|  |
|--|
|  |
|  |

**SECURITIES AND EXCHANGE  COMMISSION  WASHINGTON, D.C. 20549  FORM 10-QSB**

(Mark  One)

    Quarterly  Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934  for the quarterly period ended March 31, 2003.

     

    Transition  Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934  for the transition period from ______________________ to _________.

     Commission  File No. 000-30294

**DIALOG  GROUP, INC.**(Name of Small Business Issuer  in its Charter)

| Delaware                                                           |   |   | 87-0394290                                  |   |
|--------------------------------------------------------------------|--------|--------|---------------------------------------------|--------|
| (State      or Other Jurisdiction ofIncorporation or Organization) |   |   | (I.R.S.      EmployerIdentification Number) |   |

| Twelfth Floor, 257 Park      Avenue South, New York, NY |   | 10010      |   |
|---------------------------------------------------------|--------|------------|--------|
| (Address of Principal Executive      Offices)           |   | (Zip Code) |   |

212.254.1917  (Issuer's Telephone Number)

     Check whether  the issuer (1) has filed all reports required to be filed by Section 13 or 15  (d) of the Securities Exchange Act of 1934 during the past 12 months (or such  shorter period that the registrant was required to file such reports), and (2)  has been subject to such filing requirements for the past 90 days: Yes      No  

     State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date.

     At May 16, 2003 there were 79,764,497 shares of common stock, par value $.001 per share outstanding.

     Transitional  Small Business Disclosure Format (check one):  Yes        No 

 

----

Back to Contents

DIALOG GROUP, INC. AND SUBSIDIARIES

INDEX

| PageNumber       |   |                                                                                                                                                                  |                                                                                                                                   |   |
|------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------|--------|
|             |   |                                                                                                                                                                  | **          Part      I.       Financial Information** |   |
|             |   |                                                                                                                                                                  |                                                                                                                                   |   |
|             |   | Item 1                                                                                                                                                                | Financial      Statements                                                                                                              |   |
|             |   |                                                                                                                                                                  |                                                                                                                                   |   |
| F-2              |        | Condensed      Consolidated Balance Sheets as of December 31, 2002 (audited) and March      31, 2003 (unaudited)                                                      |                                                                                                                                   |
|             |   |                                                                                                                                                                  |                                                                                                                                   |   |
| F-3              |        | Condensed      Consolidated Statements of Operations and Comprehensive Loss for the Three      Months Ended March 31, 2003 (unaudited) and March 31, 2002 (unaudited) |                                                                                                                                   |
|             |   |                                                                                                                                                                  |                                                                                                                                   |   |
| F-4              |        | Condensed      Consolidated Statements of Cash Flows for the Three Months Ended March 31,      2003 (unaudited) and March 31, 2002 (unaudited)                        |                                                                                                                                   |
|             |   |                                                                                                                                                                  |                                                                                                                                   |   |
|             |   |                                                                                                                                                                  |                                                                                                                                   |   |
| F-5 to      F-16 |        | Notes      to Condensed Consolidated Financial Statements (unaudited)                                                                                                 |                                                                                                                                   |
|             |   |                                                                                                                                                                  |                                                                                                                                   |   |
|             |   | Item      2. Management’s Discussion and Analysis or Plan of Operation                                                                                          |                                                                                                                                   |
|             |   |                                                                                                                                                                  |                                                                                                                                   |   |
|             |   | Item      5. Resignation of Director                                                                                                                                  |                                                                                                                                   |
|             |   |                                                                                                                                                                  |                                                                                                                                   |   |
|             |   |                                                                                                                                                                  | **          Part      II.       Other Information**    |   |
|             |   |                                                                                                                                                                  |                                                                                                                                   |   |
|             |   | Item 2(c)                                                                                                                                                             | Recent      Sales of Unregistered Securities                                                                                           |   |
|             |   |                                                                                                                                                                  |                                                                                                                                   |   |
|             |   | Item 6.                                                                                                                                                               | Exchibits      and Reports on Form 8-K                                                                                                 |   |
|             |   |                                                                                                                                                                  |                                                                                                                                   |   |

