EXHIBIT 13

Selected Financial Data
--------------------------------------------------------------------------------

The following selected consolidated financial data should be read in conjunction
with  the  Company's  Consolidated  Financial  Statements  and the  Notes to the
Consolidated Financial Statements.

<TABLE>
<CAPTION>

-------------------------------------------------------------------- ---------- ------------ ----------- ----------- ------------
Amounts in thousands, except per share data
Year ended December 31,                                                   1998         1997        1996        1995         1994
-------------------------------------------------------------------- ---------- ------------ ----------- ----------- ------------
<S>                                                                 <C>         <C>            <C>         <C>         <C>    
Statement of Income Data:
Revenues                                                              $293,525    $261,310)    $213,604    $168,652    $127,235)
Cost of goods sold                                                     108,567      98,329)      84,764      66,829      50,841)
                                                                     ---------- ------------ ----------- ----------- ------------
Gross profit                                                           184,958     162,981)     128,840     101,823      76,394)
Research and development expense                                        65,350      51,530)      40,666      29,045      21,650)
Selling, general and administrative expenses                            80,228      79,098)      60,052      47,673      34,646)
Asset impairment                                                         5,297           -)           -           -           -)
                                                                     ---------- ------------ ----------- ----------- ------------
Operating income                                                        34,083      32,353)      28,122      25,105      20,098)
Merger costs                                                                 -           -)           -       1,294           -)
Interest income - net                                                    3,099       1,637)       2,440       2,036       1,214)
Net realized (losses) gains on available for sale securities                32          (4)       9,175         309         (15)
Gain on sale of subsidiary                                              23,384           -)           -           -           -)
                                                                     ---------- ------------ ----------- ----------- ------------
Income before provision for income taxes                                60,598      33,986)      39,737      26,156      21,297)
Provision for income taxes                                              23,990      12,234)      14,189       9,854       5,408)
                                                                     ---------- ------------ ----------- ----------- ------------
Net income                                                           $  36,608   $  21,752)   $  25,548    $ 16,302    $ 15,889)
                                                                     ---------- ------------ ----------- ----------- ------------
Income per share:
  Basic                                                                 $ 2.29      $ 1.37)     $  1.63     $  1.06
  Diluted                                                               $ 2.21      $ 1.31)     $  1.56     $  1.02
                                                                     ---------- ------------ ----------- ----------- ------------
Shares used in the calculation of pro forma income per share:
  Basic                                                                 16,010      15,931)      15,654      15,340
  Diluted                                                               16,558      16,598)      16,417      16,039


Pro Forma Data:(1)
Income before provision for income taxes as reported                                                                    $21,297)
Provision for income taxes                                                                                                7,689)
Net income                                                                                                              $13,608)
Income per share:
  Basic                                                                                                                        $
                                                                                                                            .99)
  Diluted                                                                                                                      $
                                                                                                                            .94)
Shares used in the calculation of pro forma income per share:
  Basic                                                                                                                  13,774)
  Diluted                                                                                                                14,509)
Balance Sheet Data:
Working capital                                                       $139,559    $119,920)    $103,909     $76,997     $55,711)
Total assets                                                           216,983     182,404)     147,270     117,362      81,864)
Long-term obligations, net of current maturities                         2,475       2,481)       2,926       2,259       2,465)
Shareholders' equity(2)                                                175,677     144,865)     124,842      92,757      66,796)
-------------------------------------------------------------------- ---------- ------------ ----------- ----------- ------------
<FN>
(1) During 1994 through the IPO in April 1994 (the "S Period"),  the Company was
an S corporation and, accordingly,  was not subject to federal and certain state
corporate income taxes.  The pro forma statement of income  information has been
computed as if the Company had been subject to federal and all applicable  state
corporate income taxes during the S period, based on the statutory tax rates and
the tax laws then in effect.  

(2) The Company declared an aggregate of $2.5 million in S Corporation dividends
in 1994. No other dividends were declared during the periods presented.
</FN>

</TABLE>

<PAGE>

Managements  Discussion  and  Analysis  of  Financial  Condition  and Results of
OperationsM
--------------------------------------------------------------------------------

Business:  Dialogic  designs,  manufactures  and markets  hardware  and software
enabling  technologies for "computer  telephony" systems.  "Computer  telephony"
(CT)  is  the  term  used  to  encompass  a wide  variety  of  technologies  and
applications  that use the  information  processing  capabilities  of a computer
(often a server) to add intelligence to telephone functions and to combine these
functions with data processing.  The Company is headquartered in Parsippany, New
Jersey,  with regional  headquarters in Tokyo,  Japan;  Brussels,  Belgium;  and
Buenos Aires,  Argentina.  Dialogic employs approximately 1,250 people worldwide
and has  offices  in over  twenty  countries  around the  world.  The  following
discussion  and analysis  should be read in  conjunction  with the  Consolidated
Financial Statements and related Notes to the Consolidated Financial Statements.

Percentage of Revenues

          The following  table sets forth,  for the periods  indicated,  certain
statements of income data as a percentage of total revenues:

<TABLE>
<CAPTION>


                                                                   Percent of Sales                     Percent Change
---------------------------------------------------------- ------- ----------------- ---- ----- ----------------------- ------
Year ended December 31,                                       1998       1997        1996       1998       1997        1996
                                                                                                 vs.         vs.        vs.
                                                                                                1997       1996        1995
---------------------------------------------------------- ---------- ----------- ---------- ---------- ----------- ----------
<S>                                                           <C>         <C>        <C>         <C>        <C>         <C>  
Revenues                                                      100.0%      100.0%     100.0%      12.3%      22.3%)      26.7%
Gross profit                                                   63.0%       62.4%      60.3%      13.5%      26.5%)      26.5%
Research and development expense                               22.3%       19.7%      19.0%      26.8%      26.7%)      40.0%
Selling,  general and  administrative  expense (including
amortization of goodwill)                                      27.3%       30.3%      28.1%       1.4%      31.7%)      26.0%
Asset impairment                                                1.8%          -%         -%     100.0%         -%)         -%
Merger costs                                                      -%          -%         -%         -%         -%)     100.0%
Interest income - net                                           1.1%        0.6%       1.1%      89.3%     (32.9)%      19.8%
Net realized gains on available for sale securities               -%          -%       4.3%         -%    (100.0)%     100.0%
Gain on sale of assets of subsidiary                            8.0%          -%         -%     100.0%         -%)   
                                                                                                                           -%
---------------------------------------------------------- ---------- ----------- ---------- ---------- ----------- ----------
Income before provision for income taxes                       20.7%       13.0%      18.6%      78.3%     (14.5)%      51.9%
Provision for income taxes                                      8.2%        4.7%       6.6%      96.1%     (13.8)%      44.0%
---------------------------------------------------------- ---------- ----------- ---------- ---------- ----------- ----------
Net income                                                     12.5%        8.3%      12.0%    68.2(2)   (14.9)(1)   56.7(1))
---------------------------------------------------------- ---------- ----------- ---------- ---------- ----------- ----------
<FN>

(1)      During 1996,  the Company  recorded a pre-tax  gain of $9.1 million as a result of its first  quarter sale
     of a portion of its equity  position in VCS.  Excluding this gain,  the  percentage  increase of 1997 compared
     with 1996 would have been 10.1%.  The percentage increase for 1996 as compared to 1995 would have been 21.8%.
(2)      During 1998,  the Company  recorded a pre-tax gain of $23.4  million as a result of its first quarter sale
     of a subsidiary  and a charge of $5.3 million for the write down of certain  impaired  assets.  Excluding this
     gain and charge,  the  percentage  increase of 1998 compared with 1997 would have been 25.6%.  See notes 2 and
     3 of the Company's Notes to the Consolidated Financial Statements.
</FN>

</TABLE>


Fiscal 1998 Compared to Fiscal 1997

Revenue:  For the year ended December 31, 1998,  consolidated  revenue increased
12.3% to $293.5  million from $261.3  million in fiscal 1997.  Revenue growth in
the United  States  increased  8.9% or $18.2  million.  Revenue  reported in the
United States includes export sales primarily to Canada,  Latin America,  Korea,
China,  Southeast Asia, Middle East,  Australia and New Zealand.  Revenue growth
related  to export  sales  increased  47.2% or $15.8  million  year  over  year.
Moderate revenue growth within the United States was impacted by market weakness
and loss of fax market share. Despite global economic issues, revenues generated
from Japan and Belgium  (including  all of Western  Europe)  increased  25.3% to
$69.3  million  from $55.3  million  in the  preceding  year.  The  increase  in
international  revenue was  primarily  due to a 37.3% growth to $57.7 million in
revenue from Belgium.

During  1998,  Dialogic's  worldwide  revenue  growth  continued to be favorably
impacted by  increased  sales of  high-density  products.  During the year,  the

<PAGE>

Company continued to release commercial  production of its new products based on
DM3  architecture.  DM3  products  are  now  available  in  PCi,  cPCI,  and VME
configurations  utilizing industry standards such as H.323, G.723.1,  G.711, GSM
and T.38. Gross Profit:  Consolidated gross profit percentage for 1998 was 63.0%
compared  to 62.4% for the prior year.  The  increase  in margins  reflects  the
continued  effects of the Company's  cost  reduction  efforts across all product
lines  and the  effect  of  cost  savings  related  to a full  year  of  turnkey
manufacturing which was started in 1997.

Expenses:  Selling,  general, and administrative  expenses decreased to 27.3% of
revenue in fiscal  1998 as  compared to 30.3% in the  previous  year,  primarily
reflecting a leveraging of expenses over a larger  revenue base. The increase in
expense  dollars year over year is primarily  attributable  to additional  sales
commissions on a higher revenue base. Research and development expense increased
$13.8  million  to 22.3% of revenue  as  compared  to 19.7% of revenue in fiscal
1997.  The Company  continues to maintain a high level of R&D investment to meet
the needs of its customers and to obtain new design wins. The Company  continues
to  invest  engineering  resources  in  the  development  of  the  Dialogic  DM3
Mediastream Resource Architecture ("DM3") as well as development of IP telephony
and open switch hardware and software products.

