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

<TABLE>
<CAPTION>

                                  EXHIBIT 13.1

           INCORPORATED PORTIONS OF THE ANNUAL REPORT TO SHAREHOLDERS

Amounts in thousands,  except per share data
<S>                  <C>                <C>        <C>             <C>         <C>           <C> 
Year ended December  31,                1997       1996            1995        1994          1993
Statement  of Income  Data:   
Revenues                              $261,310   $213,604        $168,652   $127,235      $ 95,613
Cost  of goods sold                     98,329     84,764          66,829     50,841        38,151
                                       -------    -------         -------    -------        ------
Gross  profit                          162,981    128,840         101,823     76,394        57,462
Research and development expense        51,530     40,666          29,045     21,650        16,687
Selling, general and administrative
  expenses                              78,107     59,666          47,617     34,646        27,409
Amortization of goodwill                   991        386              56       -              -
                                       -------    -------         -------    -------        ------
Operating income                        32,353     28,122          25,105     20,098        13,366
Merger costs                                -          -            1,294       -              -
Interest (expense) income - net          1,637      2,440           2,036      1,214            75
Net  realized  (losses) gains on 
  available for sale securities            (4)      9,175             309        (15)          -
                                       -------    -------         -------    -------        ------
Income before provision for income
  taxes                                 33,986     39,737          26,156     21,297        13,441
Provision  for income taxes             12,234     14,189           9,854      5,408         1,317
                                       -------    -------         -------    -------        ------
Net income                            $ 21,752   $ 25,548        $ 16,302   $ 15,889      $ 12,124
Income per share:   
     Basic                            $   1.37   $   1.63        $   1.06  
     Diluted                          $   1.31   $   1.56        $   1.02  
                                       -------    -------         -------    -------        ------
Shares used in the calculation of pro 
  forma  income  per share:
     Basic                              15,931     15,654          15,340
     Diluted                            16,598     16,417          16,039

Pro Forma Data:(1)
Income  before provision for income
  taxes as  reported                                                         $21,297      $ 13,441
Provision  for income taxes                                                    7,689         4,986
Net income                                                                   $13,608      $  8,455
Income per share:   
     Basic                                                                   $   .99      $    .85
     Diluted                                                                 $   .94      $    .69
Shares used in the calculation of pro 
  forma income per share:
     Basic                                                                    13,774           9,996
     Diluted                                                                  14,509          12,282
Balance Sheet Data:
Working capital                       $119,920   $103,909        $ 76,997   $ 55,711        $ 14,903
Total assets                           182,404    147,270         117,362     81,864          38,572
Long-term obligations, net of
  current maturities                     2,481     2,926            2,259      2,465             630
Shareholders' equity(2)                144,865   124,842           92,757     66,796          21,418
________________________

</TABLE>

     (1) During 1993 through the IPO in April 1994 (the "S Period"), the Company
was an S corporation  and,  accordingly,  was not subject to federal and certain
state corporate income taxes. The pro forma statement of income  information has
been  computed as if the Company had been subject to federal and all  applicable
state  corporate  income taxes during the S period,  based on the  statutory tax
rates and the tax laws then in effect.

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

<PAGE>


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

Business:   Dialogic   designs,   manufactures   and  sells  high   performance,
standards-based  computer telephony (CT) components.  Computer telephony systems
built with Dialogic products manage  telephone,  facsimile and multi-media calls
answered by computer over wireless and wired networks worldwide.  The Company is
headquartered in Parsippany,  New Jersey,  with regional  headquarters in Tokyo,
Japan;  Brussels,  Belgium;  and  Buenos  Aires,  Argentina.   Dialogic  employs
approximately 1,000 people worldwide and has offices in major industrial centers
around  the  world. 

     The following table and commentary  should be read in conjunction  with the
Consolidated   Financial  Statements  and  related  Notes  to  the  Consolidated
Financial Statements.

Percentage of Revenues

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

<TABLE>
<CAPTION>

                                        Percent of Sales            Percent of Change
Year ended December 31,          1997          1996    1995      1997       1996     1995
                                                                   vs.        vs.      vs.
                                                                  1996       1995     1994


<S>                                <C>         <C>      <C>       <C>       <C>       <C>  
Revenues                           100.0%      100.0%   100.0%     22.3%     26.7%     32.6%
Gross profit                        62.4        60.3     60.4      26.5      26.5      33.3
Research and
development expense                 19.7        19.0     17.2      26.7      40.0      34.2
Selling, general and administrative
   expenses (including amortization
   of goodwill)                     30.3        28.1     28.3      31.7      26.0      38.8
Merger costs                         -           -        0.8       -       100.0    (100.0)
Interest income -  net               0.6         1.1      1.2     (32.9)     19.8      67.7
Net realized gains on available 
   for sale securities                -          4.3      0.2    (100.0)    100.0     100.0
                                    -----      -----      ---     ------    -----    ------
Income before provision for income
   taxes                            13.0        18.6     15.5     (14.5)     51.9      22.8
Provision for income taxes           4.7         6.6      5.8     (13.8)     44.0      82.2
                                    -----      -----     ----     ------     ----      ----
Net income                           8.3        12.0      9.7     (14.9)(1)  56.7(1)    2.6

</TABLE>
_______________________

(1) During 1996, the Company recorded a pre-tax gain of $9.1 million as a result
of its first quarter sale of a portion of its equity position in VCS.  Excluding
this gain,  the  percentage  increase of 1997 compared with 1996 would have been
10.1%.  The  percentage  increase  for 1996 as  compared to 1995 would have been
21.8%.  See  Note  3 of  the  Company's  Notes  to  the  Consolidated  Financial
Statements.

