Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations 

Overview

          The past  three  years  have  been  years of  significant  growth  for
Dialogic. Year-to-year revenue growth exceeded 30% in 1994 and 1995 and amounted
to 27% in 1996.  Revenue  increases have enabled the Company to increase profits
during  the  period  and  invest  substantially  in  research  and  development.
Liquidity was enhanced as well during this period;  Dialogic's  working  capital
increased from $15 million at January 1, 1994 to $100 million three years later,
reflecting  the  Company's  1994 initial  public  offering  (the "IPO"),  strong
operating  cash flows and  realized  and  unrealized  gains  from the  Company's
investment in Voice Control Systems, Inc. ("VCS").

          The  Company   consummated  two  acquisitions   during  1995  and  one
acquisition during 1996. On February 14, 1995, Dialogic acquired certain assets,
consisting  principally of computer telephone  integration  software technology,
from  Digital  Equipment  Corporation.  This  acquisition  led to the  Company's
introduction  of its CT  Connect  products  in July 1995 and  Dialogic  offering
consulting services through its Synapse Group. On February 27, 1995, the Company
acquired Spectron Microsystems,  Inc. ("Spectron"),  a California-based producer
of digital signal  processor  ("DSP")  operating  systems.  This transaction was
accounted  for as a pooling of  interests.  Since the  historical  operations of
Spectron  prior to the merger were not  material to the  Company's  consolidated
operations and financial  position,  prior period financial  statements were not
restated to reflect the merger.  On June 27, 1996, the Company acquired Dianatel
Corporation  ("Dianatel"),  a  California-based  manufacturer of digital network
interface and other signal  computing  products.  The Dianatel  acquisition  was
accounted for as a purchase. Other than $1.3 million of expenses relating to the
Spectron  transaction and $4.7 million of goodwill  associated with the Dianatel
acquisition  which  will  be  amortized  over  five  years  beginning  with  the
acquisition, the Company's results of operations were not materially affected by
any of these acquisitions.  For information regarding the Company's acquisitions
see Note 2 to the  Company's  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:

Year Ended December 31,                            1994       1995       1996
Revenues                                          100.0%     100.0%     100.0%
Costs and expenses:

     Cost of goods sold                            40.0       39.6       39.7
     Research and development expenses             17.0       17.2       19.0
     Selling, general and administrative expenses  27.2       28.3       28.1
     Merger costs                                   -           .8        -
     Interest income - net                          (.9)      (1.2)     (1.1)
     Net realized gains on available 
          for sale securities                       -          (.2)     (4.3)
Income before provision for income taxes           16.7       15.5      18.6
Provision for income taxes                          4.2        5.8       6.6
Net income                                         12.5        9.7      12.0
Pro forma net income(1)                            10.7         -         -

(1) Dialogic was an S corporation through April 1994. The pro forma information 
presented  herein  has  been  computed  as  if the Company had been taxed as a C
corporation throughout 1994.

Percentage Change

          The  following  table  sets  forth,  for the  periods  indicated,  the
percentage  increase of certain  items  included in the  Company's  consolidated
statements of income:

                                      1995                         1996
                                 Compared With                 Compared With 
                                     1994                        1995

Revenues                            32.6%                       26.7%
Costs of goods sold                 31.4                        26.8 
Research and development expenses   34.2                        40.0 
Selling, general and 
  administrative expenses           37.6                        26.0 
Net income                           2.6                        56.7 (2) 
Pro forma net income(1)             19.8                          -

(1)  Dialogic  was  an   S  corporation  through  April 1994.   The  pro  forma 
information  presented herein has been computed as if the Company had been taxed
as a C corporation  throughout 1994. 

(2) During 1996, the Company recorded a net 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 1996 compared with 1995  would 
have been 21.8%. See Note 5 of the Company's Notes to the Consolidated Financial
Statements.

Revenues 

          Revenues  increased  by  $41.4  million  or 33% in 1995  and by  $44.9
million or 27% to $213.6 million in 1996.  Excluding  revenues generated in 1995
by Spectron,  CT-Connect and the Synapse  Group,  revenue growth would have been
approximately 29% in 1995. Revenue gains in 1995 were primarily  attributable to
the sales of new products  incorporating  SCSA  technology  across the Company's
entire product line,  increased  demand from existing  customers for low density
products used in call processing,  unified messaging and call center systems and
demand from existing and new customers  for high density  components  for use in
call completion, wireless and intelligent peripheral applications.  During 1996,
revenue  growth  was  primarily  driven by the sales of high  density  products,
principally  T-1 and E-1  single and  DualSpan  cards.  Much of that  growth was
attributable  to new customers.  During 1996 the Company also  experienced  unit
growth and to a lesser extent revenue  growth in its low density  product lines.
However,  the rate of growth of low density product  revenues has decreased over
the last several years. There were no material price adjustments during 1994 and
1995. In 1996, the Company reduced prices on its low density products during the
first quarter and on certain high density  products  during the fourth  quarter.
The Company will consider price  adjustments in the future in order to enter new
and emerging markets or to react to price reductions on competing products.

          International sales,  primarily in Europe and Asia/Pacific,  increased
by $12  million  or 32%  from  1994 to 1995 and by $13  million  or 26% to $62.3
million in 1996.  In 1996, a  substantial  percentage  increase in  Asia/Pacific
revenues  was  partially  offset  by a lesser  percentage  increase  in  certain
European markets,  primarily  Central Europe. In these markets,  economic issues
(recessionary  pressures) and regulatory  issues  (generally,  a slowdown in the
deregulation  of the telecom  industry)  appear to be impeding the deployment of
computer telephony products.  As reflected below, the allocation of domestic and
international  revenues  have remained  relatively  constant over the past three
years ($000's):

Year Ended December 31,                 1994            1995            1996
Domestic:
Amount                                $89,908         $119,336        $151,293
Percentage of total revenues             70.7%            70.8%           70.8%
                                       ------          -------         ------- 
International:
Amount                                $37,327          $49,316         $62,311
Percentage of total revenues             29.3%            29.2%           29.2%
                                       ------          -------          ------ 

Dialogic  includes  in  international   revenues,   revenues  of  the  Company's
international  subsidiaries  and export revenues from the America's to customers
in  Asia/Pacific  and Europe.  Revenues from  domestic  customers are treated as
domestic  revenues  even  if the  Dialogic  components  sold  to  such  domestic
customers are incorporated into systems which are ultimately sold overseas.


Cost of Goods Sold/Gross Margin

          Dialogic's  gross margin and cost of goods sold  percentage  decreased
slightly from 1994 to 1995 and remained relatively  unchanged from 1995 to 1996.
The decrease in cost of goods sold as a percentage  of revenue from 1994 to 1995
reflects design  improvements and reductions in material costs for the Dialogic/
GammaLink  product lines and the addition of Spectron's and CT-Connect's  higher
margin  products.  In 1996,  gross margins  remained  relatively  unchanged as a
percentage  of revenues.  During 1996 the Company  continued its efforts to cost
reduce  many of its  products,  and  continued  to benefit  from  reductions  in
material costs.  These reductions in cost of goods sold were offset at the gross
margin level by the reduced  revenues  resulting  from the Company's  1996 price
reductions and a one-time charge of $1.0 million  related to a patent  licensing
agreement  entered into with Syntellect.  Increases in the dollar amount of cost
of goods sold primarily reflect the Company's increased sales volume and the one
time charge associated with the Syntellect agreement.

Research and Development Expenses

          Research  and  development  expenses  increased by $7.4 million or 34%
from 1994 to 1995 and by $11.6  million or 40% to $40.7  million  in 1996.  As a
percentage of revenues,  such  expenses  represented  17.0%,  17.2% and 19.0% of
revenues  in 1994,  1995,  and 1996,  respectively.  The  increase in the dollar
amount  of such  expenses  over the  past  three  years  reflect  the  continued
expansion of the Company's engineering staff and related overhead,  the addition
of engineering  resources from the Company's  1995 and 1996  acquisitions  and a
substantial  investment  of  engineering  resources  that resulted in Dialogic's
February 1997 announcement of its DM3 Mediastream Resource Architecture ("DM3").
DM3 represents a new set of  specifications,  hardware and core firmware modules
that are intended to govern how the Company's  next  generation of products will
be designed.

