilities.  We've added new
functionality to our Intela system,  notably new call center features to support
this key  market  thrust.  These  enhancements  underlie  our  success  with the
European  call  center  opportunities  and the  deployment  of the  Intela-based
solution for Sprint.

A new product release, The Automated Collector(TM),  which supports both inbound
and outbound calls and has wide application within service bureaus,  expands our
support of call center operations.  To support large retail chains, Microlog has
added  enhancements  to our retail  product  line;  among them,  KeyStar(TM),  a
telecommunications  front-end that  interfaces  incoming  telephone lines to our
APRS and  existing  internal  phone  systems.  One of the benefits to the retail
pharmacy is not  requiring  the purchase of a new  telephone  system in order to
integrate with the APRS.

Microlog continues to expand its rich portfolio of patented inventions. In 1997,
we received a patent for "Methods for  Communicating  with a  Telecommunications
Device for the Deaf" (TDD). This  functionality  offers the ability to interface
TDD with  interactive  communications  systems  through  software only,  thereby
eliminating the need for any extra hardware.

We continue to build on our substantial  investment in our internal  information
system infrastructure, which is modernizing the way we handle customer, product,
and accounting information.  The new system is a major step in our commitment to
streamline  the way our  employees  and our business  partners  access and share
information.

In our continuing commitment to invest in our employees, we've hired people with
specific  hard-to-find  skills, and increased training levels for existing staff
to strengthen our expertise in critical  skill areas.  Our expanded sales force,
our greater depth in technical talent, our investigative cutting-edge research &
development team (Skunkworks),  and our combined  marketing/product  development
teams all contributed to our expanded market focus.


LOOKING TOWARD THE FUTURE

All these  accomplishments in fiscal 1997 have positioned  Microlog well for the
future.  We see a primary  strategic  direction for Microlog in 1998 and beyond.
Our vision is for Microlog to become one of the premier companies in the call


<PAGE>

center  industry,  supporting  an  emerging  market  that  plays to our  current
strengths and offers attractive  opportunities  for growth.  With the increasing
globalization of business, companies will need to redesign their call centers to
better  serve   geographically   dispersed   customers   with  diverse   service
requirements. This need calls into play a myriad of technical capabilities which
Microlog  either has or is developing  both  internally  and in concert with our
strategic partners and with companies with capabilities that complement our own.

On a personal note, I want to congratulate Joe Lynn, Chief  Development  Officer
and co-founder of Microlog, on his recent retirement. Joe has been a director of
the Company since its  formation in 1969,  and has been an  inspiration  for our
Company.  We thank Joe for his many creative  solutions and dedication  over the
years.

As we  look  forward,  after  another  year  of  strong  growth,  we  thank  our
shareholders  and our customers for their  confidence and support,  and we thank
our employees,  distributors, and business partners, who are the backbone of our
success.

Together, we will make a bold leap to the future in 1998.



Richard A. Thompson
President and Chief Executive Officer

<PAGE>
THE NEW CALL CENTER
AN ESSENTIAL BUSINESS TOOL

In today's increasingly global, increasingly competitive environment,  companies
are turning to advanced  technology  to help them gain a competitive  edge.  The
call center is becoming a key strategic asset in this environment. Traditionally
a   people-intensive   operation   aimed  primarily  at  dealing  with  customer
complaints, todayOs call center is integral to business operations with focus on
total customer satisfaction.

Advances in technology that support call center  operations are changing the way
call centers serve their  customers.  Automated call  distribution,  interactive
voice response,  and computer  telephony  integration  enable networking smaller
call centers into a single,  seamless  operation and linking  callers to service
representatives  wherever  they  may  be  located.  These  technologies  support
intelligent call routing,  which directs a call to the center and representative
best equipped to respond to the callerOs  needs.  They enable  integration  with
internal systems to share customer information with other business  units sales,
marketing, product development,  finance, right up to top management who use the
information as a strategic planning tool.

Microlog  has  incorporated  these  technologies  into  our  Intela  product  to
penetrate this dynamic  market.  In Europe,  where use of call centers is seeing
significant growth,  Microlog has pursued  opportunities  identified by Microlog
Europe and by European  companies who are distributors of our Intela system.  In
North  America,  call center support is becoming a major thrust of our business,
especially in support of U.S.,  state,  and local  government  clients,  who are
turning to interactive communications to enable them to provide higher levels of
support without increasing personnel.

A number of contracts won in fiscal 1997  demonstrate how Microlog is responding
to the call center opportunity to become a much different company.


MICROLOGOS DUTCH PARTNER
RAISES THE STANDARD FOR QUALITY

Long  recognized  as  one  of  the  world's  preeminent  trading  nations,   The
Netherlands   is   emerging   as  a  standard   bearer  for  its   international
telecommunications service. PTT Telecom, the national telecommunications carrier
of  The   Netherlands,   has  one  of  the  most   advanced   telecommunications
infrastructures  in the world. Its totally digital switching system ensures 99.9
percent network  completion to its customers;  little wonder that PTT Telecom is
leading the way in integrated  voice/data  solutions.  PTT Telecom  offers voice
mail as a standard  feature of its  telephone  service.  The  telecommunications
carrier has created an intranet in The  Netherlands  that  enables  users of its
service to  communicate  by electronic  mail as well. In 1997,  PTT Telecom took
another step


<PAGE>
in integrated voice/data services by becoming a distributor of Microlog's Intela
to provide interactive communications in The Netherlands.

"People  today want access to services and  information  in the most  convenient
way,"  says  Sander  Demarteau,  Product  Manager,  Voice  Support  and  Special
Marketing,   PTT  Telecom.   "Interactive   communications  gives  them  another
convenient  way to access  information.  Our goal is to become the one stop shop
for all our customersO communications needs."

KLM Royal Dutch  Airlines was one of the first  companies in The  Netherlands to
embrace the  technology to enhance its service for members of its frequent flyer
program,  The Flying  Dutchman.  The clubOs 800,000 members  worldwide earn free
travel points when flying on KLM and partner airlines to nearly 400 destinations
around  the globe.  To enhance  service  to club  members,  KLM asked  OgilvyOne
Worldwide,  which  supports its call center  operations,  to provide a quick and
easy way for members to inquire  about  frequent  flyer  miles  earned and other
program benefits.

OgilvyOne  selected PTT Telecom to develop the  application  because the carrier
could  support  members  from  anywhere in the world and because  they liked the
robustness  and  flexibility  of the  Microlog  Intela  platform,  which  easily
integrates with other call center equipment. Using Intela, PTT Telecom developed
an application that enables frequent flyers to call one of six help desks,  each
of which gives responses in a different language,  to inquire about miles earned
in the program. From any touch-tone telephone, members can call the help desk of
choice to learn how many  frequent  flyer miles they have earned,  review recent
flight  histories,  and check on the status of requests for free flight  awards.
Members can use the system to request forms or  brochures.  They can get answers
to questions  like how to report  address  changes or lost  membership  cards by
selecting from a menu of frequently asked questions compiled by the help desks.

While  interactive  communications  have been available in The  Netherlands  for
several years, many people are still reluctant to use the technology, preferring
to speak to a live agent. The KLM application gives members that option.

KLM is introducing  the service  incrementally,  beginning with a group of users
who are  receptive  to using the  service.  The system went live in October 1997
with 10,000 members using the  application.  As KLM learns the benefits of using
interactive  communications,   it  will  promote  the  service  to  its  general
membership.

"As users in The Netherlands become more comfortable with using the telephone as
a business tool, we believe the technology will have broad  application  because
of its ability to provide  faster  response when and where people need it," says
Sander Demarteau. "Intela's openness, programmability,  and ability to interface
with other call center  equipment  gives us an efficient  tool to provide  those
services."


<PAGE>
ICROLOG SUPPORTS SPRINTOS EFFORTS
TO ENHANCE GOVERNMENT SERVICE

Like  commercial  enterprises,  government  agencies are recognizing the need to
provide higher levels of support to their  customers while  maintaining  austere
budget  management.  Increasingly,  agencies  look to  their  telecommunications
service provider to help them attain these higher service levels.

Sprint  Communications  Co., LP, which is one of two Federal  Telecommunications
Services (FTS) 2000 long distance  providers to the Federal  Government,  is now
offering its  government  customers an  interactive  toll free service that will
allow agencies to provide 24- hour automated information to callers in a faster,
more efficient way. The service is designed to  dramatically  reduce users' wait
time and improve agency response to its users.

Sprint selected Microlog to provide the interactive  communications platform for
its FTS 2000  solution.  Based on Sprint's  experience  working with Microlog in
support of the Internal Revenue Service,  Sprint  determined that Microlog could
provide the level of quality and service it sought for this application.

Microlog's Intela system permits callers to use touch-tone  telephone keypads or
speech commands to request  information  from an automated menu. The system will
retrieve  information  from  government  databases  to respond  to the  caller's
requests.  The  service is very cost  effective  for  government  users  because
MicrologOs  interactive  communications  platform  interfaces  directly with the
Sprint  telecommunications  network.  This means that agencies using the service
donOt  have to  install  switching  equipment  on-site  to route  calls and link
databases.

"Interactive communications capabilities are expanding and gaining acceptance in
the marketplace," says Kevin Cullen, Sprint Group Manager of Toll-Free Products.
"Sprint seeks to expand its  interactive  capabilities in a quick and timely way
and we will work with Microlog to accomplish this."

The  enhanced  service  platform  provided  by  Sprint  and  Microlog  will give
government  agencies  the  flexibility  and  reliability  they  require to serve
geographically  dispersed  customers in an efficient and cost-effective way. The
system  enables the  processing of large volumes of  simultaneous  calls without
encountering bottlenecks found in many other systems. Intela's open architecture
enables emerging technologies to be incorporated quickly and easily, keeping the
system robust.  Using Intela,  Sprint can deliver  customized  applications that
meet and exceed their government clients' business needs.

One large  government  agency that provides  information  to more than 3 million
U.S.  citizens  is  conducting  a  trial  of the  interactive  response  system.
Discussions with other Sprint government customers are underway.

"Sprint's interactive  communications  solution is a win-win opportunity for the
government  and its  customers,"  says Don Teague,  Vice  President  and General


<PAGE>
Manager of Sprint's Government Systems Division.  "Callers get immediate answers
to their  frequently asked  questions,  while agencies save real dollars.  We're
pleased to have developed a unique  solution that should have many  applications
throughout the government to improve service and increase efficiency."


XEROX(R) CHOOSES MICROLOG
TO ENHANCE PRODUCT SUPPORT

Xerox   Corporation,   The   Document   Company(R),   offers  a  wide  array  of
document-related  business  solutions,   products,  and  services  to  customers
worldwide.  Xerox is  committed  to  providing  its  customers  with the highest
quality  products and backing those  products with the highest level of service.
XeroxOs goal is to make sure that its products are on the job helping  users run
their businesses.

In The  Netherlands,  Xerox is meeting that commitment by offering its customers
interactive communications to reduce the time required to initiate a request for
service and shorten the response time.