Fiscal 1997 Compared to Fiscal 1996

Revenue:  For the year ended December 31, 1997,  consolidated  revenue increased
22.3% to $261.3  million from $213.6  million in fiscal 1996.  Revenue growth in
the Americas  increased  18.6% or $38.1 million.  Revenue growth in the Americas
was impacted by longer than originally anticipated cycles for new product design
wins. International revenues, primarily Europe and Asia/Pacific, increased 29.6%
to $62.7 million from $48.4 million the preceding year. During 1997,  Dialogic's
worldwide  revenue  growth was  favorably  impacted by  increased  sales of high
density  products.  Sales from high density products  represented 55.6% of total
1997 revenue versus 48.7% of the total revenue in 1996.

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

Expenses:  As a  percentage  of  consolidated  revenues,  selling,  general  and
administrative  expenses  increased to 30.3% in fiscal 1997 as compared to 28.1%
in the  previous  year.  The  increase  in selling,  general and  administrative
expenses is attributable to the continuing  growth 

<PAGE>

of domestic and international  sales and marketing  efforts  associated with new
product launches and establishment of additional sales offices, costs associated
with internal technology infrastructure and the costs associated with the hiring
and relocation of executive staff members.

     Research  and  development  expense  increased  $10.9  million  to 19.7% of
revenue as compared to 19.0% of revenue in fiscal 1996.  The  increase  reflects
the  Company's  continued   investment  of  engineering   resources  related  to
Dialogic's DM3 Mediastream Resource  Architecture ("DM3") announced in the first
quarter of 1997.

     The Company recognized amortization expense of goodwill associated with the
acquisition of Dianatel Corporation of approximately $1.0 million in fiscal 1997
as compared to $386 thousand in the prior year.

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

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

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

Fiscal 1996 Compared to Fiscal 1995

Revenues:  Consolidated  revenues  increased  26.7% to $214  million  from  $169
million in fiscal 1995.  Revenues in the Americas increased 27.6% year over year
while Europe and Asia/Pacific grew 24.6%.

     During 1996, revenue growth,  primarily attributable to new customers,  was
driven by the sales of high density products, principally T-1 and E-1 Single and
Dual Span  cards.  The  Company  also  experienced  unit growth and, to a lesser
extent, revenue growth in its low density product lines.

Gross Profit:  Consolidated  gross profit for fiscal 1996 was 60.3%  compared to
60.4% for the prior year. During 1996, the Company continued its efforts to cost
reduce many of its products and benefited  from  reductions in overall  material
costs. These reductions in cost of goods sold were partially offset at the gross
profit 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.

Expenses:  As  a  percentage  of  consolidated  sales,   selling,   general  and
administrative  expenses decreased to 28.1% as compared to 28.3% in the previous
year. The decrease is primarily attributable to the continued growth of domestic
and  international  sales and marketing  efforts,  offset partially by marketing
expenditures  associated  with new  product  launches,  expenses  related to the
Company's  expansion of  distribution  channels and the  development of enhanced
financial and distribution  systems necessary to support the Company's  expanded
business activities. Research and development expense represented 19.0% of sales
in fiscal 1996 as compared to 17.2% in fiscal 1995.  The 1996 increase  reflects
the Company's  DM3  initiative,  engineering  efforts with the  development  and
roll-out  of low and high  density  products,  GammaLink  fax  products  and the
development of software products.

Interest Income:  Dialogic  recorded net interest income of $2.4 million in 1996
as compared to $2.0 million in 1995.  The amounts  recorded  represent  interest
earned on cash balances and interest earned from the Company's elections in 1996
and 1995 to  convert  accrued  interest  on the note of VCS.  During  1996,  the
Company invested a majority of its available cash in tax-free  securities.  Such
securities  generated a 

<PAGE>

lower  pre-tax  yield than the  pre-tax  yield  received by the Company in prior
years on fully taxable  instruments.  See Note 3 of the  Company's  Notes to the
Consolidated Financial Statements.

Net Realized  Gains On Available For Sale  Securities:  During 1996, the Company
recorded a net gain of $9.1 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.

Taxes: The effective tax rate declined in fiscal 1996 to 35.7% compared to 37.7%
in fiscal  1995.  The  reduction  in rate is due to tax savings  generated  from
implementation  of a FSC and the effect of  Dialogic's  investment  in  tax-free
securities.

Net Income:  Net income for fiscal  1996 was $25.5  million or $1.56 per diluted
share,  as  compared to $1.02 per diluted  share in fiscal  1995.  Net income in
fiscal 1996 included an after-tax  gain on the sale of securities of VCS of $5.8
million or $0.35 per diluted share.

Inflation, Foreign Currency Exchange and Other Matters

Inflation has not had a significant impact on the Company's operating results to
date.  Foreign  currency  transaction  gains and losses are included  within the
Company's  selling,  general and administrative  expenses.  While the amounts of
such gains or losses have not been significant to the Company's results to date,
as the Company  continues to expand its  international  operations,  exposure to
gains and losses on international  currency transactions may increase and may be
material to quarterly and annual results. The consolidated  financial statements
of the Company  reflect the  translation  of the  functional  currencies  of its
foreign  subsidiaries under Statement of Financial Accounting Standards ("SFAS")
No. 52.

Year 2000

The Company has  undertaken a major  company-wide  study and testing  program to
locate  and cure any Year 2000  issues in the  products  or  systems on which it
relies. The Company believes its financial  operating systems are currently Year
2000 compliant.  The Company continues to work with other third-party  suppliers
to identify exposure and obtain compliance.  The Company anticipates no material
adverse effect  resulting from Year 2000 problems.  This statement  represents a
forward-looking  statement under the Private Securities Litigation Reform Act of
1997.  Undiscovered issues related to the Year 2000 issues could have an adverse
impact.

Liquidity and Capital Resources

As of December 31, 1997,  the Company had working  capital of $120 million and a
current ratio (i.e., the ratio of current assets to current  liabilities) of 4.7
to 1 as compared with working capital of $104 million and a current ratio of 7.5
to 1 at December 31, 1996.