          The  increase  in  the   percentage   relationship   of  research  and
development  expenses to total  revenues  during 1996 reflects the Company's DM3
initiative,  engineering efforts associated with the development and roll-out of
low and high density products and GammaLink fax products, and the development of
software products.

          The Company  continues to believe that  investment in  technologies is
critical to its future growth and continued technological  competitiveness.  The
Company  anticipates  that during 1997 the relative  percentage  of research and
development  expenses to revenues  will be comparable  to 1996.  This  statement
constitutes a forward looking statement under the Private Securities  Litigation
Reform  Act of  1995.  Actual  research  and  development  spending  may  differ
materially as a result of various factors, including technological developments,
availability  of qualified  personnel,  market  conditions and  competition.  At
December 31, 1996,  349 of Dialogic's 905 employees were engaged in research and
development activities.

Selling, General and Administrative Expenses

          Selling,  general and administrative expenses increased by $13 million
or 38% from 1994 to 1995 and by $12.4  million or 26% to $60.1  million in 1996.
Excluding the impact of the Spectron  acquisition in 1995, selling,  general and
administrative  expenses  increased  by 28%  from  1994 to 1995.  Such  expenses
represented  27.2%,  28.3% and 28.1% of  revenues  during  1994,  1995 and 1996,
respectively.  The increases in selling,  general and administrative expenses in
1995 and 1996  primarily  reflect,  in both  years,  the  continuing  growth  of
domestic and  international  sales and  marketing  efforts  (including  expenses
associated  with  obtaining   international   approvals),   marketing   expenses
associated with new product launches and sales and marketing expenses associated
with acquired companies.  In 1996, such expenses also reflect marketing expenses
relating  to the  expansion  of the  Company's  distribution  channels  and  the
development of enhanced financial and distribution  systems necessary to support
the Company's expanded business activities.

Interest Income

          Dialogic recorded net interest income of $2.0 million in 1995 and $2.4
million in 1996,  nearly double such income from 1994.  The amounts  recorded in
1995 and 1996 reflect  interest earned on cash balances and interest earned from
the Company's elections in the past two years to convert accrued interest on the
note of VCS into capital stock of VCS. During 1996, the Company invested much of
its cash in tax-free securities. Such securities generated a lower pre-tax yield
than the pre-tax  yield  received by the Company in prior years on fully taxable
instruments.  See Note 5 of the Company's  Notes to the  Consolidated  Financial
Statements.

          On January 1, 1997,  upon the  maturity  of the VCS note,  the Company
converted  the  principal  balance  of the  note  into  capital  stock  of  VCS.
Accordingly,  interest  income  during 1997 and future  periods will not include
interest  relating to the VCS note. 

Net Realized  Gains on  Available  for Sale Securities  

          During 1996, the Company recorded a net gain of $9.2 million primarily
as a result of its first  quarter  sale of a portion of its equity  position  in
VCS. At December 31, 1996, the Company's  balance sheet  reflected an unrealized
gain of $5.6 million  associated with the balance of Dialogic's  equity position
in VCS.

Provision for Income Taxes 

          The Company's provision for income taxes reflects Dialogic's status as
an S corporation  through the Company's IPO in April 1994 and as a C corporation
thereafter.  In  conjunction  with the  termination  of Dialogic's S corporation
status,  a  cumulative  net  federal  deferred  tax  asset of $1.1  million  was
established  with an  offsetting  credit to (and thus a  reduction  in) the 1994
provision for income taxes.  The  recognition  of the deferred tax asset did not
affect the Company's pro forma provision for income taxes in 1994. The pro forma
provision for 1994 reflects the  Company's pro forma pre-tax  income,  offset in
part by the  utilization of certain tax credits  (applicable  also to the actual
provision for income taxes). 

          The Company's  provision for income taxes increased by $2.2 million or
28%, on a pro forma basis, from 1994 to 1995 and by $4.3 million or 44% to $14.2
million in 1996. The increase in the provision for income taxes in 1995 and 1996
reflects  increased  pre-tax  income  and the  unavailability  of  research  and
development  tax  credits  during the second  half of 1995 and the first half of
1996,  offset  in part  in  1996  by the  effect  of  Dialogic's  investment  in
tax-exempt securities and by certain international tax strategies.

Inflation, Foreign Currency Exchange and Other Matters

          Inflation has not had a significant impact on the Company's  operating
results  to date.  Foreign  currency  gains and loses are  included  within  the
Company's  general,  selling and administrative  expenses.  While the amounts of
such gains or losses have not been significant to the Company's year-end 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 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. The decline in the
US dollar  against  the  functional  currencies  during  1995 had the  effect of
magnifying  the  impact  of  foreign  revenues  and  expenses  on the  Company's
consolidated results of operations. The improvement in the US dollar against the
functional currencies during 1996 had a countervailing effect during 1996.

          For information regarding certain accounting pronouncements,  see Note
1 of the Notes to the Company's Consolidated Financial Statements.

Liquidity and Capital Resources

          As of December 31, 1996,  Dialogic had working capital of $100 million
and a current ratio (i.e.,  the ratio of current assets to current  liabilities)
of 5.9 to 1, as compared with working capital of $77 million and a current ratio
of  4.4 to 1 at  December  31,  1995.  

          Dialogic's cash, cash equivalents and short-term investments increased
by $7.6 million during 1996. This increase  primarily  reflects the $7.4 million
of cash provided by the Company's operating activities and after tax proceeds of
$6.9 million on the sale of VCS stock.  Capital  expenditures  of $10.7  million
during 1996  primarily  reflect the  acquisition  of new computer  equipment and
software  associated with Dialogic's  growth and furniture and fixtures acquired
in connection with the expansion of the Company's offices worldwide.

          The Company has financed its operations  primarily  through cash flows
from operations, as well as from the net proceeds of its initial public offering
and the net realized gain from the sale of VCS  securities.  Dialogic is a party
to two credit  facilities  pursuant  to which the  Company  may borrow up to $35
million on an unsecured  basis for working capital  purposes.  See Note 7 of the
Notes to the Company' 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 the  liquidity  and capital  requirements  of
Dialogic  for at least the next  twelve  months.  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.

Risks and Uncertainties

          Dialogic's business is subject to certain risks which are described in
greater detail in Item 1 of the Dialogic Annual Report on Form 10-K for the year
ended  December  31,  1996.  Such risks  include  (i) the  possibility  that the
Company's   products   may  become   obsolete  in  light  of  rapidly   changing
technological developments or that the Company may fail to respond adequately to
such developments; (ii) the advances that other companies may make in the highly
competitive CT industry,  (iii) the likelihood  that Dialogic  revenues may vary
significantly  from accounting  period to accounting  period due to a variety of
factors,  including the timing of significant  customer orders and other factors
that impact customer demand, changes in Dialogic's products,  geographic mix and
customer mix, the  introduction of new products by Dialogic or its  competitors,
pricing  pressures  or  other  competitive  marketing  initiatives,   regulatory
developments,   economic   conditions  or   unanticipated   development   and/or
manufacturing  difficulties  or expenses,  (iv)  disputes  that may arise in the
future  regarding  the  intellectual   property  rights  of  the  Company,   its
competitors  or  other  third-parties,  (v) the  outcome  of  litigation,  which
typically  is  difficult  to predict in light of the  uncertainties  involved in
legal proceedings, (vi) uncertainties resulting from the Company's dependence on
only one or a limited  number of sources for  certain  critical  components  and
relating to the Company's  reliance  upon  third-party  suppliers  which perform
manufacturing  functions  on behalf of the  Company,  (vii) the  extent to which
Dialogic is able to obtain regulatory approvals throughout the world, (viii) the
Company's  dependence  on key  personnel  and its  ability to attract and retain
qualified  personnel  to support  future  technology  developments  and business
growth,  (ix)  risks  that may arise as a result of  efforts  to  integrate  any
companies that Dialogic may acquire in the future and (x) the  possibility  that
Dialogic  may hold excess or obsolete  inventory  at any time as a result of the
rapidly changing technology or needs of its customers.  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 revenues, gross margins
or earnings as compared with 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.



