Exhibit 13
            Annual Report to Shareholders for the fiscal year ended
                                October 31, 1994


To Our Shareholders and Friends:

Fiscal year 1995 was a very exciting and  productive  year for your Company.  We
successfully  accomplished  most of our primary  plan  objectives  for the year.
These  included  paying  off our bank  mortgage  on our  corporate  headquarters
building  from  operating  funds,  meeting  target  revenue  and  profitability,
shipping our new UNIX product Intela,  both  domestically  and  internationally,
introducing  our  first  new  standard  voice  processing  application  into the
commercial  market,  maintaining  high  product  quality  through  our ISO  9001
accreditation, and increasing our performance analysis services revenue.

Financial Performance: The Company generated $1.5 million in operating income on
consolidated  net revenues of $22.4  million.  These are record  results for the
Company.  We aggressively  managed operating costs and inventory to reduce costs
of goods sold to 58% of net  revenues.  Revenue  per voice  processing  employee
averaged approximately $168,000 for the year. With the payoff of our outstanding
mortgage, the Company's balance sheet has been strengthened.  The Company has in
place a $2 million line of credit and is expecting to close on an  additional $1
million loan agreement to provide working capital for the future.

Market Focus:  Government - Our government voice processing  business enjoyed an
excellent year as approximately 65% of voice processing  revenues were generated
from government  customers.  Of particular note was the acceptance by one of our
major  customers,  the  Internal  Revenue  Service,  of  our  new  Intela  voice
processing system. It is Microlog's successful  implementation of the IRS' Voice
Balance Due (VBD)  application which has helped to initiate a completely new way
for the IRS to collect money owed to the government  without  traditional  labor
intensive collection efforts. The IRS plans to introduce this application in its
larger call centers in 1996.  Additionally,  our  government  group  secured the
largest  single  system  order for our Intela  system at the end of fiscal 1995.
This system, which is able to handle over 900 simultaneous  callers,  will allow
taxpayers to check the status of important  tax related  information  associated
with income tax filing over the Internet.

Market  Focus:  Commercial  -  Although  our  planned  transition  to take  full
advantage of commercial voice processing  opportunities continues to take longer
than we  would  like,  our  year-over-year  revenue  from  commercial  customers
increased 64%. Late in fiscal 1995, we introduced our first standard  commercial
"off the  shelf"  application  -  "Retail  Solution".  Initially,  this  product
targeted retail  pharmacies for use with prescription  renewals.  By fiscal year
end, we had installed or had orders for  approximately 200 units, and have since
received our first  significant  order for this product.  We are optimistic that
this market segment, with over 60,000 pharmacies in North America, offers growth
potential  for fiscal 1996 and beyond.  We  anticipate  new  applications  being
introduced in fiscal 1996.

Market Focus:  International - Global demand for voice  processing  applications
continues  to  increase.  During  fiscal  1995,  we  entered  into  distribution
agreements with two new international  partners in the Middle East Alpha Data in
the United Arab Emirates and Gulf  Resources in Kuwait.  By year end, we were in
the final stages of new arrangements with several  additional  partners.  During
the year, our major European OEM partner, Philips Communications Systems B.V. of
The  Netherlands,  introduced  Microlog's  new UNIX  voice  processing  product,
Intela,  in six European  countries.  Philips generated some initial orders from
certain accounts that offer significant  potential for additional  business over
the next few years. In the Asia-Pacific  region,  we installed a 120 line system
at a prestigious customer's site that offers potential for future expansion.

Market Focus:  Performance  Analysis - Despite the reduction in  defense-related
spending,  our Old Dominion Systems  Incorporated of Maryland (ODSM)  subsidiary
continued to perform well,  generating  $8.3 million in revenue,  up $.2 million
from the  prior  year.  During  the  year,  we were  successful  in  adding  new
contracts,  as well as increasing  the level of work  authorized  under existing
contracts,  from the Johns Hopkins  University Applied Physics Laboratory (APL),
the Company's principal customer for performance  analysis services.  Of special
note is ODSM'S award of a  continuation  contract  from APL for a base period of
one year with two one year option  years that is valued at $4.4 million over the
next 3 years.

Quality Focus:  Fiscal 1995 was your Company's  first full year operating  under
the most stringent International Standards Organization (ISO) accreditation, ISO
9001. The ISO processes, with the accompanying procedures that we have in place,
enable us not only to consistently deliver very high quality products,  but also
to accelerate our new product  development  activity.  ISO provides the internal
discipline associated with designing, developing,


                                        1


<PAGE>



manufacturing,  and supporting our voice processing products which, when coupled
with our sound  financial  controls,  enables us to better  manage the  Company.
These controls and disciplines  underscore our commitment to delivering value to
our customers,  shareholders,  and  employees.  We are proud to announce that we
received recertification of ISO 9001 in November 1995.

Future  Directions:  Microlog  turned a corner in fiscal 1995. We now believe we
have the product,  procedures,  organizational  depth,  and commitment to expand
your  Company in the market  segments  where we compete.  Management  is solidly
determined to creating  value for our  customers,  employees,  and  shareholders
alike.

We would like to expressly  thank our dedicated  employees for their loyalty and
commitment to excellence and our sincere  appreciation to our  distributors  and
business  partners.  A special  thank you is extended to our customers for their
continued  commitment  to our Company and products.  Lastly,  we welcome our new
customers, VAR's, and shareholders to the Microlog family.




Richard A. Thompson                                     Joe J. Lynn
President and Chief Operating Officer                   Chief Executive Officer


                                        2


<PAGE>
              Microlog: Building A Strong Foundation for the Future

During 1995 -- a banner year for  Microlog -- we  generated  record  revenues of
$22.4  million,   representing  a  20%  increase  over  1994.  This  performance
demonstrates our ability to grow in line with the voice processing market, which
is also currently  growing at approximately  20% per year. On the  international
front,  we  continued  to expand our global  presence by  recruiting  additional
distribution  partners.  Here at home,  our UNIX-based  Intela voice  processing
systems  helped  increase our  government  business and our new Retail  Solution
product aided our entry into major commercial voice response market segments.

Intela:  UNIX Voice Processing Platform Becomes Flagship Product

Our Intela product is of critical  importance to Microlog's future growth,  both
here and abroad.  For this reason, we devoted  considerable  resources to adding
features  and  functionality  to the  product  in order to further  enhance  its
marketability.

Intela is our Graphical User  Interface  ("GUI") based  interactive  information
response ("IIR") platform designed to run multiple voice processing applications
simultaneously.  It is based on a Pentium  hardware  platform  utilizing  a UNIX
operating  system.   Intela  is  capable  of  supporting  over  1000  voice/data
telecommunication lines or "ports",  meeting even the most demanding call volume
requirements.  Intela also has a non-proprietary open architecture which enables
us to incorporate  emerging  technologies  quickly and to more easily  interface
with  customers'  various   telecommunications  and  networking  equipment.   In
addition,  Intela supports a wide range of international  features including the
localization of user screens and software.

In addition to adding  text-to-speech  ("TTS") and international digital network
protocol support,  we incorporated  multilingual  continuous speech recognition,
enhanced telephone switch support,  support for additional databases, and Analog
Display  Services  Interface  ("ADSI")  support -- a protocol  allowing  our IIR
system to display text on an ADSI screen  phone.  We also added a number of call
center enhancements designed to enable call centers, such as collection agencies
and credit card companies, to effectively manage high call volumes.

With  these   enhancements  in  place,  we  feel  that  the  Intela  product  is
well-positioned  for  strong  performance  in both  domestic  and  international
markets.

Retail Solution:  Major Commercial Market Segment Targeted With New Product Line

During 1995,  we also  dedicated  development  efforts to the "Retail  Solution"
product line,  which was designed and  manufactured  specifically for the retail
pharmacy industry.

The Retail Solution offers multiple voice  processing  applications  designed to
improve operations and increase profits at retail pharmacies. These applications
include the  Automated  Prescription  Refill  System  ("APRS(R)"),  Prescription
Ready, Photo Ready, the ProNouncer(R),  Call Routing, and Voice Messaging. These
Retail Solution  applications  are designed to improve  productivity  and reduce
costs, while increasing sales. All applications run on a single voice processing
platform   capable  of  accommodating   additional   applications  as  they  are
introduced.

In  North  America,   over  60,000  retail  pharmacy   outlets  fill  2  billion
prescriptions annually;  approximately  two-thirds -- or 1.3 billion -- of these
prescriptions are refills. The APRS improves the efficiency and reduces the cost
of the  prescription  refill process for  pharmacies.  Customers can place their
refill  orders 24 hours a day by entering  their  prescription  information  via
telephone.  By using the APRS,  pharmacies  free their  staff to spend more time
consulting with customers, thereby helping to improve customer service and store
loyalty.

Prescription  Ready and Photo Ready help improve  pharmacy  cash flow by placing
reminder  phone  calls to  customers  who have not picked up their  prescription
orders or their  processed  film, and the  ProNouncer(R)  is Microlog's  digital
in-store  automated  announcement  system.  Call  Routing  helps  improve  staff
productivity by answering incoming lines and automatically  directing callers to
the desired store department  while avoiding the need for a human operator.  All
applications in the Retail Solution are available in multiple languages, support
the  Telecommunication  Device for the Deaf  ("TDD")  interface  for the hearing
impaired, and are available separately


                                        3


<PAGE>



or combined into a single system. The Retail Solution is available running under
both DOS and UNIX operating system software.

Our development of the Retail Solution  product line is consistent with plans to
transition our voice  processing  business  increasingly to commercial  markets,
specifically  to  those  markets  that  we  believe  offer   profitable   growth
opportunities.  During  1996,  we  will  continue  to  develop  and  launch  new
applications that focus on commercial market segments with strong potential.

