EXHIBIT 13

LETTER TO SHAREHOLDERS

Fiscal 1999  continued a recent history of  disappointing  results for Microlog.
Consolidated  losses were $4.7 million,  attributable to three main areas beyond
the  continued  erosion  in voice  processing  revenues.  The  first was a major
reduction in force and corporate restructuring.  This reduction was necessitated
by a continued  reduction in the Company's core voice processing  business and a
reliance  on two key  customers  who did not  maintain  their  historical  order
volumes.  The second area was continuing losses from  international  operations,
prior to the sale of our remaining European assets to Comsys International.  And
the final area was the Company's  continued  investment in our uniQue(R) contact
center  product  line  in  the  absence  of  significant   revenues  from  those
investments.  All in all, fiscal 1999 was a difficult year for our shareholders,
customers,  and our employees as we labored to reshape  Microlog to benefit from
the  exploding  Internet  marketplace  and the new  opportunities  presented for
customer care created by Internet e-Commerce demand.


       OLD DOMINION SYSTEMS OF MARYLAND (ODSM) - PROFESSIONAL SERVICES BUSINESS


Our  professional  services  business  remained  profitable  in  1999,  but  did
experience an overall  revenue  reduction due to the fact that some employees we
formerly contracted to our principal customer became full time employees of that
customer during fiscal 1999. Nevertheless,  we believe our partnership with that
customer,  the Johns Hopkins  University  Applied  Physics  Laboratory,  remains
strong and we are working with their  management to explore creative new ways to
serve their needs.  We are cautiously  optimistic that we will be able to offset
the trend towards hiring directly in fiscal 2000, allowing us to once again grow
our professional  services  business.  We completed a modest new contract during
the fiscal year that we expect  will grow in the coming year as well.  ODSM will
remain focused on contract  professional services in the Federal and state/local
government, and defense-related sectors.


       VOICE PROCESSING BUSINESS - A WORK IN PROGRESS


The sales of touch-tone  Interactive  Voice Response (IVR) systems  continued to
decline  throughout  the fiscal  year.  While we did  experience  some  positive
revenues  related to the Year 2000 as customers  upgraded older systems for Year
2000 compliant  systems,  we were not successful in replacing  later stage major
accounts with new accounts of equal  magnitude.  In addition,  three factors are
reshaping the IVR industry sector and our position in that sector.

>>   First and  foremost is the  maturity of the IVR  marketplace,  evidenced by
     historical  year over year growth rates in excess of 25% moderating to 8% -
     10%. We believe this moderation will continue into the near future.  Simply
     put, IVR hardware  addresses a rapidly  maturing market resulting in fierce
     competition and downward pricing pressure, leading to ...

>>   Consolidation.  If there was a dominating theme in the IVR industry in 1999
     it was  consolidation.  Starting  in  mid-1998,  Aspect  Telecommunications
     acquired Voicetek  (Microlog's OEM supplier),  followed by the combinations
     of InterVoice and BriteVoice, and Nortel and Periphonics.  This transformed
     a highly  fragmented  industry  sector  where no single  participant  had a
     market  share  greater  than  12%  into a  sector  dominated  by a few  big
     suppliers commanding a combined market share in excess of 65%.

>>   The final factor is convergence.  Specifically,  voice and data systems are
     converging into a single, standards-based technology platform. While not an
     overnight change,  convergence  will, we believe,  result in IVR systems no
     longer  being  specialized   standalone   platforms.   Rather,   they  will
     increasingly  become a  component  part of a  broader  technology  platform
     delivering multiple voice (telephony) and data (Internet) services.

Consolidation  has disrupted our technology  supply chain;  commoditazation  has
eroded our margins; convergence, on the other hand, has created opportunity.

We made our first  step  into the  world of  convergence  with the  creation  of
uniQue, built to address voice and data self service  applications,  and we will
do more in the coming year to exploit the opportunities presented by convergence
both in the area of product and professional services.

                                       1

<PAGE>

The year also saw changes in the leadership structure within the Company.  Steve
Smith stepped in as CEO, and significantly enhances the focus of the Company and
the fundamental cost infrastructure.  His refreshing new approach is responsible
in large part for the more positive  positioning of the Company today.  While we
regret Steve's  departure in February 2000, we respect his very personal reasons
for doing so, and we will  provide the  continuity  in approach  that we believe
will keep the Company on a positive track.

       POSITIVE EVENTS IN FISCAL 1999


Despite the operating loss,  there were a number of positive  developments  that
have  positioned  Microlog  to  capitalize  on the  future.  The  first and most
important of which was the  completion  of an equity  investment  totaling  $4.0
million from TFX  Equities.  This provided  much needed  investment  capital and
helped the Company to reestablish operating capital credit lines as well.