Independent Auditors' Report


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

          We have  audited  the  accompanying  consolidated  balance  sheets  of
Dialogic  Corporation and subsidiaries as of December 31, 1995 and 1996, and the
related consolidated  statements of income,  shareholders' equity and cash flows
for each of the  three  years in the  period  ended  December  31,  1996.  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  signicant  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,  1995  and  1996,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.


DELOITTE & TOUCHE LLP
New York, New York
February 10, 1997

<PAGE>



                          Consolidated Balance Sheets
                     Dialogic Corporation and Subsidiaries
                      (In thousands, except share amounts)

December 31,                                    1995            1996
ASSETS
CURRENT ASSETS: 
        Cash and cash equivalents             $ 5,987        $ 11,848
        Short term investments                 24,689          26,443
        Convertible note, options and 
          shares recorded at fair 
          market value                         12,777          11,030
        Accounts receivable (net of allowance
          for doubtful accounts of $894 in 
          1995 and $829 in 1996)               25,727          34,706
        Inventory                              23,969          27,762
        Deferred income taxes                   3,067           3,871
        Other current assets                    3,107           5,086
                                                -----           -----
                Total current assets           99,323         120,746
                                               ------         -------
PROPERTY AND EQUIPMENT - Net                   15,126          20,408
GOODWILL  (net of accumulated amortization 
     of $56 in 1995 and $442 in 1996)              79           4,434
DEPOSITS AND OTHER ASSETS                       2,834           2,661
                                                -----           -----
TOTAL ASSETS                              $   117,362     $   148,249
                                          ===========     ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
        Accounts payable                  $     9,232     $     7,043
        Accrued expenses                        7,199           8,256
        Deferred income taxes                   5,320           4,623
        Current maturities of long-term 
           liabilities                            595             559
                                                  ---             ---
                Total current liabilities      22,346          20,481
                                               ------          ------

LONG-TERM LIABILITIES                           2,259           2,926
SHAREHOLDERS' EQUITY:
        Preferred stock, no par value - 
          10,000,000 shares authorized; 
          none issued
        Common stock, no par value - 60,000,000 
          shares authorized; 15,491,965 and 
          15,774,222 shares outstanding, 
          respectively                           199             203
        Additional paid-in capital            38,697          46,740
        Retained earnings                     46,723          72,271
        Cumulative translation adjustment        373              14
        Net unrealized gains on available 
          for sale securities                  6,765           5,614
                                               -----           -----
                Total shareholders' equity    92,757         124,842
                                              ------         -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY  $117,362       $ 148,249
                                            ========       =========

See notes to consolidated financial statements.

<PAGE>
                       Consolidated Statements of Income
                     Dialogic Corporation and Subsidiaries
                      (In thousands, except share amounts)

Year Ended December 31,                      1994           1995           1996
REVENUES                                $  127,235     $  168,652     $ 213,604
                                        ----------     ----------     ----------
COSTS AND EXPENSES:
        Cost of goods sold                  50,841         66,829        84,764
        Research and development expenses   21,650         29,045        40,666
        Selling, general and administrative 
          expenses                          34,646         47,673        60,052
        Merger costs                          -             1,294           -
        Interest expense                       107             44            95
        Interest income                     (1,321)        (2,080)       (2,535)
        Net realized (gains)/losses on 
          available for sale securities         15           (309)       (9,175)
                                           -------        -------       ------- 
                Total costs and expenses   105,938        142,496       173,867
                                           -------        -------       -------
INCOME BEFORE PROVISION FOR INCOME TAXES    21,297         26,156        39,737
PROVISION FOR INCOME TAXES                   5,408          9,854        14,189
                                             -----          -----        ------
NET INCOME                             $    15,889     $   16,302    $   25,548
                                       ===========     ==========    ==========
Income per share                                       $     1.02    $     1.56
                                                       ==========    ===========
Shares used in the calculation 
  of income per share                                      16,039        16,417
                                                           ======        ======

PRO FORMA INCOME DATA (Unaudited):
Income before provision for income 
     taxes as reported                 $    21,297
Pro forma income taxes                       7,689
                                       -----------
Pro forma net income                   $    13,608
                                       ===========
Pro forma income per share             $       .94
                                       ===========
Shares used in the calculation of pro 
    forma income per share                  14,509
                                       ===========

See notes to consolidated financial statements.

<PAGE>
<TABLE>

                Consolidated Statements of Shareholders' Equity
                     Dialogic Corporation and Subsidiaries
                       (In thousands, except share data)

<CAPTION>
                                                                                                      Unrealized
                                                                                                      Gains/Losses
                                                       Note      Additional              Cumulative      on            Total
                                   Common Stock      Receivable  Paid-in   Retained     Translation   Available for   Shareholders'
                                Shares      Amount  for Stock   Capital    Earnings     Adjustment   Sale Securities   Equity

<S>                           <C>           <C>     <C>         <C>         <C>         <C>          <C>             <C>        
Balance, January 1, 1994      11,356,006    $151    $(476)       $4,249     $17,496     $  (2)      $   -            $   21,418
                              ----------    ----    -----        ------     -------     -----       ----             ----------
Exercise of stock options        464,027       5       -          1,177        -            -           -                 1,182
Issuance of common stock       2,889,375      39       -         27,854        -            -           -                27,893
Dividends declared                 -          -        -            -       (2,455)         -           -                (2,455)
Currency translation gain          -          -        -            -          -           212          -                   212
Repayment of note
   receivable for stock            -          -       191           -          -            -           -                   191
Net unrealized gains on
   available for sale securities   -          -        -            -          -            -         2,301               2,301
Reclassication of undistributed 
   S corporation retained earnings -          -        -          1,000     (1,000)         -           -                    -
Other                              -          -        -            243        (78)         -           -                   165
Net income                         -          -        -            -       15,889          -           -                15,889
Balance, December 31, 1994    14,709,408    195      (285)       34,523     29,852         210        2,301              66,796
                              ----------    ---      ----        ------     ------         ---        -----              ------
Exercise of stock options        351,342      4        -          2,753        -            -           -                 2,757
Issuance of common stock 
        in connection with 
        acquisitions             430,229      -        -          1,201        569          -           -                 1,770
Currency translation gain          -          -        -            -          -           163          -                   163
Repayment of note
        receivable for stock       -          -       285           -          -            -           -                   285
Net unrealized gains on
        available for sale 
        securities                 -          -        -            -          -            -         4,464               4,464
Issuance of common stock under
        employee stock purchase
        plan                      15,119      -        -            220        -            -           -                   220
Purchase and retirement 
        of treasury stock        (14,133)     -        -            -          -            -           -                    -
Net income                         -          -        -            -       16,302          -           -                16,302
Balance, December 31, 1995     15,491,965   199        -         38,697     46,723         373        6,765              92,757
                               ----------   ---       ---        ------     ------         ---        -----              ------
Exercise of stock options         179,822     3        -          2,881        -            -           -                 2,884
Issuance of common stock 
        in connection with 
        acquisitions               55,424     1        -          3,794        -            -           -                 3,795
Currency translation (loss)        -          -        -            -          -         (359)          -                  (359)
Net unrealized (losses) on
        available for sale 
        securities                 -          -        -            -          -            -        (1,151)             (1,151)
Issuance of common stock under
        employee stock purchase
        plan                       47,011     -        -          1,368        -            -          -                  1,368
Net income                         -          -        -            -       25,548          -          -                 25,548
Balance, December 31, 1996     15,774,222  $203     $  -        $46,740    $72,271     $   14       $ 5,614          $  124,842
                               ==========  ====     ===         =======    =======     ======       =======          ==========

          See notes to consolidated financial statements.
</TABLE>

<PAGE>

<TABLE>
                     Consolidated Statements of Cash Flows
                     Dialogic Corporation and Subsidiaries
                                 (In thousands)

Year Ended December 31,                                  1994                   1995                           1996