Asset  Impairment:  During the first  quarter of 1998,  the Company  undertook a
strategic  review of its business and product  offerings.  At the  conclusion of
this review, the Company determined it would no longer allocate resources to its
Dianatel  product line.  Activities to sell and upgrade  Dianatel  products were
discontinued and employees working on Dianatel related products were diverted to
other  activities.  As a result of this decision,  management has concluded that
the  carrying  value of the  goodwill  that arose on the  purchase  of  Dianatel
Corporation  was no longer  justifiable,  and the  Company  recorded  a non-cash
impairment  charge of $3.5 million  related to the  write-down of goodwill.  The
discontinuance  of this product line will not have a  significant  effect on the
revenues or earnings of the Company in future periods.

          During  the  first  quarter  of 1998,  the  Company  upgraded  certain
internal information  technology systems.  Accordingly,  the Company took a $1.8
million  charge ($1.3  million  after-tax)  to reduce the carrying  value of the
internal  information  technology  assets  that will no longer be  utilized  and
therefore provide no future benefit to the Company.

Interest  Income:  The Company recorded $3.1 million net interest income for the
fiscal year ended  December 31,  1998,  compared to $1.6 million in the previous
fiscal  year.  Interest  income in 1998 of $1.7 million was  generated  from the
Company's investments in tax-free securities as compared to $1.8 million in 1997
from tax-free investments. In addition, the Company generated approximately $1.6
million of interest income on short-term bank deposits.  The increase  primarily
reflects the growth in the Company's short-term bank deposits due in part to the
proceeds  from the sale of assets of a  subsidiary  during the first  quarter of
1998. The Company continues to invest a substantial amount of its available cash
in tax-free securities.

Gain on Sale of Subsidiary: On February 17, 1998, the Company completed the sale
of the principal assets and operations of Spectron Microsystems,  Inc., a wholly
owned subsidiary,  to Texas  Instruments Inc. for $26.0 million,  resulting in a
pre-tax gain of $23.4 million.

Taxes: The effective tax rate for fiscal 1998 was 39.6% as compared to 36.0% for
fiscal  1997.  The increase is  attributable  to the  write-down  of the non-tax
deductible goodwill of Dianatel  Corporation in the first quarter of 1998 in the
amount of $3.5 million,  as well as the higher effective tax rate on the gain on
sale of assets of a subsidiary.

Net  Income:  Net  income for  fiscal  year 1998 was $36.6  million or $2.21 per
diluted  share as compared to $21.8  million or $1.31 per diluted  share for the
previous  year.  Net income for the current year  included an after-tax  gain of

<PAGE>

$14.0  million or $0.84 per diluted  share on the first  quarter asset sale of a
subsidiary and charges related to asset impairment of $4.8 million  after-tax or
$0.29 per diluted share for the write-down of certain assets.

<PAGE>

Fiscal 1997 Compared to Fiscal 1996

Revenue:  For the year ended December 31, 1997,  consolidated  revenue increased
22.3% to $261.3  million from $213.6  million in fiscal 1996.  Revenue growth in
the United States increased 20.1% or $34.5 million. Revenue growth in the United
States was impacted by longer than originally anticipated cycles for new product
design wins.  International  revenues,  primarily  Belgium and Japan,  increased
31.4% to $55.3  million  from $42.1  million the  preceding  year.  During 1997,
Dialogic's worldwide revenue growth was favorably impacted by increased sales of
high-density  products.  Sales from high-density  products  represented 55.6% of
total 1997 revenue versus 48.7% of the total revenue in 1996.

Gross Profit:  Consolidated  gross profit percentage for 1997 was 62.4% compared
to 60.3% for the prior year.  The  increase in margins  reflects  the  continued
effects of the Company's cost reduction efforts across all product lines. During
1997, the Company  substantially  completed its move of production to a selected
turnkey  manufacturer  resulting in further cost savings.  In addition,  margins
were  impacted  by  favorable  product mix  related to the  increased  volume of
high-density  products,  offset  partially by a one-time charge of $600 thousand
for the settlement of royalties related to a potential patent infringement.

Expenses:  As a  percentage  of  consolidated  revenues,  selling,  general  and
administrative  expenses  increased to 30.3% in fiscal 1997 as compared to 28.1%
in the  previous  year.  The  increase  in selling,  general and  administrative
expenses is attributable to the continuing  growth of domestic and international
sales  and  marketing   efforts   associated  with  new  product   launches  and
establishment  of  additional  sales  offices,  costs  associated  with internal
technology   infrastructure  and  the  costs  associated  with  the  hiring  and
relocation  of  executive  staff  members.   Research  and  development  expense
increased  $10.9  million to 19.7% of revenue as compared to 19.0% of revenue in
fiscal  1996.  The increase  reflects  the  Company's  continued  investment  of
engineering  resources  related to Dialogic's DM3 Architecture  announced in the
first quarter of 1997. The Company recognized  amortization  expense of goodwill
associated with the acquisition of Dianatel  Corporation of  approximately  $1.0
million in fiscal 1997 as compared to $386 thousand in the prior year.

Interest  Income:  The Company recorded $1.6 million net interest income for the
fiscal year ended  December 31,  1997,  compared to $2.4 million in the previous
fiscal year.  Interest  income in 1997 of $1.8 million was  primarily  generated
from the  Company's  investments  in tax free  securities  as  compared  to $2.5
million in 1996 from tax free  investments  and from the  Company's  election to
convert  accrued  interest on the note of Voice Control  Systems,  ("VCS").  The
Company  continues  to  invest a  majority  of its  available  cash in  tax-free
securities.

Taxes:  The effective tax rate for fiscal 1997 was 36.0%,  compared to 35.7% for
fiscal 1996.

Net Income:  Net income for fiscal  1997 was $21.8  million or $1.31 per diluted
share,  compared to $25.5  million or $1.56 per diluted  share for the  previous
year.  Net  income in fiscal  1996  included  an  after-tax  gain on the sale of
securities of VCS of $5.8 million or $0.35 per diluted share.

Inflation,   Foreign  Currency  and  Other  Matters  Inflation  has  not  had  a
significant impact on the Company's  operating results to date. Foreign currency
transaction gains and losses are included within the Company's selling,  general
and  administrative   expenses.  The  majority  of  the  Company's  revenue  and
receivables  are  denominated in the US dollars.  Based on the foreign  currency
exposure of  nonfunctional  currency  denominated  receivables  and  payables at
December  31,  1998,  a 10%  adverse  change  in the  currency  rates  would not
materially  affect the Company's  financial  position,  results of operations or
cash flows.  While the amounts of such gains or losses have not been significant
to the  Company's  results  to date,  as the  Company  continues  to expand  its
international operations, exposure to gains and losses on international currency
transactions  may increase and may be material to quarterly and annual  results.
The consolidated  financial statements of the Company reflect the translation of
the  functional  currencies  of its  foreign  subsidiaries  under  Statement  of
Financial Accounting Standards ("SFAS") No. 52.

<PAGE>

Year 2000

The Year 2000 issue is  primarily  the result of computer  programs or databases
using a two-digit  format,  as opposed to four  digits,  to represent a calendar
year. Some computer  systems will be unable to correctly  interpret dates beyond
the year 1999,  which could  cause a system  failure or other  computer  errors,
leading to a  disruption  in the  operation  or  accuracy of such  systems.  The
Company has  undertaken a company-wide  study and testing  program to locate and
cure any Year 2000  issues in the  products or systems on which it relies and in
the  products it offers for sale or license.  The Company  believes its internal
systems, including both its financial operating (information technology) systems
and  non-information  technology systems are Year 2000 compliant.  The Company's
financial  operating systems have been upgraded to a Year 2000 compliant release
within the context of its normal  operating  environment.  Such  upgrade was not
accelerated in anticipation of Year 2000 issues.  No material  additional  costs
were  incurred in upgrading the Company's  internal  systems.  This phase of the
Company's  Year 2000 study is  completed.  The Company has been and  anticipates
continuing  to work jointly  with  strategic  vendors and  business  partners to
identify  any Year  2000  issues  that  may  impact  the  Company.  The  Company
anticipates  that  evaluation  and corrective  actions,  if any, will be ongoing
throughout  1999.  To date,  the Company has not  identified  any such  problems
requiring corrective action that will result in a material adverse impact on the
Company.  However,  there can be no assurance  that the companies with which the
Company does business will achieve Year 2000 compliance in a timely fashion,  or
that such failure to comply by another company will not have a material  adverse
effect on the Company. The Company believes the products it currently offers for
sale or license are all Year 2000 compliant,  and that the cost to remediate any
previously sold product that is not Year 2000 compliant will not be material.

          The Company  has and will incur  internal  staff costs  related to the
above  initiative.  The Company  maintains a web site and has  responded to many
inquiries from customers  regarding Year 2000 compliance of its products.  These
costs are not  considered to have a material  impact on the Company's  operating
results and have not been quantified.

          Based on the  assessment  effort to date, the Company does not believe
that the Year 2000 issue will have a material  adverse  effect on its  financial
condition,   results  of   operations,   or  cash  flows.   This   represents  a
forward-looking  statement under the Private Securities Litigation Reform Act of
1995.  Actual  results could differ  materially  from the  Company's  belief and
expectations,  which are based on  certain  assumptions  and  expectations  that
ultimately may prove to be inaccurate. Potential sources of risk include (a) the
inability  of principal  suppliers to be Year 2000 ready,  which could result in
delays  in  product  deliveries  from  such  suppliers;  (b)  disruption  of the
distribution channel,  including  transportation  vendors; (c) customer problems
which could affect revenue demand; (d) undiscovered  issues related to Year 2000
compatibility  which could have a material  adverse  impact.  The Company's Year
2000  assessment  is ongoing and the  consideration  of  contingency  plans will
continue to be evaluated as new information  becomes  available.  At this stage,
however,  the Company  has not  developed a  comprehensive  contingency  plan to
address  situations  that may result if any of the third  parties upon which the
Company is  dependent is unable to achieve  Year 2000  compliance.  The need for
such a contingency plan will be evaluated throughout 1999. 

Liquidity and Capital  Resources 

          As of December  31,  1998,  the  Company  had working  capital of $140
million  and a current  ratio  (i.e.,  the ratio of  current  assets to  current
liabilities)  of 4.7 to 1, compared  with working  capital of $120 million and a
current ratio of 4.7 to 1 at December 31, 1997.