VCS 3500:  Broad Functionality Continues to Help Drive Sales

The VCS 3500 Interactive  Voice Response  ("IVR") platform  continued to perform
well in 1995.  Historically  a strong IVR product,  especially in the government
sector,  the VCS 3500 was  significantly  enhanced with an eye toward  expansion
into the commercial  sector.  In fact, a number of the basic systems  underlying
the Retail Solution were based on VCS 3500 functionality.

We won several  significant  VCS 3500  contracts in 1995,  including an $800,000
order  to  upgrade   sixty-five  VCS  3500  systems  at  U.S.   Immigration  and
Naturalization Service (INS) offices around the country. These systems drive the
INS "Ask  Immigration"  hotline,  enabling  callers to gain access to  bilingual
immigration  information  24 hours a day,  seven  days a week.  Today,  Microlog
systems  handle over seven million calls annually and 90% of the callers get the
information they need through the "Ask Immigration" system,  without the need of
a human operator.

Microlog also patented two new VCS 3500 features in 1995:  the Language  Switch,
which makes it  possible to run up to 24  different  languages,  including  TDD,
concurrently on a system and Release Line Trunking ("RLT"),  which, for example,
makes it possible for a single operator to serve several remote sites.

CallStar:  New Markets Opened Abroad

CallStar is our full featured voice mail/automated  attendant product.  CallStar
remains a  reliable  and  affordable  voice  processing  product.  As demand for
traditional voice mail products in developing nations increased, we were able to
expand CallStar's presence abroad, particularly in the Far East.

International Business Significantly Increased

In 1995, international revenues grew by more than 45%. We attribute this success
to the quality of our international distribution partners and to the flexibility
of our voice  processing  solutions.  Throughout  the year, we focused on adding
international   functionality  to  our  voice   processing   solutions  --  from
text-to-speech  in multiple  languages,  to support of international  Integrated
Services Digital Network ("ISDN") protocols.

In 1994, we were proud to announce the signing of Philips Communications Systems
B.V. of The Netherlands to a non-exclusive OEM distribution  agreement to market
and support the Intela  product line, in a number of European and  Asian-Pacific
markets.

During 1995, we continued to identify other high-quality  international partners
to distribute our voice processing solutions.

1996 and Beyond

One  goal for 1996 is to  expand  our  international  markets  and to offer  new
application  solutions  to  commercial  and  government  sectors.  To  aid  this
expansion, we intend to continue to add additional international global features
for the  Intela  product,  as well as  adding  support  for  Computer  Telephone
Integration  ("CTI"),   additional  database  support,   Internet,  and  network
management capabilities.


                                        4


<PAGE>

MICROLOG SUBSIDIARY

Old Dominion Systems Incorporated of Maryland

Providing Professional Business Services For Nearly 25 Years

Microlog provides defense-oriented technical support and administrative services
to U.S. Government prime contractors through its subsidiary Old Dominion Systems
Incorporated  of Maryland  (ODSM).  ODSM is  instrumental in the development and
evaluation of submarine-based strategic missile systems, undersea sonar systems,
mobile communications  networks, and space-qualified systems associated with the
Ballistic Missile Defense Organization.

Old Dominion  Systems  Incorporated  of Maryland  increased  its revenue to $8.3
million,  up  from  $8.1  million  in  1994.  ODSM's   comprehensive   technical
capabilities  include software  development life cycle support,  data management
support,  systems  engineering  and  integration,  computer  operations and user
support, and information  management services for both government and commercial
organizations.

                                        5


<PAGE>

<TABLE>
<CAPTION>

Microlog Corporation

Consolidated Statements of Operations

                                                                           Year Ended October 31,
---------------------------------------------------------------------------------------------------------------------
                                                                1993                1994                1995
---------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>                <C>                  <C>         
Net sales:
    Products                                               $10,848,391        $  7,856,759         $  9,905,239
    Services                                                 9,949,932          10,812,003           12,480,404
---------------------------------------------------------------------------------------------------------------------
        Total net sales                                     20,798,323          18,668,762           22,385,643
---------------------------------------------------------------------------------------------------------------------

Costs and expenses:
    Cost of products                                         4,387,830           5,760,284            4,746,581
    Cost of services                                         7,715,575           8,625,581            8,173,060
    Selling, general and administrative                      6,132,231           7,005,470            6,373,764
    Research and development                                 1,511,753           1,643,850            1,591,895
    Restructuring costs                                             --             550,258                   --
---------------------------------------------------------------------------------------------------------------------

        Total costs and expenses                            19,747,389          23,585,443           20,885,300
---------------------------------------------------------------------------------------------------------------------

Income (loss) from operations                                1,050,934          (4,916,681)           1,500,343

Investment income                                               65,135              38,244               24,078
Interest expense                                              (143,943)           (137,416)            (112,244)
Other  (expense) income, net                                   (15,092)             55,046               (5,046)
---------------------------------------------------------------------------------------------------------------------

Income (loss) before income taxes
    and extraordinary item                                      957,034         (4,960,807)           1,407,131

Provision for income taxes                                      470,255             23,234               20,000
---------------------------------------------------------------------------------------------------------------------

Income (loss) before extraordinary item                         486,779         (4,984,041)           1,387,131

Extraordinary item - tax benefit from
    utilization of net operating
    loss carryforward                                           433,000                 --                  --
---------------------------------------------------------------------------------------------------------------------

Net income (loss)                                            $  919,779        $(4,984,041)         $ 1,387,131
---------------------------------------------------------------------------------------------------------------------

Per common share:
   Primary:
      Income (loss) before extraordinary item                $     0.12        $     (1.29)         $      0.34
      Extraordinary item                                           0.11                --                   --
---------------------------------------------------------------------------------------------------------------------
Net income (loss)                                            $     0.23        $     (1.29)         $      0.34
---------------------------------------------------------------------------------------------------------------------

   Fully diluted:
      Income (loss) before extraordinary item                $     0.12        $     (1.29)         $      0.34
      Extraordinary item                                           0.10                --                   --
---------------------------------------------------------------------------------------------------------------------
Net income (loss)                                            $     0.22        $     (1.29)         $      0.34
---------------------------------------------------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.
</TABLE>


                                                       6


<PAGE>


<TABLE>
<CAPTION>

Microlog Corporation

Consolidated Balance Sheets
                                                                                          October 31,
-----------------------------------------------------------------------------------------------------------------
                                                                                1994                     1995
-----------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>                     <C>         
Assets
Current assets:
   Cash and cash equivalents                                                $ 1,166,194             $    922,763
   Receivables                                                                2,617,337                2,948,538
   Receivable from related party                                                 70,237                   97,622
   Inventories                                                                  882,184                1,436,889
   Other current assets                                                         157,590                  110,365
------------------------------------------------------------------------------------------------------------------

   Total current  assets                                                      4,893,542                5,516,177

Fixed assets, net                                                             2,941,925                3,006,528
Licenses, net                                                                   638,095                  523,810
Other assets                                                                    365,286                  232,491
Goodwill, net                                                                   217,131                  146,710
------------------------------------------------------------------------------------------------------------------

   Total assets                                                             $ 9,055,979             $  9,425,716
------------------------------------------------------------------------------------------------------------------

Liabilities and Stockholders' Equity
Current liabilities:
   Current portion of long-term debt                                        $ 1,463,818             $     45,455
   Accounts payable                                                           1,083,970                1,388,122
   Accrued compensation and related expenses                                  1,634,278                2,103,316
   Other accrued expenses                                                     1,415,480                1,230,310
------------------------------------------------------------------------------------------------------------------

   Total current liabilities                                                  5,597,546                4,767,203

Long-term debt                                                                   45,456                       --
Deferred officers' compensation                                                 269,218                  269,218
Other liabilities                                                               394,865                  227,641
------------------------------------------------------------------------------------------------------------------

   Total liabilities                                                          6,307,085                5,264,062
------------------------------------------------------------------------------------------------------------------

Mandatorily redeemable common stock,
   102,857 shares issued, redeemable at $2.1875 per share                       225,000                       --
------------------------------------------------------------------------------------------------------------------

Commitments and contingencies

Stockholders' equity:
   Serial preferred stock, $.01 par value,
      1,000,000 shares authorized, no shares issued                                  --                       --
   Common stock, $.01 par value, 10,000,000 shares
      authorized, 4,379,511 and 4,507,968 shares issued                          43,795                   45,079
   Capital in excess of par value                                            14,765,999               15,015,344
   Treasury stock, at cost, 601,870 shares                                   (1,176,537)              (1,176,537)
   Accumulated deficit                                                      (11,109,363)              (9,722,232)
------------------------------------------------------------------------------------------------------------------

   Total stockholders' equity                                                 2,523,894                4,161,654
------------------------------------------------------------------------------------------------------------------
   Total liabilities and stockholders' equity                               $ 9,055,979             $  9,425,716
------------------------------------------------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.
</TABLE>




                                        7



<PAGE>


<TABLE>
<CAPTION>

Microlog Corporation

Consolidated Statements of Changes in Stockholders' Equity



                                          Serial        Common Stock      Capital In  Treasury Stock
                                      Preferred Stock                      Excess of                       Accumulated
                                    Shares  Par Value  Shares   Par Value  Par Value   Shares    Cost       Deficit        Total
-----------------------------------------------------------------------------------------------------------------------------------

<S>                   <C> <C>                        <C>        <C>      <C>          <C>       <C>         <C>          <C>       
Balance as of October 31, 1992        --       --    4,338,699  $43,387  $14,715,192  301,870   $(520,287)  $(7,045,101) $7,193,191

  Settlement of Genesis Electronics
    Corporation acquisition escrow    --       --           --       --           --  300,000    (656,250)          --     (656,250)

  Issuance of common stock            --       --       33,962      339       43,463       --          --           --      43 ,802

  Net income for the year ended
    October 31, 1993                  --       --           --       --           --       --          --       919,779     919,779
-----------------------------------------------------------------------------------------------------------------------------------

Balance as of October 31, 1993        --       --    4,372,661   43,726   14,758,655  601,870  (1,176,537)   (6,125,322)  7,500,522