The National Welcome Center,  outside Amsterdam,  supports service requests from
Xerox  product  users in The  Netherlands.  Using the  traditional  call  center
approach,  operators  receive  customer service requests and direct calls to the
appropriate  product  engineer for  resolution.  This  approach to service has a
number of  limitations.  Operators  receive calls in the order in which they are
placed.  This means that a major client with a high service priority may have to
wait in the queue while an operator  responds to a caller with a routine problem
that can be  easily  remedied.  Operators  responding  to the  call  must key in
customer information, product serial number, and problem description, prolonging
the time of the call.

The system built on Microlog's  Intela  platform  alleviates  these  problems by
giving  customers  the option of  by-passing  the Welcome  Center  operator  and
recording  product  problems  directly into the system.  Callers are prompted to
enter the product  serial  number and to select the type of problem  experienced
from a menu of options.  Callers also have the option to use the system's  voice
mail capability to record a more detailed description of the problem. The system
confirms the product serial number,  stores the recorded  message,  and lets the
caller know that a product service engineer will respond.

Using skills selection,  the system pages the appropriate service engineer,  who
calls into the system to hear the  customer's  explanation  of the problem.  The
engineer  can then call the customer to propose a solution or schedule a service
appointment.

An important  feature of the system is its ability to  interface  with the Xerox
mainframe  that  stores  customer  support   records,   such  as  service  level
agreements.  This  enables  effective  call  management  because  the system can
prioritize  calls to ensure that  service  levels are met.  The system  verifies
availability of engineers 


<PAGE>
based on the status code entered into the  database.  If the  principal  support
engineer isn't available,  the system has a priority order to follow to identify
the best person available to respond.

"This is not a one size fits all solution.  Not all  customers  require the same
level of  response,"  says Paul Derksen,  Senior  Support  Specialist,  National
Welcome  Center.  "The system we have built using  Intela lets us respond to our
customers  according to their needs.  Customers  that use our high end products,
for example,  are very knowledgeable  about our products.  When they encounter a
problem  they can't  solve,  they want to be  connected  directly to the service
engineer that supports their products.  Because the Intela system is tied to our
customer   database,   it  recognizes  a  high  priority  call  and  handles  it
accordingly. This is a key element of quality service."

"Microlog is very  flexible and has a high level of knowledge of  implementation
with any mainframe," says Center Manager, Jan-Simon Swagemakers.  "Interfacing a
system with our mainframes is a complex process, often taking weeks or months to
do properly. Microlog built the interface for us in just three days."

Xerox  sees the  product  support  application  as just the  first  step  toward
streamlining  its call center support  operations.  Mr.  Swagemakers  sees other
opportunities  such as automating the placing of orders for copier supplies.  He
believes  that  Microlog's  Intela  system will help them  quickly  achieve that
objective.


SYKES IS TESTING THE LIMITS
OF CALL CENTER TECHNOLOGY

Sykes Enterprises,  Incorporated,  a diverse information technology company with
headquarters in Tampa,  Florida,  provides  outsourcing  services to Fortune 500
companies globally.  The company's mission is to be the best and most innovative
provider of services,  helping its customers be more efficient,  profitable, and
also  providing  their own  customers  with the  highest  quality  products  and
services.

As one of the largest suppliers of outsourced information technology services in
the industry today,  Sykes' goal is to balance people and technology for optimum
productivity and efficiency.  Because its call centers support companies in many
industries, Sykes' operations have to provide a wide range of calling options to
accommodate  varying  client  requirements.  In its call centers in Europe,  the
company  provides  services  in  a  multi-  language,  multi-switching  platform
environment.

To support its European operations,  Sykes reached an agreement with Microlog to
deploy our Intela system in call centers throughout  Europe.  Sykes chose Intela
for its interactive  communications platform because it can support diverse call
center technology and enable rapid development of new applications.


<PAGE>
"Our goal is to integrate all our call centers using a common resource  backbone
that provides  advanced  technology like knowledge  based systems,  self-managed
problem  tracking,  and case  based  reasoning  that  takes a caller  through  a
decision  logic tree to resolve  problems.  The Intela can interface  with these
technologies  to  give  us  that  capability,"  says  Keith  Barr,  Director  of
Information  Technology,  who is  responsible  for  defining  Sykes' call center
strategy for Europe.

Sykes'  European call centers manage calls coming from 22 countries  speaking 13
languages.  The call centers' interactive  communications system must be able to
direct  callers to the  language of choice  either  through  prompts or by using
intelligent  call routing based on the origin of the call.  The Intela  provides
this functionality.

In a multi-country environment,  the system has to integrate with the wide range
of switching platforms used in European countries.  The Intela UNIX platform can
also provide this  functionality.  The flexibility of the UNIX  environment also
enables integration of voice to e-mail and can support voice recognition,  which
lets callers speak their choices rather than using the telephone keyboard, which
also makes the system user friendly.

In the outsourced call center  operation,  the service  provider must be able to
give its  customers  full  reporting  of caller  activity.  Intela  can  support
management  tools like call  monitoring and automated  reporting to provide that
accountability.

"As a provider of outsourced call center support,  we are always  stretching the
limits of technology to provide our customers with the best service and the most
options to support  varying  customer  needs.  The Intela system will help us do
that,"  says  Keith  Barr.   "Europe  is  the  ideal  testing   ground  for  new
technologies. If you can do it here, you can do it anywhere."

WHAT LIES AHEAD

Our Intela system is key to our strategic advance into call center applications.
In 1997,  we added new  features  and  functions  to the  system to enable us to
penetrate more deeply into this growing  market.  To enable easy  integration of
computer and telephone functions,  Intela takes advantage of the latest computer
telephony  integration  (CTI)  technology.  Intelligent  call routing  matches a
caller  with  the  agent  best  equipped  to  respond  to  the  caller's  needs.
IntelaConnect adds a layer of information by tapping into company databases that
contain customer information and passing that information,  along with the call,
to help agents  provide a higher  level of service.  The quality of our products
and our growing reputation within the industry have attracted  companies to join
forces with Microlog to support the demand for cutting edge capabilities in call
center service.

As Internet and intranet  technologies  advance,  more companies are using these
technologies to attain the enhanced customer support they can provide.  This has
led to an expanded  definition of a call center - one that includes  interactive
Web  



<PAGE>

response, e-mail requests, and Web call back requests in addition to intelligent
handling of telephone calls. Diverse technology  integration is not only a trend
but an  opportunity  that plays to  Microlog's  strengths  -  integrating  voice
response,  Web  response,  and  computer  telephony  integration  - in ways that
satisfy customer needs while enhancing corporate efficiency and responsiveness.

As we  increase  our  technical  depth in call  center  technology,  we are also
expanding  call  center  support to more  operations.  To support  call  centers
engaged in  collections,  we have  commercialized  The Automated  Collector,  an
application originally developed for the U.S. Internal Revenue Service to elicit
promises to pay from delinquent tax payers. This robust collections tool enables
call centers that deal with  delinquent  customers to increase  their ability to
collect late payments without increasing support staff. The application supports
both inbound  calls from debtors who want to arrange a payment plan and outbound
calls that remind customers of the delinquent status of their accounts. With The
Automated Collector, businesses can increase productivity,  reduce expenses, and
increase incoming and outgoing call volume--all without additional personnel.

Microlog  believes  that  over the  next  five  years,  call  center  operations
worldwide  should  experience  significant  growth  and will  become  much  more
sophisticated in the way they support customers. Microlog is committed to expand
our services to support  this  market.  In  realizing  this  commitment,  we are
becoming a different kind of company.







<PAGE>
Microlog Corporation

Consolidated Statements of Operations
<TABLE>
<CAPTION>
                                                            Year Ended October 31,

                                                    1995                1996               1997
-------------------------------------------- -----------------  ------------------ -------------------
<S>                                               <C>                <C>                 <C>          
Net sales:
    Products                                      $  9,905,239       $  11,458,643       $  13,970,212
    Services                                        12,480,404          14,248,092          17,797,616
-------------------------------------------- -----------------  ------------------ -------------------
        Total net sales                             22,385,643          25,706,735          31,767,828
-------------------------------------------- -----------------  ------------------ -------------------

Costs and expenses:
    Cost of products                                 4,746,581           5,190,018           7,203,426
    Cost of services                                 8,173,060           9,918,101          12,237,609
    Selling, general and administrative              6,373,764           6,394,407           6,374,468
    Research and development                         1,591,895           2,093,496           3,578,665
-------------------------------------------- -----------------  ------------------ -------------------
        Total costs and expenses                    20,885,300          23,596,022          29,394,168
-------------------------------------------- -----------------  ------------------ -------------------

Income from operations                               1,500,343           2,110,713           2,373,660

Investment income                                       24,078              10,900              29,883
Interest expense                                     (112,244)            (91,786)           (119,165)
Other (expense) income, net                            (5,046)              43,611            (53,279)
-------------------------------------------- -----------------  ------------------ -------------------

Income before income taxes                           1,407,131           2,073,438           2,231,099

Benefit (provision) for income taxes                  (20,000)             639,296           1,500,545
-------------------------------------------- -----------------  ------------------ -------------------

Net income                                        $  1,387,131      $    2,712,734      $    3,731,644
-------------------------------------------- -----------------  ------------------ -------------------

Net income per share                              $       0.34      $         0.59      $         0.82
-------------------------------------------- -----------------  ------------------ -------------------
</TABLE>

See accompanying notes to consolidated financial statements.


<PAGE>
Microlog Corporation

Consolidated Balance Sheets
<TABLE>
<CAPTION>
                                                                      October 31,
                                                                1996                 1997
-----------------------------------------------------------------------------------------------
<S>                                                        <C>              <C>              
ASSETS
Current assets:
   Cash and cash equivalents                               $    1,170,603   $       3,979,452
   Receivables, net                                             4,259,841           3,882,564
   Inventories, net                                             2,218,306           1,920,983
   Deferred tax asset                                             650,000           1,200,000
   Other current assets                                           208,551             422,836
------------------------------------------------------  ----------------- -------------------

   Total current  assets                                        8,507,301          11,405,835
------------------------------------------------------  ----------------- -------------------

Fixed assets, net                                               3,886,371           3,733,994
Licenses, net                                                     409,524             295,238
Deferred tax asset                                                     --             950,000
Other assets                                                      101,788              61,395
Goodwill, net                                                     807,738             608,238
------------------------------------------------------  ----------------- -------------------

   Total assets                                            $   13,712,722    $     17,054,700
------------------------------------------------------  ----------------- -------------------

LIABILITIES AND STOCKHOLERS' EQUITY
Current liabilities:
   Current portion of long-term debt                       $       54,740   $          61,180
   Borrowings under line-of-credit agreement                    1,400,000                  --
   Accounts payable                                               962,715           1,872,200
   Accrued compensation and related expenses                    1,874,691           1,807,709
   Deferred revenue                                               585,220             695,017
   Other accrued expenses                                         485,753             300,152
------------------------------------------------------  ----------------- -------------------

   Total current liabilities                                    5,363,119           4,736,258
------------------------------------------------------  ----------------- -------------------

Long-term debt                                                    202,860             141,680
Deferred officers' compensation                                   267,921             256,255
Other liabilities                                                 112,184              32,635
------------------------------------------------------  ----------------- -------------------

   Total liabilities                                            5,946,084           5,166,828
------------------------------------------------------  ----------------- -------------------

Commitments and contingencies
Stockholders' equity:
   Serial preferred stock, $.01 par value,
      1,000,000 shares authorized, no shares issued
      and outstanding                                                --                   --
   Common stock, $.01 par value, 10,000,000 shares
      authorized, 4,792,004 and 4,872,753 shares 
      issued and 4,190,134 and 4,270,883 outstanding               47,920              48,727
   Capital in excess of par value                              15,904,753          16,293,536
   Treasury stock, at cost, 601,870 shares                    (1,176,537)          (1,176,537)
   Accumulated deficit                                        (7,009,498)          (3,277,854)
------------------------------------------------------  -----------------  -------------------

   Total stockholders' equity                                   7,766,638          11,887,872
------------------------------------------------------  -----------------  ------------------
   Total liabilities and stockholders' equity                 $13,712,722     $    17,054,700
------------------------------------------------------  ----------------- -------------------
</TABLE>

See accompanying notes to consolidated financial statements.



