<PAGE>
                     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, 1995           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  statement  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 19, 1996 closing price of these shares) was  approximately
$20.8 million.  The Common Stock is traded  over-the-counter  and quoted through
the Nasdaq SmallCap Market.

As of January 19, 1996,  3,964,073 shares of the Registrant's  Common Stock were
outstanding.
------------------------------------------------------------------------------



<PAGE>


                       Documents Incorporated by Reference


Parts I and III  incorporate  information  by  reference  from  portions  of the
Company's  definitive  Proxy  Statement  dated  January  29,  1996  (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, 1995 (the "Annual Report to Shareholders").



<PAGE>



                                     PART I

ITEM 1.  BUSINESS

General

Microlog Corporation ("Microlog" or the "Company") designs, assembles,  markets,
and services a variety of  microprocessor-based  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"),  and  American  Telephone  and  Telegraph
("AT&T"),  prime  contractors  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 1995, 1994, and 1993 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.  They
are  accessible  through  touch-tone  and rotary  telephones.  Voice  processing
systems range from small systems with basic voice processing  features to larger
more  complex  systems.   Many  voice  processing  systems  focus  on  only  one
application.

Microlog  offers through its Intela,  a Graphical  User Interface  ("GUI")-based
interactive voice  information  processing system designed to run multiple voice
processing applications simultaneously. Through its DOS-based VCS 3500, Microlog
offers customized  systems which can include up to eleven primary  applications,
each  supported  by separate  software  modules,  and also  offers,  through its
CallStar,  products  which  are  standard  and  can be sold  in  volume  through
distribution channels.

Products

The Company's voice processing  systems are comprised of a  specially-configured
microprocessor-based  hardware  platform and versatile  proprietary  application
software which allows users to store,  retrieve,  and transmit  digitized  voice
messages and to access  information on computer  databases.  The Company's voice
processing  products  include a new  addition  to its product  line,  the Intela
("Intela"),  which is a UNIX-based  voice  processing  system capable of running
multiple voice processing applications  simultaneously.  The Company also offers
the  DOS-based VCS 3500 voice  processing  system,  which  performs up to eleven
voice  processing  applications,  and the  CallStar  series  of  voice  mail and
automated attendant products.

Interactive Information Response ("IIR") 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  in  stock  and  determining  the  status  of
applications or permits in process. A special application of IIR is also used by
taxpayers  who are in arrears in paying their  Federal  income taxes to call the
Intela IIR system from a  touch-tone  telephone  and  automatically  establish a
repayment  plan  with the IRS.  Microlog  IIR  software  interfaces  to the most
popular  types of host  mini-computers,  mainframe  computers,  and  local  area
networks  ("LANs").  Microlog  emphasizes the IIR applications of its new Intela
product,  but also provides IIR applications  through the VCS 3500. The CallStar
product provides  primarily voice mail,  automated  attendant and  fax-on-demand
features.

The following voice  processing  applications are provided by the Intela and VCS
3500 products:

         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.

         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.

         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.  Callers  have many options to review and may record their
         messages  until  satisfied,  and mailbox  owners  have many  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." Although all of the
         Company's voice processing products provide voice mail, the CallStar is
         a less  expensive  product  designed  specifically  for voice  mail and
         automated attendant applications.

         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 different  greetings and different menus of options to be
         presented to different callers. In the event extensions are busy or not
         answered,  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  called  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.

         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.

         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.

         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.

         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's  speech  recognition  is speaker  independent  and therefore
         requires 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.

         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.

Intela

Intela  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.  The Company
is  currently  working on  additional  releases  of the  product  with  expanded
features.

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.

The Company has incorporated all of the interface  features of its DOS-based VCS
3500 with Graphical User  Interface-based  tools for application  development in
Intela.  Intela  is  based  on a  Pentium  hardware  platform  utilizing  a UNIX
operating system and is capable of supporting 4 to over 1000 ports. Intela 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.

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.

Product  Architecture.  The basic  Intela  architecture  consists  of four major
system  components:  the Application  Server(s),  the Port Server(s),  the Voice
Distributed 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 Intelas and
the application server, as well as among the Intelas themselves.

Intelaware   Software   Platform.   Microlog's   Intelaware  is  an  application
development and deployment environment for both Interactive Information Response
("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  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  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
         port and storage capacity by networking systems and clusters of systems
         together.  Expansions depend on the application  server 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  such
         activities  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,  and these  reports can be sent to a
         printer for a hard copy print-out.  Reports  available 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, 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  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 4 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.

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 eleven
separate voice  response or voice  messaging  applications.  Prices for VCS 3500
systems range from $10,000 to over $250,000 and are dependent upon the number of
ports in the system (from 2 ports to 96 or more), the number of voice processing
applications  desired,  the  amount of voice  storage,  the need for  additional
equipment (in the case of large or unique systems),  and the extent to which the
product must be adapted to the customer's specific needs.

The  VCS  3500  system  may be  purchased  with  up to  eleven  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), 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  eleven  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 eleven  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.


CallStar

CallStar 2000,  developed during fiscal 1991 and available for delivery early in
fiscal 1992, and CallStar 1200,  introduced at the end of fiscal 1993, 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 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.

Prior Systems.  With the introduction of CallStar,  the Company discontinued the
manufacturing and sales of the Genesis CINDI systems.  The Company is continuing
to provide parts and service to the over 4,500 CINDI's sold.

Application Solutions

During 1995, the Company dedicated  development  efforts to repackage and market
existing  applications  previously  developed  for  the  government  sector  for
commercial  customers.   The  first  suite  of  applications  targeted  for  the
commercial  market is called the Retail  Solution.  Retail Solution  consists of
several  applications  designed  and  manufactured  specifically  for the retail
pharmacy industry.  These applications include the Automated Prescription Refill
System ("APRS"),  Photo Ready,  Prescription Ready, the ProNouncer(R),  and Call
Routing.  APRS allows users to place their prescription refill orders 24 hours a
day by entering their  prescription  information via telephone.  Photo Ready and
Prescription Ready  automatically dials individuals who have not picked up their
complete  prescription orders or processed film, and the ProNouncer is a digital
in-store automated  announcement system. Call Routing answers incoming lines and
automatically  directs callers to the desired store department  without the need
for a human operator.

Sales and Marketing

The  Company's  Applications  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 being 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,  a sales manager for commercial  sales,  and five salesmen.  The
Company's  direct  sales force is  presently  based in the  Washington-Baltimore
metropolitan   area  with  satellite  offices  in  Illinois,   California,   and
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,
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.

Distribution  Sales The  Distribution  Sales force  currently  has a director in
charge of international sales, one salesmen, and one sales engineer. The Company
has established distribution  relationships with GTE, Sprint North Supply, and a
variety  of  smaller  independent  companies  in  the  domestic  market.  In the
international  market,  Microlog has  established a distribution  agreement with
Philips  Communication Systems B.V. ("Philips") of The Netherlands to market and
support the Intela product line initially in Europe,  then worldwide,  under the
name   VoiceManager   800.  The  Company  has   established  or  is  negotiating
distribution  agreements in other countries in Europe,  the Middle East, and the
Far East.

Marketing.  The marketing  organization currently has a director who manages the
Company's product and marketing  related  activities,  one product manager,  one
application  business development manager, and two assistant marketing managers.
This organization interfaces with Direct and Distribution Sales in marketing and
selling the  company's  products,  applications,  and  services.  The  Company's
Training and Documentation groups are also under the marketing organization.

Promotional  Activities  The Company's  promotional  efforts  during fiscal 1995
included  advertising  in industry  trade  publications,  direct  mail,  product
presentations  at trade  shows and similar  events,  and public  relations.  The
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 1996.

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 the VCS  3500  and  Intela
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
comparable prices.

The Company  performs  maintenance for its VCS 3500 and Intela 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.

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, 1995,  the Company had a backlog of existing  orders for voice
processing systems totaling $3.7 million.  The backlog,  as of October 31, 1994,
was also $3.7 million.  The Company has experienced  fluctuations in its backlog
at various times during the past two fiscal years attributable  primarily to the
seasonality of governmental  purchases.  In addition, the Company has observed a
lengthening  of the period  between the date of booking an order and the date of
shipment, with the shipment depending on any customer delivery schedules and any
customization  needed  for  VCS  3500  or  Intela   applications.   The  Company
anticipates  that all of the  outstanding  orders at  October  31,  1995 will be
shipped  and the sales  recognized  during  fiscal  1996.  Although  the Company
believes that its entire backlog of orders  consists of firm orders,  because of
the possibility of customer changes in delivery schedules and delays inherent in
the government  contracting  process, the Company's backlog as of any particular
date may not be indicative of actual sales for any future period.

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
eleven  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 VCS 3500 and Intela
products,   the  Company  places   emphasis  on  the  eleven  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
eleven 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 VCS 3500 and Intela.

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 1996.

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.  The Company has  continued to improve its voice  processing
product line and is currently  developing new products and  enhancements  to its
existing  products.  In March 1994, the Company  introduced the first release of
its Intela  product and in October,  a new  software  release for  CallStar  was
introduced.  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.

                                       Research and Development Expenditures

                                     (In thousands, except percentage amounts)

                                                          Year Ended October 31,

                                                 1993       1994          1995
                                                 ----       ----          ----
Research and development expense ........      $1,512       $1,644       $1,592

         Percentage of voice
           processing net sales .........          11%          16%          11%
                                               ======       ======       ======


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. In fiscal
1994, the Company signed a five-year lease for a new  manufacturing and training
facility  located in  Gaithersburg,  Maryland which became  operational in March
1995.  Microlog  currently  has 11 employees  in its  manufacturing  group.  The
Company generally uses standard parts and components  obtained from a variety of
computer  vendors  and  specially  configures  these  components  to produce the
hardware for its systems.  Certain components used in the Company's products are
presently  available from limited sources. To date, the Company has been able to
obtain supplies of these components in a timely manner from these sources.

Software Protection, Technology Licenses, and Trademarks

The Company regards its software as proprietary  and has implemented  protective
measures  both of a legal and a  practical  nature to ensure  that the  software
retains  that  status.  The  Company  derives  protection  for its  software  by
licensing  only the  object  code to  customers  and  keeping  the  source  code
confidential.  Like  many  other  companies  in the 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.

The Company has patents on 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 Automated  Announcement  Systems, TDD Message Storage, and other
TDD-related   innovations.   EVR,  Microlog,  Call  Installer,   Truant,  CINDI,
ProNouncer,  CallStar,  and APRS,  are all  registered  trademarks  owned by the
Company. Intela, Intelaware,  Intelaview, AACS, AARS, ACIS, and CALLSTAR FXD 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 extnesion 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.  Another
important customer is American Telephone and Telegraph  ("AT&T"),  for which the
Company has been performing  services since 1988.  Sales from contracts with APL
(primarily)  and AT&T  accounted for 36%, 43% and 37% of the Company's net sales
for fiscal 1993, 1994, and 1995, respectively. The Company's contracts with AT&T
were significantly reduced during fiscal 1993 as a result of decreases in levels
of work associated with these contracts. Net sales from performance analysis and
support  services through AT&T for fiscal 1995 was  significantly  less than the
fiscal 1994 net sales. Net sales through AT&T for fiscal 1996 are expected to be
less than  those in fiscal  1995.  The  Company  is  seeking  to  diversify  its
operations for performance analysis and support services by seeking contracts in
non-defense related areas.

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

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

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

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

Contracts

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

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,  1995,  the  Company  had a backlog  of  funding on  existing
contracts for performance  analysis and support services  totaling $7.8 million.
By comparison, the backlog as of October 31, 1994 was $4.6 million. The increase
in backlog is attributable  primarily to a significant multi-year contract award
and  increased  funding  levels  on  existing  or  new  contracts.  The  Company
anticipates  that these  services will be provided  during the next three fiscal
years. The Company  estimates that of the $7.8 million of backlog at October 31,
1995,  $3.9 million will be recognized  as sales beyond fiscal 1996.  Because of
the delays inherent in the government contracting process or possible changes in
defense priorities or spending,  the Company's backlog as of any particular date
may not be  indicative  of actual  sales for any  future  period.  Although  the
Company believes that its backlog of funding on existing  contracts is firm, the
possibility  exists  that  funding  for some  contracts  on which the Company is
continuing to work, in the  expectation of renewal,  may not be authorized  (and
the Government has the right to cancel contracts at any time),  although to date
this has not occurred.

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  and are
included in the Company's fiscal 1995  consolidated  financial  statements.  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 19, 1996,  the Company and its  subsidiaries  employed a total of 236
persons,  including 6 part-time  employees.  Of these personnel,  86 are engaged
principally  in the  Company's  voice  processing  systems  operations,  142 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.

The Company also owns one 850 square foot office  condominium  unit located at 4
Professional  Drive,  Gaithersburg,  Maryland  (formerly  used for the Company's
principal executive offices), which it leases.


ITEM 3.  LEGAL PROCEEDINGS

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

On May 24, 1993, Microlog and its subsidiaries reached a settlement with VMX and
Dytel.  Under the terms of the  settlement,  the  litigation  was dismissed with
prejudice and the products of Microlog's  subsidiaries,  Microlog Corporation of
Maryland,  and Genesis Electronics  Corporation,  are fully licensed under VMX's
and Dytel's voice mail and automatic call processing  patents.  Microlog and its
subsidiaries  paid VMX $275,000 upon execution of the  settlement  documents and
issued to VMX $225,000 of Microlog  common  stock  (102,857  shares),  which was
subject to  redemption as discussed in Note 11.  Additionally,  Microlog and its
subsidiaries   will  pay  to  VMX  a  total  of  $500,000  in  eleven  quarterly
installments  starting on July 31, 1993. Of the settlement amount,  $444,704 was
attributed  to the receipt by  Microlog of Maryland  and Genesis of a fully paid
voice mail license, and $555,296 was attributed to a license under VMX and Dytel
automatic call processing  patents.  The Company  recorded the new licenses at a
cost of $800,000, and is amortizing the licenses over seven years.

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


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

None.

                                                      PART II

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

The information  required by this item is incorporated  herein by reference from
"Price Range of Common Stock" and "Dividend  Policy" on page 29 of the Company's
Annual Report to Shareholders.


ITEM 6.  SELECTED FINANCIAL DATA

The  information  required by this item is  incorporated  herein by reference on
pages 29 and 30 of the Company's Annual Report to Shareholders.


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

The information  required by this item is incorporated  herein by reference from
pages 23 through 30 of the Company's 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, 1993,  1994, and 1995,
Consolidated  Balance  Sheets as of October  31,  1994,  and 1995,  Consolidated
Statements  of Changes in  Stockholders'  Equity for the years ended October 31,
1993, 1994, and 1995,  Consolidated Statements of Cash Flows for the years ended
October  31,  1993,  1994,  and  1995,  and  Notes  to  Consolidated   Financial
Statements,  together  with the  report  thereon of Price  Waterhouse  LLP dated
December 22, 1995, are  incorporated by reference from pages 6 through 22 of the
Company's Annual Report to Shareholders.


ITEM 9.    DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information  concerning  directors and certain executive officers of the Company
found under the caption  "Election of Directors" and the caption  "Section 16(a)
Disclosure" on pages 6 through 15 is  incorporated  herein by reference from the
Company's Proxy Statement.


ITEM 11.   EXECUTIVE COMPENSATION

The  information  found  under the  caption  "Executive  Compensation  and Other
Information",  found on pages 8 through 15, of the Company's  Proxy Statement is
incorporated herein by reference (excluding  specifically the sections captioned
"Comparative Company Performance" and "Management  Compensation Committee Report
on Executive Compensation").


ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information found under the caption "Stock Owned by Management and Principal
Stockholders"  on pages 4 and 5 of the Company's Proxy Statement is incorporated
herein by reference.


ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information found under the caption  "Compensation  Committee Interlocks and
Insider   Participation"  on  page  14  of  the  Company's  Proxy  Statement  is
incorporated herein by reference.

                                     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 6 through 22 of the
Company's  Annual  Report  to  Shareholders  and  are  incorporated   herein  by
reference.

         Consolidated  Statements of Operations  for the years ended October 31,
         1993, 1994, and 1995

         Consolidated Balance Sheets as of October 31, 1994, and 1995

         Consolidated  Statements  of  Changes in  Stockholders'  Equity for the
         years ended October 31, 1993, 1994, and 1995

         Consolidated  Statements  of Cash Flows for the years ended October 31,
         1993, 1994, and 1995

         Notes to Consolidated Financial Statements

         Report of Independent Accountants


(a)(2)  Financial Statement Schedules

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 VIII       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

Exhibit
Number                                               Description

      3.1         Amended and Restated  Articles of Incorporation of Registrant,
                  as amended 1/

      3.2         By-laws of Registrant, as amended 1/

      4.1         Specimen Stock Certificate 1/

      10.1        Employment  Agreements between the Company and Joe J. Lynn and
                  Steven R. Delmar, respectively 5/

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

      10.3        Consulting  and  Non-Competition   Agreement  with  J.  Graham
                  Hartwell 5/

      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/

      10.7        Microlog Corporation 1986 Stock Option Plan, as amended 6/
                                                                          -

      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, 1995

      22          Subsidiaries of the Registrant 5/

      24          Consent of Price Waterhouse LLP


*/         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, 1995.



<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>
To Our Shareholders and Friends:

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

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

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

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

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

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

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


                                        1


<PAGE>



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

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

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




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


                                        2


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

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

Intela:  UNIX Voice Processing Platform Becomes Flagship Product

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

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

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

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

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

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

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

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

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


                                        3


<PAGE>



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

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

VCS 3500:  Broad Functionality Continues to Help Drive Sales

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

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

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

CallStar:  New Markets Opened Abroad

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

International Business Significantly Increased

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

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

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

1996 and Beyond

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


                                        4


<PAGE>

MICROLOG SUBSIDIARY

Old Dominion Systems Incorporated of Maryland

Providing Professional Business Services For Nearly 25 Years

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

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

                                        5


<PAGE>

<TABLE>
<CAPTION>

Microlog Corporation

Consolidated Statements of Operations

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

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

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

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

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

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

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

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

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

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

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

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

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


                                                       6


<PAGE>


<TABLE>
<CAPTION>

Microlog Corporation

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

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

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

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

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

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

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

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

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

Commitments and contingencies

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

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

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




                                        7



<PAGE>


<TABLE>
<CAPTION>

Microlog Corporation

Consolidated Statements of Changes in Stockholders' Equity



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

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

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

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

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

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

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

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

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

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

  Release of mandatorily
    redeemable common stock           --       --      102,857    1,028      223,972       --         --            --      225,000

  Net income for the year ended
    October 31, 1995                  --       --           --       --           --       --         --      1,387,131   1,387,131
-----------------------------------------------------------------------------------------------------------------------------------

Balance as of October 31, 1995        --       --    4,507,968  $45,079  $15,015,344  601,870  $(1,176,537) $(9,722,232) $4,161,654
-----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>




                                                              8


<PAGE>
<TABLE>
<CAPTION>

Microlog Corporation

Consolidated Statements of Cash Flows

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

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

                                                       9





<PAGE>


Microlog Corporation

Notes to Consolidated Financial Statements

Note 1: Basis of Presentation and Major Customers


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



Microlog Corporation of Maryland, a subsidiary, designs, assembles, markets, and
services customized voice processing systems and other communications  products.
Old Dominion  Systems  Incorporated  of Maryland,  a  subsidiary,  is engaged in
providing performance analysis of certain major weapons systems and related data
processing support to the Federal Government through prime contractors.


A summary of information  about the Company's  operations by business segment is
as follows:


<TABLE>
<CAPTION>


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

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


                                                       10



<PAGE>


<TABLE>
<CAPTION>

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

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


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

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

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

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

Note 2: Summary of Accounting Policies

Revenue Recognition

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

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

Cash Equivalents and Investments

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



                                       11




<PAGE>

Inventories

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

Fixed Assets

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

Intangible Assets

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

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

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

Warranty Reserve

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

Net Income (Loss) Per Share

Net income (loss) per common share is computed by dividing net income (loss) for
the period by the weighted  average number of shares  outstanding,  adjusted for
the effect of common  stock  equivalents  arising  from the assumed  exercise of
stock  options,   if  dilutive.   Primary  weighted  average  number  of  shares
outstanding for the years ended October 31, 1993, 1994, and 1995 were 4,065,000,
3,877,029 and 4,066,705,  respectively. Fully diluted weighted average number of
shares  outstanding  for the years ended October 31, 1993,  1994,  and 1995 were
4,116,000, 3,877,029, and 4,066,705, respectively.


Note 3:  Acquisition of Genesis Electronics Corporation

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

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




                                       12




<PAGE>


Note 4: Receivables

Receivables consist of the following:


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

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

Note 5:  Inventories

Inventories consist of the following:


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

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

Note 6: Fixed Assets

Fixed assets consist of the following:


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

Estimated useful lives are as follows:

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


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







                                       13




<PAGE>



Note 7: Accrued Expenses


Accrued expenses consist of the following:

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

Note 8:  Debt

In December 1995, the Company  entered into a new line of credit facility with a
bank. The Company can borrow up to 70% of its eligible  receivables to a maximum
of  $2,000,000.  The line of credit bears interest at the bank's prime rate plus
1.25% and contains a 1/2 of 1% commitment  fee on the average  unused portion of
the line and a loan origination fee of $10,000.  The line of credit subjects the
Company  to a number  of  restrictive  covenants,  including  a  requirement  to
maintain a minimum consolidated tangible net worth, a ratio of total liabilities
to tangible net worth, and a current ratio.  There are restrictions on merger or
acquisitions,  payment of  dividends,  and certain  restrictions  on  additional
borrowings.

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

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

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

Long-term debt consists of the following:

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



                                       14




<PAGE>

Note 9: Restructuring of Operations

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

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

<TABLE>
<CAPTION>

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

Note 10: Commitments and Contingencies

Compensation Arrangements

In  February  1988,   the  Company   entered  into   non-contributory   deferred
compensation contracts with three officers,  which concluded on January 1, 1993.
The general  provisions of the contracts called for the Company to make payments
to the employees over ten years  subsequent to their  retirement.  The amount of
such  payments  was based on  $72,000  aggregate  annual  deferred  compensation
(limited  to certain  minimum net income  levels  under the  original  five year
contracts)  plus  interest at prime  rates  through  the  individual  employee's
retirement date. Effective April 30, 1991, one of these individuals retired from
the Company and elected to receive his deferred  compensation  over the ten year
period.  As of  May  1,  1991,  the  Company  ceased  making  contributions  and
accumulating  interest to his deferred  compensation  contract.  The Company has
expensed $31,000, $545, and $0, in fiscal 1993, 1994, and 1995, respectively.

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


                                       15




<PAGE>

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

Operating Lease Obligations

The Company  has  obtained  the use of certain  facilities  and other  equipment
through  noncancellable  operating leases, which expire in various years through
1999. Minimum future  noncancellable  operating lease payments as of October 31,
1995 are as follows:

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

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

Legal

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

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

Of the settlement amount,  $444,704 was attributed to the receipt by Microlog of
Maryland  and  Genesis  of a fully paid voice mail  license,  and  $555,296  was
attributed to a license under VMX and Dytel automatic call  processing  patents.
Microlog's  subsidiaries  also  will  pay  annual  license  maintenance  fees of
$120,000 to VMX under the call processing  patents,  with the patent expiring in
2007.  Microlog of Maryland  and Genesis will  receive a credit  against  future
license  maintenance  fees equal to 12% of the purchase  price paid for products
purchased from Rhetorex, a wholly-owned  subsidiary of VMX. The Company recorded
the new  licenses at a cost of $800,000 and is  amortizing  the costs over seven
years (See Note 16).