          The Company's  consolidated  cash,  cash  equivalents  and  marketable
securities  increased by $21.8 million  during  fiscal 1998.  Cash provided from
operations  was $27.8  million,  while $1.6  million was  provided by  investing
activities and $7.8 million used in financing activities.

          The   Company's   investing   activities   in  fiscal  1998   included
expenditures of $15.0 million for property and equipment,  primarily  associated
with  the  expansion  of  the  Company's   headquarters  and  $6.9  million  for
investments in companies Dialogic believes to be strategic partners. The Company
received  $26.0  million  from  proceeds  of the  sale  of  assets  of  Spectron
Microsystems in the first quarter of 1998.

<PAGE>

          Net cash used in financing activities was $7.8 million. On November 6,
1997,  the Board of  Directors  authorized a share  repurchase  program of up to
800,000 shares to be bought over three years.  In 1998, the Company  repurchased
350,000 shares of the Company's  common stock  pursuant to the repurchase  plan,
accounting  for  approximately  $9.9  million of such  activities.  To date,  an
aggregate 400,000 shares of treasury stock have been purchased for $11.8 million
cash.  In addition,  the Company  realized  proceeds  from the exercise of stock
options and issuance of common stock of $2.8 million.

          The Company has financed its operations  primarily  through cash flows
from  operations  as well as from  the net  realized  gain  from its sale of VCS
securities,   and  the  net  proceeds  from  the  sale  of  assets  of  Spectron
Microsystems Inc. Dialogic is a party to a credit facility pursuant to which the
Company may borrow up to $30 million on an unsecured  basis for working  capital
purposes.  See  notes  2, 4 and 6 of the  Notes  to the  Company's  Consolidated
Financial Statements.

          The Company  believes that the  combination of its current  liquidity,
cash generated from operations and the credit  available under its existing bank
lines will be sufficient to meet its  liquidity and capital  requirements.  This
statement  represents a forward-looking  statement under the Private  Securities
Litigation Reform Act of 1995. The actual  sufficiency of such capital resources
could differ  materially from the Company's  expectations,  depending  primarily
upon the extent to which  unanticipated  capital  requirements may arise and the
extent to which unanticipated events may have a materially adverse effect on the
Company's profitability.

New Accounting Pronouncements

In June of 1998,  the FASB  issued  SFAS No.  133,  "Accounting  for  Derivative
Instruments and Hedging Activities." This statement  establishes  accounting and
reporting standards for derivative  instruments and requires  recognition of all
derivatives as assets or liabilities in the statement of financial  position and
measurement of these  instruments at fair value.  The statement is effective for
fiscal years  beginning after June 15, 1999.  Management  believes that adopting
this  statement  will not have a  material  impact  on the  financial  position,
results of operations, or cash flows of the Company.

Risks and Uncertainties

Dialogic's business is subject to certain risks which are described in detail in
Item 1 of the Dialogic  Annual  Report on Form 10-K for its year ended  December
31, 1998. Such risks include,  but are not limited to, product demand and market
acceptance  risks; the effect of worldwide  economic  conditions;  the impact of
competitive  products and pricing;  the Company's  ability to enter new markets;
the adoption of new standards and the Company's ability to meet those standards;
product  development  problems;  effects  of  competitive  forces  and  pace  of
deregulation  in the  telecommunications  industry;  the status of  intellectual
property rights; commercialization and technological difficulties;  capacity and
supply  constraints or  difficulties;  the impact of  acquisitions or mergers of
customers,  competitors or suppliers;  constraints on capital resources; general
business conditions;  and the effect of the Company's accounting policies.  Such
factors,  as well as announcements of technological  innovations or new products
by  Dialogic,   its  competitors  or  third-parties;   consolidations  or  other
substantial  changes  within  or  affecting  the  computer  telephony  industry;
quarterly  variations  in the  Company's  results of  operations;  shortfalls in
Dialogic's  revenues,  gross  margins or earnings as  compared  with  investment
analysts' expectations,  regulatory developments, capital market conditions; and
general and economic  conditions,  may also cause substantial  volatility in the
market price of the Company's common stock. The Company continually  reevaluates
its operations and business  structure and may, from time to time,  take actions
to restructure operations accordingly.

<PAGE>

Independent Auditors' Report
--------------------------------------------------------------------------------

To the Board of Directors and Shareholders of
Dialogic Corporation
Parsippany, New Jersey 07054

          We have  audited  the  accompanying  consolidated  balance  sheets  of
Dialogic  Corporation and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated  statements of income,  statements of comprehensive income,
shareholders'  equity and cash  flows for each of the three  years in the period
ended December 31, 1998. 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 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 audits provide a reasonable basis for our opinion.

          In our opinion, such consolidated financial statements present fairly,
in all material  respects,  the financial  position of Dialogic  Corporation and
subsidiaries  as of  December  31,  1998  and  1997,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.


DELOITTE & TOUCHE LLP

Parsippany, New Jersey
January 27, 1999
(except for Note 10, as to which the date is March 2, 1999)



<PAGE>

<TABLE>
<CAPTION>

Consolidated Balance Sheets                                                     
--------------------------------------------------------------------------------

Assets
--------------------------------------------------------------------------------
(Amounts in thousands, except share data)
 December 31,                                                                                          1998)             1997)
--------------------------------------------------------------------------------------------- ---------------- -----------------
Current assets:
<S>                                                                                                  <C>               <C>     
     Cash and cash equivalents                                                                       $39,774)          $18,764)
     Marketable securities                                                                            44,594)           43,774)
     Accounts receivable (net of allowance for doubtful
          accounts of $1,871 and $1,280, respectively)                                                55,094)           45,186)
     Inventory:
          Raw materials                                                                                3,939)            8,827)
          Work in process                                                                              5,073)            6,724)
          Finished goods                                                                              12,835)           14,941)
                                                                                              ---------------- -----------------
                                                                                                      21,847)           30,492)
     Deferred income taxes                                                                             9,130)            7,190)
     Other current assets                                                                              7,295)            6,842)
                                                                                              ---------------- -----------------
          Total current assets                                                                       177,734)          152,248)
                                                                                              ---------------- -----------------

Property and equipment:
     Leasehold improvements                                                                            6,872)            5,049)
     Furniture and fixtures                                                                            8,959)            6,809)
     Equipment                                                                                        43,056)           35,084)
                                                                                              ---------------- -----------------
                                                                                                      58,887)           46,942)
     Less accumulated depreciation and amortization                                                  (31,483)          (24,327)
                                                                                              ---------------- -----------------
                                                                                                      27,404)           22,615)
Other assets                                                                                          11,845)            7,541)
                                                                                              ---------------- -----------------

TOTAL ASSETS                                                                                        $216,983)         $182,404)
                                                                                              ---------------- -----------------
</TABLE>


<TABLE>


Liabilities and Shareholders' Equity

--------------------------------------------------------------------------------------------- ---------------- -----------------
(Amounts in thousands except share data)
December 31,                                                                                             1998              1997
Current liabilities:
<S>                                                                                                  <C>               <C>     
     Accounts payable                                                                                $13,746)          $14,361)
     Accrued salaries and benefits                                                                     8,683)            6,390)
     Accrued royalties                                                                                 1,289)            1,825)
     Accrued expenses                                                                                  9,211)            7,986)
     Income taxes payable                                                                              5,088)            1,237)
     Current maturities of long-term liabilities                                                         158)              529)
          Total current liabilities                                                                   38,175)           32,328)

Long-term liabilities                                                                                  2,475)            2,481)
Deferred income taxes                                                                                    656)            2,730)
Commitments and contingencies (Note 8)                                                                     -)                 -

Shareholders' Equity:
     Preferred stock, no par value, stated value $0.01 - 10,000,000 shares authorized:
          none issued                                                                                      -)                -)
     Common stock, no par value, stated value $0.01 - 60,000,000 shares authorized:
           16,287,541 and 16,100,862 shares issued, respectively                                         217)              214)
     Additional paid-in capital                                                                       56,575)           51,941)
     Retained earnings                                                                               130,631)           94,023)
     Accumulated other comprehensive income                                                              755)              599)
     Unearned compensation - restricted stock                                                           (702)                -)
     Treasury stock, at cost; 400,000 and 50,000 shares, respectively                                (11,799)           (1,912)
          Total shareholders' equity                                                                 175,677)          144,865)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                          $216,983)         $182,404)


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

The accompanying notes are an integral part of the Consolidated Financial Statements.

</TABLE>

<PAGE>

<TABLE>

--------------------------------------------------------------------------------
Consolidated Statements of Income                                               
--------------------------------------------------------------------------------

(Amounts in thousands, except per share data)
December 31,                                                                                   1998         1997)          1996
-------------------------------------------------------------------------------------- ------------- ------------- -------------
<S>                                                                                        <C>          <C>            <C>     
Revenues                                                                                   $293,525     $261,310)      $213,604
Cost of goods sold                                                                          108,567       98,329)        84,764
                                                                                       ------------- ------------- -------------
Gross profit                                                                                184,958      162,981)       128,840
Research and development expense                                                             65,350       51,530)        40,666
Selling, general and administrative expenses                                                 80,228       79,098)        60,052
Asset impairment                                                                              5,297            -)             -
                                                                                       ------------- ------------- -------------
  Operating income                                                                           34,083       32,353)        28,122
Interest income - net                                                                         3,099        1,637)         2,440
Net realized gains (losses) on available for sale securities                                     32           (4)         9,175
Gain on sale of subsidiary                                                                   23,384            -)             -
                                                                                       ------------- ------------- -------------
Income before provision for income taxes                                                     60,598       33,986)        39,737
Provision for income taxes                                                                   23,990       12,234)        14,189
                                                                                       ------------- ------------- -------------
Net income                                                                                 $ 36,608     $ 21,752)      $ 25,548
                                                                                       ------------- ------------- -------------

                                                                                       ------------- ------------- -------------
Net income per share:
  Basic                                                                                     $  2.29      $  1.37)       $  1.63
  Diluted                                                                                   $  2.21      $  1.31)       $  1.56
                                                                                       ------------- ------------- -------------

