SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

For the fiscal year ended October 31, 1996    Commission File No. 0-14880


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


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


         20270 Goldenrod Lane                                       20876-4070
         Germantown, Maryland                                       (Zip Code)
(Address of principal executive offices)

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

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

                                      NONE

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

                     Common Stock, par value $.01 per share
                                (Title of class)

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

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

The  aggregate  market  value of shares of Common  Stock held by  non-affiliates
(based on the January 16, 1997 closing price of these shares) was  approximately
$26.7 million.  The Common Stock is traded  over-the-counter  and quoted through
the Nasdaq National Market.

       As of January 16, 1997, 4,193,143 shares of the Registrant's Common
                            Stock were outstanding.
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                       Documents Incorporated by Reference
                       -----------------------------------


Parts I and III  incorporate  information  by  reference  from  portions  of the
Company's  definitive  Proxy Statement to be filed within 120 days after the end
of the  fiscal  year (the  "Proxy  Statement").  Parts I, II and IV  incorporate
information  by  reference  from  portions  of the  Company's  Annual  Report to
Shareholders  for the fiscal year ended October 31, 1996 (the "Annual  Report to
Shareholders").


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                                     PART I

ITEM 1.  BUSINESS

General

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

The results of the Company's  performance during fiscal 1996, 1995, and 1994 are
discussed  in  greater  detail  in  "Management's  Discussion  and  Analysis  of
Financial  Condition and Results of Operations,"  incorporated by reference into
Item 7 of the report. That section should be read in its entirety in conjunction
with the  discussion  of the  Company's  business  in this  Item 1.  Information
concerning the Company's  operations by business segment is hereby  incorporated
by  reference  from Note 1 of the  Notes to  Consolidated  Financial  Statements
incorporated by reference into Item 8 of this Report.

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

VOICE PROCESSING

Voice Processing Industry

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

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

Products

The  Company's  voice  processing  products  include the  Intela(TM)  UNIX-based
platform  product,  which is capable of running many different voice  processing
applications simultaneously.  The Company also offers a Retail Solutions product
line that operates under a UNIX and DOS operating  system,  a DOS-based VCS 3500
platform  product,   and  the  CallStar(R)  voice  messaging  system.   Microlog
emphasizes the IIR applications of its Intela product, but also

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provides  IIR  applications  through the VCS 3500 and Retail  Solutions  product
line. The CallStar product provides primarily voice mail and automated attendant
functions.

The following voice  processing  functionality  is provided by the Intela and/or
VCS 3500 products:

         Audiotex  is  used  by   organizations  to  construct  a  "library"  of
         pre-recorded   messages  which  outside   callers  can  access  through
         touch-tone  or  voice  commands   without  live  operator   assistance.
         Customers can record and change menus and messages  themselves over the
         telephone  at any time.  Libraries of  information  may be presented in
         different languages, and callers with rotary telephones may also access
         menus and information. Up to 5,000 messages may be presented.  Audiotex
         software finds wide use by organizations which receive large volumes of
         highly-repetitive telephone requests for information.  Major advantages
         of audiotex over live information operators include the availability of
         information at every hour of the day and the consistency in the content
         of information dispensed.

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

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

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

         Local Database  provides very similar  functions to IIR, but allows the
         data of  interest,  up to  100,000  records,  to  reside  on the  voice
         processing system rather than a host mini- or mainframe computer.  This
         provides a  cost-effective  approach for smaller IIR  applications.  It
         also allows large IIR applications to do local batch processing of data
         by downloading to the voice processing system for data manipulation.

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

         Outbound Dialing permits an organization to send messages automatically
         to large lists of external  phone  numbers and to record  responses  to
         those messages,  if necessary.  This very flexible  software can handle
         multiple  lists  with up to 10,000  names per list.  It can draw from a
         library of 1,000 messages and send different  combinations  of messages
         to individual  phone numbers as directed.  The software also  generates
         management reports about the number of successful  connections,  length
         of calls, and content of responses.

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


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

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

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

         Voice Mail  provides an  organization  with "voice  mailboxes" in which
         internal or external callers may leave detailed,  confidential messages
         at any  time.  Messages  may be left for  groups  of  people as well as
         individuals.   Caller's  options  include  reviewing  the  message  and
         recording their messages until  satisfied.  Mailbox owners have options
         to review, save, forward or discard voice messages.

         Voice Mail overcomes many  limitations of telephone  systems,  allowing
         people to exchange  information and transact business without having to
         be on the  phone  simultaneously.  It  eliminates  paperwork  and  adds
         meaning and content  which  written  messages  can't  reflect.  Primary
         benefits   are,   increased   office    productivity    through   fewer
         interruptions, timely, accurate message delivery, and increased message
         detail, eliminating callbacks and "telephone tag."

         Intela

The  Intela  platform  is an IIR system  designed  for  simultaneous  support of
multiple applications and interactive  information solutions.  Prices for Intela
systems  are  dependent  on the  number of ports in the  system  (from 4 to over
1000), the amount of voice storage,  the need for additional  equipment,  and in
the case of direct sales,  the time needed to develop a customized  application.
Intela is based on a Pentium hardware platform utilizing a UNIX operating system
with a Graphical User Interface for application development.

The Intela system has a non-proprietary  open architecture.  It supports foreign
language user screens,  voice prompts,  and documentation.  Intela also supports
text-to-speech,   speech   recognition,   remote  and  local   databases,   host
connectivity, and fax.

Microlog has employed the Intela in projects for the Internal  Revenue  Service.
Some of these projects included Voice Balance Due (VBD),  which enables eligible
taxpayers  to check the status of their debt to the U.S.  government  and set up
repayment plans. The Refund Inquiry  Application  enables  taxpayers to call the
IRS and, by selecting the Refund Inquiry on Intela,  automatically  obtain their
refund status, including the amount of the refund.

Each Intela system contains multiple  microprocessors with hard disk storage and
several  voice cards.  Intela uses  distributed  microprocessors,  each of which
handles a part of the  total  processing  task,  rather  than one large  central
processor. By increasing the number of voice cards and the number of distributed
microprocessors,  the Company can configure the voice processing  systems with a
greater  number of ports and hours of message  storage.  Depending upon customer
specifications,  systems  are  provided  as  tabletop,  floor-standing,  or rack
mounted units.  These units can be networked to create a larger system with more
than 1000 ports.

<PAGE>
Product  Architecture.  The basic  Intela  architecture  consists  of four major
system  components:  the Application  Server(s),  the Port Server(s),  the Voice
Distribution and Control Network, and the Intelaware Software Platform.

Application Server. The application server defines the computing  environment in
which Intelaware  resides and provides  centralized  management and control,  as
well as optional secure voice storage.  The application server can be a personal
computer,  a workstation,  or minicomputer.  It interfaces to a voice processing
peripheral, or Intela Port Server, via a command link on Ethernet or an RS-232-C
link.

Port  Server.  Microlog's  Intela  T100 and  Intela  R100 are  voice  processing
peripherals,  each  providing  call  and  speech  processing,  as well as  voice
storage.  Interfacing to either a CO- or PBX-based telephone system, these units
answer  calls,  process and store  speech,  all under the  direction of commands
coming from Intelaware software on the application server across a command link.

Voice Distribution and Control Network. An Ethernet-based, high-speed network is
used to control the port server and transfer  voice files between the Intela and
the application server, as well as among the Intela(s) themselves.

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

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

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

         Prompt  Loading  and  Management  Facility.  A major  function in voice
         applications  is prompt  creation.  With the Intelaware  prompt loading
         facility, prompts can be reviewed, recorded, installed, deleted, backed
         up to removable media,  restored, and distributed over a wide-area data
         (WAN)  network.  They  can be  loaded  on-line  over the  telephone,  a
         microphone,  or from a tape,  and the  process  can be semi- or  fully-
         automatic,  depending on whether DTMF (dual-tone  multifrequency) tones
         are  coded  on the tape to  identify  the  prompts.  Users  can  record
         individual  prompts,  a list of  prompts,  or record  with DTMF  prompt
         numbers, and they will be replaced only after they've been reviewed and
         accepted.  New or updated prompts will be phased in automatically while
         applications remain on-line.

         Prompt  Manager.  The  Intelaware  prompt  management  facility  has  a
         Graphical Prompt Manager. This editor allows users to retrieve a prompt
         from  storage  on a port  server  or  Intela  and  have  the  graphical
         representation shown in a window. The user can modify the prompt simply
         by clicking on the window and performing any of the following  actions:
         cut, copy, paste, delete, trim silence,  adjust again, convert sections
         of a prompt to silence, and change sampling rate.

         System   Administration.   The  load/unload  of  applications  and  the
         management of the Port Servers  connected to the application  processor
         are done through the System Administration  interface.  If a system has
         network  hardware in the system  configuration,  administration  can be
         performed through one central point.  Administrators can bring up a new
         revision of an  application  or move an  application  to another  trunk
         while the system is on-line.  If a caller  happens to be on the line at
         the time,  the changes on that trunk will take effect  after the caller
         hangs up. Intelaware can support multiple Intelas to expand to larger

<PAGE>
         port and storage capacity by networking systems and clusters of systems
         together.  Expansions depend on the application server that the systems
         are connected to.

         Centralized  System  Management.  The system monitor menu, under system
         administration,  provides  a  graphical  means to address  the  central
         administration  of  a  distributed  system.  It  provides  a  graphical
         representation  of the  application  server and its  attached  Intelas,
         including  the  command  link mode  used,  Ethernet  or  serial  links.
         Further,  by  clicking  on the Intela  icon,  an  additional  window is
         displayed.  In this window, a graphic of the Intela display panel, with
         active trunk status  indicators  and disk usage  indicators,  is shown.
         Clicking on a trunk status  indicator  opens an additional  window that
         depicts information on the application that is running, shows what cell
         it is in, and so forth.

         Reports.  To track significant  statistical  information for activities
         such as billing and to justify services,  Intelaware offers a choice of
         reports  that  can be  created  and  viewed  without  interrupting  the
         operation  of an  application.  These  reports  can  then  be sent to a
         printer for a hard copy print-out.  Available  reports are call detail,
         cell usage, trunk usage, subscriber  information,  and transaction log.
         If requirements include other than these standard reports,  they can be
         customized using the underlying statistics.

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

The Microlog Intela platform  architecture  supports a variety of configurations
that meet varying functional, processing, and voice port and storage needs. This
platform  is  designed  for  simultaneous  support  of  multiple   applications,
including both voice response and voice messaging services.  Within the Microlog
platform  architecture,  particular  hardware  configurations may be proposed to
provide  cost-effective  solutions to a wide range of system  requirements.  All
systems can be configured with built-in redundancy so that at least 50% of total
system  capacity  is  maintained  across any single  component  failure.  Growth
capability  is achieved  by the modular  upgrade of  application  servers,  port
servers,  disk storage,  additional  communications  links, and additional voice
processing units.

The Intela system includes a monitor,  keyboard,  and printer. These are used to
program  the  system,  organize  the  storage  of  information  (which  will  be
accessible to users),  produce reports,  and monitor system activity.  Customers
that contract for the Company's system maintenance services also purchase modems
so that the Company can perform remote diagnostic procedures.

In 1996,  the Company  completed  Intela  release 2.07,  and  completed  work on
functional  enhancements to the optional  features of the product.  In addition,
work  was   underway  to  support   international   connectivity   features  and
customization,  to be  included  in a new  release of the  product  targeted  at
international sales in 1997.

         VCS 3500

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

<PAGE>
The  VCS  3500  system  may be  purchased  with  up to  twelve  different  voice
processing applications:  voice mail, automated attendant, automated transaction
processing,  audiotex,  interactive  voice response,  local  database,  outbound
dialing,  multiple languages  including  Telecommunications  Device for the Deaf
(TDD), release line trunking (RLT), speech recognition, text-to-speech, and fax.
The Company also provides other  applications and customization  where required.
The Company has developed a separate  software module for each voice  processing
application,  making it possible to provide  customers  with any  combination of
these twelve voice processing  applications.  Additional software modules may be
added after a system has been installed,  thereby  allowing  customers to expand
their systems  gradually,  as the need arises,  without  substantial  additional
cost.

Microlog's voice processing  software modules include a proprietary  application
software matrix which allows users to customize the systems without the need for
additional  software.  The VCS 3500  system's  application  software  provides a
series of menus  containing  instructions  for the entry of data into the matrix
which will result in a customized system. For example,  the automated  attendant
application  of the VCS 3500 can be  customized  to forward  calls  based on the
recipient's last name,  extension  number,  or other code of up to 20 letters or
numbers.  The features in the application software matrix may be set to specific
dates or  times,  allowing  the  system to  activate  or  de-activate  different
information  menus,  greetings,  or other  features  on  particular  dates or at
particular times. The complexity of the interactive  voice response  application
presently  requires that most  customizing  of this  application be performed by
Microlog.

The Company's VCS 3500 has a flexible system  architecture.  All of the VCS 3500
systems use similar hardware  platforms and the Company activates one or more of
the twelve  software  modules to enable a system to perform  the  desired  voice
processing  applications.  In the case of complex  systems  performing  extra or
unusual  applications  as  requested  by a  particular  user,  the  Company  can
customize the voice processing systems' architecture.  By using similar hardware
platforms  for VCS 3500  systems,  the Company has been able to achieve  greater
system reliability and more efficient assembly, testing, and maintenance.