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


                                       16




<PAGE>

Note 11: Mandatorily Redeemable Common Stock

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

Note 12: Stock Option Plans

The Company has two  incentive  stock option  plans.  Under the first plan,  the
Company may grant  options to Directors  and employees to purchase up to 750,000
shares of common  stock at not less than fair market value at the time of grant.
Under the second  plan,  which was  adopted by the Board of  Directors  in 1995,
subject to shareholder  approval,  the Company may grant options to employees to
purchase  up to  1,000,000  shares of common  stock at not less than fair market
value at the time of grant. Additional information with respect to the incentive
stock option activity is summarized in the following table:


<TABLE>
<CAPTION>

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

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

The Company also has reserved 50,000 shares for issuance  outside these plans as
stock options or stock bonuses to key employees.  These shares may be granted at
such times and under  such terms as the Board of  Directors  may  determine.  No
grants or issuances had been made as of October 31, 1995.

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

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




                                       17




<PAGE>

Note 13: Income Taxes

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


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


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

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

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

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

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


                                       18




<PAGE>



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





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

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

Approximately  $9.6 million of tax loss  carryforwards  and $156,000 of research
and  development  tax credits can be  utilized by the Company  through  2008 and
2007,  respectively.  If certain  substantial changes in the Company's ownership
should  occur,  there  would  be an  annual  limitation  on  the  amount  of the
carryforwards which can be utilized.

Note 14: Related Party Transactions

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

Note 15: Pension and Profit Sharing Plans

The  parent  and its  subsidiaries  have a  defined  contribution  pension  plan
covering all employees.  After the employee completes  one-year of service,  the
plan  provides  for  annual  contributions  by the  Company  equal  to 6% of the
employee's  annual earnings,  excluding  bonuses and commissions.  The Company's
contributions  to the plan vest  after a  five-year  period.  Effective  for the
period  September 1, 1991 through July 31, 1993, the Board of Directors  reduced
the contribution rate to 1% of each employee's annual earnings for all companies
except Old Dominion  Systems  Incorporated of Maryland.  Employees may also make
voluntary  contributions  to the plan up to a  maximum  of 10% of  their  annual
earnings.  In accordance with the plan,  unvested amounts relating to terminated
employees  with a break in service  greater than one year are  credited  against
pension  contributions by the Company.  Such  forfeitures  amounted to $115,000,
$115,000, and $111,000 in fiscal 1993, 1994, and 1995,  respectively.  It is the
Company's  policy to fund  pension  cost  accrued.  Net  expense of the plan was
approximately  $199,000,  $331,000, and $365,000 in fiscal 1993, 1994, and 1995,
respectively.

The Company also  maintains a 401(k)  profit  sharing  plan and trust.  The plan
allows for  employees  to  contribute  up to 10% of gross  salary.  The  Company
matches 50% of employee contributions not exceeding 4% of eligible


                                       19




<PAGE>



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

Note 16: Supplemental Cash Flow Information

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

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

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

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

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

As discussed in Note 11, in 1995,  the Company was released from its  obligation
to repurchase common stock from VMX, when all of the 102,857 shares were sold by
VMX in the open market. As a result, the Company's  liability to VMX of $225,000
was credited to stockholders' equity in the consolidated balance sheet.


                                      20




<PAGE>

Note 17: Selected Quarterly Financial Data (Unaudited)

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

<TABLE>
<CAPTION>



                                             Jan. 31,         April 30,         July 31,          Oct. 31,
                                                 1994              1994             1994              1994
----------------------------------------------------------------------------------------------------------
<S>                                       <C>               <C>              <C>                <C>       
Net sales                                 $4,095,399        $4,421,370       $4,290,151         $5,861,842
Gross margin                               1,148,579         1,101,994         (182,852)         2,215,176
Income (loss) from operations               (950,309)         (966,065)      (3,343,347)           343,040
Net income (loss)                           (976,190)         (948,976)      (3,379,685)           320,810
   Per common share:                          $(0.25)           $(0.24)          $(0.87)             $0.08
----------------------------------------------------------------------------------------------------------

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

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

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




                                       21



<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS
                        ---------------------------------


           To the Board of Directors and Stockholders
           Microlog Corporation


           In our opinion, the accompanying  consolidated balance sheets and the
           related  consolidated   statements  of  operations,   of  changes  in
           stockholders'  equity  and  of  cash  flows  present  fairly,  in all
           material respects, the financial position of Microlog Corporation and
           its  subsidiaries  at October 31,  1995 and 1994,  and the results of
           their  operations and their cash flows for each of the three years in
           the period  ended  October 31, 1995,  in  conformity  with  generally
           accepted accounting  principles.  These financial  statements are the
           responsibility of the Company's management;  our responsibility is to
           express an opinion on these financial statements based on our audits.
           We  conducted  our  audits of these  statements  in  accordance  with
           generally  accepted auditing standards which require that we plan and
           perform the audit to obtain  reasonable  assurance  about whether the
           financial  statements  are free of  material  misstatement.  An audit
           includes examining,  on a test basis, evidence supporting the amounts
           and disclosures in the financial statements, assessing the accounting
           principles  used and  significant  estimates made by management,  and
           evaluating the overall financial statement  presentation.  We believe
           that our audits provide a reasonable basis for the opinion  expressed
           above.





           Price Waterhouse LLP
           Washington, DC
           December 22, 1995
           ---------------------------------------------------------------------






                                       22




<PAGE>





                                       30




<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations

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

<TABLE>
<CAPTION>

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



Results of Operations

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

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


                                       23




<PAGE>

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

Net Sales

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

Voice Processing Net Sales

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

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

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

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

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

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

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

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


                                       24




<PAGE>



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

As of October 31, 1995,  the Company had a backlog of existing  orders for voice
processing systems totaling $3.7 million.  The backlog,  as of October 31, 1994,
was also $3.7 million.  The Company has experienced  fluctuations in its backlog
at various times during the past two fiscal years attributable  primarily to the
seasonality of governmental  purchases.  In addition, the Company has observed a
lengthening  of the period  between the date of booking an order and the date of
shipment, with the shipment depending on any customer delivery schedules and any
customization  needed  for  VCS  3500  or  Intela   applications.   The  Company
anticipates  that all of the  outstanding  orders at  October  31,  1995 will be
shipped  and the sales  recognized  during  fiscal  1996.  Although  the Company
believes that its entire backlog of orders  consists of firm orders,  because of
the possibility of customer changes in delivery schedules and delays inherent in
the government  contracting  process, the Company's backlog as of any particular
date may not be indicative of actual sales for any future period.

Performance Analysis and Support Services Net Sales

Net sales from  performance  analysis and support  services for fiscal 1995 were
$8.3 million,  which represented a 3% increase from the net sales from this line
of business  during the prior year. Net sales for fiscal 1994 were $8.1 million,
representing an increase of 8% from $7.5 million in fiscal 1993. These increases
resulted from the addition of new  contracts,  as well as increases in the level
of work authorized  under existing  contracts from the Johns Hopkins  University
Applied Physics Laboratory  ("APL"),  the Company's principal customer for these
services.

The Company has another  customer for these  services,  American  Telephone  and
Telegraph  ("AT&T").  However,  the  Company's  contracts  with  AT&T  have been
declining  since  fiscal  1993  as a  result  of  decreases  in  levels  of work
associated with these contracts. Net sales to this customer were 4%, 5%, and 10%
of performance  analysis and support  services sales for fiscal 1995,  1994, and
1993,  respectively.  Net sales  through AT&T for fiscal 1996 are expected to be
significantly less than fiscal 1995.

The Company is seeking to diversify its operations for performance  analysis and
support services by seeking contracts in non-defense  related areas.  Because of
the lower profit  margins  allowed on  contracts  for  performance  analysis and
support  services and the  Company's  limited  success to date in obtaining  new
contracts  with  contractors  and agencies  other than APL or AT&T,  the Company
believes  that  this  segment  of its  business  is not  likely  to  generate  a
substantial increase in profitability.  Nevertheless,  the Company believes that
its  performance  analysis  contracts are likely to continue to provide a stable
source  of sales for the  Company.  The  Company  does not  anticipate  that any
changes in defense  priorities or spending  will result in any material  adverse
affect over the next fiscal year on its net sales from performance  analysis and
support  services nor alter the manner in which it procures  contracts  for such
services.  However,  there is no assurance that changes in defense priorities or
continuing  budget  reductions  will not cause such an effect  during the fiscal
year or thereafter.

As of October  31,  1995,  the  Company  had a backlog  of  funding on  existing
contracts for performance  analysis and support services  totaling $7.8 million.
By comparison, the backlog as of October 31, 1994 was $4.6 million. The increase
in backlog is attributable  primarily to a significant multi-year contract award
and  increased  funding  levels  on  existing  or  new  contracts.  The  Company
anticipates  that these  services will be provided  during the next three fiscal
years. The Company  estimates that of the $7.8 million of backlog at October 31,
1995,  $3.9 million will be recognized  as sales beyond fiscal 1996.  Because of
the delays inherent in the government contracting process or possible changes in
defense priorities or spending,  the Company's backlog as of any particular date
may not be  indicative  of actual  sales for any  future  period.  Although  the
Company believes that its backlog of funding on existing  contracts is firm, the
possibility  exists  that  funding  for some  contracts  on which the Company is
continuing to work, in the  expectation of renewal,  may not be authorized  (and
the Government has the right to cancel contracts at any time),  although to date
this has not occurred.




                                       25




<PAGE>



Costs and Expenses

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

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

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

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

Research and development  expenses reflect costs associated with the development
of  applicable  software  and  product  enhancements  for  the  Company's  voice
processing  systems.  The  Company  believes  that the  process of  establishing
technological  feasibility with its new products is completed approximately upon
release of the products to its customers. Hence, the Company does not anticipate
capitalizing  research and development costs.  Research and development expenses
were $1.6 million,  or 7% of net sales for fiscal 1995;  $1.6 million,  or 9% of
net sales for fiscal year 1994; and $1.5 million,  or 7% of net sales for fiscal
1993.  The Company  presently  plans to maintain its  research  and  development
program at  approximately  the same level,  although  research  and  development
expenses in the next fiscal year are expected to be somewhat  higher than fiscal
1995,  because of the  Company's  strategy to continue  the  development  of new
products and the enhancement of existing products.

Restructuring Costs

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


                                       26




<PAGE>

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

Investment and Other Income, Net

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

Provision for Income Taxes

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

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

Merger Price Adjustments and Escrowed Shares

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

Litigation Settlement

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

On May 24, 1993, Microlog and its subsidiaries reached a settlement with VMX and
Dytel.  Under the terms of the  settlement,  the  litigation  was dismissed with
prejudice and the products of Microlog's  subsidiaries,  Microlog Corporation of
Maryland,  and Genesis Electronics  Corporation,  are fully licensed under VMX's
and Dytel's voice mail and automatic call processing  patents.  Microlog and its
subsidiaries  paid VMX $275,000 upon execution of the  settlement  documents and
issued to VMX $225,000 of Microlog  common  stock  (102,857  shares),  which was
subject to redemption under certain conditions if still held by VMX at April 30,
1996 at a price of $2.1875 per share,  as  discussed  in Note 10 of The Notes to
Consolidated Financial Statements. As discussed in Note 11, in 1995, the Company
was released from its  obligation to repurchase  common stock from VMX, when all
of the 102,857  shares  were sold by VMX in the open  market.  As a result,  the
Company's  liability to VMX of $225,000 was credited to stockholders'  equity in
the  consolidated  balance sheet.  Additionally,  Microlog and its  subsidiaries
agreed  to pay to VMX a total  of  $500,000  in  eleven  quarterly  installments
starting on July 31, 1993;  the first five  installments  have been paid. Of the
settlement amount, $444,704 was attributed to the receipt by Microlog of


                                       27




<PAGE>

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

Liquidity and Capital Resources

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

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

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

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

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

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

The Company believes that, through conservative  management of its cash and cash
equivalents,  it will not  need  additional  financial  resources  beyond  these
presently expected to be available during fiscal 1996.

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



                                       28




<PAGE>

Quarterly Results

Note  17 of the  Notes  to  Consolidated  Financial  Statements  of the  Company
contained in this Annual Report presents unaudited  quarterly  operating results
for the Company's  last eight fiscal  quarters.  The Company  believes that this
unaudited  information  contains  all  adjustments,  consisting  only of  normal
recurring  adjustments,  necessary  for a  fair  presentation  of  the  selected
quarterly  information when read in conjunction with the Consolidated  Financial
Statements  and Notes  thereto.  The  operating  results for any quarter are not
necessarily indicative of results for any subsequent period.

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

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

Price Range of Common Stock

The Common Stock is presently  traded on the  over-the-counter  market under the
symbol MLOG.  As of January 19, 1996,  there were  approximately  277 holders of
record  of the  Common  Stock.  This  number  does not  reflect  the  number  of
individuals  or  institutional  investors  holding stock in nominee name through
banks, brokerage firms, and others.

Note  17 of the  Notes  to  Consolidated  Financial  Statements  of the  Company
contained in this Annual Report sets forth, for the period indicated,  the range
of high and low  transaction  prices for the  Common  Stock as  reported  on the
Nasdaq  SmallCap  Market.  The closing  price of the Common Stock on January 19,
1996 was $5.25 per share.

Dividend Policy

The  Company has paid  dividends  twice since its  inception  in 1969,  the most
recent being a $.10 cash dividend ($.033 as adjusted for a  three-for-one  stock
split in April 1986) in November 1985.  Certain of the Company's debt agreements
restrict  the  payment  of  dividends.  See Note 8 of the Notes to  Consolidated
Financial Statements.  The Company does not anticipate paying any cash dividends
in the foreseeable future.

Microlog Corporation

Selected Consolidated Financial Data

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

Income Statement Data:

<TABLE>
<CAPTION>

                                                                   Year Ended October 31,
-------------------------------------------------------------------------------------------------------------------
                                          1991            1992             1993           1994              1995
-------------------------------------------------------------------------------------------------------------------
<S>                                   <C>              <C>             <C>            <C>               <C>        
Net sales                             $19,614,230      $19,526,503     $20,798,323    $18,668,762       $22,385,643
Income (loss) from
  operations                           (6,916,544)      (3,465,726)      1,050,934     (4,916,681)        1,500,343
Net income (loss)                      (6,780,139)      (3,454,284)        919,779     (4,984,041)        1,387,132
Per common share:
  Primary                            $      (1.71)     $      (.86)    $       .23    $     (1.29)      $       .34
  Fully diluted                      $      (1.71)     $      (.86)    $       .22    $     (1.29)      $       .34
</TABLE>

                                       29



<PAGE>


Balance Sheet Data:


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

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




                                                       30







<PAGE>
                                   Exhibit 13


             Annual Report to Shareholders for the fiscal year ended

                                October 31, 1994


<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 33-34094) of Microlog  Corporation  of
our report  dated  December  22,  1995  appearing  on page 22 of the 1995 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, 1996


<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/ Joe J. Lynn
                                                      ---------------
                                                          Joe J. Lynn
                                                   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.



/s/ Joe J. Lynn                                                 January 26, 1996
--------------------------------------------
Joe J. Lynn
Chief Executive Officer




/s/ Richard A. Thompson                                         January 26, 1996
--------------------------------------------
Richard A. Thompson
President and Chief Operating Officer




/s/ Steven R. Delmar                                            January 26, 1996
--------------------------------------------
Steven R. Delmar
Executive Vice President and Chief Financial Officer
(Principal Accounting Officer)



/s/ J. Graham Hartwell                                          January 26, 1996
--------------------------------------------
J. Graham Hartwell
Chairman of the Board and Director




/s/ David M. Gische                                             January 26, 1996
--------------------------------------------
David M. Gische
Director



/s/ Robert E. Gray, Jr.                                         January 26, 1996
--------------------------------------------
Robert E. Gray, Jr.
Director


<PAGE>





<TABLE>
<CAPTION>

                                      ADDITIONAL SCHEDULE REQUIRED
                              SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

                                                           BALANCE                                             BALANCE
FISCAL YEAR ENDED 10/31/95                                  11/1           ADDITIONS         DELETIONS          10/31
--------------------------------------------------     --------------------------------------------------------------------
<S>                                                            <C>                <C>               <C>            <C>    
RECEIVABLES
   ALLOWANCE FOR DOUBTFUL ACCTS                                233,081            15,422            81,292         167,211

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

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

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

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


FISCAL YEAR ENDED 10/31/93
--------------------------------------------------

RECEIVABLES
   ALLOWANCE FOR DOUBTFUL ACCTS                                187,715            22,000            35,261         174,454

INVENTORY
   RESERVE FOR OBSOLESCENCE                                    824,173                              46,598         777,575
</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  22,  1995  appearing  on page 22 of the 1995  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 22, 1995




























                                       F-2

<PAGE>


--------------------------------------------------------------------------------
                                  EXHIBIT 10.9
--------------------------------------------------------------------------------

                       Farmers and Mechanics National Bank
                                 Promissory Note




<PAGE>


--------------------------------------------------------------------------------
[GRAPHIC OMITTED]
--------------------------------------------------------------------------------

<PAGE>
                                                       - 2 -


                            SCHEDULE 14A INFORMATION
                 Proxy  Statement  Pursuant to Section  14(a) of the  Securities
Exchange Act of 1934 Filed by the  Registrant [] Filed by a Party other than the
Registrant [ ] Check the  appropriate  box: [ ] Preliminary  Proxy Statement [ ]
Confidential,  for Use of the commission Only (as permitted by Rule  14a-6(e)(2)
[] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting
Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12

                              Microlog Corporation
                (Name of Registrant as Specified In Its Charter)


     (Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[]   $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2), or
     Item 22(a)(2) of Schedule 14A..
[ ] $500 per  each  party  to the  controversy  pursuant  to  Exchange  Act Rule
14a-6(i)(3).  [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
     1) Title of each class of securities to which transaction applies:

     2) Aggregate number of securities to which transaction applies:

     3) Per unit  price  or  other  underlying  value  of  transaction  computed
        pursuant to Exchange Act Rule 0-11:1/

     4) Proposed maximum aggregate value of transaction:


     5) Total fee paid:



     1/ Set forth the amount on which the filing fee is calculated and state how
     it was determined.

[ ]  Check box if any part of the fee is offset as provided by Exchange Act Rule
     0-11(a)(2)  and identify the filing for which the  offsetting  fee was paid
     previously.  Identify the previous filing by registration statement number,
     or the Form or Schedule  and the date of its filing.  1) Amount  previously
     paid:

     2) Form, Schedule or Registration Statement No.:

     3) Filing Party:

     4) Date Filed:
                           January _29, 1996


<PAGE>
                              MICROLOG CORPORATION
                              20270 Goldenrod Lane
                            Germantown, MD 20876-4070
                                 (301) 428-9100


                                 PROXY STATEMENT


                         ANNUAL MEETING OF SHAREHOLDERS
                                 MARCH 26, 1996


                SOLICITATION, VOTING AND REVOCABILITY OF PROXIES

                  This Proxy  Statement  is  furnished  in  connection  with the
solicitation  of proxies by the Board of  Directors of Microlog  Corporation,  a
Virginia  corporation  (the  "Company"),  for use at the 1996 Annual  Meeting of
Shareholders  to be held on March 26,  1996 at 10:00 a.m.,  local  time,  at the
Gaithersburg   Marriott   Washingtonian   Center,   9751  Washingtonian   Blvd.,
Gaithersburg,  Maryland,  20878,  and at any  adjournments  thereof (the "Annual
Meeting").

                  The Annual Meeting is being called for the following purposes:

                  (1)      to elect two  directors  to serve for a term of three
                           years;

                  (2)      to ratify the appointment of Price  Waterhouse LLP as
                           independent accountants of the Company for the fiscal
                           year ending October 31, 1996;

                  (3)      to consider and vote upon a proposed new Stock Option
                           Plan with  1,000,000  shares of the Company's  common
                           stock  reserved  for  issuance  upon the  exercise of
                           options granted under such new Stock Option Plan;

                  (4)      to consider and vote upon proposed  amendments to the
                           Company's  Non-Employee  Director  Stock  Option Plan
                           which would,  among other  things,  (i) increase from
                           75,000 to 125,000 the number of shares  reserved  for
                           issuance  upon the exercise of options  granted under
                           the  Non-Employee  Director  Stock Option Plan,  (ii)
                           provide  for annual  grants of an option to  purchase
                           3,000  shares  (rather  than  1,000  shares)  of  the
                           Company's common stock to each non-employee  director
                           of the  Company,  and  provide  that such grants will
                           occur in December  (rather than March) of each fiscal
                           year,  and (iii) extend the term of the plan to April
                           30, 2001; and

                  (5)      to transact such other  business as may properly come
                           before  the  Annual   Meeting  or  any   adjournments
                           thereof.

                  Record holders of the Company's  common stock,  par value $.01
per share  ("Common  Stock"),  at the close of business on February 2, 1996, the
record date, are entitled to notice of, and to vote at, the Annual  Meeting.  As
of January 19, 1996,  there were  outstanding  3,964,073 shares of Common Stock.
Each  shareholder  will be entitled  to one vote for each share of Common  Stock
held at the close of business on the record date. At the Annual  Meeting,  votes
will be counted by written ballot.

                  This  Proxy  Statement,  and the  accompanying  notice  of the
Annual Meeting and proxy card, will first be sent or given to shareholders on or
about February 20, 1996.  The Company's  Annual Report to  Shareholders  for the
fiscal year ended October 31, 1995 accompanies this Proxy Statement.

                  The  shares  of  Common  Stock  represented  by valid  proxies
received  by the  Company  in time  for the  Annual  Meeting  will be  voted  as
specified in such proxies. Executed but unmarked proxies will be voted:

                  (1)      FOR the election of the Board of Directors'  nominees
                           for director;

                  (2)      FOR the  ratification  of the  appointment  of  Price
                           Waterhouse  LLP  as  independent  accountants  of the
                           Company for the fiscal year ending October 31, 1996;

                  (3)      FOR the  approval of the new  Company's  Stock Option
                           Plan with  1,000,000  shares of the Company's  Common
                           Stock  reserved  for  issuance  upon the  exercise of
                           options granted under such new Stock Option Plan; and

                  (4)      FOR the approval of the  amendments  to the Company's
                           Non-Employee  Director Stock Option Plan which would,
                           among  other  things,  (i)  increase  from  75,000 to
                           125,000 the number of shares  reserved  for  issuance
                           upon  the  exercise  of  options  granted  under  the
                           Non-Employee Director Stock Option Plan, (ii) provide
                           for  annual  grants of an option  to  purchase  3,000
                           shares  (rather than 1,000  shares) of the  Company's
                           Common  Stock to each  non-employee  director  of the
                           Company,  and provide  that such grants will occur in
                           December (rather than March) of each fiscal year, and
                           (iii) extend the term of the plan to April 30, 2001.

                  If any other matters  properly come before the Annual Meeting,
the persons named as proxies will, unless the shareholder otherwise specifies in
the proxy,  vote upon such matters as  determined  by a majority of the Board of
Directors.

                  The election of the Board of Directors'  nominees for director
will require the affirmative  vote of a plurality of the shares entitled to vote
in the  election of  directors.  Approval  of the  ratification  of  independent
accountants,  the new Stock Option Plan,  and the amendment to the  Non-Employee
Director  Stock Option Plan  requires the  affirmative  vote of the holders of a
majority of the shares of Common  Stock of the Company  entitled to vote thereon
and who vote in person or by proxy at the  Annual  Meeting.  In order to approve
the  transaction  of any other  business as may properly  come before the Annual
Meeting,  or any  adjournments  thereof,  the votes cast at the  Annual  Meeting
approving the action must exceed the votes cast opposing the action. Abstentions
and broker  non-votes  will not be counted as either  approving  or opposing the
action.

                  Any  shareholder  giving a proxy has the right to revoke it at
any time before it is exercised by  attending  the Annual  Meeting and voting in
person or by delivering to the Secretary of the Company at 20270 Goldenrod Lane,
Germantown, MD 20876-4070, a written notice of revocation or duly executed proxy
bearing a later date.

                  The cost of  soliciting  proxies will be borne by the Company.
In addition to the use of the mails,  proxies may be solicited  personally or by
telephone,  facsimile or telegraph by officers,  directors, and employees of the
Company who will not be specially compensated for such solicitation  activities.
Arrangements  will  also be made with  brokerage  houses  and other  custodians,
nominees,   and  fiduciaries  for  forwarding   solicitation  materials  to  the
beneficial owners of such shares held of record by such persons, and the Company
will reimburse such persons for their reasonable expenses incurred in connection
therewith.