<S>                                                     <C>                 <C>                              <C>      
CASH FLOWS FROM OPERATING  ACTIVITIES: 
Net income                                               $ 15,889           $ 16,302                         $ 25,548
Adjustments  to reconcile  net income to 
     net cash  provided by operating
     activities:         
     Depreciation  and  amortization                        2,002              3,223                            6,103
     Provision  for inventory  obsolescence                   307                826                              159
     Provision for bad debts                                  357                724                              724
     Deferred rent                                            483                327                              336 
     Tax benefit  from  exercise  of 
          stock  options                                      666              1,865                            1,902
     Minority  interest                                        -                  46                               39 
     Deferred  income taxes                                  (581)            (1,107)                            (587)
     Non-cash interest  income                               (597)              (532)                          (1,069)
     Net realized  (gain) loss on available for
          sale  securities                                     15               (309)                          (9,175)
     Non-cash  merger  costs                                   -                 609                                - 
Changes  in operating  assets and  liabilities:  
     (Increase) in accounts  receivable                    (4,035)            (8,995)                          (9,234) 
     (Increase) decrease in inventory                         940            (12,682)                          (3,639) 
     (Increase) decrease  in other  current  assets           325               (951)                          (1,910)
     (Decrease)  increase  in accounts payable             (1,966)             2,503                           (2,393)  
     Increase  (decrease) in accrued expenses                (605)             3,092                              789 
     Other                                                    182                445                             (143) 
          Net cash  provided by  
               operating  activities                       13,382              5,386                            7,450  
                                                           ------              -----                            ----- 
CASH FLOWS FROM  INVESTING  ACTIVITIES:
     Capital expenditures                                  (7,226)            (7,614)                         (10,722) 
     Purchase of short-term investments                   (25,318)           (23,257)                         (45,937) 
     Proceeds from sales of short-term  investments         3,275             21,808                           44,044 
     Proceeds from sales of other investments                 -                  -                             10,100 
     Acquisition of business                                  -                  378                             (820) 
     Net cash used in  investing  activities              (29,269)            (8,685)                          (3,335)
                                                          -------              ------                           ------ 
CASH FLOWS FROM FINANCING  ACTIVITIES:  
     Dividends paid                                        (5,125)               -                                  - 
     Principal  payments under capital 
          lease obligations                                  (236)              (392)                             (104) 
     Proceeds from  short-term  borrowings                 19,615              2,157                            12,625  
     Repayments on short-term  borrowings                 (20,482)            (2,157)                          (12,625) 
     Exercise of stock options                                516                892                               982 
     Issuance of common stock                              27,893                220                             1,368
     Repayment of note  receivable
          for  stock                                          191                285                                 - 
     Other                                                   (114)                -                              (500)
     Net  cash  provided  by  financing
          activities                                       22,258              1,005                             1,746 
                                                           ------              -----                             ----- 
NET (DECREASE) INCREASE IN CASH
     AND CASH EQUIVALENTS                                   6,371             (2,294)                            5,861 
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                1,910              8,281                             5,987 
CASH AND CASH EQUIVALENTS,  END OF YEAR                  $  8,281            $ 5,987                           $11,848 
                                                         =========           =======                           ======= 
SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION:
     Cash paid  during  the year for:  
     Interest                                            $    107            $    28                            $    95
     Income taxes                                           5,442              8,264                             13,739
SUPPLEMENTAL  DISCLOSURES  OF NON-CASH  INVESTING 
     AND FINANCING  ACTIVITIES 
Equipment acquired under capital lease obligations       $    118            $   -                              $   157
Other assets  acquired by incurring  long-term  debt        2,000                -                                   - 
Change in net  unrealized  (losses)/gains  
     on available  for sale  securities                     2,301              4,464                             (1,151)
Stock and options  issued for  acquisition  of business       -                   -                               3,795
                                                            =====            =======                             =======

See notes to consolidated financial statements.

</TABLE>

<PAGE>



                   Notes to Consolidated Financial Statements

                     Dialogic Corporation and Subsidiaries
 
1. Summary of Signicant Accounting Policies 

Nature of Business - Dialogic designs,  manufactures and sells high performance,
standards-based  computer  telephony (CT)  components  sold globally to original
equipment  manufacturers,  value added resellers and service  providers  through
both a direct sales force and  distributors.  Computer  telephony  systems built
with  Dialogic  products  manage  telephone,  facsimile  and  multi-media  calls
answered by computers  over wireless and wired  networks  worldwide.  Dialogic's
products are used in voice, fax, data, voice  recognition,  speech synthesis and
call center management CT applications. Dialogic products are offered as modular
building  blocks that enable its  customers  to design CT systems  that meet the
application demands of their end-user customers. The company is headquartered in
Parsippany,  New Jersey, with regional  headquarters in Tokyo, Japan,  Brussels,
Belgium and Buenos Aires,  Argentina.  Dialogic employs approximately 900 people
worldwide, and has offices in major industrial centers around the world.

Principles of Consolidation - The consolidated  financial statements include the
accounts  of  Dialogic  Corporation  and  its  subsidiaries  (collectively,  the
"Company").   Signicant   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 estimates
and assumptions that affect the reported amounts of assets and liabilities,  and
the reported amounts of revenues and expenses during the reporting  period.  The
preparation  of financial  statements  in  conformity  with  generally  accepted
accounting principles also requires management to make estimates and assumptions
that affect the disclosures of contingent  assets and liabilities at the date of
the financial statements. Actual results could differ from those estimates.

Reclassications -  Certain  reclassications  were  made  to  the  1994 and 1995 
financial statements to conform to the 1996 presentation.

Revenue Recognition - The Company recognizes revenues  on  the date of shipment.

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

Property  and  Equipment  -  Property  and  equipment  are  stated  at cost less
accumulated  depreciation  and  amortization.  Depreciation and amortization are
computed at straight-line  or accelerated  methods at rates adequate to allocate
the cost of the applicable assets over their expected useful lives,  which range
from one to five years on  equipment  (including  software)  and seven years for
furniture and fixtures. Equipment under capital lease and leasehold improvements
are  amortized  over the lease  term or  estimated  useful  life,  whichever  is
shorter.

Income Taxes - Immediately  prior to the  consummation of the Company's IPO, the
Company  terminated its status as an S  corporation.  While the Company was an S
corporation,  federal income taxes and state income taxes for those states which
recognize  S  corporation  status  were  reported  by and taxed  directly to the
Company's shareholders rather than to the Company. Due to the termination of its
status as an S  corporation  on April 16,  1994,  the  Company is now subject to
federal and all  applicable  state income taxes on taxable  income  earned.  The
Company provides deferred income taxes on temporary  differences between amounts
of assets and liabilities for financial  reporting  purposes and such amounts as
measured  by tax laws in  accordance  with SFAS No. 109  "Accounting  for Income
Taxes."

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 SFAS No. 86. 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.

Foreign  Currency  Translation  - For the  Company's  international  operations,
assets and  liabilities  are  translated at year-end  exchange  rates and income
statement items are translated at average exchange rates  prevailing  during the
year.   Translation   adjustments  are  recorded  as  a  separate  component  of
shareholders' equity.

Cash   Equivalents  and  Investments  -  Cash   equivalents  are  highly  liquid
investments,  including  certicates of deposit,  government  securities and time
deposits,  with  maturities  of three  months  or less at the time of  purchase.
Short-term  investments  are similar  investments  with  maturities of more than
three months.  Cash  equivalents  are stated at cost which  approximates  market
value.  Included in cash and cash equivalents is $324,000 and $533,000 which was
withheld  from  employees  for employee  benefit  plans at December 31, 1995 and
1996.

On January 1, 1994 the Company  adopted  SFAS No. 115,  "Accounting  for Certain
Investments in Debt and Equity  Securities".  This Statement  requires that debt
and equity  securities that have readily  determinable fair values be carried at
fair value unless they are held to maturity.  Securities are classied as held to
maturity  only if the Company has the positive  intent and ability to hold these
securities to maturity. If not classied as held to maturity, such securities are
classied as  securities  available  for sale or trading  securities.  Unrealized
gains or losses for  securities  held in the  available  for sale  portfolio are
excluded  from  earnings  and  reported  net of tax as a separate  component  of
shareholders' equity.  Short-term  investments and the convertible note, options
and shares (see Note 5) are classied as available for sale securities.  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 issue
specific data at the valuation date.