----

**DIALOG GROUP, INC. AND SUBSIDIARIES  CONDENSED CONSOLIDATED BALANCE SHEETS  ASSETS**

|                                                             |   |   | **March 31,**   |   |   | **December 31,** |   |
|------------------------------------------------------------------|--------|--------|-----------------|--------|--------|------------------|--------|
|                                                             |   |   | **2003**        |   |   | **2002**         |   |
|                                                             |   |   | **(Unaudited)** |   |   |             |   |
| **CURRENT ASSETS:**                                              |   |   |            |   |
| Cash                                                             |   | $      | 225,614         |   | $      | 54,111           |   |
| Accounts receivable, net                                         |   |   | 980,308         |   |   | 461,099          |   |
| Inventories                                                      |   |   | 11,524          |   |   | 12,858           |   |
| Prepaid expenses and other current assets                        |   |   | 238,919         |   |   | 105,917          |   |
|                                                             |   |        |                 |   |        |                  |   |
| Total current assets                                             |   |   | 1,456,365       |   |   | 633,985          |   |
|                                                             |   |   |            |   |   |             |   |
| **PROPERTY AND EQUIPMENT,      NET**                             |   |   | 270,665         |   |   | 128,300          |   |
|                                                             |   |   |            |   |   |             |   |
| **OTHER ASSETS:**                                                |   |   |            |   |   |             |   |
| Note receivable                                                  |   |   | 100,000         |   |   | 100,000          |   |
| Goodwill                                                         |   |   | 4,474,888       |   |   | —           |   |
| Other assets                                                     |   |   | 42,222          |   |   | 15,457           |   |
|                                                             |   |        |                 |   |        |                  |   |
| Total other assets                                               |   |   | 4,617,110       |   |   | 115,457          |   |
|                                                             |   |        |                 |   |        |                  |   |
| **TOTAL ASSETS**                                                 |   | $      | 6,344,140       |   | $      | 877,742          |   |
|                                                             |   |        |                 |   |        |                  |   |
| **LIABILITIES AND STOCKHOLDERS'      EQUITY (DEFICIENCY)**       |   |   |            |   |   |             |   |
|                                                             |   |   |            |   |   |             |   |
| **CURRENT LIABILITIES:**                                         |   |   |            |   |   |             |   |
| Accounts payable                                                 |   | $      | 1,600,670       |   | $      | 1,386,307        |   |
| Notes and obligations payable, current                           |   |   | 627,902         |   |   | 400,000          |   |
| Accrued expenses                                                 |   |   | 1,713,256       |   |   | 1,195,650        |   |
| Deferred revenue                                                 |   |   | 1,125,783       |   |   | 405,442          |   |
| Other current liabilities                                        |   |   | 120,570         |   |   | 227,039          |   |
| Due to related parties                                           |   |   | 208,606         |   |   | 140,243          |   |
|                                                             |   |        |                 |   |        |                  |   |
| Total current liabilities                                        |   |   | 5,396,787       |   |   | 3,754,681        |   |
|                                                             |   |        |                 |   |        |                  |   |
|                                                             |   |   |            |   |   |             |   |
| **LONG TERM DEBT**                                               |   |   | 106,666         |   |   | —           |   |
|                                                             |   |   |            |   |   |             |   |
| **STOCKHOLDERS' EQUITY      (DEFICIENCY):**                      |   |   |            |   |   |             |   |
| Preferred stock                                                  |   |   | 82,381          |   |   | 224,800          |   |
| Common stock                                                     |   |   | 67,973          |   |   | 19,954           |   |
| Additional paid-in-capital                                       |   |   | 3,907,329       |   |   | 15,562,739       |   |
| Accumulated deficit                                              |   |   | (3,160,425      | )      |   | (18,568,754      | )      |
| Accumulated other comprehensive income                           |   |   | 38,220          |   |   | 34,694           |   |
| Less: deferred compensation                                      |   |   | (94,791         | )      |   | (150,372         | )      |
|                                                             |   |        |                 |   |        |                  |   |
| Total stockholders' equity (deficiency)                          |   |   | 840,687         |   |   | (2,876,939       | )      |
|                                                             |   |        |                 |   |        |                  |   |
| **TOTAL LIABILITIES AND      STOCKHOLDERS' EQUITY (DEFICIENCY)** |   | $      | 6,344,140       |   | $      | 877,742          |   |
|                                                             |   |        |                 |   |        |                  |   |

The accompanying notes are an integral part of these financial statements.