                  The Company is required to file an Annual  Report on Form 10-K
for the fiscal  year ended  October 31, 1995 with the  Securities  and  Exchange
Commission  ("SEC").  Shareholders  can obtain,  free of charge,  a copy of such
Annual  Report  by  writing  to  Microlog  Corporation,  20270  Goldenrod  Lane,
Germantown, MD 20876-4070, Attention: Corporate Secretary.



<PAGE>


              STOCK OWNED BY MANAGEMENT AND PRINCIPAL SHAREHOLDERS

                  The following  table sets forth  information as of January 19,
1996 with  respect to the  ownership  of shares of Common Stock by (i) owners of
more than 5% of the Company's  outstanding  Common Stock, (ii) each director and
nominee for director of the Company,  (iii) each of the named executive officers
of the Company,  and (iv) all  directors and officers of the Company as a group.
The information is based on the most recent filings with the SEC by such persons
or upon  information  provided by such persons to the Company.  Unless otherwise
indicated,  the persons  shown in the table are believed to have sole voting and
investment power with respect to the entire number of shares reported.
<TABLE>
<CAPTION>

Name and Address of                                  Number of Shares                          Percentage of
Beneficial Owner (1)                                 Beneficially Owned                        Ownership (2)
--------------------                                 ------------------                        -------------

<S>                                                       <C>                                         <C>  
Joe J. Lynn                                                 453,350                                   11.4%
20270 Goldenrod Lane
Germantown, MD  20876-4070

J. Graham Hartwell                                          404,050                                   10.2%
20270 Goldenrod Lane
Germantown, MD  20876-4070

Hathaway & Associates, Ltd                                  314,000                                    7.9%
119 Rowayton Avenue
Rowayton, Connecticut 06853

Steven R. Delmar                                            135,305 (3)                                3.3%
20270 Goldenrod Lane
Germantown, MD  20876-4070

Richard A. Thompson                                         112,000 (4)                                2.8%
20270 Goldenrod Lane
Germantown, MD  20876-4070

Deborah M. Grove                                             41,599 (5)                                1.0%
20270 Goldenrod Lane
Germantown, MD  20876-4070

Robert E. Gray, Jr.                                          36,520 (6)                                   *
20270 Goldenrod Lane
Germantown, MD  20876-4070

David M. Gische                                              29,000 (6)                                   *
20270 Goldenrod Lane
Germantown, MD  20876-4070

All officers and directors as
a group (9 persons)                                       1,239,233 (7)                               29.3%
----------------------------
<FN>
*    Less than 1% of the shares outstanding.

(1)   In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, a
      person is deemed to be the beneficial  owner of a security for purposes of
      the Rule if he or she has or shares voting power or investment  power with
      respect to such security or has the right to acquire such ownership within
      60 days. As used herein, "voting power" is the power to vote or direct the
      voting of shares, and "investment power" is the power to dispose or direct
      the disposition of shares.

(2)   For  the  purpose  of  computing  the  percentage  of  ownership  of  each
      beneficial owner, any securities which were not outstanding but which were
      subject to options,  warrants,  rights,  or conversion  privileges held by
      such  beneficial  owner  exercisable  within  60 days  were  deemed  to be
      outstanding in determining the percentage owned by such person but are not
      deemed  outstanding  in  determining  the  percentage  owned by any  other
      person.

(3)   Includes 12,000 shares held by the Company's Money Purchase  Pension Plan,
      of  which  Mr.  Delmar  is a  trustee.  Mr.  Delmar  disclaims  beneficial
      ownership of such shares. Also includes 85,000 shares that may be acquired
      by Mr. Delmar within 60 days of the record date upon the exercise of stock
      options. Does not include 15,000 shares that may be acquired by Mr. Delmar
      more  than 60 days  after  the  record  date  upon the  exercise  of stock
      options, which grants are subject to approval by shareholders as described
      in Proposal No. 3 below.

(4)   Includes 12,000 shares held by the Company's Money Purchase  Pension Plan,
      of which Mr.  Thompson is a trustee.  Mr.  Thompson  disclaims  beneficial
      ownership  of such  shares.  Also  includes  100,000  shares  that  may be
      acquired  by Mr.  Thompson  within  60 days of the  record  date  upon the
      exercise of stock  options.  Does not include  250,000  shares that may be
      acquired by Mr.  Thompson more than 60 days after the record date upon the
      exercise  of stock  options,  which  grants  are  subject to  approval  by
      shareholders as described in Proposal No. 3 below.

(5)   Includes 18,333 shares that may be acquired by Ms. Grove within 60 days of
      the record  date upon the  exercise  of stock  options.  Does not  include
      21,667  shares that may be  acquired by Ms.  Grove more than 60 days after
      the record date upon the exercise of stock options, of which 15,000 shares
      are subject to approval by  shareholders  as  described  in Proposal No. 3
      below.

(6)   Includes  26,000 shares that may be acquired  within 60 days of the record
      date upon the exercise of stock options that have been granted.

(7)   Includes  262,000 shares that may be acquired within 60 days of the record
      date upon the exercise of stock options.  Does not include  320,033 shares
      that may be  acquired  more than 60 days  after the  record  date upon the
      exercise of stock  options.  Includes  12,000 shares held by the Company's
      Money  Purchase  Pension Plan,  of which  Messrs.  Thompson and Delmar are
      trustees.  Messrs. Thompson and Delmar each disclaims beneficial ownership
      of such shares.
</FN>
</TABLE>


<PAGE>


                            MATTERS TO BE ACTED UPON

                              ELECTION OF DIRECTORS
                                (Proposal No. 1)

                  The  By-Laws  of  the  Company   currently  provide  that  the
membership  of the Board be divided into three  classes.  The Board of Directors
currently  consists of six directors with each class having two  directors.  The
term of only one class of directors  expires each year, and their successors are
elected for a term of three years and until their  successors  are duly  elected
and qualified.  Any director elected to fill any vacancy  occurring in the Board
of  Directors,  including  any  vacancy  created by an increase in the number of
directors,  shall hold office for the remainder of the full term of the class of
directors  in which the new  directorship  was  created or in which the  vacancy
occurred. There is currently one vacancy on the Board.

                  At the Annual  Meeting,  two  directors  will be elected.  The
nominees,  David M. Gische and  Richard A.  Thompson,  currently  are serving as
directors and have indicated their  willingness to continue  serving if elected.
Two directors were elected in 1995 for three-year  terms ending in 1998, and one
director was elected in 1994 for a three-year  term ending in 1997. The Board is
presently searching for a suitable candidate to fill the vacancy on the Board.

                  The following  table  provides  information as to the nominees
for director of the Company for terms ending in 1999, and as to directors  whose
terms in office will continue.

                                                            Expiration
Name                               Age                       of Term

Nominee

David M. Gische   46               1999
Richard A. Thompson                  49                        1999

Continuing Directors

J. Graham Hartwell                   65                        1998
Joe J. Lynn                          64                        1998
Robert E. Gray, Jr.                  54                        1997


                  David M. Gische has been a director of the Company since April
1985. Mr. Gische,  an attorney,  has been  associated with the law firm of Ross,
Dixon & Masback in Washington,  D.C.  since  November 1983.  From September 1978
until November 1983, Mr. Gische was  associated  with the  Washington,  D.C. law
firm of Hogan & Hartson LLP, counsel to the Company.

                  Richard A.  Thompson has been  President  and Chief  Operating
Officer of the Company since June 1992 and was elected a director of the Company
in September  1992.  Prior to joining  Microlog  Corporation,  Mr.  Thompson was
President and a director of General Kinetics, Inc., a diversified  manufacturing
company  from October 1989 to December  1991.  Other  positions he has held have
been as President of Thompson Associates, a management consulting firm from 1988
to 1989 and as  Marketing  Manager with  General  Electric  Company from 1985 to
1988. Mr.
Thompson is also a Captain in the U. S. Naval Reserve.

                   J. Graham Hartwell has been Chairman of the Board since March
1986 and a director of the Company  since 1969.  He was President of the Company
from its  organization in 1969 until October 1989. In October 1989, Mr. Hartwell
became Chief Executive  Officer of the Company and served in that capacity until
his retirement on April 30, 1991.

                  Joe J. Lynn became Chief  Executive  Officer of the Company on
May 1, 1991.  He served as  President  of the Company  from October 1989 to June
1992.  Before this,  Mr. Lynn was  Executive  Vice  President of the Company and
served  as  President  of the  Company's  subsidiary,  Microlog  Corporation  of
Maryland.  He has been a director of the Company  since its  formation  in 1969.
From 1966 until 1970, Mr. Lynn was employed as a manager with DBA Systems,  Inc.
Prior  thereto,  from 1961 to 1966,  he served as a manager at the Kennedy Space
Flight  Center for RCA,  which is  presently a  subsidiary  of General  Electric
Company.

                  Robert E. Gray,  Jr. has been a director of the Company  since
1977. He is currently  Senior Vice  President of Prosperity  Bank and Trust,  in
Springfield, Virginia. He was employed by Hallmark Bank & Trust Co. from 1985 to
1992 - as Director and Executive  Vice  President  from 1989 to 1992,  and prior
thereto as Senior Vice President and Chief Lending  Officer.  From 1992 to 1993,
he served as Senior Vice  President of Suburban Bank of Virginia,  NA in McLean,
Virginia.

                  During  fiscal  year 1995,  there  were 6 meetings  (including
regularly  scheduled  and  special  meetings)  of the  Board of  Directors.  All
directors attended more than 75% of such meetings.

                  The Board has an Audit  Committee,  a Management  Compensation
Committee,  and a  Stock  Option  Committee,  but  does  not  have a  nominating
committee. The Audit, Management Compensation,  and Stock Option Committees each
consists of Messrs. Gische and Gray.

                  The Audit Committee is primarily responsible for approving the
services performed by the Company's independent accountants. The Audit Committee
met 1 time during fiscal year 1995. All members of the Audit Committee  attended
this meeting.

                  The function of the  Management  Compensation  Committee is to
make  recommendations to the Board of Directors with respect to the compensation
of certain  officers  and  employees,  including  the  executive  officers.  The
Management  Compensation  Committee  met 1 time during  fiscal  year 1995.  Each
member of the Management Compensation Committee attended this meeting.

                  The  function  of  the  Stock  Option  Committee  is  to  make
recommendations  to the Board of  Directors  with  respect to the grant of stock
options to officers and employees. The Stock Option Committee met 5 times during
fiscal  year 1995.  Each member of the Stock  Option  Committee  attended  these
meetings.



<PAGE>


                                   MANAGEMENT

                  The executive  officers of the Company,  and their  respective
ages as of January 19, 1996, are as follows:

Name                         Age         Offices and Positions Held

Joe J. Lynn                  64          Chief Executive Officer and Director

Richard A. Thompson          49          President, Chief Operating Officer and
                                           Director

Steven R. Delmar             39          Executive Vice President and Chief
                                           Financial Officer

Deborah M. Grove             43          President of subsidiary, Old Dominion 
                                           Systems Incorporated of Maryland

                  Steven R.  Delmar has been  Executive  Vice  President  of the
Company  since  October  1989  and was  President  of  Microlog  Corporation  of
Maryland, a wholly-owned  subsidiary of the Company, from May 1991 to July 1992.
Mr. Delmar was Microlog's Chief Financial Officer from January 1987 to May 1991.
He served as Chief  Operating  Officer of Microlog  (rather than Chief Financial
Officer) from May 1991 until July 1992, and following the hiring of Mr. Thompson
as President and Chief  Operating  Officer,  Mr. Delmar  resumed his position as
Chief Financial Officer.  He was Vice President of the Company from January 1987
to October  1989.  Since 1979,  Mr.  Delmar has held  various  offices  with the
Company and its  subsidiaries,  including  Assistant  Comptroller,  Comptroller,
General Manager and Vice President.  A certified public  accountant,  Mr. Delmar
held  accounting   positions  with  Bechtel  Power  Corporation,   a  commercial
construction firm, and the Veterans  Administration prior to his employment with
Microlog.

                  Deborah M. Grove  became  President  of Old  Dominion  Systems
Incorporated of Maryland, a wholly-owned subsidiary of the Company, in May 1991.
From 1983 until May 1991, Ms. Grove was Vice  President of Old Dominion  Systems
Incorporated  of Maryland  and from 1985 until May 1991,  Vice  President of Old
Dominion  Services,  Inc. Ms. Grove holds a Master of Science degree in Business
and Finance and a Bachelor of Science degree in Business Administration.


                  EXECUTIVE COMPENSATION AND OTHER INFORMATION

Summary of Cash and Certain Other Compensation

                  The following table shows, for the fiscal years ending October
31,  1993,  1994,  and 1995,  the  salary,  bonus  and  certain  other  forms of
compensation paid or accrued for those years by the Company and its subsidiaries
to the Chief Executive  Officer and each of the three other  executive  officers
whose  salary and bonus  compensation  exceeded  $100,000 in fiscal 1995 ("named
executive officers").



<PAGE>

<TABLE>
<CAPTION>
                                            SUMMARY COMPENSATION TABLE


                           Annual Compensation                                    Long Term Compensation
--------------------------------------------------------------------------- -----------------------------------
--------------------------------------------------------------------------- ---------------------- ------------ -----------
                                                                                   Awards            Payouts
                                                                  Other
                                                                 Annual     Restricted                          All Other
                                                               Compen-sationStock        Options/SALTIP         Compen-sation
    Name and Principal      Fiscal        Salary     Bonus       ($)(b)     Award(s)     (#)       Payouts ($)    ($)(c)
                                          -------                ------                  ---               ---    ------
         Position              Year       ($)(a)       ($)                   ($)
         --------              ----       ------       ---                   ---
<S>                            <C>        <C>        <C>          <C>                                            <C>   
Joe J. Lynn                    1995       169,919    50,000       7,715                                          10,851
Chief Executive Officer        1994       169,207                 4,513                                          12,027
                               1993       162,344    35,500         682                                           4,904


Richard A. Thompson            1995       160,000    90,000       4,622                   100,000                12,125
President and Chief            1994       157,453                 5,947                                          12,500
Operating Officer              1993       144,997    34,776       5,552                                           3,867


Steven R. Delmar               1995       130,000    40,000       3,980                    15,000                10,255
Executive Vice President       1994       129,163                 3,873                                          11,164
and Chief Financial            1993       126,025    29,000       1,669                                           4,688
Officer


Deborah M. Grove               1995       110,000    40,000      10,039                    15,000                 8,784
President of subsidiary,       1994       106,386                 9,498                                           8,520
Old Dominion Systems           1993        95,969    16,000       7,464                                           7,462
Incorporated of Maryland
--------------------------- ----------- ------------ --------- ------------ ------------ --------- ------------ -----------
<FN>

(a)  Includes deferred compensation
     For fiscal 1995, 1994, and 1993 Mr. Lynn's deferred  compensation  included
     in his salary was $4,919, $151, and $11,853 respectively.  For fiscal 1995,
     1994, and 1993 Mr. Delmar's  deferred  compensation  included in his salary
     was $0, $149,  and $1,017,  respectively.  For fiscal 1995,  1994, and 1993
     Mrs. Grove's deferred compensation included in her salary was $0, $124, and
     $847, respectively.
(b)  Other annual  compensation  consists of reimbursements  under the Company's
     Executive Medical Reimbursement Plan and paid personal leave.
(c)  All other compensation consists of 401k matching  contributions and pension
     plan  contributions.  For fiscal 1995 Mr.  Lynn's 401k matching and pension
     contributions  were  $1,851 and $9,000,  respectively.  For fiscal 1995 Mr.
     Thompson's 401k matching and pension  contributions were $3,200 and $9,000,
     respectively.  For fiscal  1995 Mr.  Delmar's  401k  matching  and  pension
     contributions  were $2,275 and $7,980,  respectively.  For fiscal 1995 Mrs.
     Grove's  401k  matching and pension  contributions  were $1,798 and $6,986,
     respectively.
</FN>
</TABLE>

<PAGE>
Stock Options

                  The  following  table  contains  information  with  respect to
grants of stock  options  to each of the named  executive  officers  during  the
fiscal year ended  October 31,  1995.  All such grants were made under the prior
stock  option  plan  or the  new  Stock  Option  Plan  (subject  to  shareholder
approval).
<TABLE>
<CAPTION>

                                         OPTION GRANTS IN LAST FISCAL YEAR

                                                                                                  Potential
                                                                                             Realizable Value at
                                                                                             Assumed Annual Rates
                                                    Individual Grants                        Rates of Stock Price
                                                                                               Appreciation for
                                                  % of Total                                    Option Term (a)
                               Number of        Options Granted    Exercise    Expiration
                             Options Granted     to Employees    Price ($/sh)     Date        5% ($)      10% ($)
                             ---------------     ------------    ------------     ----    -----------     -------
<S>                               <C>                 <C>            <C>       <C>  <C>      <C>         <C>    
Richard A. Thompson (b)           100,000             17.0%          $4.375    9/28/05       275,500     697,500

Steven R. Delmar (c)               15,000              2.6%          $4.375    9/28/05       41,325     104,625

Deborah M. Grove (c)               15,000              2.6%          $4.375    9/28/05       41,325     104,625
                                   10,000              1.7%          $1.000   12/20/04       61,300     103,500
--------------------
<FN>
(a)  Share prices for Mr. Thompson assuming a 5% and 10% annual  appreciation at
     the end of the term of his  option  are  $7.13  and  $11.35,  respectively;
     shares prices for Mr. Delmar  assuming a 5% and 10% annual  appreciation at
     the end of the term of his option are $7.13 and $11.35,  respectively;  and
     shares prices for Ms. Grove  assuming a 5% and 10% annual  appreciation  at
     the end of the term of her option are $7.13 and $11.35, respectively.

(b)  These  options vest over a three-year  period with 33.3% vesting at the end
     of each year.

(c)  These  options vest at the end of a five year period.  The  achievement  of
     specific objectives could accelerate the vesting to one year.
</FN>
</TABLE>

                  The  following  table  provides  information   concerning  the
exercise of stock options by the named executive officers during fiscal 1995.
<TABLE>
<CAPTION>

                                    AGGREGATED OPTION EXERCISES IN LAST FISCAL
                                          YEAR, AND FY-END OPTION VALUES

                                                                     Number of Securities    Value of Unexercised In-the
                                                                    Underlying Unexercised     Money Options at FY-End
                                                                     Options at FY End (#)              ($)(a)
                              Shares Acquired on        Value            Exercisable/                Exercisable/
           NAME                  Exercise (#)        Realized ($)        Unexercisable              Unexercisable
           ----                  ------------        ------------        -------------              -------------
<S>                                                                      <C>     <C>                   <C>     <C>    
Richard A. Thompson                   --                  --             100,000/100,000               425,000/425,000
Deborah M. Grove                      --                  --               18,333/21,667                 77,915/92,085
Steven R. Delmar                      --                  --               75,000/25,000               318,750/106,250
----------------------------
<FN>

(a)  Calculations based on closing price of stock of $4.25 on October 31, 1995.
</FN>
</TABLE>

Employment, Deferred Compensation, and Consulting Agreements

                  The Company is a party to employment  agreements  with Messrs.
Lynn and Delmar, which provide for employment of these officers through December
31,  1996.  The  annual  salaries  of these  individuals  under  the  employment
agreements  are  subject to  increase  each year as  determined  by the Board of
Directors,  and each individual is entitled to receive  discretionary bonuses as
determined  by the Board.  On December  26,  1995,  the Board of  Directors  set
salaries,  to become  effective as of November 1, 1995,  under these  agreements
(exclusive of deferred compensation) for Messrs. Lynn and Delmar of $170,000 and
$135,000, respectively, which represent 3% and 4% increases from the prior year.
The employment contracts entitle the two individuals to certain fringe benefits,
including insurance coverage and various executive perquisites. Upon termination
of employment  without cause, each individual will be entitled to receive a lump
sum cash payment equal to the  individual's  then current salary  calculated for
the remaining period of the agreement  (without any present value discount).  In
the event of a change in control of the Company  (as  defined in the  agreement)
and  subsequent  termination  of the  individual's  employment,  voluntarily  or
involuntarily,  within two years,  the individual  will be entitled to receive a
lump sum payment equal to  approximately  three times his average  annual salary
during  the five most  recent  fiscal  years of the  Company.  It  currently  is
estimated  that the amount  payable  to Messrs.  Lynn and Delmar in the event of
their termination following a change in control of the Company would be $474,000
and $381,000,  respectively.  Further, under the agreements, each individual has
agreed that for a period of one year after  termination of employment other than
a termination  by the Company  without  cause,  he will not, among other things,
compete with the  Company,  solicit  employees to leave the Company,  or solicit
customers to reduce their level of business with the Company.

                  The  Company is a party to an  employment  agreement  with Mr.
Thompson. The agreement provides for employment of Mr. Thompson through December
31, 1998. Mr. Thompson's annual salary under his employment agreement is subject
to increase and  discretionary  bonuses each year as  determined by the Board of
Directors.  On December 20, 1995,  the Board of Directors set a salary to become
effective  as of  November  1, 1995 under this  agreement  for Mr.  Thompson  of
$165,000,  which  represents a 3% increase from the prior year.  The  employment
contract entitles Mr. Thompson to certain fringe benefits,  including  insurance
coverage and various  executive  perquisites.  Upon  termination  of  employment
without  cause,  the existing base salary,  plus all  benefits,  will be paid in
monthly  installments for twelve months. In the event of his termination without
cause,  Mr.  Thompson  would  receive  approximately  $206,250.  The  employment
agreement  also entitles Mr.  Thompson to continue to serve as a director of the
Company for so long as he continues to be an officer of the Company.

                  The  Company  is  a  party  to  a   noncontributory   deferred
compensation  agreement  with Mr. Lynn under which the Company is  obligated  to
make  payments  to Mr.  Lynn (or his  beneficiaries)  over the  ten-year  period
subsequent to his  retirement  (on or after age 65),  permanent  disability,  or
death.  The  aggregate  amount owed to Mr. Lynn under this  agreement is payable
either  in  equal  monthly  installments  over  the  ten-year  period  or  in an
appropriately  discounted single sum payment (at the election of Mr. Lynn). This
amount is determined by multiplying $2,500 by the number of months of employment
during  the  period  April 1,  1988 to  January  1, 1995 and  adding an  initial
contribution  of $10,000.  During the fiscal year ended  October 31,  1995,  the
Company  accrued $-0- in deferred  compensation  and interest for Mr. Lynn under
this contract.

                  The  Company  is a party to a  consulting  and  noncompetition
agreement with Mr.  Hartwell,  who retired from his position as Chief  Executive
Officer of the Company effective April 30, 1991. Mr. Hartwell continues to serve
as a director of the Company. The agreement provides for the consulting services
of Mr. Hartwell  through May 1, 1996,  with an annual  consulting fee payment of
$80,000. In addition, the agreement provides Mr. Hartwell with medical insurance
coverage.

Management Compensation Committee Report on Executive Compensation

                  Decisions  on   compensation   of  the  Company's   executives
generally are made by the two-member  Management  Compensation  Committee of the
Board.  Each member of the Management  Compensation  Committee is a non-employee
director. All decisions by the Management Compensation Committee relating to the
compensation of the Company's executive officers are reviewed by the full Board.
Set forth below is a report submitted by the Management  Compensation  Committee
addressing the Company's  compensation policies for fiscal 1995 as they affected
the Company's executive officers,  including the Chief Executive Officer and the
named executive officers.