Concentration of Credit 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.

Income Per Share - Income per share is based on the weighted  average  number of
common  shares and  common  share  equivalents  outstanding  during the  periods
presented.  Stock  options  have been  included  in the  computations  using the
treasury  stock method when their  effect would be dilutive.  In 1994 income per
share was  computed on a pro forma  basis as the  Company  was an S  Corporation
through April 1994.  Pro forma tax expense is computed as though the Company was
a C Corporation for the entire year.

Accounting  Pronouncements - In March 1995, the Financial  Accounting  Standards
Board (FASB) issued SFAS No. 121,  "Accounting  for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." This statement is effective
for fiscal years  beginning  January 1, 1996. The adoption of this statement did
not have an effect on the Company's  consolidated financial condition or results
of operations.

In October  1995,  the FASB  issued SFAS No. 123,  "Accounting  for  Stock-Based
Compensation,"  which is effective  for the Company  beginning  January 1, 1996.
SFAS No. 123 requires  expanded  disclosures in annual  financial  statements of
stock-based  compensation  arrangements  with employees and encourages (but does
not  require)  compensation  cost to be measured  based on the fair value of the
equity  instrument  awarded.  Companies are permitted,  however,  to continue to
apply Accounting  Principles  Board (APB) Opinion No. 25,  "Accounting for Stock
Issued to Employees," which recognizes  compensation cost based on the intrinsic
value of the equity instrument  awarded.  The Company will continue to apply APB
Opinion No. 25 to its stock based compensation  awards to employees and has made
the  required  disclosure  of the pro forma  effect on net income and income per
share in Note 6 to the Company's Consolidated Financial Statements.


2. Acquisitions

On June 6, 1994,  the Company  issued 1.4 million shares of its Common Stock for
all of the  outstanding  stock of  GammaLink,  a California  based  developer of
facsimile  boards  for  computer-based   applications.   In  addition,  formerly
outstanding  options  to  acquire  shares  of  GammaLink's  capital  stock  were
converted into options to purchase a total of 279,000 shares of Dialogic  Common
Stock.  This  acquisition has been accounted for as a pooling of interests.  

     The following  summarizes the separate results of the Company and GammaLink
from  January  1,  1994  through  the  end of the  interim  period  nearest  the
acquisition ($000's):

                  Dialogic        GammaLink       Eliminations (1)        Total
                  ---------       ---------       ----------------        ------
Six Months Ended June 30, 1994 (Unaudited)
Revenues        $ 51,669          $  8,472        $   (895)             $59,246
Net Income        7,705                777            (188)               8,294

(1) Intercompany transactions between Dialogic and GammaLink. 

     On February 14,1995,  the Company completed the purchase of certain assets,
consisting   principally  of  software   technology,   from  Digital   Equipment
Corporation.  Such assets have enabled the Company to develop, market and sell a
server product for computer  control of telephone  switches.  Under the terms of
the  agreement,  the purchase price was $250,000.  Additionally,  the Company is
required to make future royalty payments (not to exceed $1.75 million)which will
be based on sales of products  utilizing  the acquired  technology  over a three
year period.

     On February 27, 1995,  the Company  acquired  Spectron  Microsystems,  Inc.
("Spectron")  a  California-based   producer  of  DSP  operating  systems.   The
acquisition  was  structured  as a  merger  pursuant  to  which  a  wholly-owned
subsidiary  of Dialogic  merged with and into Spectron and  shareholders  of the
acquired  entity  exchanged  all of their  capital  stock for a total of 430,229
shares of the Company's  Common Stock.  Spectron  stock options were replaced by
stock  options  entitling  their holders to purchase a total of 97,308 shares of
the Company's Common Stock. This transaction has been accounted for as a pooling
of interests.  Since the historical  operations of Spectron prior to the date of
the merger  were not  material  to the  Company's  consolidated  operations  and
financial position, prior period financial statements have not been restated.

     On June 27, 1996, the Company acquired all of the outstanding  common stock
of Dianatel  Corporation in exchange for 55,424 shares of Dialogic common stock,
$1.1 million in cash and options to purchase  29,874  shares of Dialogic  common
stock.  The merger has been accounted for as a purchase.  The merger resulted in
goodwill of approximately  $4.7 million which is being amortized over five years
beginning with the date of the acquisition.

3. Balance Sheet Detail

                      Consisted of the following ($000's)
December 31,                         1995              1996

Inventories
        Raw materials          $       11,900    $     10,399
        Work-in-process                 2,784           4,607
        Finished goods                  9,285          12,756
                               ---------------   ------------
                               $       23,969    $     27,762
                               ===============   ============

Allowances for excess or obsolete  inventories were $1,460 and $1,552 at the end
of 1995 and 1996, respectively.

Property and Equipment

        Furniture and fixtures    $      4,835    $      5,843
        Equipmen                        18,613          27,328
        Leasehold improvements           1,815           3,059
                                  ------------    ------------
                                  $     25,263    $     36,230
                                  ============    =============
        Less accumulated 
          depreciation and 
          amortization                  10,137         15,822
                                  ------------    -----------
                                  $     15,126    $    20,408
                                  ============    ===========
Deposits and Other assets

        Deposits                  $        761    $       720
        License fees                     1,924          1,563
        Other                              149            378
                                  -------------   -----------
                                  $      2,834    $     2,661
                                  ============    ===========
Long-Term Liabilities
        Deferred rent             $        963    $    1,299
        License fees                     1,250           750
        Note payable (prime + 1%)          -             634
        Other                               46           243
                                  -------------   ----------
                                  $      2,259    $    2,926
                                  ============    ==========

4. Shareholders' Equity

In 1994,  the  Company  effected  a 1.5 for 1 stock  split of common  shares and
amended its  certicate  of  incorporation  to  increase  the number of shares of
Common  Stock that the  Company is  authorized  to issue to  60,000,000.  During
November  1993,  the  Board  declared a dividend in the amount of $2.7 million, 
which was paid in February 1994. 

     On  April  19,  1994,  Dialogic  consummated  its IPO,  issuing  a total of
2,889,375 shares of Common Stock,  which resulted in net proceeds to Dialogic of
approximately  $27.9  million.  Upon  termination of the Company's S corporation
status, cash distributions  totaling $2.4 million were paid to stockholders from
the undistributed S corporation retained earnings. The remaining undistributed S
corporation retained earnings of approximately $1.0 million have been reclassied
as additional paid in capital.

Note  Receivable  for Stock - GammaLink had an employment  agreement with one of
its officers.  Under the  agreement,  the officer  acquired   96,754  shares  of
Common Stock for  $50,000  and  notes  in the principal amount of $476,000.  The
notes  were  secured  by  the  Company's  Common  Stock.  In  December  1994 and
January 1995 the notes were repaid.

5. Available For Sale Securities

The following is a summary of the  available for sale  securities as of December
31,1996 and 1995 ($000's):

<TABLE>
<CAPTION>

                
                                            Cost            Gross           Gross              Estimated
                                                            Unrealized      Unrealized         Fair Value
1996                                                        Gains           Losses

<S>                                     <C>                 <C>            <C>                <C>     
Municipal Bonds                         $ 26,395            $    48        $  -               $ 26,443
Convertible note and shares                1,954              9,076           -                 11,030
                                           -----              -----                             ------
   Total available for sale securities  $ 28,349            $ 9,124        $  -               $ 37,473
                                        ========            =======        ========            =======
</TABLE>

Included in the convertible note and shares
are equity securities of $792, net of 
unrealized gains of $274.

<TABLE>
<CAPTION>


1995                            
<S>                                     <C>                 <C>            <C>                <C>     
Government Bonds                        $   17,765          $   236        $   -              $ 18,001
Municipal Bonds                              2,045                6            -                 2,051
Corporate Bonds                              4,566               78           (7)                4,637
                                             -----               --           --                 -----
        Total short term investments        24,376              320           (7)               24,689
                                            ------              ---           --                ------
Convertible note, options and shares         1,904           10,873            -                12,777
                                             -----           ------                             ------
        Total available for 
          sale securities               $   26,280          $11,193        $  (7)             $ 37,466
                                        ==========          =======        =====              ========
</TABLE>

Included in the convertible note, options and shares are equity securities of 
$742, net of unrealized gains of $4,954.