F-2

----

Back to Contents

**DIALOG GROUP, INC. AND SUBSIDIARIES  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS  FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002  (Unaudited)**

|                                                                                    |   | **2003**   |   |   |   | **2002**   |   |
|----------------------------------------------------------------------------------------------|--------|------------|--------|--------|--------|------------|--------|
|                                                                                         |   |       |   |   |   |       |   |
| **REVENUES**                                                                                 | $      | 1,335,239  |   |   | $      | 1,110,790  |   |
|                                                                                         |   |       |   |   |   |       |   |
| **COST OF REVENUES**                                                                         |   | 738,379    |   |   |   | 637,516    |   |
|                                                                                         |        |            |   |   |        |            |   |
| **GROSS PROFIT**                                                                             |   | 596,860    |   |   |   | 473,274    |   |
|                                                                                         |   |       |   |   |   |       |   |
| **OPERATING      EXPENSES:**                                                                 |   |       |   |   |   |       |   |
|      Payroll      and payroll related expenses                      |   | 294,534    |   |   |   | 147,152    |   |
|      Selling      and marketing                                     |   | 93,813     |   |   |   | 57,837     |   |
|      Depreciation      and amortization                             |   | 20,096     |   |   |   | 9,046      |   |
|      Loss      on goodwill impairment                               |   | —     |   |   |   | 624,859    |   |
|      Loss      on website impairment                                |   | —     |   |   |   | 300,000    |   |
|      Loss      on trademark impairment                              |   | —     |   |   |   | 15,625     |   |
|      Loss      on fixed assets impairment                           |   | —     |   |   |   | 95,067     |   |
|      Other      general and administrative expenses                 |   | 280,636    |   |   |   | 188,471    |   |
|                                                                                         |        |            |   |   |        |            |   |
|           Total      Operating Expenses    |   | 689,079    |   |   |   | 1,438,057  |   |
|                                                                                         |        |            |   |   |        |            |   |
| **LOSS FROM      OPERATIONS**                                                                |   | (92,219    | )      |   |   | (964,783   | )      |
|                                                                                         |   |       |   |   |   |       |   |
| **OTHER INCOME      (EXPENSES):**                                                            |   |       |   |   |   |       |   |
|      Interest      expense                                          |   | (109,600   | )      |   |   | (7,313     | )      |
|      Other      income                                              |   | —     |   |   |   | 74,692     |   |
|                                                                                         |        |            |   |   |        |            |   |
|           Net      Other Income (Expenses) |   | (109,600   | )      |   |   | 67,379     |   |
|                                                                                         |        |            |   |   |        |            |   |
| **NET LOSS**                                                                                 |   | (201,819   | )      |   |   | (897,404   | )      |
|                                                                                         |        |            |   |   |        |            |   |
| **OTHER COMPREHENSIVE      INCOME:**                                                         |   |       |   |   |   |       |   |
|      Foreign      curreny translation adjustments                   |   | 3,526      |   |   |   | —     |   |
|                                                                                         |        |            |   |   |        |            |   |
| **TOTAL COMPREHENSIVE      LOSS**                                                            | $      | (198,293   | )      |   | $      | (897,404   | )      |
|                                                                                         |        |            |   |   |        |            |   |
| **NET LOSS      PER SHARE, BASIC AND DILUTED**                                               | $      | (0.01      | )      |   | $      | —     |   |
|                                                                                         |        |            |   |   |        |            |   |
| **NET LOSS      PER SHARE, BASIC AND DILUTED - PRO-FORMA**                                   | $      | —     |   |   | $      | (0.02      | )      |
|                                                                                         |        |            |   |   |        |            |   |
| **WEIGHTED        AVERAGE COMMON SHARES OUTSTANDING BASIC AND DILUTED**                      |   | 37,195,429 |   |   |   | 37,195,429 |   |
|                                                                                         |        |            |   |   |        |            |   |
|                                                                                         |

