EXHIBIT 13


             Annual Report to Shareholders for the fiscal year ended

                                October 31, 1999



                                    MARKETING

Microlog's   award-winning   products  and  services  have  increased   customer
satisfaction by raising the level of service offered by the new "contact center"
of the twenty-first century.  Business has discovered that their contact centers
can no longer  cater  solely  to  telephony  driven  events.  The  advent of the
Internet and  e-Commerce has changed the rules for customer sales and service in
today's business  environment.  Servicing customers at the contact center of the
future  must now  include  the Web,  as well as  traditional  media,  telephone,
e-mail,  fax, and postal  mail.  Integration  of all the various  media into the
contact center, as well as Web enabling the contact center,  was a challenge met
head-on by Microlog in 1999.

Microlog's approach to improving the productivity of the contact center revolves
around three core components. They include:

o   TIVRA (formerly Intela) - Microlog's Interactive Voice Response (IVR) system
o   uniQue(TM) - Microlog's award winning contact center software
o   Professional Services & Consultation

TIVRA is Microlog's  top-of-the line  interactive  voice response (IVR) product.
For over seven years  Microlog's  TIVRA systems have met any and all  challenges
placed on it from  customers  who demand  the best.  Whether  it's the  Internal
Revenue Service, who receives thousands of calls daily from concerned tax payers
requesting information, or the Virginia Lottery, whose customers want to know if
they  have the  winning  number,  TIVRA  can  handle  any task  requiring  phone
interactions. TIVRA is the perfect front-end solution to any contact center.


"Product of the Year" 1998-1999

uniQue(TM),  winner of four  "Product of the Year Awards" in 1998,  continues to
receive accolades from the press in 1999. Call Center Solutions awarded "Product
of the  Year"  to  uniQue,  Microlog's  contact  center  solution.  uniQue  is a
comprehensive  open  architecture,  cross platform solution for customer contact
centers that  integrates  all of the contact  center's  telephony,  computer and
business applications into a smooth operation.


uniQue and the Web

Today's  companies  realize  that  their Web sites  are an  important  source of
revenue and service.  However,  research has shown that customers  abandon their
electronic  shopping  carts as much as two thirds of the time,  due to a lack of
support options at the point of decision.  Microlog's uniQue software  addresses
this issue by giving the customer  multiple options from the Web site with which
to contact the company.  uniQue's Web-enabling features include call me buttons,
Web-chat,  push-pages,  and voice-over IP. In addition, uniQue seamlessly blends
and prioritizes these Web contact types with the other traditional contact types
including phones, email, and fax.


Reports...Reports...Reports

As any contact center manager knows, managing the operations and productivity of
the center can only be done with accurate and timely  reports.  uniQue  provides
the contact center manager with definable tables that allow the easy creation of
customized contact outcome descriptions for every campaign. uniQue also contains
a set of six  standard  performance  reports,  such as  agent  productivity  and
performance,  along with a  user-controlled  report  writer.  The report  writer
allows the user to design and develop a complete set of reports to meet the most
detailed or unusual reporting requirements.



<PAGE>


Professional Services & Consultation

The  mission of  Microlog's  professional  services is to deliver  high  quality
computer-based  technology services,  capabilities and solutions to our business
customers.  Simply stated,  our objective is to help those business customers to
help  their   customers.   The  end  result   will  be  to  retain  and  satisfy
end-customers, improve operations and lower costs, provide robust and manageable
technology  implementations,  and establish  long-term  business  relationships.
Whether its project management, Web site development,  telephony integration, or
back-office systems  integration,  Microlog has the experience and the people to
solve any problem.


Microlog Corporation is solving today's  communication  problems with tomorrow's
technology---today.

WWW.MLOG.COM


MICROLOG CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                            YEAR ENDED OCTOBER 31,

                                                                 1997                1998               1999

----------------------------------------------------------------------------------------------------------------
<S>                                                               <C>                <C>                <C>
Net sales:
    Products                                                      $13,970            $ 9,367            $ 3,646
    Services                                                       17,798             17,090             14,377
----------------------------------------------------------------------------------------------------------------
    Total net sales                                                31,768             26,457             18,023
Costs and expenses:
    Cost of products                                                7,203              8,688              3,064
    Cost of services                                               12,238             11,855             10,382
    Selling, general and administrative                             6,374              9,088              5,768
    Research and development                                        3,579              3,256              2,870
    Restructuring                                                      --                 --                693
----------------------------------------------------------------------------------------------------------------
        Total costs and expenses                                   29,394             32,887             22,777
----------------------------------------------------------------------------------------------------------------
(Loss) income from operations                                       2,374            (6,430)            (4,754)

Investment income                                                      29                 58                35
Interest expense                                                     (119)               (56)              (71)
Other income (expense), net                                          (53)                  86               97
----------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes                                   2,231            (6,342)            (4,693)

(Provision) benefit for income taxes                                1,501            (2,299)                 --
----------------------------------------------------------------------------------------------------------------
Net (loss) income                                                 $ 3,732          $ (8,641)          $ (4,693)
----------------------------------------------------------------------------------------------------------------
Net (loss) income per share:
        Basic                                                       $0.89            $(2.02)            $(1.02)
        Diluted                                                     $0.82            $(2.02)            $(1.02)
----------------------------------------------------------------------------------------------------------------
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



                                        2
<PAGE>

MICROLOG CORPORATION

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                              OCTOBER 31,
                                                                                     1998                      1999
----------------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>                 <C>
Assets
Current assets:
  Cash and cash equivalents                                                               $ 2,340             $ 3,425
   Receivables, net                                                                         3,057               1,155
   Inventories, net                                                                           872                 375
   Other current assets                                                                       534                 301
----------------------------------------------------------------------------------------------------------------------
   Total current  assets                                                                    6,803               5,256

Fixed assets, net                                                                           1,353                 917
Licenses, net                                                                                 181                 100
Other assets                                                                                  223                 153
----------------------------------------------------------------------------------------------------------------------
   Total assets                                                                           $ 8,560             $ 6,426
----------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
   Current portion of long-term debt                                                       $   68              $   74
   Accounts payable                                                                         1,079                 388
   Accrued compensation and related expenses                                                2,082               1,965
   Deferred revenue                                                                           719                 447
   Other accrued expenses                                                                     902                 564
----------------------------------------------------------------------------------------------------------------------
   Total current liabilities                                                                4,850               3,438

Long-term debt                                                                                 74                   --
Deferred officers' compensation                                                               249                 151
Other liabilities                                                                              17                  33
----------------------------------------------------------------------------------------------------------------------
   Total liabilities                                                                        5,190               3,622
----------------------------------------------------------------------------------------------------------------------
Commitments and contingencies

Stockholders' equity:
   Serial preferred stock, $.01 par value,
      1,000,000 shares authorized, no shares issued and outstanding                            --                  --
   Common stock, $.01 par value, 10,000,000 shares authorized,
      4,889,205 and 7,575,597 shares issued and 4,287,335
      And 6,973,727 outstanding                                                                49                  76
   Capital in excess of par value                                                          16,417              20,517
   Treasury stock, at cost, 601,870 shares                                                (1,177)             (1,177)
   Accumulated deficit                                                                   (11,919)            (16,612)
----------------------------------------------------------------------------------------------------------------------
   Total stockholders' equity                                                               3,370               2,804
----------------------------------------------------------------------------------------------------------------------
   Total liabilities and stockholders' equity                                             $ 8,560             $ 6,426
----------------------------------------------------------------------------------------------------------------------
</TABLE>


SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



                                        3
<PAGE>

MICROLOG CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(IN THOUSANDS)

<TABLE>
<CAPTION>
                                                               CAPITAL IN
                                             COMMON STOCK       EXCESS OF     TREASURY STOCK         ACCUMULATED
                                           SHARES   PAR VALUE   PAR VALUE    SHARES      COST          DEFICIT         TOTAL
--------------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>        <C>         <C>         <C>       <C>            <C>             <C>
Balance as of October 31, 1996               4,792      $ 48        $15,905     602       $(1,177)       $(7,010)        $7,766

  Exercise of common stock options              81         1            189      --             --             --           190

  Consulting expense funded
    Through stock options granted               --        --            200      --             --             --           200

  Net income for the year ended
    October 31, 1997                            --        --             --      --             --          3,732         3,732
--------------------------------------------------------------------------------------------------------------------------------
Balance as of October 31, 1997               4,873        49         16,294     602        (1,177)        (3,278)        11,888

  Exercise of common stock options              16        --             23      --             --             --            23

  Consulting expense funded
    Through stock options granted               --        --            100      --             --             --           100

  Net loss for the year ended
    October 31, 1998                            --        --             --      --             --        (8,641)       (8,641)
--------------------------------------------------------------------------------------------------------------------------------
Balance as of October 31, 1998               4,889        49         16,417     602        (1,177)       (11,919)         3,370

  Exercise of common stock options              20        --             20      --             --             --            20

  Consulting expense funded
    Through stock options granted               --        --            155      --             --             --           155

  Issuance of common stock                   2,667        27          3,925      --             --             --         3,952

  Net loss for the year ended
    October 31, 1999                            --        --             --      --             --        (4,693)       (4,693)
--------------------------------------------------------------------------------------------------------------------------------
Balance as of October 31, 1999               7,576      $ 76        $20,517     602       $(1,177)      $(16,612)        $2,804
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



                                       4
<PAGE>

MICROLOG CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                           YEAR ENDED OCTOBER 31,
                                                                 1997               1998                1999
---------------------------------------------------------------------------------------------------------------
<S>                                                             <C>               <C>                 <C>
Cash flows from operating activities:
     Net (loss) income                                          $ 3,732           $ (8,641)           $ (4,693)
     Adjustments to reconcile net (loss) income to net
       cash (used in) provided by operating activities:
         Depreciation                                               839                847                 579
         Amortization of goodwill and licensing agreement           314                722                 125
         Loss on disposition of fixed assets                         84                 65                 108
         Gain on sale of building and land                           --               (290)                 --
         Provision for sales returns and doubtful accounts           49                 29                  --
         Provision for inventory reserves                            93              1,299                 309
         Consulting expense funded through stock options
               granted                                              200                100                 155
           Changes in assets and liabilities:
             Receivables                                            328                797               1,902
             Inventories                                            205               (250)                188
               Deferred tax asset                                (1,500)             2,150                  --
             Other assets                                          (174)              (273)                259
             Accounts payable                                       909               (793)               (691)
             Accrued compensation and related expenses              (67)               274                (117)
             Deferred revenue                                       110               (193)               (195)
             Deferred gain on sale of assets of Microlog Europe      --                 --                 140
             Deferred gain on sale of building and land              --                217                (217)
             Other accrued expenses and accrued liabilities        (265)               586                (322)
             Deferred officers' compensation                        (12)                (7)                (98)
---------------------------------------------------------------------------------------------------------------

     Net cash (used in) provided by operating activities          4,845             (3,361)             (2,568)
--------------------------------------------------------------------------------------------------------------

Cash flows from investing activities:
     Purchases of fixed assets                                     (778)              (517)               (283)
     Proceeds from sale of fixed assets                               7                 --                  32
     Proceeds from sale of building and land                          --             2,276                  --
---------------------------------------------------------------------------------------------------------------

     Net cash (used in) provided by investing activities           (771)             1,759                (251)
---------------------------------------------------------------------------------------------------------------

Cash flows from financing activities:
        Reduction in long-term debt                                 (55)               (61)                (68)
        Net borrowings under line-of-credit agreement            (1,400)                --                  --
        Net proceeds from issuance of common stock                   --                 --               3,952
        Exercise of common stock options                            190                 23                  20
--------------------------------------------------------------------------------------------------------------

     Net cash provided by (used in) financing activities         (1,265)               (38)              3,904
--------------------------------------------------------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents              2,809             (1,640)              1,085
Cash and cash equivalents at beginning of year                    1,171              3,980               2,340
--------------------------------------------------------------------------------------------------------------