<PAGE>
Microlog Corporation

Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
                                                   Serial                                        
                                                 Preferred Stock           Common Stock   
                                              Shares      Par Value      Shares    Par Value 
----------------------------------------------------------------------------------------------------
<S>                                             <C>         <C>        <C>            <C>         
Balance as of October 31, 1994                   ---          --       4,379,511      $43,795     

  Exercise of common stock options                --          --          25,600          256     

  Release of mandatorily
    redeemable common stock                       --          --         102,857        1,028     

  Net income for the year ended
    October 31, 1995                              --          --              --           --     
---------------------------------------------------------------------------------------------------
Balance as of October 31, 1995                   ---          --       4,507,968       45,079     

  Exercise of common stock options                --          --         219,114        2,192     

  Issuance of common stock in
    conjunction with acquisition of
    Phonatic International B.V.                   --          --          64,922          649     

  Net income for the year ended
    October 31, 1996                              --          --              --           --     
---------------------------------------------------------------------------------------------------
Balance as of October 31, 1996                   ---          --       4,792,004       47,920     

  Exercise of common stock options                --          --          80,749          807     

  Consulting expense funded through
    stock options granted                         --          --              --           --     

  Net income for the year ended
    October 31, 1997                              --          --              --           --     
---------------------------------------------------------------------------------------------------
Balance as of October 31, 1997                   ---          --       4,872,753     $ 48,727     
===================================================================================================
</TABLE>
<PAGE>


<TABLE>
<CAPTION>

                                             Capital in 
                                              Excess of               Treasury Stock
                                              Par Value      Shares          Cost 
--------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>              <C>          <C>               <C>                <C>       
Balance as of October 31, 1994             $14,765,999      601,870      $(1,176,537)      $(11,109,363)      $2,523,894

  Exercise of common stock options              25,373           --                --                 --          25,629

  Release of mandatorily
    redeemable common stock                    223,972           --                --                 --         225,000

  Net income for the year ended
    October 31, 1995                                --           --                --         1,387,131       1,387,131
--------------------------------------------------------------------------------------------------------------------------
Balance as of October 31, 1995              15,015,344      601,870       (1,176,537)        (9,722,232)       4,161,654

  Exercise of common stock options             305,758           --                --                 --         307,950

  Issuance of common stock in
    conjunction with acquisition of
    Phonatic International B.V.                583,651           --                --                 --         584,300

  Net income for the year ended
    October 31, 1996                                --           --                --         2,712,734        2,712,734
--------------------------------------------------------------------------------------------------------------------------
Balance as of October 31, 1996              15,904,753      601,870       (1,176,537)        (7,009,498)       7,766,638

  Exercise of common stock options             188,783           --                --                 --         189,590

  Consulting expense funded through
    stock options granted                      200,000           --                --                 --         200,000

  Net income for the year ended
    October 31, 1997                                --           --                --         3,731,644       3,731,644

Balance as of October 31, 1997            $ 16,293,536      601,870    $  (1,176,537)       $(3,277,854)     $11,887,872
==========================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.


<PAGE>
Microlog Corporation

Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
                                                                    Year Ended October 31,
                                                                1995              1996                   1997
--------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S>                                                         <C>                <C>                 <C>        
     Net income                                             $ 1,387,131        $ 2,712,734         $ 3,731,644
     Adjustments to reconcile net income to net
       cash provided by (used in) operating activities:
         Depreciation                                           474,537            633,182             839,033
         Amortization of goodwill and licensing agreement       184,706            227,742             313,786
         Loss (gain) on disposition of fixed assets               2,869            (55,455)             84,457
         Deferred tax benefit                                        --           (650,000)         (1,500,000)
         Consulting expense funded through stock options
            granted                                                  --                 --             200,000
           Changes in assets and liabilities:
             Receivables                                       (358,586)        (1,198,255)            377,277
             Inventories                                       (554,705)          (781,417)            297,323
             Other assets                                       180,020             32,517            (173,892)
             Accounts payable                                   304,152           (425,407)            909,485
             Accrued compensation and related expenses          469,038           (228,625)            (66,982)
             Deferred officers' compensation                         --             (1,297)            (11,666)
             Deferred revenue                                   204,619           (110,149)            109,797
             Other accrued expenses                            (557,013)          (212,621)           (265,150)
----------------------------------------------------------------------------------------------------------------

     Net cash provided by (used in) operating activities      1,736,768            (57,051)          4,845,112
----------------------------------------------------------------------------------------------------------------

Cash flows from investing activities:
     Purchases of fixed assets                                 (543,159)        (1,318,969)           (777,613)
     Proceeds from sale of fixed assets                           1,150             72,000               6,500
     Purchase of Phonatic International B.V.                         --           (110,635)                 --
----------------------------------------------------------------------------------------------------------------

     Net cash used in investing activities                     (542,009)        (1,357,604)           (771,113)
----------------------------------------------------------------------------------------------------------------

Cash flows from financing activities:
        Reduction in long-term debt                          (1,463,819)           (45,455)            (54,740)
        Net borrowings under line-of-credit agreement                --          1,400,000          (1,400,000)
        Exercise of common stock options                         25,629            307,950             189,590
----------------------------------------------------------------------------------------------------------------

     Net cash (used in) provided by financing activities     (1,438,190)         1,662,495          (1,265,150)
----------------------------------------------------------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents           (243,431)           247,840           2,808,849
Cash and cash equivalents at beginning of year                1,166,194            922,763           1,170,603
----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                    $   922,763        $ 1,170,603         $ 3,979,452
================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.


<PAGE>
Notes to Consolidated Financial Statements

Note 1: Basis of Presentation and Major Customers

The  accompanying  consolidated  financial  statements  include the  accounts of
Microlog  Corporation  and  its  wholly-owned  subsidiaries  (collectively,  the
Company). All intercompany transactions have been eliminated.

Microlog  Corporation  of Maryland,  and  Microlog  Europe,  both  subsidiaries,
design,  assemble,  market,  and service customized voice processing systems and
other communications  products. Old Dominion Systems Incorporated of Maryland, a
subsidiary,  is engaged  in  providing  performance  analysis  of certain  major
weapons  systems and related data processing  support to the Federal  Government
through prime contractors.

A summary of information  about the Company's  operations by business segment is
as follows:
<TABLE>
<CAPTION>
                                                             Year Ended October 31,
                                                     1995          1996                    1997
------------------------------------------------------------------------------------------------
                                                                 (Amounts in thousands)
Net sales:
          <S>                                         <C>              <C>              <C>
          Voice processing systems and other
            communications products                   $14,089          $15,836           $19,277
         Performance analysis and
            support services                            8,297            9,871            12,491
------------------------------------------------------------------------------------------------
         Net sales                                    $22,386          $25,707           $31,768
=================================================================================================
Income from operations:
         Voice processing systems and other
            communications products                       795         $  1,131         $     829
         Performance analysis and
            support services                              705              980             1,545
------------------------------------------------------------------------------------------------
         Income from operations                      $  1,500         $  2,111          $  2,374
=================================================================================================

Identifiable assets:
         Voice processing systems and other
            communications products                   $ 6,383          $10,822           $14,333
         Performance analysis and
            support services                              683              645               600
         Buildings for common use                       2,360            2,246             2,122
------------------------------------------------------------------------------------------------
         Identifiable assets                          $ 9,426          $13,713           $17,055
=================================================================================================

Capital expenditures:
         Voice processing systems and other
            communications products                    $  531           $1,537            $  772
         Performance analysis and
            support services                                2               15                 6
         Buildings for common use                          10               25                 0
------------------------------------------------------------------------------------------------
         Capital expenditures                          $  543           $1,577            $  778
=================================================================================================

Depreciation expense:
         Voice processing systems and other
            communications products                    $  358          $   501            $  704
         Performance analysis and
            support services                                6                8                11
         Buildings for common use                         111              124               124
------------------------------------------------------------------------------------------------
         Depreciation expense                          $  475          $   633            $  839
=================================================================================================
</TABLE>

Approximately  43%,  37% and 31% of the  Company's  consolidated  net  sales for
fiscal 1995, 1996, and 1997, respectively, involved the sale of voice processing
systems and other communications products to the Federal Government.

<PAGE>
Approximately 3%, 10% and 18% of the Company's consolidated net sales for fiscal
1995, 1996, and 1997 respectively, involved the sale of voice processing systems
and  other  communications  products  to  one  customer  in  the  pharmaceutical
industry.

Approximately 6%, 6%, and 9% of the Company's  consolidated net sales for fiscal
1995,  1996,  and  1997,  respectively,  involved  the sale of voice  processing
systems and other communications products to foreign countries.

Approximately  37%,  38%, and 39% of the  Company's  consolidated  net sales for
fiscal 1995, 1996, and 1997,  respectively,  involved  performance  analysis and
support  services  subcontracts  with prime  contractors to the U.S. Navy. These
contracts  have been  extended,  or have options to extend,  to various dates in
fiscal 1998 and 1999.

The Company  extends credit to its customers and billings are made in accordance
with contract terms.


Note 2: Summary of Accounting Policies

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  of the  financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates and assumptions.


Revenue Recognition

Sales of products and services are recognized at the time deliveries are made or
services are performed. When customers,  under terms of specific orders, request
that the Company  manufacture  and invoice  goods on a bill and hold basis,  the
Company recognizes revenue based on the completion of the manufacturing process,
acceptance  by the customer,  and passage of title to the  customer.  For fiscal
1995,  1996,  and  1997,  the  Company   recognized  0,  0,  and  $3.5  million,
respectively,  in sales  under  such bill and hold  agreements.  The  system was
operational at the customers premises in November 1997.

Contract  revenues are  recognized on the  percentage  of  completion  basis for
fixed-price  contracts.  Revenues  are  recorded  to the extent  costs have been
incurred for cost-plus-fixed-fee  contracts, including a percentage of the fixed
fee computed in accordance with the contract  provisions.  Revenues for time and
materials contracts are recognized at negotiated hourly rates as incurred and as
materials  are  delivered.  Provisions  for losses on  contracts in progress are
provided when, in the opinion of management such losses are anticipated. Certain
contracts  are  subject  to  audit,  possible  adjustment,  or  termination  for
convenience  by the Federal  Government.  Contract  costs have been examined and
settled through fiscal 1992.


Cash and Cash Equivalents

The Company  considers all liquid  investments with an original maturity of less
than  three  months to be cash  equivalents.  Cash  equivalents  consist of U.S.
treasury  bills,  certificates  of deposit,  repurchase  agreements,  (which are
collateralized by securities issued or guaranteed by the U.S. Treasury).