  Issuance of common stock            --       --        6,850       69        7,344       --          --            --       7,413

  Net loss for the year ended
    October 31, 1994                  --       --           --       --           --       --          --    (4,984,041) (4,984,041)
-----------------------------------------------------------------------------------------------------------------------------------

Balance as of October 31, 1994        --       --    4,379,511   43,795   14,765,999  601,870  (1,176,537)  (11,109,363)  2,523,894

  Issuance of common stock            --       --       25,600      256       25,373       --          --            --      25,629

  Release of mandatorily
    redeemable common stock           --       --      102,857    1,028      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        --       --    4,507,968  $45,079  $15,015,344  601,870 $(1,176,537)  $(9,722,232) $4,161,654
-----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>




                                                              8


<PAGE>
<TABLE>
<CAPTION>

Microlog Corporation

Consolidated Statements of Cash Flows

                                                                         Year Ended October 31,
                                                            1993                    1994                1995
--------------------------------------------------------------------------------------------------------------
<S>                                                         <C>                <C>                  <C>       
Cash flows from operating activities:
     Net income (loss)                                      $   919,779        $(4,984,041)         $1,387,131
     Adjustments to reconcile net income (loss)
       to net cash provided by (used in) operating activities:
         Depreciation                                         1,128,656            879,046             474,537
         Deferred officers' compensation                         33,000             18,000                  --
         Amortization of goodwill and licensing agreement       271,364            274,713             184,706
         Loss on disposition of fixed assets                     19,653             18,544               2,869
         Changes in assets and liabilities:
             Receivables                                       (637,520)         1,433,393            (358,586)
             Inventories                                        304,595          1,042,768            (554,705)
             Other current assets                                19,927            (78,595)             47,225
             Accounts payable                                     6,842            307,894             304,152
             Accrued compensation and related expenses          287,338             43,751             469,038
             Other accrued expenses                          (1,254,806)           729,378            (352,394)
---------------------------------------------------------------------------------------------------------------
     Net cash provided by (used in) operating activities      1,098,828           (315,149)          1,603,973
----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
     Purchases of fixed assets                                 (630,954)          (487,103)           (543,159)
     Proceeds from sale of fixed assets                           3,000             65,638               1,150
     Sale or maturity of investments                            604,550                 --                  --
     Purchase of licenses                                      (275,000)                --                  --
     Other assets                                                (7,592)          (212,155)            132,795
--------------------------------------------------------------------------------------------------------------
     Net cash used in investing activities                     (305,996)          (633,620)           (409,214)
---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
     Issuance of common stock                                    29,490              7,413              25,629
     Reduction of long-term debt                               (411,530)          (505,244)         (1,463,819)
---------------------------------------------------------------------------------------------------------------
     Net cash used in financing activities                     (382,040)          (497,831)         (1,438,190)
----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents            410,792         (1,446,600)           (243,431)
Cash and cash equivalents at beginning of year                2,202,002          2,612,794           1,166,194
----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                    $ 2,612,794        $ 1,166,194          $  922,763
================================================================================================================

See accompanying notes to consolidated financial statements.
</TABLE>

                                                       9





<PAGE>


Microlog Corporation

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, a subsidiary, designs, assembles, markets, and
services 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,
----------------------------------------------------------------------------------------------------------
                                                                 1993            1994               1995
----------------------------------------------------------------------------------------------------------
                                                                           (Amounts in thousands)

<S>                                                             <C>              <C>               <C>    
Net sales:
         Voice processing systems and other
            communications products                             $13,337          $10,574           $14,089
         Performance analysis and
            support services                                      7,461            8,095             8,297
----------------------------------------------------------------------------------------------------------
         Net sales                                              $20,798          $18,669           $22,386
----------------------------------------------------------------------------------------------------------
Income (loss) from operations:
         Voice processing systems and other
            communications products                             $   536          $(5,363)          $   795
         Performance analysis and
            support services                                        515              446               705
----------------------------------------------------------------------------------------------------------
         Income (loss) from operations                          $ 1,051          $(4,917)          $ 1,500
----------------------------------------------------------------------------------------------------------
Identifiable assets:
         Voice processing systems and other
            communications products                             $ 8,838          $ 4,968           $ 6,383
         Performance analysis and
            support services                                      2,203            1,785               683
         Buildings for common use                                 2,398            2,303             2,360
----------------------------------------------------------------------------------------------------------
         Identifiable assets                                    $13,439          $ 9,056           $ 9,426
----------------------------------------------------------------------------------------------------------
</TABLE>


                                                       10



<PAGE>


<TABLE>
<CAPTION>

                                                                             Year Ended October 31,
----------------------------------------------------------------------------------------------------------
                                                                   1993             1994              1995
----------------------------------------------------------------------------------------------------------
                                                                           (Amounts in thousands)

<S>                                                              <C>                <C>               <C> 
Capital expenditures:
         Voice processing systems and other
            communications products                              $  621             $459              $531
         Performance analysis and
            support services                                          1               13                 2
         Buildings for common use                                     9               15                10
----------------------------------------------------------------------------------------------------------
         Capital expenditures                                    $  631             $487              $543
----------------------------------------------------------------------------------------------------------
Depreciation expense:
         Voice processing systems and other
            communications products                              $  917             $781              $358
         Performance analysis and
            support services                                          4                5                 6
         Buildings for common use                                   208               93               111
----------------------------------------------------------------------------------------------------------
         Depreciation expense                                    $1,129             $879              $475
----------------------------------------------------------------------------------------------------------
</TABLE>


Approximately  36%,  32%, and 38% of the  Company's  consolidated  net sales for
fiscal 1993, 1994, and 1995, respectively, involved the sale of voice processing
systems and other communications products to the Federal Government.

Approximately 6%, 4%, and 6% of the Company's  consolidated net sales for fiscal
1993,  1994,  and 1995,  respectively,  involved the export of voice  processing
systems and other communications products to foreign countries.

Approximately  36%,  43%, and 37% of the  Company's  consolidated  net sales for
fiscal 1993, 1994, and 1995,  respectively,  involved  performance  analysis and
support  services  subcontracts  with prime  contractors to the U.S. Navy. These
contracts have been extended to various dates in fiscal 1996, 1997, and 1998.

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

Note 2: Summary of Accounting Policies

Revenue Recognition

Sales of products and services are recognized at the time deliveries are made or
services are performed.

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 and possible  adjustment by the Federal
Government. Contract costs have been examined and settled through fiscal 1992.

Cash Equivalents and Investments

The Company  considers all liquid  investments with an original maturity of less
than three  months to be cash  equivalents.  Cash  equivalents  and  investments
consist of U.S. treasury bills, certificates of deposit,  repurchase agreements,
(which  are  collateralized  by  securities  issued  or  guaranteed  by the U.S.
Treasury),  and municipal bonds, at cost, which approximates market. The Company
has not experienced any losses on its investments.



                                       11




<PAGE>

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.

Intangible Assets

Licenses are recorded at cost and  amortized on a  straight-line  basis over the
expected benefit periods.  Accumulated amortization at October 31, 1994 and 1995
was $161,905 and $276,190, respectively.

Goodwill  arising  from  the  purchase  described  in Note 3 is  amortized  on a
straight-line basis over seven years.

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.

Net Income (Loss) Per Share

Net income (loss) per common share is computed by dividing net income (loss) 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.   Primary  weighted  average  number  of  shares
outstanding for the years ended October 31, 1993, 1994, and 1995 were 4,065,000,
3,877,029 and 4,066,705,  respectively. Fully diluted weighted average number of
shares  outstanding  for the years ended October 31, 1993,  1994,  and 1995 were
4,116,000, 3,877,029, and 4,066,705, respectively.


Note 3:  Acquisition of Genesis Electronics Corporation

On November 29,  1990,  the Company  acquired  Genesis  Electronics  Corporation
(Genesis),  a voice mail provider for small to medium sized businesses,  located
in Rancho Cordova,  California.  Pursuant to the merger  agreement,  the Company
issued  675,000 shares of its common stock valued at  approximately  $1,477,000,
paid  $500,000 in cash to the Genesis  shareholders,  and  incurred  transaction
costs  totaling  $450,000.  Of the merger  consideration,  $250,000  and 300,000
shares of common stock were deposited into an escrow account to satisfy possible
purchase price  reductions and contract  indemnities.  The shares held in escrow
were  considered  to be  outstanding  shares for  financial  reporting  purposes
through March 15, 1993. On March 16, 1993, the Company reached an agreement with
shareholders  of  Genesis  to  settle  certain  price  reductions  and  contract
indemnities.  Under the settlement agreement, the $250,000 of cash (plus accrued
interest) was released from escrow to the Genesis  shareholders  and the Company
received back the 300,000  shares of Microlog  stock.  The Company  recorded the
300,000  shares as treasury  stock at a cost of  $656,250,  reduced  goodwill by
$484,930, and reduced an outstanding indemnity receivable by $171,320.

The acquisition has been accounted for as a purchase. The excess of the purchase
price over the fair value of net assets acquired totaled $715,000,  as adjusted.
This  amount is being  amortized  on a  straight-line  basis over  seven  years.
Accumulated  amortization  as of October  31,  1994 and 1995 was  $498,315,  and
$568,736, respectively.