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

The VCS 3500  includes  a  monitor,  keyboard,  and  printer,  which are used to
program the system, organize the storage of information which will be accessible
to users, produce reports, and monitor system activity.  Customers that contract
for the Company's system  maintenance  services also purchase modems so that the
Company can perform remote diagnostic procedures.

The VCS  3500  voice  response  applications  can be  used  with  most  customer
telephone  systems.  When  used  in  connection  with a PBX,  Centrex  or  other
telephone  system having a switch capable of transferring  calls  automatically,
the system can provide a direct connection between the caller and the customer's
telephone  system.  The system can also be designed to allow callers to transfer
their calls to a live operator on the customer's telephone system.

In 1996,  the Company  completed  VCS  release  3.5, a major  release  including
functional   enhancements  and  product   improvements   requested  by  existing
customers.

         CallStar(R)

CallStar products are based on Microlog's flexible,  industry-standard  hardware
platform and operating system,  and incorporate new user interfaces and software
standardization and improved integration features.

The CallStar  2000 has capacity of up to 24 ports,  and is available  with voice
mail and  automated  attendant  software.  CallStar  1200 was  designed  for the
small-to-medium  organization with capacities of 2 to 12 ports and a standard 18
hours of storage with up to 50 hours of storage  optional.  These models combine
features of the VCS

<PAGE>
3500 with the popular user  interface,  model  standardization  and  integration
technology   from  the  former  CINDI   product  line  of  Genesis   Electronics
Corporation, a company based in Rancho Cordova,  California that was acquired by
the Company in November 1990.

The CallStar system is sold primarily through indirect channels as a stand-alone
voice mail  system.  Over the past  year,  sales  through  these  channels  have
diminished as the Company  continues to emphasize  high-function IIR systems and
applications and de-emphasizes stand-alone voice mail.

         Retail Solutions

During 1996, the Company continued to dedicate development efforts to refine its
offerings under the Retail Solutions product line. Retail Solutions  consists of
several  applications  designed  and  manufactured  specifically  for the retail
pharmacy industry. These applications include the APRS(R) Automated Prescription
Refill System, Photo Ready(TM), Prescription Ready(TM), and the ProNouncer(R).

         APRS(R)             Automated Prescription Refill System

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

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

The APRS product includes the following features:

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

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

         Call  Routing.  The APRS system can answer all  incoming  calls,  greet
         customers  with a  store-specific  recording,  and then,  based on Call
         Routing, allow callers to transfer to the desired department(s).

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

         Automatic  Speech  Recognition.  Speech  Recognition  enables  pharmacy
         customers  who have  rotary  phones to speak their  responses  into the
         telephone, rather than pushing buttons on their telephone keypad.

<PAGE>
         This  is  particularly important in regions where there is still a high
         percentage of rotary phones--or in areas where a sizable portion of the
         population may be more comfortable speaking into the phone.

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

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

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

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

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

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

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

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

         Text-to-Speech.  Through Text-to-Speech technology,  callers can hear a
         text file "read to them" over the phone. Names, addresses,  drug names,
         and any  other  text-based  information  stored  in a  database  can be
         converted into speech.  This can be used,  for example,  in conjunction
         with a compliance outdial program--voicing the name of the prescription
         holder as it reminds them to pick up their refill.

         System Performance  Reports.  The product's reporting  functionality is
         designed to help pharmacies  gauge how well the system is operating and
         to measure performance  activity.  Reports can be printed automatically
         on a daily  basis and can also be  generated  on  demand by the  system
         administrator.

         Other Retail Solutions Products

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

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

         APRS UNIX.  During 1996,  Microlog  developed a UNIX-based APRS system.
         The System is  available  as a stand alone  configuration  as well as a
         "board and software"  solution.  The "board and  software"  solution is
         designed  for  customers  who already have an in-store  processor  with
         spare capacity.

         Customized  management software allows selected control functions to be
         executed from a remote, central location. Such features include loading
         of new software modules,  running diagnostics,  and implementing system
         changes.

         Enhanced  features of the system  include  more  comprehensive  outdial
         reports,   graphical   user   interface   for  system   administration,
         multi-level  passwords,  and easy  expandability of systems through the
         use of a variety of voice cards.

Sales and Marketing

The  Company's  Applications,  Retail  Solutions  and VCS 3500  systems are sold
primarily  through  direct  sales,  while the CallStar  products  have been sold
principally  through a  distribution  network.  Intela is also sold through both
direct sales and a distribution network.

Direct Sales  Force.  The direct sales force has a director in charge of Federal
systems sales, and four salesmen,  two sales engineers,  and three sales support
personnel.   The  Company's  direct  sales  force  is  presently  based  in  the
Washington-Baltimore  metropolitan area with a satellite office in Pennsylvania.
The Company provides  training to its direct sales persons and furnishes ongoing
technical  support to these  persons  through  its systems  engineers  and other
personnel.  The Company  compensates its direct and distribution sales personnel
through a base salary plus commissions,  which generally  represent a percentage
of the net sales for which they are responsible.

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

International  Sales. The international  sales force currently has a director in
charge of  international  sales, two salesmen,  and three sales  engineers.  The
sales force and support group is presently  located in the  Washington-Baltimore
metropolitan  area,  and in Neunen,  The  Netherlands.  During fiscal 1996,  the
Company acquired Phonatic  International B.V. of the Netherlands,  to strengthen
its presence in the European voice response market.

The  Company  has  entered  into  non-exclusive   distribution  agreements  with
international companies,  including Philips Communication Systems B.V. (Philips)
of The  Netherlands  and  Communication  & Network System PTE Ltd. of Singapore,
along with 5 other companies in Europe, Asia, and the Middle East, to market and
support the Intela product line worldwide. Philips markets the Intela IIR system
as the VoiceManager 800 series.

Marketing. The marketing organization currently has a vice president who manages
the Company's product and marketing related activities,  three product managers,
one marketing manager,  and one assistant  marketing manager.  This organization
interfaces  with direct and  international  sales in  marketing  and selling the
company's products, applications, and services.

Promotional  Activities.  The Company's  promotional  efforts during fiscal 1996
included  advertising  in industry  trade  publications,  direct  mail,  product
presentations at trade shows and similar events, and public relations. The

<PAGE>
Company also conducted seminars for potential  customers in certain  industries,
such as Federal,  state and local  governments.  The Company expects to continue
these promotional activities during fiscal 1997.

Services

The Company  provides  limited  warranties  for parts and labor on its  products
ranging from 90 days to two years,  from the date of delivery.  The Company also
offers its  customers  annual  maintenance  contracts  under  which the  Company
maintains  and  services  the  systems.   Microlog  charges  an  annual  fee  of
approximately  10% to 16% of the purchase  price of its systems for  maintenance
contracts  covering normal  business  hours.  The fee is highest for maintenance
contracts  providing for 24-hour or weekend assistance.  Distributors  generally
perform  the  maintenance  required  on  systems  sold by them,  and most of the
Company's  distributors  offer annual maintenance  contracts,  which the Company
believes  are similar to those  offered by the Company and provided at generally
comparable  prices.

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

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

Customer  service and support for voice  processing  products  sold  through the
distribution  network  generally  is  provided by the  distributor.  Most of the
distributors offer annual maintenance contracts to customers with varying levels
of support.  CallStar  products  sold  through  distributors  would also receive
service and support from distributors,  and CallStar models sold to customers on
a direct basis are covered by the VCS 3500 customer service and support program.
The  Company  provides a limited  warranty  for parts and labor on its  CallStar
products for one-year,  with the exception of CallStar 1200 which has a two-year
warranty on voice boards and up to a four-year extended service warranty.

Backlog

As of October 31, 1996,  the Company had a backlog of existing  orders for voice
processing systems totaling $4.9 million.  The backlog,  as of October 31, 1995,
was $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 customer  delivery  schedules and the
level of customization required for Intela applications. The Company anticipates
that all of the  outstanding  orders at October 31, 1996 will be shipped and the
sales  recognized  during  fiscal 1997.  Although the Company  believes that its
entire backlog of orders consists of firm orders,  because of the possibility of
customer  changes in delivery  schedules and delays  inherent in the  government
contracting  process, the Company's backlog as of any particular date may not be
indicative of actual sales for any future period.
<PAGE>
Competition

The voice  processing  industry is highly  competitive and the Company  believes
that  competition  will intensify.  The Company  competes with a large number of
companies which produce voice  processing  products  offering one or more of the
twelve  voice  processing  applications  performed  by the  Company's  products.
Microlog's  competitors include companies such as AT&T,  Computer  Communication
Specialists ("CCS"),  InterVoice,  Inc., Perception Technology Corporation,  and
Syntellect,  that have emphasized  sales of systems with audiotex or interactive
voice  response  applications.  Direct  competition  with  the  Company's  voice
processing systems also arises from a substantial  number of companies,  such as
AVT,  Centigram,  and  Active  Voice,  that  focus on the  market  for  small or
medium-size  voice messaging  (voice mail or automated  attendant)  systems.  In
addition,  the Company also  competes  with dealers and  distributors  that sell
voice processing products of these and other competitors.

New or enhanced products can be expected from the Company's  competitors.  It is
also likely that there will be new entrants into the voice  processing  industry
because of the absence of any major technological barriers to entry.

Competition for the sale of voice  processing  systems has been based in part on
the application  required by the customer.  In marketing its Intela and VCS 3500
products,   the  Company  places   emphasis  on  the  twelve  voice   processing
applications  that can be  performed  and the  ability  of these  systems  to be
expanded to incorporate  additional  applications.  Although many of its primary
competitors continue to develop new voice processing  applications,  the Company
believes  that no competing  microprocessor-based  system  presently  offers all
twelve voice processing  applications on a single hardware platform. The Company
also believes  that many of its  competitors'  products  cannot be customized as
easily to the user's specific needs as the Intela and VCS 3500.

In marketing its Retail  Solution,  the Company places  emphasis on the suite of
applications and solutions that these applications  offer.  Potential  customers
have the ability to add additional  solutions as the need arises. The Company is
also able to customize these  applications to meet the user's needs. The Company
is  actively  developing  additional  features  to the Retail  Solution  and new
solutions for release in fiscal 1997.

In marketing its CallStar products, the Company places emphasis on the extensive
features,  and the ease of use and installation of its products in comparison to
competition.  The Company believes that the user interface for these products is
presently one of the best accepted  interfaces in the market.  In addition,  the
dealer support  programs,  including sales support,  service support and others,
help differentiate Microlog from the competition.

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

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

Research and Development and Product Engineering

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

During 1996 the Company  completed  a new release for its Intela  product  line,
release 2.07, this release adds functional enhancements to the optional features
of the product. Also during 1996, the Company began to offer release 3.5 for the
VCS product line. The 3.5 release included functional enhancements, such as, DOS
Protected

<PAGE>
Mode Interface, Global Tones, Release Line Trunking ("RLT"),  Telecommunications
Devices for the Deaf ("TDD"), and Multi-lingual Speech Recognition. For the APRS
systems, the Company developed a UNIX-based system which is available as a stand
along configuration as well as a "board and software"  solution.  The "board and
software"  solution  is designed  for  customers  who  already  have an in-store
processor with spare capacity.  The Company's product  engineering staff also is
engaged in the development of special product  features for current or potential
customers.  Unless prohibited by government regulation or customer contract, the
Company  retains  ownership of all software  applications  and features  that it
develops.

The following table sets forth for the periods indicated the Company's  research
and development  expenditures  and the percentage of voice  processing net sales
represented by these expenditures.
<TABLE>
<CAPTION>

                                       Research and Development Expenditures

                                     (In thousands, except percentage amounts)

                             Year Ended October 31,

                                                 1994              1995             1996
                                                 ----              ----             ----
<S>                                            <C>               <C>              <C>   
Research and development expense               $1,644            $1,592           $2,093

         Percentage of voice
           processing net sales                   16%               11%              13%
                                               ======            ======           ======
</TABLE>

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

Manufacturing and Operations

The Company  assembles  its own equipment  using  standard  parts  obtained from
outside sources.  The proprietary aspects of the Company's systems are primarily
in the software  provided with the  equipment  and in the specific  applications
development  designed for the customer.  Systems are built to order as they vary
in size and sophistication of software modules. The CallStar is the only product
that comes in a standard equipment format, although the Company is standardizing
some vertical market  applications.  Equipment assembly,  along with testing and
quality  control,  are performed at its  Gaithersburg,  Maryland  facility.  The
Company leases a manufacturing  and training  facility  located in Gaithersburg,
Maryland which expires in September,  1999.  Microlog currently has 13 employees
in its  manufacturing  group.  The Company  generally  uses  standard  parts and
components obtained from a variety of computer vendors and specially  configures
these  components  to produce the hardware for its systems.  Certain  components
used in the Company's products are presently  available from limited sources. To
date,  the Company has been able to obtain  supplies  of these  components  in a
timely manner from these sources.