The accompanying notes are  an integral part of these financial statements.  F-3

----

Back to Contents

**DIALOG GROUP, INC. AND SUBSIDIARIES    CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002  (UNAUDITED)**

|                                                                               |   |   |      |   |   |     |   |
|------------------------------------------------------------------------------------|--------|--------|-----------|--------|--------|----------|--------|
|                                                                               |   |   | **2003**  |   |   | **2002** |   |
|                                                                               |   |        |           |   |        |          |   |
| **Cash Flows from Operating Activities:**                                          |   | $      | (201,819) |   | $      | (897,404 | )      |
| Net loss                                                                           |   |   |      |   |   |     |   |
| Adjustments to reconcile net loss to net cash        used in operating activities: |   |   |      |   |   |     |   |
| Depreciation and amortization                                                      |   |   | 20,096    |   |   | 9,046    |   |
| Loss on goodwill impairment                                                        |   |   | —    |   |   | 624,859  |   |
| Loss on website impairment                                                         |   |   | —    |   |   | 300,000  |   |
| Loss on trademark impairment                                                       |   |   | —    |   |   | 15,625   |   |
| Loss on fixed assets impairment                                                    |   |   | —    |   |   | 95,067   |   |
| Gain on debt forgiveness                                                           |   |   |      |   |   | (74,376  | )      |
| Changes in operating assets and liabilities:                                       |   |   |      |   |   |     |   |
| (Increase) decrease in:                                                            |   |   |      |   |   |     |   |
| Accounts receivable                                                                |   |   | (158,772  | )      |   | (267,328 | )      |
| Other current receivable                                                           |   |   | 22,715    |   |   | —   |   |
| Prepaid expenses and other current assets                                          |   |   | 18,871    |   |   | 17,027   |   |
| Increase (decrease) in:                                                            |   |   |      |   |   |     |   |
| Accounts payable and accrued expenses                                              |   |   | 182,190   |   |   | 18,711   |   |
| Other current liabilities                                                          |   |   | (100,937  | )      |   | —   |   |
| Deferred revenue                                                                   |   |   | (80,583   | )      |   | (145,037 | )      |
|                                                                               |   |        |           |   |        |          |   |
| **Net Cash Used in Operating Activities**                                          |   |   | (298,239  | )      |   | (303,810 |   |
|                                                                               |   |        |           |   |        |          |   |
| **Cash Flows from Investing Activities:**                                          |   |   |      |   |   |     |   |
| Purchase of property and equipment                                                 |   |   | (40,802   | )      |   | (1,284   | )      |
|                                                                               |   |        |           |   |        |          |   |
| **Net Cash Used in Investing Activities**                                          |   |   | (40,802   | )      |   | (1,284   | )      |
|                                                                               |   |        |           |   |        |          |   |
| **Cash Flows from Financing Activities:**                                          |   |   |      |   |   |     |   |
| Loans from shareholders                                                            |   |   | 30,250    |   |   | 30,734   |   |
| Borrowing from related parties                                                     |   |   | 19,792    |   |   | —   |   |
| Sale of common stock                                                               |   |   | 173,666   |   |   | —   |   |
| Short-term borrowing, net                                                          |   |   | 25,203    |   |   | 58,161   |   |
|                                                                               |   |        |           |   |        |          |   |
| **Net Cash Provided by Financing        Activities**                               |   |   | 248,911   |   |   | 88,895   |   |
|                                                                               |   |        |           |   |        |          |   |
| **Net decrease in cash**                                                           |   |   | (90,130   | )      |   | (216,199 | )      |
| **Effect of exchange rate on cash**                                                |   |   | 4,148     |   |   | —   |   |
| **Cash, beginning of period**                                                      |   |   | 311,596   |   |   | 240,927  |   |
|                                                                               |   |        |           |   |        |          |   |
| **Cash, end of period**                                                            |   | $      | 225,614   |   | $      | 24,728   |   |
|                                                                               |   |        |           |   |        |          |   |
| **SUPPLEMENTAL DISCLOSURE OF CASH FLOW      INFORMATION:**                         |   |   |      |   |   |     |   |
| Interest paid during the period                                                    |   | $      | —    |   | $      | 55,284   |   |
|                                                                               |   |        |           |   |        |          |   |
| Income taxes paid during the period                                                |   | $      | —    |   | $      | —   |   |
|                                                                               |   |        |           |   |        |          |   |
| **SUPPLEMENTAL DISCLOSURE OF NON-CASH      INVESTING AND FINANCING ACTIVITIES:**   |   |   |      |   |   |     |   |
| Shares issued in acquistion of HCD                                                 |   | $      | 1,017,139 |   | $      | —   |   |
|                                                                               |   |        |           |   |   |          |   |
| Shares issued in acquistion of IP2M                                                |   | $      | 260,908   |   | $      | —   |   |
|                                                                               |   |        |           |   |        |          |   |
|                                                                               |   |   |      |   |   |     |   |