                                       12




<PAGE>


Note 4: Receivables

Receivables consist of the following:


                                                            October 31,
                                                        1994          1995
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

Customer accounts receivable                       $ 2,552,228      $ 2,996,413
Contract retention                                      71,306           78,742
Accumulated unbilled costs and fees                    226,884           40,594
-------------------------------------------------------------------------------
                                                     2,850,418        3,115,749
Less: Allowance for doubtful accounts                 (233,081)        (167,211)
-------------------------------------------------------------------------------
                                                   $ 2,617,337      $ 2,948,538
-------------------------------------------------------------------------------

Note 5:  Inventories

Inventories consist of the following:


                                           October 31,
------------------------------------------------------------
                                      1994          1995
------------------------------------------------------------
Components and finished goods    $ 1,726,615    $ 1,999,192
Work-in-process                      300,263        492,312
------------------------------------------------------------
                                   2,026,878      2,491,504
Less: Reserve for obsolescence    (1,144,694)    (1,054,615)
------------------------------------------------------------
                                 $   882,184    $ 1,436,889
------------------------------------------------------------

During the third  quarter of fiscal 1994,  the Company  adjusted its reserve for
obsolete  inventory by  approximately  $1.1  million.  The Company  discontinued
manufacturing  the CINDI line of voice processing  products in January 1992. The
demand for  replacement  parts has declined more rapidly than expected,  and the
Company believes such demand will continue to decline.  As a result, the Company
reserved  $375,000 for the CINDI product line. In addition,  the introduction of
the Company's VCS Intela  product in March 1994 and the switch from 386 CPU's to
486/Pentium  CPU's in the Company's voice processing  products made it necessary
to reserve  $762,000 for its VCS 3500  product line to reflect  inventory at the
lower of cost or market.

Note 6: Fixed Assets

Fixed assets consist of the following:


                                                          October 31,
----------------------------------------------------------------------------
                                                     1994           1995
----------------------------------------------------------------------------
Buildings                                        $ 2,523,100    $ 2,532,567
Land                                                 520,000        520,000
Office furniture, equipment and capital leases     3,229,416      3,621,890
Vehicles                                              34,772         23,642
Leasehold improvements                                52,702        211,021
----------------------------------------------------------------------------
                                                   6,359,990      6,909,120
Less:  Accumulated depreciation                   (3,418,065)    (3,902,592)
----------------------------------------------------------------------------
                                                 $ 2,941,925    $ 3,006,528
----------------------------------------------------------------------------

Estimated useful lives are as follows:

    Buildings                                                     30-40 years
    Office furniture, equipment and vehicles                        3-7 years
    Capital leases and leasehold improvements            Shorter of estimated
                                                    useful life or lease term


Depreciation  expense during fiscal 1993,  1994, and 1995 includes capital lease
amortization of approximately $100,000, $52,000, and $0, respectively.


                                       13

<PAGE>



Note 7: Accrued Expenses


Accrued expenses consist of the following:

                                                    October 31,
-------------------------------------------------------------------
                                                 1994        1995
-------------------------------------------------------------------
Accrued restructuring costs                 $  345,936   $  184,615
Accrued warranty and deferred maintenance      490,750      695,369
Other                                          578,794      350,326
-------------------------------------------------------------------
                                            $1,415,480   $1,230,310
-------------------------------------------------------------------

Note 8:  Debt

In December 1995, the Company  entered into a new line of credit facility with a
bank. The Company can 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% and contains a 1/2 of 1% commitment  fee on the average  unused portion of
the line and a loan origination fee of $10,000.  The line of credit subjects the
Company  to a number  of  restrictive  covenants,  including  a  requirement  to
maintain a minimum consolidated tangible net worth, a ratio of total liabilities
to tangible net worth, and a current ratio.  There are restrictions on merger or
acquisitions,  payment of  dividends,  and certain  restrictions  on  additional
borrowings.

The Company is currently  negotiating a loan agreement with the same bank for an
additional  $1,000,000 for working capital. The agreement will be secured by the
Company's building and will bear interest at the bank's prime rate plus 0.5% and
contains  a 0.5% fee on the  average  unused  portion  of the  loan.  This  loan
agreement will contain the same restrictive  covenants as the $2 million line of
credit.

From July 1, 1993 through  December 13, 1995,  the Company had no line of credit
facility.  From January 1, 1992 through June 30, 1993, the Company  maintained a
$1,000,000  revolving  credit  facility,  bearing  interest  at prime,  with any
borrowed  amounts  collateralized  by depository  accounts held by the bank. The
Company could borrow up to 95% of the  collateralized  balance.  No amounts were
drawn on this credit facility.

On October 31, 1995,  the Company paid the remaining  balance of $839,000 of its
mortgage loan,  which had an interest rate at the bank's prime rate plus two and
one half  percent,  on its  Corporate  Headquarters.  The Company was in default
under its mortgage loan  covenants  and received  waivers from its bank of these
covenants  through  October 31, 1995.  In  connection  with these  waivers,  the
maturity  date of the  loan  was  accelerated  by  agreement  with  the  bank to
September 30, 1994. The bank subsequently  extended the due date of the mortgage
until  December 31, 1994,  in return for which the Company paid an extension fee
of 1% of the mortgage note balance at September 30, 1994 and $50,000 payments on
October 15, 1994, November 15, 1994, and December 15, 1994. The Company obtained
an  additional  extension  of the due date of the  mortgage  note until June 30,
1995. This extension  required the Company to pay additional  principal payments
of $37,500 per month from February 1995 through June 1995. The Company  obtained
an  additional  extension of the due date of the mortgage note until October 31,
1995.  This  extension  required  the  Company to pay an  additional  $40,000 of
principal at closing plus a $20,000  principal  payment on October 15, 1995. The
remaining balance of $839,000 was paid on October 31, 1995.

Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                        October 31,
---------------------------------------------------------------------------------------------
                                                                 1994                 1995
---------------------------------------------------------------------------------------------
<S>                                                          <C>                  <C>     
Note payable secured by building                             $1,282,000           $     --
Term note, non-interest bearing, due in quarterly
  installments of $45,455 through January 1996 (Note 10)        227,274              45,455
----------------------------------------------------------------------------------------------
                                                              1,509,274              45,455
Less:  Current portion                                       (1,463,818)            (45,455)
----------------------------------------------------------------------------------------------
Long-term debt                                               $   45,456           $      --
---------------------------------------------------------------------------------------------
</TABLE>

                                       14


<PAGE>

Note 9: Restructuring of Operations

During the third quarter of both fiscal 1992 and 1994, the Company  restructured
and  consolidated  its voice  processing  operations and incurred  restructuring
charges of $1,280,000 and $550,258, respectively.  Approximately $980,000 of the
restructuring  charge in fiscal 1992 related to leased  facilities which were in
excess  of  the  Company's  needs.  The  fiscal  1994   restructuring   included
approximately  $224,000  for  the  severance  costs  of  23  employees,  $62,000
associated  with the closing of a sales  office,  $165,000  associated  with the
remaining  expense of a  consulting  contract  with the  Company's  former chief
executive  officer,  and $99,000  associated  with fixed assets.  At October 31,
1995,  the  Company  had  accrued  current  liabilities  and  other  liabilities
associated  with the  1992 and 1994  restructurings  of  $168,000  and  $70,000,
respectively.

The  following  table sets forth the  Company's  restructuring  reserves for the
years ended October 31, 1993, 1994 and 1995.

<TABLE>
<CAPTION>

                                                                Restructuring Reserves
                                                                ----------------------
                                        Employee        Asset
                                       Separations     Writedowns   Facilities     Other            Total
-------------------------------------------------------------------------------------------------------------
<S>                                      <C>            <C>          <C>         <C>              <C>       
Total 1992 restructuring
      of operations loss                 $300,000       $100,000     $820,000     $ 60,000        $1,280,000
Cash payments                            (249,231)            --     (521,838)     (60,000)         (831,069)
Non-cash items                                 --       (100,000)          --           --          (100,000)
-------------------------------------------------------------------------------------------------------------
Reserve balance, October 31, 1993          50,769             --      298,162           --           348,931
Total 1994 restructuring
      of operations loss                  223,987         98,908       62,493      164,870           550,258
Cash payments                            (185,717)            --     (110,522)     (22,482)         (318,721)
Non-cash items                                 --        (67,702)          --           --           (67,702)
-------------------------------------------------------------------------------------------------------------
Reserve balance, October 31, 1994          89,039         31,206      250,133      142,388           512,766
Cash payments                            $(89,039)            --      (75,244)     (89,929)         (254,212)
Non-cash items                                 --        (20,804)          --           --           (20,804)
-------------------------------------------------------------------------------------------------------------
Reserve balance, October 31, 1995              --       $ 10,402     $174,889     $ 52,459        $  237,750
-------------------------------------------------------------------------------------------------------------
</TABLE>

Note 10: 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 $31,000, $545, and $0, in fiscal 1993, 1994, and 1995, respectively.

In addition to the existing deferred compensation contracts,  the Company has an
executive  deferred  bonus plan which permits the Company,  at the discretion of
the Board of Directors,  to make deferred bonus awards to key employees based on
their performance,  not to exceed 15 percent of the participant's  compensation,
plus interest at the prime interest rate.  Amounts  awarded become vested at the
end of the fourth  fiscal year  following  the award.  The Company has  expensed
$2,000,  $773 and $0, of  interest  expense  in  fiscal  1993,  1994,  and 1995,
respectively,  for these bonuses.  No bonuses were granted in fiscal 1993, 1994,
or 1995.


                                       15




<PAGE>

The Company is a party to employment agreements, expiring in 1996 and 1998, with
several of its executive officers.  Under certain conditions,  these individuals
will be  entitled  to  receive  lump sum or  monthly  payments  which  aggregate
approximately $1,060,000.

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
1999. Minimum future  noncancellable  operating lease payments as of October 31,
1995 are as follows:

                                                           Operating Leases
         -----------------------------------------------------------------------
         Year Ending October 31,     Gross            Sublease           Net
         -----------------------------------------------------------------------
              1996               $   552,951         $(277,848)     $   275,103
              1997                   552,547          (277,848)         274,699
              1998                   546,637          (180,600)         366,037
              1999                   323,798                --          323,798
         ----------------------------------------------------------------------
                                  $1,975,933         $(736,296)      $1,239,637
         =======================================================================

As of October 31, 1995,  the Company has reserves of $342,000 for the  remaining
net operating  lease  obligation of $698,000  associated with its Rancho Cordova
facility. Rent expense under noncancellable operating lease agreements in fiscal
1993, 1994, and 1995 was approximately $223,000,  $225,000, and $267,000 (net of
sublease income of $97,000, $278,000, and $278,000), respectively.