Cash and cash equivalents at end of year                        $ 3,980            $ 2,340             $ 3,425
--------------------------------------------------------------------------------------------------------------
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                       5
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BASIS OF PRESENTATION AND MAJOR CUSTOMERS

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

Microlog Corporation of Maryland a subsidiary,  designs, assembles, markets, and
services customized voice processing systems and other communications  products.
Old Dominion Systems Incorporated of Maryland, formerly a subsidiary,  which was
merged into  Microlog  Corporation  of Maryland  effective  October 31, 1999, 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 (IN THOUSANDS):

<TABLE>
<CAPTION>
                                                                         YEAR ENDED OCTOBER 31,
                                                                 1997             1998             1999
----------------------------------------------------------------------------------------------------------
<S>                                                           <C>              <C>              <C>
Net sales:
         Voice processing systems and other
            communications products and services              $  19,277        $  14,743        $    7,896
         Performance analysis and
            support services                                     12,491           11,714            10,127
----------------------------------------------------------------------------------------------------------
         Net sales                                            $  31,768        $  26,457         $  18,023
----------------------------------------------------------------------------------------------------------

(Loss) income from operations:
         Voice processing systems and other
            communications products and services             $      829       $   (7,515)       $   (5,245)
         Performance analysis and
            support services                                      1,545            1,085               491
----------------------------------------------------------------------------------------------------------
         (Loss) income from operations                        $   2,374       $   (6,430)       $   (4,754)
----------------------------------------------------------------------------------------------------------

Identifiable assets:
         Voice processing systems and other
            communications products and services              $  14,333        $   8,163         $   6,174
         Performance analysis and
            support services                                        600              397               252
         Buildings for common use                                 2,122               --                --
----------------------------------------------------------------------------------------------------------
         Identifiable assets                                  $  17,055        $   8,560         $   6,426
----------------------------------------------------------------------------------------------------------

Capital expenditures:
         Voice processing systems and other
            communications products and services            $       772        $     509         $     282
         Performance analysis and
            support services                                          6                8                 1
----------------------------------------------------------------------------------------------------------
         Capital expenditures                               $       778        $     517         $     283
----------------------------------------------------------------------------------------------------------

Depreciation expense:
         Voice processing systems and other
            communications products and services             $      704        $     734         $     572
         Performance analysis and
            support services                                         11               12                 7
         Buildings for common use                                   124              101                --
----------------------------------------------------------------------------------------------------------
         Depreciation expense                                $      839        $     847         $     579
----------------------------------------------------------------------------------------------------------
</TABLE>



                                       6
<PAGE>

Approximately  31%,  30% and 23% of the  Company's  consolidated  net  sales for
fiscal  years 1997,  1998,  and 1999,  respectively,  involved the sale of voice
processing systems and other communications products and services to the Federal
Government.

Approximately  18%,  10% and 11% of the  Company's  consolidated  net  sales for
fiscal  years 1997,  1998,  and 1999  respectively,  involved  the sale of voice
processing  systems  and  other  communications  products  and  services  to one
customer in the pharmaceutical industry.

Approximately 9%, 13%, and 6% of the Company's consolidated net sales for fiscal
years 1997, 1998, and 1999, respectively,  involved the sale of voice processing
systems and other communications products and services to foreign countries.

Approximately  39%,  44%, and 56% of the  Company's  consolidated  net sales for
fiscal years 1997, 1998, and 1999,  respectively,  involved performance analysis
and support services subcontracts with prime contractors to the U.S. Navy. These
contracts  have been  extended,  or have options to extend,  to various dates in
fiscal years 2000 through 2003.


NOTE 2: SUMMARY OF ACCOUNTING POLICIES

USE OF ESTIMATES

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

REVENUE RECOGNITION

Sales of products and services are recognized at the time deliveries are made or
services are performed. When customers,  under terms of specific orders, request
that the Company  manufacture  and invoice  goods on a bill and hold basis,  the
Company recognizes revenue based on the completion of the manufacturing process,
acceptance  by the customer,  and passage of title to the  customer.  For fiscal
years 1997,  1998, and 1999, the Company  recognized  $3.5 million,  $0, and $0,
respectively, in sales under such bill and hold agreements.

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

CASH AND CASH EQUIVALENTS

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

INVENTORIES

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



                                       7
<PAGE>

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 two to
seven years.  Accumulated amortization at October 31, 1998 and 1999 was $619,000
and $744,000, respectively.

Goodwill,  which arose from the  acquisition  of  companies,  was amortized on a
straight-line  basis  over six to seven  years.  As a  result  of the  Company's
periodic analysis of its goodwill recoverability, the goodwill balance was fully
written off during fiscal year 1998 (Note 4).

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.

Management   periodically   reviews  intangible  assets  for  recoverability  by
analyzing  future cash flows for  associated  businesses  and product  lines and
makes adjustments for impairment when necessary.

WARRANTY RESERVE

Normal  product  warranty for service and repairs is  generally  provided for 90
days to two years, subsequent to delivery. The Company has incurred only minimal
expenses for  warranties  over the past few fiscal years and  therefore  has not
accrued a liability for warranty obligations at October 31, 1999.

STOCK-BASED COMPENSATION

The Company  accounts for  stock-based  compensation  using the intrinsic  value
method  prescribed in Accounting  Principles  Board Opinion No. 25 (APB No. 25),
"Accounting  for Stock Issued to Employees" and related  interpretations.  Under
APB No. 25,  compensation  cost is measured as the excess, if any, of the market
price of the Company's stock at the date of the grant over the exercise price of
the option granted.  Compensation cost for stock options,  if any, is recognized
ratably  over the vesting  period.  The Company  provides  additional  pro forma
disclosures as required under  Statement of Financial  Accounting  Standards No.
123 (SFAS No. 123), "Accounting for Stock-Based Compensation" (Note 11).

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

NET (LOSS) INCOME PER SHARE

In February 1997, the Financial  Accounting  Standards  Board (FASB) issued SFAS
No. 128,  "Earnings per Share." SFAS No. 128  simplifies  the earnings per share
(EPS)   computation  and  replaces  the  presentation  of  primary  EPS  with  a
presentation  of basic EPS. This  statement also requires dual  presentation  of
basic and diluted EPS on the face of the income  statement  for entities  with a
complex  capital  structure and requires a  reconciliation  of the numerator and
denominator  used for the  basic  and  diluted  EPS  computations.  The  Company
implemented  SFAS No. 128 in fiscal year 1998,  as  required.  Accordingly,  all
prior period EPS data has been restated (Note 13).

NEWLY ISSUED ACCOUNTING STANDARDS

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



                                       8
<PAGE>

In October 1997, the Accounting  Standards  Executive  Committee  (AcSEC) issued
Statement of Position 97-2 (SoP 97-2),  "Software  Revenue  Recognition,"  which
supersedes SoP 91-1. This statement  provides guidance on when revenue should be
recognized  and in what  amounts for  licensing,  selling,  leasing or otherwise
marketing  computer  software.  SoP 97-2 was effective for the Company's  fiscal
year  1999.  The  adoption  of SoP 97-2 did not have a  material  effect  on the
current  operations.  However,  the effect of this  statement is uncertain as it
relates to future products.

In February 1998, the FASB issued SFAS No. 132,  "Employers'  Disclosures  About
Pensions and Other  Postretirement  Benefits." This statement  standardizes  the
disclosure  requirements for pensions and other  postretirement  benefits to the
extent practicable and requires additional information on changes in the benefit
obligations  and fair  values  of plan  assets  that will  facilitate  analysis.
Additionally,  SFAS No. 132 eliminates certain disclosures that are no longer as
useful as they were when SFAS No. 87, "Employers' Accounting for Pensions", SFAS
No. 88,  "Employers'  Accounting for  Settlements  and  Curtailments  of Defined
Benefit  Pension  Plans  and  for  Termination  Benefits",  and  SFAS  No.  106,
"Employers  Accounting  for  Postretirement  Benefits  Other than Pensions" were
issued.  SFAS No. 132 was  effective  for the  Company's  fiscal year 1999.  The
adoption  of SFAS No.  132 did not have a  material  effect on the  consolidated
financial statements.

NOTE 3: OPERATIONS

The Company  incurred a net loss of $4.7 million for fiscal year 1999 and has an
accumulated  deficit  of $16.6  million  at  October  31,  1999.  The  Company's
continued  existence is dependent upon its ability to generate  sufficient  cash
flows from internal and external sources to meet its operating needs. Management
has recently  taken  several steps to meet its  liquidity  requirements  for the
foreseeable  future,  including  restructuring  operations  to reduce  operating
expenses to levels  commensurate with revenues and attracting  capital through a
private placement  transaction.  The Company  anticipates that existing cash and
cash  equivalents  generated from fiscal year 2000 operations will be sufficient
to meet its working  capital needs.  The Company has, in the past,  been able to
secure additional financing to meet its operating  requirements,  although there
can be no assurance that it will be able to continue to do so.

NOTE 4: MICROLOG EUROPE

In  June  1996,  the  Company  acquired  Phonatic   International  B.V.  of  The
Netherlands.  The Company  changed the name of  Phonatic to Microlog  Europe,  a
wholly-owned   subsidiary  of  Microlog  Corporation  of  Maryland.  To  acquire
Phonatic,  the Company acquired assets of $152,000,  issued 65,000 shares of its
common  stock  valued  at  $584,000,  paid  $234,000  in  cash  to the  Phonatic
shareholders,  assumed $108,000 in liabilities,  and incurred  acquisition costs
totaling  approximately  $46,000.  The  acquisition  has been accounted for as a
purchase and,  therefore,  only activity  subsequent to the acquisition date has
been included in consolidated results. The excess of the purchase price over the
fair value of net assets acquired totaled $775,000 and was recorded as goodwill.

During fiscal year 1998, the Company  reevaluated  its  international  marketing
strategy and, as a result,  decided to terminate three employees.  As of October
31,  1998,  the Company  established  reserves of  $281,000  representing  costs
associated with the termination of employees,  the remaining net operating lease
obligation associated with its Netherlands  facility,  and the relocation of its
office.  Additionally,  the  Company,  based on current  undiscounted  cash flow
projections, evaluated the recoverability of its goodwill balance and determined
that the goodwill balance was impaired.  Accordingly,  the Company wrote-off the
remaining goodwill balance of $473,000 in October 1998.

In September 1999, the Company sold the voice processing  operations of Microlog
Europe to Comsys International,  B.V. of The Netherlands.  The Company agreed to
grant Comsys certain rights to resell its TIVRA (formerly  Intela)  software and
related hardware.  The Company also agreed to assign certain agreements to which
Microlog  is party  relating  to the TIVRA  product.  As part of the  sale,  two
Microlog employees became employees of Comsys. The sale is anticipated to result
in a gain to Microlog of approximately $100,000. Since some of the proceeds from
the sale are based on future  contracts  between Comsys and the Company's former
customers,  the gain on the sale was  estimated  and therefore has been deferred
into fiscal year 2000.



                                       9
<PAGE>

NOTE 5: RECEIVABLES

RECEIVABLES CONSIST OF THE FOLLOWING (IN THOUSANDS):

<TABLE>
<CAPTION>
                                                                         OCTOBER 31,
                                                                 1998                   1999
-------------------------------------------------------------------------------------------------
<S>                                                             <C>                     <C>
Billed accounts receivable                                      $ 2,932                 $   1,071
Contract retention                                                   23                        --
Accumulated unbilled costs and fees                                 246                       234
-------------------------------------------------------------------------------------------------
                                                                  3,201                     1,305

Less: Allowance for doubtful accounts                              (144)                     (150)
-------------------------------------------------------------------------------------------------
                                                              $   3,057                 $   1,155
-------------------------------------------------------------------------------------------------
</TABLE>

NOTE 6: INVENTORIES

INVENTORIES CONSIST OF THE FOLLOWING (IN THOUSANDS):

<TABLE>
<CAPTION>
                                                                           OCTOBER 31,
                                                                 1998                      1999
-------------------------------------------------------------------------------------------------
<S>                                                             <C>                       <C>
Components                                                      $ 1,357                   $   730
Work-in-process and finished goods                                1,159                       133
-------------------------------------------------------------------------------------------------
                                                                  2,516                       863

Less: Reserve for obsolescence                                   (1,644)                     (488)
-------------------------------------------------------------------------------------------------
                                                               $    872                   $   375
-------------------------------------------------------------------------------------------------
</TABLE>

During fiscal year 1999, the Company disposed of obsolete  inventory relating to
certain  product  lines for which future sales are  doubtful.  The inventory was
previously  reserved  for and,  therefore,  resulted in a net  reduction of $1.2
million to the reserve for obsolescence.