     The  Company's   consolidated   cash,   cash   equivalents  and  short-term
investments  increased by $24.2 million  during fiscal 1997.  Cash provided from
operations  was  $30.6  million,  while  $24.2  million  was  used in  investing
activities and $500 thousand provided by financing activities.

     The Company's investing activities in fiscal 1997 included  expenditures of
$10.7  million for property and equipment  associated  with the expansion of the
Company's  headquarters  and  costs  associated  with  Dialogic's  move  of  its
GammaLink and Dianatel operations from Sunnyvale to Santa Clara, California.

     Cash  provided  by  financing  activities  was  $500  thousand,  consisting
primarily of proceeds  from the exercise of stock options and issuance of common
stock. On November 6, 1997, the Board of Directors authorized a share repurchase
program of up to 800,000  shares to be bought over the next three years.  During
1997,  an aggregate of 50,000  shares of treasury  stock was  purchased for $1.9
million cash.

     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 its 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 5 and 9 of the
Notes to the Company's Consolidated Financial Statements.

<PAGE>

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

New Accounting Pronouncements

In June 1997,  the  Financial  Accounting  Standards  Board issued SFAS No. 130,
"Reporting  Comprehensive  Income," which is effective for the Company beginning
January 1, 1998. This statement  establishes standards for reporting and display
of  comprehensive  income  and its  components  (revenues,  expenses,  gains and
losses)  in a full set of  general-purpose  financial  statements.  The  Company
believes that the information to be included in deriving  comprehensive  income,
although not currently presented in a separate financial statement, is disclosed
as a part of these financial statements.

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related  Information," which is
effective for the Company beginning January 1, 1998. This statement  establishes
standards for the way that public business  enterprises report information about
operating  segments  in annual  financial  statements  and  requires  that these
enterprises  report selected  information  about  operating  segments in interim
financial  reports issued to shareholders.  The Company is currently  evaluating
the  impact  that the  adoption  of SFAS No.  131 will have on its  consolidated
financial statements.

Risks and Uncertainties

Dialogic's business is subject to certain risks which are described in detail in
Item 1 of the Dialogic  Annual  Report on Form 10-K for its year ended  December
31, 1997.  Such risks include but are not limited to,  product demand and market
acceptance  risks, the effect of worldwide  economic  conditions,  the impact of
competitive  products and pricing,  the Company's  ability to enter new markets,
the adoption of new standards and the Company's ability to meet those standards,
product  development,  effects of competitive forces and pace of deregulation in
the  telecommunications  industry,  the status of intellectual  property rights,
commercialization   and   technological   difficulties,   capacity   and  supply
constraints  or  difficulties,   consolidating  of  capital  resources,  general
business conditions and the effect of the Company's  accounting  policies.  Such
factors,  as well as announcements of technological  innovations or new products
by  Dialogic,   its  competitors  or  third-parties,   consolidations  or  other
substantial  changes  within  or  affecting  the  computer  telephony  industry,
quarterly  variations  in the  Company's  results of  operations,  shortfalls in
Dialogic  revenues,  gross  margins or  earnings  as  compared  with  investment
analysts' expectations,  regulatory  development,  capital market conditions and
general and economic  conditions,  may also cause substantial  volatility in the
market price of the Company's common stock. The Company continually  reevaluates
its operations and business  structure and may, from time to time,  take actions
to restructure operations accordingly.

<PAGE>

Independent Auditors' Report

Deloitte &
  Touche LLP



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


     We have audited the  accompanying  consolidated  balance sheets of Dialogic
Corporation  and  subsidiaries as of December 31, 1997 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,  1997.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.  

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits  provide a reasonable  basis for our opinion. 


     In our opinion,  such consolidated  financial statements present fairly, in
all  material  respects,  the  financial  position of Dialogic  Corporation  and
subsidiaries  as of  December  31,  1997  and  1996,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.



DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 10, 1998
(except for Notes 7 and 9, as to which
the date is February 18, 1998)



<PAGE>


Consolidated Balance Sheets            Dialogic   Corporation  and Subsidiaries


Assets

(Amounts in thousands, except share data
December   31,                                         1997                1996
Current  assets:
  Cash  and  cash equivalents                        $  18,764          $ 11,848
  Marketable securities                                 43,774            26,443
  Convertible note                                        -               11,030
  Accounts receivable (net of allowance 
     for doubtful accounts of $1,280 \
     and $829, respectively)                            45,186           34,706
  Inventory:
     Raw materials                                       8,827           10,399
     Work in process                                     6,724            4,607
     Finished goods                                     14,941           12,756
                                                        ------           ------
                                                        30,492           27,762
   Deferred income taxes                                 7,190            2,817
   Other current assets                                  6,842            5,161
                                                       -------          --------
     Total current assets                              152,248          119,767
Property and equipment:
     Leasehold improvements                              5,049            3,059
     Furniture and fixtures                              6,809            5,843
     Equipment                                          35,084           27,328
                                                        ------           -------
                                                        46,942           36,230
     Less accumulated depreciation and amortization    (24,327)         (15,822)
                                                       -------           -------
                                                        22,615           20,408
Excess of cost over net assets acquired 
(less accumulated amortization of $1,488 
and $497, respectively)                                  3,443            4,434
Other assets                                             4,098            2,661
                                                       -------          --------
TOTAL ASSETS                                          $182,404         $147,270
                                                       =======          =======

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

<PAGE>

Consolidated Balance Sheets              Dialogic  Corporation  and Subsidiaries


Liabilities and Shareholders' Equity


(Amounts  in  thousands except share data)
December  31,                                        1997             1996
Current  liabilities:
   Accounts payable                            $    14,361       $   7,043
   Accrued salaries and benefits                     6,390           3,145
   Accrued royalties                                 1,825             248
   Accrued expenses                                  7,986           4,518
   Income taxes payable                              1,237             345
   Current maturities of long-term liabilities         529             559
                                                    ------          -------
      Total current liabilities                     32,328          15,858
                                                    ------          -------
Long-term liabilities                                2,481           2,926
Deferred income taxes                                2,730           3,644
Commitments and contingencies (Note 7)