A  second  event  was the  sale  and  closure  of all  European  operations.  We
consummated an agreement with Comsys International of The Netherlands to acquire
our European assets (primarily support agreements and distributors), allowing us
to close our European  subsidiary  and provide  continuity  to our customers and
distributors who had supported our efforts  overseas.  The agreement leaves open
the  possibility  of  reselling  the uniQue  software in Europe at a later date,
either directly, through Comsys, or through other means.

We  additionally  procured and  installed our inaugural  uniQue  customers,  and
operated  aggressively to realize the benefits of our cost cutting efforts,  all
of which we believe  position  Microlog for  positive  results in the new fiscal
year.


       FISCAL 2000 OUTLOOK ... IT'S "BACK TO THE FUTURE"


Moving into 2000 ... the new Millennium ... we are struck by the old phrase "the
more  things  change,  the more they  remain the same." We have seen  previously
unimaginable new things in business  brought about by the Internet.  Despite all
this change, however, much of business remains the same, namely:

    >> You still need to have or make something people or other businesses want,
    >> You still need to get the message about your products out,
    >> You still need to take orders and collect money,
    >> You still need to ship and install,
    >> You still need to serve your customers after the sale, and
    >> You still need to make money.

So what has changed?  Simply answered, the sophistication of the tools available
to conduct business. Oh, and let's not forget the rapid pace of change. With the
increase in both  sophistication and pace, we feel there will be an ever-growing
need for companies who can make sense of it all, bringing us back to the future.

Microlog has for over thirty years been about one thing:  helping our  customers
serve their customers  better!  We develop software products and provide systems
integration services that allow our customers to provide self-service  solutions
that leverage the telephone (our roots) and the Web (our future).  We think this
is important  because the more rapidly  things  change,  the more help companies
will need applying it to their business operations.

We remain committed to our future,  including a return to profitability,  and we
look forward to being a part of yours.



John C. Mears                               Steven R. Delmar
Managing Director, Chief Operating Officer  Managing Director, Sales & Marketing

                                       2

<PAGE>
                                    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(R)-  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.

uniQue(R)"Product of the Year" 1998-1999

uniQue(R),  winner of four  "Product of the Year  Awards" in 1998,  continued 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, e-mail, 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.

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


<PAGE>

MICROLOG CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
                                                                 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)
------------------------------------------- ----------------- -------------- --------------

See accompanying notes to consolidated financial statements.

</TABLE>


<PAGE>

MICROLOG CORPORATION

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)\
<TABLE>
                                                                                 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
-------------------------------------------------------------------------------------- ----------

See accompanying notes to consolidated financial statements.

</TABLE>

<PAGE>



MICROLOG CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(IN THOUSANDS)

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

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


<PAGE>

MICROLOG CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)
<TABLE>


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

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

<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, develops,  markets, and
supports 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.

The Company  manages its  business  segments  on the basis of the  products  and
services  offered.  The Company's two  reportable  segments  consist of Microlog
Corporation  of  Maryland,  referred  to as voice  processing  systems and other
communications  products and services,  and Old Dominion Systems Incorporated of
Maryland,  referred  to  as  performance  analysis  and  support  services.  The
Company's  management  evaluates  segment  performance  on the basis of  segment
earnings  which includes an allocation of corporate  general and  administrative
expenses to each segment.

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

<TABLE>
                                                                      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>

<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 are  recognized at the time  deliveries  are made. The Company
generates  software  revenues  from  licensing  the  right  to use its  software
products  and  also  generates   service   revenues  from   implementation   and
installation services, ongoing maintenance,  training services, and professional
services performed.

Revenue from software  license  agreements  is  recognized  upon shipment of the
software if:  persuasive  evidence of an arrangement  exists;  sufficient vendor
specific  objective  evidence exists to support  allocating the total fee to all
elements of the arrangement; the fee is fixed or determinable; and collection is
probable.

Ongoing  maintenance  contracts,  which include software upgrades,  are invoiced
separately and revenue is earned ratably over the term of the contract.  Revenue
from  implementation  and installation  services is recognized when the services
are  completed.  Revenue from  training  services and  professional  services is
recognized when the services are completed.

In a rare instance when a customer,  under terms of a specific  order,  requests
that the Company  manufacture  and invoice  goods on a bill and hold basis,  the
Company  sets aside the goods from the  available  inventory  for sale.  Revenue
recognition  is  based  on the  completion  of the  manufacturing  process,  the
satisfaction of all performance obligations, acceptance by the customer, and the
passage of title and risk of ownership to the customer.  The Company  recognized
$3.5 million in sales in fiscal year 1997 under one bill and hold agreement.  No
such transactions occurred in fiscal years 1998 and 1999.