The accompanying notes are an integral part of these financial statements.

F-4

----

Back to Contents

**DIALOG GROUP, INC. AND SUBSIDIARIES  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  MARCH 31, 2003(Unaudited)**

| **NOTE 1 –** | **BASIS OF PRESENTATION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|-------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|              | The condensed consolidated      balance sheet as of March 31, 2003, the condensed consolidated statements      of operations for the three months ended March 31, 2003 and 2002, and the      condensed consolidated statements of cash flows for the three months ended      March 31, 2003 and 2002 are unaudited. However, in the opinion of management,      all adjustments (which include reclassifications and normal recurring adjustments)      necessary to present fairly the financial position, results of operations      and cash flows at March 31, 2003 and for all periods presented, have been      made. The results of operations for the three-month period ended March 31,      2003 are not necessarily indicative of the operating results for the full      year. |
|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

|   | These condensed consolidated      financial statements and notes are presented in accordance with rules and      regulations of the Securities and Exchange Commission. Certain information      and footnote disclosures normally included in the consolidated financial      statements prepared in accordance with accounting principles generally accepted      in the United States of America have been condensed or omitted. It is suggested      that these condensed consolidated financial statements be read in conjunction      with the Company’s consolidated financial statements and notes thereto      included in the Company’s December 31, 2002 Form 10-KSB, and the consolidated      financial statements of Healthcare Dialog, Inc. and Subsidiaries (“HCD”)      and the financial statements of IP2M, Inc. (“IP2M”) (see Note      2), filed with the Company Form 8-K/A. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

|   | PRINCIPLES OF CONSOLIDATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | The condensed consolidated      financial statements include the accounts of the Company (“DGI”)      and its wholly-owned subsidiaries, Healthcare Dialog, Inc. (“HCD”),      IP2M, Inc. (“IP2M”), Findstar, plc, (“Findstar”),      ThinkDirectMarketing, Inc. (“TDMI”), HCD’s wholly-owned      and majority-owned subsidiaries, P.V.D and Partners (“PVD”),      CLP Graphics Center, Inc. (“CLP”), QD Corporation (“QD”),      Findstar’s wholly-owned subsidiary, Panda Software (UK) Limited, and      TDMI’s wholly-owned subsidiary, DirectMailQuotes, LLC (“DMQ”).      All significant intercompany balances and transactions have been eliminated. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

|   | REPORTING PERIOD |
|--------|------------------|
|   |             |

|   | As further explained in      Note 2, the acquisition of HCD effective March 1, 2003 was accounted for      as a reverse acquisition. HCD was deemed to be the accounting acquirer and      the Company was deemed the legal acquirer. The accompanying condensed consolidated      financial statements for the three months ended March 31, 2003 depict the      results of operations and cash flows of HCD and subsidiaries for the three      months ended March 31, 2003 and the results of operations and cash flows      of DGI, Findstar and subsidiary, TDMI and subsidiary and IP2M from March      1, 2003, (effective date of the acquisition) to March 31, 2003. The accompanying      condensed consolidated financial statements for the three months ended March      31, 2002 depict the results of operations and cash flows of HCD and subsidiaries      only. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

F-5

----

Back to Contents

**DIALOG GROUP, INC. AND SUBSIDIARIES  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  MARCH 31, 2003(Unaudited)**

 