                                                                                       ------------- ------------- -------------
Weighted average number of common shares outstanding:
  Basic                                                                                      16,010       15,931)        15,654
  Diluted                                                                                    16,558       16,598)        16,417
                                                                                       ------------- ------------- -------------


The accompanying notes are an integral part of the Consolidated Financial Statements.
</TABLE>

<PAGE>
<TABLE>


Consolidated Statements of Comprehensive Income                                        Dialogic Corporation and Subsidiaries
-------------------------------------------------------------------------------------------------------------------

(Amounts in thousands)
Year ended December 31,                                                                       1998)         1997)         1996)

<S>                                                                                       <C>           <C>           <C>      
Net income:                                                                               $ 36,608)     $ 21,752)     $ 25,548)

Foreign currency translation adjustment:
     Foreign currency translation gains (losses)                                               598)         (400)         (359)

Net unrealized gains (losses) on investment securities:
     Net  unrealized  (losses)  gains arising  during the 
     period (net of tax of $237, $2,540 and                                                   (421)       (4,631)         4,721
     ($2,392), respectively)
     Reclassification  adjustment for (gains)  losses  
     included in net income (net of tax of $11,                                                (21)            2)       (5,872)
     ($2) and $3,303, respectively)
     Net unrealized (losses) gains on investment securities                                   (442)       (4,629)       (1,151)
          Total other comprehensive income (loss)                                               156       (5,029)       (1,510)

Comprehensive income                                                                      $ 36,764)     $ 16,723)     $ 24,038)

The accompanying notes are an integral part of the Consolidated Financial Statements.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>

Consolidated Statements of Shareholders' Equity
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                       
                                                                                                  Accumulated Comprehensive
                                                                              Unearned                      Income           Total
                                                        Additional          Compensation          Cumulative  Unrealized     Share-
                              Number   Shares   Common  Paid-in   Retained  Restricted  Treasury  Translation Gains/Losses  holders'
  (In thousands)              Common  Treasury  Stock   Capital   Earnings    Stock      Stock    Adjustment  On Investments Equity
                              ------------------------------------------------------------------------------------------------------

<S>                            <C>      <C>     <C>   <C>        <C>           <C>        <C>         <C>         <C>       <C>     
  Balance, January 1, 1996     15,492    -      $206    $38,690    $46,723   $   -      $   -       $  373        $6,765    $92,757)
  ----------------------------------------------------------------------------------------------------------------------------------
  Exercise of stock options       180    -         3      1,201        -         -          -                        -        1,204)
  Issuance of common stock
     in connection with
     acquisitions                  55    -         1      3,794        -         -          -          -             -        3,795
  Currency translation loss         -    -         -         -         -         -          -         (359)             -      (359)
  Net unrealized losses on
     available for sale             -    -         -         -         -         -          -          -       (1,151)       (1,151)
     securities
  Issuance  of  common   stock
     under employee stock          47    -         -      1,368        -         -          -          -             -        1,368
     purchase plan
  Tax benefit from exercise of
       stock options                -    -         -      1,680        -         -          -          -             -        1,680
  Net income                        -    -         -         -      25,548       -          -          -             -       25,548
  ----------------------------------------------------------------------------------------------------------------------------------
  Balance, December 31, 1996   15,774    -       210     46,733     72,271       -          -         14        5,614)      124,842
  ----------------------------------------------------------------------------------------------------------------------------------
  Purchases of treasury stock       -   (50)       -         -         -         -      (1,912)        -             -       (1,912)
  Exercise of stock options       234    -         3      1,431        -         -          -          -             -        1,434
  Issuance of common stock as
       directors' fees              3    -         -         85        -         -          -          -             -           85
  Currency translation loss         -    -         -         -         -         -          -       (400)            -         (400)
  Net unrealized losses on                                                                            
       available for sale
       securities, net of tax       -    -         -         -         -         -          -          -        (4,629)      (4,629)
  Issuance of common  stock
       under employee stock        90    -         1      1,716        -         -          -          -             -        1,717
       purchase plan
  Tax benefit from exercise 
       of stock options             -    -         -      1,976        -         -          -          -             -        1,976
  Net income                        -    -         -         -      21,752       -          -          -             -       21,752
  ----------------------------------------------------------------------------------------------------------------------------------
  Balance, December 31, 1997   16,101   (50)     214     51,941     94,023       -      (1,912)     (386)           985     144,865
  ----------------------------------------------------------------------------------------------------------------------------------
  Purchases of treasury stock       -  (350)       -         -         -         -      (9,887)        -             -       (9,887)
  Exercise of stock options       122    -         2        869        -         -          -          -             -          871
  Issuance of common stock as
       directors' fees              2    -         -         86        -         -          -          -             -           86
  Net unearned compensation
       restricted stock             -    -         -        933        -       (702)        -          -             -          231
  Currency translation gain         -    -         -         -         -         -          -        598            -           598
  Net unrealized losses on
       available for sale
       securities,                  -    -         -         -         -         -          -          -           (442)       (442)
       net of tax
  Issuance  of  common   stock
       under employee stock        62    -         1      1,816        -         -          -          -             -        1,817)
       purchase plan
  Tax benefit from exercise of
       stock options                -    -         -        930        -         -          -          -             -          930
  Net income                        -    -         -        -       36,608       -          -          -             -       36,608
  ----------------------------------------------------------------------------------------------------------------------------------
  Balance, December 31, 1998   16,287  (400)    $217    $56,575   $130,631    ($702)  ($11,799)     $212           $543    $175,677
  ----------------------------------------------------------------------------------------------------------------------------------

  The accompanying notes are an integral part of the Consolidated Financial Statements.

</TABLE>

<PAGE>

Consolidated Statements of Cash Flows                                           
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

(In thousands)
Year ended December 31,                                                                        1998          1997          1996
-------------------------------------------------------------------------------------- ------------- ------------- -------------
Cash flows from operating activities:
<S>                                                                                       <C>           <C>           <C>      
Net income                                                                                $ 36,608)     $ 21,752)     $ 25,548)
Adjustments for non-cash items included in net income:
          Depreciation and amortization                                                      8,634)        9,496)        6,103)
          Asset impairment                                                                   5,297)            -)            -)
          Deferred income taxes                                                             (3,310)       (2,642)         (587)
          Non-cash interest income                                                               -)            -)       (1,069)
          Net realized (gain) loss on available for sale securities                            (32)            4)       (9,175)
          Gain on sale of subsidiary                                                       (23,384)            -)            -)
          Other                                                                                675)          909)        2,493)
          Changes in operating assets and liabilities                                        3,331)        1,496)      (15,504)
                                                                                       ------------- ------------- -------------
                    Net cash flows provided by operating activities                         27,819)       31,015)        7,809)
                                                                                       ------------- ------------- -------------
Investing Activities:
          Capital expenditures                                                             (15,233)      (10,712)      (10,722)
          Purchase of available for sale securities                                        (18,442)      (25,656)      (45,937)
          Purchase of investments (cost method)                                             (6,875)            -)            -)
          Proceeds from sales of available for sale securities                              16,270)       12,187)       44,044)
          Proceeds from sales of other investments                                               -)            -)       10,100)
          Proceeds from sale of subsidiary, net of cash disposed                            25,869)            -)            -)
          Other                                                                                  -)            -)         (820)
                                                                                       ------------- ------------- -------------
                    Net cash flows provided by (used in) investing activities                1,589)      (24,181)       (3,335)
                                                                                       ------------- ------------- -------------
Financing Activities:
          Proceeds from short-term borrowings                                                    -)            -)       12,625)
          Repayments on short-term borrowings                                                    -)            -)      (12,625)
          Exercise of stock options                                                            871)        1,434)         1,204
          Purchase of treasury stock                                                        (9,887)       (1,912)            -)
          Issuance of common stock                                                           1,817)        1,717)        1,368)
          Other                                                                               (646)         (757)         (826)
                                                                                       ------------- ------------- -------------
                    Net cash flows provided by (used in) financing activities               (7,845)          482)        1,746)
                                                                                       ------------- ------------- -------------
Increase in cash and cash equivalents                                                       21,563)        7,316)        6,220)
Effect of exchange rate on cash                                                               (553)         (400)         (359)
Cash and cash equivalents, beginning of year                                                18,764)       11,848)        5,987)
                                                                                       ------------- ------------- -------------
Cash and cash equivalents, end of year                                                    $ 39,774)     $ 18,764)     $ 11,848)
                                                                                       ============= ============= =============

Change in operating assets and liability components:
          (Increase) in accounts receivable                                              $ (10,238)    $ (10,480)     $ (8,510)
          (Increase) decrease in inventory                                                   9,008)       (2,731)       (3,480)
          (Increase) in other current assets                                                  (425)       (1,680)       (1,910)
          Increase (decrease) in accounts payable                                             (492)        7,318)       (2,393)
          Increase in accrued expenses                                                       5,478)        9,069)          789)
                                                                                       ------------- ------------- -------------
                    Change in operating assets and liabilities                               3,331)      $ 1,496)     $(15,504)
                                                                                       ============= ============= =============


Supplemental disclosures of cash flow information:
          Cash paid during the year for:
          Interest`                                                                         $  165)       $  108)      $    95)
          Income taxes                                                                      18,898)       14,379)       13,739)
Supplemental disclosures of non-cash investing
          and financing activities:
Tax benefit from exercise of stock options                                                     930)        1,979)        1,680)
Stock and options issued for acquisition of business                                             -)            -)        3,795)
Issuance of restricted common stock                                                            933)            -)            -)
-------------------------------------------------------------------------------------- ------------- ------------- -------------

The accompanying notes are an integral part of the Consolidated Financial Statements.
</TABLE>

<PAGE>

Notes to Consolidated Financial Statements                                      
--------------------------------------------------------------------------------

1. Summary of Significant Accounting Policies

Nature of Business - Dialogic  designs,  manufactures  and markets  hardware and
software  enabling  technologies  for "computer  telephony"  systems.  "Computer
telephony" (CT) is a term used to encompass a wide variety of  technologies  and
applications  that use the  information  processing  capabilities  of a computer
(often a server) to add intelligence to telephone functions and to combine these
functions with data processing.  Dialogic products are used in voice, fax, data,
voice recognition,  speech synthesis and call center management CT applications.
Dialogic  products  are  sold  globally  to  original  equipment  manufacturers,
value-added  resellers and service  providers  through both a direct sales force
and distributors.  The Company is headquartered in Parsippany,  New Jersey, with
regional  headquarters in Tokyo,  Japan;  Brussels,  Belgium;  and Buenos Aires,
Argentina.