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.

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.

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 sale included the
rights to three  maintenance  contracts to which Microlog is a party relating to
the TIVRA  product.  The Company also agreed to grant Comsys  certain  rights to
resell  its TIVRA  software  and  related  hardware.  As part of the  sale,  two
Microlog employees became employees of Comsys. The Company recorded a receivable
of $100,000, which is contingent upon the renewals and ultimate cash collections
by Comsys, of the three maintenance contracts. The sale is anticipated to result
in an estimated net gain to Microlog of  approximately  $100,000,  but since the
collectability  of the receivable and the resulting gain is uncertain,  the gain
on the sale was deferred until it is realized.

NOTE 5: RECEIVABLES

RECEIVABLES CONSIST OF THE FOLLOWING (IN THOUSANDS):
<TABLE>

                                                                            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
================================================================================================

NOTE 6:  INVENTORIES

INVENTORIES CONSIST OF THE FOLLOWING (IN THOUSANDS):
                                                                          October 31,
                                                                  1998                   1999
------------------------------------------------------------------------------------------------
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>
                                                                             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
================================================================================================
</TABLE>
<TABLE>
<S>                                                                   <C>
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).

<PAGE>


NOTE 8: ACCRUED EXPENSES

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

<TABLE>

                                                                             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>
                                                                             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  forbearance  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 and maintenance,  which began on June 30,
1996.  Four annual  payments have been made to date. The final payment is due on
June 30,  2000.  The  debt for the  principal  payment  is shown as the  current
portion of long-term debt on the balance sheet.

<PAGE>

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-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):
<TABLE>

         Year Ending October 31,
              <S>                           <C>
              2000                          $     344
              2001                                353
              2002                                363
              2003                                365
              2004                                365
              Thereafter                        1,773
-----------------------------------------------------
              Total                           $ 3,563
</TABLE>

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.

<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>
                                              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>
                                              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>

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>

                                               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.  In exchange  for  providing  consulting  services for a period of
approximately six months, 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.  40,000 shares would become exercisable upon commencement
of the project,  40,000 shares would become exercisable upon the completion of a
certain  milestone,  and the additional  115,000 shares would become exercisable
upon the  attainment  of  certain  levels of the market  price of the  Company's
common stock. The options have a term of five years, expiring in June 2002.

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,  Parthenon  agreed  to  provide  additional
consulting  services and 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,
which  included  $75,000  related to the  repricing of the options that occurred
during fiscal year 1999, as a result of re-measuring the cost of the services at
fair market value.  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.


The following table summarizes  information about all stock options  outstanding
at October 31, 1999:
<TABLE>

                                                          Options Outstanding         Options Exercisable
                                                      ---------------------------- ---------------------------

                                                      Weighted-Average
                                                         Years of
                          Range                         Remaining     Weighted-Average          Weighted-Average
                            Of                         Contractual     Exercise                    Exercise
                         Exercise         Number           Life          Price        Number         Price
                          Prices       Outstanding                                  Exercisable
                      --------------- --------------- --------------- ------------ -------------- ------------
<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>

                                                          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>
                                                     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>

<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>

                                                              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>

                                                                 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>

<PAGE>

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

<TABLE>

                                                                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>

                                                                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.

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


<PAGE>

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

In fiscal  year  1999,  the  Company  recorded  $693,000  in costs  related to a
comprehensive  restructuring  program  that  was  implemented  during  the  last
three-quarters  of 1999. 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.  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>

                             Year Ended October 31,
                      1997             1998             1999
                      ----             ----             ----
<S>                 <C>             <C>               <C>
Interest            $    94         $     29          $     48
Income taxes        $    25         $    125          $    --
</TABLE>

<PAGE>

NOTE 17: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

THE FOLLOWING TABLE PRESENTS UNAUDITED QUARTERLY OPERATING RESULTS AND THE PRICE
RANGE OF COMMON STOCK FOR THE COMPANY'S LAST EIGHT FISCAL QUARTERS.
<TABLE>

(In thousands, except per share data)

                                          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                                       (1,169)             (749)          (3,855)            (2,868)
Net loss per share:
   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        $       806
Loss from operations                           (1,266)           (2,218)            (211)            (1,059)
Net loss                                       (1,199)           (2,189)            (187)            (1,118)
Net loss per share:
   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>

<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 operations 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.