SHAREHOLDERS' EQUITY:
  Preferred stock, par value $0.01 - 10,000,000 
     shares authorized: none issued                    -                 -
  Common stock, par value $0.01 - 60,000,000 
     shares authorized; 16,100,862 and 
     15,774,222 shares issued, respectively            207             203
  Additional paid-in capital                        51,948          46,740
  Retained    earnings                              94,023          72,271
  Net unrealized gains on available for sale
     securities                                        985           5,614
  Cumulative translation adjustments                  (386)             14
  Treasury stock,  at cost; 50,000 shares at 
     December 31, 1997                              (1,912)              -
                                                   -------         -------
       Total shareholders' equity                  144,865         124,842
                                                  --------         -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY        $182,404       $ 147,270
                                                  ========       =========

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

<PAGE>

Consolidated Statements of Income         Dialogic Corporation and Subsidiaries


(Amounts in thousands except per share data)

December 31,                                 1997             1996         1995
Revenues                                   $261,310         $213,604    $168,652
Cost of goods sold                           98,329           84,764      66,829
                                            -------          -------     -------
Gross profit                                162,981          128,840     101,823
Research and development  expense            51,530           40,666      29,045
Selling, general and administrative
  expenses                                   78,107           59,666      47,617
Amortization of goodwill                        991              386          56
                                            -------          -------     -------
  Operating income                           32,353           28,122      25,105
Merger costs                                   -                 -         1,294
Interest expense                                177               95          44
Interest income                               1,814            2,535       2,080

Net realized (losses) gains on available 
  for  sale  securities                          (4)           9,175         309
                                            -------          -------     -------
Income before provision for income taxes     33,986           39,737      26,156
Provision for income taxes                   12,234           14,189       9,854
                                            -------          -------     -------
Net income                                  $21,752         $ 25,548    $ 16,302
                                             ======          =======     =======
Net  income per share:
     Basic                                  $  1.37         $   1.63    $   1.06
     Diluted                                $  1.31         $   1.56    $   1.02
                                             ======          =======     =======
Weighted average number of common 
  shares outstanding:
     Basic                                   15,931           15,654      15,340
     Diluted                                 16,598           16,417      16,039
                                             ======           ======      ======

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


<PAGE>

Consolidated Statements of Shareholders'   Dialogic Corporation and Subsidiaries
Equity

<TABLE>
<CAPTION>


                                                                                                              Unrealized
                                                                                                              Gains/Losses
                                                                                                                  on         Total
                                                        Note      Additional           Cumulative               Available   Share-
                             Number of Shares  Common  Receivable  Paid-in   Retained  Translation  Treasury    for Sale    holders'
(In thousands)               Common  Treasury  Stock   for Stock   Capital   Earnings  Adjustment   Stock       Securities   Equity

Balance, January  1, 1995    14,709      -      $195    $(285)     $34,523   $29,852     $210        $ -        $ 2,301     $66,796
                             ------------------------------------------------------------------------------------------------------
<S>                             <C>                <C>                 <C>                                                      <C>
Exercise of stock options       352      -         4       -           888      -          -           -           -            892
Issuance of common stock
   in connection with
   acquisitions                 430      -         -       -         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      -         -       -           220      -          -           -            -           220
Purchase and retirement
   of treasury stock            (14)     -         -       -             -     -           -           -            -            -
Tax benefit from exercise of
   stock options                   -     -         -       -          1,865    -           -           -            -         1,865
Net income                         -     -         -       -             -   16,302        -           -            -        16,302
                              ------------------------------------------------------------------------------------------------------
Balance, December 31, 1995     15,492    -        199      -         38,697  46,723       373          -          6,765      92,757
                              ------------------------------------------------------------------------------------------------------
Exercise of stock options         180    -          3      -          1,201    -           -           -             -        1,204
Issuance of common stock
   in connection with
   acquisitions                    55    -          1      -          3,794    -           -           -             -        3,795
Currency translation (loss)        -     -          -      -             -     -         (359)         -             -         (359)
Net unrealized (losses) on
  available for sale securities    -     -          -      -             -     -           -           -         (1,151)     (1,151)
Issuance of common stock under
  employee stock purchase plan     47    -          -      -          1,368     -          -           -             -        1,368
Tax benefit from exercise of
  stock options                    -     -          -      -          1,680     -          -           -             -        1,680
Net income                         -     -          -      -             -    25,548       -           -             -       25,548
                              ------------------------------------------------------------------------------------------------------
Balance, December 31, 1996     15,774    -         203     -         46,740   72,271       14          -          5,614    124,842
                              ------------------------------------------------------------------------------------------------------
Purchases of treasury stock        -    (50)        -      -            -       -          -        (1,912)          -      (1,912)
Exercise of stock options         234    -           3     -           1,431    -          -           -             -       1,434
Issuance  of common stock as
   Directors' fees                  3    -          -      -              85    -          -           -             -          85
Currency translation (loss)         -    -          -      -              -     -        (400)         -             -        (400)
Net unrealized (losses) on
   available for sale securities,
   net of tax                       -    -          -      -              -     -          -           -         (4,629)    (4,629)
Issuance of common stock under
   employee stock purchase plan    90    -          1      -           1,716    -          -           -             -       1,717
Tax benefit from exercise of
   stock options                   -     -          -      -           1,976    -          -           -             -       1,976
Net income                         -     -          -      -             -    21,752       -           -             -      21,752
                               ------  ---        ----    ---          ------  ------     ----       ------         ---     -------
Balance, December 31, 1997     16,101  (50)       $207   $ -         $51,948 $94,023    ($386)     ($1,912)       $ 985   $144,865
                               ------  ---        ----    ---         ------  ------      ----       ------         ---    --------
The accompanying notes are an integral part of the Consolidated Financial Statements.