Legal

Microlog and its  subsidiaries,  Microlog  Corporation of Maryland,  and Genesis
Electronics  Corporation,  were  sued  in  February  1991 in the  United  States
District  Court for the  Northern  District of Texas by VMX,  Inc.,  ("VMX") and
Dytel Corporation  ("Dytel").  The lawsuit alleged  nonpayment of royalties owed
under a license  granted by VMX to Genesis  with  respect to certain  voice mail
technology  and  infringement  by all three  defendant  corporations  of certain
patents  involving call processing  technology held by VMX and/or Dytel. VMX and
Dytel were seeking an accounting of royalties  allegedly  owed under the Genesis
agreement and were seeking an injunction  and an accounting  with respect to the
alleged infringement of the call processing technology patents.

On May 24, 1993, Microlog and its subsidiaries reached a settlement with VMX and
Dytel.  Under the terms of the  settlement,  the  litigation  was dismissed with
prejudice and the products of Microlog's  subsidiaries,  Microlog Corporation of
Maryland,  and Genesis Electronics  Corporation,  are fully licensed under VMX's
and Dytel's voice mail and automatic call processing  patents.  Microlog and its
subsidiaries  paid VMX $275,000 upon execution of the  settlement  documents and
issued to VMX  $225,000 of  Microlog  common  stock  (102,857  shares)  which is
subject to  redemption as discussed in Note 11.  Additionally,  Microlog and its
subsidiaries will pay to VMX $500,000 in eleven quarterly  installments starting
on July 31, 1993. As of October 31, 1995,  ten  installments  had been made. One
final payment of $45,455 is due in January 1996.

Of the settlement amount,  $444,704 was attributed to the receipt by Microlog of
Maryland  and  Genesis  of a fully paid voice mail  license,  and  $555,296  was
attributed to a license under VMX and Dytel automatic call  processing  patents.
Microlog's  subsidiaries  also  will  pay  annual  license  maintenance  fees of
$120,000 to VMX under the call processing  patents,  with the patent expiring in
2007.  Microlog of Maryland  and Genesis 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. The Company recorded
the new  licenses at a cost of $800,000 and is  amortizing  the costs over seven
years (See Note 16).

The Company is subject to other  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.


                                       16




<PAGE>

Note 11: Mandatorily Redeemable Common Stock

In accordance  with the  settlement  discussed in Note 10, the Company issued to
VMX 102,857  shares of Microlog  common stock with a market value at the date of
issuance of  $225,000.  Under  certain  conditions,  the Company was required to
repurchase  any such  shares held by VMX at April 30, 1996 at a price of $2.1875
per share.  On July 26,  1995,  VMX sold all of these shares in the open market,
releasing the Company from its obligation to purchase these shares.

Note 12: 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,  which was  adopted by the Board of  Directors  in 1995,
subject to shareholder  approval,  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:


<TABLE>
<CAPTION>

                                               Number                           Option Amount
                                            of Shares                  Per Share             Total
----------------------------------------------------------------------------------------------------
<S>                                          <C>                   <C>                  <C>        
Shares under option, October 31, 1992         458,500              $1.00-5.00           $   750,125
Options granted                               144,800               1.00-3.75               413,300
Options canceled                              (73,790)              1.00-2.75              (132,085)
Options exercised                             (21,910)              1.00-1.50               (29,490)
----------------------------------------------------------------------------------------------------
Shares under option, October 31, 1993         507,600               1.00-5.00             1,001,850
Options granted                                36,750               1.00-2.38                39,938
Options canceled                             (103,750)              1.00-5.00              (308,494)
Options exercised                              (6,850)              1.00-2.25                (7,413)
----------------------------------------------------------------------------------------------------
Shares under option, October 31, 1994         433,750               1.00-5.00               725,881
Options granted                               587,167               1.00-4.38             1,877,943
Options canceled                              (85,785)              1.00-2.38              (144,648)
Options exercised                             (25,600)              1.00-1.13               (25,629)
----------------------------------------------------------------------------------------------------
Shares under option, October 31, 1995         909,532              $1.00-5.00           $ 2,433,547
----------------------------------------------------------------------------------------------------
</TABLE>

Options  granted  under the plans vest at  various  dates  from  immediately  to
ratably over five years. As of October 31, 1995,  options available for granting
were 498,958,  and granted  options for  purchasing  318,650  shares,  at prices
ranging from $1.00 to $5.00 per share, were exercisable.

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, 1995.

Additionally,  the Company maintains a non-employee  director stock option plan.
Under this plan, which was amended in December 1995, the Company may grant up to
125,000  shares,  subject  to  shareholder  approval,  at not less than the fair
market value at the time of grant.  Options are fully exercisable upon granting.
Non-statutory options for 61,000 shares have been granted with an exercise price
of $1.375 to $6.75. As of October 31, 1995,  options available for granting were
14,000.

The Company has also issued stock options to non-employee consultants outside of
the above  plans.  Options for 48,000  shares have been granted with an exercise
price of $1.00 to $2.9375.  Options  granted  vest  immediately  to ratably over
three  years.  Compensation  expense  associated  with  these  options  was  not
material.

                                       17

<PAGE>

Note 13: Income Taxes

On November 1, 1993,  the Company  adopted  Statement  of  Financial  Accounting
Standards No. 109 (FAS109), Accounting for Income Taxes. The adoption of FAS 109
changes the Company's  method of  accounting  for income taxes from the deferred
method  (APB 11) to an asset and  liability  approach.  Previously,  the Company
deferred the past tax effects of timing differences  between financial reporting
and taxable income. The asset and liability approach requires the recognition of
deferred tax liabilities and assets for the expected future tax  consequences of
temporary  differences  between the carrying amounts and the tax bases of assets
and liabilities.  There was no material  cumulative  effect from the adoption of
FAS 109.


The provision for income taxes in fiscal 1993, 1994, and 1995 consists of:


                                                      Year Ended October 31,
-------------------------------------------------------------------------------
                                                   1993       1994       1995
-------------------------------------------------------------------------------
Income taxes payable                            $ 37,255   $ 23,234   $ 20,000
Deferred income taxes                               --         --         --
Tax effect of net operating loss carryforward    433,000       --         --
-------------------------------------------------------------------------------
                                                $470,255   $ 23,234   $ 20,000
-------------------------------------------------------------------------------

Microlog and its subsidiaries file a consolidated Federal income tax return. The
provision for income taxes  recorded in fiscal 1993 contains a charge in lieu of
Federal and state income taxes that would be required to be paid had the Company
not been able to utilize its net operating loss  carryforwards.  The tax benefit
for fiscal 1993 of $433,000 ($.11 per share)  resulting from such utilization is
shown as an extraordinary item in the consolidated statement of operations.

Income  taxes  payable in fiscal 1993 and 1994  related to state  income  taxes.
Income  taxes  payable  in  fiscal  1995  relate to state  income  taxes and the
alternative minimum tax for Federal income tax.

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

                                          Year Ended October 31,
                                          1993    1994     1995
-----------------------------------------------------------------
Statutory Federal tax rate (benefit)     34.0%  (34.0%)   34.0%
State income taxes, net of
  Federal tax benefit                     5.7    (5.0)     5.0
Benefit not recorded due to
  net carryforward position                --    36.0       --
Utilization of net operating loss          --      --    (42.6)
Goodwill amortization                     7.6     3.2      4.4
Other                                     1.8      .3       .6
-----------------------------------------------------------------
                                         49.1%    0.5%     1.4%
-----------------------------------------------------------------


                                       18


<PAGE>



Deferred tax (liabilities) assets are comprised of the following:





                                            October 31,
                                       1994           1995
--------------------------------------------------------------
Inventory                        $    (9,364    $      --
--------------------------------------------------------------
Gross deferred tax liabilities        (9,364)          --
Accounts receivable reserve           90,902         65,212
Inventory reserves                   488,363        360,257
Accrued vacation and benefits        131,967        175,148
Warranty reserves                     20,573         52,553
Restructuring reserves               288,914        160,781
Deferred compensation                109,638        104,995
Deferred revenues                    170,820         95,444
Sales returns                         45,047         21,304
Other                                118,221        145,606
Loss carryforwards                 4,005,061      3,750,602
--------------------------------------------------------------
Gross deferred tax assets          5,469,506      4,931,902
Valuation allowance               (5,460,142)    (4,931,902)
--------------------------------------------------------------
Net deferred income taxes        $     --       $      --
--------------------------------------------------------------

The net change in the valuation allowance for deferred tax assets was a decrease
of  $528,240  during  the year and  relates  primarily  to  utilization  of loss
carryforwards, as well as reversal of other temporary differences.

Approximately  $9.6 million of tax loss  carryforwards  and $156,000 of research
and  development  tax credits can be  utilized by the Company  through  2008 and
2007,  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 14: Related Party Transactions

During  fiscal 1993,  1994,  and 1995,  the Company  sold  products and services
aggregating  $1,799,924,  $426,725,  and  $110,986,  respectively,  to  American
Computer and  Electronics  Corporation  (American  Computer),  of which a former
member  of the  Company's  Board  of  Directors  is an  executive  officer.  The
Company's former Chief Executive Officer, who is a member of the Company's Board
of Directors, was a member of American Computer's Board of Directors. At October
31, 1995, $97,622 was due from this related party.