Software Protection, Technology Licenses, and Trademarks

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

<PAGE>
The Company has patents on Automated  Announcement Systems,  Detection of TDD in
an Automated Telephone System, Automated Telephone System with TDD capabilities,
Digital  Switching,  Voice  Messaging,   Multiple-Language  Automated  Telephone
Systems,  Telecommunications  Device  for the Deaf  ("TDD")  compatibility,  and
Release Line Trunking ("RLT"),  and pending patent  applications on, TDD Message
Storage,  and other  TDD-related  innovations.  EVR,  Microlog,  Call Installer,
Truant, CINDI, ProNouncer,  CallStar, CallStar FXD, and APRS, are all registered
trademarks owned by the Company. Intela,  Intelaware,  Intelaview,  Prescription
Ready Connecting People to a World of Information,  and The Automated Collector,
are all  trademarks or service marks which are the subject of  applications  for
registration  owned by the Company which are pending in the United States Patent
and Trademark Office.  INTEL Corporation has filed with the U.S. Trademark Trial
and Appeal Board  requests for extension of time in which to file  opposition to
registration  by the  Company  of the  marks  Intela,  VCS  Intela,  Intelaware,
Intelaview.  Settlement discussions between the Company and INTEL Corporation on
these matters are currently on going. The Company is currently using, and claims
common law rights in the following additional unregistered marks: Voice Connect,
Genesis,  Voice  Path,  and VCS 3500.  In  addition,  the  Company  enters  into
confidentiality agreements with its employees,  distributors,  and customers and
limits  access to and  distribution  of its software,  documentation,  and other
proprietary  information.  There can be no assurance that the steps taken by the
Company  to  protect   its   proprietary   rights  will  be  adequate  to  deter
misappropriation of its technology.  Further, there can be no assurance that any
patent issued or that its registered copyrights can be successfully defended. In
any event, the Company  believes that factors such as  technological  innovation
and  expertise  and  market  responsiveness  are more  important  than the legal
protections described above.

PERFORMANCE ANALYSIS AND SUPPORT SERVICES

General

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

The principal customer for the Company's  performance analysis and technical and
administrative  support  services  is The  Johns  Hopkins  University's  Applied
Physics  Laboratory  ("APL"),  a United  States Navy  contractor,  for which the
Company or its subsidiaries have been performing services since 1972. Sales from
contracts with APL accounted for 43%, 37% and 38% of the Company's net sales for
fiscal 1994, 1995, and 1996, respectively.

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

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

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

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

Contracts

The Company's  contracts are  generally  one-year in duration,  and many of such
contracts  contain two one-year  extension  options,  with a fixed level of work
authorized  under the contract.  Several of the Company's  larger contracts with
APL have been renewed or  re-awarded to the Company  annually,  and the level of
work  authorized  at the time of  contract  renewal  has  provided  for,  in the
aggregate, the same or a greater level of services.

The Company  provides  services under three types of contracts.  The majority of
contracts  are on a  time-and-materials  basis,  pursuant  to which the  Company
receives a pre-set fee for all services  provided  under the  contract,  without
regard to the Company's cost of supplying these services, and is reimbursed only
for the cost of materials.  Other  contracts are on a purchase order basis which
operates similar to a time and materials contract,  and on a cost plus fixed fee
bases. Occasionally, the Company experiences delays in contract awards, contract
funding,  and payment,  which the Company  believes is customary under contracts
which involve performance of services for Federal Government agencies.

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

Competition

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

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

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

Backlog

As of October  31,  1996,  the  Company  had a backlog  of  funding on  existing
contracts for performance  analysis and support services  totaling $5.5 million.
By comparison,  the backlog as of October 31, 1995 was $7.8 million. The Company
anticipates  that these  services will be provided  during the next three fiscal
years. The Company  estimates that of the $5.5 million of backlog at October 31,
1996, $1.9 million will be recognized as sales beyond

<PAGE>
fiscal  1997.  Because  of the delays  inherent  in the  government  contracting
process or possible  changes in defense  priorities  or spending,  the Company's
backlog as of any particular  date may not be indicative of actual sales for any
future  period.  Although  the Company  believes  that its backlog of funding on
existing  contracts  is firm,  the  possibility  exists  that  funding  for some
contracts on which the Company is  continuing  to work,  in the  expectation  of
renewal,  may not be  authorized  (and the  Government  has the  right to cancel
contracts at any time), although to date this has not occurred.

Government Regulation

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

Employees

At January 16, 1997,  the Company and its  subsidiaries  employed a total of 267
persons,  including 4 part-time  employees.  Of these personnel,  89 are engaged
principally  in the  Company's  voice  processing  systems  operations,  170 are
engaged in performance analysis and support services, and 8 serve as officers or
managers  or perform  administrative  services  for the  Company  and all of its
subsidiaries.

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


ITEM 2.  PROPERTIES

The Company  occupies a 24,000  square foot  building in  Germantown,  Maryland,
which it uses for its  principal  executive  offices  and its  voice  processing
operations center. The Company also leases 22,700 square feet of office space in
Rancho Cordova,  California  which was Genesis'  headquarters  and 12,000 square
feet in Gaithersburg, Maryland which it uses for production and warehouse of its
voice processing products. In February 1993, the Company entered into a sublease
for its Rancho Cordova facility.  The sublease is for a five-year term and began
in June 1993.


ITEM 3.  LEGAL PROCEEDINGS

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


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

None.

<PAGE>

                                     PART II

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

The information  required by this item is incorporated  herein by reference from
"Price Range of Common Stock" and "Dividend  Policy" on page 22 of the Company's
printed Annual Report to Shareholders.


ITEM 6.  SELECTED FINANCIAL DATA

The  information  required by this item is  incorporated  herein by reference on
page 23 of the Company's printed Annual Report to Shareholders.


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

The information  required by this item is incorporated  herein by reference from
pages 19 through 23 of the Company's printed Annual Report to Shareholders.


ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated  Financial  Statements of the Company,  including  Consolidated
Statements of Operations  for the years ended October 31, 1994,  1995, and 1996,
Consolidated  Balance  Sheets as of October  31,  1995,  and 1996,  Consolidated
Statements  of Changes in  Stockholders'  Equity for the years ended October 31,
1994, 1995, and 1996,  Consolidated Statements of Cash Flows for the years ended
October  31,  1994,  1995,  and  1996,  and  Notes  to  Consolidated   Financial
Statements,  together  with the  report  thereon of Price  Waterhouse  LLP dated
December 16, 1996, are  incorporated by reference from pages 8 through 18 of the
Company's printed Annual Report to Shareholders.


ITEM 9.    DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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


ITEM 11.   EXECUTIVE COMPENSATION

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

<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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


ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

                                     PART IV

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

(a)(1)  Financial Statements

The  following  financial  statements  are included on pages 8 through 18 of the
Company's  printed Annual Report to Shareholders and are incorporated  herein by
reference.

         Consolidated  Statements  of Operations for the years ended October 31,
         1994, 1995, and 1996

         Consolidated Balance Sheets as of October 31, 1995, and 1996

         Consolidated  Statements  of  Changes in  Stockholders'  Equity for the
         years ended October 31, 1994, 1995, and 1996

         Consolidated  Statements of  Cash Flows for the years ended October 31,
         1994, 1995, and 1996

         Notes to Consolidated Financial Statements

         Report of Independent Accountants

(a)(2)  Financial Statement Schedule

Unaudited   supplementary  data  entitled  "Selected  Quarterly  Financial  Data
(unaudited)" is  incorporated  herein by reference in Item 8 (included in "Notes
to Consolidated Financial Statements" as Note 17).

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

F-1          Schedule II    Valuation and Qualifying Accounts and Reserves

F-2          Report of Independent Accountants on Financial Statement Schedule

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

(a)(3)  Exhibits

<TABLE>
<CAPTION>
Exhibit
Number                                               Description
<S>               <C>
      3.1         Amended and Restated Articles of Incorporation of Registrant, as amended 1/

<PAGE>




      3.2         By-laws of Registrant, as amended 1/

      4.1         Specimen Stock Certificate 1/

      10.1        Employment Agreement between the Company and Joe J. Lynn.

      10.2        Deferred  Compensation  Agreements  between the Company and J. Graham  Hartwell and Joe J.  Lynn,
                  respectively 3/

      10.4        Employment Agreement between the Company and Richard A. Thompson 5/

      10.5        Microlog Corporation Executive Deferred Bonus Plan 2/

      10.6        Microlog Corporation Medical Reimbursement Plan 5/

      10.8        Microlog Corporation 1989 Non-Employee Director Non-Qualified Stock Option Plan 6/
                                                                                                  -

      10.9        Agreements with Farmers & Mechanics National Bank

      10.10       Sub-contracting Agreement with Aspect Telecommunications Corporation 6/

      10.11       Sub-contracting Agreement with Applied Physics Laboratory 6/

      10.12       Agreement with Philips Communication Systems B.V.*/ 7/

      13          Annual Report to Shareholders for the fiscal year ended October 31, 1996

      22          Subsidiaries of the Registrant 5/

      24          Consent of Price Waterhouse LLP
</TABLE>
----------
*/        Confidential treatment has been granted for portions of this document.

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

2/   Filed as an Exhibit to Annual Report on Form 10-K for the fiscal year ended
     October 31, 1987.

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

4/   Filed as an Exhibit to Annual Report on Form 10-K for the fiscal year ended
     October 31, 1990.

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

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

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

(b)        Reports on Form 8-K

No reports on Form 8-K were filed by the  Company  during the fiscal  year ended
October 31, 1996.


<PAGE>

OTHER MATTERS
-------------

For the purposes of complying  with the  amendments to the rules  governing Form
S-8 (effective  July 13, 1990) under the Securities Act of 1933, the undersigned
registrant hereby undertakes as follows, which undertaking shall be incorporated
by  reference  into  registrant's  Registration  Statements  on Form  S-8,  Nos.
33-30965 (filed September 11, 1989) and 33-34094 (filed March 30, 1990):

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


<PAGE>




                                   Exhibit 13


             Annual Report to Shareholders for the fiscal year ended

                                October 31, 1996


<PAGE>



                                   Exhibit 24


                         Consent of Price Waterhouse LLP


<PAGE>




                       CONSENT OF INDEPENDENT ACCOUNTANTS
                       ----------------------------------

We  hereby  consent  to the  incorporation  by  reference  in  the  Registration
Statements on Form S-8 (No.  33-30965 and 333-2612) of Microlog  Corporation  of
our report  dated  December  16, 1996  appearing  on page 18 of the 1996 Printed
Annual Report to Shareholders of Microlog  Corporation  which is incorporated in
this  Annual  Report on Form  10-K.  We also  consent  to the  incorporation  by
reference of our report on the Financial  Statement  Schedule,  which appears on
page F-2 of this Form 10-K.




Price Waterhouse LLP

Washington, DC
January 29, 1997


<PAGE>



                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934, as amended, the registrant has duly caused this report to be signed
on its behalf by the  undersigned,  thereunto  duly  authorized,  in the City of
Germantown, State of Maryland on January 26, 1996.


                                      MICROLOG CORPORATION


                                      By  /s/ Richard A. Thompson
                                          -------------------------------------
                                          Richard A. Thompson
                                          President and Chief Executive Officer

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




------------------------------------------------               February 10, 1997
Steven R. Delmar
Executive Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)



------------------------------------------------               February 10, 1997
David M. Gische
Director



------------------------------------------------               February 10, 1997
Robert E. Gray, Jr.
Director



------------------------------------------------               February 10, 1997
J. Graham Hartwell
Chairman of the Board and Director



------------------------------------------------               February 10, 1997
Joe J. Lynn
Chief Development Officer and Director



------------------------------------------------               February 10, 1997
Richard A. Thompson
President and Chief Executive Officer


<PAGE>
<TABLE>
<CAPTION>
                                      ADDITIONAL SCHEDULE REQUIRED
                               SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

                                                           BALANCE                                             BALANCE
FISCAL YEAR ENDED 10/31/96                                  11/1           ADDITIONS         DELETIONS          10/31
--------------------------------------------------     --------------------------------------------------------------------
<S>                                                            <C>                <C>               <C>            <C>    
RECEIVABLES
                       ALLOWANCE FOR DOUBTFUL ACCOUNTS         167,211            80,729            40,852         207,088

INVENTORY
   RESERVE FOR OBSOLESCENCE                                  1,054,615           379,293         1,181,290         252,618

INCOME TAXES
   VALUATION ALLOWANCE                                       4,931,902                 0         1,470,352       3,461,550

FISCAL YEAR ENDED 10/31/95
--------------------------------------------------

RECEIVABLES
   ALLOWANCE FOR DOUBTFUL ACCOUNTS                             233,081            15,422            81,292         167,211

INVENTORY
   RESERVE FOR OBSOLESCENCE                                  1,144,694           321,117           411,196       1,054,615

INCOME TAXES
   VALUATION ALLOWANCE                                       5,460,142                 0           528,240       4,931,902

FISCAL YEAR ENDED 10/31/94
--------------------------------------------------

RECEIVABLES
   ALLOWANCE FOR DOUBTFUL ACCOUNTS                             174,454            72,000            13,373         233,081

INVENTORY
   RESERVE FOR OBSOLESCENCE                                    777,575         1,137,039           769,920       1,144,694

INCOME TAXES
   VALUATION ALLOWANCE                                       3,473,212         1,986,930                 0       5,460,142

</TABLE>


                                       F-1







<PAGE>

        REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
        -----------------------------------------------------------------


To The Board of Directors and Stockholders
Microlog Corporation



Our audits of the consolidated  financial  statements  referred to in our report
dated  December 16, 1996  appearing on page 18 of the 1996 Printed Annual Report
to Shareholders of Microlog Corporation (which report and consolidated financial
statements  are  incorporated  by reference in this Annual  Report on Form 10-K)
also included an audit of the Financial  Statement Schedule listed in Item 14(a)
of this Form 10-K. In our opinion,  the Financial  Statement  Schedule  presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.