Compensation   Policies  for  Executive   Officers.   The  Company's   executive
compensation   policies   are   designed  to  provide   competitive   levels  of
compensation,   assist  the  Company  in  attracting  and  retaining   qualified
executives,  reward superior  corporate  performance,  and recognize  individual
initiative and  achievement.  Measurement of corporate  performance is primarily
based upon Company goals and industry  performance levels. The Company considers
compensation  paid to its executive  officers to be  deductible  for purposes of
Section  162(m) of the Internal  Revenue  Code.  Target  levels of the executive
officers'  overall  compensation  are  intended  to  be  consistent  with  other
executives  in the  Company's  industry,  including  members of its peer  group,
taking  into  account  the  size  and  financial  results  of  these  respective
companies.  The Management  Compensation Committee believes that stock ownership
by  management  and  stock-based  performance   compensation   arrangements  are
beneficial  in  aligning   management's  and  shareholders'   interests  in  the
enhancement of shareholder value.

Relationship of Performance to Executive Compensation.  Compensation paid to the
Company's executive officers in fiscal 1995, which related to the performance of
the Company,  consisted of the following components:  base salary, cash bonuses,
grants of stock options under stock option plans, and executive perquisites.

                  Base Salary.  The Management  Compensation  Committee  reviews
executive  base salaries on a regular basis.  In view of the Company's  improved
financial  performance  during fiscal 1995 and the lack of any salary  increases
during four of the prior five years,  base  salaries were  increased  $5,000 per
officer for fiscal 1996.

                  Cash  Bonuses.  The  Management  Compensation  Committee  also
determines,  generally on an annual basis, whether to award bonuses to executive
officers based upon their  individual  performance or on the  performance of the
Company as a whole.  In prior years,  the Board,  at the  recommendation  of the
Management Compensation  Committee,  has adopted specific incentive compensation
arrangements for executive officers which consist of cash bonuses payable if the
Company  achieved  certain pre-tax (and pre-bonus)  profit and sales goals.  The
Company utilizes an executive bonus plan under which a pool of funds, determined
by formula, are set aside for selected executives. The amount of funds set aside
for the bonus pool is based on the  Company's  sales and pre-tax  income.  A new
Executive  Bonus Plan with new  performance  goals was adopted for fiscal  1996.
Bonuses of $244,000 were paid for fiscal 1995 under the Executive  Bonus Plan in
effect for fiscal 1995.

                  Stock  Options.  The Company  provided a  long-term  incentive
through a stock  option plan which was adopted in 1986,  and intends to continue
this  incentive  through a new stock  option  plan  adopted in 1995,  subject to
shareholder  approval.  The stock  option  plans were and are intended to foster
management  team cohesion and align  management and shareholder  interests.  Key
employees,  including executive officers, were and are eligible for grants under
the stock option plans.  The stock option plans were and are administered by the
Stock Option Committee,  which consists  exclusively of non-employee  directors.
Awards are  intended to provide  incentives  for  executive  officers to enhance
long-term corporate performance, as reflected in stock price, thereby increasing
shareholder value, and to provide non-cash compensation to such officers as part
of their  overall  compensation  package.  The Company  believes  that the stock
option plans encourage  superior  performance  that can result in  significantly
enhanced  shareholder  value. The option price of shares granted under the stock
option plans may be less than the fair market value of the shares underlying the
option on the date of grant,  but such  options  generally  have been granted at
fair market  value.  Options  granted  under the stock  option  plans  generally
terminate  automatically  upon  termination  of  employment  or service with the
Company, except in cases of disability or death.

                  In  September  1995,  Mr.  Thompson  was  awarded  options  to
purchase 100,000 shares (as was the case in Mr.  Thompson's prior contract).  As
part of his new three year employment contract, based upon the Board's view that
Mr. Thompson's continued performance as President and Chief Operating Officer is
very important to the Company,  particularly  as Mr. Lynn,  the Chief  Executive
Officer,  approaches retirement age, the Board recommended (and the Stock Option
Committee of the Board granted)  additional options for Mr. Thompson to purchase
150,000  shares of Common Stock,  vesting in ten years ending in December  2005.
The additional  options contain an accelerated  vesting provision based upon the
trading  price of the  Company's  Common Stock in June of each of 1996  ($3.50),
1997 ($5.00),  and 1998  ($10.00).  The Company's  Common Stock was trading at a
price of less than $3.00 when these price  targets were  initially  agreed upon,
and had traded at  significantly  lower  levels in the prior  year.  Each of the
options  granted to Mr.  Thompson are subject to approval by shareholders of the
new stock option plan described in Proposal No. 3 below.

                  With  respect  to  other  named  executive   officers,   after
considering  the  numbers of options  held by such  officers,  the Stock  Option
Committee  awarded  options to purchase  15,000 shares to each of Mr. Delmar and
Ms. Grove,  are subject to approval by shareholders of the new stock option plan
described in Proposal No. 3 below.

                  Executive Perquisites. In prior years the Company has provided
certain perquisites for its executive officers which the Management Compensation
Committee has  determined are customary for similar  companies.  With respect to
fiscal  1996,  the  Management  Compensation  Committee  decided  to  set  aside
approximately  $115,000  for  executives  and a group  of other  key  employees,
collectively,   for  executive  perquisites  selected  by  such  employees.  The
Committee  determined that  self-selection of perquisites would probably be most
efficient  for this  portion  of  compensation  of the  executive  and other key
employees,  taking advantage of available cost savings, tax benefits,  and other
factors.

                  Other  Compensation.  In addition to the compensation  paid to
executive  officers  as  described  above,  executive  officers  and  other  key
employees receive benefits under the Company's Medical Reimbursement Plan (along
with supplemental health benefits of up to $7,500 per executive),  and executive
officers  receive,  along  with  and on  the  same  terms  as  other  employees,
contributions by the Company pursuant to the Company's Pension Plan and matching
contributions under the Company's Pre-Tax Savings Plan (401k).

                  CEO  Compensation.  In setting the Chief  Executive  Officer's
salary and incentive  compensation for fiscal 1996, the Management  Compensation
Committee reviewed the Company's fiscal 1995 financial  performance in revenues,
expenses  and pre-tax net income.  Based upon its review at the outset of fiscal
1996, the Committee  approved a modest  increase in Mr. Lynn's salary for fiscal
1996 of $5,000.  The  Committee  believes that any  significant  increase in Mr.
Lynn's  compensation  for 1996 will come from the executive bonus plan, which is
based on achieving the Company's  revenue and net income  targets,  and that Mr.
Lynn has  substantial  motivation to increase the value of the Company's  Common
Stock due to the large number of shares that he holds. The Committee  believes a
significant   performance-based  component  of  total  compensation  serves  the
interests of  shareholders  by directly  linking  management  compensation  with
corporate performance.

                    Management Compensation Committee Report
       Submitted by the Members of the Management Compensation Committee:

                                                  David M. Gische
                                                  Robert E. Gray, Jr.

Compensation Committee Interlocks and Insider Participation

                  None.

Comparative Company Performance

                  The following line graph compares cumulative total shareholder
return for the Company with a performance  indicator of the NASDAQ stock market,
and a peer group index over the last five fiscal years.  The peer group consists
of  Active   Voice,   Boston   Technology,   Brite  Voice   Systems,   Centigram
Communications Inc.,  Cognitronics,  Comverse  Technology,  Davox Corp., Digital
Sound, Intervoice Inc., Octel Communications,  CP., Perception Inc., Syntellect,
Inc.


[GRAPHIC OMITTED]




<PAGE>


Compensation of Directors

                  Compensation of Mr. Gische and Mr. Gray,  through fiscal 1995,
consisted  of $500 per  meeting  with a maximum of $5,000 per year for each such
director.  Effective  December  20, 1995,  the per meeting fee was  increased to
$1,000  per  meeting  with a  maximum  of  $10,000  per year for each  director.
Employee  directors  are  not  paid  for  attending  meetings  of the  Board  of
Directors.

                  The Company has a non-employee director stock option plan (the
"Non-Employee Director Plan"), which was approved by the shareholders,  pursuant
to which  75,000  shares of Common  Stock have been  reserved  for  issuance  to
non-employee directors of the Company upon exercise of options granted under the
Non-Employee  Director Plan. The Company  believes that options issued under the
Non-Employee  Director  Plan create an incentive for  non-employee  directors to
expend  maximum  effort for the growth and success of the  Company.  Options for
1,000 shares of Common Stock were granted  during fiscal 1995 to each of Messrs.
Gische and Gray under the  Non-Employee  Director  Plan. The option price of all
options granted under the Non-Employee Director Plan equal the fair market value
of the shares underlying the option on the date of grant.  Options granted under
the Non-Employee Director Plan expire if not exercised within ten years from the
date of the grant of the option. The terms of the Non-Employee Director Plan and
options to be granted  thereunder  is proposed to be amended,  as  described  in
Proposal No. 4 below.

Section 16(a) Disclosure

                  Section 16(a) of the Securities  Exchange Act of 1934 requires
the Company's officers and directors,  and persons who own more than ten-percent
of a registered  class of the Company's  equity  securities,  to file reports of
beneficial ownership and changes in beneficial ownership with the Securities and
Exchange  Commission.   Officers,   directors,   and  greater  than  ten-percent
shareholders  are required by SEC  regulation to furnish the Company with copies
of all Section 16(a) forms they file.

                  Based  solely  on its  review  of the  copies  of  such  forms
received by it, or written  representations  from certain reporting persons that
no Form 5's,  other than two Form 5's which  were filed late for two  Directors,
were required for those persons,  the Company believes that, during fiscal 1995,
all filing requirements applicable to its officers,  directors, and greater than
ten-percent beneficial owners were complied with.






             RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS

                                (Proposal No. 2)

                  The  Board  of  Directors  has  appointed  the  firm of  Price
Waterhouse  LLP as  independent  accountants  of the Company for the fiscal year
ending  October 31, 1996,  subject to  ratification  of such  appointment by the
shareholders.  The  appointment  of this  firm was  recommended  to the Board of
Directors  by its  Audit  Committee.  Price  Waterhouse  LLP has been  acting as
independent accountants of the Company since 1979.

                  The  submission of this matter to  shareholders  at the Annual
Meeting is not required by law or by the By-Laws of the  Company.  Nevertheless,
the Board of Directors of the Company is  submitting it to the  shareholders  to
ascertain their views. If this  appointment is not ratified by the holders of at
least a  majority  of the  shares of Common  Stock of the  Company at the Annual
Meeting,  the Board of Directors  intends to reconsider its appointment of Price
Waterhouse LLP as independent accountants of the Company.

                  Representatives of Price Waterhouse LLP will be present at the
Annual  Meeting  and  will  be  available  to  respond  to  questions  or make a
statement, if they so desire.



<PAGE>


                              NEW STOCK OPTION PLAN

                                (Proposal No. 3)

                  On September  28, 1995 and  December  20,  1995,  the Board of
Directors,  subject to  shareholder  approval,  adopted the Microlog  1995 Stock
Option Plan (the "New Stock Option Plan") with 1,000,000  shares of Common Stock
of the Company  reserved  for  issuance  upon the  exercise  of options  granted
thereunder.  Based  upon the  closing  price of the  Company's  Common  Stock on
January 19, 1996,  the  aggregate  market value of the total number of shares of
Common Stock  underlying  the stock options  available for grant,  including the
shares  reserved  for  issuance  that are subject to  shareholder  approval,  is
$2,315,160.75.

                  The  principal  provisions  of the New Stock  Option  Plan are
summarized below. Such summary does not, however,  purport to be complete and is
qualified in its entirety by the terms of the New Stock Option Plan,  the entire
text of which is  attached  hereto  as  Exhibit  1 and  incorporated  herein  by
reference.

Reason for Adoption of the New Stock Option Plan

                  Approval  of  adoption  of the New Stock  Option Plan is being
sought  primarily  because the prior stock  option plan  expires by its terms in
April 1996 and no new  options  may be granted  thereunder  after such date.  In
addition, no shares of authorized but unissued Common Stock remain available for
future  grant under the terms of the prior stock  option  plan.  With the recent
streamlining of personnel and in light of the Company's  current cash resources,
the Company  intends to continue to rely  heavily on stock  options to encourage
the continued  employment of key personnel and to provide an important incentive
for superior  performance.  The Board of Directors believes that adoption of the
New Stock Option Plan with 1,000,000  shares  available for grant  thereunder is
appropriate  at this time in order to assure that a  meaningful  number of stock
options  will be  available  for  grant  to  employees  of the  Company  and its
subsidiaries.

Description of the New Stock Option Plan

                  The  New  Stock  Option  Plan  was  adopted  by the  Board  of
Directors  in  September  1995 and  amended on  December  20,  1995,  subject to
shareholder  approval.  Under the terms of the New Stock Option Plan,  1,000,000
shares of Common Stock of the Company will be reserved for issuance to employees
of the Company and its  subsidiaries  upon exercise of options granted under the
New Stock Option Plan. The Stock Option  Committee,  consisting of two directors
of the  Company,  Messrs.  Gische  and Gray  (neither  of whom is an  officer or
salaried  employee of the Company),  has  authority to administer  the New Stock
Option Plan and grant options thereunder.

                  Incentive  stock  options  may be granted  under the New Stock
Option Plan from time to time to any full-time employee of the Company or any of
its  subsidiaries,  including  employees who are officers of the Company and its
subsidiaries  (approximately  240 in number as of January 19, 1996). The maximum
number of shares of Common Stock  subject to options  that may be granted  under
the New Stock Option Plan to any executive  officer or other employee is 500,000
shares. Non-employee directors are not eligible to receive options under the New
Stock  Option  Plan.  No option may be granted  under the New Stock  Option Plan
after the tenth  anniversary of the effective date of the New Stock Option Plan,
September 28, 2005.

                  Under the New Stock Option Plan, the option price of incentive
stock  options  may not be  less  than  the  fair  market  value  of the  shares
underlying  the option on the date the  option is granted  (or less than 110% of
the fair  market  value in the case of a person  who owns  more  than 10% of the
Company's  Common Stock).  The option price of  nonqualified  options may not be
less than the par value of the shares underlying the option.  The aggregate fair
market  value of Common  Stock  (determined  at the time the option is granted),
with respect to which incentive stock options granted under the New Stock Option
Plan (and all other benefit plans of the Company) are  exercisable for the first
time by any employee during any calendar year, may not exceed $100,000.  Payment
for shares  purchased under the New Stock Option Plan may be made either in cash
or cash equivalents, in shares of Common Stock with a fair market value equal to
the option price,  or a combination of cash and shares of Common Stock.  The New
Stock  Option  Plan also  allows for  "cashless  exercise,"  in which a licensed
broker  tenders to the  Company  cash equal to the  exercise  price  (plus taxes
required to be withheld) at the time the Company issues the stock certificates.

                  Options  granted under the New Stock Option Plan generally are
not  transferable  during the lifetime of the employee and Common Stock acquired
prior to six months after the grant of any option may not be transferred.

                  Options  granted  under the New Stock Option Plan are expected
to  expire if not  exercised  within  ten years  from the date of grant and will
terminate  automatically upon an optionee's termination of employment or service
with the Company (or three months  thereafter,  in the case of normal retirement
in  accordance  with Company  policy)  unless  otherwise  provided in the option
agreement pertaining to such option. If any optionee dies while in the employ or
service of the Company or a subsidiary,  his or her options, whether or not then
exercisable,  may be  exercised by his or her estate or by a person who acquires
the right to  exercise  such option by bequest or  inheritance,  within one year
after the date of such  death  (but not  later  than the date the  option  would
otherwise  expire),  unless otherwise  provided in the option  agreement.  If an
optionee's  service or employment with the Company or a subsidiary is terminated
by reason of permanent and total disability,  his or her options, whether or not
then  exercisable,  may be exercised  within one year after such  termination of
service or  employment  (but not later  than the date on which the option  would
otherwise  expire),  unless otherwise  provided in the option agreement.  In the
event of a change in control of the Company (as defined in the New Stock  Option
Plan), all outstanding options generally would immediately become exercisable.

                  The New Stock  Option  Plan is  intended  to  qualify  for the
exemption  provided  by Rule 16b-3  under the  Securities  Exchange  Act. To the
extent any provision  does not comply with the  requirements  of Rule 16b-3,  it
shall be deemed  inoperative to the extent permitted by law and deemed advisable
by the Board.

                  If the  outstanding  shares of Common  Stock are  increased or
decreased or changed into or exchanged for a different  number or kind of shares
or  other  securities  of  the  Company  by  reason  of  any   recapitalization,
reclassification, stock split, reverse split, combination of shares, exchange of
shares,  stock dividend or other distribution  payable in Common Stock, or other
increase or decrease in the outstanding  shares of Common Stock effected without
receipt of consideration  by the Company,  occurring after the effective date of
the New Stock  Option  Plan,  the number and kinds of shares for the purchase of
which  options may be granted  under the New Stock  Option Plan will be adjusted
proportionately and accordingly by the Company. In addition, the number and kind
of shares for which options are outstanding will be adjusted proportionately and
accordingly  so that the  proportionate  interest  of the  holder of the  option
immediately following such event will, to the extent practicable, be the same as
immediately prior to such event. Any such adjustment in outstanding options will
not change the aggregate  option price payable with respect to shares subject to
the  unexercised  portion  of  the  option  outstanding,   but  will  include  a
corresponding proportionate adjustment in the option price per share.

                  Upon  dissolution  or  liquidation  of the Company,  or upon a
reorganization,  merger or  consolidation  or other business  combination of the
Company  with  one or more  other  entities  in  which  the  Company  is not the
surviving  entity, or upon the sale of all or substantially all of the assets of
the  Company to another  entity,  or upon any  transaction  (including,  without
limitation,  a merger or  reorganization  in which the Company is the  surviving
corporation)  approved  by the Board  which  results in any person or entity (or
persons or entities acting as a group or otherwise in concert) owning 80 percent
or more of the combined voting power of all classes of stock of the Company, the
New Stock Option Plan and all options  outstanding  thereunder  will  terminate,
except to the extent a provision is made in connection with such transaction for
the  continuation  of the New Stock  Option  Plan and/or the  assumption  of the
options or for the  substitution  for such  options of new options  covering the
stock of a successor employer corporation, or parent or subsidiary thereof, with
appropriate  adjustments  as to the number and kind of shares and the per option
exercise  prices,  in  which  event  the  New  Stock  Option  Plan  and  options
theretofore granted will continue in the manner and under the terms so provided.
In the event of such termination, all outstanding options will be exercisable in
full during such period  immediately prior to the occurrence of such termination
as the Board of Directors,  in its sole discretion,  may determine and designate
whether or not such options are exercisable during such period.

                  Subject to the  foregoing,  if the  Company  is the  surviving
corporation in any reorganization,  merger, or consolidation of the Company with
one or more  corporations,  any option granted  pursuant to the New Stock Option
Plan will pertain to and apply to the securities to which a holder of the number
of shares of Common  Stock  subject  to such  option  would  have been  entitled
immediately  following such  reorganization,  merger, or  consolidation,  with a
corresponding proportionate adjustment of the per share option exercise price so
that the aggregate  option  exercise  price  thereafter  will be the same as the
aggregate  option exercise price of the shares  remaining  subject to the option
immediately prior to such reorganization, merger, or consolidation.

                  The Board of  Directors  of the  Company  may, at any time and
from time to time,  amend,  suspend or terminate the New Stock Option Plan as to
shares of Common Stock as to which options have not been granted.  However,  the
Board of Directors  may not amend the New Stock Option Plan,  except  subject to
the  approval  of the  Company's  shareholders,  if  such  amendment  would  (1)
materially increase the benefits accruing to eligible  individuals under the New
Stock Option Plan;  (2) change the  requirements  as to  eligibility  to receive
options under the New Stock Option Plan;  or (3) increase the maximum  number of
shares that may be sold  pursuant to options  granted under the New Stock Option
Plan, other than adjustments upon changes in capitalization.

                  Unless previously  terminated,  the New Stock Option Plan will
terminate  automatically  on September 28, 2005,  the tenth  anniversary  of the
effective  date of the New Stock  Option Plan.  No  termination,  suspension  or
amendment  of the New Stock Option Plan may  adversely  affect the rights of the
holder of an option without such holder's consent.

Federal Income Tax Consequences

                  The grant of an  incentive  stock option will not be a taxable
event for the optionee or the Company.  Generally,  the grant of a  nonqualified
option  should not be a taxable  event for the optionee or the Company  provided
that,  if the  per-share  exercise  price of the  option is less than the market
value of a share of the Company  Common  Stock on the date of grant,  there is a
substantial  risk,  on the basis of all the facts  and  circumstances,  that the
value of the Company  stock could be less than the option  price during the term
of the option.

                  With respect to "incentive  stock  options",  an optionee will
not recognize  taxable income upon the grant or exercise of an incentive option,
and any gain realized upon a disposition of shares acquired pursuant to exercise
of an incentive option will be taxed as long-term  capital gain, if the optionee
holds the shares for at least two years after the date the incentive  option was
granted  and for at least one year  after  the date the  option  was  exercised.
However,  the excess of the fair market value of the Common Stock  subject to an
incentive  option on the date of exercise  (or,  in some  cases,  on the date of
expiration of certain  securities laws restrictions as to the disposition of the
shares  unless the optionee  files a special tax  election  within 30 days after
exercise)  over the option  exercise  price will be  includable  in  alternative
minimum  taxable  income  in the year of  exercise  (or the  year in which  such
restrictions  expire) for purposes of the  alternative  minimum tax. This excess
increases  the  optionee's  basis in the stock for  purposes of the  alternative
minimum tax but not for  purposes of the regular  income tax. An optionee may be
entitled to a credit  against  regular tax liability in future years for minimum
taxes paid with respect to the exercise of  incentive  options.  The Company and
its  subsidiaries  will not be entitled to any business  expense  deduction with
respect to the grant or exercise of an  incentive  option,  except as  discussed
below.

                  For  the  exercise  of an  incentive  option  to  qualify  for
favorable  tax  treatment,  the  optionee  generally  must be an employee of the
Company  or a  subsidiary  from the date the  option is  granted  through a date
within three months before the date of exercise.  In the case of an optionee who
is disabled, within the meaning of Section 22(e)(3) of the Internal Revenue Code
of  1986,  as  amended,  (the  "Code")(or  the  corresponding  provision  of any
subsequently enacted tax statute), the three-month period for exercise following
termination  of  employment  is extended to one year. In the case of an employee
who  dies,  the time for  exercising  incentive  options  after  termination  of
employment and the holding period for stock received pursuant to the exercise of
the option are waived.  The New Stock Option Plan generally  requires,  however,
that incentive  options be exercised within one year following the date of death
of an  employee,  but not later  than the time the  option  would  expire by its
terms.

                  If all of the  requirements for incentive option treatment are
met except for the special  holding  period rules set forth above,  the optionee
will recognize  ordinary income upon the disposition of the stock,  generally in
an amount  equal to the excess of the fair market value of the stock at the time
the incentive  option was exercised over the option exercise price.  The balance
of the realized gain, if any, will be long-or short-term capital gain, depending
upon  whether the stock was sold more than one year after the  incentive  option
was  exercised.  If the optionee  sells the stock prior to  satisfaction  of the
holding  period rules but at a price below the fair market value of the stock at
the time the incentive option was exercised,  the amount of ordinary income will
be  limited to the  excess of the  amount  realized  on the sale over the option
exercise  price.  If the optionee sells the stock prior to  satisfaction  of the
holding period rules, the Company will be allowed a business  expense  deduction
to the  extent  it  complies  with  applicable  reporting  requirements  and the
optionee recognizes ordinary income.

                  The New Stock Option Plan provides that optionees may exercise
an incentive option by tendering shares of Common Stock with a fair market value
equal to part or all of the option  exercise price. An exchange of common shares
for common shares of the same  corporation is ordinarily a nontaxable  exchange,
and the tax basis of the shares  exchanged is treated as the  substituted  basis
for the shares  received.  The shares tendered would be treated as exchanged for
an  equivalent  number of option  shares,  which would take the tax basis of the
tendered shares, and the additional option shares would have a zero basis. These
rules  would apply to use of shares of Common  Stock to  exercise  an  incentive
option unless the shares used to effect the exchange have been received pursuant
to exercise of an incentive option or another statutory option and the requisite
holding period  requirements have not been met, in which case the tender of such
shares would be a taxable  transaction (with the excess of the fair market value
of the shares  tendered over the optionee's  basis in those shares being taxable
gain).