Note 15: Pension and Profit Sharing Plans

The  parent  and its  subsidiaries  have 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  annual earnings,  excluding  bonuses and commissions.  The Company's
contributions  to the plan vest  after a  five-year  period.  Effective  for the
period  September 1, 1991 through July 31, 1993, the Board of Directors  reduced
the contribution rate to 1% of each employee's annual earnings for all companies
except Old Dominion  Systems  Incorporated of Maryland.  Employees may also make
voluntary  contributions  to the plan up to a  maximum  of 10% of  their  annual
earnings.  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 $115,000,
$115,000, and $111,000 in fiscal 1993, 1994, and 1995,  respectively.  It is the
Company's  policy to fund  pension  cost  accrued.  Net  expense of the plan was
approximately  $199,000,  $331,000, and $365,000 in fiscal 1993, 1994, and 1995,
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.  The  Company
matches 50% of employee contributions not exceeding 4% of eligible


                                       19




<PAGE>



salary. Effective for the period September 1, 1991 through January 31, 1993, the
matching  contributions  were  suspended for all  companies  except Old Dominion
Systems  Incorporated of Maryland.  Total expense of the plan was  approximately
$67,000, $145,000, and $138,000 in fiscal 1993, 1994, and 1995, respectively.

Note 16: Supplemental Cash Flow Information

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

                    Year Ended October 31,
---------------------------------------------
                 1993       1994       1995
---------------------------------------------
Interest       $123,100   $137,400   $112,243
Income taxes   $ 40,800   $ 31,500   $ 23,234

During fiscal 1993,  the Company issued 12,052 shares of Common Stock as payment
for deferred officers'  compensation  totaling $14,312. No shares were issued in
fiscal 1994 or 1995.

As discussed in Note 10, in 1993, the Company purchased patent licenses from VMX
and Dytel in conjunction with the settlement of related litigation as follows:

Cash paid                    $ 275,000
New term note payable          500,000
Common stock issued            225,000
Existing VMX license           125,000
Existing term note payable    (161,759)
Accrued royalties             (163,241)
---------------------------------------
Licenses acquired            $ 800,000
---------------------------------------

As discussed in Note 11, 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.


                                      20




<PAGE>

Note 17: 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,
                                                 1994              1994             1994              1994
----------------------------------------------------------------------------------------------------------
<S>                                       <C>               <C>              <C>                <C>       
Net sales                                 $4,095,399        $4,421,370       $4,290,151         $5,861,842
Gross margin                               1,148,579         1,101,994         (182,852)         2,215,176
Income (loss) from operations               (950,309)         (966,065)      (3,343,347)           343,040
Net income (loss)                           (976,190)         (948,976)      (3,379,685)           320,810
   Per common share:                          $(0.25)           $(0.24)          $(0.87)             $0.08
----------------------------------------------------------------------------------------------------------

Stock prices
      High                                    $3.750            $2.625           $1.500              $1.00
      Low                                      2.375             1.000            0.875               0.50
----------------------------------------------------------------------------------------------------------
                                             Jan. 31,         April 30,         July 31,          Oct. 31,
                                                 1995              1995             1995              1995
----------------------------------------------------------------------------------------------------------

Net sales                                  $5,428,806       $5,306,899       $5,555,881         $6,094,057
Gross margin                                2,092,901        2,297,968        2,418,972          2,656,161
Income from operations                        263,844          302,691          361,692            478,929
Net income                                    263,844          302,691          361,692            458,929
   Per common share:                            $0.07            $0.08            $0.09              $0.11
----------------------------------------------------------------------------------------------------------

Stock prices
     High                                  $     1.50       $    1.813       $    3.375         $    5.125
     Low                                         0.50            0.875            1.250              2.750
----------------------------------------------------------------------------------------------------------
</TABLE>




                                       21



<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,  1995 and 1994,  and the results of
           their  operations and their cash flows for each of the three years in
           the period  ended  October 31, 1995,  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
           Washington, DC
           December 22, 1995
           ---------------------------------------------------------------------






                                       22




<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>
<CAPTION>

                                                                                             Period-to-Period
                                                                                            Percentage Changes
                                                     Percentage of Net Sales
                                                     Year Ended October 31,                  1993          1994
                                                                                              to            to
                                                       1993      1994         1995           1994          1995
                                                    --------------------------------         ------------------
<S>                                                 <C>          <C>           <C>          <C>           <C>  
Net sales:
  Voice processing                                  64.1%        56.6%         62.9%        (20.7%)       33.2%
  Performance analysis                              35.9%        43.4%         37.1%          8.5%         2.5%
                                                   --------------------------------
  Total net sales                                  100.0%       100.0%        100.0%        (10.2%)       19.9%
                                                    -------------------------------
Costs and expenses:
  Cost of sales                                     58.2%        77.1%         57.7%         18.9%        10.2%)
  Selling, general and administrative               29.5%        37.5%         28.5%         27.9%        (9.0%)
  Research and development                           7.3%         8.8%          7.1%          8.7%        (3.2%)
  Restructuring costs                                0.0%         2.9%          0.0%        100.0%      (100.0%)
                                                    -------------------------------
  Total costs and expenses                          95.0%       126.3%         93.3%         19.4%       (11.4%)
                                                    -------------------------------
Investment and other income
  and (expense), net                                (0.4%)       (0.3%)        (0.4%)        53.0%       111.2%
                                                    --------------------------------
Income (loss) before income taxes
  and extraordinary item                             4.6%       (26.6%)         6.3%       (618.4%)      128.4%
                                                    --------------------------------
Provision for income taxes                           2.3%         0.1%          0.1%        (95.1%)      (13.9%)
                                                    --------------------------------
Income (loss) before extraordinary item              2.3%       (26.7%)         6.2%      (1123.9%)      127.8%
                                                    --------------------------------
Extraordinary item                                   2.1%         0.0%          0.0%          0.0%         0.0%
                                                    --------------------------------
Net income (loss)                                    4.4%       (26.7%)         6.2%       (641.9%)      127.8%
                                                    ===============================
</TABLE>



Results of Operations

The Company had net income of $1.4 million  ($.34 per share) for the fiscal year
ended October 31, 1995. By comparison,  the Company  incurred a net loss of $5.0
million  ($1.29 per share) for the fiscal year October 31,  1994,  and had a net
income of $920,000  ($.23 per share) for the fiscal year ended October 31, 1993.
The  improvement  in  earnings in fiscal 1995 was  primarily  attributable  to a
significant  increase in voice  processing net sales and a restructuring  of the
Company's  voice  processing  operations  in the third  quarter of fiscal  1994,
bringing costs more in line with sales.

On October 31, 1995,  the Company paid the remaining  balance of $839,000 of its
mortgage  loan  on its  Corporate  Headquarters.  This  repayment  resolved  the
Company's  difficulties under that loan,  including  non-compliance with certain
mortgage  loan  covenants  and  indications  from the bank that it was no longer
willing to extend the maturity  date of the loan.  The Company has since entered
into a new line of credit  facility  with another bank under which it can borrow
up to 70% of its eligible  accounts  receivable to a maximum of $2,000,000.  The
Company is


                                       23




<PAGE>

currently  negotiating  an additional  $1,000,000  loan  agreement with the same
bank,  which will be secured  by the  Company's  building.  See  "Liquidity  and
Capital Resources".

Net Sales

Net sales for fiscal 1995 were $22.4 million,  which  represented an increase of
20% from net sales in fiscal 1994. Net sales for fiscal 1994 were $18.7 million,
which represented a decrease of 10% as compared to $20.8 million of net sales in
fiscal  1993.  The  increase in fiscal 1995 and the decrease in net sales during
fiscal 1994 are primarily attributable to changes in voice processing net sales.

Voice Processing Net Sales

The Company's  voice  processing net sales increased 33% in fiscal 1995 to $14.1
million,  compared to $10.6  million in fiscal  1994.  The increase in net sales
during fiscal 1995 resulted from a increase of 26% in voice  processing  product
sales,  and by an increase of 54% in product  support and  services  sales.  The
increase in product sales is primarily  attributable  to an increase in sales to
government customers ($3.6 million), which the Company believes is primarily due
to the  attractiveness  to government  customers of the Company's Intela and VCS
3500 products, to an increase in sales to commercial customers ($0.7 million) of
the  Company's  new Retail  Solution  products,  and to an  increase in sales to
international customers ($0.4 million).

The Company's voice processing net sales decreased 21% in fiscal 1994 from $13.3
million in fiscal  1993.  The decline in net sales during  fiscal 1994  resulted
from a decrease of 28% in voice  processing  product sales offset by an increase
of 9% in product  support and services  sales.  The decline in product  sales is
primarily  attributable to decreases in sales of the Company's VCS 3500 products
to large multiple unit customers and to international customers.

In 1995, sales to the Company's 10 largest customers  accounted for 73% of voice
processing  sales. The ten largest customers in fiscal 1993 accounted for 73% of
voice  processing  sales.  By contrast,  sales to these customers in fiscal 1994
accounted for only 50% of voice processing sales.

Net sales of voice processing product support and support services increased 54%
in fiscal 1995 to $4.2 million, compared to $2.7 million in fiscal 1994. Product
support and services net sales in fiscal 1993 were $2.5 million. The increase in
service  sales in fiscal 1995 is  primarily  attributable  to an increase in the
base of systems covered by maintenance contracts,  as well as an increase in the
applications used by the Federal Government.

During  fiscal 1995,  approximately  $9.6 million (68% of voice  processing  net
sales and 43% of  consolidated  net sales) were in the government  sector.  This
compares  to  $5.9  million  (56%  of  voice  processing  net  sales  and 32% of
consolidated  net  sales)  for  fiscal  1994  and  $7.6  million  (57% of  voice
processing  net  sales and 36% of  consolidated  net  sales)  for  fiscal  1993.
Traditionally  the  government  market  segment  has been a  strong  one for the
Company.  The increase in sales to government agencies resulted principally from
increased  sales of the  Company's  Intela and VCS 3500 products to the Internal
Revenue Service and for applications  such as Voice Balance Due (VBD) and Refund
Inquiry.