Principles of Consolidation - The consolidated  financial statements include the
accounts  of  Dialogic  Corporation  and  its  subsidiaries  (collectively,  the
"Company"). Intercompany accounts and transactions have been eliminated.

Use of Estimates - The  preparation of financial  statements in conformity  with
generally accepted  accounting  principles  requires  management to make certain
estimates  and  assumptions  that  affect  the  reported  amount of  assets  and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reported period. Actual results could differ from these estimates.

Reclassifications  -  Certain  reclassifications  were made to the 1996 and 1997
consolidated financial statements to conform to the 1998 presentation.

Revenue Recognition - The Company recognizes revenues when products are shipped.
Revenue  from  maintenance  and support  contracts  is deferred  and  recognized
ratably over the service period.

Inventory  -  Inventory  is  stated at the  lower of cost  (first-in,  first-out
method) or market.

Property and  Equipment - Property and equipment are carried at cost and include
expenditures for major  improvements which  substantially  increase their useful
life.  Repairs  and  maintenance  are  expensed  as  incurred.  Depreciation  of
equipment,  software and fixtures is computed on the  straight-line  method over
estimated useful lives of one to seven years.  Equipment under capital lease and
leasehold  improvements  are  amortized  over  the  shorter  of  lease  terms or
estimated useful life.

Long-lived  Assets -  Whenever  events  indicate  that the  carrying  values  of
long-lived  assets may not be  recoverable,  the Company  evaluates the carrying
values of such assets using future  undiscounted  cash flows.  If the sum of the
expected  undiscounted future cash flows is less than the carrying amount of the
asset,  the Company will  recognize an impairment  loss equal to the  difference

<PAGE>

between  the fair value and  carrying  value of such  asset.  During  1998,  the
Company recorded an impairment loss (see note 3).  Management  believes that, as
of December 31, 1998, the carrying value of long-lived assets is appropriate.

Fair Value of Financial  Instruments - The estimated fair value of the Company's
financial  instruments,  which  include  cash  and  cash  equivalents,  accounts
receivable and accounts payable  approximates  their carrying value.  Marketable
securities are carried at fair value at each balance sheet date.

Foreign Currency  Translation - The functional currency of the Company's foreign
operations is the applicable local currency. The translation from the applicable
foreign currencies to U.S. dollars is performed for balance sheet accounts using
the  exchange  rates in effect at the  balance  sheet date and for  revenue  and
expense accounts using a weighted  average exchange rate during the period.  The
gains and losses resulting from such  translations are included in shareholders'
equity.  Gains or  losses  resulting  from  foreign  currency  transactions  are
included in the  Statement of  Operations,  and include  gains  (losses) of $126
thousand,   ($750)  thousand  and  ($324)  thousand  in  1998,  1997  and  1996,
respectively.

Income Taxes - The Company  recognizes  deferred tax assets and  liabilities for
the  expected  future tax  consequences  of  temporary  differences  between the
financial  reporting  and tax bases of existing  assets and  liabilities.  These
assets and  liabilities  are measured using  currently  enacted rates.  Deferred
income tax assets are  recognized to the extent  realization of such benefits is
more likely than not.

Research  and  Development  Expenses - Research  and  development  is charged to
expense in the year incurred.

Software  Development  Expenses - The  development of new software  products and
substantial  enhancements to existing  software products is expensed as incurred
until  technological  feasibility  has  been  established,  at  which  time  any
additional  costs would be capitalized in accordance with Statement of Financial
Accounting  Standards  ("SFAS")  No. 86,  "Accounting  for the Costs of Computer
Software  to be Sold,  Leased,  or  Otherwise  Marketed."  Because  the  Company
believes its current  process for developing  software is essentially  completed
concurrently with the establishment of technological feasibility,  no costs have
been capitalized to date.

Cash  Equivalents  and  Marketable   Securities  -  Cash   equivalents   include
certificates  of  deposit,   government  securities  and  time  deposits,   with
maturities  of  three  months  or  less  at the  time  of  purchase.  Marketable
securities  are  comprised of  investments  in municipal  bonds as well as Voice
Control Systems, Inc. ("VCS") common stock.

          The   Company    classifies    these    marketable    securities    as
available-for-sale securities in accordance with the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity  Securities."  Unrealized
gains and losses for these  securities  are excluded  from earnings and reported
net of tax as a separate component of stockholders'  equity.  Realized gains and
losses on sales of  investments,  as  determined  on a  specific  identification
basis,  are included in the consolidated  statements of income.  Fair values are
determined  by  reference  to market  prices for  securities  as quoted based on
publicly  traded  exchanges or as determined by a municipal bond pricing service
which  utilizes  current  trade,  bids,  offers and other  specific  data at the
valuation date.

Other Assets - Other assets include amounts associated with long-term royalties,
license fees,  deposits,  and investments in certain companies  operating in the

<PAGE>

computer  telephony  industry.  As the  investments  in these  companies are not
readily marketable and represent less than 20% voting interest,  the investments
are carried at cost and periodically assessed for potential impairment in value.
The investment balances totaled $6.9 million at December 31, 1998. Additionally,
at December 31, 1997,  other assets  included  $3.5 million (net of  accumulated
amortization of $1.5 million) of goodwill. See note 3.

Concentration  of Risk - Financial  instruments  which  potentially  subject the
Company  to  concentration  of  credit  risk  consist  principally  of  accounts
receivable  from  customers in the  computer  telephony  industry.  This risk is
mitigated by the large number of customers in the  Company's  customer  base and
the Company's  procedures for extending  credit and  collection of  receivables.
Additionally,  the Company has  subcontracted  one supplier to  manufacture  the
majority of the Company's  product.  The Company  believes that other  suppliers
have the  capability  to perform this service but that  changing  suppliers  may
cause delays and additional cost to the Company.

Income Per Share - The Company  computes income per share in accordance with the
provisions of SFAS No. 128, "Earnings per Share." SFAS No. 128 requires the dual
presentation of basic and diluted earnings per share ("EPS"). Basic EPS excludes
dilution and is computed by dividing net income available to common stockholders
by the weighted  average  number of common  shares  outstanding  for the period.
Diluted EPS reflects the potential dilution that could occur if stock options or
other  contracts  to issue  common  stock were  exercised  and  resulted  in the
issuance  of common  stock  that then  shared in the  earnings  of the  Company.
Diluted  EPS is  computed  using the  treasury  stock  method when the effect of
common stock equivalents would be dilutive. All prior periods have been restated
to comply with the  provisions  of SFAS No. 128.  The  dilutive  effect of stock
options on weighted  average shares  outstanding was 548 thousand,  667 thousand
and 763 thousand for 1998, 1997 and 1996, respectively.

Comprehensive  Income - In 1998,  the Company  adopted SFAS No. 130,  "Reporting
Comprehensive  Income," and has restated  prior years'  financial  statements to
conform to the  reporting  standard.  SFAS No.  130  establishes  standards  for
reporting and displaying  comprehensive  income and its components in a full set
of  general-purpose  financial  statements.  Comprehensive  income  includes all
changes in  stockholders'  equity  during a period except those  resulting  from
investments by owners and distributions to owners.  The adoption of SFAS No. 130
resulted  in  revised  and  additional  disclosures  but  had no  effect  on the
financial position, results of operations or cash flows of the Company.

Segment  Reporting - In 1998,  the Company  adopted  SFAS No. 131,  "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131 specifies
the presentation and disclosure of operating segment information reported in the
annual and interim reports issued to stockholders.  SFAS No. 131 supersedes SFAS
No.  14,  "Financial  Reporting  for  Segments  of a Business  Enterprise,"  and
requires that segment information of earlier years be restated to conform to the
new  standard.  The adoption of SFAS No. 131 resulted in revised and  additional
disclosures but had no effect on the financial position,  results of operations,
or cash flows of the Company.

Accounting  Pronouncements  - In June of 1998,  the FASB  issued  SFAS No.  133,
"Accounting for Derivative  Instruments and Hedging  Activities." This statement
establishes  accounting and reporting  standards for derivative  instruments and
requires  recognition  of  all  derivatives  as  assets  or  liabilities  in the
statement of position and  measurement of these  instruments at fair value.  The
statement  is  effective  for  fiscal  years  beginning  after  June  15,  1999.
Management believes that adopting this statement will not have a material impact
on the financial position, results of operations, or cash flows of the Company.

<PAGE>

2.  Divestment
--------------------------------------------------------------------------------

On February 17, 1998, the Company  completed the sale of the principal assets of
Spectron Microsystems Inc., a wholly owned subsidiary,  to Texas Instruments for
$26.0 million,  resulting in a pre-tax gain of $23.4 million. The disposition of
these assets will not have a  significant  effect on the revenues or earnings of
the Company in future periods.

3.  Asset Impairment
--------------------------------------------------------------------------------

During the first quarter of 1998,  the Company  undertook a strategic  review of
its business  and product  offerings.  At the  conclusion  of this  review,  the
Company determined it would no longer allocate resources to its Dianatel product
line. Activities to sell and upgrade Dianatel products were ceased and employees
working on Dianatel related products were diverted to other  activities.  As the
result of this decision, management has concluded that the carrying value of the
goodwill  that  arose on the  purchase  of  Dianatel  Corporation  was no longer
justifiable,  and the  Company  recorded  a non-cash  impairment  charge of $3.5
million  related to the  write-down  of  goodwill.  The  discontinuance  of this
product line will not have a  significant  effect on the revenues or earnings of
the Company in future periods.

          During  the  first  quarter  of 1998,  the  Company  upgraded  certain
internal information  technology systems.  Accordingly,  the Company took a $1.8
million  charge ($1.3  million  after-tax)  to reduce the carrying  value of the
internal  information  technology  assets  that will no longer be  utilized  and
therefore provide no future benefit to the Company.

          Management  believes  the  recognition  of these  impairments  were in
accordance  with the provisions of SFAS No. 121,  "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of."