                  Upon exercise of a nonqualified option,  however, the optionee
will recognize  ordinary income in an amount equal to the difference between the
option  exercise price and the fair market value of the Common Stock on the date
of exercise (or, if the optionee is subject to certain  restrictions  imposed by
the securities laws, upon the lapse of those  restrictions,  unless the optionee
makes a special  tax  election  within 30 days after  exercise).  If the Company
complies with the applicable  reporting  requirements,  it will be entitled to a
business  expense  deduction  in the same  amount  and at the  same  time as the
optionee  recognizes  ordinary  income.  Upon a  subsequent  sale or exchange of
shares acquired pursuant to the exercise of a nonqualified  option, the optionee
will have taxable gain or loss,  measured by the  difference  between the amount
realized  on the  disposition  and the tax basis of the shares  (generally,  the
amount  paid for the shares plus the amount  treated as  ordinary  income at the
time the option was exercised). Provided that the shares have been held for more
than one year,  such gain or loss would  constitute  long-term  capital  gain or
loss.

                  If an optionee surrenders shares of Common Stock in payment of
part or all of the exercise price of a nonqualified option, no gain or loss will
be recognized with respect to the shares  surrendered,  and the optionee will be
treated as receiving an equivalent  number of shares pursuant to the exercise of
the option in a nontaxable exchange. The basis of the shares surrendered will be
treated as the substituted  tax basis for an equivalent  number of option shares
received. However, the fair market value of any shares received in excess of the
number of shares  surrendered (i.e., the difference between the aggregate option
exercise  price and the  aggregate  fair  market  value of the  shares  received
pursuant  to  exercise of the  option)  will be taxed as  ordinary  income.  The
optionee's  basis of such  additional  shares is equal to the amount included in
the optionee's income.

                  Under current  federal income tax law, the highest tax rate on
ordinary  income is 39.6% and  long-term  capital gains are subject to a maximum
tax rate of 28%. Because of certain provisions in the law relating to the "phase
out" of personal exemptions and certain limitations on itemized deductions,  the
federal income tax consequences to a particular taxpayer of receiving additional
amounts  of  ordinary  income  or  capital  gain may be  greater  than  would be
indicated by application of the foregoing tax rates to the additional  amount of
income or gain.

Recommendation of the Board of Directors

                  Approval of the New Stock Option Plan requires the affirmative
vote of the holders of a majority  of the shares of Common  Stock of the Company
present,  or  represented  by proxy,  and entitled to vote thereon at the Annual
Meeting.  The Board of Directors  recommends that shareholders vote FOR approval
of the New Stock Option Plan.



<PAGE>


              AMENDMENT TO NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN

                                (Proposal No. 4)

                  On  December  20,  1995,  the Board of  Directors,  subject to
shareholder  approval,  approved an amendment to the Non-Employee Director Stock
Option  Plan (i) to  increase  from  75,000 to  125,000  the number of shares of
Common Stock of the Company  reserved for issuance  upon the exercise of options
granted under the  Non-Employee  Director Stock Option Plan, (ii) to provide for
annual grants of an option to purchase  3,000 shares  (rather than 1,000 shares)
of the Company's common stock to each non-employee  director of the Company, and
provide  that such  grants will occur in  December  (rather  than March) of each
fiscal  year,  and (iii) to extend  the term of the plan to April 30,  2001.  On
January 19, 1996,  the Board further  amended the  Non-Employee  Director  Stock
Option Plan to provide for the  exercise of options by the  surrender  of shares
held by the optionee or by  "cashless"  exercise  through a broker and to make a
variety of minor  changes  to conform  certain  provisions  of the  Non-Employee
Director  Plan to those of the New Stock  Option  Plan.  Based upon the  closing
price of the Company's  Common Stock on January 19, 1996,  the aggregate  market
value of the total number of shares of Common Stock underlying the stock options
available for grant, including the shares that were added to the plan subject to
shareholder approval, is $73,500.

                  The principal  provisions of the  Non-Employee  Director Stock
Option Plan are summarized below. Such summary does not, however,  purport to be
complete  and is  qualified  in its  entirety  by the terms of the  Non-Employee
Director Stock Option Plan,  the entire text of which,  as amended and restated,
is attached as Exhibit 2 and incorporated herein by reference.

Reasons for Amendment of the Stock Option Plan

                  The  Non-Employee  Director  Stock  Option Plan is intended to
advance the  interests  of the Company by providing  each member  serving on the
Board of  Directors  of the  Company  who is not an  officer  or other  salaried
employee of the Company or any subsidiary (a  "Non-Employee  Director")  with an
opportunity  to acquire or increase a proprietary  interest in the Company.  The
Board of Directors  believes  that the  opportunity  to acquire  stock under the
Non-Employee Director Stock Option Plan will create another strong incentive for
Non-Employee  Directors to expend  maximum  effort for the growth and success of
the Company and to remain in the service of the Company.  For this  reason,  the
Board of Directors  believes  that it is  appropriate  to extend the term of the
plan to  April  30,  2001,  which  will  result  in  options  being  granted  to
Non-Employee  Directors for an additional three years. In addition, the Board of
Directors  believes that it is  appropriate  at this time to increase the annual
grants  of  options   thereunder  to  purchase  3,000  shares  to  each  of  the
Non-Employee  Directors.  The  compensation  of  the  members  of the  Board  of
Directors  is  believed  to be at the lower end for  public  companies,  and the
Company  wishes to increase  the level of  compensation  to retain its  existing
directors  and attract  qualified  new  directors.  The use of stock  options to
increase director compensation helps conserve the Company's cash resources.  The
increase  in the  number of shares  reserved  for grant  under the  Non-Employee
Director  Stock Option Plan is being sought to permit the  extension of the plan
an increase in annual  grants to be  implemented.  Prior to December  20,  1995,
14,000 shares of authorized  but unissued  Common Stock  remained  available for
future grants under the terms of the  Non-Employee  Director  Stock Option Plan.
Finally,  the Board believes it is appropriate to permit Non-Employee  Directors
to  exercise  options  by  exchanging  shares  held by  them or by a  "cashless"
exercise procedure.

Description of the Non-Employee Director Stock Option Plan

                  Under the terms of the Non-Employee Director Stock Option Plan
prior to adoption of the  amendment,  up to 75,000  shares of Common  Stock were
reserved for issuance  under the  Non-Employee  Director  Stock Option Plan. The
stock options  granted  under the  Non-Employee  Director  Stock Option Plan are
non-incentive options.

                  Under  the terms of the  Non-Employee  Director  Stock  Option
Plan,  each  Non-Employee  Director  serving  on the Board of  Directors  on the
effective  date of the  Non-Employee  Director Stock Option Plan (June 10, 1989)
was  granted  an  option  to  purchase  5,000  shares  of  Common  Stock.   Each
Non-Employee  Director  subsequently  elected  to the  Board  of  Directors  was
entitled  to receive an option to  purchase  5,000  shares of Common  Stock.  In
addition, each continuing Non-Employee Director received an automatic grant of a
non-incentive  stock option to purchase 1,000 shares of Common Stock in March of
each year from 1990 through  1995,  and a special  one-time  grant of options to
purchase 10,000 shares in December 1992.

                  The option  exercise  price  under the  Non-Employee  Director
Stock  Option  Plan is equal to one  hundred  percent  (100%) of the fair market
value of Common Stock on the date the option is granted.  Options  granted under
the  Non-Employee  Director Stock Option Plan expire if not exercised within ten
(10) years from the date of grant.

                  Payment for shares purchased under the  Non-Employee  Director
Stock Option Plan, as amended,  may be made either in cash or cash  equivalents,
in shares of Common Stock with a fair market value equal to the option price, or
a combination  of cash and shares of Common  Stock.  The  Non-Employee  Director
Stock Option Plan, as amended,  also allows for "cashless  exercise," in which a
licensed  broker  tenders to the Company cash equal to the exercise  price (plus
taxes  required  to be  withheld)  at the  time the  Company  issues  the  stock
certificates.

                  Options granted under the  Non-Employee  Director Stock Option
Plan  continue  to be in effect  for the  remainder  of their  respective  terms
notwithstanding  termination  of any  optionee's  service  with the Company or a
subsidiary.

                  If the  outstanding  shares of Common  Stock are  increased or
decreased or changed into or exchanged for a different  number or kind of shares
or  other  securities  of  the  Company  by  reason  of  any   recapitalization,
reclassification,  stock split, combination of shares, exchange of shares, stock
dividend or other  distribution  payable in Common Stock,  or other  increase or
decrease  in the  outstanding  shares  of  Common  Stock,  occurring  after  the
effective  date of the  Non-Employee  Director Stock Option Plan, the number and
kinds of shares for the  purchase  of which  options  may be  granted  under the
Non-Employee  Director  Stock Option Plan will be adjusted  proportionately  and
accordingly by the Company. In addition, the number and kind of shares for which
options are outstanding will be adjusted proportionately and accordingly so that
the  proportionate  interest of the holder of the option  immediately  following
such event will, to the extent practicable,  be the same as immediately prior to
such event.  Any such  adjustment  in  outstanding  options  will not change the
aggregate option price payable with respect to shares subject to the unexercised
portion of the option outstanding but will include a corresponding proportionate
adjustment in the option price per share.

                  Upon the dissolution or liquidation of the Company,  or upon a
merger,  consolidation or  reorganization  of the Company with one or more other
corporations  in which the Company is not the surviving  corporation,  or upon a
sale  of all or  substantially  all of the  assets  of the  Company  to  another
corporation, or upon any transaction (including, without limitation, a merger or
reorganization  in which the Company is the surviving  corporation)  approved by
the Board which  results in any person or entity owing 80 percent or more of the
combined voting power of all classes of stock of the Company,  the  Non-Employee
Director Stock Option Plan and all options outstanding hereunder will terminate,
except to the  extent  provision  is made in  writing  in  connection  with such
transaction for the continuation of the Non-Employee  Director Stock Option Plan
and/or  the  assumption  of  the  options   theretofore   granted,  or  for  the
substitution  for such options of new options  covering the stock of a successor
corporation,  or a parent or subsidiary thereof, with appropriate adjustments as
to the  number  and kinds of shares  and  exercise  prices,  in which  event the
Non-Employee  Director  Stock Option Plan and options  theretofore  granted will
continue in the manner and under the terms so provided.

                  Subject to the  foregoing,  if the  Company  is the  surviving
corporation in any reorganization,  merger, or consolidation of the Company with
one or more other corporations,  any option granted pursuant to the Non-Employee
Director  Stock Option Plan will pertain to and apply to the securities to which
a holder of the number of shares of Common  Stock  subject to such option  would
have  been  entitled  immediately  following  such  reorganization,  merger,  or
consolidation, with a corresponding proportionate adjustment of the option price
per share so that the aggregate  option price thereafter will be the same as the
aggregate  option price of shares  remaining  subject to the option  immediately
prior to such reorganization, merger, or consolidation.

                  The Board of Directors may, at any time and from time to time,
amend,  suspend or terminate the  Non-Employee  Director Stock Option Plan as to
any shares of Common Stock as to which options have not been  granted.  However,
the Company's  shareholders must approve any amendment that would (1) materially
change  the  requirements  as  to  eligibility  to  receive  options  under  the
Non-Employee  Director  Stock  Option Plan;  (2) increase the maximum  number of
shares  that may be sold  pursuant  to options  granted  under the  Non-Employee
Director   Stock  Option   Plan,   other  than   adjustments   upon  changes  in
capitalization; (3) change the minimum option price, other than adjustments upon
changes in capitalization;  (4) increase the maximum period during which options
may be exercised;  (5) extend the term of the Non-Employee Director Stock Option
Plan; or (6) materially  increase the benefits accruing to eligible  individuals
under the Non-Employee Director Stock Option Plan.

                  Under the terms of the Non-Employee Director Stock Option Plan
prior to adoption of this amendment,  the plan will terminate  automatically  on
April 30, 1997,  unless  previously  terminated.  No termination,  suspension or
amendment  of the  Non-Employee  Director  Stock  Option  Plan may,  without the
consent of the optionee to whom an option has been granted, adversely affect the
rights of the holder of the option.

Federal Income Tax Consequences

                  No gain or loss is recognized by the optionee at the time such
an option is  granted.  Upon  exercise  of an  option,  the  federal  income tax
consequences  will be substantially  the same as described above with respect to
nonqualified options granted under the New Stock Option Plan.

Option Grants

                  In  December  1995,  Messrs.  Gische  and Gray each were given
annual grants of options to purchase  3,000 shares of Common  Stock,  subject to
shareholder approval.  Each will receive automatic grants of options to purchase
3,000 shares of Common Stock in December of each year through  2001,  subject to
shareholder   approval.   If  shareholder  approval  of  the  amendment  of  the
Non-Employee  Director  Stock  Option Plan is not  approved,  they will  instead
receive annual grants of 1,000 shares in March of 1996 and 1997.

Recommendation of the Board of Directors

                  Approval of the amendment to the  Non-Employee  Director Stock
Option Plan  requires the  affirmative  vote of the holders of a majority of the
shares of Common  Stock of the Company  entitled to vote thereon and who vote in
person or by proxy at the Annual Meeting. The Board of Directors recommends that
shareholders  vote FOR approval of the  amendment to the  Non-Employee  Director
Stock Option Plan.



<PAGE>

                              SHAREHOLDER PROPOSALS
                                AND OTHER MATTERS


                  Proposals  of  shareholders  intended to be  presented  at the
Company's 1997 Annual Meeting of Shareholders  must be received at the Company's
principal  executive  offices not later than  October 31, 1996 in order for such
proposals to be included in the Company's  proxy statement and proxy relating to
the 1997 Annual  Meeting of  Shareholders.  Nothing in this  paragraph  shall be
deemed to  require  the  Company to  include  in the proxy  statement  and proxy
relating to the 1997 Annual Meeting of  Shareholders  any  shareholder  proposal
that does not meet all of the  requirements for such inclusion in effect at that
time.

                  The Board of Directors does not intend to present, and has not
been informed that any other person  intends to present,  any matters for action
at the Annual  Meeting  other than those  specifically  referred to herein.  If,
however, any other matters should properly come before the Annual Meeting, it is
the  intention  of the  person  named in the  enclosed  proxy to vote the shares
represented  thereby in accordance with the  determination  of a majority of the
Board of Directors.

                  The Board of Directors of the Company urges each  shareholder,
whether  or not he or she  intends  to be  present  at the  Annual  Meeting,  to
complete, sign and return the enclosed proxy as promptly as possible.

                                         By Order of the Board of  Directors



                                         Joe J. Lynn
                                         Chief Executive Officer

<PAGE>







                                                         February         , 1996



Dear Shareholder:

                  You are cordially invited to attend the 1996 Annual Meeting of
Shareholders of Microlog  Corporation (the "Company") to be held March 26, 1996,
at  10:00  a.m.,  at  the  Gaithersburg  Marriott   Washingtonian  Center,  9751
Washingtonian Blvd., Gaithersburg, Maryland, 20878.

                  The Annual Meeting has been called for the following purposes:

                  (1)      to elect two  directors  to serve for a term of three
                           years;

                  (2)      to ratify the  appointment  by the Board of Directors
                           of the firm of Price  Waterhouse  LLP as  independent
                           accountants of the Company for the fiscal year ending
                           October 31, 1996;

                  (3)      to consider and vote upon a proposed new Stock Option
                           Plan with  1,000,000  shares of the Company's  common
                           stock  reserved  for  issuance  upon the  exercise of
                           options granted under such new Stock Option Plan;

                  (4)      to consider and vote upon proposed  amendments to the
                           Company's  Non-Employee  Director  Stock  Option Plan
                           which would,  among other  things,  (i) increase from
                           75,000 to 125,000 the number of shares  reserved  for
                           issuance  upon the exercise of options  granted under
                           the  Non-Employee  Director  Stock Option Plan,  (ii)
                           provide  for annual  grants of an option to  purchase
                           3,000  shares  (rather  than  1,000  shares)  of  the
                           Company's common stock to each non-employee  director
                           of the  Company,  and  provide  that such grants will
                           occur in December  (rather than March) of each fiscal
                           year,  and (iii) extend the term of the plan to April
                           30, 2001; and

                  (5)      to transact such other  business as may properly come
                           before  the  Annual   Meeting  or  any   adjournments
                           thereof.

The Board of Directors of Microlog Corporation  unanimously  recommends that you
vote "FOR"  proposals  (1),  (2),  (3), and (4) to be  considered  at the Annual
Meeting.

                  Your vote is important, regardless of the number of shares you
own. On behalf of the Board of Directors,  I urge you to vote,  sign,  date, and
return the enclosed  proxy card as soon as possible,  even if you plan to attend
the Annual  Meeting.  Signing  this proxy will not  prevent  you from  voting in
person  should you be able to attend the meeting.  Signing the proxy will assure
that your vote is counted if, for any reason, you are unable to attend.

                                                         Sincerely yours,



                                                         Joe J. Lynn
                                                         Chief Executive Officer



<PAGE>


                              MICROLOG CORPORATION
                              20270 Goldenrod Lane
                            Germantown, MD 20876-4070
                                 (301) 428-9100

                    NOTICE OF ANNUAL MEETING OF SHAREHOLDERS;
                            TO BE HELD MARCH 26, 1996

                  NOTICE  IS  HEREBY  GIVEN  that the  1996  Annual  Meeting  of
Shareholders of Microlog  Corporation  (the "Company") will be held on March 26,
1996, at 10:00 a.m.,  local time,  at the  Gaithersburg  Marriott  Washingtonian
Center,  9751  Washingtonian  Blvd.,  Gaithersburg,  Maryland,  20878,  for  the
following purposes:

                  1.       To elect two  directors  to serve for a term of three
                           years;

                  2.       To ratify the  appointment  by the Board of Directors
                           of the firm of Price  Waterhouse  LLP as  independent
                           accountants of the Company for the fiscal year ending
                           October 31, 1996;

                  3.       To consider and vote upon a proposed new Stock Option
                           Plan with  1,000,000  shares of the Company's  common
                           stock  reserved  for  issuance  upon the  exercise of
                           options granted under such new Stock Option Plan;

                  4.       to consider and vote upon proposed  amendments to the
                           Company's  Non-Employee  Director  Stock  Option Plan
                           which would,  among other  things,  (i) increase from
                           75,000 to 125,000 the number of shares  reserved  for
                           issuance  upon the exercise of options  granted under
                           the  Non-Employee  Director  Stock Option Plan,  (ii)
                           provide  for annual  grants of an option to  purchase
                           3,000  shares  (rather  than  1,000  shares)  of  the
                           Company's common stock to each non-employee  director
                           of the  Company,  and  provide  that such grants will
                           occur in December  (rather than March) of each fiscal
                           year,  and (iii) extend the term of the plan to April
                           30, 2001; and

                  5.       To transact such other  business as may properly come
                           before  the  Annual   Meeting  or  any   adjournments
                           thereof.

                  Pursuant to the By-Laws of the Company, the Board of Directors
has fixed  February  2, 1996 as the  record  date for the  Annual  Meeting  with
respect  to this  solicitation.  Only  shareholders  of  record  at the close of
business  on that date will be  entitled  to notice of and to vote at the Annual
Meeting or any adjournments thereof.

                  In the event there are not sufficient  votes to approve one or
more of the foregoing  proposals at the time of the Annual  Meeting,  the Annual
Meeting may be adjourned in order to permit further  solicitation  of proxies by
the Company.

                                             By Order of the Board of Directors


                                             Joe J. Lynn
                                             Chief Executive Officer

Germantown, Maryland
February 20, 1996



<PAGE>


PLEASE  FILL OUT,  DATE AND SIGN THE  ENCLOSED  PROXY  CARD AND RETURN IT IN THE
ENCLOSED POSTAGE-PAID  ENVELOPE,  WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING.
YOU MAY, IF YOU WISH, WITHDRAW YOUR PROXY AND VOTE YOUR SHARES PERSONALLY.



<PAGE>


                                 REVOCABLE PROXY

                              MICROLOG CORPORATION

       THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.



                  The  undersigned  shareholder  hereby  appoints  Joe J.  Lynn,
Richard A. Thompson,  or Steven R. Delmar, or any of them, attorneys and proxies
of the  undersigned,  with full power of substitution and with authority in each
of them to act in the absence of the other,  to vote and act for the undersigned
at  the  Annual  Meeting  of  Shareholders  of the  Company  to be  held  at the
Gaithersburg   Marriott   Washingtonian   Center,   9751  Washingtonian   Blvd.,
Gaithersburg,  Maryland, 20878, on March 26, 1996 at 10:00 a.m., local time, and
at any adjournments thereof, in respect of all shares of the Common Stock of the
Company which the undersigned may be entitled to vote, on the following matters:

1.               Election of two directors for a three year term ending in 1999:

                 David M. Gische
                 Richard A. Thompson


                 |_|   FOR  the nominees listed above.

                 |_|   WITHHOLD AUTHORITY to vote for the following nominee(s):

2.               Proposal to ratify the appointment of Price  Waterhouse LLP as
                 the independent accountants of the Company for the fiscal year
                 ending October 31, 1996

                 |_|   FOR             |_|   AGAINST              |_|   ABSTAIN

3.               The  approval  of the new  Company's  Stock  Option  Plan with
                 1,000,000 the number of shares of the  Company's  Common Stock
                 reserved  for issuance  upon the  exercise of options  granted
                 under such new Stock Option Plan;

                 |_|   FOR             |_|   AGAINST              |_|   ABSTAIN

4.               The approval of the  amendments to the Company's  Non-Employee
                 Director  Stock Option Plan which would,  among other  things,
                 (i)  increase  from  75,000 to  125,000  the  number of shares
                 reserved  for issuance  upon the  exercise of options  granted
                 under  the  Non-Employee  Director  Stock  Option  Plan,  (ii)
                 provide  for  annual  grants of an option  to  purchase  3,000
                 shares  (rather  than 1,000  shares) of the  Company's  common
                 stock  to  each  non-employee  director  of the  Company,  and
                 provide  that such grants will occur in December  (rather than
                 March) of each fiscal  year,  and (iii) extend the term of the
                 plan to April 30, 2001; and

                 |_|   FOR             |_|   AGAINST              |_|   ABSTAIN

5.               In their  discretion,  on any other  matters that may properly
                  come  before the  meeting,  or any  adjournments  thereof,  in
                  accordance with the recommendations of a majority of the Board
                  of Directors.

             (Continued and to be dated and signed on reverse side.)



<PAGE>


                           (continued from other side)

This proxy,  when  properly  executed,  will be voted as directed  herein by the
undersigned  shareholder.  However, if no direction is given, this proxy will be
voted FOR the nominees in proposal 1, and FOR proposals 2, 3 and 4.

                  The undersigned hereby acknowledges prior receipt of a copy of
the Notice of Annual Meeting of Shareholders  and proxy statement dated February
, 1996 and the 1995 Annual Report to Shareholders,  and hereby revokes any proxy
or proxies  heretofore given. This Proxy may be revoked at any time before it is
voted by delivering to the Secretary of the Company either a written  revocation
of proxy,  or a duly executed proxy bearing a later date, or by appearing at the
Annual Meeting and voting in person.

                  If you  receive  more than one  proxy  card,  please  sign and
return all cards in the accompanying envelope.

| |   I PLAN TO ATTEND THE MARCH 26, 1996 ANNUAL SHAREHOLDERS MEETING

                                             Date:                      , 1996.





--------------------------------------------------------------------------------
                                        Signature of Shareholder or Authorized
                                        Representative

                                                              Please   date  and
                                                              sign   exactly  as
                                                              name       appears
                                                              hereon.       Each
                                                              executor,
                                                              administrator,
                                                              trustee, guardian,
                                                              attorney-in-fact
                                                              and          other
                                                              fiduciary   should
                                                              sign and  indicate
                                                              his  or  her  full
                                                              title. In the case
                                                              of stock ownership
                                                              in the name of two
                                                              or  more  persons,
                                                              both       persons
                                                              should sign.