Price Waterhouse LLP
Washington, DC
December 16, 1996


                                       F-2
<PAGE>
Microlog
1996
Annual Report
"...developing lasting partnerships."
Connecting people
to a world of informationTM
Microlog Headquarters
20270 Goldenrod Lane
Germantown, Maryland 20876-4070
USA
Tel. 301-428-9100
Fax 301-916-2475
http://www.mlog.com

Microlog Europe
De Pinckart 54
5674 CC Nuenen
Postbus 319
5670 AH Nuenen
The Netherlands
Tel. 31 (0)40 2631255
Fax 31 (0)40 2839922

Microlog Corporation designs, develops, markets, and supports a complete line of
Interactive  Information  Response (IIR) systems and  application  solutions for
customers  worldwide.  Our  solutions  help  clients in  government  and private
industry  operate more  efficiently,  productively,  and  profitably. 

We define ourselves as suppliers of Interactive  Information Response technology
to better  reflect the myriad of ways users of these  systems  can now  interact
with information.  In traditional Interactive Voice Response, callers hear voice
prompts and then use a touch-tone  telephone to enter  information  into, and/or
retrieve  information  from,  a  computer  database.  Now,  IIR users can access
information not only through voice,  but also through the Internet,  faxes,  TDD
(Telephony  Device  for the Deaf ), ADSI  (Analog  Display  Services  Interface)
screen phones, and pagers.

Microlog  Corporation  is  headquartered  near  Washington,  DC, in  Germantown,
Maryland.  Microlog  Europe,  an  international  subsidiary,  is  based  in  The
Netherlands.

Old Dominion Systems Incorporated of Maryland,  a Microlog subsidiary,  provides
technical and administrative support to US prime government contractors.  ODSM's
comprehensive  technical  capabilities  include software  development life cycle
support,  data management  support,  systems  engineering and  integration,  and
information  management services. 


                              [ GRAPHIC OMITTED ]

To Our Shareholders and Friends 

We are  pleased to announce  that 1996  represented  Microlog's  best year ever,
producing record results in terms of both revenues and profitability.  In fiscal
1996, Microlog generated $2.7 million in net income on consolidated net revenues
of $25.7  million.  All three of the Company's  IIR business  units--Government,
Commercial,  and  International--along  with ODSM, produced higher revenues this
year compared to 1995.

The  Company  also  succeeded  in adding a $1.0  million  loan  facility  to its
existing $2.0 million line of credit to provide  additional  working capital for
the future.

Market Focus

Commercial

Our year-over-year  revenue from commercial  customers increased 144%, from $1.6
million in 1995 to $3.9 million in 1996. This was due in part to the multi-year,
multi-million  dollar  contract  Microlog  was  awarded to  provide  Interactive
Information  Response  systems to Eckerd  Corporation,  one of the largest  drug
store chains in the US. 

As we continue to build market share in this niche, we are also developing plans
for the phased  penetration of other industry  niches with the long-term goal of
establishing broad brand equity for Microlog products.

Government

Our government  business  continues to provide Microlog with a solid base and an
ongoing  revenue  opportunity  as  our  resource-pressed   government  customers
continue  to  embrace  IIR   technology   as  a  means  to  better  serve  their
constituents.  For instance,  one of our most significant  government customers,
the  Internal  Revenue  Service,  ordered a $5 million  upgrade  during  1996 to
standardize on Microlog's Intela(TM) IIR platform product.
<PAGE>


International

During fiscal year 1996,  Microlog  strengthened  its position in Europe through
the  acquisition  of the Dutch IIR supplier,  Phonatic  International  B.V. This
merger underscores  Microlog's  commitment to establishing itself as a player in
the worldwide Interactive Information Response marketplace,  building first on a
strong  base  in  Europe.

During 1996, Microlog also signed several new distribution  partners,  including
Devotech in France,  as well as Deutsche  Telekom in Germany.  In addition,  our
partner in Singapore,  Communications  and Network  Systems PTE,  Ltd.,  secured
several significant contracts during 1996.

Performance  Analysis 

Our Old  Dominion  Systems  Incorporated  of  Maryland  (ODSM)  subsidiary  also
continued to perform well,  generating $9.9 million in revenue,  up $1.6 million
from the prior year. During the year, we were successful in adding new contracts
and increasing the level of work  authorized  under existing  contracts from the
Johns  Hopkins  University  Applied  Physics  Laboratory  (APL),  the  Company's
principal  customer since 1972. ODSM's scope of work continues to be in the form
of technical data processing and analysis,  engineering and scientific analysis,
and  computer  services.  Management  anticipates  continued  growth  from  this
business segment in 1997.

Looking Ahead  

Microlog's  objective  for  fiscal  year  1997 is to grow at a rate  equal to or
greater than the industry norm. We expect to pursue this growth through  further
investment  in people,  processes,  and tools,  and a focus on  building  market
share, particularly in the retail pharmacy market.

We shall continue to pursue  promising new markets,  explore  further  strategic
acquisitions,  and rapidly insert new technological developments to our products
in order to strengthen our position domestically and abroad.

Our thanks go to the many people who have  contributed  to the past
year's  results.  We thank our employees for their loyalty and  dedication,  our
distributors  and  business  partners for their  commitment  to our products and
services,  and our shareholders and customers for their continued  confidence in
Microlog. We also welcome our new partners/customers, value added resellers, and
shareholders to the Microlog family.

/s/ Richard a. Thompson

Richard A. Thompson
President and Chief Executive Officer
Developing Lasting Partnerships
<PAGE>

Commercial Business Unit

Eckerd Corporation Leads the Way With Microlog

Eckerd is a company with a vision.  With over 1,700  stores in thirteen  states,
Eckerd was  already  one of the  largest  retail  drug chains in the US in 1996,
ranking  No. 1 or No.  2 in  twenty-three  of the  nation's  top 100 drug  store
markets. But that was not enough: Frank Newman, Eckerd's CEO, announced the goal
of growing to 2,000 units by the end of the decade and becoming No. 1 in each of
the company's metropolitan markets within five to seven years. Then, J.C. Penney
announced that it would buy Eckerd,  merging it with Penney's  current  holding,
Thrift Drug, creating a single chain with approximately 2,700 units. Penney also
announced that Newman would become CEO of the combined  entity.  

                                        In   keeping   with   Eckerd's
                                        reputation   as  an   industry
"Microlog's  APRS...enables us          innovator,   the  company  had
to   both   improve   in-store          embarked  on a  re-engineering
efficiency   and   provide   a          program  in 1993  designed  to
higher level of service to our          make  the  company  "the  best
time-pressed customers."                provider   of   pharmacy   and
                                        related  health  care  in  the
Richard D. (Dale) Adkins, Vice          industry."  As  a  part  of  a
President      of     Pharmacy          major     pharmacy      system
Operations, Eckerd Corporation          overhaul,  Eckerd  selected  a
Government                              new in-store processor,  along
                                        with new telephone  equipment.
                                        It also signed a multi-million
                                        dollar, three year contract in
                                        1996  to  install   Microlog's
                                        APRS(R) Automated Prescription
                                        Refill  System  in most of its
                                        pharmacies.                   
 
Eckerd selected  Microlog due to APRS' rich set of features,  our extensive UNIX
programming knowledge,  and our deep telephony and project management expertise.
APRS, one of the primary modules  available under  Microlog's  Retail  Solutions
product line, enables physicians to call in prescriptions, and patients to order
refills automatically, from any touch-tone phone.

This provides  convenience,  faster  turnaround,  and better  service for Eckerd
customers,  and frees up pharmacists for additional  patient  consultations.  As
managed  care  continues  to  change  the way  health  care is  delivered,  APRS
technology  becomes a critical  enabler  of the  pharmacist's  evolving  role at
Eckerd--that  of  providing  pharmacy  care  services  that  extend  far  beyond
dispensing medications.

APRS' robust features  include the  Prescription  Ready(TM) out dial capability,
which promotes "patient  compliance" by placing reminder calls to those who have
not used all their refills;  this helps ensure  patients take the optimum dosage
of medication as prescribed by their doctor. Also, through a direct link between
APRS  and the  pharmacy  database,  APRS can  leverage  the  extensive  medical,
customer,  and marketing  information  stored on the pharmacy  system.  APRS can
provide  customers  drug  interaction   information  and  promote  complementary
over-the-counter products available for purchase.

The opportunity in the retail  pharmacy  marketplace  grows as industry  leaders
begin to reap the competitive benefits of deploying voice processing technology.
As they do so, the rest of the industry is likely to find it necessary to follow
suit--particularly  in light of increasing  margin  pressures and the continuing
trend toward  market  consolidation.  Microlog is  well-positioned  to serve the
needs of these pharmacy customers.

<PAGE>
Business Unit

IRS Call Centers Standardize on Intelax

Like all government agencies, the Internal Revenue Service is increasingly being
asked to do more with less.  Constituents  and lawmakers alike are demanding the
agency provide better service to taxpayers  while driving down operating  costs.
As a long time technology partner, Microlog takes great pride in helping the IRS
meet this  challenge.  

During 1996,  the IRS  committed to  standardizing  its  nationwide  call center
network on our Intela IIR  platform,  with plans to  automate  45 percent of all
calls.  By the end of fiscal  year  1996,  Microlog  had  received a total of $5
million in orders from the IRS to upgrade existing Microlog equipment to Intela.
The IRS placed the orders through its contract with Aspect Telecommunications, a
market leader in providing product and service solutions for organizations  with
mission-critical call centers.

By year end,  more than 20 IRS Intela  systems  were up and  running  across the
country,  with some  systems  running as many as seven  Interactive  Information
Response  applications.  These applications were designed to efficiently process
tax-related calls from citizens, generally without requiring the assistance of a
customer service representative.

The Voice  Balance Due  application  allows  taxpayers in arrears to commit to a
federal  tax  repayment  plan,  which  has  led  to a  significant  increase  in
incremental  collections.  In fact, one IRS office collected 200,000 promises to
pay through VBD in just six weeks.  Callers can also check the status and amount
of their refunds through the Refund Inquiry  application and can get information
about where to file  returns and where to send  remittances  using the  Location
application.  There  is also a CTI (Computer Telephony Interface) application--
developed              jointly
with   Aspect--ensuring   that
when a  taxpayer  does need to
talk with a  customer  service
representative,  the  call  is          "The  decision  to  upgrade to 
handled   efficiently:    data          Intela  was  based on the IRS' 
already  collected  by  Intela          need   for   enhanced    voice 
from    the     taxpayer    is          response capabilities provided 
transferred   along  with  the          by the Intela software and the 
call to the representative.             UNIX operating environment."   
                                                                       
Microlog  was one of the first          Robert Grossman, Manager, TRIS 
companies  to  develop a voice          Project    Office,    Internal 
response  system  specifically          Revenue Service                
for the  needs  of  government          
and  has   served  the  public
sector for more than 20 years,
installing   more  than  8,400
voice  processing  ports at the IRS alone.  One cornerstone of our  relationship
with  the  IRS and  other  government  customers  has  been  our  commitment  to
delivering  products and services of the highest quality.  In fact, Microlog was
the first  voice  processing  company  to  receive  ISO 9001  certification.  In
addition,   we  will  pursue  CMM  Level  II  certification   during  1997.  The
"Capabilities Maturity Model" is recognized by major government entities as well
as Fortune 500  corporations  for its  effectiveness  in ensuring  adherence  to
rigorous software development standards and procedures.
<PAGE>

 International  Business Unit 

Microlog  Plays  Integral Role in Philips' Call Center Strategy  

Philips Business  Communications of The Netherlands,  a household name in Europe
and  Asia,   is  one  of  the  world's   leading   suppliers  of  open  business
communications  solutions,  providing scalable switching platforms,  value added
applications and services.  A leading telecom switch provider,  Philips has 10.3
million total PABX lines installed worldwide.

                                                  In 1994,  Philips and Microlog
                                                  entered   into   a   strategic
                                                  alliance  to  jointly  develop
                                                  Philips'  VoiceManager 800, an
"Working in  partnership  with                    advanced   voice    processing
Microlog,  we  believe we have                    platform  based on  Microlog's
developed the voice processing                    Intela  product  line.   Since
product  necessary to meet the                    then,   we  have  worked  with
demanding  requirements of our                    Philips   on   several   major
call center  customers  across                    accounts, as Philips has built
Europe and Asia.                                  market   awareness   for   the
                                                  VoiceManager  800  across  six
"   Ian   Murdoch,   Marketing                    European   and   seven   Asian
Director,   Philips   Business                    countries.                    
Communications                                                                  
                                                  As we enter  1997,  the Intela
                                                  platform   forms  an  integral
                                                  part of Philips'  newly-formed
                                                  TeleBusiness    Group's   call
center strategy.  In fact, the  TeleBusiness  Group plans to focus on markets in
which  Microlog  has  extensive  applications  expertise:   health  and  medical
services,  banking and insurance,  utilities,  and government,  among others. In
partnering with Microlog,  Philips is confident that customers will benefit from
the best of breed for PABX integrated voice response solutions.

In support of these sales efforts, Microlog put the final touches on a major new
Intela release toward the close of fiscal 1996. This international  release will
provide robust digital connectivity  functionality critical to market success in
Europe and Asia.  The release will also provide  support for Philips'  Automatic
Speech Recognition, Dial Pulse Detection, and various fax enhancements.
<PAGE>

Microlog Looks Ahead

when  soldiers  serving  in Desert  Storm  called  stateside,  it was a Microlog
solution  that helped them  connect  with family and friends at home.  Developed
prior  to the  Gulf  War,  Release  Line  Trunking  (RLT)  provides  a  uniform,
switch-independent  means to transfer  calls.  Closer to home, RLT provides such
valuable  functions  as  automatically  transferring  after-hours  calls  from a
patient's local pharmacy to the same chain's nearest 24 hour pharmacy.