<PAGE>

4. Available For Sale Securities
--------------------------------------------------------------------------------

The following is a summary of the  available for sale  securities as of December
31, 1998 and 1997:

<TABLE>

Amounts in thousands

                                                                                              Gross        Gross
                                                                                            Unrealized  Unrealized   Estimated
1998                                                                               Cost       Gains       Losses     Fair Value
------------------------------------------------------------------------------- ----------- ----------- ------------ -----------
<S>                                                                               <C>          <C>         <C>         <C>    
Municipal bonds                                                                   $41,898      $ 246       $ -         $42,144
Equity investment                                                                   1,954        496         -           2,450
------------------------------------------------------------------------------- ----------- ----------- ------------ -----------
     Total available for sale securities                                          $43,852      $ 742       $ -         $44,594
------------------------------------------------------------------------------- ----------- ----------- ------------ -----------


1997
------------------------------------------------------------------------------- ----------- ----------- ------------ -----------
Municipal bonds                                                                   $39,863      $ 149       $ -         $40,012
Equity investment                                                                   1,954      1,808         -           3,762
------------------------------------------------------------------------------- ----------- ----------- ------------ -----------
     Total available for sale securities                                          $41,817     $1,957       $ -         $43,774
------------------------------------------------------------------------------- ----------- ----------- ------------ -----------

</TABLE>

The cost and  estimated  fair value of debt  securities at December 31, 1998, by
contractual maturity, are as follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------- ---------- -----------
Amounts in thousands
--------------------------------------------------------------------------------------------------------- ---------- -----------
                                                                                                                     Estimated
                                                                                                            Cost     Fair Value
                                                                                                          ---------- -----------
<S>                                                                                                        <C>        <C>
  
1999                                                                                                       $10,013    $10,044
2000                                                                                                        21,513     21,706
2001                                                                                                        10,372     10,394
--------------------------------------------------------------------------------------------------------- ---------- -----------
The net realized  gains on sales of debt  securities  totaled  approximately  $32 in 1998, and the gross   $41,898    $42,144
realized losses totaled approximately $4 in 1997.
--------------------------------------------------------------------------------------------------------- ---------- -----------

</TABLE>

          The Company's equity  investment is in shares of VCS common stock. The
fair  values  of the  Company's  investments  in VCS  have  been  determined  by
reference  to the  market  prices  for VCS stock as quoted  on  publicly  traded
exchanges on the respective  valuation dates. At December 31, 1998 and 1997, the
Company  held  1,399,715  shares of VCS common  stock.  

          VCS  is a  supplier  to  the  Company  of  certain  proprietary  voice
recognition  technologies.  During 1998, 1997 and 1996, the Company's  purchases
from VCS amounted to $3,305,000, $3,075,000 and $2,953,000, respectively.

5.  Employee Benefit Plans
--------------------------------------------------------------------------------

Profit  Sharing  Plan - The Company has a quarterly  profit  sharing  program in
which all employees participate, except certain members of senior management. If
certain profit thresholds are met in a quarter, a pool is created based upon the

<PAGE>

achievement  of targeted  profit  goals.  Payments  are made to  employees  on a
quarterly  basis.  For the years ended  December  31, 1998,  1997 and 1996,  the
Company recorded expenses under the program of $1.8 million,  $1.5 million,  and
$978 thousand, respectively.


<PAGE>

Savings Plan - The Company has a savings  plan,  which  qualifies  under Section
401(k)  of the  Internal  Revenue  Code.  Under  the  plan,  participating  U.S.
employees  may  defer  up to 15% of  their  pre-tax  salary,  but no  more  than
statutory limits. The Company contributes a discretionary  match,  currently set
at forty-two cents for each dollar contributed by a participant up to 5% of that
participant's salary, with a maximum contribution of $3,360 per participant. The
Company's  matching  contributions to the savings plan were $858 thousand,  $725
thousand and $458 thousand in 1998, 1997 and 1996, respectively.

Stock  Compensation  Plans - At  December  31,  1998,  the  Company  had certain
stock-based  compensation  plans which are described  below. The Company applies
APB Opinion  No. 25 and related  Interpretations  in  accounting  for its plans.
Accordingly,  no compensation  cost has been recognized for either type of plan.
Had compensation  cost been determined in accordance with the method of SFAS No.
123,  "Accounting for Stock-Based  Compensation," based on the fair value at the
grant date for  awards  during  1998,  1997 and 1996,  under  those  plans,  the
Company's  net income and  income per share  would have been  reduced to the pro
forma amounts indicated below:

<TABLE>
<CAPTION>

------------------------------------------------------------------------- ----------------- ----------------- ----------------
Amounts in thousands, except per share amounts
------------------------------------------------------------------------- ----------------- ----------------- ----------------
                                                                                      1998              1997             1996
------------------------------------------------------------------------- ----------------- ----------------- ----------------
Net income:
<S>                                                                               <C>               <C>              <C>     
     As reported                                                                  $ 36,608          $ 21,752         $ 25,548
     Pro forma                                                                    $ 31,527          $ 19,126         $ 22,340
------------------------------------------------------------------------- ----------------- ----------------- ----------------
Income per share:
     As reported:
       Basic                                                                        $ 2.29            $ 1.37           $ 1.63
       Diluted                                                                      $ 2.21            $ 1.31           $ 1.56
     Pro forma:
       Basic                                                                        $ 1.97            $ 1.20           $ 1.43
       Diluted                                                                      $ 1.90            $ 1.15           $ 1.36
------------------------------------------------------------------------- ----------------- ----------------- ----------------
</TABLE>

          The  effects  of  applying  SFAS  No.  123  for  providing  pro  forma
disclosures are not likely to be  representative  of the effects on reported net
income  for the  future  years  because  options  vest  over  several  years and
additional  awards  generally  are made each year.  The fair value of the 29,874
stock options  issued in  connection  with the 1996  acquisition  of Dianatel is
included in the Dianatel  purchase  price and therefore  does not affect the pro
forma amounts indicated above.

Stock Option Plans - The Company has stock option plans for directors,  officers
and other  employees  which  provides  for  non-qualified  and  incentive  stock
options. At December 31, 1998, 1,168,994 shares were available for future grants
under the plans.  All options have been  granted at exercise  prices at or above
fair  market  value at the date of grant  and vest over  periods  of up to seven
years. All options have a maximum term of ten years.

          On October 25,  1998,  the Company  authorized  the grant of new stock
options to certain  employees  who agreed to cancel stock options which had been
granted to them  during  1997 and 1998.  The  options  were  reissued  effective

<PAGE>

October 25, 1998 at $19.1875 per share, the fair market value on the date of the
grant.  All employees were eligible to  participate in the reissue  program with
the exception of Executive  officers and highly  compensated  senior management,
and 829,225  stock  options were issued under this grant.  The reissued  options
will vest over a four-year period  beginning  October 25, 1998. The options will
expire on October 25, 2006.


<PAGE>

          For the purposes of the pro forma  amounts  indicated  above and other
disclosures,  the fair value of each option  grant was  estimated on the date of
grant  using  the   Black-Scholes   option  pricing  model  with  the  following
assumptions:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------- ------------- ------------- -------------
Year of grant                                                                                 1998%         1997%         1996%
-------------------------------------------------------------------------------------- ------------- ------------- -------------
<S>                                                                                             <C>           <C>           <C>
Volatility                                                                                      58%           79%           75%
Weighted average risk free interest rate                                                       6.0%          6.5%          6.3%
Expected life (yrs)                                                                              5             5             6
-------------------------------------------------------------------------------------- ------------- ------------- -------------
No dividends are assumed to be paid during the expected life of any option.
-------------------------------------------------------------------------------------- ------------- ------------- -------------
</TABLE>

          A summary  of the status of the  Company's  stock  option  plans as of
December 31, 1998,  1997 and 1996,  and changes  during the years ended on those
dates is presented below:

<TABLE>
<CAPTION>

                                               1998                           1997                            1996
                                    ---------------------------    ----------------------------    ---------------------------
                                     Shares     Weighted-Average     Shares     Weighted-Average   Shares      Weighted-Average
                                      (000)     Exercise Price        (000)     Exercise Price       (000)     Exercise Price
----------------------------------- ----------- ---------------    ------------ ---------------    ----------- ---------------
Options outstanding
<S>                                    <C>         <C>               <C>           <C>               <C>          <C>    
     at beginning of year              2,629)      $ 21.56)          2,269)        $ 16.00)          1,962)       $ 12.00
Granted                                1,856)        26.96)            711)          34.36)            626)         31.00
Exercised                               (122)         7.08)           (235)           6.12)           (173)          5.00
Forfeited/canceled                    (1,184)        33.20)           (116)          27.80)           (146)         29.00
                                    -----------                    ------------                    -----------
Options outstanding
     at end of year                    3,179)      $ 20.97)          2,629)        $ 21.56)          2,269)       $ 16.00
                                    -----------                    ------------                    -----------

Options exercisable at year end        1,119)                          925)                            855)
Weighted average fair
     value of options granted
     during the year                          $15.07                         $23.83                          $23.00
----------------------------------- --------------------------- -- ---------------------------- -- ---------------------------
</TABLE>


          The  following  table  summarizes   information  about  stock  options
outstanding at December 31, 1998:

<TABLE>
<CAPTION>

--------------------------------- ----------------- ---------------- ----------------- -- ----------------------------------
                                                      Options                                      Options Exercisable
                                                    Outstanding
--------------------------------- ----------------- ---------------- ----------------- -- ----------------------------------
                                       Number       Weighted-Average
                                    Outstanding        Remaining     Weighted-Average          Number       Weighted-Average
                                                                                            Exercisable
Range of Exercise Prices            at 12/31/98       Contractual     Exercise Price        at 12/31/98     Exercise Price
                                       (000)          life (yrs)                               (000)
--------------------------------- ----------------- ---------------- -----------------    ----------------- ----------------
<S>  <C>                               <C>               <C>             <C>                   <C>            <C>     
$    1.60   to $  4.93                  271               2.7             $ 3.81                257            $   3.81
     5.73   to    9.33                  307               4.7               7.33                265          
                                                                                                                   7.44
    10.67   to   18.88                  321               5.4              15.09                242               14.76
    19.00   to   28.75                1,692               7.5              21.86                267               24.29
    30.00   to   55.75                  588               7.4              36.67                 88               37.41
--------------------------------- ----------------- ---------------- ----------------- -- ----------------- ----------------

</TABLE>

Restricted  Stock  Awards - In 1998,  the Company made  restricted  stock awards
totaling 29 thousand shares. The fair value of these awards is $934 thousand and
the awards  vest  between  six  months  and five  years from date of grant.  The
unearned compensation has been recorded as a contra account within stockholders'
equity and is amortized to  compensation  expense over the vesting  period.  The
weighted average fair value of restricted stock awards during 1998 was $32.05.