</TABLE>

<PAGE>

Consolidated Statements of Cash Flows      Dialogic Corporation and Subsidiaries

<TABLE>
<CAPTION>

(In  thousands)
Year  ended  December   31,                            1997           1996           1995
Cash  flows from operating  activities:
<S>                                                 <C>             <C>              <C>     
Net income                                          $21,752         $ 25,548         $ 16,302
Adjustments for non-cash items included in net income:
     Depreciation and amortization                    9,496            6,103            3,223
     Deferred income taxes                           (2,642)            (587)          (1,107)
     Non-cash interest income                          -              (1,069)            (532)
     Net realized (gain) loss on available for sale
        securities                                        4           (9,175)            (309)
     Non-cash merger costs                             -                 -                609
     Other                                              509            2,134            2,683
     Changes in operating assets and liabilities      1,496          (15,504)         (15,483)
                                                      -----          --------         --------
       Net cash flows provided by operating 
          activities                                 30,615            7,450            5,386
                                                     ------          --------         --------
Investing  Activities:
     Capital expenditures                           (10,712)         (10,722)          (7,614)
     Purchase of short-term investments             (25,656)         (45,937)         (23,257)
     Proceeds from sales of short-term
         investments                                 12,187           44,044           21,808
     Proceeds from sales of other investments          -              10,100             -    
     Acquisition of business, net of  cash  acquired   -                (820)             378
                                                      -----          --------         --------
       Net cash flows used in investing
          activities                                 (24,181)          (3,335)          (8,685)
                                                      -----          --------         --------
Financing Activities:
     Proceeds from short-term
          borrowings                                   -              12,625            2,157
     Repayments on short-term borrowings               -             (12,625)          (2,157)
     Exercise of stock options                        1,434              982              892
     Purchase of treasury stock                      (1,912)             -                -  
     Issuance of common stock                         1,717            1,368              220
     Repayment of note receivable for stock            -                 -                285
     Other                                             (757)            (604)            (392)
                                                      -----          --------         --------
       Net cash flows provided by financing
          activities                                    482            1,746             1,005
                                                      -----          --------         --------
Increase (decrease) in cash and cash equivalents      6,916            5,861            (2,294)
Cash and cash equivalents, beginning of  year        11,848            5,987             8,281
                                                     ------          --------         --------
Cash and cash equivalents, end of year             $ 18,764       $   11,848          $  5,987
                                                    =======        =========           =======
Change in operating assets and liability components: 
   (Increase) in  accounts receivable             $(10,480)      $   (8,510)         $ (8,169)
   (Increase) in  inventory                         (2,731)          (3,480)          (11,958)
   (Increase) in other current assets               (1,680)          (1,910)             (951)
    Increase (decrease) in accounts payable          7,318           (2,393)            2,503
    Increase in accrued expenses                     9,069              789             3,092
                                                     ------          --------         --------
          Change in operating assets 
             and liabilities                      $  1,496       $  (15,504)         $(15,483)
                                                   =======        ==========          ========
Supplemental disclosures of cash flow information:
    Cash paid during the year for:                
    Interest                                      $    108       $       95          $     28
    Income taxes                                    14,379           13,739             8,264
    Tax benefit from exercise of stock
        options                                      1,979            1,680             1,865
Supplemental disclosures of non-cash investing 
     and financing activities:
Change in net unrealized (losses)/gains on 
     available for sale securities                  (4,629)          (1,151)            4,464
Stock and options issued for acquisition of business   -              3,795                -

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


Notes to Consolidated Financial Statements Dialogic Corporation and Subsidiaries

1. Summary of Significant 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. Dialogic 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  and include  software  integral to or provided  with
hardware products and stand-alone system software.

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

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

Reclassifications  -  Certain  reclassifications  were made to the 1995 and 1996
consolidated financial statements to conform to the 1997 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 carried at cost and include
expenditures for major  improvements which  substantially  increase their useful
life. Repairs and maintenance are expensed as incurred.  When assets are retired
or otherwise disposed of, the assets and related allowances for depreciation and
amortization are eliminated from the accounts, and any resulting gain or loss is
recognized in the Statement of Operations.

Depreciation and Amortization - For financial reporting  purposes,  depreciation
of equipment, software and fixtures is computed on the straight-line method over
estimated useful lives of one to seven years.  Equipment under capital lease and
leasehold  improvements  are  amortized  over  the  shorter  of  lease  terms or
estimated useful life.

Intangible  Assets - Intangible  assets  acquired are  primarily  from  business
acquisitions  and represent the excess of cost over the fair value of net assets
acquired. Excess of cost over fair market value of net assets is being amortized
on a straight-line basis over five years. Amortization expense was $991 thousand
in 1997, $386 thousand in 1996 and $56 thousand in 1995.

Fair Value of Financial  Instruments - The estimated fair value of the Company's
financial  instruments,  which include cash equivalents and accounts receivable,
approximates their carrying value.

Foreign Currency  Translation - The functional  currency for the majority of the
Company's foreign  operations is the applicable local currency.  The translation
from the applicable  foreign currencies to U.S. dollars is performed for balance
sheet  accounts using the exchange 

<PAGE>

rates in effect at the balance  sheet date and for revenue and expense  accounts
using a weighted average  exchange rate during the period.  The gains and losses
resulting from such translations are included in shareholders'  equity. Gains or
losses  resulting  from  foreign  currency  transactions  are  included  in  the
Statement of Operations.

Income Taxes - The Company has adopted the  provisions of Statement of Financial
Accounting  Standards ("SFAS") No. 109,  "Accounting for Income Taxes." SFAS No.
109 requires the  recognition  of deferred  tax assets and  liabilities  for the
expected future tax consequences of temporary  differences between the financial
reporting and tax bases of existing assets and liabilities.  Deferred income tax
assets are recognized to the extent  realization of such benefits is more likely
than not.

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

Software  Development  Expenses - The  development of new software  products and
substantial  enhancements to existing  software products is expensed as incurred
until  technological  feasibility  has  been  established,  at  which  time  any
additional  costs would be capitalized  in accordance  with 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.