Fair Value of Financial Instruments

The carrying amounts of cash, accounts receivable, accounts payable, and accrued
expenses approximate fair value because of the short maturity of these items.

The  carrying  amounts of debt  issued  pursuant  to the  Company's  bank credit
agreements   approximate   fair  value  because  the  interest  rates  on  these
instruments change with market interest rates.


Inventories

Inventories  are  stated  at the  lower  of  cost,  determined  on the  first-in
first-out method, or market.


Fixed Assets

Fixed assets are recorded at cost and depreciated on a  straight-line  basis for
financial reporting purposes and accelerated methods for income tax purposes.
<PAGE>
Intangible Assets

Licenses are recorded at cost and amortized on a straight-line  basis over seven
years.  Accumulated  amortization  at October 31, 1996 and 1997 was $390,476 and
$504,762, respectively.

Goodwill  arising from the  acquisitions  of  companies is being  amortized on a
straight-line  basis over six to seven years. The Company considers  goodwill to
be recoverable  and is evaluated  quarterly based on current  undiscounted  cash
flow projections of each specific acquired business. Accumulated amortization at
October 31, 1996 and 1997 was $682,183 and $881,683, respectively.

Costs incurred in basic research and development  are expensed as incurred.  The
Company  has  determined   that  the  process  of   establishing   technological
feasibility with its new products is completed approximately upon the release of
the  products to its  customers.  Accordingly,  software  development  costs are
expensed as incurred.


Warranty Reserve

Normal  product  warranty for service and repairs is  generally  provided for 90
days to two years, subsequent to delivery. Based on experience,  the Company has
accrued expenses related to warranty obligations.


Stock-based Compensation

The Company  accounts for  stock-based  compensation  using the intrinsic  value
method prescribed in Accounting  Principles Board Option No. 25, "Accounting for
Stock Issued to Employee," (APB No. 25) and related  interpretations.  Under APB
No. 25, compensation cost is measured as the excess, if any, of the market price
of the Company's  stock at the date of the grant over the exercise  price of the
option  granted.  Compensation  cost for stock  options,  if any, is  recognized
ratably  over the vesting  period.  The Company  provides  additional  pro forma
disclosures as required under  Statement of Financial  Accounting  Standards No.
123, "Accounting for Stock-Based Compensation," (SFAS No.123) (Note 10).

Transactions for which  non-employees are issued equity instruments for goods or
services  received are recorded by the Company  based upon the fair value of the
goods or services received or the fair value of the equity  instruments  issued,
whichever is more reliably measured.


Net Income Per Share

Net income per common share is computed by dividing net income for the period by
the weighted  average number of shares  outstanding,  adjusted for the effect of
common stock equivalents  arising from the assumed exercise of stock options, if
dilutive.  The weighted average number of shares outstanding for the years ended
October 31,  1995,  1996,  and 1997 were  4,066,705,  4,566,199  and  4,550,627,
respectively.


Newly Issued Accounting Standards

In February  1997,  the  Financial  Accounting  Standards  Board  (FASB)  issued
Statement of  Financial  Accounting  Standards  (SFAS No.  128),  "Earnings  per
Share",  which  establishes new standards for computing and presenting  earnings
per share  (EPS).  As required by SFAS No. 128,  the Company  will adopt the new
standards in the quarter ending January 31, 1998, the Company's first quarter of
fiscal 1998, and restate all prior periods.  The pro forma basic and diluted EPS
for each of the three  years in the period  ende  October 31, 1997 are set forth
below:


                                         1995       1996        1997
------------------------------------------------------------------------
Basic earnings per share                 $0.36     $0.67        $0.89
------------------------------------------------------------------------
Diluted earnings per share               $0.34     $0.59        $0.82
------------------------------------------------------------------------

In June 1997, the FASB issued SFAS No. 130, "Comprehensive Income." SFAS No. 130
becomes   effective   for  the   Company's   fiscal   year  1999  and   requires
reclassification of earlier financial statements for comparative purposes.  SFAS
No. 130 requires that changes in the amounts of certain items, including foreign
currency  translation  adjustments and gains and losses on certain securities be
shown in the  financial  statements.  SFAS No.  130 does not  require a specific
format for the financial  statement in which  comprehensive  income is reported,
but does  require  that an amount  representing  total  comprehensive  income be
reported in that  statement.  The Company  believes the adoption of SFAS No. 130
will not have a material effect on the consolidated financial statements.

Also in June 1997, the FASB issued SFAS No. 131,  "Disclosures about Segments of
an  Enterprise  and Related  Information."  This  Statement  will change the way
public companies report  information  about segments of their business in annual
financial statements and requires them to report selected segment information in
their quarterly  reports issued to  stockholders.  It also requires  entity-wide
disclosures  about the products and  services an entity  provides,  the material
countries  in  which  it  holds  assets  and  reports  revenues,  and its  major
customers.  The Statement is effective for the Company's  fiscal year 1999.  The
Company believes the adoption of SFAS No. 131 will not have a material effect on
the consolidated financial statements.


<PAGE>
Reclassifications

Certain   reclassifications  have  been  made  to  the  prior  year's  financial
statements in order to conform to the 1997 presentation.


Note 3: Acquisition of Phonatic International B.V.

On June 28,  1996,  the  Company  acquired  Phonatic  International  B.V. of The
Netherlands.  The Company  changed the name of  Phonatic to Microlog  Europe,  a
wholly  owned  subsidiary  of  Microlog  Corporation  of  Maryland.  To  acquire
Phonatic,  the Company acquired assets of $151,513,  issued 64,922 shares of its
common  stock  valued  at  $584,300,  paid  $233,720  in  cash  to the  Phonatic
shareholders,  assumed $107,976 in liabilities,  and incurred  acquisition costs
totaling approximately $46,000.

The acquisition has been accounted for as a purchase and therefore only activity
subsequent to the acquisition  date has been included in  consolidated  results.
The excess of the  purchase  price  over the fair  value of net assets  acquired
totaled $774,483 and has been recorded as goodwill.


Note 4: Receivables

Receivables consist of the following:

                                                     October 31,
                                              1996                    1997
------------------------------------------------------------------------------
Billed accounts receivable               $ 4,339,445               $ 3,969,400
Contract retention                            77,742                    42,997
Accumulated unbilled costs and fees           49,742                    22,353
------------------------------------------------------------------------------
                                           4,466,929                 4,034,750

Less: Allowance for doubtful accounts       (207,088)                 (152,186)
-------------------------------------------------------------------------------
                                         $ 4,259,841               $ 3,882,564
-------------------------------------------------------------------------------


Note 5:  Inventories

Inventories consist of the following:
                                                       October 31,
                                              1996                   1997
-------------------------------------------------------------------------------
Components                               $ 1,259,752              $  1,474,629
Work-in-process and finished goods         1,211,172                   791,576
------------------------------------------------------------------------------
                                           2,470,924                 2,266,205

Less: Reserve for obsolescence              (252,618)                 (345,222)
------------------------------------------------------------------------------
                                         $ 2,218,306              $  1,920,983
------------------------------------------------------------------------------

During fiscal 1996, the Company disposed of obsolete  inventory  relating to the
CINDI and VCS 3500 lines of voice  processing  products  that it had  previously
reserved, resulting in an $800,000 reduction to the reserve for obsolescence.


Note 6: Fixed Assets

Fixed assets consist of the following:
                                                            October 31,
                                                     1996               1997
--------------------------------------------------------------------------------
Building                                         $ 2,511,266      $  2,511,266
Land                                                 520,000           520,000
Office furniture, equipment and capital leases     3,119,150         3,451,382
Vehicles                                              23,642            23,642
Leasehold improvements                               176,096           176,096
-------------------------------------------------------------------------------
                                                   6,350,154         6,682,386

Less:  Accumulated depreciation                   (2,463,783)       (2,948,392)
-------------------------------------------------------------------------------
                                                 $ 3,886,371      $  3,733,994
-------------------------------------------------------------------------------

<PAGE>
Estimated useful lives are as follows:
        Building:                                                      30 years
        Office furniture, equipment and vehicles:                     3-7 years
        Capital leases and leasehold improvements:        Shorter of  estimated
                                                          useful life or lease 
                                                            term

Note 7: Accrued Compensation and Related Expenses

Accrued compensation and related expenses consist of the following:

                                                          October 31,
                                                   1996                 1997
------------------------------------------------------------------------------
Accrued wages                                $   817,992          $   629,919
Accrued vacation and personal leave              558,926              686,198
Other related expenses                           497,773              491,592
-----------------------------------------------------------------------------

                                             $ 1,874,691          $ 1,807,709
------------------------------------------------------------------------------


Note 8:  Debt

In February 1997, the Company renewed its line-of-credit  facility with its bank
which  allows the Company to borrow up to 70% of its eligible  receivables  to a
maximum of  $2,000,000.  The  line-of-credit  bears interest at the bank's prime
rate plus 1.25% (9.75% at October 31, 1997),  and contains a 0.5% commitment fee
on the average unused portion of the line. The line expires on February 28, 1998
and  subjects  the  Company to a number of  restrictive  covenants,  including a
requirement  to maintain a minimum  consolidated  tangible net worth,  a maximum
ratio of total  liabilities to tangible net worth,  and a minimum current ratio.
There are  restrictions on mergers or  acquisitions,  payment of dividends,  and
certain restrictions on additional borrowings. The line is secured by all of the
Company's  tangible  assets.  At October 31, 1997, there was no outstanding debt
against this line-of-credit.

In February  1997, the Company also renewed its  $1,000,000  loan facility.  The
loan facility  bears  interest at the bank's prime rate plus 0.5% (9% at October
31, 1997),  and contains a 0.5% fee on the average  unused  portion of the loan.
The  loan  agreement  expires  on  February  28,  1999,  and  contains  the same
restrictive  covenants  as  the  line-of-credit,  and  the  agreements  for  the
line-of-credit  and loan facility  contain cross  default  provisions.  The loan
agreement  allows the  Company,  at its option,  to make  monthly  interest-only
payments on the outstanding  principal balance,  but all outstanding amounts are
due in full on February 28, 1999.  The loan facility is secured by the Company's
principal  headquarters  building. At October 31, 1997, there was no outstanding
debt against this loan facility.

On June 30,  1996,  the  Company  entered  into a  contract  to  purchase  a new
management  information  system  including  a five year  maintenance  plan.  The
purchase,  including  maintenance,  is being  financed by the vendor over a five
year term at an annual  interest  rate of 8%. The  financing  terms require five
annual  payments of $140,000  each,  including  interest,  beginning on June 30,
1996.  Two annual  payments have been made to date.  The final payment is due on
June 30, 2000.


Note 9: Commitments and Contingencies

Compensation Arrangements

In  February  1988,   the  Company   entered  into   non-contributory   deferred
compensation contracts with three officers,  which concluded on January 1, 1993.
The general  provisions of the contracts called for the Company to make payments
to the employees over ten years  subsequent to their  retirement.  The amount of
such  payments  was based on  $72,000  aggregate  annual  deferred  compensation
(limited  to certain  minimum net income  levels  under the  original  five year
contracts)  plus  interest at prime  rates  through  the  individual  employee's
retirement date. Effective April 30, 1991, one of these individuals retired from
the Company and elected to receive his deferred  compensation  over the ten year
period.  As of  May  1,  1991,  the  Company  ceased  making  contributions  and
accumulating  interest to his deferred  compensation  contract.  The Company has
expensed $0, $9,617, and $25,231, in fiscal 1995, 1996, and 1997, respectively.