<PAGE>

Employee  Stock  Purchase Plan - On April 28, 1995,  the Company's  stockholders
approved the  establishment  of the Employee  Stock  Purchase Plan (the "ESPP").
Under the ESPP, employees meeting certain eligibility  requirements may elect to
contribute  up to ten percent of their  compensation  to purchase the  Company's
common  stock at a purchase  price equal to 85% of the fair market  value of the
stock at the  beginning  or end of each  offering  period,  whichever  is lower.
Persons  holding more than 5% of common stock in the Company are not eligible to
participate  in the ESPP.  Under the ESPP,  the Company  reserved for issuance a
total of 300,000 shares. (See Note 10 of the Company's Notes to the Consolidated
Financial Statements). Approximately 40% of eligible employees have participated
in the ESPP during the last three years. Under the ESPP, the employees purchased
or  committed to purchase  80,205,  86,603 and 49,674  shares in 1998,  1997 and
1996,  respectively.  For the purpose of the pro forma amounts  indicated above,
compensation cost was based on the fair value of the employee's  purchase rights
on the date of grant which was estimated using the  Black-Scholes  model and the
assumptions  noted above,  with the exception of expected option life, which was
assumed to be .25  years.  The fair value of those  purchase  rights  granted in
1998,  1997 and  1996  was  $454  thousand,  $508  thousand  and $588  thousand,
respectively.

6.  Credit Facilities
--------------------------------------------------------------------------------

The Company  maintains a credit  facility  with a lender,  pursuant to which the
Company may borrow up to $30 million on an unsecured  basis for working  capital
purposes.  Loans made under this agreement  bear interest,  at the option of the
Company,   primarily  at  the  rate  equal  to  the  lenders'   base  rate  less
three-quarter percent or LIBOR. Future borrowing under this facility will be due
and payable on June 1, 1999. At December 31, 1998 and 1997,  no borrowings  were
outstanding pursuant to this facility.  Under this facility, $3 million has been
reserved for letters of credit,  of which none has been utilized at December 31,
1998.

--------------------------------------------------------------------------------
7.  Provision for Income Taxes
--------------------------------------------------------------------------------

Components of the provision for income taxes are as follows:

<TABLE>
<CAPTION>

------------------------------------------------------------------------ ----------------- ----------------- ------------------
Amounts in thousands                                                                 1998              1997               1996
------------------------------------------------------------------------ ----------------- ----------------- ------------------
Provision for income taxes:
<S>                                                                              <C>                <C>               <C>     
     Federal                                                                     $18,549)           $7,848)           $11,744)
     Foreign                                                                       2,609)            2,273)               868)
     State                                                                         2,832)            2,113)             1,577)
                                                                         ----------------- ----------------- ------------------
          Total                                                                   23,990)          $12,234)           $14,189)
                                                                         ================= ================= ==================
Components of income tax provision:
Current
     Federal                                                                     $21,750)          $10,447)           $12,343)
     Foreign                                                                       2,609)            2,259)               824)
     State                                                                         2,941)            2,170)             1,616)
                                                                         ----------------- ----------------- ------------------
           Total current                                                          27,300)           14,876)            14,783)
Deferred
     Federal                                                                      (3,201)           (2,599)              (599)
     Foreign                                                                           -)               14)                44)
     State                                                                          (109)              (57)               (39)
                                                                         ----------------- ----------------- ------------------
          Total deferred                                                          (3,310)           (2,642)              (594)
                                                                         ----------------- ----------------- ------------------
          Total                                                                  $23,990)          $12,234)           $14,189)
                                                                         ================= ================= ==================

</TABLE>

<PAGE>

          Deferred  income  taxes  reflect  the net  tax  effects  of  temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts calculated for income tax purposes.

          The  principal  components of the deferred tax assets and deferred tax
liabilities are as follows:

<TABLE>
<CAPTION>

------------------------------------------------------------------------ ----------------- ----------------- ------------------
Amounts in thousands                                                                                  1998)              1997)
------------------------------------------------------------------------ ----------------- ----------------- ------------------
Deferred tax assets:
<S>                                                                                                <C>                <C>     
Reserves                                                                                           $ 7,636)           $ 5,548)
Foreign tax credit carryforward                                                                      4,880)             2,271)
Deferred revenue and deferred rent                                                                     723)               746)
Other                                                                                                1,711)             1,066)
                                                                                           ----------------- ------------------
                                                                                                    14,950)             9,631)
Deferred tax liabilities:
Unrealized gains on available for sale securities                                                     (268)              (973)
Undistributed earnings of foreign subsidiaries                                                      (5,780)            (3,332)
Depreciation                                                                                          (219)              (695)
Other                                                                                                 (209)              (171)
                                                                                           ----------------- ------------------
                                                                                                    (6,476)            (5,171)
                                                                                           ----------------- ------------------
Net deferred tax assets                                                                            $ 8,474)           $ 4,460)
                                                                                           ================= ==================

 Reconciliations between the U.S. federal statutory rate and the effective tax rate are as follows:

------------------------------------------------------------------------ ----------------- ----------------- ------------------
December 31,                                                                                                  
                                                                                   1998)             1997)              1996)
------------------------------------------------------------------------ ----------------- ----------------- ------------------
Federal taxes at statutory rate                                                    35.0%)            35.0%)             35.0%)
State taxes, net of federal income tax benefit                                      4.5%)             4.7%)              2.6%)
Foreign income subject to a rate different from U.S. rate                           0.9%)             1.4%)              0.5%)
Research and development tax credit                                                (1.8)%            (4.0)%             (1.8)%
Foreign sales corporation benefit                                                  (1.8)%            (2.6)%             (0.8)%
Tax exempt income                                                                  (1.0)%            (1.4)%             (0.6)%
Non-deductible amortization                                                         2.0%)             1.0%)              0.3%)
Other                                                                               1.8%)             1.9%)              0.5%)
                                                                         ----------------  ----------------- ------------------
Total effective tax rate                                                           39.6%)            36.0%)             35.7%)
                                                                         ================  ================= ==================

</TABLE>

          The  Company  has  provided  for  U.S.  federal  income  taxes  on the
undistributed  earnings  of its  non-U.S.  subsidiaries.  The  Company has a net
operating loss carryforward of approximately $600 thousand in Japan, expiring in
the year 2002.

<PAGE>

8.  Commitments and Contingencies
--------------------------------------------------------------------------------

(a) Lease Commitments - Equipment with a net book value of $86 thousand and $202
thousand  at  December  31,  1998 and  1997,  respectively  (net of  accumulated
depreciation of $71 thousand and $681 thousand), is leased under capital leases.

          The Company leases certain  office/warehouse space and equipment under
operating  leases which expire at various times through 2005. Total rent expense
under operating leases amounted to approximately $8.0 million,  $6.8 million and
$5.8 million for the years ended December 31, 1998, 1997 and 1996, respectively.
At  December  31,  1998,   future   minimum  lease   payments  are  as  follows:

Amounts in thousands
                                                   Operating          Capital 
Year ending December 31,                             Leases           Leases
--------------------------------------------------------------------------------
1999                                              $ 8,370              $ 40 
2000                                                7,892                40 
2001                                                6,844                20 
2002                                                6,434                -
2003                                                5,902                -
Thereafter                                          8,141                -
--------------------------------------------------------------------------------
Total                                              43,583               100
--------------------------------------------------------------------------------
Amounts representing interest                                           (14)
--------------------------------------------------------------------------------
Present value of minimum lease payments                                  86
--------------------------------------------------------------------------------
Current portion                                                          33
--------------------------------------------------------------------------------

(b) Legal  Proceedings  - In June 1995,  the Company  entered  into a settlement
agreement that resulted in the dismissal of various legal proceedings involving,
among others, the Company and Brooktrout  Technology,  Inc.  ("Brooktrout").  In
November 1995,  Brooktrout filed a complaint in the United States District Court
for the District of Massachusetts  naming the Company,  its GammaLink subsidiary
(since merged into the Company) and its Chairman of the Board as defendants. The
complaint  sought to rescind the  settlement  agreement  and obtain  unspecified
compensatory  and  punitive  damages  on  the  basis  of  allegations  that  the
defendants   fraudulently  induced  Brooktrout  to  enter  into  the  settlement
agreement.  Dialogic denied the claims as baseless, moved to dismiss and filed a
counterclaim.  In December  1996, the District Court entered an order of summary
judgment  against   Brooktrout   dismissing  its  fraud  claims.   Subsequently,
Brooktrout  amended its  complaint to add a claim for breach of the implied duty
of good faith and fair  dealing.  On  February 9, 1999,  the  parties  reached a
settlement in this litigation in which Brooktrout dismissed all remaining claims
against  Dialogic and its chairman with  prejudice,  Brooktrout  granted certain
additional  patent rights to Dialogic,  and Dialogic  dismissed its counterclaim
against  Brooktrout with prejudice.  Neither  Dialogic nor its chairman made any
payment to Brooktrout in this matter.

<PAGE>

          Separately,  the Company's Spectron subsidiary had sued Brooktrout for
patent infringement. This case was transferred to the District of Massachusetts.
Dialogic  believes it has retained the rights to maintain  this lawsuit  despite
the February 1998 sale of the Spectron  assets.  Brooktrout has moved to dismiss
this case  claiming that Dialogic no longer has standing to enforce the patents.
Trial in this case is now scheduled for June 14, 1999.

          During the third  quarter of 1996, a complaint was filed in New Jersey
Superior  Court against the Company and certain of its  directors  alleging that
the  defendants  breached  principles  of common  law fraud in  connection  with
certain public statements made prior to the Company's July 8, 1996 press release
announcing  preliminary  results  for the  quarter  ended  June  30,  1996.  The
complaint  sought monetary  damages on behalf of a purported class of purchasers
of  the  Company's  Common  Stock.  On  February  18,  1998,  on  motion  by the
defendants,  the complaint was  dismissed by the court with  prejudice.  Time to
appeal the dismissal has expired.