NOTE 7: FIXED ASSETS

FIXED ASSETS CONSIST OF THE FOLLOWING (IN THOUSANDS):

<TABLE>
<CAPTION>
                                                                           OCTOBER 31,
                                                                 1998                      1999
-------------------------------------------------------------------------------------------------
<S>                                                             <C>                       <C>
Office furniture and equipment                                  $ 3,700                   $ 2,977
Vehicles                                                             24                        10
Leasehold improvements                                              171                        22
-------------------------------------------------------------------------------------------------
                                                                  3,895                     3,009

Less:  Accumulated depreciation                                  (2,542)                   (2,092)
-------------------------------------------------------------------------------------------------
                                                               $  1,353                  $    917
-------------------------------------------------------------------------------------------------

Estimated useful lives are as follows:
         Office furniture, equipment and vehicles:                                      3-7 years
         Leasehold improvements:                                            Shorter of  estimated
                                                                        useful life or lease term
</TABLE>

In August 1998,  under a sale-leaseback  agreement,  the Company sold its office
building  and land with a net book  value of  $1,986,000  for  $2,420,000,  less
selling costs of $144,000.  The gain of $290,000 was amortized  over the term of
the lease, which was through April 1999. In April 1999, the Company entered into
a new lease for its building through 2009 (Note 10).



                                       10
<PAGE>

NOTE 8: ACCRUED EXPENSES

ACCRUED   COMPENSATION  AND  RELATED  EXPENSES  CONSIST  OF  THE  FOLLOWING  (IN
THOUSANDS):

<TABLE>
<CAPTION>
                                                                         OCTOBER 31,
                                                                 1998                    1999
-------------------------------------------------------------------------------------------------
<S>                                                           <C>                         <C>
Accrued wages                                                 $  1,016                    $ 1,103
Accrued vacation and personal leave                                693                        471
Other related expenses                                             373                        391
-------------------------------------------------------------------------------------------------
                                                               $ 2,082                    $ 1,965
-------------------------------------------------------------------------------------------------
</TABLE>


OTHER ACCRUED EXPENSES CONSIST OF THE FOLLOWING (IN THOUSANDS):

<TABLE>
<CAPTION>
                                                                          OCTOBER 31,
                                                                 1998                    1999
-------------------------------------------------------------------------------------------------
<S>                                                            <C>                       <C>
Accrued maintenance, marketing, travel and other expenses      $    689                  $    448
Accrued legal and consulting expenses                               213                       116
-------------------------------------------------------------------------------------------------
                                                               $    902                  $    564
-------------------------------------------------------------------------------------------------
</TABLE>


NOTE 9: DEBT

In fiscal year 1999, the Company  closed and drew on a revolving  line-of-credit
facility  which  allows  the  Company  to  borrow  up to  75%  of  its  eligible
receivables  to a maximum of  $2,000,000,  subject to the right of the financial
institution  to make  loans only in its  discretion.  The  line-of-credit  bears
interest at the bank's prime rate plus 2.25% (10.75% at October 31,  1999),  and
contains a 0.025%  fee on the  average  unused  portion of the line as well as a
monthly  collateral fee and a 1% upfront  commitment  fee. The loan subjects the
Company to a  restrictive  covenant of not  exceeding  115% of its  consolidated
planned  quarterly losses for its second and third quarters of fiscal year 1999,
and a requirement for consolidated profitability beginning in the fourth quarter
of  fiscal  year  1999.  The line  also  subjects  the  Company  to a number  of
restrictive  covenants,  including  restrictions  on  mergers  or  acquisitions,
payment of dividends,  and certain  restrictions on additional  borrowings.  The
line  is  secured  by  all of the  Company's  assets.  The  Company  was  not in
compliance  with the  restrictive  covenant in the second quarter of fiscal year
1999,  but  obtained a waiver from the bank.  The Company was not in  compliance
with the  restrictive  covenant  in the fourth  quarter of fiscal  year 1999 for
which a forbearance  agreement has been  obtained.  The  forebearance  agreement
waives the lenders right under an event of default to terminate  the loan.  This
line of credit  expires  in March 2000 and the  Company  and the bank are in the
process of renewal  discussions.  There was no  outstanding  debt  against  this
line-of-credit at October 31, 1999.

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

NOTE 10: COMMITMENTS AND CONTINGENCIES

COMPENSATION ARRANGEMENTS

In  February  1988,   the  Company   entered  into   non-contributory   deferred
compensation  contracts (the Contracts) with three officers.  Under the terms of
the  Contracts,  (i) the  Company's  total  annual  contributions  for the three
officers  was limited to $72,000,  (ii)  contributions  ceased at the earlier of
January 31, 1993 or the officer's retirement and (iii) accumulated contributions
accrue interest at the prime rate through the officer's  retirement.  Subsequent
to retirement  and at the officer's  option,  the officer is eligible to receive
his deferred  compensation  balance in either  monthly  payments  over a 10-


                                       11
<PAGE>

year period or one lump-sum payment. Two of the officers retired in May 1991 and
January 1998,  respectively,  and elected to receive their deferred compensation
balances over a 10-year  period.  One officer retired in August 1999 and elected
to receive her deferred  compensation balance in a lump-sum payment. The payment
was made in January 2000. The Company has incurred  interest expense of $25,000,
$27,000 and $23,000 in fiscal years 1997, 1998, and 1999, respectively.

The Company is a party to employment  agreements,  expiring in 2000, with two of
its executive officers. In the event that these individuals are terminated, they
would be  entitled  to receive  lump sum or monthly  payments,  which  aggregate
approximately $306,000.

OPERATING LEASE OBLIGATIONS

In May 1998, the Company entered into a 15 year lease  commitment,  which was to
commence on or about June 1999,  for office space  intended to  consolidate  the
Company's headquarters,  warehouse, and training facilities. In August 1998, the
Company sold its office  building and committed to lease back the building prior
to its  occupation of the new leased space.  In April 1999,  the Company and its
new landlord agreed to terminate the 15 year lease commitment for the new leased
space. The Company incurred $160,000 in termination costs, but was released from
future obligations by the landlord.  At that time, the Company also committed to
lease back its building  through 2009. In September  1999,  the Company's  lease
obligation  at its  Gaithersburg,  Maryland  facility  expired  and at that time
relocated its warehouse and training functions to its headquarters facility.

Additionally,   the  Company  leases  other  equipment  through   noncancellable
operating  leases,  which expire in various years through 2004.  Minimum  future
noncancellable operating lease payments as of October 31, 1999 are as follows(in
thousands):

         YEAR ENDING OCTOBER 31,

              2000                          $     344
              2001                                353
              2002                                363
              2003                                365
              2004                                365
              Thereafter                        1,773
         --------------------------------------------
              Total                           $ 3,563

In fiscal year 1999,  the  Company's  operating  lease  obligation at its Rancho
Cordova,   California  facility  expired.   Rent  expense  under  noncancellable
operating   lease   agreements  in  fiscal  years  1997,   1998,  and  1999  was
approximately  $299,000,  $379,000,  and  $565,000  (net of  sublease  income of
$278,000, $281,000, and $159,000), respectively.

LEGAL

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

ROYALTIES

The Company is committed to pay annual license maintenance fees of $120,000 to a
certain party under certain call processing  patents,  which expire in 2007. The
Company will receive a credit against future license  maintenance  fees equal to
12% of the purchase price paid for products purchased from the certain party.



                                       12
<PAGE>

NOTE 11: STOCK OPTION PLANS

The Company has two  incentive  stock option  plans.  Under the first plan,  the
Company may grant  options to Directors  and employees to purchase up to 750,000
shares of common  stock at not less than fair market value at the time of grant.
Under the second  plan,  which was  increased  by 600,000  shares in fiscal year
1999,  the Company may grant  options to  employees  to purchase up to 1,600,000
shares of common  stock at not less than fair market value at the time of grant.
Additional  information with respect to both of the incentive stock option plans
is summarized in the following table:

<TABLE>
<CAPTION>
                                               NUMBER               WEIGHTED AVERAGE
                                             OF SHARES               EXERCISE PRICE
                                             ---------               --------------
<S>                                           <C>                    <C>
Shares under option, October 31, 1996         865,014                $   3.79
Options granted                               300,000                    5.75
Options canceled                              (75,344)                   5.09
Options exercised                             (80,749)                   2.35
------------------------------------------------------------------------------------

Shares under option, October 31, 1997       1,008,921                    4.39
Options granted                             1,122,400                    1.83
Options canceled                           (1,159,875)                   4.26
Options exercised                             (16,452)                   1.45
------------------------------------------------------------------------------------

Shares under option, October 31, 1998         954,994                    1.59
Options granted                               721,500                    1.34
Options canceled                             (406,248)                   1.49
Options exercised                             (19,725)                   1.12
------------------------------------------------------------------------------------

Shares under option, October 31, 1999       1,250,521                $   1.49
------------------------------------------------------------------------------------
</TABLE>

Options  granted  under the plans vest at  various  dates  from  immediately  to
ratably  over five years and  expire  ten years from the date of grant.  Certain
options contain possible  accelerated  vesting clauses should specific financial
measures be met. As of October 31, 1999,  options  available  for granting  were
535,300.  Subsequent  to October 31, 1999,  123,700  options have been issued to
employees.

Due to the decline in the market value of the Company's  common stock, the Board
of  Directors  authorized  the  Company  to  reprice  stock  options  granted to
employees and officers  with exercise  prices in excess of the fair market value
on August 14, 1998.  Stock  options held by optionees  other than  directors and
non-employees,  which were granted under the incentive stock plans and which had
an exercise  price  greater  than $1.75 per share,  were amended to reduce their
exercise price to $1.63 per share,  which was the closing price of the Company's
common stock on August 14, 1998.  The stock  options that were repriced have the
same terms as the  original  options to which  they  relate.  A total of 907,150
options with a weighted  average  exercise  price of $5.01 were repriced and are
included in options canceled and granted for fiscal year 1998.

Additionally,  the Company maintains a non-employee  Director stock option plan.
Under this plan, the Company may grant up to 250,000 shares at not less than the
fair market value at the time of grant. Additional information is as follows:

<TABLE>
<CAPTION>
                                               NUMBER               WEIGHTED AVERAGE
                                             OF SHARES               EXERCISE PRICE
------------------------------------------------------------------------------------
<S>                                            <C>                       <C>
Shares under option, October 31, 1996          44,000                 $  3.61
Options granted                                 6,000                    5.63
------------------------------------------------------------------------------------

Shares under option, October 31, 1997          50,000                    3.85
Options granted                                22,000                    6.13
------------------------------------------------------------------------------------

Shares under option, October 31, 1998          72,000                    4.55
Options Canceled                              (15,000)                   4.75
Options granted                                24,000                    1.31
------------------------------------------------------------------------------------

Shares under option, October 31, 1999          81,000                $   3.55
------------------------------------------------------------------------------------
</TABLE>

                                       13
<PAGE>

Options  granted under the plan vest  immediately  and expire ten years from the
date of grant.  As of October 31, 1999,  options  available  for  granting  were
146,000.