The Company is a party to employment agreements, expiring in 1998 and 1999, with
several of its executive officers.  Under certain conditions,  these individuals
will be  entitled  to receive  lump-sum  or  monthly  payments  which  aggregate
approximately   $740,000.   Subsequent  to  December  31,  1997,  one  of  these
individuals   retired  which  reduces  the  Company's   obligation  under  these
agreements (see Note 15).

<PAGE>
Operating Lease Obligations

The Company  has  obtained  the use of certain  facilities  and other  equipment
through  noncancellable  operating leases, which expire in various years through
2000. Minimum future  noncancellable  operating lease payments as of October 31,
1997 are as follows:

      Operating Leases


     Year Ending October 31,           Gross           Sublease          Net
--------------------------------------------------------------------------------
           1998                    $   561,982       $ (185,232)     $  376,750
           1999                        336,125               __         336,125
           2000                        124,748               __         124,748
-------------------------------------------------------------------------------
                                    $1,022,855       $ (185,232)     $  837,623
================================================================================

As of October 31, 1997,  the Company has reserves of $112,000 for the  remaining
net operating  lease  obligation of $440,000  associated with its Rancho Cordova
facility. Rent expense under noncancellable operating lease agreements in fiscal
1995, 1996, and 1997 was approximately $267,000,  $275,000, and $299,000 (net of
sublease income of $278,000, $278,000, and $278,000), respectively.

Legal

As part of the fiscal 1993 settlement of a lawsuit,  the Company issued $225,000
(102,857 shares) of mandatorily redeemable common stock to VMX, Inc. ("VMX"). On
July 26,  1995,  VMX sold all of these shares in the open market and the Company
was released from any future redemption requirements.

The  Company  is  subject  to  litigation  from  time to time  arising  from its
operations and receives  occasional  letters  alleging  infringement  of patents
owned by third parties.  Management believes that such litigation and claims are
without  merit and will not have a material  effect on the  Company's  financial
position or results of operations.


Royalties

As part of the VMX lawsuit  settlement,  the Company is  committed to pay annual
license  maintenance  fees of  $120,000  to VMX under  certain  call  processing
patents,  which expire in 2007. The Company will receive a credit against future
license  maintenance  fees equal to 12% of the purchase  price paid for products
purchased from Rhetorex, a wholly-owned subsidiary of VMX.


Note 10: Stock Option Plans

The Company has two  incentive  stock option  plans.  Under the first plan,  the
Company may grant  options to Directors  and employees to purchase up to 750,000
shares of common  stock at not less than fair market value at the time of grant.
Under the second plan, the Company may grant options to employees to purchase up
to  1,000,000  shares of common  stock at not less than fair market value at the
time of grant. Additional information with respect to the incentive stock option
activity is summarized in the following table:

                                             Number        Weighted Average
                                            of Shares       Exercise Price
-------------------------------------------------------------------------

Shares under option, October 31, 1994         433,750            $1.67
Options granted                               587,167             3.20
Options canceled                              (85,785)            1.69
Options exercised                             (25,600)            1.00
-------------------------------------------------------------------------

Shares under option, October 31, 1995         909,532             2.68
Options granted                               253,875             5.73
Options canceled                             (104,279)            3.25
Options exercised                            (194,114)            1.38
-------------------------------------------------------------------------

Shares under option, October 31, 1996         865,014             3.79
Options granted                               300,000             5.75
Options canceled                              (75,344)            5.09
Options exercised                             (80,749)            2.35
-------------------------------------------------------------------------

Shares under option, October 31, 1997       1,008,921            $4.39
=========================================================================



<PAGE>
Options  granted  under the plans vest at  various  dates  from  immediately  to
ratably  over five years and  expire  ten years from the date of grant.  Certain
options contain possible  accelerated  vesting clauses should specific financial
measures be met. As of October 31, 1997,  options  available  for granting  were
275,450.

Additionally,  the Company maintains a non-employee  Director stock option plan.
Under this plan, the Company may grant up to 125,000 shares at not less than the
fair market value at the time of grant. Additional information is as follows:

                                             Number       Weighted Average
                                            of Shares       Exercise Price
-------------------------------------------------------------------------

Shares under option, October 31, 1994          59,000           $2.68
Options granted                                 2,000            1.38
-------------------------------------------------------------------------

Shares under option, October 31, 1995          61,000            2.64
Options granted                                 6,000            5.50
Options exercised                             (23,000)           1.52
-------------------------------------------------------------------------

Shares under option, October 31, 1996          44,000            3.61
Options granted                                 6,000            5.63
-------------------------------------------------------------------------

Shares under option, October 31, 1997          50,000           $3.85
=========================================================================

Options  granted under the plan vest  immediately  and expire ten years from the
date of grant.  As of October 31, 1997,  options  available  for  granting  were
52,000.

The Company has also issued stock options to non-employee consultants outside of
the above plans.  These shares may be granted at such times and under such terms
as the Board of Directors may determine. Additional information is as follows:

                                             Number        Weighted Average
                                            of Shares         Exercise Price
-------------------------------------------------------------------------

Shares under option, October 31, 1994           3,000            $1.75
Options granted                                45,000             1.22
-------------------------------------------------------------------------

Shares under option, October 31, 1995          48,000             1.25
Options granted                                 5,000             8.38
Options exercised                              (2,000)            2.13
-------------------------------------------------------------------------

Shares under option, October 31, 1996          51,000             1.91
Options granted                               205,000             5.00
Options canceled                              (16,000)            4.10
-------------------------------------------------------------------------

Shares under option, October 31, 1997         240,000            $4.39
=========================================================================



Generally,  options vest upon the  achievement of certain events and expire from
two to five years from the date of grant.

In the third  quarter of fiscal  1997,  the Company  entered  into a  consulting
agreement with The Parthenon Group, Inc.  ("Parthenon"),  a strategic  marketing
and  consulting  organization.  The  Company  has  agreed to grant to  Parthenon
non-statutory  options to purchase up to 195,000  shares of the common  stock of
Microlog at an exercise price of $5 per share. Options to purchase 40,000 shares
became  exercisable  in the  third  quarter  of  fiscal  1997  upon  Parthenon's
commencement  of work.  Future  options will become  exercisable  based upon the
achievement of certain average closing prices of Microlog's  common stock on the
Nasdaq National  Market.  The expense  associated with these options of $300,000
will be  recorded  over the term of the  engagement,  and the  Company  recorded
$200,000 as consulting expense in fiscal 1997.

The Company also has reserved 50,000 shares for issuance  outside these plans as
stock options or stock bonuses to key employees.  These shares may be granted at
such times and under  such terms as the Board of  Directors  may  determine.  No
grants or issuances had been made as of October 31, 1997.

<PAGE>
The following table summarizes  information about all stock options  outstanding
at October 31, 1997:
<TABLE>
<CAPTION>
                                                  Options Outstanding              Options Exercisable
                                                 ---------------------------------------------------------------

                                                     Weighted-
                                                      Average         Weighted-                    Weighted-
                      Range of          Number       Remaining        Average       Number         Average
                    Exercise Price   Outstanding  Contractual Life  Exercise Price Exerciseable  Exercise Price
                    ----------------------------------------------------------------------------------------------
<S>                 <C>     <C>           <C>          <C>           <C>             <C>          <C>   
Incentive Stock 
Option Plans        $1.00 - $1.13         80,612       7.0 years     $  1.03         43,947       $  1.04
                    $1.56 - $1.75        130,834       4.1 years        1.67        130,000          1.67
                    $2.94 - $4.38        300,300       7.9 years        4.33        114,485          4.30
                    $4.69 - $5.75        268,425       8.7 years        5.37        102,125          5.50
                    $6.00 - $6.88        228,750       9.1 years        6.07         12,663          6.05
                    $1.00 - $6.88      1,008,921       7.8 years     $  4.39        403,220       $  3.46
                    ---------------------------------------------------------------------------------------------

Non-Employee
Director Plan
                    $1.38                 14,000       5.7 years     $  1.38          14,000       $  1.38
                    $2.00 - $2.75          6,000       4.7 years        2.50           6,000          2.50
                    $4.75 - $6.75         30,000       4.5 years        5.28          30,000          5.28
                    $1.38 - $6.75         50,000       4.9 years     $  3.85          50,000       $  3.85
                    ---------------------------------------------------------------------------------------------

Non-Employee Plan
                    $1.00                 40,000       7.1 years     $  1.00         20,000       $  1.00
                    $5.00                195,000       4.6 years        5.00         40,000          5.00
                    $8.38                  5,000       3.4 years        8.38
                    $1.00 - $8.38        240,000       5.0 years     $  4.39         60,000       $  3.67
                    --------------------------------------------------------------------------------------------
</TABLE>

The  weighted-average  fair value of options granted during fiscal 1996 and 1997
was $2.89 and $3.43,  respectively.  The fair value of each  significant  option
grant is  estimated  on the date of grant  using the  Black-Scholes  model.  The
following weighted average  assumptions are included in the Company's fair value
calculations:

                                   1996       1997
                                 ------------------
    Expected life (years)          3.3        3.9
    Risk-free interest rate        5.5%       6.2%
    Volatility                    80.0%      78.0%
    Dividend yield                ----       ----

The  Company  continues  to  apply  APB No.  25 in  accounting  for  stock-based
compensation  for the incentive and  non-employee  Director  plans. To date, all
stock options have been issued at market  value;  accordingly,  no  compensation
cost has been  recognized.  Had the Company  determined costs for these plans in
accordance  with SFAS No. 123, the  Company's  pro forma net income and earnings
per share would have been $2,583,620 and $0.57,  respectively in fiscal 1996 and
$3,447,498  and $0.76,  respectively  in fiscal 1997. The SFAS No. 123 method of
accounting  does not apply to options  granted  prior to November  1, 1995,  and
accordingly, the resulting pro forma compensation cost may not be representative
of amounts expected in the future.


<PAGE>
Note 11: Income Taxes

Income taxes are provided  for the tax effects of  transactions  reported in the
financial  statements  and consist of taxes  currently due plus  deferred  taxes
related  primarily  to  differences  between  the basis of fixed and  intangible
assets and revenue  recognition  for  financial  and income tax  reporting.  The
deferred tax assets and  liabilities  represent the future tax  consequences  of
those differences, which will either be taxable or deductible when the assets or
liabilities are recovered or settled.