The cost and  estimated  fair value of debt  securities at December 31, 1996, by
contractual maturity, are as follows ($000's):

                                              Cost                Estimated
                                                                  Fair Value
1997                                    $     5,409              $   14,228
1998                                         13,006                  13,023
1999                                          2,992                   2,995
2000                                            -                      - 
2001                                            -                      -       
Thereafter                                    6,150                   6,161
                                        -----------              ----------
                                        $    27,557              $   36,407
                                        ===========              ==========

During 1995 and 1996, the gross  realized  gains on sales of securities  totaled
approximately  $327 and  $9,345,  respectively,  and the gross  realized  losses
totaled approximately $18 and $170, respectively.

          In 1991, the Company  completed a series of agreements  with VCS which
were subsequently  amended as of March 14, 1994; such agreements provide,  among
other things, as follows:

          (a) The Company paid  $900,000 in cash for a  convertible  note in the
principal  amount of $1.2 million with  interest at "prime" plus 2% and having a
maturity date of January 1, 1997. In addition,  the Company  received a security
interest in certain  technology.  Under the note agreement,  the Company had the
right to convert all or any part of the principal amount of the note and accrued
interest  into  shares  of VCS  stock at a rate of one  share  for each  $.92 of
principal  and  interest  accrued. 

          (b) VCS  granted to the  Company an option to  purchase  up to 914,231
shares of VCS common stock at a purchase  price of $.61 per share.  

          During 1994, 1995, and 1996, the Company recognized interest income in
amounts  of  $335,000,  $532,000,  and  $1,069,000,  respectively,  based on the
estimated  fair values of the VCS stock which the Company  elected to receive in
lieu of cash on each of the interest  payment dates of the convertible  note. In
1994, upon  reassessing the  creditworthiness  of VCS, the Company  recognized a
discount of $262,000,  which is reflected in interest  income.  During 1996, the
Company sold 1,150,000  shares of stock in VCS's public offering for proceeds of
$10.1 million by exercising  its option and by selling  additional  shares held.
The Company  realized a pre-tax gain on available  for sale  securities  of $9.1
million. On January 1, 1997 the Company converted the principal of the note into
1,264,474  shares of  capital  stock of VCS,  after  which the  Company's  total
holdings in VCS amounted to 1,399,715 shares of capital stock.

          The convertible note,  options and shares were classified as available
for sale under SFAS 115, since the Company views these as investments.  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. Prior to December 31, 1996 such fair values included
discounts to reflect the possible  illiquidity in the market for VCS stock.  

          VCS  is a  supplier  to  the  Company  of  certain  proprietary  voice
recognition  technologies.  During 1994, 1995 and 1996, the Company's  purchases
from VCS amounted to $2,651,000, $5,825,000, and $2,953,000, respectively.

6. Employee Benefit Plans

Bonus Plan - The Company has a quarterly  bonus  program in which all  employees
participate, except certain members of senior management. Each quarter a pool is
created based upon the achievement of targeted profit goals.  Payments are made 
to employees on a quarterly basis. For the years ended December 31, 1994, 1995, 
and 1996, the Company recorded expenses under the program of $874,000, $990,000,
and $978,000,  respectively. 

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  forty  cents  for  each  dollar
contributed  by  a  participant,   with  a  maximum  contribution  of  2%  of  a
participant's earnings. The Company's matching contributions to the savings plan
were $250,000,  $311,000,  and $458,000 in 1994,  1995, and 1996,  respectively.

Stock  Compensation  Plans  - At  December  31,1996,  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 1995 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  ($000's  except  per share  amounts):


                                               1995                   1996 

Net Income 
     As reported                             $ 16,302               $ 25,548  
     Pro  forma                              $ 14,818               $ 22,340  

Income  per  share 
     As reported                             $   1.02               $  1.56 
     Pro forma                               $    .92               $  1.36


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 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 all employees,  which provides for nonqualified and incentive stock options.
At December 31, 1996,  652,520 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.  

          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:

Year of Grant                                1994            1995        1996
                                            ------           ----        ----
Volatility                                    75%             75%         75%  
Weighted average risk free interest rate     7.0%            6.4%        6.3%  
Expected life (yrs)                            6               6           6 
 
No dividends are assumed to be paid during the expected life of any option.

<PAGE>

          A summary  of the status of the  Company's  stock  option  plans as of
December  31,1994,  1995,  and 1996 and changes during the years ending on those
dates is presented below:

<TABLE>
<CAPTION>

                                        1994                           1995                                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  2,031       $    5.00              1,850     $     7.00                1,962           $    12.00
Granted                    319           13.00                511          23.00                  626                31.00
Exercised                 (464)           1.00               (351)          3.00                 (173)                5.00
Forfeited/Canceled         (36)           5.00                (48)         10.00                 (146)               29.00
Options outstanding 
   at end of year        1,850       $    7.00              1,962     $    12.00                2,269           $    16.00
                         =====                              =====                               =====                   
Options Exercisable at 
     year end              827                                759                                 855    
Weighted average fair 
   value of options granted 
   during the year             $ 10.00                            $  16.00                                $  23.00
</TABLE>

The following table summarizes  information  about stock options  outstanding at
December 31, 1996:

<TABLE>
<CAPTION>

     
                                               Options Outstanding                                       Options Exercisable
-----------------------------------------------------------------------------------------    -------------------------------------- 
                                     Number      Weighted-Average 
                                   Outstanding      Remaining            Weighted-Average    Number Exercisable     Weighted-Average
     Range of  Exercise Prices     at 12/31/96   Contractual life (yrs)   Exercise Price         at 12/31/96          Exercise Price
-------------------------------    -----------   ----------------------  ----------------    ------------------     ----------------
<C>            <C>                   <C>             <C>                    <C>                  <C>                    <C>       
$ 1.33    to   $  4.93               497,000         4.6                    $  3.60              391,000                $ 3.57    
  5.73    to      9.33               449,000         6.7                       7.10              246,000                  7.50    
  10.67   to     18.88               376,000         7.4                      15.13              158,000                 14.23   
  21.00   to     28.75               719,000         8.9                      24.94               60,000                 23.50   
  30.00   to     55.75               228,000         9.6                      36.44                 -                       -   
                                   ---------         ---                    --------             -------                ------------
                                   2,269,000         7.3                    $ 16.27              855,000                $ 8.08    
                                   =========         ===                    =======              =======                ============
</TABLE>



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
use up to ten percent of their  compensation  to purchase the  Company's  common
stock at a purchase price equal to eighty-five  percent of the fair market value
of the stock at the  beginning  or end of each  offering  period,  whichever  is
lower.  Certain members of senior  management are not eligible to participate in
the ESPP.  Under the ESPP, the Company  reserved for issuance a total of 300,000
shares.  Approximately  fifty percent of eligible employees have participated in
the ESPP during the last two years.  Under the ESPP, the employees  purchased or
committed to purchase  29,109 shares and 49,770 in 1995 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 with the following assumptions
for 1995 and  1996;  no  dividends,  an  expected  life of .25  years,  expected
volatility of seventy-five  percent,  and weighted  average  risk-free  interest
rates of 5.5 and 5.1 percent. The fair value of those purchase rights granted in
1995 and 1996 was $169,000 and $588,000, respectively.

7. Credit Facilities

The Company maintains credit facilities, with two different lenders, pursuant to
which the Company may borrow up to $35 million on an unsecured basis for working
capital purposes. 

          Loans made under these agreements bear interest,  at the option of the
Company,  primarily at a rate equal to the lenders'  base rate less  one-quarter
percent or LIBOR plus one percent.  At December 31, 1995 and 1996 no  borrowings
were  outstanding  pursuant to these credit  facilities.  Future borrowing under
this facility will be due and payable on July 1, 1997.