Release Line Trunking is just one of the seven patents Microlog already holds in
areas including multiple language switch technology and Telephony Device for the
Deaf (TDD)  applications.  An additional patent is pending and Microlog plans to
pursue others in related areas.

In 1996,  Microlog  strengthened its commitment to research and to extending its
already  rich  portfolio  of patented  inventions.  The  Microlog  research  and
development  group  will  be  concentrating  in 1997  and  beyond  on  extending
Microlog's  expertise in  distributed  network-based  computing and  management,
Internet-based  voice  and  data  applications,  low-end  hardware  capabilities
including general and digital signal processors in a single compact package, and
advanced telephony features for productivity enhancements. 

Technical  innovations  are  always  important  to a  technology-based  company.
However,  they are not the only keys to  success.  Microlog's  success  has been
founded on an ability to  understand  customer  needs and then fulfill them more
uniquely  and rapidly  than  others,  while  providing  higher  levels of value,
quality,  and service.  In 1997, we will build further on this tradition,  while
developing an increased focus on strategic market planning, aligned closely with
an on-going  commitment to technology R&D. This approach was strengthened during
1996 with the formation of a "product  development"  group,  combining  software
engineering and product marketing under one cohesive umbrella.

Strategic  market  planning  allows Microlog to identify market niches where its
strengths  can  be  leveraged,   through   direct  or  indirect   marketing  and
distribution  channels.  As the company  grows,  these niches will grow in size,
number,  and  geographic  presence.  Planning  allows  the  market  niches to be
identified at the point of early technology acceptance on the part of customers,
and allows the  efficient and  sequential  allocation of small numbers of highly
skilled  Microlog  staff to harvest  high volume  opportunities  over short time
frames. This has been the key in the highly successful Government and Commercial
Business Units, and is the model for future successes in International and other
vertical market segments to come.
<PAGE>


<TABLE>
<CAPTION>

Consolidated Statements of Operations
                                                                              Year Ended October 31,
                                                                     1994           1995             1996

Net sales:
<S>                                                            <C>             <C>             <C>         
        Products                                               $  7,856,759    $  9,905,239    $ 11,458,643
        Services                                                 10,812,003      12,480,404      14,248,092
-----------------------------------------------------------------------------------------------------------
                Total net sales                                  18,668,762      22,385,643      25,706,735
-----------------------------------------------------------------------------------------------------------
Costs and expenses:
        Cost of products                                          5,760,284       4,746,581       5,190,018
        Cost of services                                          8,625,581       8,173,060       9,918,101
        Selling, general and administrative                       7,005,470       6,373,764       6,394,407
        Research and development                                  1,643,850       1,591,895       2,093,496
        Restructuring costs                                         550,258              --              --
-----------------------------------------------------------------------------------------------------------
                Total costs and expenses                         23,585,443      20,885,300      23,596,022
-----------------------------------------------------------------------------------------------------------
Income (loss) from operations                                    (4,916,681)      1,500,343       2,110,713
Investment income                                                    38,244          24,078          10,900
Interest expense                                                   (137,416)       (112,244)        (91,786)
Other income (expense), net                                          55,046          (5,046)         43,611
-----------------------------------------------------------------------------------------------------------
Income (loss) before income taxes                                (4,960,807)      1,407,131       2,073,438
Benefit (provision) for income taxes                                (23,234)        (20,000)        639,296
-----------------------------------------------------------------------------------------------------------
Net Income (loss)                                              $ (4,984,041)   $  1,387,131    $  2,712,734
-----------------------------------------------------------------------------------------------------------
Per common share                                               $      (1.29)   $       0.34    $       0.59
-----------------------------------------------------------------------------------------------------------
</TABLE>

                     See accompanying notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>


Consolidated Balance Sheets
                                                                              October 31,
                                                                         1995           1996
Assets
Current assets:
<S>                                                                 <C>             <C>         
        Cash and cash equivalents                                   $    922,763    $  1,170,603
        Receivables, net                                               3,046,160       4,259,841
        Inventories, net                                               1,436,889       2,218,306
        Deferred tax asset                                                    --         650,000
        Other current assets                                             110,365         208,551
------------------------------------------------------------------------------------------------
        Total current assets                                           5,516,177       8,507,301
------------------------------------------------------------------------------------------------
Fixed assets, net                                                      3,006,528       3,886,371
Licenses, net                                                            523,810         409,524
Other assets                                                             232,491         101,788
Goodwill, net                                                            146,710         807,738
------------------------------------------------------------------------------------------------
        Total assets                                                $  9,425,716    $ 13,712,722
------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
        Current portion of long-term debt                           $     45,455    $     54,740
        Borrowings under line-of-credit agreement                             --       1,400,000
        Accounts payable                                               1,388,122         962,715
        Accrued compensation and related expenses                      2,103,316       1,874,691
        Other accrued expenses                                         1,230,310       1,070,973
------------------------------------------------------------------------------------------------
        Total current liabilities                                      4,767,203       5,363,119
------------------------------------------------------------------------------------------------
Long-term debt                                                              --           202,860
Deferred officers' compensation                                          269,218         267,921
Other liabilities                                                        227,641         112,184
------------------------------------------------------------------------------------------------
        Total liabilities                                              5,264,062       5,946,084
------------------------------------------------------------------------------------------------
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, 4,507,968 and 4,792,004 shares issued         45,079          47,920
        Capital in excess of par value                                15,015,344      15,904,753
        Treasury stock, at cost, 601,870 shares (1,176,537)           (1,176,537)
        Accumulated deficit                                           (9,722,232)     (7,009,498)
------------------------------------------------------------------------------------------------
        Total stockholders' equity                                     4,161,654       7,766,638
------------------------------------------------------------------------------------------------
        Total liabilities and stockholders' equity                  $  9,425,716    $ 13,712,722
------------------------------------------------------------------------------------------------

</TABLE>

                     See accompanying notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>

Consolidated Statements of Changes in Stockholders' Equity



                                                       Serial                                       Capital In
                                                  Preferred Stock             Common Stock          Excess of  
                                                 Shares  Par Value        Shares     Par Value      Par Value  

<S>                                               <C>         <C>       <C>         <C>            <C>         
Balance as of October 31, 1993                    --          --        4,372,661   $     43,726   $ 14,758,655
        Exercise of common stock options          --          --            6,850             69          7,344
        Net loss for the year ended
                October 31, 1994                  --          --             --             --             --  
Balance as of October 31, 1994                                --             --        4,379,511         43,795
        Exercise of common stock options          --          --           25,600            256         25,373
        Release of mandatorily
                redeemable common stock                       --             --          102,857          1,028
        Net income for the year ended
                October 31, 1995                  --          --             --             --             --  
Balance as of October 31, 1995                                --             --        4,507,968         45,079
        Exercise of common stock options          --          --          219,114          2,192        305,758
        Issuance of common stock in
                conjunction with acquisition
                of Phonatic International B.V     --          --           64,922            649        583,651
        Net income for the year ended
                October 31, 1996                  --          --             --             --             --  
Balance as of October 31, 1996                    --          --        4,792,004   $     47,920   $ 15,904,753

</TABLE>
<TABLE>
<CAPTION>
                                                         Treasury Stock        Accumulated
                                                    Shares           Cost       Deficit             Total

<S>                                           <C>             <C>             <C>             <C>         
Balance as of October 31, 1993                      601,870   $ (1,176,537)   $ (6,125,322)   $  7,500,522
        Exercise of common stock options               --             --              --             7,413
        Net loss for the year ended
                October 31, 1994                       --             --        (4,984,041)     (4,984,041)
Balance as of October 31, 1994                   14,765,999        601,870     (11,109,363)      2,523,894
        Exercise of common stock options               --             --              --            25,629
        Release of mandatorily
                redeemable common stock           223,972--           --              --           225,000
        Net income for the year ended
                October 31, 1995                       --             --         1,387,131       1,387,131
Balance as of October 31, 1995                   15,015,344        601,870      (9,722,232)      4,161,654
        Exercise of common stock options               --             --              --           307,950
        Issuance of common stock in
                conjunction with acquisition
                of Phonatic International B.V          --             --              --           584,300
        Net income for the year ended
                October 31, 1996                       --             --         2,712,734       2,712,734
Balance as of October 31, 1996                      601,870   $ (1,176,537)   $ (7,009,498)   $  7,766,638

See accompanying notes to consolidated financial statements
</TABLE>

<PAGE>

Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>


                                                                                               Year Ended October 31,
                                                                                1994                   1995             1996
                                                                                ----                   ----             ----

Cash flows from operating activities:
<S>                                                                         <C>                   <C>                  <C>        
        Net income (loss)                                                   $(4,984,041)          $ 1,387,131          $ 2,712,734
        Adjustments to reconcile net income (loss) to net
                cash (used in) provided by operating activities:
                        Depreciation                                            879,046               474,537              633,182
                        Deferred officers' compensation                          18,000                    --               (1,297)
                        Amortization of goodwill and licensing agreement        274,713               184,706              227,742
                        (Gain) loss on disposition of fixed assets               18,544                 2,869              (55,455)
                        Deferred tax benefit                                       --                    --               (650,000)
                        Changes in assets and liabilities:
                                Receivables                                   1,433,393              (358,586)          (1,198,255)
                                Inventories                                   1,042,768              (554,705)            (781,417)
                                Other current assets                            (78,595)               47,225              (98,186)
                                Accounts payable                                307,894               304,152             (425,407)
                                Accrued compensation and related expenses        43,751               469,038             (228,625)
                                Other accrued expenses                          729,378              (352,394)            (322,770)
-----------------------------------------------------------------------------------------------------------------------------------
        Net cash (used in) provided by operating activities                    (315,149)            1,603,973             (187,754)
-----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
        Purchases of fixed assets                                              (487,103)             (543,159)          (1,318,969)
        Proceeds from sale of fixed assets                                       65,638                 1,150               72,000
        Purchase of Phonatic International B.V.                                      --                    --             (110,635)
        Other assets                                                           (212,155)              132,795              130,703
-----------------------------------------------------------------------------------------------------------------------------------
        Net cash used in investing activities                                  (633,620)             (409,214)          (1,226,901)
-----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
        Reduction in long-term debt                                            (505,244)           (1,463,819)             (45,455)
        Net borrowings under line-of-credit agreement                              --                    --              1,400,000
        Exercise of common stock options                                          7,413                25,629              307,950
-----------------------------------------------------------------------------------------------------------------------------------
        Net cash provided by (used in) financing activities                    (497,831)           (1,438,190)           1,662,495
-----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                         (1,446,600)             (243,431)             247,840
Cash and cash equivalents at beginning of year                                2,612,794             1,166,194              922,763
-----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                    $ 1,166,194           $   922,763          $ 1,170,603
-----------------------------------------------------------------------------------------------------------------------------------

                                                                        See accompanying notes to consolidated financial statements
</TABLE>

<PAGE>
Notes to Consolidated Financial Statements
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:

                                                  Year Ended October 31,
                                                  1994    1995    1996
                                                  ----    ----    ----
                                                  (Amounts in thousands) 
Net sales:
        Voice processing systems and
                other communications products   $10,574   $14,089   $15,836
        Performance analysis and
                support services                  8,095     8,297     9,871
--------------------------------------------------------------------------------
        Net sales                               $18,669   $22,386   $25,707
--------------------------------------------------------------------------------
Income (loss) from operations:
        Voice processing systems and
                other communications products   $(5,363)  $   795   $ 1,131
        Performance analysis and
                support services                    446       705       980
--------------------------------------------------------------------------------
        Income (loss) from operations           $(4,917)  $ 1,500   $ 2,111
--------------------------------------------------------------------------------
Identifiable assets:
        Voice processing systems and
                other communications products   $ 4,968   $ 6,383   $10,822
        Performance analysis and
                support services                  1,785       683       645
        Buildings for common use                  2,303     2,360     2,246
--------------------------------------------------------------------------------
        Identifiable assets                     $ 9,056   $ 9,426   $13,713
--------------------------------------------------------------------------------
Capital expenditures:
        Voice processing systems and
                other communications products   $   459   $   531   $ 1,550
        Performance analysis and
                support services                     13         2        15
        Buildings for common use                     15        10        25
--------------------------------------------------------------------------------
        Capital expenditures                    $   487   $   543   $ 1,590
--------------------------------------------------------------------------------
Depreciation expense:
        Voice processing systems and
                other communications products   $   781   $   358   $   501
        Performance analysis and
                support services                      5         6         8
        Buildings for common use                     93       111       124
--------------------------------------------------------------------------------
        Depreciation expense                    $   879   $   475   $   633
--------------------------------------------------------------------------------
<PAGE>


     Approximately 32%, 38%, and 37% of the Company's consolidated net sales for
fiscal 1994, 1995, and 1996, respectively, involved the sale of voice processing
systems and other communications products to the Federal Government.


     Approximately  0%, 3%, and 10% of the Company's  consolidated net sales for
fiscal 1994, 1995, and 1996, respectively, involved the sale of voice processing
systems and other communications  products to one customer in the pharmaceutical
industry.

     Approximately  4%, 6%, and 6% of the Company's  consolidated  net sales for
fiscal  1994,  1995,  and  1996,  respectively,  involved  the  export  of voice
processing systems and other communications products to foreign countries.