 

| **NOTE 2 –** | **ACQUISITIONS**                                                                                                                                                                                                                                   |
|-------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              |                                                                                                                                                                                                                                               |
|              | ACQUISITION OF HCD                                                                                                                                                                                                                                 |
|              |                                                                                                                                                                                                                                               |
|              | On November 6, 2002, the      Company entered into an Agreement for Merger (the “Agreement”)      with HCD. On February 27, 2003, the Agreement was amended and the merger      was consummated. It became effective on March 1, 2003. |
|              |                                                                                                                                                                                                                                               |

|   | The consideration paid by      the Company for the acquisition consisted of 30,075,219 shares of the Company’s      common stock and 183,235 shares of the Company’s Class B-1 preferred      stock. The agreement called for an additional $1,650,000 in financing. One      of the Company’s major shareholders had agreed to assure that at least      $650,000 will be raised and had agreed to post negotiable collateral against      its obligation to purchase up to 3,513,514 shares of the Company’s      common stock. The parties subsequently canceled the shareholder’s      guarantee that $650,000 will be raised and its obligation to purchase up      to $3,513,514 shares of the Company’s common stock. In return, the      shareholder returned to the Company 3,500,000 of the company’s common      stock that it owned. The 3,500,000 shares were accounted for as a reduction      of the purchase price, resulting in net shares of common stock of 26,575,219      issued to HCD. The consideration also included $76,958 of estimated transactions      costs. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

|   | Of the approximately 70,203,000      shares of common stock outstanding after the consummation of both transactions      (giving effect to the conversion of the preferred stock), HCD controlled      48.45% of the combined entity, DGI controlled 40.29% of the combined entity,      with IP2M controlling the remaining 11.26%. In addition, HCD currently controls      the Board of Directors, with two of the current four members being former      officers of HCD. As a result, HCD was deemed the accounting acquirer and      the acquisition of HCD was accounted for as a reverse acquisition. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

|   | The following set forth      the consideration paid by the Company, which may be subject to certain adjustments: |
|--------|------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                             |

|   | Restricted common shares      (26,575,219 at $0.03 per share) |   | $      | 797,257   |   |
|--------|---------------------------------------------------------------|--------|--------|-----------|--------|
|   | Restricted preferred shares      (183,235 at $1.20 per share) |   |   | 219,882   |   |
|   | Estimated transaction costs                                   |   |   | 76,958    |   |
|        |                                                          |   |        |           |        |
|   | Total      Purchase Price                                     |   | $      | 1,094,097 |   |
|        |                                                               |        |        |           |        |

|   | For purpose of determining      the price of the common stock, management believed that the best reference      is the price of recent sales of the Company’s common stock. During      the month of March 2003, the Company sold shares of its common stock in      reliance of Regulation S to foreign investors at $0.06 per share. Since      the shares issued in this acquisition were not sold in reliance of Regulation      S, which is less restrictive, and there are additional restrictions, management      believed that an additional discount of 50% should be applied to the $0.06      per share, resulting in a price of $0.03 per share. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

|   | Similarly, since each preferred      share is convertible into 40 shares of common stock, management believed      that the preferred shares should be valued at 40 times $0.03, or $1.20 per      share. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

F-6

----

Back to Contents

**DIALOG GROUP, INC. AND SUBSIDIARIES  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  MARCH 31, 2003(Unaudited)**

 

 

| **NOTE 2 –** | **ACQUISITIONS (CONTINUED)**                                                                                                                                                                          |
|-------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              |                                                                                                                                                                                                  |
|              | ACQUISITION OF HCD (CONTINUED)                                                                                                                                                                        |
|              |                                                                                                                                                                                                  |
|              | The following table set      forth the preliminary allocation of the purchase price to DGI’s tangible      and intangible assets acquired and liabilities assumed as of December 31,      2002: |
|              |                                                                                                                                                                                                  |