PLEASE MARK,  DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY TO ENSURE A QUORUM
AT THE  MEETING.  IT IS IMPORTANT  WHETHER YOU OWN FEW OR MANY SHARES.  DELAY IN
RETURNING YOUR PROXY MAY SUBJECT THE COMPANY TO ADDITIONAL EXPENSE.



<PAGE>


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                                     - 14 -
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                                                                       EXHIBIT 1


                              MICROLOG CORPORATION
                             1995 STOCK OPTION PLAN


                  Microlog Corporation (the "Corporation") sets forth herein the
terms of this 1995 Stock Option Plan (the "Plan") as follows:


1.                PURPOSE

                  The  Plan  is  intended  to  advance  the   interests  of  the
Corporation by providing eligible individuals (as designated pursuant to Section
4 below) with an  opportunity  to acquire or increase a proprietary  interest in
the  Corporation,  which  thereby  will  create a stronger  incentive  to expend
maximum  effort  for  the  growth  and  success  of  the   Corporation  and  its
subsidiaries,  and will  encourage  such eligible  individuals  to remain in the
employ of the Corporation or one or more of its subsidiaries.  Each stock option
granted  under the Plan (an  "Option")  is  intended to be an  "incentive  stock
option" within the meaning of Section 422 of the Internal  Revenue Code of 1986,
or the  corresponding  provision of any  subsequently-enacted  tax  statute,  as
amended from time to time (the "Code") ("Incentive Stock Option"), except (i) to
the  extent  that any such  Option  would  exceed the  limitations  set forth in
Section 7 below;  and (ii) for Options  specifically  designated  at the time of
grant as not being "incentive stock options."


2.                ADMINISTRATION

                  (a)  Board.  The Plan  shall be  administered  by the Board of
Directors of the Corporation (the "Board"),  which shall have the full power and
authority  to take all  actions,  and to make  all  determinations  required  or
provided  for under the Plan or any  Option  granted  or  Option  Agreement  (as
defined in Section 8 below)  entered into  hereunder  and all such other actions
and  determinations  not inconsistent  with the specific terms and provisions of
the  Plan  deemed  by  the  Board  to  be  necessary  or   appropriate   to  the
administration  of the Plan or any Option  granted or Option  Agreement  entered
into hereunder.  All such actions and determinations shall be by the affirmative
vote of a majority of the members of the Board present at a meeting at which any
issue  relating to the Plan is properly  raised for  consideration  or without a
meeting  by  written  consent  of the  Board  executed  in  accordance  with the
Corporation's Certificate of Incorporation and By-Laws, and with applicable law.
The interpretation and construction by the Board of any provision of the Plan or
of any Option granted or Option Agreement  entered into hereunder shall be final
and conclusive.

                  (b) Committee. The Board may from time to time appoint a Stock
Option  Committee (the  "Committee")  consisting of not less than two members of
the Board,  none of whom shall be an officer or other  salaried  employee of the
Corporation  or any of its  subsidiaries,  and each of whom shall qualify in all
respects as a "disinterested  person" as defined in Rule l6b-3 of the Securities
and Exchange  Commission  under the Securities  Exchange Act of 1934, as amended
(the "Exchange Act").  The Board, in its sole  discretion,  may provide that the
role of the Committee  shall be limited to making  recommendations  to the Board
concerning  any  determinations  to be made and actions to be taken by the Board
pursuant  to or with  respect  to the Plan,  or the Board  may  delegate  to the
Committee such powers and authorities related to the administration of the Plan,
as set forth in Section  2(a) above,  as the Board shall  determine,  consistent
with the  Certificate  of  Incorporation  and  By-Laws  of the  Corporation  and
applicable law. The Board may remove members, add members, and fill vacancies on
the  Committee  from  time to time,  all in  accordance  with the  Corporation's
Certificate of Incorporation and By-Laws,  and with applicable law. The majority
vote of the  Committee,  or acts reduced to or approved in writing by a majority
of the members of the Committee, shall be the valid acts of the Committee.

                  (c) No  Liability.  No member of the Board or of the Committee
shall be liable for any action or determination  made in good faith with respect
to the Plan or any Option granted or Option Agreement entered into hereunder.

                  (d) Delegation to the Committee. In the event that the Plan or
any Option granted or Option Agreement  entered into hereunder  provides for any
action to be taken by or determination to be made by the Board,  such action may
be taken by or such  determination may be made by the Committee if the power and
authority to do so has been  delegated to the Committee by the Board as provided
for in Section 2(b) above. Unless otherwise  expressly  determined by the Board,
any such action or determination by the Committee shall be final and conclusive.

                  (e) Action by the Board. The Board may act under the Plan with
respect  to any  Option  granted  to or Option  Agreement  entered  into with an
officer, director or shareholder of the Corporation who is subject to Section 16
of the Exchange Act other than by, or in accordance with the recommendations of,
the Committee, constituted as set forth in Section 2(b) above, only if the Board
satisfies  the  requirements  of  Rule  16b-3  of the  Securities  and  Exchange
Commission under the Exchange Act relating to "disinterested administration."


3.                STOCK

                  The stock that may be issued pursuant to Options granted under
the Plan  shall be shares of Common  Stock,  par value  $.01 per  share,  of the
Corporation (the "Stock"), which shares may be treasury shares or authorized but
unissued  shares.  The number of shares of Stock that may be issued  pursuant to
Options  granted  under the Plan  shall not  exceed in the  aggregate  1,000,000
shares.  The foregoing number of shares are subject to adjustment as provided in
Section  17 below.  If any  Option  expires,  terminates,  or is  terminated  or
canceled for any reason prior to exercise in full, the shares of Stock that were
subject to the unexercised  portion of such Option shall be available for future
Options granted under the Plan.


4.                ELIGIBILITY

                  Options may be granted  under the Plan to any  employee of the
Corporation or any "subsidiary  corporation" (a "Subsidiary") thereof within the
meaning of Section  424(f) of the Code  (including  any such  employee who is an
officer or director of the  Corporation  or any  Subsidiary)  as the Board shall
determine and designate  from time to time prior to expiration or termination of
the Plan.  The maximum  number of shares of Stock subject to Options that may be
granted  under  the  Plan to any  executive  officer  or other  employee  of the
Corporation  or any  Subsidiary  is 500,000  shares  (subject to  adjustment  as
provided in Section 17  hereof).  An  individual  may hold more than one Option,
subject to such restrictions as are provided herein.


5.                EFFECTIVE DATE AND TERM OF THE PLAN

                  (a) Effective Date. The Plan shall be effective as of the date
of adoption by the Board, which date is set forth below,  subject to approval of
the Plan within one year of such effective date by the affirmative  votes of the
holders of a majority of the Stock of the Corporation  present,  or represented,
and entitled to vote at a meeting duly held in accordance  with  applicable law;
provided,  however,  that upon approval of the Plan by the  shareholders  of the
Corporation as set forth above,  all Options  granted under the Plan on or after
the  effective  date  shall be fully  effective  as if the  shareholders  of the
Corporation  had approved the Plan on the effective  date.  If the  shareholders
fail to approve the Plan  within one year of such  effective  date,  any options
granted hereunder shall be null and void and of no effect.

                  (b) Term. The Plan shall  terminate on the date ten years from
the effective date.


6.                GRANT OF OPTIONS

                  Subject  to the terms and  conditions  of the Plan,  the Board
may, at any time and from time to time,  prior to the date of termination of the
Plan,   grant  to  such  eligible   individuals   as  the  Board  may  determine
("Optionees"),  Options to  purchase  such number of shares of the Stock on such
terms  and  conditions  as the  Board  may  determine,  including  any  terms or
conditions  which may be necessary  to qualify  such Options as Incentive  Stock
Options.  The date on which the Board  approves  the grant of an Option (or such
later date as is specified by the Board) shall be  considered  the date on which
such Option is granted.


7.                LIMITATION ON INCENTIVE STOCK OPTIONS

                  An Option (other than an Option described in exception (ii) of
Section 1) shall  constitute  an  Incentive  Stock Option to the extent that the
aggregate  fair market value  (determined  at the time the option is granted) of
the stock with respect to which  Incentive Stock Options are exercisable for the
first time by any  Optionee  during any  calendar  year  (under the Plan and all
other plans of the Optionee's employer corporation and its parent and subsidiary
corporations  within the meaning of Section  422(d) of the Code) does not exceed
$100,000. This limitation shall be applied by taking Options into account in the
order in which they were granted.


8.                OPTION AGREEMENTS

                  All Options granted pursuant to the Plan shall be evidenced by
written agreements ("Option Agreements"),  to be executed by the Corporation and
by the  Optionee,  in such  form or forms as the Board  shall  from time to time
determine.  Option  Agreements  covering Options granted from time to time or at
the same time need not contain similar provisions;  provided,  however, that all
such Option Agreements shall comply with all terms of the Plan.


9.                OPTION PRICE

                  The  purchase  price of each share of the Stock  subject to an
Option  (the  "Option  Price")  shall be fixed by the Board  and  stated in each
Option Agreement, except that the Option Price of a share of Stock subject to an
Option that is intended to  constitute  an  Incentive  Stock Option shall be not
less than 100  percent of the fair  market  value of a share of the Stock on the
date the Option is granted (as determined in good faith by the Board); provided,
however, that in the event the Optionee would otherwise be ineligible to receive
an Incentive Stock Option by reason of the provisions of Sections  422(b)(6) and
424(d) of the Code (relating to stock  ownership of more than ten percent),  the
Option Price of an Option that is intended to be an Incentive Stock Option shall
be not less than 110 percent of the fair market value of a share of Stock at the
time  such  Option  is  granted.  In the  event  that the  Stock is listed on an
established national or regional stock exchange, is admitted to quotation on the
National  Association of Securities  Dealers  Automated  Quotation System, or is
publicly  traded on an established  securities  market,  in determining the fair
market value of the Stock, the Board shall use the closing price of the Stock on
such  exchange or System or in such market (the highest  such  closing  price if
there is more that one such exchange or market) on the trading date  immediately
before the Option is granted  (or, if there is no such closing  price,  then the
Board shall use the mean  between the high and low prices on such date),  or, if
no sale of the Stock had been made on such  day,  on the next  preceding  day on
which any such sale shall have been made.


10.               TERM AND EXERCISE OF OPTIONS

                  (a) Term.  Each Option granted under the Plan shall  terminate
and all rights to purchase shares  thereunder shall cease upon the expiration of
ten years from the date such Option is granted, or on such date prior thereto as
may be fixed by the Board and stated in the Option  Agreement  relating  to such
Option;  provided,  however,  that in the event the Optionee would  otherwise be
ineligible to receive an Incentive  Stock Option by reason of the  provisions of
Sections  422(b)(6) and 424(d) of the Code (relating to stock  ownership of more
than ten percent),  an Option granted to such Optionee that is intended to be an
Incentive Stock Option shall in no event be exercisable  after the expiration of
five years from the date it is granted.

                  (b) Option  Period and  Limitations  on Exercise.  Each Option
shall be  exercisable,  in whole or in part,  at any time and from time to time,
over a period  commencing  on or after  the date of grant  and  ending  upon the
expiration or  termination of the Option,  as the Board shall  determine and set
forth in the Option  Agreement  relating to such  Option.  Without  limiting the
foregoing,  the Board,  subject to the terms and  conditions of the Plan, may in
its sole  discretion  provide that an Option may not be exercised in whole or in
part for any period or periods of time during which such Option is  outstanding;
provided,  however,  that any  such  limitation  on the  exercise  of an  Option
contained in any Option  Agreement may be  rescinded,  modified or waived by the
Board, in its sole discretion,  at any time and from time to time after the date
of grant of such Option, so as to accelerate the time at which the Option may be
exercised.  Each Option shall be  exercisable,  in whole or in part, at any time
and from time to time, over a period  commencing on the date of grant and ending
upon the expiration of the Option.  Notwithstanding  any other  provision of the
Plan, no Option  granted to an Optionee  under the Plan shall be  exercisable in
whole or in part prior to the date the Plan is approved by the  shareholders  of
the Corporation as provided in Section 5 above.

                  (c)  Method  of  Exercise.   An  Option  that  is  exercisable
hereunder may be exercised by delivery to the  Corporation  on any business day,
at its principal office, addressed to the attention of the Committee, of written
notice of exercise, which notice shall specify the number of shares with respect
to which the Option is being  exercised.  The minimum  number of shares of Stock
with respect to which an Option may be  exercised,  in whole or in part,  at any
time shall be the lesser of 100 shares or the maximum number of shares available
for purchase under the Option at the time of exercise. Except as provided below,
payment in full of the Option  Price of the shares for which the Option is being
exercised shall accompany the written notice of exercise of the Option and shall
be made either (i) in cash or in cash  equivalents;  (ii)  through the tender to
the Corporation of shares of Stock,  which shares shall be valued,  for purposes
of  determining  the extent to which the Option Price has been paid thereby,  at
their fair market value  (determined in the manner described in Section 9 above)
on the date of exercise;  or (iii) by a combination of the methods  described in
(i) and (ii); provided, however, that the Board may in its discretion impose and
set forth in the Option Agreement such limitations or prohibitions on the use of
shares of Stock to exercise Options as it deems appropriate.  If shares of Stock
that are  acquired by the  Optionee  through  exercise of an Option or an option
issued  under  another  stock  option plan  maintained  by the  Corporation  are
surrendered  in payment of the Option Price,  the Stock  surrendered  in payment
must have been (i) held by the  Optionee for more than six months at the time of
surrender,  or (ii)  acquired  under an Option  granted not less than six months
prior to the time of surrender.  Unless the Board shall provide otherwise in the
case of an  Option  Agreement,  payment  in full of the  Option  Price  need not
accompany the written notice of exercise provided the notice of exercise directs
that the Stock  certificate or certificates  for the shares for which the Option
is exercised be delivered to a licensed broker  acceptable to the Corporation as
the agent for the  individual  exercising the Option and, at the time such Stock
certificate or certificates are delivered, the broker tenders to the Corporation
cash (or cash  equivalents  acceptable to the  Corporation)  equal to the Option
Price for the shares of Stock  purchased  pursuant to the exercise of the Option
plus the amount (if any) of federal and other taxes which the  Corporation  may,
in its  judgment,  be required to withhold  with  respect to the exercise of the
Option.  An attempt to exercise any Option granted  hereunder  other than as set
forth  above shall be invalid  and of no force and  effect.  Promptly  after the
exercise of an Option and the payment in full of the Option  Price of the shares
of Stock covered thereby, the individual exercising the Option shall be entitled
to the issuance of a Stock certificate or certificates  evidencing his ownership
of such shares. A separate Stock certificate or certificates shall be issued for
any shares purchased pursuant to the exercise of an Option which is an Incentive
Stock Option,  which  certificate or  certificates  shall not include any shares
which were  purchased  pursuant  to the  exercise  of an Option  which is not an
Incentive Stock Option. An individual holding or exercising an Option shall have
none of the rights of a shareholder  until the shares of Stock  covered  thereby
are fully paid and issued to him and, except as provided in Section 17 below, no
adjustment shall be made for dividends or other rights for which the record date
is prior to the date of such issuance.

                  (d)  Restrictions  on  Transfer  of  Stock.  If an  Option  is
exercised prior to the date that is six months from the later of (i) the date of
grant of the Option or (ii) the date of shareholder approval of the Plan and the
individual  exercising  the Option is a reporting  person under Section 16(a) of
the Exchange  Act, then such  certificate  or  certificates  shall bear a legend
restricting  the transfer of the Stock covered  thereby until the  expiration of
six months from the later of the date  specified in clause (i) above or the date
specified in clause (ii) above.


11.               TRANSFERABILITY OF OPTIONS

                  During  the  lifetime  of an  Optionee  to whom an  Option  is
granted,   only  such  Optionee  (or,  in  the  event  of  legal  incapacity  or
incompetence,  the Optionee's guardian or legal representative) may exercise the
Option. No Option shall be assignable or transferable by the Optionee to whom it
is granted, other than by will or the laws of descent and distribution.


12.               TERMINATION OF EMPLOYMENT

                  Upon the termination of the employment of an Optionee with the
Corporation or a Subsidiary, other than by reason of the death or "permanent and
total  disability"  (within the meaning of Section 22(e)(3) of the Code) of such
Optionee,  any  Option  granted  to an  Optionee  pursuant  to  the  Plan  shall
terminate,  and such Optionee shall have no further right to purchase  shares of
Stock pursuant to such Option;  provided,  however,  that in the event that such
termination  of  employment  is  by  reason  of  the  Optionee's  retirement  in
accordance  with  the  normal  retirement  policies  of  the  Corporation  or  a
Subsidiary,  as the case may be, then such Optionee shall have the right, at any
time within  three  months  after the date of such  retirement  (or such shorter
period as may be specified in an Option Agreement),  and prior to termination of
the Option  pursuant to Section 10(a) above,  to exercise,  in whole or in part,
any Option held by such Optionee at the date of such retirement,  whether or not
such  Option was  exercisable  immediately  before  such  retirement;  provided,
further, that the Board may provide, by inclusion of appropriate language in any
Option Agreement,  that the Optionee may (subject to the general  limitations on
exercise  set forth in Section  10(b)  above),  in the event of  termination  of
employment of the Optionee  with the  Corporation  or a Subsidiary,  exercise an
Option,  in whole or in part,  at any time  subsequent  to such  termination  of
employment  and prior to  termination  of the Option  pursuant to Section  10(a)
above,  either  subject to or without  regard to any  installment  limitation on
exercise  imposed  pursuant to Section  10(b) above.  Whether a  termination  of
employment is to be  considered  by reason of retirement in accordance  with the
normal retirement  policies of the Corporation or a Subsidiary,  as the case may
be, and whether a leave of absence or leave on military  or  government  service
shall  constitute a termination  of employment for purposes of the Plan shall be
determined by the Board, which determination shall be final and conclusive.  For
purposes of the Plan, a termination  of  employment  with the  Corporation  or a
Subsidiary  shall  not be  deemed  to  occur  if  the  Optionee  is  immediately
thereafter employed by the Corporation or any Subsidiary.


13.               RIGHTS IN THE EVENT OF DEATH, DISABILITY OR CHANGE IN CONTROL

                  (a) Death of an  Employee.  If an  Optionee  dies while in the
employ of the  Corporation  or a Subsidiary  or within the period  following the
termination of employment  during which the Option is exercisable  under Section
12 above or Section 13(b) below, the executors or  administrators or legatees or
distributees  of such  Optionee's  estate  shall have the right  (subject to the
general  limitations on exercise set forth in Section 10(b) above),  at any time
within one year after the date of such Optionee's death and prior to termination
of the Option  pursuant to Section 10(a) above (or such shorter period as may be
specified in an Option Agreement),  to exercise any Option held by such Optionee
at the date of such Optionee's death, whether or not such Option was exercisable
immediately prior to such Optionee's death;  provided,  however,  that the Board
may provide by inclusion of appropriate  language in any Option  Agreement that,
in the event of the death of the Optionee,  the executors or  administrators  or
legatees  or  distributees  of such  Optionee's  estate may  exercise  an Option
(subject  to the general  limitations  on  exercise  set forth in Section  10(b)
above), in whole or in part, at any time subsequent to such Optionee's death and
prior to  termination  of the Option  pursuant to Section  10(a)  above,  either
subject to or without regard to any installment  limitation on exercise  imposed
pursuant to Section 10(b) above.

                  (b)  Disability  of an  Employee.  If an  Optionee  terminates
employment  with the Corporation or a Subsidiary by reason of the "permanent and
total  disability"  (within the meaning of Section 22(e)(3) of the Code) of such
Optionee,  then such  Optionee  shall  have the right  (subject  to the  general
limitations  on exercise set forth in Section 10(b)  above),  at any time within
one year after such  termination  of employment  and prior to termination of the
Option  pursuant  to  Section  10(a)  above  (or such  shorter  period as may be
specified in an Option Agreement),  to exercise, in whole or in part, any Option
held by such Optionee at the date of such termination of employment,  whether or
not  such  Option  was  exercisable  immediately  prior to such  termination  of
employment;  provided,  however,  that the Board may  provide,  by  inclusion of
appropriate language in any Option Agreement,  that the Optionee may (subject to
the general  limitations  on exercise set forth in Section 10(b) above),  in the
event of the termination of employment of the Optionee with the Corporation or a
Subsidiary by reason of the "permanent and total disability" (within the meaning
of Section  22(e)(3) of the Code) of such Optionee,  exercise an Option in whole
or in part, at any time  subsequent to such  termination of employment and prior
to termination of the Option pursuant to Section 10(a) above,  either subject to
or without regard to any installment  limitation on exercise imposed pursuant to
Section 10(b) above.  Whether a termination of employment is to be considered by
reason of "permanent  and total  disability"  for purposes of this Plan shall be
determined by the Board, which determination shall be final and conclusive.

                  (c) Change in Control. Except as otherwise provided in Section
17(f) below,  in the event of the  occurrence of a Change in Control (as defined
below) or in the event  that the  Board,  in its sole and  absolute  discretion,
determines that there exists a threat of a Change in Control, each Option issued
before the date of such occurrence or such  determination,  which Option has not
theretofore  terminated  as provided in Section 10(a) above,  shall  immediately
become  exercisable  in  full  as  of  the  date  of  such  occurrence  or  such
determination,  whether or not such Option was otherwise exercisable immediately
before such  occurrence  or such  determination.  For  purposes of this Plan,  a
"Change  in  Control"  shall be deemed to occur  if,  at any  time,  any  person
(including,   without   limitation,   any   individual,   sole   proprietorship,
partnership, trust, corporation,  association, joint venture, pool, syndicate or
other entity, whether or not incorporated), or any two or more persons acting as
a syndicate or group and thereby deemed collectively to be a "person" within the
meaning of Section  13(d)(3) of the Exchange Act,  shall acquire shares of stock
of the Corporation,  which acquisition  results in such person or persons owning
in the aggregate shares of stock of the Company possessing 20 percent or more of
the total  combined  voting  power of all  classes of stock of the  Corporation,
unless prior to such  acquisition  the full Board shall by at least a two-thirds
vote have  specifically  approved  such  acquisition  and  determined  that such
acquisition  shall not  constitute a Change in Control for purposes of the Plan.
Whether  there  exists a threat of a Change in Control for purposes of this Plan
shall be  determined  by the  Board,  which  determination  shall  be final  and
conclusive.


14.               USE OF PROCEEDS

                  The  proceeds  received  by the  Corporation  from the sale of
Stock pursuant to Options granted under the Plan shall constitute  general funds
of the Corporation.


15.               REQUIREMENTS OF LAW

                  (a) Violations of Law. The  Corporation  shall not be required
to sell or issue any shares of Stock under any Option if the sale or issuance of
such shares would constitute a violation by the individual exercising the Option
or  the  Corporation  of  any  provisions  of  any  law  or  regulation  of  any
governmental  authority,  including  without  limitation  any  federal  or state
securities laws or  regulations.  Specifically in connection with the Securities
Act of 1933 (as now in effect or as  hereafter  amended),  upon  exercise of any
Option, unless a registration statement under such Act is in effect with respect
to the shares of Stock covered by such Option, the Company shall not be required
to sell or issue such shares unless the Board has received evidence satisfactory
to it that the holder of such  Option may  acquire  such  shares  pursuant to an
exemption from registration under such Act. Any determination in this connection
by the Board shall be final, binding, and conclusive. The Company may, but shall
in no event be obligated to, register any securities  covered hereby pursuant to
the  Securities  Act of 1933 (as now in effect  or as  hereafter  amended).  The
Corporation  shall not be obligated to take any  affirmative  action in order to
cause the  exercise of an Option or the issuance of shares  pursuant  thereto to
comply  with any law or  regulation  of any  governmental  authority.  As to any
jurisdiction  that expressly imposes the requirement that an Option shall not be
exercisable  unless  and until the shares of Stock  covered  by such  Option are
registered  or are subject to an  available  exemption  from  registration,  the
exercise  of  such  Option  (under  circumstances  in  which  the  laws  of such
jurisdiction  apply) shall be deemed  conditioned upon the effectiveness of such
registration or the availability of such an exemption.