     Approximately 43%, 37%, and 38% of the Company's consolidated net sales for
fiscal 1994, 1995, and 1996,  respectively,  involved  performance  analysis and
support  services  subcontracts  with prime  contractors  to the US Navy.  These
contracts  have been  extended,  or have options to extend,  to various dates in
fiscal 1997 and 1998.

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


2
--------------------------------------------------------------------------------
Summary of Accounting Policies 

Use of  Estimates
The preparation of financial  statements,  in conformity with generally accepted
accounting  principles,  requires  management to make estimates and  assumptions
that affect the  reported  amounts of assets and  liabilities  of the  financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates and assumptions.

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

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

Fair Value of Financial  Instruments 
The carrying amounts of cash, accounts  receivable,  accounts payable,
and accrued expenses  approximate fair
value because of the short maturity of these items. 
<PAGE>

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

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

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

Intangible  Assets
Licenses are recorded at cost and amortized on a straight-line  basis over seven
years.  Accumulated  amortization  at October 31, 1995 and 1996 was $276,190 and
$390,476,  respectively. 
Goodwill  arising from the  acquisitions  of  companies is being  amortized on a
straight-line  basis over six to seven years. The Company considers  goodwill to
be recoverable  and is evaluated  quarterly based on current  undiscounted  cash
flow projections of each specific acquired business. Accumulated amortization at
October 31, 1995 and 1996 was $568,727 and $682,183, respectively.
     Costs incurred in basic research and  development are expensed as incurred.
The  Company  has  determined  that the  process of  establishing  technological
feasibility with its new products is completed approximately upon the release of
the  products to its  customers.  Accordingly,  software  development  costs are
expensed as incurred.

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

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.  The weighted average number of shares  outstanding
for the years ended October 31, 1994, 1995, and 1996 were 3,877,029,  4,066,705,
and 4,566,199, respectively.


3
--------------------------------------------------------------------------------
Acquisition  of  Phonatic  International  B.V.  On June 28,  1996,  the  Company
acquired Phonatic International B.V. of The Netherlands. The Company changed the
name of Phonatic to  Microlog  Europe,  a  wholly-owned  subsidiary  of Microlog
Corporation of Maryland.  To acquire  Phonatic,  the Company  acquired assets of
$151,513,  issued  64,922  shares of its common stock  valued at $584,300,  paid
$233,720 in cash to the Phonatic shareholders,  assumed $107,976 in liabilities,
and incurred acquisition costs totaling  approximately  $46,000. 
     The  acquisition  has been  accounted for as a purchase and therefore  only
activity  subsequent to the  acquisition  date has been included in consolidated
results.  The  excess of the  purchase  price  over the fair value of net assets
acquired totaled $774,483 and has been recorded as goodwill.

<PAGE>

4 
--------------------------------------------------------------------------------
Receivables


Receivables  consist of the following:
                                                          October 31,
                                                     1995            1996
                                                     ----            ----
Billed accounts receivable                       $ 3,094,035      $ 4,339,445
Contract retention                                    78,742           77,742
Accumulated unbilled costs and fees                   40,594           49,742
--------------------------------------------------------------------------------
                                                   3,213,371        4,466,929
Less: Allowance for doubtful accounts               (167,211)        (207,088)
--------------------------------------------------------------------------------
                                                 $ 3,046,160      $ 4,259,841
--------------------------------------------------------------------------------


5
--------------------------------------------------------------------------------
Inventories


Inventories consist of the following:
                                                          October 31,
                                                     1995            1996
                                                     ----            ----
Components and finished goods                    $ 1,999,192      $ 1,951,370
Work-in-process                                      492,312          519,554
--------------------------------------------------------------------------------
                                                   2,491,504        2,470,924
Less: Reserve for obsolescence                    (1,054,615)        (252,618)
--------------------------------------------------------------------------------
                                                 $ 1,436,889      $ 2,218,306
--------------------------------------------------------------------------------

     During fiscal 1996, the Company  adjusted its reserve for  obsolescence  by
approximately  $800,000.  The Company disposed of obsolete inventory relating to
the  CINDI  and VCS 3500  lines of voice  processing  products  for which it had
previously reserved.


6
--------------------------------------------------------------------------------
Fixed Assets


Fixed assets consist of the following:
                                                          October 31,
                                                     1995            1996
                                                     ----            ----
Buildings                                        $ 2,532,567      $ 2,511,266
Land                                                 520,000          520,000
Office furniture, equipment,
        and capital leases                         3,621,890        3,119,150
Vehicles                                              23,642           23,642
Leasehold improvements                               211,021          176,096
--------------------------------------------------------------------------------
                                                   6,909,120        6,350,154
Less: Accumulated depreciation                    (3,902,592)      (2,463,783)
--------------------------------------------------------------------------------
                                                 $ 3,006,528      $ 3,886,371
--------------------------------------------------------------------------------
<PAGE>

Notes To Consolidated Financial Statements

Estimated useful lives are as follows:

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

     Depreciation  expense during fiscal 1994,  1995, and 1996 includes  capital
lease amortization of approximately $52,000, $0, and $0, respectively.


7
Accrued Expenses


Accrued expenses consist of the following:

                                                          October 31,
                                                     1995            1996
                                                     ----            ----

Accrued restructuring costs                      $   184,615      $   115,458
Accrued warranty and deferred maintenance            695,369          585,220
Other                                                350,326          370,295
--------------------------------------------------------------------------------
                                                 $ 1,230,310      $ 1,070,973
--------------------------------------------------------------------------------

8
--------------------------------------------------------------------------------
Debt


In December 1995, the Company  entered into a new line of credit facility with a
bank  under  which it 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% (9.50% at October 31, 1996), and contains a 1/2 of 1% commitment
fee on the average  unused portion of the line. The line expires on February 28,
1997 and subjects the Company to a number of restrictive covenants,  including a
requirement  to maintain a minimum  consolidated  tangible net worth,  a maximum
ratio of total  liabilities to tangible net worth,  and a minimum current ratio.
There are  restrictions on mergers or  acquisitions,  payment of dividends,  and
certain restrictions on additional borrowings. The line is secured by all of the
Company's tangible assets. At October 31, 1996, $400,000 was outstanding against
this line of credit. 

     In April 1996, the Company added a $1,000,000 loan facility to its existing
$2,000,000 line of credit.  This additional line of credit bears interest at the
bank's prime rate plus 0.5% (8.75% at October 31, 1996), and contains a 0.5% fee
on  the  average  unused  portion  of the  loan.  The  line  contains  the  same
restrictive  covenants as the $2,000,000 line of credit,  and the agreements for
the line of credit and loan facility contain cross default provisions.  The loan
agreement  allows the  Company,  at its option,  to make  monthly  interest-only
payments on the outstanding  principal balance,  but all outstanding amounts are
due in full on February 28, 1998. The line is secured by the Company's principal
headquarters  building.  At October 31, 1996, $1,000,000 was outstanding against
this line of credit.  

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

<PAGE>

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 a $99,000 write-off of fixed assets.
     The following table sets forth the Company's restructuring reserves for the
years ended October 31, 1994, 1995, and 1996.
<TABLE>
<CAPTION>

                                             Employee         Asset
                                           Separations      Writedowns     Facilities        Other          Total
                                           -----------      ----------     ----------        -----          -----
Reserve balance,
<S>             <C> <C>                    <C>             <C>            <C>             <C>              <C>      
        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
Cash payments                                   --              --           (60,608)        (52,459)       (113,067)
Non-cash items                                  --           (10,402)           --              --           (10,402)
Reserve balance,
        October 31, 1996                   $    --         $    --        $  114,281      $     --         $ 114,281
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements

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 $545, $0, and $9,617, in fiscal 1994, 1995, and 1996, respectively. 
     The Company is a party to employment agreements, expiring in 1998 and 1999,
with  several  of  its  executive  officers.  Under  certain  conditions,  these
individuals  will be  entitled  to receive  lump sum or monthly  payments  which
aggregate approximately $505,000.

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,
1996 are as follows:


Operating  Leases 
Year Ending  
October 31,                  Gross        Sublease            Net
--------------------------------------------------------------------------------
1997                     $ 577,009     $ (277,848)     $ 299,161
1998                       564,729       (203,755)       360,974
1999                       338,983             --        338,983
--------------------------------------------------------------------------------
$                        1,480,721     $ (481,603)     $ 999,118
--------------------------------------------------------------------------------

     As of October  31,  1996,  the Company  has  reserves  of $228,000  for the
remaining net operating lease obligation of $552,000  associated with its Rancho
Cordova facility.  Rent expense under noncancellable  operating lease agreements
in  fiscal  1994,  1995,  and 1996 was  approximately  $225,000,  $267,000,  and
$275,000  (net  of  sublease  income  of  $278,000,   $278,000,  and  $278,000),
respectively.  
Legal 
As part of the fiscal 1993 settlement of a lawsuit,  the Company issued $225,000
(102,857 shares) of mandatorily  redeemable  common stock to VMX, Inc. (VMX). On
July 26,  1995,  VMX sold all of these shares in the open market and the Company
was released from any future redemption requirements.
     The Company is subject to  litigation  from time to time  arising  from its
operations and receives  occasional  letters  alleging  infringement  of patents
owned by third parties.  Management believes that such litigation and claims are
without  merit and will not have a material  effect on the  Company's  financial
position or results of operations.
Royalties
As part of the VMX lawsuit  settlement,  the Company is  committed to pay annual
license  maintenance  fees of  $120,000  to VMX under  certain  call  processing
patents,  which expire in 2007. The Company will receive a credit against future
license  maintenance  fees equal to 12% of the purchase  price paid for products
purchased from Rhetorex, a wholly-owned subsidiary of VMX. 
<PAGE>


11 
--------------------------------------------------------------------------------
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,  approved by the  shareholders  on March 26,  1996,  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: 

                                                            Option Amount 
                                       Number     ------------------------------
                                      of Shares   Per Share                Total
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
Options granted                        253,875      5.50-9.75         1,581,141
Options canceled                      (104,279)     1.00-9.75          (338,922)
Options exercised                     (194,114)     1.00-5.00          (268,601)
--------------------------------------------------------------------------------
Shares under option,
October 31, 1996                       865,014    $ 1.00-9.75       $ 3,407,165
--------------------------------------------------------------------------------
<PAGE>
Notes to Consolidated Financial Statements


     Options  granted under the plans vest at various dates from  immediately to
ratably  over five years and  expire  ten years from the date of grant.  Certain
options contain possible  accelerated  vesting clauses should specific financial
measures be met. As of October 31, 1996,  options  available  for granting  were
521,500,  and granted options for purchasing  310,170 shares,  at prices ranging
from $1.00 to $5.50 per share, were exercisable.

     Additionally,  the Company  maintains a non-employee  Director stock option
plan.  Under this plan,  which was amended in December  1995 and approved by the
shareholders  on March 26, 1996,  the Company may grant up to 125,000  shares at
not less than the fair market value at the time of grant. Additional information
is as follows:
                                                            Option Amount
                                                      --------------------------
                                        Number              
                                      of Shares       Per Share            Total
--------------------------------------------------------------------------------
Shares under option,
        October 31, 1993             57,000       $  1.37-6.75      $  155,250
Options Granted                       2,000               1.37           2,750
--------------------------------------------------------------------------------
Shares under option,
        October 31, 1994             59,000          1.37-6.75         158,000
Options Granted                       2,000               1.37           2,750
--------------------------------------------------------------------------------
Shares under option,
        October 31, 1995             61,000          1.37-6.75         160,750
Options Granted                       6,000               5.50          33,000
Options Exercised                   (23,000)         1.37-2.75         (35,000)
--------------------------------------------------------------------------------
Shares under option,
        October 31, 1996             44,000       $  1.37-6.75      $  158,750
--------------------------------------------------------------------------------

     Options  granted under the plan vest  immediately and expire ten years from
the date of grant. As of October 31, 1996,  options  available for granting were
58,000.

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

                                        Number            Option Amount
                                      of Shares     Per Share            Total
--------------------------------------------------------------------------------
Shares under option,
        October 31, 1993                2,000       $     2.13      $    4,250
Options Granted                         1,000             1.00           1,000
--------------------------------------------------------------------------------
Shares under option,
        October 31, 1994                3,000        1.00-2.13           5,250
Options Granted                        45,000        1.00-2.94          54,688
--------------------------------------------------------------------------------
Shares under option,
        October 31, 1995               48,000        1.00-2.94           59,938
Options Granted                         5,000             8.38           41,875
Options Exercised                      (2,000)            2.13           (4,250)
--------------------------------------------------------------------------------
Shares under option,
        October 31, 1996               51,000      $ 1.00-8.38      $    97,563
--------------------------------------------------------------------------------
<PAGE>

     Options granted vest immediately to ratably over three years and expire ten
years from the date of grant.  As of  October  31,  1996,  granted  options  for
purchasing 21,000 shares,  at $1.00 per share,  were  exercisable.  Compensation
expense associated with these options was not material.

     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, 1996.