8. Provision for Income Taxes

The provision for income taxes is comprised of the following ($000's):
<TABLE>
<CAPTION>

Year Ended December 31,                      1994              1995            1996
-----------------------                    -------           -------         -------
Federal:
<S>                                       <C>             <C>                 <C>    
        Current                           $ 4,212         $    9,24           12,343 
        Deferred                              479              (926)            (599)
                                          -------         ----------          ------
                Total federal               4,691             8,798           11,744
                                          -------         ----------          ------
State:
        Current                               854             1,136            1,616
        Deferred                               87              (227)             (39)
                                          -------         ----------          ------
                Total state                   941               909            1,577
                                          -------         ----------          ------
Foreign:
        Current                               848               134              824
        Deferred                               38                13               44
                                          -------         ---------            -----
                Total foreign                 886               147              868
                                          -------         ---------            -----
Provision before cumulative net  
   federal deferred tax asset               6,518             9,854           14,189
                                          -------         ---------           ------
Cumulative net federal deferred tax asset  (1,110)               -               -
                                          --------        ---------           ------
                Total provision          $  5,408         $   9,854       $   14,189
                                         =========        =========       ==========
</TABLE>

          The Company  provides for deferred taxes,  arising from the cumulative
temporary differences between the carrying amounts of assets and liabilities for
financial  reporting  purposes and the amounts used for income tax purposes,  by
recording  an income  tax  benefit  or  charge  for such  deferred  taxes in its
consolidated  statements of income.  In conjunction  with the termination of the
Company's S corporation  status in 1994, a cumulative  net federal  deferred tax
asset of $1.1 million was recognized with an offsetting  credit to the provision
for income taxes.

         The  federal  and state tax  effects  of  signicant  items  comprising 
the Company's deferred tax assets and liabilities are as follows ($000's):
        
December 31,                                     1995                    1996 

Deferred tax assets:

Allowance for doubtful accounts               $   234                  $  222
Inventory reserves                                614                     645
Credit memo reserve                               339                     557
Self insurance reserve                            213                     291
Warranty reserve                                  220                     144
Deferred revenue and deferred rent                527                     701
Other reserves                                    375                     595
Other                                             545                     716
                                              -------                  ------
Total deferred tax assets                     $ 3,067                  $3,871
                                              =======                  ======
Deferred tax liabilities:
Unrealized gains on available 
     for sale securities                      $(4,440)                $(3,507)
Depreciation                                     (510)                   (633)
Other                                            (370)                   (483)
                                             --------                 --------
Total deferred tax liabilities               $ (5,320)                $(4,623)
                                             =========                ========

          The effective  income tax rates  differed  from the federal  statutory
income tax rates as follows ($000's):

<TABLE>
<CAPTION>


December 31,                                        1994            1995           1996
                                                    ----            ----           ----
<S>                                            <C>               <C>            <C>     
Federal taxes at statutory rate                $   7,454         $  9,155       $ 13,908
Cumulative net federal deferred tax asset         (1,110)             -             -   
State taxes net of federal benefit                   612              591          1,025
Effect of foreign taxes                              254                5            180
Effect of S corporation status                    (1,568)             -             -   
Research and development credits                    (340)            (438)          (721
Acquisition costs                                     -               429           -   
Foreign sales corporation benefit                     -               -             (319)
Tax exempt income                                     -               -             (233)
Goodwill amortization                                 -               -              131
Other                                                106              112            218
                                              ----------         --------       ---------
Total                                         $    5,408         $  9,854       $ 14,189
                                              ==========         ========       ========
</TABLE>

     Provision has not been made for deferred U.S. income taxes on undistributed
earnings of foreign subsidiaries totalling $3.6 million since those earnings are
intended to be  permanently  invested.  It is not  practicable  to estimate  the
income  tax  liability  that  might  be  incurred  upon the  remittance  of such
earnings.

Pro Forma  Provision  for  Income  Taxes  (Unaudited) - The  unaudited pro forma
provision for income taxes represents estimated  income  taxes  that would  have
been reported had the Company fled its tax return as a taxable C corporation for
1994.     The  Company has accounted  for  income taxes on a pro forma basis in 
accordance with SFAS No. 109.  

     The pro forma  provision  for income taxes is  comprised  of the  following
($000's):

December 31,                                                              1994  
                                                                          ----
Federal:
        Current                                                         $5,427
        Deferred                                                           435
                                                                        ------
                Total federal                                            5,862
                                                                        ------
State:
        Current                                                            854
        Deferred                                                            87
                                                                        ------
                Total state                                                941
                                                                        ------
Foreign:
        Current                                                            848
        Deferred                                                            38
                Total foreign                                              886
                                                                        ------
Total provision                                                         $7,689
                                                                        ======
<PAGE>

9. Commitments and Contingencies

(a)  Lease   Commitments  - Equipment  with a  net  book  value of $248,000  and
$282,000  at  December  31,  1995 and  1996,  respectively  (net of  accumulated
depreciation  of $478,000 and  $601,000),  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 $3.3 million,  $4.5 million and
$5.8  million  for  the  years  ended   December  31,  1994,   1995,  and  1996,
respectively.  At December 31, 1996 future minimum lease payments are as follows
($000's):

                                               Operating       Capital
Year Ending December 31,                        Leases         Leases
                                               ---------       -------
1997                                           $  6,726        $  59
1998                                              6,768           40
1999                                              6,592           40
2000                                              6,157           40
2001                                              5,279           30
Thereafter                                       17,680            -
                                               --------        ------
Total                                         $  49,202        $  209
                                              =========        ======
Amounts representing interest                                    (40)
                                              ---------        ------
Present value of minimum lease payments                          169
                                              ---------        ------
Current portion                                                $  59
                                              =========        ======


(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
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 the settlement agreement.  The defendants deny the substantive allegations
of this complaint and have filed a counterclaim seeking damages from Brooktrout.
In  December  1996,  the  District  Court  entered an order of summary  judgment
against  Brooktrout  dismissing  certain of its claims, but leaving unresolved a
statutory unfair practice claim by Brooktrout and leaving  unresolved all of the
defendant's counterclaims.  Such order remained appealable. Although outcomes of
legal  proceedings  are difficult to predict and cannot be assured,  the Company
does not believe that such  proceedings  will  materially  adversely  affect its
consolidated financial condition, results of operations or liquidity. 

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  seeks  monetary  damages  on  behalf of a  purported  class of  
purchasers of the Company's Common  Stock.   Management  is unable to predict a 
potential  range of monetary exposure,  if  any,  to the Company,  but  believes
that the  substantive  claims asserted  are  without merit  and  that a material
adverse  effect on the Company's consolidated  financial  condition,  results of
operations or liquidity is less than probable.  However,  based on the extent of
the decline in the market price of the  Company's Common Stock  after such press
release  was  published,  an unfavorable  result could have a material  adverse 
effect on the  Company.  

The  Company is  also  engaged  in  other  legal  proceedings  arising   in  the
ordinary  course  of its  business,  the  result  of which  proceedings  are not
expected  to  have a  material  adverse  effect  on the  Company's  consolidated
financial condition, results of operations and liquidity.

Management intends  to defend  each  of  the  above-mentioned  legal proceedings
vigorously.  The Company's  statements regarding the potential effect of each of
these legal proceedings constitute  forward-looking  statements.  Actual results
could differ materially from these statements, depending upon uncertainties that
exist in any  litigation  relating to  interpretations  of legal  issues and the
development and presentation of factual issues.