Cash  Equivalents and  Investments - Cash  equivalents  include  certificates 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.

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

Other Assets - Other assets include amounts associated with long-term royalties,
license fees, notes related to executive relocation and deposits.

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 - During the fiscal year ended  December 31, 1997,  the Company
adopted  SFAS No. 128,  "Earnings  per Share."  SFAS No. 128  requires  the dual
presentation of basic and diluted earnings per share ("EPS"). Basic EPS excludes
dilution and is computed by dividing net income available to common stockholders
by the weighted  average  number of common  shares  outstanding  for the period.
Diluted EPS reflects the potential dilution that could occur if stock options or
other  contracts  to issue  common  stock were  exercised  and  resulted  in the
issuance  of common  stock  that then  shared in the  earnings  of the  Company.
Diluted  EPS is  computed  using the  treasury  stock  method when the effect of
common stock equivalents would be dilutive. All prior periods have been restated
to comply with the provisions of SFAS No. 128. The only reconciling item between
the  denominator  used  to  calculate  basic  EPS and  the  denominator  used to
calculate  diluted  EPS is the  dilutive  effect  of  stock  options  issued  to
employees of the Company.  The Company has issued no other potentially  dilutive
common stock equivalents.

<PAGE>
Accounting  Pronouncements  - In June 1997, the Financial  Accounting  Standards
Board issued SFAS No. 130, "Reporting  Comprehensive Income," which is effective
for the Company beginning January 1, 1998. This statement  establishes standards
for reporting and display of comprehensive income and its components  (revenues,
expenses,  gains  and  losses)  in  a  full  set  of  general-purpose  financial
statements. The Company believes that the information to be included in deriving
comprehensive  income,  although not currently presented in a separate financial
statement, is disclosed as a part of these financial statements.

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related  Information," which is
effective for the Company beginning January 1, 1998. This statement  establishes
standards for the way that public business  enterprises report information about
operating  segments  in annual  financial  statements  and  requires  that these
enterprises  report selected  information  about  operating  segments in interim
financial  reports issued to shareholders.  The Company is currently  evaluating
the  impact  that the  adoption  of SFAS No.  131 will have on its  consolidated
financial statements.

2.  Acquisitions

     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. Available For Sale Securities

The following is a summary of the  available for sale  securities as of December
31, 1997 and 1996:

<TABLE>
<CAPTION>

Amounts in thousands                         Cost      Gross       Gross     Estimated
                                                      Unrealized  Unrealized   Fair Value
1997                                                   Gains        Losses     

<S>                                        <C>      <C>           <C>           <C>    
Municipal bonds                            $39,863  $    149      $   -         $40,012
Equity investments                           1,954     1,808          -           3,762
                                           ----------------------------------------------
   Total available for sale securities     $41,817  $  1,957      $   -         $43,774
                                           ----------------------------------------------
1996

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

</TABLE>

<PAGE>

The cost and  estimated  fair value of debt  securities at December 31, 1997, by
contractual maturity, are as follows:

Amounts in thousands

                                                       Cost        Estimated
                                                                   Fair Value
1998                                                 $ 11,608      $ 11,646
1999                                                   11,558        11,608
2000                                                   15,974        16,035
2001                                                      723           723
2002                                                        -             -
Thereafter                                                  -             -
                                                       ------         -----
The  gross  realized  gains on sales of securities 
totaled  approximately $9,345 in 1996, and the gross
realized losses totaled  approximately $170 in 1996
and $4 in 1997.                                      $ 39,863      $ 40,012

     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  thousand 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  1996,  the  Company  recognized  interest  income in the  amount of
$1,069,000 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.  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 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, 1997, such
fair values included  discounts to reflect the possible  liquidity in the market
for VCS stock. 

     VCS is a supplier to the Company of certain  proprietary  voice recognition
technologies.  During 1997,  1996 and 1995,  the  Company's  purchases  from VCS
amounted to $3,075,000, $2,953,000 and $5,825,000, respectively.

4.  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, 1997,
1996 and 1995, the Company recorded  expenses under the program of $1.5 million,
$978 thousand and $990 thousand, respectively.

<PAGE>

Savings Plan - The Company has a savings  plan,  which  qualifies  under Section
401(k)  of the  Internal  Revenue  Code.  Under  the  plan,  participating  U.S.
employees  may  defer  up to 15% of  their  pre-tax  salary,  but no  more  than
statutory  limits.   The  Company   contributes  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 $725  thousand,  $458  thousand and $311  thousand in 1997,  1996 and 1995,
respectively.

Stock  Compensation  Plans - At  December  31,  1997,  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  1997,  1996 and 1995,  under  those  plans,  the
Company's  net income and  income per share  would have been  reduced to the pro
forma amounts indicated below:

Amounts in thousands, except per share amounts

                                        1997                1996            1995
Net income:    

   As reported                          $21,752          $ 25,548       $ 16,302
   Pro forma                            $19,126          $ 22,340       $ 14,818
                                        -------           -------        -------
Income per share:          
   As reported
     Basic                              $  1.37          $   1.63       $   1.06
     Diluted                            $  1.31          $   1.56       $   1.02

   Pro forma: 
     Basic                              $  1.20          $   1.43       $   0.97
     Diluted                            $  1.15          $   1.36       $   0.92

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

Stock Option Plans - The Company has stock option plans for directors,  officers
and other  employees  which  provides  for  non-qualified  and  incentive  stock
options. At December 31, 1997, 1,886,231 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                                     1997           1996      1995
Volatility                                      66% - 98%         75%       75%
Weighted average risk free interest
   rate                                           6.5%           6.3%      6.4%
Expected life (yrs)                                 5              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, 1997,  1996 and 1995,  and changes during the years ending on those dates is
presented below:

<TABLE>
<CAPTION>

                                         1997                          1996                               1995
                                  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~           2,269        $ 16.00           1,962       $  12.00               1,850     $7.00
Granted                             711          34.36             626          31.00                 511      23.00
Exercised                          (235)          6.12            (173)          5.00                (351)      3.00
Forfeited/canceled                 (116)         27.80            (146)         29.00                 (48)     10.00
                                  ------                         ------                             ------
Options outstanding
     at end of year               2,629        $ 21.56           2,269       $  16.00               1,962     $12.00
                                  =====                          =====                              =====

Options exercisable at year end     925                            855            759     
Weighted average fair
   value of options granted
   during the year                     $ 23.83           $23.00          $16.00

</TABLE>

     The following table summarizes  information about stock options outstanding
at December 31, 1997:

<TABLE>
<CAPTION>
                                   Options Outstanding                         Options Exercisable
                              Number       Weighted-Average
                           Outstanding        Remaining               Weighted-Average         Number Exercisable  Weighted-Average
Range of Exercise Prices    at 12/31/97   Contractual life(yrs)       Exercise Price             at 12/31/97        Exercise Price
<C>        <C>              <C>                <C>                     <C>                      <C>             <C>      
$  1.33 to $  4.93          358,000            3.6                     $ 3.68                   322,000         $    3.68
   5.73 to    9.33          374,000            5.6                       7.21                   265,000              7.44
  10.67 to   18.88          343,000            6.3                      15.10                   200,000             14.55
  19.00 to   28.75          806,000            8.0                      24.56                   136,000             23.81
  30.00 to   55.75          748,000            8.8                      36.99                     2,000             31.34

</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
contribute  up to ten percent of their  compensation  to purchase the  Company's
common  stock at a purchase  price equal to 85% of the fair market  value of the
stock at the  beginning  or end of each  offering  period,  whichever  is lower.
Persons  holding more than 5% of common stock in the Company are not eligible to
participate  in the ESPP.  Under the ESPP,  the Company  reserved for issuance a
total  of  300,000  shares.   Approximately  50%  of  eligible   employees  have
participated  in the ESPP  during  the last  three  years.  Under the ESPP,  the
employees purchased or committed to purchase 90,181, 49,770 and 15,119 shares in
1997,  1996 and 1995,  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 1997, 1996 and 1995; no dividends,  an
expected life of .25 years, expected volatility range of 66% to 98% and weighted
average  risk-free  interest  rates of 6.5% and  5.1%.  The fair  value of those
purchase  rights  granted in 1997 and 1996 was $508 thousand and $588  thousand,
respectively.

5.  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  the  rate  equal  to  the  lenders'   base  rate  less
three-quarter  percent or LIBOR.  At December 31, 1997 and 1996,  no  borrowings
were  outstanding  pursuant to these credit  facilities.  Future borrowing under
these facilities will be due and payable on November 1, 1998.

<PAGE>
6.  Provision for Income Taxes

Components of the provision for income taxes are as follows:

Amounts  in   thousands                      1997           1996         1995
Provision for income taxes:
   Federal                                $   7,848      $ 11,744       $8,798
   Foreign                                    2,273           868          147
   State                                      2,113         1,577          909
                                             ------        ------        -----
    Total                                 $  12,234      $ 14,189       $9,854
                                             ======       =======        =====
Components of income  tax provision:
Current
   Federal                                  $10,447      $ 12,343       $9,724
   Foreign                                    2,259           824          134
   State                                      2,170         1,616        1,136
                                             ------        ------       ------
     Total current                           14,876        14,783       10,994
Deferred
   Federal                                   (2,599)         (599)        (926)
   Foreign                                       14            44           13
   State                                        (57)          (39)        (227)
                                              ------       -------      --------
     Total deferred                          (2,642)         (594)      (1,140)
                                             -------       -------      -------
     Total                                  $12,234       $14,189      $ 9,854
                                             ======        ======       ======

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

<PAGE>

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

Amounts in thousands                     1997                     1996
Deferred tax assets:
Bad debt allowance                 $     424                    $   222
Inventory reserves                     1,256                        645
Credit  memo  reserve                  1,104                        557
Self  insurance reserve                  353                        291
Warranty reserve                         289                        144
Foreign tax credit carryforward        2,271                         -
Deferred  revenue and deferred rent      746                        701
Other reserves                         2,122                        595
Other                                  1,066                        716
                                       -----                      -----
                                       9,631                      3,871
Deferred tax liabilities:
Unrealized  gains on available
for sale securities                     (973)                    (3,507)
Undistributed earnings of foreign
subsidiaries                         (3,332)                         -
Depreciation                           (695)                       (633)
Other                                  (171)                       (558)
                                     -------                     -------
                                     (5,171)                     (4,698)
                                     -------                     -------
Net  deferred tax assets 
  (liabilities)                      $4,460                      $ (827)
                                      =====                       ======

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

December  31,                           1997           1996             1995
Federal taxes at statutory  rate        35.0%          35.0%            35.0%
State  taxes,  net of  federal
  income tax benefit                     4.7           2.6               2.3
Foreign income subject to a rate
  different from U.S. rate              1.4            0.5                -
Research and development tax credit    (4.0)          (1.8)             (1.7)
Acquisition costs                        -              -                1.6
Foreign sales corporation
   benefit                             (2.6)          (0.8)               -
Tax exempt income                      (1.4)          (0.6)               -
Non-deductible amortization             1.0            0.3                .1
Other                                   1.9            0.5               0.4
                                       ----           ----              ----
Total effective tax rate               36.0%          35.7%             37.7%

     The Company has provided for U.S. federal income taxes on the undistributed
earnings of its  non-U.S.  subsidiaries.  The Company has a net  operating  loss
carryforward of approximately $746,000 in Japan expiring in year 2002.

<PAGE>


7.  Commitments and Contingencies

(a) Lease  Commitments  - Equipment  with a net book value of $202  thousand and
$282 thousand at December 31, 1997 and 1996,  respectively  (net of  accumulated
depreciation  of $681  thousand  and $601  thousand),  is leased  under  capital
leases.
      