    Vienna, Virginia
    December 13, 1999



<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




<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>
                                                                                  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                             ---          ---          03.9%            --        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

A SUMMARY OF INFORMATION  ABOUT THE COMPANY'S  OPERATIONS BY BUSINESS SEGMENT IS
AS FOLLOWS (IN THOUSANDS):
<TABLE>
                                                                              Year Ended October 31,
                                                                 1997             1998              1999
---------------------------------------------------------------------------------------------------------
<S>                                                           <C>              <C>               <C>
         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)
-----------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

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 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.

<PAGE>

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 $14.7  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  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 sales of the APRS
product  over that

<PAGE>


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 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

<PAGE>

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.

VOICE PROCESSING COSTS AND EXPENSES

Cost of sales of products for voice processing 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 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 for voice processing were $1.7 million,  or 39% of net
sales of services,  for fiscal year 1999;  $2.2 million,  or 40% of net sales of
services,  for  fiscal  year  1998;  and $2.1  million,  or 40% of net  sales of
services,  for fiscal year 1997.  The decrease in cost of sales of services,  in
dollar amount,  for fiscal year 1999 was primarily  attributable to the decrease
in sales of services.

Selling,  general  and  administrative  costs  for  voice  processing  were $4.9
million,  or 62% of net sales,  for fiscal year 1999; $8.1 million or 55% of net
sales, for fiscal year 1998; $5.6 million,  or 29% of net sales, for fiscal year
1997.  The  decrease  in  fiscal  year  1999  in  dollar  amount  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 for voice processing 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 voice processing 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

<PAGE>


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.

PERFORMANCE ANALYSIS AND SUPPORT SERVICES COSTS AND EXPENSES

Cost of sales of services for performance  analysis were $8.7 million, or 86% of
net sales of services,  for fiscal year 1999; $9.7 million,  or 83% of net sales
of services,  for fiscal year 1998;  and $10.1  million,  or 81% of net sales of
services, for fiscal year 1997. The decrease in cost of sales, in dollar amount,
for fiscal years 1999 and 1998 was primarily  attributable  to reduced  services
sales. The increase in cost of sales, as a percentage of sales, for fiscal years
1999 and 1998 was primarily attributable to certain fixed costs that do not vary
directly  with sales  volume,  therefore,  the  decline in net sales of services
products did not result in a similar decline in costs.

Selling,  general and  administrative  costs for performance  analysis were $0.9
million,  or 9% of net sales of services,  for fiscal year 1999; $0.9 million or
8% of net sales of services,  for fiscal year 1998;  and $0.8 million,  or 7% of
net  sales,  for  fiscal  year 1997.  The  increase  in  selling,  general,  and
administrative  costs, as a percentage of sales,  for fiscal years 1999 and 1998
was primarily attributable to certain fixed costs that do not vary directly with
sales volume,  therefore,  the decline in net sales of services products did not
result in a similar decline in costs.

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.

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

<PAGE>


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, 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.


<PAGE>

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 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

<PAGE>


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, 1999 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.

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

<PAGE>


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. 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

<PAGE>


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.


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>

                                                            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)

Balance Sheet Data (in thousands):

                                                     October 31,
                                  1995         1996      1997          1998            1999
--------------------------------------------------------------------------------------------

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.

<PAGE>




MICROLOG CORPORATE INFORMATION

DIRECTORS

David M. Gische,
Chairman of the Board
Attorney, Ross, Dixon & Bell

Randall P. Gaboriault
Director of Information Technology
Teleflex Incorporated

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

David B. Levi
Director

Joe J. Lynn
Director

John J. Sickler
President
TFX Equities Incorporated

Steven R. Delmar
Managing Director, Sales and Marketing

John C. Mears
Managing Director, Chief Operating Officer





TRANSFER AGENT

Continental Stock Transfer & Trust Company
2 Broadway
New York, NY  10004-2277
(212) 509-4000

ANNUAL MEETING

Thursday, March 30, 2000, 10 a.m.
Corporate Headquarters
20270 Goldenrod Lane
Germantown, MD 20876-4070


TICKER SYMBOL
NASDAQ Over-the-Counter - MLOG




OFFICERS

MICROLOG CORPORATION
PARENT COMPANY & SUBSIDIARY

Steven R. Delmar
Managing Director, Sales and Marketing

John C. Mears
Managing Director, Chief Operating Officer

Deborah M. Grove
Vice President, Professional Services
              Business Development

Kirk E. Isenbart
Treasurer and Controller

Arlene France
Corporate Secretary



CORPORATE OFFICES

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



INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Grant Thornton
2070 Chain Bridge Road, Suite 375
Vienna, Virginia  22182-2536

LEGAL COUNSEL

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