The (benefit) provision for income taxes in fiscal 1995, 1996, and 1997 consists
of:

                                             Year Ended October 31,
                                        1995        1996               1997
                                     ------------------------------------------
Income taxes payable (refundable)   $  20,000    $    10,704      $       (545)
Change in valuation allowance              --       (650,000)       (1,500,000)
--------------------------------------------------------------------------------
                                    $  20,000      $(639,296)      $(1,500,545)
================================================================================

Income taxes payable (refundable) in fiscal 1995, 1996, and 1997 relate to state
income taxes and the alternative minimum tax for Federal income tax. The Company
recorded a deferred  tax asset of  $650,000  in fiscal  1996 and  $1,500,000  in
fiscal  1997  reflecting  the  benefit  of  approximately  $5.5  million in loss
carryforwards,   which  expire  in  varying   amounts  between  2006  and  2011.
Realization  is  dependent  on  generating  sufficient  taxable  income prior to
expiration  of the loss  carryforwards.  Although  realization  is not  assured,
management  believes  it is more likely  than not that all of the  deferred  tax
asset  will be  realized.  The  amount  of the  deferred  tax  asset  considered
realizable,  however,  could be reduced in the near term if  estimates of future
taxable  income  during the  carryforward  period are  reduced.  The Company has
provided a valuation  allowance for the remaining  $1.6 million of net operating
losses as  management  has  determined  it more likely than not that this amount
will not be realized.

A reconciliation  of the statutory  Federal tax rate to the Company's  effective
tax rate is as follows:

                                                 Year Ended October 31,
                                         1995             1996             1997
                                        ----------------------------------------

Statutory Federal tax rate                 34.0%           34.0%          34.0%
State income taxes, net of

  Federal tax benefit                       5.0             5.0            5.0
Utilization of net operating loss         (42.6)          (40.9)         (43.6)
Goodwill amortization                       4.4             3.0            3.0
Change in valuation allowance              ---            (31.3)         (67.2)
Other                                       0.6            (0.6)           1.5 
--------------------------------------------------------------------------------

                                            1.4%          (30.8)%        (67.3)%
================================================================================


Deferred tax assets are comprised of the following:

                                                         October 31,
                                               1996                      1997
                                       -----------------------------------------
Accounts receivable reserve            $       80,764          $       59,353
Inventory reserves                             98,521                 134,636
Accrued vacation and benefits                 174,244                 182,243
Deferred compensation                         104,489                 109,299
Deferred revenues                             228,236                 271,057
Other                                          71,673                 222,464
Research and development credits              178,000                 293,000
Foreign net operating losses                                           89,168
Loss carryforwards                          3,175,623               2,755,612
-------------------------------------------------------------------------------
Gross deferred tax assets                   4,111,550               4,116,832
Valuation allowance                        (3,461,550)             (1,966,832)
--------------------------------------------------------------------------------
Net deferred tax asset                $       650,000          $    2,150,000
================================================================================

The net change in the valuation allowance for deferred tax assets was a decrease
of  $1,494,718  during the year and relates  primarily  to  utilization  of loss
carryforwards,  the  release of a portion of the  valuation  allowance,  and the
reversal of other temporary differences.

<PAGE>
Approximately  $7.1 million of tax loss  carryforwards  and $293,000 of research
and  development  tax credits can be  utilized by the Company  through  2011 and
2012,  respectively.  If certain  substantial changes in the Company's ownership
should  occur,  there  would  be an  annual  limitation  on  the  amount  of the
carryforwards which can be utilized.


Note 12: Pension and Profit Sharing Plans

The Company has a defined  contribution  pension plan  covering  all  employees.
After the employee completes  one-year of service,  the plan provides for annual
contributions  by the  Company  equal  to 6% of  the  employee's  gross  salary,
excluding bonuses and commissions.  The Company's contributions to the plan vest
after a five-year period. Employees may also make voluntary contributions to the
plan up to a maximum of 10% of their gross salary.  In accordance with the plan,
unvested  amounts  relating  to  terminated  employees  with a break in  service
greater than one year are credited against pension contributions by the Company.
Such  forfeitures  amounted to $111,000,  $111,000,  and $81,000 in fiscal 1995,
1996, and 1997,  respectively.  It is the Company's policy to fund pension costs
accrued.  Net  expense of the plan was  approximately  $365,000,  $365,000,  and
$441,000 in fiscal 1995, 1996, and 1997, respectively.

The Company also  maintains a 401(k)  profit  sharing  plan and trust.  The plan
allows for  employees to contribute up to 10% of gross salary on a pre-tax basis
and 5% of gross  salary  on an  after-tax  basis.  The  Company  matches  50% of
employee  contributions up to 4% of eligible  salary.  Total expense of the plan
was  approximately  $138,000,  $176,000,  and $224,000 in fiscal 1995, 1996, and
1997, respectively.


Note 13: Supplemental Cash Flow Information

The Company paid cash for interest expense and income taxes as follows:

                                                      Year Ended October 31,
                                                 1995        1996        1997
                                                --------------------------------
Interest                                        $112,243    $81,000    $119,165
Income taxes                                    $ 23,234    $20,983    $ 25,000


Non-cash investing and financing activities:

Note issued for purchase of fixed assets                   $257,600

Details of acquisition (Note 3):

Fair value of assets acquired                              $925,996
Liabilities assumed                                         107,976
Common stock issued                                         584,300
----------------------------------------------------------------------

Cash paid                                                   233,720
Less: cash acquired                                         123,085
----------------------------------------------------------------------


Net cash paid for acquisition                              $110,635
======================================================================


As discussed in Note 9, in 1995, the Company was released from its obligation to
repurchase  common stock from VMX,  when all of the 102,857  shares were sold by
VMX in the open market. As a result, the Company's  liability to VMX of $225,000
was credited to stockholders' equity in the consolidated balance sheet.

<PAGE>
Note 14: Selected Quarterly Financial Data (Unaudited)

The following table presents unaudited quarterly operating results and the price
range of common stock for the Company's last eight fiscal quarters.

<TABLE>
<CAPTION>

                                 Jan. 31,         April 30,         July 31,          Oct. 31,
                                   1996              1996             1996              1996
------------------------------------------------------------------------------------------------

<S>                            <C>               <C>              <C>               <C>       
Net sales                      $5,915,273        $6,537,208       $6,565,486        $6,688,768
Gross margin                    2,422,093         2,861,600        2,729,190         2,585,733
Income from operations            496,689           594,614          570,546           448,864
Net income                        465,150           571,133          546,287         1,130,164
   Per share                   $     0.11        $     0.13      $      0.12        $     0.23
------------------------------------------------------------------------------------------------
Stock prices
    High                       $    6.375        $    10.00      $    12.625        $    8.125
    Low                        $    4.125        $     4.50      $     5.000        $    5.250
==============================================================================================
                                 Jan. 31,         April 30,         July 31,          Oct. 31,
                                   1997              1997             1997              1997
----------------------------------------------------------------------------------------------

Net sales                      $7,093,502        $7,239,214      $ 8,842,228        $8,592,884
Gross margin                    3,043,374         2,716,464        3,374,491         3,192,464
Income from operations            606,717           554,299          511,364           701,280
Net income                        668,821           615,517          614,541         1,832,765
   Per share                   $     0.15       $      0.14      $      0.14        $   0.  39
----------------------------------------------------------------------------------------------
Stock prices
      High                     $    7.375       $      6.50     $      5.984       $    8.750
      Low                      $    5.125       $      5.25     $      4.188       $    4.500
===============================================================================================
</TABLE>


Note 15:  Subsequent Events

Subsequent to year end, one of the Company's  executive  officers retired.  As a
result of this  retirement,  the  total  lump-sum  for  monthly  payments  which
individuals are entitled to receive under various  compensation  agreements with
the Company has been reduced to $573,000 (see Note 9).


<PAGE>




                        REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and Stockholders
Microlog Corporation

In our opinion,  the  accompanying  consolidated  balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material  respects,  the financial position of
Microlog  Corporation and its subsidiaries at October 31, 1997 and 1996, and the
results of their  operations and their cash flows for each of the three years in
the period  ended  October 31,  1997,  in  conformity  with  generally  accepted
accounting principles.  These financial statements are the responsibility of the
Company's  management;  our  responsibility  is to  express  an opinion on these
financial  statements  based on our  audits.  We  conducted  our audits of these
statements  in accordance  with  generally  accepted  auditing  standards  which
require that we plan and perform the audit to obtain reasonable  assurance about
whether the financial  statements  are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for the opinion expressed above.




PRICE WATERHOUSE LLP


Falls Church, Virginia
December 18, 1997

<PAGE>

Management's Discussion and Analysis of
Financial Condition and Results of Operations

The following  table sets forth for the fiscal periods  indicated the percentage
of  net  sales   represented  by  certain  items   reflected  in  the  Company's
consolidated  statements of operations and the percentage  change in these items
from the prior fiscal period.
<TABLE>

                                                                                Period-to-Period
                                                                               Percentage Changes
<CAPTION>
                                             Percentage of Net Sales
                                               Year Ended October 31,            1995      1996
                                                                                  to        to
                                             1995        1996          1997      1996      1997
                                             ------------------------------      --------------

Net sales:
 <S>                                        <C>           <C>           <C>      <C>      <C>  
  Voice processing                          62.9%         61.5%         60.7%    12.4%    21.7%
  Performance analysis                      37.1%         38.5%         39.3%    19.0%    26.5%
-----------------------------------------------------------------------------

  Total net sales                          100.0%        100.0%        100.0%    14.8%    23.6%
-----------------------------------------------------------------------------

Costs and expenses:
  Cost of sales                             57.7%         58.8%         61.2%    16.9%    28.7%
  Selling, general and administrative       28.5%         24.9%         20.1%     0.3%    (0.3%)
  Research and development                   7.1%          8.1%         11.3%    31.5%    70.9%
-----------------------------------------------------------------------------

  Total costs and expenses                  93.3%         91.8%         92.6%    13.0%    24.6%
Investment and other income
  (expense), net                            (0.4%)        (0.1%)        (0.4%)  (60.0%)
-----------------------------------------------------------------------------

Income before income taxes                   6.3%          8.1%          7.0%    47.4%     7.6%
-----------------------------------------------------------------------------

Benefit (provision) for income taxes        (0.1%)         2.5%          4.7%
-----------------------------------------------------------------------------

Net income                                   6.2%         10.6%         11.7%    95.6%    37.6%
-----------------------------------------------------------------------------
</TABLE>


Results of Operations

The Company had net income of $3.7 million  ($.82 per share) for the fiscal year
ended October 31, 1997.  These  results  include a $1.5 million ($.33 per share)
income tax  benefit  associated  with the  expected  future  realization  of the
Company's net operating  loss  carryforwards  that  management  believes is more
likely than not to be  realized.  By  comparison,  the Company had net income of
$2.7 million ($.59 per share) for the fiscal year ended October 31, 1996,  which
included a $0.7 million ($.14 per share) income tax benefit  associated with the
expected  future  realization of the Company's net operating loss  carryforwards
and had net income of $1.4  million  ($.34 per share),  which did not include an
income tax benefit,  for the fiscal year ended October 31, 1995. The improvement
in income  before  taxes of $0.2 million in fiscal 1997 was  attributable  to an
increase of $0.6 million in performance  analysis income offset by a decrease of
$0.3 million in voice processing income.


Net Sales

Net sales for fiscal 1997 were $31.8 million,  which  represented an increase of
24% from net sales in fiscal 1996. Net sales for fiscal 1996 were $25.7 million,
which represented an increase of 15% from net sales in fiscal 1995. The increase
in  fiscal  1997,  as well as in  fiscal  1996,  was due to  increases  in voice
processing net sales as well as increases in performance analysis net sales.