          The Company is also engaged in other legal proceedings  arising in the
ordinary course of business,  the results of which  proceedings are not expected
to have a  material  adverse  effect  on the  Company's  consolidated  financial
condition, results of operations or liquidity. Management intends to defend each
of the above-mentioned legal proceedings vigorously.

<PAGE>

9.  Segments and Geographic Information
--------------------------------------------------------------------------------

In 1998,  the Company  adopted SFAS No. 131,  "Disclosures  about Segments of an
Enterprise and Related Information." SFAS No. 131 specifies the presentation and
disclosure of operating  segment  information.  The Company operates and manages
its business under one segment,  "Computer  Telephony."  "Computer Telephony" is
the term used to encompass a wide variety of technologies and applications  that
use the  information  processing  capabilities of a computer (often a server) to
add intelligence to telephone functions and to combine those functions with data
processing.  Management has reached the conclusion that the Company  operates as
one  segment  after  considering  a variety of factors  including  the nature of
products sold,  production process,  its customer base, and distribution methods
and determining that they are similar entity wide. The Company primarily derives
its  revenue  from the sale of  telephony  boards  that are  offered  as modular
building  blocks that  enable its  customers -  primarily  VARs,  OEMs,  systems
integrators,  service providers and applications developers - to design computer
telephony  systems  that  meet  the  applications   demands  of  their  end-user
customers. No one customer accounts for more than 5% of total revenue.

Information  about the  Company's  operations in different  geographic  areas at
December 31, 1998, 1997 and 1996, and the years then ended is presented below:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Amounts in thousands
--------------------------------------------------------------------------------


1998                                            United States       Japan         Belgium          Other        Consolidated
----------------------------------------------- --------------- -------------- --------------- --------------- -------------

<S>                                                <C>            <C>             <C>            <C>            <C>
Revenue, external                                  $224,220       $ 11,561)       $ 57,744         -            $ 293,525
Long-lived assets                                  $ 24,741       $    268        $  1,512      $   883         $  27,404
Total assets                                       $189,014       $  6,389)       $ 19,156      $ 2,424         $ 216,983
Net income                                         $ 33,588       $     48        $  2,972      $  -            $  36,608
----------------------------------------------- --------------- -------------- --------------- --------------- ---------------

1997                                            United States       Japan         Belgium          Other        Consolidated
----------------------------------------------- --------------- -------------- --------------- --------------- ---------------

Revenue, external                                  $205,975       $ 13,271)       $ 42,064          -            $261,310
Long-lived assets                                  $ 24,409       $    219        $    929      $   501          $ 26,058
Total assets                                       $160,302       $  4,977)       $ 15,285      $ 1,840          $182,404
Net income                                         $ 19,847       $  ( 828)       $  2,733      $   -            $ 21,752
----------------------------------------------- --------------- -------------- --------------- --------------- ---------------



1996                                            United States       Japan         Belgium          Other        Consolidated
----------------------------------------------- --------------- -------------- --------------- --------------- ---------------

Revenue, external                                  $171,517       $ 12,282)       $ 29,805           -           $213,604
Long-lived assets                                  $ 23,281       $    265        $    965        $   331        $ 24,842
Total assets                                       $129,516       $  5,078)       $ 11,286        $ 1,390        $147,270
Net income                                         $ 24,495       $    232        $    821        $   -          $ 25,548
----------------------------------------------- --------------- -------------- --------------- --------------- ---------------
</TABLE>

          Revenue   reported  from  the  United  States  includes  export  sales
primarily to Canada, Latin America,  Korea, China,  Southeast Asia, Middle East,

<PAGE>

Australia,  and New Zealand.  Revenue  attributed to Belgium primarily  includes
sales from the  Company's  Belgian  subsidiary  to  customers  in all of Western
Europe.  Revenues  attributed to Japan include sales from the Company's Japanese
subsidiary to customers in Japan.  The  above-mentioned  revenues for the United
States  included  export sales to customers  aggregating  $49.3  million,  $33.5
million and $20.2  million for fiscal years ended  December  31, 1998,  1997 and
1996, respectively.

<PAGE>

10.  Subsequent Events
--------------------------------------------------------------------------------

Legal:

On February 9, 1999,  the  Company  entered  into a  settlement  agreement  that
resulted in the dismissal of various legal proceedings involving,  among others,
the Company and Brooktrout Technology, Inc. ("Brooktrout").  The parties reached
a settlement  in their  litigation in which all parties  dismissed  their claims
with  prejudice,  and  Dialogic  received  a "pass  through"  license to certain
Brooktrout  patents.  Neither  Dialogic  nor its  Chairman  made any payments to
Brooktrout in this matter.  Separately,  the Company's  Spectron  subsidiary had
sued  Brooktrout  for  patent  infringement.  This case was  transferred  to the
District  of  Massachusetts.  Dialogic  believes it has  retained  the rights to
maintain  this lawsuit  despite the February  1998 sale of the Spectron  assets.
Brooktrout has moved to dismiss this case,  claiming that Dialogic no longer has
standing to enforce the patents.  Trial in this case is now  scheduled  for June
14, 1999.

Authorized Shares:

On February 22, 1999, the Board of Directors voted to seek shareholder  approval
to increase  the number of  authorized  shares to 500  thousand for the Employee
Stock Purchase Plan.

Strategic Partnership:

On March 2, 1999,  Dialogic and Microsoft  Corporation  announced that they have
entered into a strategic  alliance  relating to Dialogic's CT server  initiative
and Dialogic's CT Media for Windows NT middleware product.  Under the terms of a
license and development agreement, Microsoft will become a nonexclusive licensee
of Dialogic's CT Media for Windows NT  middleware  product.  Dialogic will enter
into  development  activities to create  specific  applications in the telephony
space  which will be owned by  Microsoft  and will  provide  other  support  and
development  services.  Under the license and development  agreement,  Microsoft
payments to Dialogic over the next four years are expected to be $20 million for
the initial licenses for CT Media for Windows NT, the development services,  and
certain  support.  Microsoft's  license  to  CT  Media  is  subject  to  certain
contractual  limitations,  and Dialogic will continue to own and remains free to
license CT Media.

          In a separate  transaction,  also occurring  March 2, 1999,  Microsoft
agreed,  for an aggregate  purchase price of $24.2 million,  to acquire  860,681
newly issued shares of Dialogic common stock and a warrant  entitling  Microsoft
to purchase  279,869 shares of Dialogic common stock.  The warrant has a term of
four years and is  exercisable  at a price of $35.19 per share.  Both the issued
shares and the shares  resulting from the exercise of the warrant are subject to
a lockup period beginning on the transaction  date. During the first year of the
lockup period,  Microsoft may sell none of the shares,  and may only sell 50% of
the shares in the second year of the lockup period.  Thereafter,  all shares may
be freely  sold.  On March 2, 1999,  Dialogic  issued the shares and  warrant to
Microsoft.


<PAGE>

Supplementary Financial Information
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>

Selected Quarterly Financial Information (Unaudited)

------------------------------------------------------------------------ ------------- --------------------------- -------------
Amounts in thousands, except per share data                                                          1998
                                                         Quarter ended:   March 31, (      June 30,      Sept 30,       Dec 31,
------------------------------------------------------------------------ ------------- ------------- ------------- -------------
<S>                                                                        <C>              <C>           <C>           <C>    
Total revenues                                                             $66,388(1)       $73,131       $76,121       $77,885
Gross profit                                                                41,731(1)        46,358        47,165        49,704
Net income                                                                  15,573(1)         7,034         6,956         7,045
Income per share:
  Basic                                                                     $  .97(1)        $  .44        $  .43        $  .44
  Diluted                                                                   $  .93(1)        $  .42        $  .43        $  .43
------------------------------------------------------------------------ ------------- ------------- ------------- -------------
                                                                                                     1997
                                                         Quarter ended:   March 31, (      June 30,      Sept 30,       Dec 31,
------------------------------------------------------------------------ ------------- ------------- ------------- -------------
Total revenues                                                             $57,089(1)       $63,196       $68,760       $72,265
Gross profit                                                                35,320(1)        39,826        42,878        44,957
Net income                                                                   3,227(1)         4,778         6,352         7,395
Income per share:
  Basic                                                                     $  .20(1)        $  .30        $  .40        $  .46
  Diluted                                                                   $  .20(1)        $  .29        $  .38        $  .44
------------------------------------------------------------------------ ------------- ------------- ------------- -------------
</TABLE>

(1) Includes  after-tax gain on sale of Spectron  assets of $14.0 million ($0.84
per diluted share) and an after-tax impairment charge of $4.8 million ($0.29 per
diluted share).

<TABLE>
--------------------------------------------------------------------------------
Market Price and Dividend Data
--------------------------------------------------------------------------------

                                                                                                             High           Low

<S>                                                                                          <C> <C>        <C>           <C>  
Quarter ended March 31, 1997                                                                                36.75         19.38
Quarter ended June 30, 1997                                                                                 29.25         16.06
Quarter ended September 30, 1997                                                                            43.00         26.87
Quarter ended December 31, 1997                                                                             49.87         36.25
Quarter ended March 31, 1998                                                                                47.00         31.75
Quarter ended June 30, 1998                                                                                 44.38         26.25
Quarter ended September 30, 1998                                                                            37.69         26.25
Quarter ended December 31, 1998                                                                             26.75         17.88
-------------------------------------------------------------------------------------------------- --------------- -------------

</TABLE>

As of January 31, 1999,  there were  approximately  203 holders of record of the
Company's  Common  Stock.  Since  its  IPO,  the  Company  has not paid any cash
dividends  on its  capital  stock.  The  Company's  current  policy is to retain
earnings  for  its  use in the  business.  Accordingly,  the  Company  does  not
anticipate paying cash dividends in the future. Any payment of cash dividends in
the future will  depend  upon the  financial  condition,  capital  requirements,
potential  growth and  earnings of the  Company as well as other  factors as the
Board of Directors deems relevant.