12
--------------------------------------------------------------------------------
Income Taxes 


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

     The  (benefit)  provision for income taxes in fiscal 1994,  1995,  and 1996
consists of:

          
                                                      Year Ended October 31,
                                               1994          1995          1996
                                               ----          ----          ----
Income taxes payable                     $    23,234     $   20,000   $ 10,704
Change in valuation allowance                     --             --    (650,000)
--------------------------------------------------------------------------------
                                         $    23,234     $   20,000   $(639,296)
--------------------------------------------------------------------------------

     Income taxes  payable in fiscal 1994 relate to state income  taxes.  Income
taxes  payable  in fiscal  1995 and 1996  relate to state  income  taxes and the
alternative  minimum tax for  Federal  income  tax.  The Company has  recorded a
deferred  tax asset of  $650,000  in  fiscal  1996  reflecting  the  benefit  of
approximately  $1.6  million  in loss  carryforwards,  which  expire in  varying
amounts between 2008 and 2007. Realization is dependent on generating sufficient
taxable  income  prior  to  expiration  of  the  loss  carryforwards.   Although
realization is not assured,  management believes it is more likely than not that
all of the deferred  tax asset will be realized.  The amount of the deferred tax
asset  considered  realizable,  however,  could be  reduced  in the near term if
estimates of future taxable income during the  carryforward  period are reduced.
The Company has provided a valuation allowance for the remaining $8.1 million of
net operating  losses as management  has determined it more likely than not that
this amount will not be realized.
<PAGE>
Notes to Consolidated Financial Statements

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

                                                       Year Ended October 31,
                                                  1994        1995        1996
                                                  ----        ----        ----
Statutory Federal tax rate (benefit)             (34.0%)      34.0%      34.0%
State income taxes, net of
        Federal tax benefit                        (5.0)       5.0        5.0
Benefit not recorded due to
        net carryforward position                  36.0         --         --
Utilization of net operating loss                    --      (42.6)      (40.9)
Goodwill amortization                               3.2        4.4         3.0
Change in valuation allowance                        --         --       (31.3)
Other                                               0.3        0.6        (0.6)
--------------------------------------------------------------------------------
                                                    0.5%       1.4%      (30.8)%
--------------------------------------------------------------------------------
Deferred tax assets (liabilities) are comprised of the following:

                                                            October 31,
                                                     1995                1996
                                                     ----                ----

Accounts receivable reserve                      $    65,212        $    80,764
Inventory reserves                                   360,257             98,521
Accrued vacation and benefits                        175,148            174,244
Warranty reserves                                     52,553               --
Restructuring reserves                               160,781             88,781
Deferred compensation                                104,995            104,489
Deferred revenues                                     95,444            228,236
Sales returns                                         21,304               --
Other                                                145,606            160,892
Loss carryforwards                                 3,750,602          3,175,623
--------------------------------------------------------------------------------
Gross deferred tax assets                          4,931,902          4,111,550
Valuation allowance                               (4,931,902)        (3,461,550)
--------------------------------------------------------------------------------
Net deferred tax asset                           $      --          $   650,000
--------------------------------------------------------------------------------

     The net change in the  valuation  allowance  for  deferred tax assets was a
decrease of $1,470,352  during the year and relates  primarily to utilization of
loss carryforwards, the release of a portion of the valuation allowance, and the
reversal of other temporary differences.

     Approximately  $9.7  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.
<PAGE>

13
--------------------------------------------------------------------------------
Pension and Profit Sharing Plans


The Company has a defined  contribution  pension plan  covering  all  employees.
After the employee  completes one year of service,  the plan provides for annual
contributions  by the  Company  equal  to 6% of  the  employee's  gross  salary,
excluding bonuses and commissions.  The Company's contributions to the plan vest
after a five year period. Employees may also make voluntary contributions to the
plan up to a maximum of 10% of their gross salary.  In accordance with the plan,
unvested  amounts  relating  to  terminated  employees  with a break in  service
greater than one year are credited against pension contributions by the Company.
Such forfeitures  amounted to $115,000,  $111,000,  and $111,000 in fiscal 1994,
1995, and 1996,  respectively.  It is the Company's  policy to fund pension cost
accrued.  Net  expense of the plan was  approximately  $331,000,  $365,000,  and
$365,000  in  fiscal  1994,  1995,  and 1996,  respectively.  

     The Company also maintains a 401(k) profit sharing plan and trust. The plan
allows for  employees to contribute up to 10% of gross salary on a pre-tax basis
and 5% of gross  salary  on an  after-tax  basis.  The  Company  matches  50% of
employee  contributions up to 4% of eligible  salary.  Total expense of the plan
was  approximately  $145,000,  $138,000,  and $176,000 in fiscal 1994, 1995, and
1996, respectively.  



14 
--------------------------------------------------------------------------------
Supplemental Cash Flow Information 

The Company paid cash for interest expense and income taxes as follows:
                    
                                        Year Ended  October 31, 
                                   1994          1995            1996 
                                   ----          ----            ---- 
Interest                      $ 137,400      $ 112,243        $ 81,000 
Income taxes                  $  31,500      $  23,234        $ 20,983

Non-cash investing and financing activities:

Note issued for purchase of fixed assets (Note 8)             $257,600

Details of acquisition (Note 3):


Fair value of assets acquired                                 $925,996
Liabilities assumed                                            107,976
Common stock issued                                            584,300
--------------------------------------------------------------------------------
Cash paid                                                      233,720
Less: cash acquired                                            123,085
--------------------------------------------------------------------------------
Net cash paid for acquisition                                 $110,635
--------------------------------------------------------------------------------

     As  discussed  in Note 10,  in 1995,  the  Company  was  released  from its
obligation to repurchase  common stock from VMX, when all of the 102,857  shares
were sold by VMX in the open market. As a result, the Company's liability to VMX
of $225,000 was credited to  stockholders'  equity in the  consolidated  balance
sheet.
<PAGE>
Notes to Consolidated Financial Statements

15
--------------------------------------------------------------------------------
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.


                              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            280,974      340,337      383,013      496,019
Net income                        263,844      302,691      361,667      458,929
    Per common share:          $     0.07   $     0.08   $     0.09   $     0.11
--------------------------------------------------------------------------------
Stock prices
    High                            1.500   $    1.813   $    3.375   $    5.125
    Low                        $    0.500   $    0.875   $    1.250   $    2.750
--------------------------------------------------------------------------------


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

Net sales                      $5,915,273   $6,537,208   $6,565,486   $6,688,768
Gross margin                    2,422,093    2,861,600    2,729,190    2,585,733
Income from operations            496,689      594,614      570,546      448,864
Net income                        465,150      571,133      546,287    1,130,164
        Per common share       $     0.11   $     0.13   $     0.12   $     0.23
--------------------------------------------------------------------------------
Stock prices
        High                   $    6.375   $   10.000   $   12.625   $    8.125
        Low                    $    4.125   $    4.500   $    5.000   $    5.250
--------------------------------------------------------------------------------


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, 1996 and 1995, and the
results of their  operations and their cash flows for each of the three years in
the period  ended  October 31,  1996,  in  conformity  with  generally  accepted
accounting principles.  These financial statements are the responsibility of the
Company's  management;  our  responsibility  is to  express  an opinion on these
financial  statements  based on our  audits.  We  conducted  our audits of these
statements  in accordance  with  generally  accepted  auditing  standards  which
require that we plan and perform the audit to obtain reasonable  assurance about
whether the financial  statements  are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for the opinion expressed above.


/s/Price Waterhouse LLP
------------------------
Price Waterhouse LLP
Washington, DC                          December 16, 1996
<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,              1994           1995
                                                                                             to             to
                                                1994           1995           1996          1995           1996
                                                ----           ----           ----          ----           ----
Net sales:
<S>                                             <C>            <C>            <C>            <C>           <C>  
        Voice processing                        56.6%          62.9%          61.5%          33.2%         12.4%
        Performance analysis                    43.4%          37.1%          38.5%           2.5%         19.0%
------------------------------------------------------------------------------------
Total net sales                                100.0%         100.0%         100.0%          19.9%         14.8%
------------------------------------------------------------------------------------
Costs and expenses:
        Cost of sales                           77.1%          57.7%          58.8%         (10.2%)        16.9%
Selling,  general and
        administrative                          37.5%          28.5%          24.9%          (9.0%)          --
Research and development                         8.8%           7.1%           8.1%          (3.2%)        31.5%
Restructuring costs                              2.9%            --             --         (100.0%)          --  
------------------------------------------------------------------------------------
Total costs and expenses                       126.3%          93.3%          91.8%         (11.4%)        13.0%
Investment and other income
        (expense), net                          (0.3%)         (0.4%)         (0.1%)        111.2%        (60.0%)
------------------------------------------------------------------------------------
Income (loss) before income taxes              (26.6%)          6.3%           8.1%         128.4%         47.4%
------------------------------------------------------------------------------------
Benefit (provision) for income taxes            (0.1%)         (0.1%)          2.5%         (13.9%)          --
-------------------------------------------------------------------------------------
Net income (loss)                              (26.7%)          6.2%          10.6%         127.8%         95.6%
-------------------------------------------------------------------------------------
</TABLE>


Results of Operations
The Company had net income of $2.7 million  ($.59 per share) for the fiscal year
ended  October 31,  1996.  These  results  include a $650,000  ($0.14 per share)
income tax  benefit  associated  with the  expected  future  realization  of the
Company's net operating  loss  carryforwards  that  management  believes is more
likely than not to be  realized.  By  comparison,  the Company had net income of
$1.4 million ($.34 per share),  which did not include an income tax benefit, for
the fiscal  year ended  October  31,  1995,  and had a net loss of $5.0  million
($1.29 per share),  for the fiscal year ended October 31, 1994. The  improvement
in earnings in fiscal 1996 was  primarily  attributable  to  increases  in voice
processing net sales as well as increases in performance analysis net sales. 

Net Sales  
Net sales for fiscal 1996 were $25.7 million,  which  represented an increase of
15% from net sales in fiscal 1995. Net sales for fiscal 1995 were $22.4 million,
which represented an increase of 20% from net sales in fiscal 1994. The increase
in fiscal 1996 was due to  increases  in voice  processing  net sales as well as
increases in  performance  analysis  net sales.  The increase in fiscal 1995 was
primarily  attributable  to  increases  in voice  processing  net  sales.  

Voice Processing Net Sales 
The Company's  voice  processing net sales increased 12% in fiscal 1996 to $15.8
million,  compared to $14.1  million in fiscal  1995.  The increase in net sales
during fiscal 1996 included an increase of 16% in voice processing product sales
and an increase of 5% in product  support and  services  sales.  The increase in
product  sales is primarily  attributable  to an increase in sales to commercial
customers ($2.2 million), of the Company's Retail Solutions product line, and an
increase  in sales to  international  customers  ($0.4  million),  offsetting  a
decrease in sales to distributors ($0.9 million). 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 an 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 was
primarily  attributable  to an increase in sales to government  customers  ($3.6
million),  which was 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 Retail Solutions  product line, and to
an increase in sales to international customers ($0.4 million).

<PAGE>
In 1996, sales to the Company's 10 largest customers  accounted for 82% of voice
processing  sales.  One of the  three  largest  customers  was  in  each  of the
Company's  three sectors,  commercial,  government,  and  international.  The 10
largest  customers in 1995 accounted for 73% of voice processing sales. In 1995,
two of the three largest  customers were in the government  sector. In 1994, the
Company's 10 largest customers accounted for only 50% of voice processing sales.

During  fiscal 1996,  approximately  $9.6 million (61% of voice  processing  net
sales and 37% of  consolidated  net sales) were in the government  sector.  This
compares  to  $9.6  million  (68%  of  voice  processing  net  sales  and 43% of
consolidated  net  sales)  for  fiscal  1995  and  $5.9  million  (56% of  voice
processing  net  sales and 32% of  consolidated  net  sales)  for  fiscal  1994.
Traditionally,  the  government  market  has  produced  strong  results  for the
Company.

Sales to  commercial  customers  increased  144% to $3.9  million  (24% of voice
processing  net  sales) in  fiscal  1996.  By  comparison,  sales to  commercial
customers  were $1.6 million (12% of voice  processing net sales) in fiscal 1995
and $1.0 million (9% of voice  processing net sales) in fiscal 1994.  Commercial
sales  increased in fiscal 1996 primarily as a result of increased  sales of the
Company's  Retail  Solutions  product line.  The Retail  Solutions  product line
offers multiple voice processing  applications designed to improve operations at
retail pharmacies.

Sales to the Company's distributors of voice mail products decreased 56% to $0.7
million (4% of voice processing net sales) in fiscal 1996. By comparison,  sales
to distributors  were $1.6 million (12% of voice processing net sales) in fiscal
1995 and $2.8 million (27% of voice  processing net sales ) in fiscal 1994. This
decrease in net sales is primarily the result of the Company's decision to focus
its  sales  and  marketing  efforts  on  its  interactive  information  response
products, and price decreases in the market for voice mail products.

International voice processing sales increased 23% to $1.6 million (10% of voice
processing net sales) in fiscal 1996. This compares to $1.3 million (9% of voice
processing net sales) in fiscal 1995 and $.8 million (8% of voice processing net
sales) in fiscal  1994.  The  increase in  international  sales is the result of
sales by  third  party  resellers  of the  Company's  products  such as  Philips
Communications  Systems  B.V. of The  Netherlands  and  Communication  & Network
Systems PTE,  Ltd. of  Singapore.  The Company is actively  pursuing  additional
third party resellers of the Company's  products.  Also, during fiscal 1996, the
Company acquired  Phonatic  International  B.V. of The Netherlands to strengthen
its  presence in the  European  information  response  market.  The new Microlog
subsidiary  operates  under the name  Microlog  Europe and is  headquartered  in
Neunen, The Netherlands.