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

<TABLE>
<CAPTION>
                                               NUMBER               WEIGHTED AVERAGE
                                             OF SHARES               EXERCISE PRICE
------------------------------------------------------------------------------------
<S>                                            <C>                       <C>
Shares under option, October 31, 1996          51,000                 $  1.91
Options granted                               205,000                    5.00
Options canceled                              (16,000)                   4.10
------------------------------------------------------------------------------------

Shares under option, October 31, 1997         240,000                    4.40
Options granted                                21,000                    1.84
------------------------------------------------------------------------------------

Shares under option, October 31, 1998         261,000                    4.20
Options Canceled                              (62,000)                   0.96
Options granted                               137,000                    1.80
------------------------------------------------------------------------------------

Shares under option, October 31, 1999         336,000                $   1.46
------------------------------------------------------------------------------------
</TABLE>

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

In fiscal year 1997,  the Company  entered into a consulting  agreement with The
Parthenon  Group,  Inc.  ("Parthenon"),  a strategic  marketing  and  consulting
organization. The Company granted Parthenon non-statutory options to purchase up
to 195,000  shares of the common stock of the Company at an exercise price of $5
per share.

In fiscal year 1999, the Company issued options to  non-employee  consultants to
purchase 47,000 shares at an exercise price of $0.94.  In addition,  the Company
entered into a second  consulting  agreement with Parthenon.  Under the terms of
this second consulting agreement,  the Company agreed to reprice options granted
in fiscal  year 1997 to  purchase  195,000  shares  of the  common  stock of the
Company at an exercise price of $0.94 per share. Additionally, the vesting terms
were revised and options to purchase  145,000  shares of the common stock of the
Company became exercisable on the date they were repriced. The remaining options
to purchase 50,000 shares of the common stock of the Company become  exercisable
in fiscal year 1999.  The Company also issued  Parthenon  additional  options to
purchase  90,000 shares of common stock at an exercise price of $2.25 per share.
These options became  exercisable on the date of grant.  The expense  associated
with all of the  options  of  $450,000  has been  recorded  over the term of the
engagement. The Company recorded $200,000,  $100,000, and $150,000 as consulting
expense in fiscal years 1997, 1998, 1999, respectively.

The Company also  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 determines.
No grants or issuances have been made as of October 31, 1999.




                                       14
<PAGE>

THE FOLLOWING TABLE SUMMARIZES  INFORMATION ABOUT ALL STOCK OPTIONS  OUTSTANDING
AT OCTOBER 31, 1999:

<TABLE>
<CAPTION>
                                                          OPTIONS OUTSTANDING         OPTIONS EXERCISABLE
                                                      --------------------------------------------------------
                                                      WEIGHTED-
                                                       AVERAGE
                          RANGE                        YEARS OF        WEIGHTED                   WEIGHTED
                            OF                         REMAINING       -AVERAGE                   -AVERAGE
                         EXERCISE        NUMBER       CONTRACTUAL      EXERCISE       NUMBER      EXERCISE
                          PRICES       OUTSTANDING        LIFE           PRICE      EXERCISABLE     PRICE
                      ----------------------------------------------------------------------------------------
<S>                   <C>                 <C>              <C>             <C>          <C>         <C>
Incentive             $0.88-$1.25         302,845          8.8             $0.97        193,665     $0.97
Stock Option          $1.63-$1.91         920,725          7.2              1.65        576,655      1.65
Plans                 $2.31                27,000          9.5              2.31         12,000      2.31
                      ----------------------------------------------------------------------------------------
                      $0.88-$2.31       1,250,570          7.7              1.50        782,320      1.50
                      ----------------------------------------------------------------------------------------

Non-Employee          $0.94-$1.69          38,000          7.1             $1.34         38,000     $1.34
Director              $2.00-$2.75           6,000          2.4              2.50          6,000      2.50
Plan                  $4.75-$6.75          37,000          7.0              6.00         37,000      6.00
                      ----------------------------------------------------------------------------------------
                      $0.94-$6.75          81,000          6.7              3.55         81,000      3.55
                      ----------------------------------------------------------------------------------------

Non-Employee          $0.94-$1.06         211,000          4.0             $0.94        211,000     $0.94
Plan                  $2.25-$2.94         120,000          4.3              2.40        120,000      2.40
                      $8.38                 5,000          1.4              8.38          5,000      8.38
                      ----------------------------------------------------------------------------------------
                      $0.94-$8.38         336,000          4.0              1.57        336,000      1.57
                      ----------------------------------------------------------------------------------------
</TABLE>


The  weighted-average  fair value of options  granted  during fiscal years 1997,
1998, and 1999 was $3.43, $0.97, and $1.21, respectively. The fair value of each
significant   option  grant  is  estimated  on  the  date  of  grant  using  the
Black-Scholes  model. The following weighted average assumptions are included in
the Company's fair value calculations:


<TABLE>
<CAPTION>
                                                          1997              1998             1999
                                                          ----              ----             ----
<S>                                                       <C>              <C>              <C>
                  Expected life (years)                    3.9              2.5               5.0
                  Risk-free interest rate                  6.2%             5.5%              5.2%
                  Volatility                              78.0%            62.5%            165.9%
                  Dividend yield                           --               --                --
</TABLE>

The  Company  continues  to  apply  APB No.  25 in  accounting  for  stock-based
compensation  for the incentive and  non-employee  Director  plans. To date, all
stock options have been issued at market  value;  accordingly,  no  compensation
cost has been  recognized.  Had the Company  determined costs for these plans in
accordance  with SFAS No. 123, the Company's pro forma net (loss) income and pro
forma (loss) income per share would have been as follows (in thousands):

<TABLE>
<CAPTION>
                                                                         YEAR ENDED OCTOBER 31,
                                                                 1997             1998             1999
-----------------------------------------------------------------------------------------------------------
<S>                                                              <C>             <C>               <C>
Pro forma net (loss) income applicable to common
   stockholders                                                  $3,447          $(8,699)          $(5,664)

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

Pro forma net (loss) income per share:
   Basic                                                        $  0.82          $  (2.03)         $(1.22)
   Diluted                                                      $  0.76          $  (2.03)         $(1.22)
-----------------------------------------------------------------------------------------------------------
</TABLE>



                                       15
<PAGE>

The SFAS No. 123 method of accounting does not apply to options granted prior to
November 1, 1995, and accordingly, the resulting pro forma compensation cost may
not be representative of amounts expected in the future.

Note 12: INCOME TAXES

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

THE (BENEFIT)  PROVISION FOR INCOME TAXES IN FISCAL YEARS 1997,  1998,  AND 1999
CONSISTS OF (IN THOUSANDS):

<TABLE>
<CAPTION>
                                                                         YEAR ENDED OCTOBER 31,
                                                                  1997            1998             1999
                                                                  ----            ----             ----
<S>                                                         <C>                <C>              <C>
Increase (decrease) in income taxes payable                 $        (1)       $     149        $       --
Decrease (increase) in deferred tax asset                        (1,500)           2,150        $       --
----------------------------------------------------------------------------------------------------------

                                                               $ (1,501)        $  2,299        $       --
-----------------------------------------------------------------------------------------------------------
</TABLE>

Income taxes payable  (refundable) in fiscal years 1997 and 1998 relate to state
income taxes and the alternative minimum tax for Federal income tax. As a result
of the Company's  profitability  in fiscal years 1995 through 1997,  the Company
recorded a deferred  tax asset of $650,000 and  $1,500,000  in fiscal years 1996
and 1997, respectively,  reflecting the benefit of approximately $5.5 million in
loss carryforwards.  Due to the unprofitable  operations in fiscal year 1998 and
the uncertain future  profitability,  the Company  reassessed the probability of
realizing  these net operating  loss  carryforwards  and  determined  that their
expected  future  realization  was not likely to be realized in the near future.
Accordingly,  the Company  wrote-off  the  deferred tax asset of  $2,150,000  in
fiscal year 1998.  The Company has provided a full  valuation  allowance for the
Company's  $16.9 million net operating  losses as management  determined it more
likely than not that this amount will not be realized.

A RECONCILIATION  OF THE STATUTORY  FEDERAL TAX RATE TO THE COMPANY'S  EFFECTIVE
TAX RATE IS AS FOLLOWS:

<TABLE>
<CAPTION>
                                                                         YEAR ENDED OCTOBER 31,
                                                                 1997            1998              1999
                                                                 ----            ----              ----
<S>                                                             <C>              <C>              <C>
Statutory Federal tax rate                                      34.0%            (34.0)%          (34.0)%
State income taxes, net of
  Federal tax benefit                                            5.0              (5.0)            (5.0)
Benefit not recorded due to carryforward position                --                38.6            39.0
Utilization of net operating loss                              (43.6)             --                 --
Goodwill amortization                                            3.0               3.3               --
Change in deferred tax asset                                   (67.2)             33.9               --
Other                                                            1.5              (0.5)              --
-------------------------------------------------------------------------------------------------------

                                                               (67.3)%            36.3%            00.0%
-------------------------------------------------------------------------------------------------------
</TABLE>



                                       16
<PAGE>

DEFERRED TAX ASSETS ARE COMPRISED OF THE FOLLOWING (IN THOUSANDS):

<TABLE>
<CAPTION>
                                                                 OCTOBER 31,
                                                       1998                      1999
                                                       ----                      ----
<S>                                                <C>                      <C>
Accounts receivable reserve                        $      84                $       49
Inventory reserves                                       641                       190
Accrued vacation and benefits                            181                       135
Deferred compensation                                    105                       101
Deferred revenues                                        261                       126
Other                                                    451                       536
Research and development credits                         406                       414
Foreign net operating losses                             265                       162
Loss carryforwards                                     4,006                     6,602
--------------------------------------------------------------------------------------

Gross deferred tax assets                              6,400                     8,315
Valuation allowance                                   (6,400)                   (8,315)
--------------------------------------------------------------------------------------
Net deferred tax asset                              $   --                    $  --
--------------------------------------------------------------------------------------
</TABLE>

The net  change in the  valuation  allowance  for  deferred  tax  assets  was an
increase  of $1.9  million  during the year.  The  Company  has  provided a full
valuation  allowance  against the  Company's  gross  deferred  tax assets  since
management  believes  that the  realization  of such  deferred tax assets is not
likely in the near future.

Approximately  $16.9 million of tax loss  carryforwards and $414,000 of research
and  development  tax credits can be utilized by the Company  through  2019.  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 13: NET (LOSS) INCOME PER SHARE CALCULATION

The following is a  reconciliation  of the  numerators and  denominators  of the
basic net (loss)  income per common share  ("basic  EPS") and diluted net (loss)
income per common and dilutive potential common share ("diluted EPS"). Basic EPS
is computed using the weighted  average number of common shares  outstanding and
diluted EPS is computed  using the weighted  average number of common and common
stock equivalent shares outstanding.

<TABLE>
<CAPTION>
                                                                                         OCTOBER 31,
(IN THOUSANDS)                                                              1997             1998           1999
---------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>             <C>            <C>
Net (loss) income                                                           $3,732          $ (8,641)      $ (4,693)

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

Weighted average common stock outstanding                                    4,216              4,282          4,619

Stock options, if converted                                                    335                 --             --

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

Weighted average common and common stock equivalent shares outstanding       4,551              4,282           4,619
---------------------------------------------------------------------------------------------------------------------
</TABLE>

Options  outstanding  in fiscal  years  1998 and 1999 are not  reflected  in the
computation  of  diluted  EPS  because  the  effect is  anti-dilutive  and would
increase diluted EPS.

NOTE 14: PENSION AND PROFIT SHARING PLANS

The Company has a defined  contribution  pension plan  covering  all  employees.
After an employee  completes  one-year of service,  the plan provides for annual
contributions  by the  Company  equal  to 6% of  the  employee's  gross  salary,
excluding bonuses and commissions.  The Company's contributions to the plan vest
after a five-year period. Employees may also make voluntary contributions to the
plan up to a maximum of 10% of their gross salary on an after-tax basis. On June
1, 1999, the Company ceased  contributions  to the pension plan for employees of
its voice  processing  operations.  At that time, all of these employees  became
100% vested in the plan.