Sales  to  commercial  customers  increased  69% to $1.6  million  (12% of voice
processing  net  sales) in  fiscal  1995.  By  comparison,  sales to  commercial
customers  were $1.0 million (9% of voice  processing  net sales) in fiscal 1994
and $1.1 million (8% of voice  processing net sales) in fiscal 1993.  Commercial
sales  increased in fiscal 1995 primarily as a result of increased  sales of the
Company's Retail Solution  product.  The Retail Solution product offers multiple
voice  processing   applications   designed  to  improve  operations  at  retail
pharmacies.

International  voice processing sales increased 49% to $1.3 million (9% of voice
processing net sales) in fiscal 1995.  This compares to $.8 million (8% of voice
processing  net sales) in fiscal 1994 and $1.2  million (9% of voice  processing
net sales) in fiscal 1993. The increase in international  sales is the result of
the  addition  of  third  party  resellers  of the  Company's  products  such as
Communication   &  Network   Systems  PTE,   Ltd.  of   Singapore   and  Philips
Communications Systems B.V. of The Netherlands. The Company is actively pursuing
additional third party resellers of the Company's products.

The Company is pursuing a strategy that it believes  will increase  sales in its
voice processing division. This strategy includes the introduction of additional
features that will enhance the global marketability of Intela,


                                       24




<PAGE>

pursuit of large  government  procurements,  marketing  of its  Retail  Solution
product,  development of new applications  solutions for commercial markets, and
expansion of third party distributors in the US, Europe, Asia, and the Far East.
Microlog   believes  that   technological   improvements  to  its  products  and
development of new  applications are essential if the Company is to increase its
voice  processing  revenues.  The Company  believes that its Intela  Interactive
Information  Response  ("IIR")  system  is  gaining  acceptance  in  government,
commercial and international  markets and the Company expects Intela to pass the
VCS 3500 as its principal product in percent of sales.

As of October 31, 1995,  the Company had a backlog of existing  orders for voice
processing systems totaling $3.7 million.  The backlog,  as of October 31, 1994,
was also $3.7 million.  The Company has experienced  fluctuations in its backlog
at various times during the past two fiscal years attributable  primarily to the
seasonality of governmental  purchases.  In addition, the Company has observed a
lengthening  of the period  between the date of booking an order and the date of
shipment, with the shipment depending on any customer delivery schedules and any
customization  needed  for  VCS  3500  or  Intela   applications.   The  Company
anticipates  that all of the  outstanding  orders at  October  31,  1995 will be
shipped  and the sales  recognized  during  fiscal  1996.  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.

Performance Analysis and Support Services Net Sales

Net sales from  performance  analysis and support  services for fiscal 1995 were
$8.3 million,  which represented a 3% increase from the net sales from this line
of business  during the prior year. Net sales for fiscal 1994 were $8.1 million,
representing an increase of 8% from $7.5 million in fiscal 1993. 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 has another  customer for these  services,  American  Telephone  and
Telegraph  ("AT&T").  However,  the  Company's  contracts  with  AT&T  have been
declining  since  fiscal  1993  as a  result  of  decreases  in  levels  of work
associated with these contracts. Net sales to this customer were 4%, 5%, and 10%
of performance  analysis and support  services sales for fiscal 1995,  1994, and
1993,  respectively.  Net sales  through AT&T for fiscal 1996 are expected to be
significantly less than fiscal 1995.

The Company is seeking to diversify its operations for performance  analysis and
support services by seeking contracts in non-defense  related areas.  Because of
the lower profit  margins  allowed on  contracts  for  performance  analysis and
support  services and the  Company's  limited  success to date in obtaining  new
contracts  with  contractors  and agencies  other than APL or AT&T,  the Company
believes  that  this  segment  of its  business  is not  likely  to  generate  a
substantial increase in profitability.  Nevertheless,  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,  1995,  the  Company  had a backlog  of  funding on  existing
contracts for performance  analysis and support services  totaling $7.8 million.
By comparison, the backlog as of October 31, 1994 was $4.6 million. The increase
in backlog is attributable  primarily to a significant multi-year contract award
and  increased  funding  levels  on  existing  or  new  contracts.  The  Company
anticipates  that these  services will be provided  during the next three fiscal
years. The Company  estimates that of the $7.8 million of backlog at October 31,
1995,  $3.9 million will be recognized  as sales beyond fiscal 1996.  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.


                                       25


<PAGE>

Costs and Expenses

Cost of sales of products  were $4.7  million,  or 48% of net sales of products,
for fiscal 1995; $5.8 million, or 73% of net sales of products, for fiscal 1994;
and $4.4 million, or 40% of net sales of products, for fiscal 1993. The decrease
in cost of sales of  products  for  fiscal  1995 is  attributable  in part to an
increase  in the  sales of  products  having a lower  cost of sales  and to cost
cutting measures taken by the Company during fiscal 1994. The high cost of sales
of  products  for  fiscal  1994 is  attributable  in large  part to a reserve of
$1,137,039  for  obsolete  inventory;  without this  reserve,  costs of sales of
products for the year ended October 31, 1994 would have equaled $4.7 million, or
59% of net sales.  The decrease in cost of sales for fiscal 1993  reflects  cost
cutting  measures  taken  by the  Company,  a  restructuring  of  the  Company's
operations (see  Restructuring  Costs), and a general reduction in raw materials
costs during fiscal 1993.  Competitive pressures and technological  improvements
in hardware  components  are  anticipated  to continue to prevent raw  materials
costs from rising.

During the third  quarter of fiscal 1994,  the Company  adjusted its reserve for
obsolete inventory by $1,137,039.  The Company  discontinued  manufacture of the
CINDI  line of voice  processing  products  in  January  1992.  The  demand  for
replacement  parts has declined more rapidly than expected,  and the Company now
believes  such demand will  continue  to decline.  As a result,  the Company has
reserved  $375,000 for the CINDI product line. In addition,  the introduction of
the Company's VCS Intela  product in March 1994 and the switch from 386 CPU's to
486/Pentium  CPU's  in the  Company's  voice  processing  products  has  made it
necessary to reserve  $762,000 for  components  relating to its VCS 3500 product
line. The Company has not discontinued its VCS 3500 product and does not plan to
do so in the near future.  However, with the introduction of its new product and
changes in product design,  the Company believed that a reserve against existing
inventory of VCS 3500 products was appropriate.

Cost of sales of services  were $8.2  million,  or 65% of net sales of services,
for fiscal 1995; $8.6 million, or 80% of net sales of services, for fiscal 1994;
and $7.7 million, or 78% of net sales of services, for fiscal 1993. The decrease
in cost of sales in fiscal 1995 is  attributable  in part to the increase in net
sales  of voice  processing  services,  which  have a lower  cost of sales  than
performance  analysis.  The decrease is also attributable to a general reduction
in raw material  costs and a  restructuring  of the Company's  voice  processing
operations in fiscal 1994.

Selling, general and administrative costs were $6.4 million or 28% of net sales,
for fiscal 1995;  $7.0 million,  or 38% of net sales,  for fiscal 1994; and $6.1
million,  or 29% of net sales, for fiscal 1993. The decreases in fiscal 1995 and
1993 were  attributable  primarily to cost cutting measures taken by the Company
and a restructuring of the Company's  operations (see Restructuring  Costs). The
increase  in fiscal  1994 was  attributable  to  increased  sales and  marketing
activities for both the voice processing and performance analysis segments.

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 $1.6 million,  or 7% of net sales for fiscal 1995;  $1.6 million,  or 9% of
net sales for fiscal year 1994; and $1.5 million,  or 7% of net sales for fiscal
1993.  The Company  presently  plans to maintain its  research  and  development
program at  approximately  the same level,  although  research  and  development
expenses in the next fiscal year are expected to be somewhat  higher than fiscal
1995,  because of the  Company's  strategy to continue  the  development  of new
products and the enhancement of existing products.

Restructuring Costs

In the quarter ended July 31, 1994, the Company's  voice  processing  operations
were restructured  extensively at a cost of approximately $550,000. This was the
third such  restructuring in four years, and resulted from the Company's ongoing
significant losses during fiscal 1991, 1992 and 1994 due to declines in revenues
for voice  processing  products and/or failure to increase such revenues to keep
pace with planned increases in expenditures.  The 1994 restructuring  included a
25%  reduction in voice  processing  personnel at a cost of $224,000,  a $62,000
charge associated with the closing of a sales office in California,  $165,000 of
expenses  associated  with the consulting  contract  between the Company and its
former Chief Executive Officer,  and $99,000 of fixed assets associated with the
office  closing  and  terminated  employees.   The  Company  believes  that  the
restructuring  has had a  positive  impact  on the  results  of  fiscal  1995 by
reducing employment, overhead, and ongoing costs of


                                       26




<PAGE>

approximately  $1.4  million  annually.  The Company  does not believe  that any
further restructuring will be required in the near future.

Investment and Other Income, Net

The Company had net investment and other expenses of $93,000 for fiscal 1995, as
compared  to $44,000 for fiscal  1994 and  $94,000  for fiscal  1993.  The lower
expense  level in fiscal 1994 resulted from a $42,000 gain on the sale of one of
its two office condominium units.  Without this gain, the Company would have had
a net other expense of $86,000 in fiscal 1994.

Provision for Income Taxes

The  Company  has  exhausted  its  ability to carry  losses  back for income tax
refunds. However, net operating loss and tax credit carryforwards for income tax
reporting  purposes of  approximately  $9.6 million and $156,000,  respectively,
will be available to offset taxes  generated from future taxable  income.  These
potential  future  tax  benefits  have  not  been  reflected  in  the  financial
statements since realization is not assured.

The 1993  provision  for income taxes of $470,255  contained a charge in lieu of
Federal and state income taxes that would be required to be paid had the Company
not been able to utilize its net operating loss carryforwards. The taxes payable
of  $23,000 in fiscal  1994,  were  attributable  to the state  income  taxes on
earnings  from a profitable  subsidiary.  The $20,000 of taxes payable in fiscal
1995 are attributable to state income taxes and the alternative  minimum tax for
Federal income tax.