     The Company  leases  certain  office/warehouse  space and  equipment  under
operating  leases which expire at various times through 2005. Total rent expense
under operating leases amounted to approximately $6.8 million,  $5.8 million and
$4.5 million for the years ended December 31, 1997, 1996 and 1995, respectively.
At December 31, 1997, future minimum lease payments are as follows:

Amounts in thousands
                                                  Operating          Capital
Year Ending December 31,                             Leases            Leases
1998                                                $7,472               $40
1999                                                 7,920                40
2000                                                 7,476                40
2001                                                 6,517                30
2002                                                 6,207                 -
Thereafter                                          15,320                 -
                                                    ------               ---
Total                                              $50,912               150
                                                    ------               ---
Amounts representing interest                                             25
                                                                         ---
Present value of minimum lease payments                                  125
                                                                         ---
Current portion                                                       $   29
                                                                         ---

(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  into 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 its fraud claims, but leaving unresolved
a statutory  unfair  practice claim by Brooktrout and leaving  unresolved all of
the  defendants'  counterclaims.  Such order  remains  appealable  at this time.
Separately,  the  Company's  Spectron  subsidiary  sued  Brooktrout  for  patent
infringement.  The Company has  retained  the rights to  maintain  this  lawsuit
despite the sale of the Spectron assets.  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  sought monetary  damages on behalf of a purported class of purchasers
of  the  Company's  common  stock.  On  February  18,  1998,  on  motion  by the
defendants, the complaint was dismissed by the court with prejudice.

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

<PAGE>
8. Operations in Geographic Areas

Information  about the  Company's  operations in different  geographic  areas at
December 31, 1997, 1996 and 1995, and the years then ended is presented below:

Amounts in thousands
<TABLE>
<CAPTION>

                                                                  Adjustments
                                             Asia/                   and
1997                          Americas     Pacific    Europe       Eliminations     Consolidated

<S>                           <C>          <C>       <C>           <C>            <C>    
Revenues:                     
Customers                     $205,975     $ 13,271  $ 42,064      $   -           $261,310
Intercompany                    36,354        6,083     1,292         (43,729)         -
                               ------        ------    ------         --------      -------
Total revenues                $242,329     $ 19,354  $ 43,356      $  (43,729)     $261,310
                              -------       -------   -------         --------      -------
Net income                   $ 20,392      $   (631) $  2,795      $     (804)     $ 21,752
Identifiable assets          $222,805      $  6,154  $ 15,830      $  (62,385)     $182,404
</TABLE>

<TABLE>
<CAPTION>

                                                                 Adjustments    
                                             Asia/                   and        
1996                          Americas     Pacific    Europe     Eliminations        Consolidated
Revenues:
<S>                           <C>         <C>        <C>         <C>                <C>     
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
Identifiable assets           $193,337    $ 6,297    $ 11,531    $  (63,895)        $147,270
</TABLE>

<TABLE>
<CAPTION>

                                                                 Adjustments
                                             Asia/                   and
1995                          Americas      Pacific   Europe     Eliminations        Consolidated
<S>                           <C>           <C>       <C>       <C>                 <C>
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
Identifiable assets           $131,924      $ 4,063   $ 8,163   $  (26,788)         $117,362
</TABLE>

     The  above-mentioned  revenues  for the Americas  included  export sales to
customers (in Asia/Pacific and Europe): aggregating $33.5 million, $20.2 million
and $14.6  million for fiscal  years ended  December  31,  1997,  1996 and 1995,
respectively.

<PAGE>

9.  Subsequent Event

On February 17, 1998, Dialogic  Corporation  completed the sale of the principal
assets and operations of Spectron  Microsystems,  a wholly owned subsidiary,  to
Texas Instruments  Incorporated for  approximately $26 million.  The transaction
will result in pre-tax gain to be recognized in the first quarter of 1998 in the
range of $18 to $25  million.  The sale  will not have a  significant  effect on
reported sales or earnings of the Company in future periods.


Supplementary Financial Information

Selected Quarterly Financial Information (Unaudited)

<TABLE>
<CAPTION>

Amounts in thousands, except per share data                                   1997
                                   Quarter ended:      March 31,      June 30,       Sept 30,    Dec  31,
<S>                                                    <C>             <C>            <C>         <C>    
Total revenues                                         $57,089         $63,196        $68,760     $72,265
Gross profit                                            35,320          39,826         42,878      44,957
Net income                                               3,227           4,778          6,352       7,395
Income per share:
     Basic                                             $  .20          $   .30         $ .40      $   .46
     Diluted                                           $  .20          $   .29         $ .38      $   .44

                                                                              1996
                                   Quarter ended:      March 31,       June 30,      Sept 30,     Dec 31,
Total revenues                                         $48,732          $50,054       $55,432     $59,386
Gross profit                                            19,751           19,908        22,733      22,372
Net income(1)                                           10,612            4,566         4,793       5,577
Income per share:(1)
     Basic                                             $  .68           $   .29      $    .31     $    .35
     Diluted                                           $  .65           $   .28      $    .29     $    .34
</TABLE>

_________________
(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.

Market Price and Dividend  Data

                                                       High          Low
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
Quarter ended March 31, 1997                           36.75         19.38
Quarter ended June 30, 1997                            29.25         16.06
Quarter ended September 30, 1997                       43.00         26.87
Quarter ended December 31, 1997                        49.87         36.25

As of January 31, 1998,  there were  approximately  224 holders of record of the
Common Stock.  Since its IPO, the Company has not paid any cash dividends on its
capital stock. The Company's current policy is to retain earnings for its use in
the business. Accordingly, the Company does not anticipate paying cash dividends
in the future.  Any payment of cash dividends in the future will depend upon the
financial condition, capital requirements,  potential growth and earnings of the
Company as well as other factors as the Board of Directors deem relevant.