                                       17
<PAGE>

In accordance with the plan,  unvested amounts relating to terminated  employees
are credited  against pension  contributions  by the Company.  Such  forfeitures
amounted to $81,000,  $128,000,  and  $239,000 in fiscal years 1997,  1998,  and
1999,  respectively.  It is the Company's  policy to fund pension costs accrued.
Net expense of the plan was approximately  $441,000,  $518,000,  and $282,000 in
fiscal years 1997, 1998, and 1999, respectively.

The Company also  maintains a 401(k)  profit  sharing  plan and trust.  The plan
allows for  employees to contribute up to 10% of gross salary on a pre-tax basis
and 5% of gross  salary  on an  after-tax  basis.  The  Company  matches  50% of
employee  contributions up to 4% of eligible  salary.  Total expense of the plan
was approximately  $224,000,  $196,000, and $186,000 in fiscal years 1997, 1998,
and 1999, respectively.

NOTE 15: RESTRUCTURING EXPENSES

At October  31,  1999,  the  Company  recorded  $693,000  in costs  related to a
comprehensive  restructuring  program  that  was  implemented  during  the  last
three-quarters of 1999. The costs include employee  severance and related costs,
office closing and  downsizing  expenses,  as well as legal and consulting  fees
related to the  restructuring  program.  The Company's  workforce was reduced by
approximately  35% as a  result.  The  foundation  of the  restructuring  effort
focused on  bringing  expenses  in-line  with  forecasted  revenue for the voice
processing  operations.  The Company has accrued restructuring costs of $123,000
at October 31, 1999, which are included in accrued expenses.

NOTE 16: SUPPLEMENTAL CASH FLOW INFORMATION

THE  COMPANY  PAID CASH FOR  INTEREST  EXPENSE  AND INCOME  TAXES AS FOLLOWS (IN
THOUSANDS):

<TABLE>
<CAPTION>
                                                                           YEAR ENDED OCTOBER 31,
                                                                  1997             1998             1999
                                                                  ----             ----             ----
<S>                                                             <C>             <C>               <C>
Interest                                                        $    94         $     29          $     48
Income taxes                                                    $    25         $    125           $    --
</TABLE>

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.

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                          Jan. 31, 1998    April 30, 1998    July 31, 1998     Oct. 31, 1998
<S>                                        <C>               <C>              <C>              <C>
Net sales                                  $    6,555        $    7,651       $    6,929       $     5,322
Gross margin                                    1,775             2,087            1,324               728
Loss from operations                          (1,117)             (727)          (1,626)            (2,960)
Net loss per share:                           (1,169)             (749)          (3,855)            (2,868)
   Basic and diluted                       $   (0.27)        $   (0.17)      $    (0.90)      $      (0.68)
----------------------------------------------------------------------------------------------------------
Stock prices
      High                                 $    7.375        $    5.875      $     4.250       $     2.063
      Low                                  $    5.156        $    4.000      $     2.063       $     0.938
----------------------------------------------------------------------------------------------------------

                                          Jan. 31, 1999    April 30, 1999    July 31, 1999     Oct. 31, 1999
Net sales                                  $    4,891        $    4,251       $    4,954        $    3,927
Gross margin                                    1,373               844            1,554               806
Loss from operations                          (1,266)           (2,218)            (211)            (1,059)
Net loss per share:                           (1,199)           (2,189)            (187)            (1,118)
   Basic and diluted                       $   (0.28)        $   (0.51)      $     (.04)        $    (0.20)
----------------------------------------------------------------------------------------------------------
Stock prices
      High                                  $   2.000        $    2.938       $    2.313         $   2.000
      Low                                   $   0.813        $    0.750       $    1.438         $   1.438
----------------------------------------------------------------------------------------------------------
</TABLE>



                                       18
<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors and Stockholders
Microlog Corporation


We  have  audited  the  accompanying  consolidated  balance  sheet  of  Microlog
Corporation and subsidiaries as of October 31, 1999, and the related  statements
of income and  stockholders'  equity,  and cash  flows for the year then  ended.
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 audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards  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.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the October 31, 1999 consolidated  financial statements referred
to above present fairly, in all material  respects,  the consolidated  financial
position of Microlog  Corporation  and  subsidiaries as of October 31, 1999, and
the  consolidated  results of operations and cash flows for the year then ended,
in conformity with generally accepted accounting principles.

GRANT THORNTON

Vienna, Virginia
December 13, 1999




                                       19
<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, 1998, and the results
of their operations and their cash flows for each of the two years in the period
ended  October 31,  1998,  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.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 3 to the
financial statements,  the Company has suffered recurring losses from operations
and has been unable to obtain  sufficient  debt  financing  for working  capital
purposes. These conditions raise substantial doubt about its ability to continue
as a going  concern.  Management's  plans in regards to these  matters  are also
described in Note 3. The  financial  statements  do not include any  adjustments
that might result from the outcome of this uncertainty.


PRICEWATERHOUSECOOPERS LLP

McLean, Virginia
March 17, 1999





                                       20
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(UNLESS OTHERWISE INDICATED, ALL DOLLAR AMOUNTS HAVE BEEN ROUNDED TO THE NEAREST
HUNDRED THOUSAND.)

<TABLE>
<CAPTION>
                                                                                             PERIOD-TO-PERIOD
                                                                                            PERCENTAGE CHANGES
                                                      PERCENTAGE OF NET SALES
                                                       YEAR ENDED OCTOBER 31,                1997          1998
                                                                                              to            to
                                                    1997         1998         1999           1998          1999
                                                    ------------------------------           ------------------
<S>                                                <C>          <C>           <C>           <C>          <C>
Net sales:

  Voice processing                                 60.7%        55.7%         43.8%         (23.5)%      (46.5)%
  Performance analysis                             39.3%        44.3%         56.2%          (6.2)%      (13.6)%
-----------------------------------------------------------------------------------

  Total net sales                                 100.0%       100.0%        100.0%         (16.7)%      (31.9)%
-----------------------------------------------------------------------------------

Costs and expenses:
  Cost of sales                                    61.2%        77.6%         74.6%           5.7%       (34.6)%
  Selling, general and administrative              20.1%        34.4%         32.0%          42.6%       (36.5)%
  Research and development                         11.3%        12.3%         15.9%          (9.0)%      (11.9)%
  Restructuring                                     --           --            3.9%           --          100.0%
-----------------------------------------------------------------------------------

Total costs and expenses                           92.6%       124.3%        126.4%          11.9%       (30.7)%
-----------------------------------------------------------------------------------
Investment and other income
  (expense), net                                   (0.4%)        0.3%          0.4%         161.5%       (30.7)%
-----------------------------------------------------------------------------------

(Loss) income before income taxes                   7.0%       (24.0)%       (26.0)%       (384.3)%     (260.4)%
------------------------------------------------------------------------------------

(Provision) benefit for income taxes                4.7%        (8.7)%         0.0%        (253.2)%     (100.0)%
------------------------------------------------------------------------------------

Net (loss) income                                  11.7%       (32.7)%       (26.0)%       (331.5)%      (45.7)%
------------------------------------------------------------------------------------
</TABLE>

RESULTS OF OPERATIONS

The Company had a net loss of $4.7 million (($1.02) per basic and diluted share)
for the fiscal year ended October 31, 1999. By comparison, the Company had a net
loss of $8.6 million  (($2.02) per basic and diluted  share) for the fiscal year
ended October 31, 1998,  which  included a $2.15  million  (($.50) per basic and
diluted share)  reversal of an income tax benefit  associated  with the expected
future  realization  of the  Company's  net operating  loss  carryforwards.  The
Company  had net  income of $3.7  million  ($.89  per  basic  share and $.82 per
diluted share) for the fiscal year ended October 31, 1997, which included a $1.5
million ($.36 per basic share and $.33 per diluted share) income tax benefit.

The net loss of $4.7  million  for  fiscal  year  1999 was  attributable  to the
Company's voice processing  operations.  Approximately $4.2 million of this loss
was due primarily to insufficient voice processing  revenues.  The loss was also
due in  part to an  increase  of  $0.3  million  in the  reserve  for  inventory
obsolescence, and $0.7 million of costs incurred for restructuring the Company's
voice  processing  operations.  These  losses  were  offset  in part by the $0.5
million  net  income  generated  from the  Company's  performance  analysis  and
supports services operations.

In fiscal year 1999, the Company incurred  restructuring charges of $693,000 for
severance and benefits and other costs for the reduction of employees. Temporary
employees and contractors were also reduced. These restructuring charges include
costs of $381,000 for severance and benefits, the write-off of assets of $49,000
for the  equipment  associated  with  headcount  reductions,  costs of  $103,000
associated with the closing of the Company's  manufacturing  facility, and costs
of $160,000 to terminate the 15-year lease commitment for new office space which
the  Company had entered  into in May 1998.  As a result of these  restructuring
activities and other cost


                                       21
<PAGE>

reduction  actions,  the Company  expects to reduce its annual voice  processing
operating expenses by approximately $4.8 million annually.

In July 1999, the Company  finalized an Investment  Agreement with TFX Equities,
Inc., a wholly owned  subsidiary  of Teleflex,  Inc. TFX  purchased  2.6 million
shares of Microlog common stock for $4.0 million.

In September 1999, the Company sold the voice processing  operations of Microlog
Europe to Comsys International,  B.V. of The Netherlands.  The Company agreed to
grant Comsys certain  rights to resell its TIVRA software and related  hardware.
The Company  also agreed to assign  certain  agreements  to which  Microlog is a
party relating to the TIVRA product. As part of the sale, two Microlog employees
became  employees  of  Comsys.  The sale is  anticipated  to result in a gain to
Microlog of approximately $100,000. Since some of the proceeds from the sale are
based on future contracts between Comsys and the Company's former customers, the
gain on the sale was  estimated and therefore has been deferred into fiscal year
2000.

Over the past two years,  the  Company  has been  experiencing  reduced  demand,
increased  competition,  and reduced margins in the voice processing area, which
the Company  attributes to market forces.  The Company believes that interactive
voice response  systems in general,  and certain  vertical  sub-segments of this
market  in  particular,  are in the  maturing  phase  of  market  evolution  for
stand-alone systems.  Accordingly,  competition has increased, margins have been
reduced,  and it has become more difficult to sell these products.  In addition,
government  customers  have been  procuring  large IVR  systems as part of major
procurements from larger vendors, which has required the Company to work through
prime  contractors,  also  resulting  in increased  margin  pressure and greater
difficulty in making sales directly.  The Company's response to this has been to
increase its research and  development  in both the uniQue and TIVRA products to
expand  its   interactive   response   offerings   to   include   Internet-based
interactions,  and to offer  professional  turnkey  services  to the  integrated
modern customer contact center market. This addresses not only traditional voice
types of contacts,  but also e-mail, fax, Web callback, IP telephony,  chat, Web
bulletin board, and hardcopy mail,  thereby expanding the Company's  addressable
market.   This   approach  also   leverages  the  trend  in  corporate   process
re-engineering  in  customer  relationship  management,  and in  outsourcing  of
related transactions and application development.

In fiscal year 2000,  the Company's  strategy for  addressing  the market trends
will be to expand its professional  services offerings to provide  comprehensive
solutions to its customers,  inclusive of the Company's products.  The objective
of these  solution  services is for the Company to help its  customers to better
serve their customers.  The Company plans to accomplish this through:  the TIVRA
voice processing  platform,  enabled by speech  recognition;  the uniQue contact
processing  platform,  for  media  processing,   Web  interfaces,   and  contact
prioritization;  and professional  services based on the analysis,  development,
and integration skills developed over the years by the Microlog and ODSM staff.

NET SALES

Net sales for fiscal year 1999 were $18.0 million,  which represented a decrease
of 32% from net sales in fiscal  year 1998.  Net sales for fiscal year 1998 were
$26.5 million, which represented a decrease of 17% from net sales in fiscal year
1997. Net sales for fiscal year 1997 were $31.8 million.  The decrease in fiscal
year 1999 was due to a decrease in voice  processing  net sales of $6.9  million
and a decrease in performance  analysis net sales of $1.6 million.  The decrease
in fiscal year 1998 was due to a decrease in voice  processing net sales of $4.5
million and a decrease in performance analysis net sales of $0.8 million.