Merger Price Adjustments and Escrowed Shares

On March 16, 1993, Microlog Corporation reached an agreement under which 300,000
shares of Microlog  stock,  held in escrow since the November 29, 1990 merger of
Genesis  Electronics  and  Microlog  Corporation,  were  returned  to  Microlog.
Pursuant to the merger  agreement,  Microlog  had  acquired  Genesis for 675,000
shares  of  its  common  stock  and  paid   $500,000  in  cash  to  the  Genesis
shareholders,  of which  $250,000 and 300,000  shares of common stock payable to
the principal Genesis  shareholders had been deposited into an escrow account to
satisfy possible purchase price adjustments and contingent  liabilities.  Claims
had been  asserted by Microlog  against  the amounts  held in escrow.  Under the
settlement agreement,  the $250,000 of cash (plus accrued interest) was released
from escrow to the principal Genesis shareholders and Microlog received back the
300,000  shares of Microlog  stock.  The Company  recorded the 300,000 shares as
treasury stock at a cost of $656,250,  reduced goodwill by $484,930, and reduced
an outstanding indemnity receivable by $171,320.

Litigation Settlement

Microlog and its  subsidiaries,  Microlog  Corporation of Maryland,  and Genesis
Electronics  Corporation,  were  sued  in  February  1991 in the  United  States
District  Court for the  Northern  District of Texas by VMX,  Inc.,  ("VMX") and
Dytel Corporation  ("Dytel").  The lawsuit alleged  nonpayment of royalties owed
under a license  granted by VMX to Genesis  with  respect to certain  voice mail
technology  and  infringement  by all three  defendant  corporations  of certain
patents  involving call processing  technology held by VMX and/or Dytel. VMX and
Dytel were seeking an accounting of royalties  allegedly  owed under the Genesis
agreement and were seeking an injunction  and an accounting  with respect to the
alleged infringement of the call processing technology patents.

On May 24, 1993, Microlog and its subsidiaries reached a settlement with VMX and
Dytel.  Under the terms of the  settlement,  the  litigation  was dismissed with
prejudice and the products of Microlog's  subsidiaries,  Microlog Corporation of
Maryland,  and Genesis Electronics  Corporation,  are fully licensed under VMX's
and Dytel's voice mail and automatic call processing  patents.  Microlog and its
subsidiaries  paid VMX $275,000 upon execution of the  settlement  documents and
issued to VMX $225,000 of Microlog  common  stock  (102,857  shares),  which was
subject to redemption under certain conditions if still held by VMX at April 30,
1996 at a price of $2.1875 per share,  as  discussed  in Note 10 of The Notes to
Consolidated Financial Statements. As discussed in Note 11, 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.  Additionally,  Microlog and its  subsidiaries
agreed  to pay to VMX a total  of  $500,000  in  eleven  quarterly  installments
starting on July 31, 1993;  the first ten  installments  have been paid.  Of the
settlement amount, $444,704 was attributed to the receipt by Microlog of


                                       27




<PAGE>

Maryland  and  Genesis  of a fully paid voice mail  license,  and  $555,296  was
attributed to a license under VMX and Dytel automatic call  processing  patents.
The Company  recorded the new  licenses at a cost of $800,000 and is  amortizing
the licenses over seven years.

Liquidity and Capital Resources

Working  capital as of October 31, 1995 was $749,000,  as compared to a negative
$704,000 as of October 31, 1994. Cash, and cash  equivalents,  as of October 31,
1995 were  $923,000,  as compared to $1.2  million as of October 31,  1994.  The
decline in cash and cash equivalents is primarily attributable to the payment of
the remaining balance of $839,000 of the Company's  mortgage loan on October 31,
1995.

Accounts  receivable  as of October 31, 1995 were $3.0  million,  as compared to
$2.7 million as of October 31,  1994.  The  increase in accounts  receivable  is
attributable to increased voice  processing net sales.  Included in the 1995 and
1994 balance is a related party receivable of $98,000 and $70,000, respectively,
relating  to the sale of voice  processing  products  and  services  to American
Computer and Electronics  Corporation,  of which a former member of the Board of
Directors  is an  executive  officer  and of  which a  member  of the  Board  of
Directors was a director.

Fixed  assets as of October  31,  1995 were $3.0  million,  as  compared to $2.9
million as of October 31, 1994.  The net increase in fixed assets  resulted from
the addition of $542,000 of assets, net of disposals and depreciation expense of
$475,000 for fiscal 1995.

On October 31, 1995,  the Company  repaid the remaining  balance of the mortgage
loan on its  Corporate  Headquarters.  The  Company  had been in  default  under
certain  mortgage  loan  covenants  during fiscal 1994 and 1995 and had received
waivers from its bank of these covenants  through October 31, 1995. The maturity
date of the loan had been  accelerated  by agreement  with the bank to September
30, 1994, and was subsequently  extended by the bank on three occasions  through
October 31,  1995.  In  connection  with these  extensions,  the Company paid an
extension  fee of 1% of the mortgage note balance at September 30, 1994 and made
additional  principal  payments in varying  amounts (from $37,500 to $50,000 per
month). The remaining balance of $839,000 was paid on October 31, 1995.

In December 1995, the Company  entered into a new line of credit facility with a
bank.  Under this  facility  the  Company  can borrow up to 70% of its  eligible
accounts  receivable  to a  maximum  of $2  million.  The line of  credit  bears
interest at the bank's prime rate plus 1.25% and contains a 0.5%  commitment fee
on the  average  unused  portion of the line.  The line of credit  subjects  the
Company  to a number  of  restrictive  covenants,  including  a  requirement  to
maintain a minimum consolidated tangible net worth, a ratio of total liabilities
to tangible net worth and a current  ratio.  There are  prohibitions  against on
merger or acquisitions,  payment of dividends, and certain additional borrowings
without  bank  approval.  The line is secured by all of the  Company's  tangible
assets.

The Company is  currently  negotiating  with the same bank for a $1 million loan
agreement  secured by the Company's  building.  The proposed  terms for the loan
provides for the loan  agreement to bear  interest at the bank's prime rate plus
0.5% and  contains a 0.5% fee on the average  unused  portion of the loan.  This
loan is  expected to contain the same  restrictive  covenants  as the $2 million
line of credit.  The  Company  anticipates  closing on this  credit  facility in
February 1996.

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 1996.

In March 1995, the Financial  Accounting  Standards  Board (the "Board")  issued
Statement of Financial  Accounting  Standards No. 121 "Accounting for Impairment
of Long Lived  Assets and for Long Lived  Assets to be  Disposed  of," which the
Company  expects to adopt in fiscal 1996.  Additionally,  in October  1995,  the
Board issued Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based  Compensation,"  which the Company  expects to adopt in fiscal 1997.
Adoption of these new statements  are not expected to have a material  impact on
the Company's financial position or results of operations.



                                       28




<PAGE>

Quarterly Results

Note  17 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's quarterly results fluctuated  significantly,  primarily because of
factors  affecting  the level of net sales and  changes in the level of selling,
general, and administrative expenses. The Company was profitable during all four
quarters of fiscal 1993. The Company  experienced  losses during the first three
quarters of fiscal 1994, including a $3.5 million loss during the third quarter,
which included a $550,000 charge  relating to a  restructuring  of the Company's
voice  processing  operations and a $1.1 million charge for obsolete  inventory.
The Company was  profitable in the fourth quarter of fiscal 1994 and in all four
quarters of fiscal 1995.

Fourth quarter net voice processing  revenues are typically improved by year-end
incentives to sales employees and the Federal Government's year-end. The Company
anticipates that this trend will continue in fiscal 1996.

Price Range of Common Stock

The Common Stock is presently  traded on the  over-the-counter  market under the
symbol MLOG.  As of January 19, 1996,  there were  approximately  277 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  17 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  SmallCap  Market.  The closing  price of the Common Stock on January 19,
1996 was $5.25 per share.

Dividend Policy

The  Company has paid  dividends  twice since its  inception  in 1969,  the most
recent being a $.10 cash dividend ($.033 as adjusted for a  three-for-one  stock
split in April 1986) in November 1985.  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.

Microlog Corporation

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,
-------------------------------------------------------------------------------------------------------------------
                                          1991            1992             1993           1994              1995
-------------------------------------------------------------------------------------------------------------------
<S>                                   <C>              <C>             <C>            <C>               <C>        
Net sales                             $19,614,230      $19,526,503     $20,798,323    $18,668,762       $22,385,643
Income (loss) from
  operations                           (6,916,544)      (3,465,726)      1,050,934     (4,916,681)        1,500,343
Net income (loss)                      (6,780,139)      (3,454,284)        919,779     (4,984,041)        1,387,132
Per common share:
  Primary                             $     (1.71)     $      (.86)    $       .23    $     (1.29)      $       .34
  Fully diluted                       $     (1.71)     $      (.86)    $       .22    $     (1.29)      $       .34
</TABLE>

                                       29



<PAGE>


Balance Sheet Data:


<TABLE>
<CAPTION>
                                                                        October 31,
-------------------------------------------------------------------------------------------------------------------
                                         1991             1992             1993           1994              1995
-------------------------------------------------------------------------------------------------------------------
<S>                                   <C>              <C>             <C>            <C>                <C>       
Working capital                       $ 6,494,495      $ 3,396,862     $ 4,945,780    ($  704,004)       $  748,974
Total assets                           17,798,042       14,084,965      13,438,828      9,055,979         9,425,716
Long-term debt, net
  of current maturities                 1,949,023        1,669,204       1,659,273         45,456                --
Stockholders' equity                   10,632,995        7,193,191       7,500,522      2,523,894         4,161,654

(1)   Net income for fiscal 1993 includes the tax benefit related to utilization
      of  net  operating  loss  carryforwards.  See  Note  13 of  the  Notes  to
      Consolidated Financial Statements.
</TABLE>




                                                       30









<PAGE>