                  (b) Compliance with Rule 16b-3.  The intent of this Plan is to
qualify for the exemption  provided by Rule 16b-3 under the Exchange Act. To the
extent any provision of the Plan does not comply with the  requirements  of Rule
16b-3, it shall be deemed  inoperative to the extent permitted by law and deemed
advisable  by the Board and shall not affect the  validity  of the Plan.  In the
event Rule 16b-3 is revised or replaced,  the Board, or the Committee  acting on
behalf of the Board, may exercise  discretion to modify this Plan in any respect
necessary  to  satisfy  the  requirements  of  the  revised   exemption  or  its
replacement.


16.               AMENDMENT AND TERMINATION OF THE PLAN

                  The  Board  may,  at any time and  from  time to time,  amend,
suspend or terminate the Plan as to any shares of Stock as to which Options have
not been  granted;  provided,  however,  that no  amendment  by the Board shall,
without  approval by a majority of the votes  present and  entitled to vote at a
duly held  meeting  of the  shareholders  of the  Corporation  at which a quorum
representing a majority of all outstanding  voting stock is, either in person or
by proxy,  present  and  voting  on the  amendment,  or by  written  consent  in
accordance with applicable  state law and the Certificate of  Incorporation  and
By-Laws  of the  Corporation,  materially  increase  the  benefits  accruing  to
participants  under the Plan,  change  the  requirements  as to  eligibility  to
receive  Options  or  increase  the  maximum  number  of  shares of Stock in the
aggregate that may be sold pursuant to Options granted under the Plan (except as
permitted under Section 17 hereof). Except as permitted under Section 17 hereof,
no amendment,  suspension or termination of the Plan shall,  without the consent
of the holder of the Option,  alter or impair  rights or  obligations  under any
Option theretofore granted under the Plan.


17.               EFFECT OF CHANGES IN CAPITALIZATION

                  (a) Changes in Stock. If the  outstanding  shares of Stock are
increased or decreased  or changed into or exchanged  for a different  number or
kind  of  shares  or  other  securities  of the  Corporation  by  reason  of any
recapitalization,  reclassification,  stock split, reverse split, combination of
shares,  exchange of shares,  stock  dividend or other  distribution  payable in
capital  stock,  or other increase or decrease in such shares  effected  without
receipt of consideration by the Corporation,  occurring after the effective date
of the Plan,  the number and kinds of shares for the  purchase of which  Options
may be granted under the Plan shall be adjusted  proportionately and accordingly
by the Corporation. In addition, the number and kind of shares for which Options
are outstanding  shall be adjusted  proportionately  and accordingly so that the
proportionate  interest of the holder of the Option  immediately  following such
event shall, to the extent practicable, be the same as immediately prior to such
event. Any such adjustment in outstanding Options shall not change the aggregate
Option Price payable with respect to shares subject to the  unexercised  portion
of the  Option  outstanding  but  shall  include a  corresponding  proportionate
adjustment in the Option Price per share.

                  (b)  Reorganization  in Which the Corporation Is the Surviving
Corporation.  Subject to Subsection (c) hereof,  if the Corporation shall be the
surviving  corporation in any  reorganization,  merger,  or consolidation of the
Corporation with one or more other corporations,  any Option theretofore granted
pursuant  to the Plan shall  pertain to and apply to the  securities  to which a
holder of the number of shares of Stock  subject to such Option  would have been
entitled immediately  following such  reorganization,  merger, or consolidation,
with a corresponding  proportionate  adjustment of the Option Price per share so
that the aggregate  Option Price  thereafter  shall be the same as the aggregate
Option Price of the shares remaining subject to the Option  immediately prior to
such reorganization, merger, or consolidation.

                  (c)  Reorganization  in  Which  the  Corporation  Is  Not  the
Surviving  Corporation  or Sale of  Assets  or Stock.  Upon the  dissolution  or
liquidation of the Corporation, or upon a merger, consolidation,  reorganization
or other business combination of the Corporation with one or more other entities
in which the Corporation is not the surviving  entity,  or upon a sale of all or
substantially  all of the assets of the Corporation to another  entity,  or upon
any transaction  (including,  without limitation,  a merger or reorganization in
which the Corporation is the surviving  corporation) approved by the Board which
results  in any person or entity (or  persons or  entities  acting as a group or
otherwise in concert)  owning 80 percent or more of the combined voting power of
all classes of stock of the  Corporation,  the Plan and all Options  outstanding
hereunder shall terminate,  except to the extent provision is made in writing in
connection  with such  transaction  for the  continuation of the Plan and/or the
assumption of the Options theretofore  granted, or for the substitution for such
Options of new options covering the stock of a successor  entity, or a parent or
subsidiary thereof,  with appropriate  adjustments as to the number and kinds of
shares and  exercise  prices,  in which event the Plan and  Options  theretofore
granted  shall  continue in the manner and under the terms so  provided.  In the
event of any such  termination of the Plan,  each  individual  holding an Option
shall have the right  (subject to the general  limitations on exercise set forth
in Section  10(b)  above and except as  otherwise  specifically  provided in the
Option Agreement  relating to such Option),  immediately prior to the occurrence
of such  termination and during such period  occurring prior to such termination
as the Board in its sole discretion  shall determine and designate,  to exercise
such  Option  in whole or in part,  whether  or not such  Option  was  otherwise
exercisable  at the time  such  termination  occurs  and  without  regard to any
installment  limitation on exercise imposed pursuant to Section 10(b) above. The
Board  shall  send  written  notice  of an  event  that  will  result  in such a
termination to all individuals who hold Options not later than the time at which
the Corporation gives notice thereof to its shareholders.

                  (d) Adjustments.  Adjustments under this Section 17 related to
stock  or  securities  of the  Corporation  shall  be made by the  Board,  whose
determination  in that  respect  shall be final,  binding,  and  conclusive.  No
fractional shares of Stock or units of other securities shall be issued pursuant
to any such  adjustment,  and any fractions  resulting from any such  adjustment
shall be eliminated in each case by rounding downward to the nearest whole share
or unit.

                  (e) No  Limitations  on  Corporation.  The  grant of an Option
pursuant  to the Plan shall not affect or limit in any way the right or power of
the  Corporation  to make  adjustments,  reclassifications,  reorganizations  or
changes of its capital or business structure or to merge, consolidate,  dissolve
or liquidate, or to sell or transfer all or any part of its business or assets.

                  (f) Parachute Payments. Notwithstanding any other provision of
the Plan, if any payment,  grant or acceleration of  exercisability of an Option
or other  benefit  to an  Optionee  under  this  Plan (a "Plan  Benefit")  would
otherwise  constitute a "parachute  payment"  within the meaning of Code Section
280G(b)(2) and if, after reduction for any applicable federal excise tax imposed
by Code Section 4999 (the  "Excise  Tax") and federal  income tax imposed by the
Code,  the Optionee's net proceeds from receiving the Plan Benefit would be less
than the amount of the Optionee's net proceeds resulting from the receipt of the
Reduced Amount described below,  after reduction for federal income taxes,  then
the Optionee's Plan Benefit shall be limited to the Reduced Amount. The "Reduced
Amount" shall be the largest Plan Benefit that could be received by the Optionee
such that no Plan Benefit and no other  payment or other benefit under any other
agreement,  contract,  or  understanding  heretofore  or hereafter  entered into
between  the  Optionee  and  the  Corporation  or  any  Subsidiary  (the  "Other
Agreements") and any formal or informal plan or other arrangement  heretofore or
hereafter  adopted  by the  Corporation  or any  Subsidiary  for the  direct  or
indirect provision of compensation to the Optionee  (including groups or classes
of participants or beneficiaries of which the Optionee is a member),  whether or
not such compensation is deferred, is in cash, or is in the form of a benefit to
or for the  Optionee (a "Benefit  Plan")  would be subject to the Excise Tax. In
the event that the Plan Benefit to the Optionee  shall be limited to the Reduced
Amount,  then  the  Optionee  shall  have  the  right,  in the  Optionee's  sole
discretion,  to designate the Plan Benefit and those  payments or benefits under
any Other  Agreements and any Benefit Plans that should be reduced or eliminated
so as to avoid having the Plan Benefit be subject to the Excise Tax.


18.               DISCLAIMER OF RIGHTS

                  No  provision  in the Plan or in any Option  granted or Option
Agreement  entered  into  pursuant to the Plan shall be construed to confer upon
any  individual  the  right to remain in the  employ of the  Corporation  or any
Subsidiary,  or to  interfere  in any way with the  right and  authority  of the
Corporation or any Subsidiary either to increase or decrease the compensation of
any individual at any time, or to terminate any employment or other relationship
between any individual and the Corporation or any Subsidiary.


19.               NONEXCLUSIVITY OF THE PLAN

                  Neither  the  adoption of the Plan nor the  submission  of the
Plan to the  shareholders  of the Corporation for approval shall be construed as
creating any limitations upon the right and authority of the Board to adopt such
other incentive compensation  arrangements (which arrangements may be applicable
either  generally  to a class or classes of  individuals  or  specifically  to a
particular  individual or individuals) as the Board in its discretion determines
desirable, including, without limitation, the granting of stock options or stock
appreciation rights otherwise than under the Plan.

                                      * * *

                  This  Plan was  duly  adopted  and  approved  by the  Board of
Directors of the  Corporation by resolution at a meeting held on the 28th day of
September,  1995 and amended by the Board of  Directors  of the  Corporation  by
resolution at a meeting held on the 20th day of December, 1995.



                                                   Secretary of the Corporation



                  This  Plan  was  duly  approved  by  the  shareholders  of the
Corporation at a meeting held on the 26th day of March, 1996.



                                                   Secretary of the Corporation


<PAGE>


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                                      - 9 -
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                                                                       EXHIBIT 2

                                                   (New language is underscored,
                                           deleted language is strickenthrough.)

                              MICROLOG CORPORATION
                    1989 NON-EMPLOYEE DIRECTOR NON-QUALIFIED
                                STOCK OPTION PLAN

                            (AS AMENDED AND RESTATED)


                  Microlog  Corporation  (the  "Company")  sets forth herein the
terms of this Non-Employee Director Stock Option Plan (the "Plan") as follows:

                  1.       PURPOSE

                  The Plan is intended to advance the  interests  of the Company
by providing each member serving on the Board of Directors of the Company who is
not an officer or other  salaried  employee of the Company or any  subsidiary (a
"Non-Employee   Director")   with  an  opportunity  to  acquire  or  increase  a
proprietary  interest  in the  Company,  which  thereby  will  create a stronger
incentive to expend maximum effort for the growth and success of the Company and
its subsidiaries,  and will encourage such  Non-Employee  Directors to remain in
the service of the Company or that of one or more of its subsidiaries. The stock
options  granted  under the Plan (an "Option") are not intended to be "incentive
stock  options"  within the meaning of Section 422A 422 of the Internal  Revenue
Code of 1986 (or the  corresponding  provision of any  subsequently  enacted tax
statute).

                  2.       STOCK

                  The stock that may be issued pursuant to Options granted under
the Plan  shall be shares of Common  Stock,  par value  $.01 per  share,  of the
Company (the  "Stock"),  which shares may be treasury  shares or authorized  but
unissued  shares.  The number of shares of Stock that may be issued  pursuant to
Options granted under the Plan shall not exceed in the aggregate  75,000 125,000
shares,  which number of shares is subject to adjustment as hereinafter provided
in Section 14 below. If any Option expires, terminates, or is terminated for any
reason  prior to exercise in full,  the shares of Stock that were subject to the
unexercised portion of such Option shall be available for future Options granted
under the Plan.

                  3.       GRANT OF OPTIONS

                  (a) Grant on Effective  Date.  On the  effective  date of this
Plan as provided in Section 5 below, each Non-Employee  Director then serving on
the Board of  Directors  of the  Company  shall be granted an Option to purchase
5,000  shares  of Stock at the price  and upon the  other  terms and  conditions
specified  in  the  Plan.  Thereafter,  subject  to  Section  3(c)  and  to  the
availability of shares issued under Section 2 of the Plan, an Option to purchase
5,000  shares of Stock,  at the  price and upon the other  terms and  conditions
specified  in the Plan,  shall be  granted  under the Plan to each  Non-Employee
Director of the Company upon the initial election of such Non-Employee  Director
to the Board.

                  (b)  Annual  Grants.  Subject  to  Section  3(c)  and  to  the
availability  of  shares  issued  under  Section  2 of the  Plan,  on the  third
Wednesday  in March of each  year,  commencing  on March 21,  1990,  each of the
Non-Employee  Directors  then  serving on the Board of  Directors of the Company
shall be granted an Option to  purchase  1,000  shares of Stock at the price and
upon the other terms and conditions specified in this Plan, except that, subject
to  approval  not later than  December  19,  1996,  by the  affirmative  vote of
shareholders who hold at least a majority of the outstanding  shares of stock of
the  Company  entitled  to vote  thereon and who vote in person or by proxy at a
duly constituted  shareholders'  meeting, of an amendment to the Plan adopted by
the Board of  Directors  of the  Company on December  20,  1995,  commencing  on
December 20, 1995,  each such Option shall be granted on the third  Wednesday in
December of each year  commencing  on December 20, 1995,  and shall be for 3,000
shares of Stock, subject to adjustment under Section 14 hereof.

                  (c) Excluded Persons. Notwithstanding anything to the contrary
contained in Section 3 of the Plan, no Non-Employee Director designated by Whale
Securities Corp. pursuant to the terms of the Underwriting Agreement dated as of
May 14, 1986 between Whale Securities Corp. and the Company shall be granted any
Options pursuant to this Plan.

                  (d)  Special  Grant.  An option to purchase  10,000  shares of
Stock,  at the price and upon the other terms and  conditions  specified  in the
Plan,  is hereby  granted  under the Plan  effective  December  22, 1992 to each
Non-Employee  Director  then serving on the Board of Directors of the Company at
the price and upon the other terms and conditions specified in the Plan, subject
to Section 3(c) and to the  availability  of shares to be issued under Section 2
of the Plan, and subject to approval of this Section 3(d) on or before April 30,
1993 by an affirmative  vote of shareholders who hold at least a majority of the
outstanding  shares of stock of the Company entitled to vote thereon,  in person
or by proxy, at a duly called meeting of the  shareholders;  provided,  however,
that upon approval of this Section 3(d) by the  shareholders of the Company this
Section 3(d) shall be fully effective as if the  shareholders of the Company had
approved this Section 3(d) on December 22, 1992.

                  4.       OPTION PRICE

                  The purchase price of each share of Stock subject to an Option
(the "Option  Price")  shall be the greater of par value or one hundred  percent
(100%) of the fair  market  value of a share of Stock on the date the  Option is
granted.  In the event that the Stock is listed on an  established  national  or
regional stock exchange, is admitted to quotation on the National Association of
Securities  Dealers  Automated  Quotation  system,  or is publicly  traded in an
established  securities  market,  the fair  market  value shall be deemed to the
closing  price of the Stock on such  exchange  or system or in such  market (the
highest such closing price if there is more than one such exchange or market) on
the trading  date  immediately  before the Option is granted (or, if there is no
such closing price,  the mean between the highest bid and lowest asked prices or
between the high and low prices on such  date),  or, if no sale of the Stock has
been made on such day, on the  immediately  preceding day on which any such sale
shall have been made.

                  5.       EFFECTIVE DATE AND TERM OF THE PLAN

                  (a)  Effective  Date.  This Plan shall be  effective as of the
date this Plan is adopted by the Board of Directors  of the Company,  subject to
approval of the Plan before or within one year after such  effective  date by an
affirmative vote of shareholders who hold at least a majority of the outstanding
shares of stock of the Company entitled to vote thereon,  in person or by proxy,
at a duly  called  meeting of the  shareholders;  provided,  however,  that upon
approval of the Plan by the  shareholders of the Company as set forth above, all
Options  granted  under the Plan on or after the  effective  date shall be fully
effective  as if the  shareholders  of the Company had  approved the Plan on the
effective  date. If the  shareholders  fail to approve the Plan before or within
one year of such effective date, any options granted hereunder shall be null and
void and of no effect.

                  (b) Term. This Plan shall terminate on April 30, 1997 2001.

                  6.       OPTION AGREEMENTS

                  All Options granted pursuant to the Plan shall be evidenced by
written agreements ("Option  Agreements"),  to be executed by the Company and by
the Optionee, substantially in the form attached as Exhibit A to this Plan, with
such changes as the officer or officers  executing  such Option  Agreements  may
determine to be necessary or advisable  (such  determination  to be conclusively
evidenced by the execution thereof by such officer or officers).

                  7.       TERM AND EXERCISE OF OPTIONS

                  (a) Term.  Each Option granted under the Plan shall  terminate
and all rights to purchase shares  thereunder shall cease upon the expiration of
ten (10) years from the date such Option is granted.

                  (b) Option  Period and  Limitations  on Exercise.  Each Option
granted  under the Plan shall be  exercisable,  in whole or in part, at any time
and from time to time,  over a period  commencing  on or after the date of grant
and  ending  upon  the  expiration  of the  Option.  Notwithstanding  any  other
provisions  of this  Plan,  no Option  granted to an  Optionee  under this Plan,
except that Options  granted on or after  December 20, 1995 shall be exercisable
in whole or in part prior to the date the Plan is approved  by the  shareholders
of the Company as provided in Section 5(a) above.  to the extent of 1,000 shares
only  until  such  time as the  amendment  to the Plan  adopted  by the Board of
Directors of the Company on December 20, 1995 has been approved by  shareholders
in  accordance  with Section 13 hereof.  If an Option is exercised  prior to the
date that is six months from the later of (i) the date of grant of the Option or
(ii) the date of  shareholder  approval of the  amendment to the Plan adopted on
December  20,  1995 (to the  extent  such  Option  was  granted  subject to such
approval) and the individual  exercising the Option is a reporting  person under
Section 16(a) of the Exchange Act, then such  certificate or certificates  shall
bear a legend  restricting  the transfer of the Stock covered  thereby until the
expiration of six months from the date specified in clause (i) above or the date
specified in clause (ii) above, whichever is applicable to such shares of Stock.

                  (c)  Method  of  Exercise.   An  Option  that  is  exercisable
hereunder  may be exercised  by delivery to the Company on any business  day, at
its  principal  office,  addressed  to the  attention  of the  Secretary  of the
Company, of written notice of exercise, which notice shall specify the number of
shares  with  respect  to which the  Option is being  exercised,  and  except as
provided  below,  shall be accompanied by payment in full of the Option Price of
the shares for which the Option is being  exercised in cash.  The minimum number
of shares of Stock with respect to which an Option may be exercised, in whole or
in part, at any time shall be the lesser of 100 shares or the maximum  number of
shares available for purchase under the Option at the time of exercise.  Payment
of Except as provided  below,  payment in full of the Option Price of the shares
for which the Option is being  exercised  shall  accompany the written notice of
exercise  of the  Option  and shall be made (i) in cash or in cash  equivalents;
(ii) subject to approval not later than  December 19, 1996,  by the  affirmative
vote of shareholders  who hold at least a majority of the outstanding  shares of
stock of the Company entitled to vote thereon and who vote in person or by proxy
at a duly  constituted  shareholders'  meeting,  of the  amendment  to the  Plan
adopted by the Board of Directors  of the Company on December 20, 1995,  through
the tender to the Company of shares of Stock,  which shares shall be valued, for
purposes  of  determining  the  extent to which the  Option  Price has been paid
thereby,  at their fair market  value  (determined  in the manner  described  in
Section 4 above) on the date of exercise;  or (iii) subject to such approval, by
a combination of the methods described in (i) and (ii); provided,  however, that
the Board may in its  discretion  impose and set forth in the  Option  Agreement
such  limitations  or  prohibitions  on the use of shares  of Stock to  exercise
Options  as it  determines  to be  necessary  or  appropriate  under  applicable
securities  or other laws.  If shares of Stock that are acquired by the Optionee
through  exercise of an Option or an option  issued under  another  stock option
plan  maintained by the Company are  surrendered in payment of the Option Price,
the Stock  surrendered  in payment  must have been (i) held by the  Optionee for
more than six months at the time of surrender,  or (ii) acquired under an Option
granted  not less than six  months  prior to the time of  surrender.  Subject to
approval  not  later  than  December  19,  1996,  by  the  affirmative  vote  of
shareholders who hold at least a majority of the outstanding  shares of stock of
the  Company  entitled  to vote  thereon and who vote in person or by proxy at a
duly constituted  shareholders' meeting, of the amendment to the Plan adopted by
the Board of Directors  of the Company on December 20, 1995,  payment in full of
the Option Price need not accompany the written notice of exercise  provided the
notice of exercise  directs that the Stock  certificate or certificates  for the
shares for which the  Option is  exercised  be  delivered  to a licensed  broker
acceptable to the Company as the agent for the individual  exercising the Option
and, at the time such Stock  certificate  or  certificates  are  delivered,  the
broker  tenders  to the  Company  cash (or cash  equivalents  acceptable  to the
Company) equal to the Option Price for the shares of Stock purchased pursuant to
the  exercise of an Option  shall be made in cash the Option plus the amount (if
any) of federal  and other taxes which the  Company  may,  in its  judgment,  be
required to withhold  with respect to the exercise of the Option.  An attempt to
exercise  any Option  granted  hereunder  other than as set forth above shall be
invalid and of no force and effect. Promptly after the exercise of an Option and
the payment in full of the Option Price of the shares of Stock covered  thereby,
the  individual  exercising  the Option  shall be entitled to the  issuance of a
Stock  certificate or certificates  evidencing his ownership of such shares.  An
individual  holding or  exercising  an Option shall have none of the rights of a
shareholder  until the shares of Stock covered thereby are fully paid and issued
to him and, except as provided in Section 14 below, no adjustment  shall be made
for  dividends or other rights for which the record date is prior to the date of
such issuance.

                  8.       TRANSFERABILITY OF OPTIONS

                  During  the  lifetime  of an  Optionee  to whom an  Option  is
granted,   only  such  Optionee  (or,  in  the  event  of  legal  incapacity  or
incompetency,  the Optionee's guardian or legal representative) may exercise the
Option. No Option shall be assignable or transferable by the Optionee to whom it
is granted, other than by will or the laws of descent and distribution.

                  9.       TERMINATION OF SERVICE

                  Subject to the provisions of Section 10 of the Plan,  upon the
termination  of the  service of an optionee  with the  Company or a  subsidiary,
Options granted to such optionee  pursuant to this Plan shall continue in effect
for the remainder of their respective terms, and shall not terminate.

                  10.      RIGHTS IN THE EVENT OF DEATH

                  If an  Optionee  dies,  the  executors  or  administrators  or
legatees or distributees of such Optionee's  estate shall have the right, at any
time prior to  termination  of the Option as provided in Section 7(a) above,  to
exercise any Option held by such Optionee at the date of such Optionee's death.

                  11.      USE OF PROCEEDS

                  The  proceeds  received by the Company  from the sale of Stock
pursuant to Options granted under the Plan shall constitute general funds of the
Company.

                  12.      REQUIREMENTS OF LAW

                  The Company  shall not be required to sell or issue any shares
of  Stock  under  any  Option  if the  sale or  issuance  of such  shares  would
constitute a violation by the individual exercising the Option or the Company of
any provisions of any law or regulation of any governmental authority, including
without  limitation  any  federal  or  state  securities  laws  or  regulations.
Specifically  in connection with the Securities Act of 1933 (as now in effect or
as  hereafter  amended),  upon  exercise  of any Option,  unless a  registration
statement  under  such Act is in  effect  with  respect  to the  shares of Stock
covered by such Option,  the Company shall not be required to sell or issue such
shares  unless the holder of such Option may acquire such shares  pursuant to an
exemption  from  registration  under such Act.  The Company may, but shall in no
event be obligated to,  register any securities  covered hereby  pursuant to the
Securities Act of 1933 (as now in effect or as hereafter  amended).  The Company
shall  not be  obligated  to take any  affirmative  action in order to cause the
exercise of an Option or the issuance of shares pursuant  thereto to comply with
any law or regulation of any governmental authority. As to any jurisdiction that
expressly imposes the requirement that an Option shall not be exercisable unless
and until the shares of Stock  covered  by such  Option  are  registered  or are
subject to an available exemption from registration, the exercise of such Option
(under  circumstances  in which the laws of such  jurisdiction  apply)  shall be
deemed   conditioned  upon  the   effectiveness  of  such  registration  or  the
availability  of such an  exemption.  The Plan is  intended  to comply with Rule
16b-3 of the Securities Exchange Commission under the Securities Exchange Act of
1934. Any provision of the Plan inconsistent with Rule 16b-3 will be inoperative
but will not affect the validity of the Plan.