VOICE PROCESSING NET SALES

The Company's  voice  processing net sales  decreased 47% in fiscal year 1999 to
$7.9  million,  compared to $14.8  million in fiscal year 1998.  The decrease in
voice  processing net sales during fiscal year 1999 was due to a 61% decrease in
voice processing  product sales and a 21% decrease in voice processing  services
sales. The decrease in voice processing product sales was primarily attributable
to a decrease of $0.7 million in sales of the Company's  Automated  Prescription
Refill System (APRS) product to commercial customers, a decrease of $2.4 million
in sales to  government  customers,  and a decrease of $2.6  million in sales to
international  customers.  The decrease in voice  processing  services sales was
primarily  due to a decrease  of $0.4  million  in  maintenance  services  and a
decrease  of $0.6  million in  application  development  services.  The  Company
believes that the decrease in sales is largely attributable to the market trends
discussed above.

The Company's  voice  processing net sales  decreased 24% in fiscal year 1998 to
$14.7  million,  compared to $19.3 million in fiscal year 1997.  The decrease in
voice  processing  net sales during  fiscal year 1998 was primarily due to a 32%
decrease in voice  processing  product sales.  The decrease in voice  processing
product sales was primarily


                                       22
<PAGE>

attributable  to a decrease of $3.1 million in sales of the Company's  Automated
Prescription Refill System (APRS) product to commercial customers, a decrease of
$1.7 million in sales to government customers, and a decrease of $0.2 million in
sales to distributors, offset in part by an increase of $0.5 million in sales to
international customers.

In fiscal year 1999, sales to the Company's 10 largest  customers  accounted for
75% of voice processing sales and one of the three largest customers was in each
of the Company's three sectors:  government,  commercial, and international.  In
fiscal year 1998, sales to the Company's 10 largest customers  accounted for 85%
of voice processing sales and one of the three largest  customers was in each of
the Company's  three sectors:  government,  commercial,  and  international.  In
fiscal year 1997, sales to the Company's 10 largest customers  accounted for 90%
of voice  processing  sales.  In  fiscal  year  1997,  two of the  four  largest
customers  were  in  the  government  sector,  while  one  customer  was  in the
commercial sector and one customer was in the international sector.

Sales to government  customers for fiscal year 1999 were $4.1 million, or 52% of
voice processing net sales and 23% of consolidated net sales,  which represented
a 48% decrease from sales to government  customers in fiscal year 1998. Sales to
government  customers  for fiscal year 1998 were $8.0  million,  or 54% of voice
processing net sales and 30% of consolidated net sales, which represented an 18%
decrease  from sales to  government  customers  in fiscal  year  1997.  Sales to
government  customers  for fiscal year 1997 were $9.7  million,  or 51% of voice
processing  net  sales  and 31% of  consolidated  net  sales.  Fiscal  year 1997
included a $3.5 million sale on a bill and hold basis requested by the customer.
The system was  accepted  and title  passed to the  customer in fiscal year 1997
and, just after fiscal year-end, in November 1997, the system was operational at
the customer's premises.  In fiscal year 1999, the Company was unable to replace
sales and upgrades of $4.1 million to a large customer that occurred in 1998. In
addition,  government customers have been procuring large IVR systems as part of
major  procurements from larger vendors,  which has required the Company to work
through  prime  contractors,  also  resulting in increased  margin  pressure and
greater difficulty in making direct sales.  Although the Company increased sales
by $1.8  million to  existing  government  customers  in fiscal  year 1998,  the
Company  was  unable to replace a $3.5  million  sale to a large  customer  that
occurred in fiscal year 1997. In addition,  the Company was unable to secure any
new  government  customers in fiscal year 1998.  The Company  believes  sales to
government  customers  also are being  affected by the market  trends  discussed
above.

Sales to commercial  customers for fiscal year 1999 were $2.7 million, or 34% of
voice processing net sales and 15% of consolidated net sales,  which represented
an 18% decrease from sales to commercial customers in fiscal year 1998. Sales to
commercial  customers  for fiscal year 1998 were $3.3  million,  or 23% of voice
processing net sales and 12% of consolidated net sales,  which represented a 48%
decrease  from sales to  commercial  customers  in fiscal  year  1997.  Sales to
commercial  customers  for fiscal year 1997 were $6.4  million,  or 33% of voice
processing  net  sales and 20% of  consolidated  net  sales.  The  decreases  in
commercial  sales in fiscal  years  1999 and 1998,  as well as the  increase  in
commercial sales in fiscal year 1997, was attributable to declining sales of the
APRS product over that three year period,  primarily to the Company's  principal
customer  in  the  retail  pharmacy  market.  This  customer  has  substantially
completed  its purchases of products from the Company and there remains no major
customers for the APRS product who have not  implemented  technology  similar to
APRS.

Sales to international  customers for fiscal year 1999 were $1.1 million, or 14%
of  voice  processing  net  sales  and  6%  of  consolidated  net  sales,  which
represented a 68% decrease from sales to international  customers in fiscal year
1998. Sales to  international  customers for fiscal year 1998 were $3.4 million,
or 23% of voice  processing net sales and 13% of consolidated  net sales,  which
represented a 17% increase from sales to international  customers in fiscal year
1997. Sales to international customers in fiscal year 1997 were $2.9 million, or
15% of voice processing net sales and 9% of consolidated net sales. The decrease
in international  sales in fiscal year 1999 was primarily due to decreased sales
of $2.3 million to the Company's European third-party resellers.  In fiscal year
1999,  the Company sold the voice  processing  operations of Microlog  Europe to
Comsys  International,  B.V. of The  Netherlands.  The  Company  agreed to grant
Comsys  certain rights to resell its TIVRA  software and related  hardware.  The
Company also agreed to assign  certain  agreements to which  Microlog is a party
relating  to the TIVRA  product.  As part of the sale,  two  Microlog  employees
became employees of Comsys. The sale is anticipated to result in a Microlog gain
of approximately $100,000. Since some of the proceeds from the sale are based on
future contracts between Comsys and the Company's former customers,  the gain on
the sale was  estimated  and  therefore has been deferred into fiscal year 2000.
The increase in  international  sales in fiscal year 1998 was primarily due to a
$1.6 million sale to a subsidiary of KPN Telecom of The  Netherlands,  offset by
decreased sales of $1.1 million to the Company's European third-party resellers.

As of October 31, 1999,  the Company had a backlog of existing  orders for voice
processing  systems and services  totaling  $2.8  million.  By  comparison,  the
backlog,  as of October 31, 1998, was $2.0 million.  The Company has

                                       23
<PAGE>

experienced   fluctuations   in  its  backlog  at  various  times  in  the  past
attributable primarily to the seasonality of governmental purchases. The Company
anticipates  that all of the  outstanding  orders at  October  31,  1999 will be
shipped and the sales recognized  during fiscal year 2000.  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 year 1999
were  $10.1  million,  which  represented  a 14%  decrease  from net sales  from
performance  analysis and support  services in fiscal year 1998.  Net sales from
performance  analysis  and  support  services  for  fiscal  year 1998 were $11.7
million,  which  represented  a 6%  decrease  from net  sales  from  performance
analysis  and support  services in fiscal  year 1997.  Net sales of  performance
analysis  and  support  services  in fiscal  year 1997 were $12.5  million.  The
decreases in net sales from performance  analysis and support services in fiscal
years 1999 and 1998  resulted  from a reduction in the level of work  authorized
under  existing  contracts  from the Johns Hopkins  University  Applied  Physics
Laboratory (APL), the Company's principal customer for these services.

The Company  believes  that its  performance  analysis  contracts  are likely to
continue to provide a stable but declining source of sales for the Company.  The
Company is experiencing (indirectly, through its contracts with APL) the effects
of  some  reductions  in  defense  spending  due  to  changes  in  U.S.  defense
priorities. The Company is not aware of any proposed reductions in spending that
will  result in any  material  adverse  affect  over the next fiscal year on its
expected net sales from performance  analysis and support services nor alter the
manner in which it procures  contracts for such services.  However,  the Company
cannot  assure you that  changes  in defense  priorities  or  continuing  budget
reductions  will not cause such an effect during the fiscal year or  thereafter.
Additionally, the Company has experienced increased competition for retention of
its  employees  from APL. As a result of the tight  labor  market and changes in
hiring policies at APL, the Company is experiencing increased employee attrition
to APL.  The Company  expects this trend to continue  through  fiscal year 2000.
Each employee hired directly by APL, and removed from our contract(s)  decreases
our revenue and profit potential from that source.

As of October  31,  1999,  the  Company  had a backlog  of  funding on  existing
contracts for performance  analysis and support services  totaling $0.4 million.
By  comparison,  the  backlog  as of  October  31,  1998 was $0.2  million.  The
Company's  contracts  consist  primarily  of  indefinite  delivery,   indefinite
quantity (IDIQ)  contracts  which  generally do not have a funding  amount,  and
therefore  are not included in backlog.  The Company  estimates  that the entire
$0.4  million  of backlog at October  31,  1999 will be  recognized  as sales in
fiscal year 2000.  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.  In addition,  the Government has the right to
cancel contracts,  whether funded or not funded,  at any time,  although to date
this has not occurred.

COSTS AND EXPENSES

Cost of sales of products  were $3.1  million,  or 84% of net sales of products,
for fiscal year 1999; $8.7 million, or 93% of net sales of products,  for fiscal
year 1998;  and $7.2 million,  or 52% of net sales of products,  for fiscal year
1997. The decrease in cost of sales, in dollar amount,  for fiscal year 1999 was
primarily  attributable to reduced product sales. The decrease in cost of sales,
as a percentage  of sales,  for fiscal year 1999 was primarily  attributable  to
higher  margins  on sales  to  commercial  customers.  The  Company's  principal
customer for its APRS product purchased additional software licenses, which have
significantly  lower costs of sales than product sales.  The increase in cost of
sales of  products,  both in dollar  amount and as a  percentage  of sales,  for
fiscal year 1998 was  primarily  attributable  to an increase of $1.3 million in
the reserve for inventory  obsolescence related to inventory for certain product
lines for which  there  has been a  significant  decline  in gross  margins  and
demand,  and  therefore  future  sales  are  doubtful.  The  increase  was  also
attributable  to lower margins on products  sales to commercial  and  government
customers.  The  Company  believes  both of these  factors are due to the market
trends discussed above. The fiscal year 1998 lower margins were  attributable to
the lack of sales of  software  licenses  in fiscal  year 1998  compared to $3.1
million of sales of software  licenses  in fiscal  year 1997.  Sales of software
licenses  have   significantly   lower  costs  of  sales  than  product   sales.
Additionally,  the  increase in cost of sales of products,  as a


                                       24
<PAGE>

percentage  of sales,  for fiscal year 1998 was  attributable  to certain  fixed
costs that do not vary directly with sales volume, therefore, the decline in net
sales of products did not result in a similar decline in costs.

Cost of sales of services were $10.4  million,  or 72% of net sales of services,
for fiscal year 1999; $11.9 million, or 69% of net sales of services, for fiscal
year 1998; and $12.2 million,  or 69% of net sales of services,  for fiscal year
1997. The increase in cost of sales,  as a percentage of sales,  for fiscal year
1999 was  primarily  attributable  to the  decrease in net sales of  performance
analysis  services.  The decrease in cost of sales, in dollar amount, for fiscal
year 1998 was primarily attributable to the decrease in net sales of performance
analysis services.