10. Operations in Geographic Areas

Information  about  the  Company's  operations in different geographic areas at 
December 31, 1996, 1995, and 1994 and  the years then  ended is presented below 
($000's): 


                                                     Adjustments
                                Asia/                   and
1996               Americas    Pacific    Europe     Eliminations   Consolidated
                   ----------  -------    ------     ------------   ------------
Revenues: 
Customers           $171,517   $12,282   $29,805      $    -           $213,604
Intercompany          32,752     4,212     2,071        (39,035)             -
                    ---------  -------   -------      -----------   ------------
Total revenues      $204,269   $16,494   $31,876      $ (39,035)       $213,604
                    =========  =======   =======      ===========   ============
Net income          $ 24,788   $   400   $   686      $    (326)       $ 25,548
Identiable assets   $194,316   $ 6,297   $11,531      $ (63,895)       $148,249


                                                     Adjustments
                                Asia/                    and
1995                Americas   Pacific  Europe       Eliminations   Consolidated
                    --------   -------  --------     ------------   ------------
Revenues: 
Customers           $133,930   $ 9,439   $25,283      $   -           $ 168,652
Intercompany          26,144     2,688     1,412        (30,244)          -
                    ---------  -------   -------      -----------     ----------
Total revenues      $160,074   $12,127   $26,695      $ (30,244)      $ 168,652
                    =========  =======   =======      ===========     ==========
Net income          $ 16,667   $   223   $    26      $    (614)      $  16,302
Identiable assets   $131,924   $ 4,063   $ 8,163      $ (26,788)      $ 117,362

                                                     Adjustments
                                 Asia/                   and
1994                Americas    Pacific  Europe      Eliminations   Consolidated
                    --------    -------  ------      ------------   ------------
Revenues:

Customers           $103,318   $ 7,553   $16,364      $   -            $127,235
Intercompany          17,462     1,663       414      (19,539)            - 
                    --------   -------   -------      -----------    -----------
Total revenue       $120,780   $ 9,216   $16,778      $ (19,539)       $127,235
                    ========   =======   =======      ===========    ===========
Net income          $ 15,410   $   577   $   340      $    (438)       $ 15,889
Identiable assets   $ 79,398   $ 3,384   $ 6,049      $  (6,967)       $ 81,864

     Intercompany sales are at prices which in general provide  for a profit to 
the selling subsidiary.  The above-mentioned revenues for the Americas  included
export sales to customers (in Asia/Pacic and Europe) as follows ($000's):

                          Asia/Pacific       Europe             Total
                        ----------------     -------           --------
1996                     $   20,224          $  -               $20,224
1995                         14,594             -                14,594
1994                         12,361           1,049              13,410


Supplementary Financial Information

Selected Quarterly Financial Information (Unaudited)
(In thousands, except share amounts)

                                                Quarter Ended
1996                            March 31,       June 30,   Sept 30,     Dec 31,
                               ----------      ---------   --------    ---------
Total revenues                  $48,732         $50,054    $55,432     $59,386 
Costs of goods sold              19,751          19,908     22,733      22,372  
Net income(1)                    10,612           4,566      4,793       5,577  
Income per share(1)                 .65             .28        .29         .34  

                                                  Quarter Ended
1995                             March 31,     June 30,     Sept 30,    Dec 31,
                                ----------     --------    ---------   ---------
Total revenues                    $ 35,812     $ 40,625    $ 44,029    $ 48,186
Costs of goods sold                 14,336       16,210      17,914      18,369
Net income(2)                        2,050        4,014       4,929       5,309
Income per share(2)                    .13          .25         .31         .33

(1)  Net  of  $9.1  million  pre-tax or $.35 per share gain on sale of 1,150,000
shares of Voice  Control  Systems,  Inc. in the first quarter and a $1.0 million
pre-tax  or $.04 per share  one-time  charge  related  to the  Company's  patent
licensing agreement with Syntellect Technology Corp. in the third quarter.


(2) Net of $1.3 million  pre-tax or $.05 per share of merger costs  related to 
the Spectron acquisition in the first quarter. 

Market Price and Dividend Data

The   Company's   Common   Stock   (the   "Common   Stock")  is  traded  in  the
over-the-counter  market  and  quoted  on  the  Nasdaq  National  Market  System
("NASDAQ")  under the symbol "DLGC." The following table sets forth the high and
low bid prices of the Common Stock on NASDAQ during the periods indicated.  Such
prices  reflect  inter-dealer  prices  without  retail  mark-up,   mark-down  or
commissions and may not represent  actual  transactions.  

                                        High                  Low 
Quarter ended March 31, 1995         $ 31.50               $ 20.25
Quarter  ended June 30, 1995           29.00                 16.50
Quarter ended September 30, 1995       27.50                 16.00
Quarter ended December 31, 1995        44.25                 20.75
Quarter ended March 31, 1996           41.50                 25.50
Quarter ended June 30, 1996            60.00                 36.75
Quarter ended  September  30, 1996     55.25                 22.50
Quarter ended  December 31, 1996       38.00                 27.00

As of  January 31, 1997, there were  approximately  250 holders of record of the
Common  Stock.  Since its  IPO,  the  Company has not paid any cash dividends on
its capital stock;  prior to that  offering,  the Company  declared  aggregate S
corporation  dividends  of $2.5  million in 1994 and $8.7  million in 1993.  The
Company's  current  policy  is to  retain  earnings  for  use in  its  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 such  other  factors as the Board of Directors may deem 
relevant.


Selected Financial Data

The   following  selected   consolidated financial   data  should  be  read  in 
conjunction with the Company's  Consolidated  Financial Statements and the Notes
thereto included elsewhere herein.  All financial information  presented herein 
for periods  prior to the 1994  acquisition  of  GammaLink  by  Dialogic  have  
been  retroactively  adjusted  in  order to account for that transaction  as  a 
pooling of interests.   For  information   regarding 1995 and 1996 acquisitions,
see "Management's  Discussion  and  Analysis of Financial  Condition and Results
of Operations".


<TABLE>
<CAPTION>


Year Ended December 31,                           1992            1993          1994         1995         1996
                                                  -----         ------          ----         ----         ----
(In thousands, except share amounts)                    
Statement of Income Data:
<S>                                              <C>           <C>            <C>          <C>         <C>      
Revenues                                         $ 65,416      $  95,613      $127,235     $ 168,652   $ 213,604
Costs and expenses:
        Cost of goods sold                         25,164         38,151        50,841        66,829      84,764
        Research and development expenses          13,140         16,687        21,650        29,045      40,666
        Selling, general and administrative 
          expenses                                 19,658         27,409        34,646        47,673      60,052
        Merger costs                                 -               -            -            1,294        -
        Interest expense (income) - net               (40)           (75)       (1,214)       (2,036)     (2,440)
        Net realized losses/(gains) on available 
          for sale securities                        -               -              15          (309)     (9,175)
Income before provision for income taxes            7,494         13,441        21,297        26,156      39,737
Provision for income taxes                            994          1,317         5,408         9,854      14,189
                                                 --------      ---------     ---------     ---------    --------
Net income                                       $  6,500      $  12,124     $  15,889     $  16,302    $ 25,548
                                                 ========      =========     =========     =========    ========
Income per share                                                                           $    1.02    $   1.56
                                                 ========      =========     =======================    ========

Shares used in the calculation of pro forma income per share(2)                               16,039      16,417

Pro Forma Data(1):

Income before provision for 
     income taxes as reported                     $ 7,494      $  13,441   $    21,297
Provision for income taxes                          3,017          4,986         7,689
                                                  -------      ---------   -----------
Net income                                        $ 4,477      $   8,455   $    13,608
                                                  =======      =========   ===========
Income per share                                     -         $     .69   $       .94
                                                  =======      =========   ===========
Shares used in the calculation 
   of pro forma income per share(2)                  -            12,282        14,509

Balance Sheet Data:                                     

Working capital                                   $12,053      $  14,903   $    55,711     $  76,977  $  100,265
Total assets                                       24,463         38,572        81,864       117,362     148,249
Long-term obligations, net of current maturities      337            630         2,465         2,259       2,926
Shareholders' equity(3)                            17,318         21,418        66,796        92,757     124,842

</TABLE>



          (1) From 1992  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.  See Note 1 of the Notes to
the Company's Consolidated Financial Statements.

          (2) For  information  regarding the shares used in the  calculation of
pro forma  income per share (i.e.,  pro forma to reflect  Dialogic as if it were
taxed as a C corporation  throughout),  see Note 1 of the Notes to the Company's
Consolidated Financial Statements.

          (3) The Company  declared an aggregate of $4.2  million,  $8.7 million
and  $2.5  million  in  S  corporation   dividends  in  1992,   1993  and  1994,
respectively. No other dividends were declared during the periods presented.