                  13.      AMENDMENT AND TERMINATION OF THE PLAN

                  The  Board  may,  at any time and  from  time to time,  amend,
suspend or terminate the Plan as to any shares of Stock as to which Options have
not been  granted;  provided,  however,  that no  amendment  by the Board shall,
without  approval by the affirmative  vote of  shareholders  who hold at least a
majority of outstanding  shares of stock of the Company entitled to vote thereon
and who vote in person or by proxy at a duly constituted  shareholders' meeting,
(a) materially change the requirements as to eligibility to receive Options; (b)
increase the maximum number of shares of Stock in the aggregate that may be sold
pursuant to Options granted under the Plan (except as permitted under Section 14
hereof);  (c) change the Option  Price set forth in Section 4 hereof  (except as
permitted under Section 14 hereof); (d) increase the maximum period during which
Options may be  exercised;  (e) extend the term of the Plan;  or (f)  materially
increase the benefits accruing to eligible individuals under the Plan. Except as
permitted  under Section 14 hereof,  no amendment,  suspension or termination of
the Plan shall, without the consent of the holder of the Option, alter or impair
rights or obligations under any Option theretofore granted under the Plan.

                  14.      EFFECT OF CHANGES IN CAPITALIZATION

                  (a) Changes in Stock. If the  outstanding  shares of Stock are
increased or decreased  or changed into or exchanged  for a different  number or
kind  of  shares  or  other   securities   of  the  Company  by  reason  of  any
recapitalization,  reclassification,  stock  split-up,  combination  of  shares,
exchange  of shares,  stock  dividend or other  distribution  payable in capital
stock, or other increase or decrease in such shares effected  without receipt of
consideration  by the Company,  occurring  after the effective date of the Plan,
the number and kinds of shares for the purchase of which  Options may be granted
under the Plan shall be adjusted proportionately and accordingly by the Company.
In  addition,  the number and kind of shares for which  Options are  outstanding
shall be adjusted  proportionately  and  accordingly  so that the  proportionate
interest of the holder of the Option immediately  following such event shall, to
the extent practicable, be the same as immediately prior to such event. Any such
adjustment in  outstanding  Options shall not change the aggregate  Option Price
payable with respect to shares subject to the unexercised  portion of the Option
outstanding  but shall include a corresponding  proportionate  adjustment in the
Option Price per share.

                  (b)  Reorganization  in Which  the  Company  Is the  Surviving
Corporation.  Subject to  Subsection  (c) hereof,  if the  Company  shall be the
surviving  corporation in any  reorganization,  merger,  or consolidation of the
Company  with one or more other  corporations,  any Option  theretofore  granted
pursuant  to the Plan shall  pertain to and apply to the  securities  to which a
holder of the number of shares of Stock  subject to such Option  would have been
entitled immediately  following such  reorganization,  merger, or consolidation,
with a corresponding  proportionate  adjustment of the Option Price per share so
that the aggregate  Option Price  thereafter  shall be the same as the aggregate
Option Price of the shares remaining subject to the Option  immediately prior to
such reorganization, merger, or consolidation.

                  (c)  Reorganization  in Which the Company Is Not the Surviving
Corporation or Sale of Assets or Stock.  Upon the  dissolution or liquidation of
the Company,  or upon a merger,  consolidation or  reorganization of the Company
with one or more other  corporations  in which the Company is not the  surviving
corporation,  or upon a sale of all or  substantially  all of the  assets of the
Company to another  corporation,  or upon any  transaction  (including,  without
limitation,  a merger or  reorganization  in which the Company is the  surviving
corporation)  approved by the Board which results in any person or entity owning
eighty  percent  (80%) or more of the  combined  voting  power of all classes of
stock of the  Company,  the Plan and all  Options  outstanding  hereunder  shall
terminate,  except to the extent provision is made in writing in connection with
such  transaction for the  continuation of the Plan and/or the assumption of the
Options  theretofore  granted,  or for the  substitution for such Options of new
options covering the stock of a successor corporation, or a parent or subsidiary
thereof,  with appropriate  adjustments as to the number and kinds of shares and
exercise prices, in which event the Plan and Options  theretofore  granted shall
continue  in the manner and under the terms so  provided.  The Board  shall send
written  notice  of an event  that  will  result  in such a  termination  to all
individuals  who hold Options not later than the time at which the Company gives
notice thereof to its shareholders  (provided,  however,  that the options shall
terminate only the consummation or occurrence of such event).

                  (d) Fractional  Shares. No fractional shares of Stock or units
of other  securities  shall be issued pursuant to any such  adjustment,  and any
fractions resulting from any such adjustment shall be eliminated in each case by
rounding downward to the nearest whole share or unit.

                  (e) No Limitations on Company. The grant of an Option pursuant
to the Plan  shall  not  affect  or  limit in any way the  right or power of the
Company to make adjustments,  reclassifications,  reorganizations  or changes of
its  capital  or  business  structure  or to  merge,  consolidate,  dissolve  or
liquidate, or to sell or transfer all or any part of its business or assets.

                  15.      DISCLAIMER OF RIGHTS

                  No  provision  in the Plan or in any Option  granted or Option
Agreement  entered  into  pursuant to the Plan shall be construed to confer upon
any  individual  the  right to  remain  in the  service  of the  Company  or any
subsidiary,  or to  interfere  in any way with the  right and  authority  of the
Company or any subsidiary either to increase or decrease the compensation of any
individual at any time, or to terminate any relationship  between any individual
and the Company or any subsidiary.

                  16.      NONEXCLUSIVITY OF THE PLAN

                  Neither  the  adoption of the Plan nor the  submission  of the
Plan to the  shareholders  of the Company for  approval  shall be  construed  as
creating any limitations upon the right and authority of the Board to adopt such
other incentive compensation  arrangements (which arrangements may be applicable
either  generally  to a class or classes of  individuals  or  specifically  to a
particular  individual or individuals) as the Board in its discretion determines
desirable,   including,  without  limitation,  the  granting  of  stock  options
otherwise than under the Plan.

                                      * * *

                  This  Plan was  duly  adopted  and  approved  by the  Board of
Directors  of the  Company by  resolution  at a meeting  held on June 10,  1989,
subject  to  shareholder  approval.  This Plan was duly  amended by the Board of
Directors,  subject to shareholder  approval, by resolutions at meetings held on
December  22, 1992 and,  January 22, 1993 and  December 20, 1995 and January 25,
1996.



                  This Plan was duly approved by the shareholders of the Company
at a meeting of the  shareholders  held on the 24th day of  February,  1990.  An
amendment  Amendments to the Plan was were duly approved by the  shareholders of
the Company on March 13, 1993 and March 26, 1996.


                                                                      SECRETARY




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--------------------------------------------------------------------------------

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                                      - 8 -


                              MICROLOG CORPORATION

                       NON-EMPLOYEE DIRECTOR NON-QUALIFIED
                             STOCK OPTION AGREEMENT


                  This   Non-Employee   Director   Non-Qualified   Stock  Option
Agreement (the "Option  Agreement") is made as of the _____ of  _______________,
by and between  Microlog  Corporation (the  "Company"),  and  __________________
____________________,  a member of the Board of  Directors of the Company who is
not an  officer  or other  employee  of the  Company  or its  subsidiaries  (the
"Optionee").

                  WHEREAS,  the  Board  of  Directors  of the  Company  has duly
adopted,  subject to approval by the  shareholders of the Company,  a an amended
1989 Non-Employee Director  Non-Qualified Stock Option Plan (the "Plan"),  which
provides  for the grant to members of the Board of  Directors of the Company who
are not officers or other employees of the Company or its  subsidiaries  options
for the  purchase  of  shares  of the  Company's  common  stock,  $.01 par value
("Stock") according to the terms of the Plan;

                  NOW,  THEREFORE,  in  consideration of the mutual promises and
covenants contained herein, the parties hereto do hereby agree as follows:

                  1. Grant of Option. Subject to the terms of the Plan (attached
hereto as Exhibit A, the terms of which are  incorporated by reference  herein),
the Company hereby grants to the Optionee the right and option (the "Option") to
purchase  from  the  Company,  on  the  terms  and  subject  to  the  conditions
hereinafter set forth, ( ,000) shares of Stock. This Option shall NOT constitute
an incentive stock option within the meaning of Section 422A 422 of the Internal
Revenue Code of 1986, as amended.

                  2. Price.  The  purchase  price (the  "Option  Price") for the
shares of Stock  subject  to the  Option  granted by this  Option  Agreement  is
Dollars ($ .00) per share.

                  3. Exercise of Option.  Except as otherwise  provided  herein,
the  Option  granted  pursuant  to this  Option  Agreement  shall be  subject to
exercise as follows:

                  A. Time of Exercise of Option.  The  Optionee may exercise the
Option (subject to the limitations on exercise set forth in Subsection E below),
in whole or in part, at any time and from time to time,  after the date of grant
of the Option,  as set forth in Section 13 below,  and prior to the tenth (10th)
anniversary  of the date of  grant of the  Option;  provided,  however,  that no
single  exercise  of the Option  shall be for less than 100  shares,  unless the
number of shares purchased is the total number available for purchase under this
Option at the time of exercise.

                  B. Exercise by Optionee.  During the lifetime of the Optionee,
only  the  Optionee  (or,  in  the  event  of his or  her  legal  incapacity  or
incompetency,  the Optionee's guardian or legal representative) may exercise the
Option.

                  C.  Termination  of  Service.  Subject  to the  provisions  of
Subsections D and Subsection E below and Section 7, upon the  termination of the
service of an optionee with the Company or a subsidiary, Options granted to such
optionee  pursuant to this Agreement  shall continue in effect for the remainder
of their respective terms, and shall not terminate.

                  D. Death. If an Optionee dies, the executors or administrators
or legatees or distributees  of such Optionee's  estate shall have the right, at
any time prior to termination of the Option, to exercise any Option held by such
Optionee at the date of such Optionee's death.

                  E.  Limitations  on  Exercise of Option.  Notwithstanding  the
foregoing Subsections of Section 3, in no event may the Option be exercised,  in
whole  or in  part,  prior  to the date  the  amended  Plan is  approved  by the
shareholders of the Company as provided  therein,  or after the occurrence of an
event referred to in Section 7 below which results in termination of the Option.
In no event may the Option be exercised for a fractional share.

                  4. Method of Exercise of Option. An Option that is exercisable
hereunder  may be exercised  by delivery to the Company on any business  day, at
its  principal  office,  addressed  to the  attention  of the  Secretary  of the
Company, of written notice of exercise, which notice shall specify the number of
shares  with  respect  to which  the  Option  is being  exercised,  and shall be
accompanied  by payment in full of the Option  Price of the shares for which the
Option is being exercised. The minimum number of shares of Stock with respect to
which an Option may be exercised,  in whole or in part, at any time shall be the
lesser of 100 shares or the  maximum  number of shares  available  for  purchase
under the Option at the time of  exercise.  Payment of the Option  Price for the
shares of Stock purchased pursuant to the exercise of an Option shall be made in
cash.  either (i) in cash or by check payable to the order of the Company;  (ii)
through  the tender to the  Company of shares of Stock,  which  shares  shall be
valued,  for  purposes of  determining  the extent to which the Option Price has
been  paid  thereby,  at their  fair  market  value  (determined  in the  manner
specified in the Plan) on the date of exercise; or (iii) by a combination of the
methods described in (i) and (ii); provided,  however,  that any shares of Stock
tendered in exchange  for shares of Stock to be issued  pursuant to the exercise
of the Option must have been held by the Optionee for at least six months before
their  tender to the Company or acquired  under an Option  granted not less than
six months prior to the time of  surrender.  Payment in full of the Option Price
need not  accompany  the  written  notice of  exercise  provided  the  notice of
exercise  directs that the Stock  certificate or certificates for the shares for
which the Option is exercised be delivered to a licensed  broker  acceptable  to
the Company as the agent for the  individual  exercising  the Option and, at the
time such Stock certificate or certificates are delivered, the broker tenders to
the Company cash (or cash  equivalents  acceptable to the Company)  equal to the
Option Price for the shares of Stock  purchased  pursuant to the exercise of the
Option plus the amount (if any) of federal  and/or other taxes which the Company
may, in its  judgment,  be required to withhold  with respect to the exercise of
the Option.  An attempt to exercise any Option granted  hereunder  other than as
set forth above shall be invalid and of no force and effect.  Promptly after the
exercise of an Option and the payment in full of the Option  Price of the shares
of Stock covered thereby, the Company shall deliver to the person exercising the
Option a certificate or certificates for the shares being purchased.

                  5. Limitations on Transfer.  The Option is not transferable by
the Optionee,  other than by will or the laws of descent and distribution in the
event of death of the Optionee.

                  6.  Rights  as  Shareholder.  Neither  the  Optionee  nor  any
executor,  administrator,  distributee or legatee of the Optionee's estate shall
be, or have any of the rights or privileges  of, a shareholder of the Company in
respect of any shares  transferable  hereunder unless and until such shares have
been fully paid and  certificates  representing  such shares have been endorsed,
transferred  and  delivered,  and the name of the Optionee (or of such executor,
administrator, distributee or legatee of the Optionee's estate) has been entered
as the  shareholder  of  record on the books of the  Company.  If the  Option is
exercised prior to the date that is six months from the later of (i) the date of
grant of the Option or (ii) the date of shareholder approval of the amendment to
the Plan adopted on December 20, 1995 and the  individual  exercising the Option
is a  reporting  person  under  Section  16(a)  of the  Exchange  Act,  then the
certificate  or  certificates  for Stock acquired as a result of the exercise of
the Option shall bear a legend  restricting  the  transfer of the Stock  covered
thereby until the expiration of six months from the date specified in clause (i)
above or the date  specified in clause (ii) above,  whichever is  applicable  to
such shares of Stock.

                  7.       Effect of Changes in Capitalization.

                  A. Changes in Stock.  If the  outstanding  shares of Stock are
increased or decreased  or changed into or exchanged  for a different  number or
kind  of  shares  or  other   securities   of  the  Company  by  reason  of  any
recapitalization,  reclassification,  stock  split-up,  combination  of  shares,
exchange  of shares,  stock  dividend or other  distribution  payable in capital
stock, or other increase or decrease in such shares effected  without receipt of
consideration by the Company, the number and kinds of shares for the purchase of
which  Options may be granted  under the Plan shall be adjusted  proportionately
and accordingly by the Company.  In addition,  the number and kind of shares for
which Options are outstanding shall be adjusted  proportionately and accordingly
so that the  proportionate  interest  of the  holder of the  Option  immediately
following  such  event  shall,  to  the  extent  practicable,  be  the  same  as
immediately  prior to such event.  Any such  adjustment in  outstanding  Options
shall not change the  aggregate  Option  Price  payable  with  respect to shares
subject to the unexercised portion of the Option outstanding but shall include a
corresponding proportionate adjustment in the Option Price per share.

                  B.  Reorganization  in  Which  the  Company  Is the  Surviving
Corporation.  Subject  to  Subsection  C  hereof,  if the  Company  shall be the
surviving  corporation in any  reorganization,  merger,  or consolidation of the
Company  with one or more other  corporations,  any Option  theretofore  granted
pursuant  to the Plan shall  pertain to and apply to the  securities  to which a
holder of the number of shares of Stock  subject to such Option  would have been
entitled immediately  following such  reorganization,  merger, or consolidation,
with a corresponding  proportionate  adjustment of the Option Price per share so
that the aggregate  Option Price  thereafter  shall be the same as the aggregate
Option Price of the shares remaining subject to the Option  immediately prior to
such reorganization, merger, or consolidation.

                  C.  Reorganization  in Which the Company Is Not the  Surviving
Corporation or Sale of Assets or Stock.  Upon the  dissolution or liquidation of
the Company,  or upon a merger,  consolidation or  reorganization of the Company
with one or more other  corporations  in which the Company is not the  surviving
corporation,  or upon a sale of all or  substantially  all of the  assets of the
Company to another  corporation,  or upon any  transaction  (including,  without
limitation,  a merger or  reorganization  in which the Company is the  surviving
corporation)  approved by the Board which results in any person or entity owning
eighty  percent  (80%) or more of the  combined  voting  power of all classes of
stock of the Company, the Option hereunder shall terminate, except to the extent
provision  is made in  connection  with such  transaction  for the  continuation
and/or the assumption of the Option,  or for the  substitution for the Option of
new  options  covering  the  stock of a  successor  corporation,  or a parent or
subsidiary thereof,  with appropriate  adjustments as to the number and kinds of
shares and  exercise  prices,  in which event the Plan and  Options  theretofore
granted shall continue in the manner and under the terms so provided.  The Board
shall send written  notice of an event that will result in such a termination to
all  individuals  who hold  Options not later than the time at which the Company
gives notice thereof to its shareholders  (provided,  however,  that the options
shall terminate only the consummation or occurrence of such event).

                  D. Fractional  Shares.  No fractional shares of Stock or units
of other  securities  shall be issued pursuant to any such  adjustment,  and any
fractions resulting from any such adjustment shall be eliminated in each case by
rounding downward to the nearest whole share or unit.

                  8. General Restrictions.  The Company shall not be required to
sell or issue any shares of Stock  under the Option if the sale or  issuance  of
such shares would constitute a violation by the individual exercising the Option
or by the Company of any provision of any law or regulation of any  governmental
authority,  including without limitation any federal or state securities laws or
regulations. If at any time the Company shall determine, in its discretion, that
the listing,  registration or  qualification of any shares subject to the Option
upon any  securities  exchange or under any state or federal law, or the consent
or approval of any  government  regulatory  body, is necessary or desirable as a
condition  of,  or in  connection  with,  the  issuance  or  purchase  of shares
hereunder,  the  Option may not be  exercised  in whole or in part  unless  such
listing,  registration,  qualification,  consent  or  approval  shall  have been
effected or obtained free of any conditions  not acceptable to the Company,  and
any delay caused  thereby shall in no way affect the date of  termination of the
Option.  Specifically  in connection  with the Securities Act of 1933 (as now in
effect or as hereafter amended),  unless a registration statement under such Act
is in effect  with  respect to the shares of Stock  covered by the  Option,  the
Company  shall not be required  to sell or issue such shares  unless the Company
has  received  evidence  satisfactory  to it that the  holder of the  Option may
acquire such shares pursuant to an exemption from  registration  under such Act.
Any determination in this connection by the Company shall be final, binding, and
conclusive. The Company may, but shall in no event be obligated to, register any
securities  covered  hereby  pursuant to the  Securities  Act of 1933 (as now in
effect or as hereafter amended).  The Company shall not be obligated to take any
affirmative  action in order to cause the exercise of the Option or the issuance
of  shares  pursuant  thereto  to  comply  with  any  law or  regulation  of any
governmental  authority.  As to any  jurisdiction  that  expressly  imposes  the
requirement that the Option shall not be exercisable unless and until the shares
of Stock  covered by the Option are  registered  or are subject to an  available
exemption from registration,  the exercise of the Option (under circumstances in
which the laws of such jurisdiction  apply) shall be deemed conditioned upon the
effectiveness of such registration or the availability of such an exemption.

                  9. Withholding of Taxes. The parties hereto recognize that the
Company or a subsidiary  may be  obligated to withhold  federal and local income
taxes  and  Social  Security  taxes to the  extent  that the  Optionee  realizes
ordinary  income in connection  with the exercise of the Option or in connection
with a  disposition  of any shares of Stock  acquired by exercise of the Option.
The Optionee agrees that the Company or a subsidiary may withhold amounts needed
to cover such taxes from payments  otherwise due and owing to the Optionee,  and
also agrees that upon demand the Optionee  will promptly pay to the Company or a
subsidiary having such obligation any additional  amounts as may be necessary to
satisfy such  withholding tax obligation.  Such payment shall be made in cash or
by certified check payable to the order of the Company or a subsidiary.

                  10.   Disclaimer  of  Rights.  No  provision  in  this  Option
Agreement  shall be  construed  to  confer  upon the  Optionee  the  right to be
employed by the Company or any  subsidiary,  or to interfere in any way with the
right and  authority  of the  Company or any  subsidiary  either to  increase or
decrease  the  compensation  of the Optionee at any time,  or to  terminate  any
employment  or other  relationship  between the  Optionee and the Company or any
subsidiary.

                  11. Interpretation of this Option Agreement. In the event that
there is any  inconsistency  between the provisions of this Option Agreement and
of the Plan, the provisions of the Plan shall govern.

                  12. Governing Law. This Option Agreement is executed  pursuant
to and shall be governed by the laws of the  Commonwealth  of Virginia  (but not
including the choice of law rules thereof).

                  13.  Date of  Grant.  The date of grant  of this  Option  is .
------------- -----------------

                  14. Notification of Disposition. The Optionee agrees to notify
the  Company in writing of any  disposition  of shares of Stock  acquired by the
Optionee  pursuant  to the  exercise  of  this  Option  within  30  days of such
disposition.15.  14.  Approval by  Shareholders.  This Option  Agreement and the
issuance of any shares  under it are  expressly  subject to the  approval of the
amended Plan by the  shareholders  of the Company as provided  for therein.  The
Option  shall not in any event be  exercisable  in whole or in part prior to the
date the Plan is approved  by the  shareholders  of the Company as provided  for
therein.

                  16 15. Binding Effect.  Subject to all  restrictions  provided
for in this Option  Agreement and by applicable  law relating to assignment  and
transfer of this Option  Agreement  and the option  rights  provided for herein,
this  Option  Agreement  shall be binding  upon and inure to the  benefit of the
parties  hereto  and  their   respective   heirs,   executors,   administrators,
successors, and assigns.

                  17 16.  Notice.  Any notice  hereunder  by the Optionee to the
Company  shall be in  writing  and  shall be  deemed  duly  given if  mailed  or
delivered to the Company at its principal office,  addressed to the attention of
the Secretary of the Company, or if so mailed or delivered to such other address
as the Company may  hereafter  designate by notice to the  Optionee.  Any notice
hereunder by the Company to the Optionee shall be in writing and shall be deemed
duly given if mailed or delivered to the Optionee at the address specified below
by the  Optionee  for such  purpose,  or if so mailed or delivered to such other
address as the Optionee may hereafter  designate by written  notice given to the
Company.

                  18 17. Entire Agreement. This Option Agreement constitutes the
entire agreement and supersedes all prior understandings and agreements, written
or oral,  of the parties  hereto  with  respect to the  subject  matter  hereof.
Neither  this  Option  Agreement  nor any term  hereof may be  amended,  waived,
discharged or terminated  except by a written  instrument  signed by the Company
and the Optionee; provided, however, that the Company unilaterally may waive any
provision  hereof in writing to the extent that such  waiver does not  adversely
affect the  interests  of the Optionee  hereunder or otherwise  cause the Option
granted  hereunder  not to qualify as an  "incentive  stock  option"  within the
meaning of Section 422A of the Code,  but no such waiver shall  operate as or be
construed  to be a  subsequent  waiver of the same  provision or a waiver of any
other provision hereof.



<PAGE>

                  IN WITNESS WHEREOF, the parties hereto have duly executed this
Option  Agreement,  or caused this Option Agreement to be duly executed on their
behalf, as of the day and year first above written.


ATTEST:                                                    MICROLOG CORPORATION


                                                 By:

Title:                                                        Title:


                                          OPTIONEE:



                                ADDRESS FOR NOTICE TO OPTIONEE:



                               Number              Street



                              City                  State            Zip Code











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