Selling,  general  and  administrative  costs were $5.8  million,  or 32% of net
sales,  for fiscal year 1999; $9.1 million or 34% of net sales,  for fiscal year
1998; $6.4 million,  or 20% of net sales,  for fiscal year 1997. The decrease in
fiscal year 1999 was primarily  attributable  to cost cutting  measures taken by
the Company, which are described in more detail under "Restructuring Costs." The
increase  in fiscal  year 1998,  both in dollar  amount and as a  percentage  of
sales,  was  primarily  attributable  to  increased  staffing  in the  sales and
marketing  departments,  expanded  marketing  programs,  the  write-off  of  the
remaining  goodwill balance resulting from the  determination  that the goodwill
balance was  impaired,  and the  relocation of  operations  associated  with the
Company's voice processing operations in The Netherlands.

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.  Accordingly,  the Company  does not
anticipate capitalizing research and development costs. Research and development
expenses  were $2.9  million,  or 16% of net sales,  for fiscal year 1999;  $3.3
million,  or 12% of net sales, for fiscal year 1998; and $3.6 million, or 11% of
net sales, for fiscal year 1997.

Research and development  expenses for 1999 were focused on the uniQue and TIVRA
products.  uniQue V 2.0 was announced and  substantially  completed as a product
offering available for customer trial in the contact center market. uniQue V 2.0
is the  second in a series of  offerings  the  Company  developed  to  provide a
comprehensive range of solutions within the contact center market in fiscal year
1999.  This  open,  standards-based  product  enables  companies  to  route  and
prioritize  phone calls,  e-mails,  web contacts,  faxes,  and hardcopy mail and
other contact types to the  appropriate  skilled agent for handling.  The uniQue
development  activities  will also be a major  focus in fiscal year 2000 for the
Company's research and development efforts.  TIVRA was enhanced for new features
and Year 2000  compliance in the System  Release 6 (SR6) version of the product.
APRS was customized for a number of customer  opportunities in fiscal year 1999.
A  significant  amount of custom  engineering  is  undertaken  by the Company in
providing  special features,  application  development,  and system  integration
services to our customers.

RESTRUCTURING COSTS

In fiscal year 1999, the Company restructured its voice processing operations in
order to bring  expenses  more in line with  anticipated  revenues.  The Company
incurred restructuring charges of $693,000, for severance and benefits and other
costs for the reduction of employees.  Temporary  employees and contractors were
also reduced. The restructuring  charges include costs of $381,000 for severance
and benefits,  the  write-off of assets of $49,000 for the equipment  associated
with headcount reductions,  costs of $103,000 associated with the closing of the
Company's manufacturing facility, and costs of $160,000 to terminate the 15 year
lease  commitment for new office space which the Company had entered into in May
1998. As a result of these  restructuring  activities  and other cost  reduction
actions,  the Company  expects to reduce its annual voice  processing  operating
expenses by approximately $4.8 million annually.

In September 1999, the Company sold the voice processing  operations of Microlog
Europe to Comsys International,  B.V. of The Netherlands.  The Company agreed to
grant Comsys certain  rights to resell its TIVRA software and related  hardware.
The Company  also agreed to assign  certain  agreements  to which  Microlog is a
party relating to the TIVRA product. As part of the sale, two Microlog employees
became  employees  of  Comsys.  The sale is  anticipated  to result in a gain to
Microlog of approximately $100,000. Since some of the proceeds from the sale are
based on future contracts between Comsys and the Company's former customers, the
gain on the sale was  estimated and therefore has been deferred into fiscal year
2000.



                                       25
<PAGE>

INVESTMENT AND OTHER INCOME, NET

The Company had net investment and other income of $61,000 for fiscal year 1999,
as compared to net  investment and other income of $88,000 for fiscal year 1998,
and other  expense of $143,000  for fiscal year 1997.  The lower income level in
fiscal  year  1999 was  primarily  attributable  to  lower  interest  income  on
short-term investments and higher interest expense on short-term borrowings. The
higher income level in fiscal year 1998 was primarily due to the recognized gain
of  $73,000  on the sale of the  Company's  office  building  and  land,  higher
interest  income on  short-term  investments,  and  lower  interest  expense  on
short-term  borrowings.  The higher  expense  level in fiscal year 1997 resulted
from an $84,000 write-off of obsolete fixed assets.

PROVISION FOR INCOME TAXES

There was no  provision  for income taxes  recorded in fiscal year 1999.  Income
taxes payable (refundable) of $149,000 in fiscal year 1998, and $(545) in fiscal
year 1997,  relate to state income taxes,  and the  alternative  minimum tax for
Federal  income tax. Based on the Company's  profitability  in fiscal years 1995
through  1997,  the  Company  recorded  a  deferred  tax asset of  $650,000  and
$1,500,000 in fiscal years 1996 and 1997,  respectively,  reflecting the benefit
of  approximately  $5.5 million in loss  carryforwards.  Due to the unprofitable
operations in fiscal year 1998 and uncertain future  profitability,  the Company
reassessed the probability of realizing  these net operating loss  carryforwards
and  determined  that their  expected  future  realization  was not likely to be
realized in the near  future.  The Company  wrote-off  the deferred tax asset of
$2.15  million in fiscal  year  1998.  The  Company  has  provided  a  valuation
allowance for $16.9 million of net operating losses as management has determined
it was not likely that this amount will be realized.

The  Company  has  exhausted  its  ability to carry  losses  back for income tax
refunds.  Net  operating  loss  and tax  credit  carryforwards  for  income  tax
reporting   purposes  of   approximately   $16.9   million  and  $0.4   million,
respectively,  will be available to offset taxes  generated  from future taxable
income through 2019. 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.

YEAR 2000 COMPLIANCE

In  fiscal  year  1998,  the  Company  began  the  process  of  identifying  and
determining the appropriate  resolution to all of the Company's  issues relating
to the  "Millennium  Bug".  These  issues  arise  because of the date  sensitive
software programs which use two digits to define the applicable year,  resulting
in  interpretation  of a date using "00" as the Year 1900  rather  than the Year
2000.  This could  result in  miscalculations  or a major  system  failure.  The
Company concluded that if no action were taken to avoid these consequences,  its
Year 2000  issues  would  have a  material  effect on the  Company's  results of
operations and financial condition.

Areas which required remediation were: 1) in-house systems and software programs
used to run the business;  2) products sold to the Company's  customers;  and 3)
systems and services provided by vendors.

The Company reviewed its in-house systems for compliance and determined that all
systems would have been affected. During fiscal year 1998, the Company completed
the  conversion  of  its  accounting,   inventory,   manufacturing  control  and
information  systems  to a  new  system  in  order  to  provide  more  efficient
management  information  throughout  the Company.  In October  1998,  as part of
system  maintenance,  a Year 2000 compliant software release was installed.  The
vendor  certified  that the new system was Year 2000  compliant.  As part of the
Company's  computer  upgrade  plan,  approximately  $0.5 million of hardware and
software  upgrades were  purchased for the internal  computer  network in fiscal
year 1998.  These systems were all Year 2000 compliant and were also part of the
Company's Year 2000 compliance program.  All remaining in-house computer systems
which are mission  critical were  identified,  including  operating  systems and
applications  software,  and studies were conducted to determine  which programs
were compliant and which were not. The Company believes that the majority of its
mission  critical  systems are currently  compliant or can be made  compliant at
minimal  cost.  Non-compliant  systems were  replaced or abandoned  prior to the
beginning  of the Year 2000.  In fiscal  year 1999,  the Company  continued  its
efforts on  ensuring  compliance  and passed a  certification  test on Year 2000
compliance  which was required by TFX Equities,  Inc.  prior to  finalizing  the
Investment Agreement.

The Company made a thorough review and testing of its products and believes that
its current products,  TIVRA and uniQue, are Year 2000 compliant.  The Company's
assessment of its current  products is partially  dependent upon the accuracy of
representations  concerning Year 2000 compliance made by its suppliers,  such as
Aspect, Dialogic,  Microsoft and SCO (Santa Cruz Operation),  among others. Many
of the Company's customers are, however, using earlier versions of the Company's
current products, previous products or discontinued products,


                                       26
<PAGE>

which are not Year 2000 compliant. The Company initiated programs to proactively
notify such customers of the risks  associated  with using these products and to
actively  encourage such customers to migrate to the Company's current products.
The Company  had  received  service and  maintenance  revenues  with  respect to
certain of these products,  and such revenues substantially ceased by the end of
the Year 1999.

In addition, the Company's products are generally integrated within a customer's
enterprise  system,  which may involve  products and systems  developed by other
vendors.  A customer may mistakenly  believe that Year 2000 compliance  problems
with its enterprise system are attributable to products provided by the Company.
The  Company  may,  in the  future,  be  subject  to  claims  based on Year 2000
compliance  issues related to a customer's  enterprise  system or other products
provided by third parties,  custom  modifications to the Company's products made
by third  parties,  or issues  arising  from the  integration  of the  Company's
products with other products.

The Company  purchases  components  and services,  which have been evaluated for
Year 2000 compliance.  The Company has divided its vendors into those who supply
critical services,  manufacturing suppliers and manufacturing  contractors.  The
Company has obtained  certification  from each of its material vendors as to its
Year 2000 compliance.  The costs to evaluate and obtain  certification  from its
key vendors were not material.


RESULTS SINCE JANUARY 1, 2000

The Company believes that it was able to complete all modifications necessary to
be Year 2000  compliant and is not aware of any  substantial  issues or problems
with in-house systems,  products sold to the Company's customers, or systems and
services  provided by vendors.  To date,  Year 2000  problems have had a minimal
effect on the Company's business.  However,  the Company may not have identified
and remediated all significant Year 2000 problems.

Further  remediation  efforts  may involve  significant  time and  expense,  and
unremediated  problems  may have a  material  adverse  effect  on the  Company's
business.  Also,  the Company  sells its  products to  companies in a variety of
industries,  each of which is experiencing different year 2000 issues.  Customer
difficulties  with  year  2000  issues  might  require  the  Company  to  devote
additional  resources  to resolve  underlying  problems.  Finally,  although the
Company has not been made a party to any litigation or arbitration proceeding to
date  involving  our  products or services  and related to year 2000  compliance
issues,  the Company  may in the future be  required  to defend its  products or
services in such  proceedings,  or to negotiate  resolutions  of claims based on
year 2000  issues.  The  costs of  defending  and  resolving  year  2000-related
disputes,  regardless of the merits of such disputes, and any liability for year
2000 related damages,  including  consequential damages, would negatively affect
the  Company's  business,   results  of  operations,   financial  condition  and
liquidity, perhaps materially.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This section  (Management's  Discussion and Analysis of Financial  Condition and
Results of Operations) contains forward-looking statements within the meaning of
Section 27A of the  Securities  Act of 1933, as amended,  and Section 21E of the
Securities   Exchange  Act  of  1934,  as  amended.   The  Company  intends  the
forward-looking  statements  to be covered  by the safe  harbor  provisions  for
forward-looking  statements  in these  sections.  All  statements  regarding the
Company's expected financial position and operating results,  business strategy,
financing  plans,  forecasted  trends  relating to our industry,  its ability to
realize  anticipated  cost  savings  and  similar  matters  are  forward-looking
statements.  These  statements  can  sometimes  be  identified  by  the  use  of
forward-looking words such as "may," "will," "anticipate," "estimate," "expect,"
"believe" or "intend." The Company cannot promise you that our  expectations  in
such  forward-looking  statements  will turn out to be correct.  Some  important
factors that could cause our actual results to be materially  different from our
expectations  include those discussed under the caption "Factors That May Effect
Future Results of Operations."

FACTORS THAT MAY EFFECT FUTURE RESULTS OF OPERATIONS

The Company  believes that its results of operations will be affected by factors
such as the timing of introduction  by the Company of new and enhanced  products
and  services,   market   acceptance  of  new  voice  processing   products  and
enhancements  of existing  products,  continuation of market trends in the voice
processing   market,   growth  in  the  voice  processing   market  in  general,
competition,  ability to secure and retain  adequate  financing,  commitments to
automation  by  potential  customers,  fluctuations  in  the  buying  cycles  of
governmental customers,  changes in


                                       27
<PAGE>

general economic conditions,  and changes in the U.S. defense industry and their
impact  on the prime  contractor  for which  the  Company  provides  performance
analysis and support services.