Voice Processing Net Sales

The Company's  voice  processing net sales increased 22% in fiscal 1997 to $19.2
million,  compared to $15.8  million in fiscal  1996.  The increase in net sales
during fiscal 1997 included an increase of 22% in voice processing product sales
and an increase of 21% in product  support and services  sales.  The increase in
sales was primarily attributable to an increase in sales to commercial customers
($2.5 million),  of the Company's  Retail Solution  product,  and an increase in
sales to international customers ($1.3 million),  offsetting a decrease in sales
to distributors ($0.5 million).

The Company's  voice  processing net sales increased 12% in fiscal 1996 to $15.8
million,  compared to $14.1  million in fiscal  1995.  The increase in net sales
during fiscal 1996 included an increase of 16% in voice processing product sales
and an increase of 5% in product  support and  services  sales.  The increase in
sales was primarily attributable

<PAGE>
to an increase in sales to commercial customers ($2.2 million), of the Company's
Retail Solution  product,  and an increase in sales to  international  customers
($0.4 million), offsetting a decrease in sales to distributors ($0.9 million).

In 1997, sales to the Company's 10 largest customers  accounted for 90% of voice
processing  sales.  Two of the four  largest  customers  were in the  government
sector while one customer was in the  commercial  sector and one customer was in
the  international  sector. In 1996, sales to the Company's 10 largest customers
accounted for 82% of voice processing  sales. One of the three largest customers
was  in  each  of the  Company's  three  sectors,  government,  commercial,  and
international.  The 10  largest  customers  in 1995  accounted  for 73% of voice
processing  sales.  In 1995,  two of the  three  largest  customers  were in the
government sector.

During  fiscal 1997,  approximately  $9.8 million (51% of voice  processing  net
sales and 31% of consolidated  net sales) were in the government  sector,  which
included  a sale of $3.5  million  on a bill and  hold  basis  requested  by the
customer.  The system was  accepted  and title  passed to the customer in fiscal
1997,  and in  November  1997,  the system  was  operational  at the  customer's
premises.  This compares to $9.6 million (61% of voice  processing net sales and
37% of  consolidated  net sales) for fiscal 1996 and $9.6  million (68% of voice
processing  net  sales and 43% of  consolidated  net  sales)  for  fiscal  1995.
Traditionally the government market has produced strong results for the Company.

Sales  to  commercial  customers  increased  66% to $6.4  million  (33% of voice
processing  net  sales) in  fiscal  1997.  By  comparison,  sales to  commercial
customers  were $3.9 million (24% of voice  processing net sales) in fiscal 1996
and $1.6 million (12% of voice processing net sales) in fiscal 1995.  Commercial
sales  increased in fiscal 1997  primarily  due to the  continuation  of ongoing
business with a large retail  pharmacy  chain as part of a large  procurement of
the Company's  Retail  Solution  product.  The Retail  Solution  product  offers
multiple voice processing  applications designed to improve operations at retail
pharmacies.

Sales to the Company's distributors of voice mail products decreased 70% to $0.2
million (1% of voice processing net sales) in fiscal 1997. By comparison,  sales
to distributors  were $0.7 million (4% of voice  processing net sales) in fiscal
1996 and $1.6 million (12% of voice  processing net sales) in fiscal 1995.  This
decrease in net sales is primarily the result of the Company's decision to focus
its sales and marketing efforts on its interactive voice response products,  and
price decreases in the market for voice mail products.  In 1996 the Company made
the decision to continue  supporting  voice  messaging  functions only within an
integrated  approach  to  interactive  communications  products.  In  1997,  the
stand-alone  CallStar  product was withdrawn from marketing,  but is still being
maintained for existing customers.

International voice processing sales increased 80% to $2.9 million (15% of voice
processing  net sales) in fiscal  1997.  This  compares to $1.6  million (10% of
voice  processing  net  sales)  in  fiscal  1996 and $1.3  million  (9% of voice
processing  net sales) in fiscal 1995. The increase in  international  sales was
primarily due to sales from new third party resellers of the Company's  products
such as Devotech of France and PTT  Telecom of The  Netherlands.  The Company is
continuing to actively pursue  additional third party resellers of the Company's
products.  During fiscal 1996, the Company acquired Phonatic  International B.V.
of The  Netherlands  to strengthen  its presence in the European  voice response
market.  This Microlog subsidiary operates under the name Microlog Europe and is
headquartered in Neunen, The Netherlands.

The  UNIX-based  Intela product has become the Company's  principal  interactive
communications  system,  surpassing the DOS-based VCS 3500.  Intela revenues for
fiscal 1997 were $8.0  million as  compared  to $7.0  million in fiscal 1996 and
$2.0 million in fiscal 1995.  There were no VCS 3500  revenues in fiscal 1997 as
compared to $0.6 million in fiscal 1996 and $5.0 million in fiscal 1995. The VCS
product  continues to be marketed and  supported,  primarily  for APRS trial and
production  applications,  and for  upgrades to support the Year 2000 effort for
existing VCS customers.

As of October 31, 1997,  the Company had a backlog of existing  orders for voice
processing systems totaling $2.9 million.  The backlog,  as of October 31, 1996,
was $4.9 million.  The Company has  experienced  fluctuations  in its backlog at
various times during the past three fiscal years  attributable  primarily to the
seasonality of governmental  purchases.  The Company anticipates that all of the
outstanding  orders at October 31, 1997 will be shipped and the sales recognized
during fiscal 1998.  Although the Company  believes  that its entire  backlog of
orders consists of firm orders,  because of the possibility of customer  changes
in delivery schedules and delays inherent in the government contracting process,
the Company's  backlog as of any particular date may not be indicative of actual
sales for any future period.

<PAGE>
Performance Analysis and Support Services Net Sales

Net sales from performance analysis and support services increased 27% in fiscal
1997 to $12.5  million,  compared to $9.9 million in fiscal  1996.  Net sales of
$9.9 million in fiscal 1996  represented  a 19% increase  over net sales of $8.3
million in fiscal  1995.  These  increases  resulted  from the  addition  of new
contracts,  as well as increases in the level of work authorized  under existing
contracts from the Johns Hopkins  University  Applied Physics  Laboratory (APL),
the Company's principal customer for these services.

The Company  believes  that its  performance  analysis  contracts  are likely to
continue to provide a stable  source of sales for the Company.  The Company does
not anticipate that any changes in defense priorities or spending will result in
any  material  adverse  affect  over the next  fiscal year on its net sales from
performance  analysis  and  support  services  nor alter the  manner in which it
procures  contracts  for such  services.  However,  there is no  assurance  that
changes in defense  priorities or continuing  budget  reductions  will not cause
such an effect during the fiscal year or thereafter.

As of October  31,  1997,  the  Company  had a backlog  of  funding on  existing
contracts for performance  analysis and support services  totaling $2.9 million.
By comparison,  the backlog as of October 31, 1996 was $5.5 million. The Company
estimates  that the entire  $2.9  million of backlog at October 31, 1997 will be
recognized  as sales in fiscal  1998.  Because  of the  delays  inherent  in the
government  contracting  process or possible  changes in defense  priorities  or
spending,  the Company's backlog as of any particular date may not be indicative
of actual sales for any future  period.  Although the Company  believes that its
backlog of funding on existing  contracts is firm, the  possibility  exists that
funding for some  contracts on which the Company is  continuing  to work, in the
expectation of renewal, may not be authorized,  and the Government has the right
to cancel contracts at any time, although to date this has not occurred.


Costs and Expenses

Cost of sales of products  were $7.2  million,  or 52% of net sales of products,
for fiscal 1997; $5.2 million, or 45% of net sales of products, for fiscal 1996;
and $4.7 million, or 48% of net sales of products, for fiscal 1995. The increase
in cost of sales of  products,  as a  percentage  of sales,  for fiscal 1997 was
primarily  attributable  to increased  pricing  pressures  in the  international
sector  resulting in higher costs as a percentage  of sales,  as well as a large
government  contract which yielded  smaller  margins than the Company's  average
margins.  The decrease in cost of sales of products,  as a percentage  of sales,
for fiscal 1996 was primarily  attributable to increased sales of the Intela and
Retail  Solution  products and decreased sales of the CallStar and VCS products,
which had a higher cost of sales.

Cost of sales of services were $12.2  million,  or 69% of net sales of services,
for fiscal 1997; $9.9 million, or 70% of net sales of services, for fiscal 1996;
and $8.2 million, or 65% of net sales of services, for fiscal 1995. The increase
in cost of sales in fiscal 1997 was  primarily  attributable  to the increase in
net sales of  performance  analysis  services.  The increase in cost of sales in
fiscal 1996,  both in dollar amount and as a percentage of sales,  was primarily
attributable  to the  increase in net sales of  performance  analysis  services,
which has a higher cost of sales than voice processing services.

Selling, general and administrative costs were $6.4 million or 20% of net sales,
for fiscal 1997;  $6.4 million,  or 25% of net sales,  for fiscal 1996; and $6.4
million,  or 28% of net sales,  for fiscal 1995. The decrease in fiscal 1997 and
in fiscal 1996, as a percentage of sales, is primarily attributable to increased
sales. The Company anticipates that selling,  general,  and administrative costs
will increase in the next fiscal year as it increases its sales, marketing,  and
administrative staffs to prepare for future growth.

Research and development  expenses reflect costs associated with the development
of  applicable  software  and  product  enhancements  for  the  Company's  voice
processing  systems.  The  Company  believes  that the  process of  establishing
technological  feasibility with its new products is completed approximately upon
release of the products to its customers. Hence, the Company does not anticipate
capitalizing  research and development costs.  Research and development expenses
were $3.6 million,  or 11% of net sales for fiscal 1997; $2.1 million,  or 8% of
net sales for fiscal year 1996; and $1.6 million,  or 7% of net sales for fiscal
1995. Research and development  expenses for fiscal 1997 were focused on Intela,
VCS 3500 and APRS.  The Intela product was enhanced for  International  release,
and the platform had four new productivity  enhancement  applications  designed.
The VCS product was enhanced to include terminal  emulation and support for Year
2000 update. The Company developed the KeyStar product during 1997. KeyStar is a
front-end  integration  hardware module,  software  controlled by the APRS, that
facilitates the  integration of the APRS into existing store systems,  including
many  diverse  telephone  systems,  PBXs,  and key  systems,  without  requiring
potentially  costly upgrades by the store.  The Company's  engineering  staff is
also  engaged in the  development  of special  product  features  for current or
potential customers.

The  Company  has  assessed  the  impact  of the Year 2000 on its  internal  and
external software, and has determined that any modification to the software will
not have a material  impact on the  Company  or its  results  of  operations  or
financial condition.

<PAGE>
Investment and Other Income, Net

The Company had net  investment  and other expenses of $143,000 for fiscal 1997,
as compared to $37,000 for fiscal 1996 and $93,000 for fiscal  1995.  The higher
expense  level in fiscal  1997  resulted  from an $84,000  write off of obsolete
fixed  assets.  The lower  expense  level in fiscal 1996 resulted from a $43,000
gain on the sale of an office  condominium unit.  Without this gain, the Company
would have had a net other expense of $80,000 in fiscal 1996.