In fiscal 1996, the Intela product  became the Company's  principal  interactive
information  response  (IIR) system  surpassing  the VCS 3500  platform.  Intela
product  revenues  for fiscal 1996 were $5.2 million as compared to $2.0 million
in fiscal 1995, while VCS 3500 product revenues were $2.2 million in fiscal 1996
as compared to $5.0 million in fiscal 1995.  The Company also  introduced a UNIX
version of its APRS Automated Prescription Refill System in fiscal 1996.
<PAGE>

As of October 31, 1996,  the Company had a backlog of existing  orders for voice
processing systems totaling $4.9 million.  The backlog,  as of October 31, 1995,
was $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 customer  delivery  schedules and the
level of customization required for Intela applications. The Company anticipates
that all of the  outstanding  orders at October 31, 1996 will be shipped and the
sales  recognized  during  fiscal 1997.  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 1996 were
$9.9 million, which represented a 19% increase from the net sales from this line
of business  during the prior year. Net sales for fiscal 1995 were $8.3 million,
representing an increase of 3% from $8.1 million in fiscal 1994. These increases
resulted from the addition of new  contracts,  as well as increases in the level
of work authorized  under existing  contracts from the Johns Hopkins  University
Applied Physics  Laboratory  (APL), the Company's  principal  customer for these
services.

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

As of October  31,  1996,  the  Company  had a backlog  of  funding on  existing
contracts for performance  analysis and support services  totaling $5.5 million.
By comparison,  the backlog as of October 31, 1995 was $7.8 million. The Company
anticipates  that these  services will be provided  during the next three fiscal
years. The Company  estimates that of the $5.5 million of backlog at October 31,
1996,  $1.9 million will be recognized  as sales beyond fiscal 1997.  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.
<PAGE>

Costs and Expenses

Cost of sales of products  were $5.2  million,  or 45% of net sales of products,
for fiscal 1996; $4.7 million, or 48% of net sales of products, for fiscal 1995;
and $5.8 million, or 73% of net sales of products, for fiscal 1994. The decrease
in cost of sales of  products  for  fiscal  1996 is  primarily  attributable  to
increased sales of the Intela and Retail  Solution  products and decreased sales
of the CallStar and VCS  products,  which have a higher cost of sales.  The high
cost of sales of products for fiscal 1994 is largely  attributable  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.  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, but
the demand for replacement  parts had declined more rapidly than expected.  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 CPUs to  486/Pentium  CPUs in the  Company's  voice  processing
products made it necessary to reserve  $762,000 for  components  relating to its
VCS 3500 product line. During fiscal 1996,  obsolete  inventory of approximately
$800,000 relating to the CINDI and VCS 3500 product lines was disposed of.

Cost of sales of services  were $9.9  million,  or 70% of net sales of services,
for fiscal 1996; $8.2 million, or 65% of net sales of services, for fiscal 1995;
and $8.6 million, or 80% of net sales of services, for fiscal 1994. The increase
in cost of sales in fiscal 1996 is primarily attributable to the increase in net
sales of performance  analysis  services,  which has a higher cost of sales than
voice  processing  services.  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 materials costs and a restructuring
of the Company's voice processing operations in fiscal 1994.

Selling, general and administrative costs were $6.4 million or 25% of net sales,
for fiscal 1996;  $6.4 million,  or 28% of net sales,  for fiscal 1995; and $7.0
million,  or 38% of net sales, for fiscal 1994. The decrease in fiscal 1996 as a
percentage of revenue is primarily  attributable to tighter management  controls
and cost cutting measures taken by the Company.  The decrease in fiscal 1995 was
primarily  attributable  to cost  cutting  measures  taken by the  Company and a
restructuring of the Company's operations (see Restructuring Costs).

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 $2.1 million,  or 8% of net sales for fiscal 1995;  $1.6 million,  or 7% of
net sales for fiscal year 1995; and $1.6 million,  or 9% of net sales for fiscal
1994.  The Company  presently  plans to maintain its  research  and  development
program


<PAGE>

at approximately the same level,  although research and development  expenses in
the next fiscal  year are  expected  to be  somewhat  higher  than fiscal  1996,
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.  The
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 a $99,000 write-off 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  years 1996 and 1995 by  reducing  employment,  overhead,  and ongoing
costs of 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 $37,000 for fiscal 1996, as
compared  to $93,000 for fiscal  1995 and  $44,000  for fiscal  1994.  The lower
expense  level in fiscal  1996  resulted  from a $43,000  gain on the sale of an
office  condominium  unit.  Without this gain,  the Company would have had a net
other expense of $80,000 in fiscal 1996.

Provision for Income Taxes

Income  taxes  payable of $23,000 in fiscal 1994 relate to state  income  taxes.
Income taxes payable of $20,000 in fiscal 1995 and $11,000 in fiscal 1996 relate
to state income taxes and the alternative minimum tax for Federal income tax. In
fiscal  1996,  the  Company  has  recorded  a  deferred  tax  asset of  $650,000
reflecting  the benefit of  approximately  $1.6  million in loss  carryforwards.
Although realization is not assured,  management believes it is more likely than
not that all of the  deferred  tax  asset  will be  realized.  The  Company  has
exhausted its ability to carry losses back for income tax refunds. Net operating
loss  and  tax  credit  carryforwards  for  income  tax  reporting  purposes  of
approximately  $9.7  million and  $156,000,  respectively,  will be available to
offset  taxes  generated  from  future  taxable  income  through  2008 and 2007.
Management believes that the future tax benefits associated with $8.1 million of
its net  operating  loss  carryforwards  is not more  likely  than not  assured.
Accordingly, no such benefit has been reflected in the Financial Statements.

Liquidity and Capital Resources

Working capital as of October 31, 1996 was  $3,144,000,  as compared to $749,000
as of October 31, 1995. The increase is primarily  attributable  to increases in
cash and cash  equivalents  of  $248,000,  accounts  receivable  of  $1,214,000,
inventories of $781,000, a deferred tax asset of $650,000, offset by an increase
in short-term borrowings of $1,400,000.

<PAGE>

Accounts  receivable  as of October  31,  1996 were  $4,300,000  as  compared to
$3,000,000  as of October 31,  1995.  The  increase in  accounts  receivable  is
primarily attributable to increased voice processing net sales.

Fixed assets as of October 31, 1996 were $3,900,000 as compared to $3,000,000 as
of October 31, 1995. The net increase in fixed assets resulted from the addition
of $1,590,000 of assets,  and depreciation  expense of $633,000 for fiscal 1996.
Major assets purchased included a new management information system and hardware
for  $625,000  and hardware  and  software  upgrades to the  Company's  internal
computer network and workstations for approximately $500,000.

In December 1995, the Company  entered into a new line of credit facility with a
bank  under  which it 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% (9.50% at October 31, 1996), and contains a 1/2 of 1% commitment
fee on the average  unused portion of the line. The line expires on February 28,
1997 and subjects the Company to a number of restrictive covenants,  including a
requirement  to maintain a minimum  consolidated  tangible net worth,  a maximum
ratio of total  liabilities to tangible net worth,  and a minimum current ratio.
There are  restrictions on mergers or  acquisitions,  payment of dividends,  and
certain restrictions on additional borrowings. The line is secured by all of the
Company's tangible assets. At October 31, 1996, $400,000 was outstanding against
this line of credit.

In April 1996,  the Company  added a  $1,000,000  loan  facility to its existing
$2,000,000 line of credit.  This additional line of credit bears interest at the
bank's prime rate plus 0.5% (8.75% at October 31, 1996), and contains a 0.5% fee
on  the  average  unused  portion  of the  loan.  The  line  contains  the  same
restrictive  covenants as the $2,000,000 line of credit,  and the agreements for
the line of credit and loan facility contain cross default provisions.  The loan
agreement  allows the  Company,  at its option,  to make  monthly  interest-only
payments on the outstanding  principal balance,  but all outstanding amounts are
due in full on February 28, 1998. The line is secured by the Company's principal
headquarters  building.  At October 31, 1996, $1,000,000 was outstanding against
this line of credit.

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 1997. It is the intent of the
Company to pay back all outstanding  amounts on the credit facilities within one
year.

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


In October 1995, the Financial  Accounting  Standards Board (the "Board") issued
Statement of Financial  Accounting Standards No. 123 "Accounting for Stock-Based
Compensation,"  which the
<PAGE>

Company  expects to adopt in fiscal 1997.  Adoption of this new statement is not
expected  to have a  material  impact on the  Company's  financial  position  or
results of operations.

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

Quarterly Results

Note  15 of the  Notes  to  Consolidated  Financial  Statements  of the  Company
contained in this Annual Report presents unaudited  quarterly  operating results
for the Company's  last eight fiscal  quarters.  The Company  believes that this
unaudited  information  contains  all  adjustments,  consisting  only of  normal
recurring  adjustments,  necessary  for a  fair  presentation  of  the  selected
quarterly  information when read in conjunction with the Consolidated  Financial
Statements  and Notes  thereto.  The  operating  results for any quarter are not
necessarily indicative of results for any subsequent period.

The Company was  profitable in all four quarters of fiscal 1995 and fiscal 1996.
The  Company's  quarterly  results  showed  continued  growth in net sales,  net
income, and net income per common share. The quarterly fluctuations for the four
quarters  of fiscal  1995 and the first  three  quarters of fiscal 1996 were not
significant.  In the fourth quarter of fiscal 1996, the Company's net income was
increased by a $650,000 ($0.14 per share) income tax benefit associated with the
expected  future  realization of the Company's net operating loss  carryforwards
that management believes is more likely than not to be realized.

Price Range of Common Stock

The Common Stock is presently  traded on the  over-the-counter  market under the
symbol MLOG.  As of January 17, 1997,  there were  approximately  279 holders of
record  of the  Common  Stock.  This  number  does not  reflect  the  number  of
individuals  or  institutional  investors  holding stock in nominee name through
banks, brokerage firms, and others.

Note  15 of the  Notes  to  Consolidated  Financial  Statements  of the  Company
contained in this Annual Report sets forth, for the period indicated,  the range
of high and low  transaction  prices for the  Common  Stock as  reported  on the
Nasdaq Market.  In February 1996,  the Company  returned to the Nasdaq  National
Market  System.  The closing  price of the Common  Stock on January 17, 1997 was
$6.75 per share.

Dividend Policy

The  Company  has not paid a  dividend  since a $.10  cash  dividend  ($.033  as
adjusted  for a  three-for-one  stock  split in April 1986) was paid 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.
<PAGE>


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,
                                               1992                 1993               1994               1995               1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>                 <C>                <C>                 <C>                <C>         
Net sales                                 $ 19,526,503        $ 20,798,323       $ 18,668,762        $ 22,385,643       $ 25,706,735
Income (loss) from
         operations                         (3,465,726)          1,050,934         (4,916,681)          1,500,343          2,110,713
Net income (loss)                           (3,454,284)            919,779         (4,984,041)          1,387,132          2,712,734
Per common share:
         Primary                          $       (.86)       $        .23       $      (1.29)       $        .34       $        .59
         Fully diluted                    $       (.86)       $        .22       $      (1.29)       $        .34       $        .59
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Balance Sheet Data:
<TABLE>
<CAPTION>

                                                                                   October 31,
                                                    1992               1993             1994                1995             1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>               <C>               <C>                <C>               <C>        
Working capital                                 $ 3,396,862       $ 4,945,780       $  (704,004)       $   748,974       $ 3,144,182
Total assets                                     14,084,965        13,438,828         9,055,979          9,425,716        13,712,722
Long-term debt, net
         of current maturities                    1,669,204         1,659,273            45,456                 --           202,860
Stockholders' equity                              7,193,191         7,500,522         2,523,894          4,161,654         7,766,638
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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



Microlog Corporate Information

Directors

David M. Gische
Attorney
Ross, Dixon & Masback

Robert E. Gray, Jr.
Senior Vice President
Prosperity Bank and Trust

J. Graham Hartwell
Chairman of the Board

Joe J. Lynn
Chief Development Officer

Richard A. Thompson
President and Chief Executive Officer

Officers

Microlog Corporation
Parent Company

Steven R. Delmar
Executive Vice President and Chief Financial Officer

Margaret C. Hartwell
Secretary and Treasurer

Joe J. Lynn
Chief Development Officer

Richard A. Thompson
President and Chief Executive Officer

Old Dominion Systems Incorporated of Maryland
Steven R. Delmar
Executive Vice President and Chief Financial Officer

Deborah M. Grove
President

Margaret C. Hartwell
Secretary and Treasurer

Richard A. Thompson
Chief Executive Officer
<PAGE>

Microlog Corporation of Maryland
Steven R. Delmar
Executive Vice President and Chief Financial Officer

Margaret C. Hartwell
Secretary and Treasurer

Joe J. Lynn
Chief Development Officer

John C. Mears
Vice President
Product Development

Richard A. Thompson
President and Chief Executive Officer

Independent  Accountants  Price  Waterhouse  LLP 1301 K Street  NW,  Suite 800 W
Washington, DC 20005-3333

Legal Counsel
Hogan and Hartson
555 13th Street, NW
Washington, DC 20004-1109

Corporate Offices
20270 Goldenrod Lane
Germantown, MD 20876-4070
(301) 428-9100

Training and Operations Facility
9161 Industrial Court
Gaithersburg, MD 20877-1427
(301) 990-2580

Annual Meeting
Tuesday, March 25, 1997, 10 a.m.
Gaithersburg Hilton
620 Perry Parkway
Gaithersburg, MD 20877-2530

Transfer Agent
Continental Stock Transfer and Trust Company
2 Broadway
New York, NY 10004-2277

Ticker Symbol
NASDAQ Over-the-Counter-MLOG