The  Company  is  subject  to the risk that its  business  strategy  will not be
successful.  The new strategy is dependent on market acceptance of the Company's
new focus, services and products,  ongoing research and development efforts, and
sales activities over the near term. In addition, the strategy is dependent upon
the Company's ability to match costs proportionately with revenue. The Company's
fiscal 2000 operating budget includes  significant  expenditures  related to its
development and marketing of its new professional services, uniQue product line,
and TIVRA  product  line.  If the  company  is unable  to  sustain  and grow the
associated revenue,  the company is subject to the risk that it may not make the
necessary  decisions  to  reduce  expenditures  in enough  time to avoid  severe
adverse consequences.

LIQUIDITY AND CAPITAL RESOURCES

The Company  incurred a net loss of $4.7 million for fiscal year 1999 and has an
accumulated  deficit  of $16.6  million  at  October  31,  1999.  The  Company's
continued  existence is dependent upon its ability to generate  sufficient  cash
flows from internal and external sources to meet its operating needs. Management
has recently  taken  several steps to meet its  liquidity  requirements  for the
foreseeable  future,  including  restructuring  operations  to reduce  operating
expenses to levels  commensurate with revenues and attracting  capital through a
private placement  transaction.  The Company  anticipates that existing cash and
cash  equivalents  generated from fiscal year 2000 operations will be sufficient
to meet its working  capital needs.  The Company has, in the past,  been able to
secure additional financing to meet its operating  requirements,  although there
can be no assurance that it will be able to continue to do so.

Working  capital as of  October  31,  1999 was $1.8  million,  compared  to $2.0
million as of October 31, 1998.  The decrease was  primarily  attributable  to a
$1.9 million  decrease in accounts  receivable,  and a $0.5 million  decrease in
inventories,  offset in part by an increase in cash and cash equivalents of $1.1
million and a decrease in accounts payable and other current liabilities of $1.4
million.

Cash and cash equivalents as of October 31, 1999 were $3.4 million,  compared to
$2.3 million as of October 31, 1998.  The increase in cash and cash  equivalents
was primarily  attributable to the proceeds from the issuance of common stock to
TFX  Equities of $4.0  million,  the  decrease in  accounts  receivable  of $1.9
million, offset in part by the net loss of $4.7 million in fiscal year 1999.

Accounts  receivable as of October 31, 1999 were $1.2 million,  compared to $3.1
million  as of October  31,  1998.  The  decrease  in  accounts  receivable  was
primarily  attributable to decreased sales in voice  processing and, to a lesser
extent, decreased sales in performance analysis and support services.

Fixed assets as of October 31, 1998 were $0.9 million,  compared to $1.4 million
as of  October  31,  1998.  The net  decrease  in  fixed  assets  resulted  from
depreciation  expense of $0.6  million,  the $0.1  million  write-off  of assets
associated  with  restructuring  costs,  offset in part by $0.3 million in asset
purchases.  Major assets purchased were primarily hardware and software upgrades
to the Company's internal computer network and workstations.

In fiscal year 1999, the Company  closed and drew on a revolving  line-of-credit
facility  which  allows  the  Company  to  borrow  up to  75%  of  its  eligible
receivables  to a maximum of  $2,000,000,  subject to the right of the financial
institution  to make  loans only in its  discretion.  The  line-of-credit  bears
interest at the bank's prime rate plus 2.25% (10.75% at October 31,  1999),  and
contains a 0.025%  fee on the  average  unused  portion of the line as well as a
monthly  collateral fee and a 1% upfront  commitment  fee. The loan subjects the
Company to a  restrictive  covenant of not  exceeding  115% of its  consolidated
planned  quarterly losses for its second and third quarters of fiscal year 1999,
and a requirement for consolidated profitability beginning in the fourth quarter
of  fiscal  year  1999.  The line  also  subjects  the  Company  to a number  of
restrictive  covenants,  including  restrictions  on  mergers  or  acquisitions,
payment of dividends,  and certain  restrictions on additional  borrowings.  The
line  is  secured  by  all of the  Company's  assets.  The  Company  was  not in
compliance  with the  restrictive  covenant in the second quarter of fiscal year
1999,  but  obtained a waiver from the bank.  The Company was not in  compliance
with the  restrictive  covenant  in the fourth  quarter of fiscal  year 1999 for
which a forbearance  agreement has been  obtained.  The  forebearance  agreement
waives the lenders right under an event of default to terminate  the loan.  This
line of credit  expires  in March 2000 and the  Company  and the bank are in the
process of renewal  discussions.  There was no  outstanding  debt  against  this
line-of-credit at October 31, 1999.


                                       28
<PAGE>

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

QUARTERLY RESULTS

Note  16 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 net loss of $4.7  million  for  fiscal  year  1999 was  attributable  to the
Company's voice processing  operations.  Approximately $4.2 million of this loss
was due primarily to insufficient voice processing  revenues.  The loss was also
due  in  part  to  a  $0.3  million   increase  in  the  reserve  for  inventory
obsolescence, and $0.7 million in costs incurred for restructuring the Company's
voice  processing  operations.  These  losses  were  offset  in part by the $0.5
million  net  income  generated  from the  Company's  performance  analysis  and
supports services operations.

The Company  experienced  losses in all four  quarters of fiscal year 1999.  The
losses in each quarter were primarily  attributable to insufficient sales in the
Company's voice processing  operations,  restructuring costs of $0.6 million and
$0.1 million in the second and fourth quarters,  respectively,  and increases in
the reserve for inventory  obsolescence  of $0.1 million and $0.2 million in the
third and fourth quarters, respectively.

The Company  experienced  losses in all four  quarters of fiscal year 1998.  The
losses in each quarter were primarily  attributable to insufficient sales in the
Company's  voice  processing  operations,  a  change  in  the  sales  mix in the
Company's  voice  processing  operations,  and  increases  in  the  reserve  for
inventory obsolescence. In the third quarter, the Company wrote-off the deferred
tax asset of $2.15 million (($0.50) per basic and diluted share).  In the fourth
quarter,  the Company established  reserves for the relocation of its operations
facility in The Netherlands,  and wrote-off the remaining goodwill balance which
aggregated $0.8 million (($0.19) per basic and diluted share).

PRICE RANGE OF COMMON STOCK

The Common Stock is  presently  traded on the Nasdaq  SmallCap  Market under the
symbol MLOG.  As of January 14, 2000,  there were  approximately  226 holders of
record  of the  common  stock.  This  number  does not  reflect  the  number  of
individuals  or  institutional  investors  holding stock in nominee name through
banks, brokerage firms, and others.

Note  15 of the  Notes  to  Consolidated  Financial  Statements  of the  Company
contained in this Annual Report sets forth, for the period indicated,  the range
of high and low  transaction  prices for the  common  stock as  reported  on the
NASDAQ  Smallcap  Market.  The closing  price of the common stock on January 14,
1999 was $1.375 per share.

In February 1999, the Company was notified by the Nasdaq  National Market System
that it had failed to  maintain  certain  maintenance  standards  for  continued
listing on the Nasdaq  National  Market  System.  The  Company  did not meet the
requirements  for minimum net tangible  assets and was  delinquent in filing its
10K report for fiscal 1998.


                                       29
<PAGE>

On August 17,  1999,  the  Company  was  notified  that it had been moved to the
Nasdaq SmallCap Market System.  The Company's common stock was delisted from the
Nasdaq  National  Market  System  on one  prior  occasion.  Subsequent  to  that
occasion,  in February 1996, the Company  returned to the Nasdaq National Market
System.  During the dedicated period,  the common stock was traded on the Nasdaq
SmallCap  Market System until its market value of public float had risen and the
Company was able to re-list on the Nasdaq National  Market System.  There can be
no  assurance  that it will be able to  re-list  such  securities  on the Nasdaq
National Market System, subsequent to the August 1999 delisting.

DIVIDEND POLICY

The  Company  has not  paid  any  dividends  in over 10  years.  Certain  of the
Company's debt agreements  restrict the Company's ability to pay dividends.  See
Note 9 of the Notes to Consolidated  Financial Statements.  The Company does not
anticipate paying any cash dividends in the foreseeable future.

NEWLY ISSUED ACCOUNTING STANDARDS

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

In October 1997, the Accounting  Standards  Executive  Committee  (AcSEC) issued
Statement of Position 97-2 (SoP 97-2),  "Software  Revenue  Recognition,"  which
supersedes SoP 91-1. This statement  provides guidance on when revenue should be
recognized  and in what  amounts for  licensing,  selling,  leasing or otherwise
marketing  computer  software.  SoP 97-2 was effective for the Company's  fiscal
year  1999.  The  adoption  of SoP 97-2 did not have a  material  effect  on the
current  operations.  However,  the effect of this  statement is uncertain as it
relates to future products.

In February 1998, the FASB issued SFAS No. 132,  "Employers'  Disclosures  About
Pensions and Other  Postretirement  Benefits." This statement  standardizes  the
disclosure  requirements for pensions and other  postretirement  benefits to the
extent practicable and requires additional information on changes in the benefit
obligations  and fair  values  of plan  assets  that will  facilitate  analysis.
Additionally,  SFAS No. 132 eliminates certain disclosures that are no longer as
useful as they were when SFAS No. 87, "Employers' Accounting for Pensions", SFAS
No. 88,  "Employers'  Accounting for  Settlements  and  Curtailments  of Defined
Benefit  Pension  Plans  and  for  Termination  Benefits",  and  SFAS  No.  106,
"Employers  Accounting  for  Postretirement  Benefits  Other than Pensions" were
issued.  SFAS No. 132 was  effective  for the  Company's  fiscal year 1999.  The
adoption  of SFAS No.  132 did not have a  material  effect on the  consolidated
financial statements.




                                       30
<PAGE>

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 (IN THOUSANDS, EXCEPT PER SHARE DATA):

<TABLE>
<CAPTION>
                                                              YEAR ENDED OCTOBER 31,
                                          1995            1996             1997         1998                1999
-------------------------------------------------------------------------------------------------------------------
<S>                                      <C>              <C>             <C>            <C>               <C>
Net sales                                $ 22,386         $ 25,707        $ 31,768       $ 26,457          $ 18,023
(Loss) income from
  operations                                1,500            2,111           2,374         (6,430)           (4,754)
Net (loss) income                           1,387            2,713 (1)       3,732 (1)     (8,641) (2)       (4,693)
Net (loss) income per share:
   Basic                                $      .36        $      .67      $      .89      $  (2.02)         $  (1.02)
   Diluted                              $      .34        $      .59      $      .82      $  (2.02)         $  (1.02)
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA (IN THOUSANDS):

                                                                    OCTOBER 31,
                                         1995             1996             1997         1998                1999
-------------------------------------------------------------------------------------------------------------------
<S>                                       <C>             <C>             <C>              <C>               <C>
Working capital                           $   749         $  3,144        $  6,671         $1,953            $1,818
Total assets                                9,426           13,713          17,055          8,560             6,426
Long-term debt, net
  of current maturities                        --              203             142             74                --
Stockholders' equity                        4,160            7,766          11,888          3,370             2,804
-------------------------------------------------------------------------------------------------------------------
</TABLE>


1)   Net income  includes a $0.65  million  ($0.16 per share basic and $0.14 per
     share  diluted)  and a $1.5  million  ($0.36 per share  basic and $0.33 per
     share  diluted)  income  tax  benefit  for  fiscal  years  1996  and  1997,
     respectively.   See  Note  12  of  the  Notes  to  Consolidated   Financial
     Statements.

2)   Net loss for fiscal year 1998 includes a $2.15  million  (($0.50) per basic
     and  diluted  share)  write-off  of  the  deferred  tax  asset.  Due to the
     unprofitable  operations  in  fiscal  year  1998 and the  uncertain  future
     profitability,  the Company  reassessed the  probability of realizing these
     net operating loss  carryforwards and determined that their expected future
     realization  was not likely to be realized in the near future.  See Note 12
     of the Notes to Consolidated Financial Statements.


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