Provision for Income Taxes

Income taxes payable  (refundable) of $20,000 in fiscal 1995,  $11,000 in fiscal
1996,  and  $(545)  in  fiscal  1997  relate  to  state  income  taxes,  and the
alternative  minimum tax for Federal income tax. The Company recorded a deferred
tax asset of  $1,500,000  in fiscal 1997 and $650,000 in fiscal 1996  reflecting
the  benefit  of  approximately  $5.5  million in loss  carryforwards.  Although
realization is not assured,  management believes it is more likely than not that
all of the deferred tax asset will be realized.

The  Company  has  exhausted  its  ability to carry  losses  back for income tax
refunds.  Net  operating  loss  and tax  credit  carryforwards  for  income  tax
reporting  purposes of  approximately  $7.1 million and $293,000,  respectively,
will be available to offset taxes  generated  from future taxable income through
2011 and 2012.  Management believes that the future tax benefits associated with
$1.6  million  of net  operating  loss  carryforwards  is less  likely  than not
assured.  Accordingly,  no such  benefit  has been  reflected  in the  Financial
Statements.


Liquidity and Capital Resources

Working  capital as of October  31, 1997 was $6.7  million,  as compared to $3.1
million as of October 31,  1996.  The  increase was  primarily  attributable  to
increases  in cash  and cash  equivalents  of $2.8  million,  an  increase  in a
deferred tax asset of $550,000 and a decrease in short term  borrowings  of $1.4
million, offset by an increase in accounts payable of $909,000.

Accounts receivable as of October 31, 1997 were $3.9 million as compared to $4.3
million  as of October  31,  1996.  The  decrease  in  accounts  receivable  was
primarily  attributable to the Company's continued aggressive collection efforts
in fiscal 1997.

Fixed  assets as of  October  31,  1997 were $3.7  million as  compared  to $3.9
million as of October  31,  1996.  The net  decrease  in fixed  assets  resulted
primarily from the addition of $778,000 of assets,  and depreciation  expense of
$839,000 for fiscal 1997.  Major assets  purchased were  primarily  hardware and
software upgrades to the Company's internal computer network and workstations.

In February 1997, the Company renewed its line-of-credit  facility with its bank
which  allows the Company to borrow up to 70% of its eligible  receivables  to a
maximum of  $2,000,000.  The  line-of-credit  bears interest at the bank's prime
rate plus 1.25% (9.75% at October 31, 1997),  and contains a 0.5% commitment fee
on the average unused portion of the line. The line expires on February 28, 1998
and  subjects  the  Company to a number of  restrictive  covenants,  including a
requirement  to maintain a minimum  consolidated  tangible net worth,  a maximum
ratio of total  liabilities to tangible net worth,  and a minimum current ratio.
There are  restrictions on mergers or  acquisitions,  payment of dividends,  and
certain restrictions on additional borrowings. The line is secured by all of the
Company's  tangible  assets.  At October 31, 1997, there was no outstanding debt
against this line-of-credit.

In February  1997, the Company also renewed its  $1,000,000  loan facility.  The
loan  facility  bears  interest  at the bank's  prime  rate plus 0.5%  (9.00% at
October 31,  1997),  and contains a 0.5%  commitment  fee on the average  unused
portion.  The loan agreement expires on February 28, 1999, and contains the same
restrictive  covenants  as  the  line-of-credit,  and  the  agreements  for  the
line-of-credit  and loan facility  contain cross  default  provisions.  The loan
agreement  allows the  Company,  at its option,  to make  monthly  interest-only
payments on the outstanding  principal balance,  but all outstanding amounts are
due in full on February 28, 1999.  The loan facility is secured by the Company's
principal  headquarters  building. At October 31, 1997, there was no outstanding
debt against this loan facility.

The Company believes that, through conservative  management of its cash and cash
equivalents,  it will not  need  additional  financial  resources  beyond  these
presently  expected to be available  during fiscal 1998. It is the intent of the
Company to pay back all outstanding  amounts on the credit facilities within one
year.

On June 30,  1996,  the  Company  entered  into a  contract  to  purchase  a new
management  information  system  including  a five year  maintenance  plan.  The
purchase,  including  maintenance,  is being  financed by the vendor over a five
year term at an annual  interest  rate of 8%. The  financing  terms require five
annual  payments of $140,000 

<PAGE>
each,  including interest,  beginning on June 30, 1996. Two annual payments have
been made to date. The final payment is due on June 30, 2000.

This  report  contains  "forward-looking  statements"  within the meaning of the
Federal  Securities laws. The Company's business is subject to significant risks
that could cause the Company's results to differ materially from those expressed
in any forward-looking statements made in this report.


Quarterly Results

Note  14 of the  Notes  to  Consolidated  Financial  Statements  of the  Company
contained in this Annual Report presents unaudited  quarterly  operating results
for the Company's  last eight fiscal  quarters.  The Company  believes that this
unaudited  information  contains  all  adjustments,  consisting  only of  normal
recurring  adjustments,  necessary  for a  fair  presentation  of  the  selected
quarterly  information when read in conjunction with the Consolidated  Financial
Statements  and Notes  thereto.  The  operating  results for any quarter are not
necessarily indicative of results for any subsequent period.

The Company was  profitable in all four quarters of fiscal 1997 and fiscal 1996.
The  Company's  quarterly  results  showed  continued  growth in net sales,  net
income,  and net income per common  share.  The quarterly  fluctuations  for the
first three quarters of fiscal 1997 were not  significant.  In each of the three
quarters, the Company's net income was increased by a $100,000 ($0.02 per share)
income tax  benefit  associated  with the  expected  future  realization  of the
Company's net operating  loss  carryforwards  that  management  believes is more
likely than not to be realized,  and in the fourth  quarter,  the  Company's net
income was increased by a $1,200,000  ($0.26 per share) income tax benefit.  The
quarterly  fluctuations  for the first  three  quarters  of fiscal 1996 were not
significant.  In the fourth quarter of fiscal 1996, the Company's net income was
increased by a $650,000 ($0.14 per share) income tax benefit as discussed above.


Price Range of Common Stock

The Common Stock is presently  traded on the  over-the-counter  market under the
symbol MLOG.  As of January 22, 1998,  there were  approximately  263 holders of
record  of the  Common  Stock.  This  number  does not  reflect  the  number  of
individuals  or  institutional  investors  holding stock in nominee name through
banks, brokerage firms, and others.

Note  15 of the  Notes  to  Consolidated  Financial  Statements  of the  Company
contained in this Annual Report sets forth, for the period indicated,  the range
of high and low  transaction  prices for the  Common  Stock as  reported  on the
NASDAQ Market.  In February 1996,  the Company  returned to the Nasdaq  National
Market  System.  The closing  price of the Common  Stock on January 22, 1998 was
$5.875 per share.


Dividend Policy

The  Company  has not  paid  any  dividends  in over 10  years.  Certain  of the
Company's debt agreements  restrict the payment of dividends.  See Note 8 of the
Notes to  Consolidated  Financial  Statements.  The Company does not  anticipate
paying any cash dividends in the foreseeable future.


Newly Issued Accounting Standards

In February  1997,  the  Financial  Accounting  Standards  Board  (FASB)  issued
Statement of  Financial  Accounting  Standards  (SFAS No.  128),  "Earnings  per
Share",  which  establishes new standards for computing and presenting  earnings
per share  (EPS).  As required by SFAS No. 128,  the Company  will adopt the new
standards in the quarter ending January 31, 1998, the Company's first quarter of
fiscal 1998, and restate all prior periods.  The pro forma basic and diluted EPS
for each of the three years in the period  ended  October 31, 1997 are set forth
below:

                                   1995       1996        1997
                                  ----------------------------

Basic earnings per share          $0.36      $0.67       $0.89
Diluted earnings per share        $0.34      $0.59       $0.82

In June 1997, the FASB issued SFAS No. 130, "Comprehensive Income." SFAS No. 130
becomes   effective   for  the   Company's   fiscal   year  1999  and   requires
reclassification of earlier financial statements for comparative purposes.  SFAS
No. 130 requires that changes in the amounts of certain items, including foreign
currency  translation  adjustments and gains and losses on certain securities be
shown in the  financial  statements.  SFAS No.  130 does not  require a specific
format for the financial  statement in which  comprehensive  income is reported,
but does  require  that an amount  representing  total  comprehensive  income be
reported in that  statement.  The Company  believes the adoption of SFAS No. 130
will not have a material effect on the consolidated financial statements.

<PAGE>
Also in June 1997, the FASB issued SFAS No. 131,  "Disclosures about Segments of
an  Enterprise  and Related  Information."  This  Statement  will change the way
public companies report  information  about segments of their business in annual
financial statements and requires them to report selected segment information in
their quarterly  reports issued to  stockholders.  It also requires  entity-wide
disclosures  about the products and  services an entity  provides,  the material
countries  in  which  it  holds  assets  and  reports  revenues,  and its  major
customers.  The Statement is effective for the Company's  fiscal year 1999.  The
Company believes the adoption of SFAS No. 131 will not have a material effect on
the consolidated financial statements.


Selected Consolidated Financial Data

The following selected consolidated financial data should be read in conjunction
with the Company's  Consolidated Financial Statements and Notes thereto and with
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations included elsewhere herein.



INCOME STATEMENT DATA:
<TABLE>
<CAPTION>
                                                                 Year Ended October 31,

                                    1993            1994           1995           1996         1997
--------------------------------------------------------------------------------------------------------
<S>                               <C>           <C>             <C>           <C>           <C>        
Net sales                         $20,798,323   $ 18,668,762    $22,385,643   $25,706,735   $31,767,828
Income (loss) from
  operations                        1,050,934     (4,916,681)     1,500,343     2,110,713     2,373,660

Net income (loss)                     919,779     (4,984,041)     1,387,132     2,712,734     3,731,644

Net income (loss)per common share:$       .23$         (1.29)    $      .34   $       .59    $      .82

                                  
--------------------------------------------------------------------------------------------------------
</TABLE>



BALANCE SHEET DATA:
<TABLE>
<CAPTION>
                                                       October 31,
                              1993           1994        1995         1996          1997
 --------------------------------------------------------------------------------------------

<S>                       <C>           <C>            <C>          <C>           <C>        
Working capital           $ 4,945,780   $  (704,004)   $  748,974   $ 3,144,182   $ 6,669,577
Total assets               13,438,828     9,055,979     9,425,716    13,712,722    17,054,700
Long-term debt, net
  of current maturities     1,659,273        45,456          --         202,860       141,680
Stockholders' equity        7,500,522     2,523,894     4,161,654     7,766,638    11,887,872
---------------------------------------------------------------------------------------------
</TABLE>


1)   Net income for fiscal 1993 includes the tax benefit  related to utilization
     of net operating loss carryforwards.

2)   Net income for fiscal 1996 includes a $650,000 ($0.14 per share) income tax
     benefit  associated with the expected  future  realization of the Company's
     net operating loss  carryforwards  that management  believes is more likely
     than not to be realized. See Note 11 of the Notes to Consolidated Financial
     Statements.

3)   Net income for fiscal 1997  includes a $1,500,000  ($0.33 per share) income
     tax  benefit  associated  with  the  expected  future  realization  of  the
     Company's net operating loss carryforwards that management believes is more
     likely than not to be  realized.  See Note 11 of the Notes to  Consolidated
     Financial Statements.