|   | Cash                                           |   | $      | 54,111     |   |
|--------|------------------------------------------------|--------|--------|------------|--------|
|   | Accounts receivable                            |   |   | 461,099    |   |
|   | Inventory                                      |   |   | 12,858     |   |
|   | Prepaid expenses and other      current assets |   |   | 256,289    |   |
|   | Property and equipment                         |   |   | 128,300    |   |
|   | Other receivable                               |   |   | 100,000    |   |
|   | Other assets                                   |   |   | 15,457     |   |
|   | Goodwill                                       |   |   | 3,820,664  |   |
|   | Accounts payable and accrued      expenses     |   |   | (2,581,957 | )      |
|   | Deferred revenue                               |   |   | (405,442   | )      |
|   | Other current liabilities                      |   |   | (227,039   | )      |
|   | Short term debt                                |   |   | (540,243   | )      |
|        |                                           |   |        |            |   |
|        |                                           |   |   |       |   |
|   | Total                                          |   | $      | 1,094,097  |   |
|        |                                                |        |        |            |        |

 

|   | ACQUISITION OF IP2M                                                                                                                                                                                                                                      |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                     |
|   | On November 23, 2002, the      Company entered into a Letter of Intent relative to its proposed acquisition      of IP2M. On February 24, 2003, the acquisition was finalized and the merger      was consummated. It became effective on March 1, 2003. |
|   |                                                                                                                                                                                                                                                     |

|   | The consideration paid by      the Company for the acquisition consisted of 6,191,029 shares of the Company’s      common stock and 44,312 shares of the Company Class B-1 preferred stock.      In addition, the agreement provided for IP2M to receive 589,710 shares of      common stock and 3,593 shares of preferred stock subject to the Company      acquiring the outstanding shares of Healthcare Horizons, Inc. and the assets      of Azimuth Target Marketing, Inc. On April 18, 2003, the Company completed      the two acquisitions (See Note 9) and the additional shares were issued      to the IP2M’s shareholders. In addition, IP2M’s shareholders      may be issued approximately 700,000 shares of the Company’s common      stock if certain financial goals are met. The consideration also included      $69,274 of estimated transactions costs |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

|   | The following set forth      the consideration paid by the Company, which may be subject to certain adjustments: |
|--------|------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                             |

|   | Restricted common shares      (6,780,739 at $0.03 per share) |   | $      | 203,422 |   |
|--------|--------------------------------------------------------------|--------|--------|---------|--------|
|   | Restricted preferred shares      (47,905 at $1.20 per share) |   |   | 57,486  |   |
|   | Estimated transaction costs                                  |   |   | 69,274  |   |
|        |                                                         |   |        |         |   |
|        |                                                         |   |   |    |   |
|   | Total Purchase Price                                         |   | $      | 330,182 |   |
|        |                                                              |        |        |         |        |

F-7

----

Back to Contents

**DIALOG GROUP, INC. AND SUBSIDIARIES  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  MARCH 31, 2003(Unaudited)**

 

| **NOTE 2 –** | **ACQUISITIONS (CONTINUED)**                                                                                                                      |
|-------------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
|              |                                                                                                                                              |
|              | ACQUISITION OF IP2M (CONTINUED)                                                                                                                   |
|              |                                                                                                                                              |
|              | The prices of the common      shares and preferred shares issued in this acquisition were determined as      described in the acquisition of HCD. |
|              |                                                                                                                                              |

|   | The following table set      forth the preliminary allocation of the purchase price of IP2M’s tangible      and intangible assets acquired and liabilities assumed as of December 31,      2002: |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                   |

|   | Cash                                           |   | $      | 7,014    |   |
|--------|------------------------------------------------|--------|--------|----------|--------|
|   | Accounts receivable                            |   |   | 61,973   |   |
|   | Prepaid expenses and other      current assets |   |   | 94,230   |   |
|   | Property and equipment                         |   |   | 72,653   |   |
|   | Goodwill                                       |   |   | 654,224  |   |
|   | Accounts payable and accrued      expenses     |   |   | (52,319  | )      |
|   | Deferred revenue                               |   |   | (394,646 | )      |
|   | Short term debt                                |   |   | (103,530 | )      |
|   | Long-term debt                                 |   |   | (9,417   | )      |
|        |                                           |   |        |          |   |
|   | Total                                          |   | $      | 330,182  |   |
|        |                                           |   |        |          |   |
|        |                                           |   |   |     |   |

|   | PRO-FORMA RESULTS OF OPERATIONS |
|--------|---------------------------------|
|   |                            |

|   | The following set forth      the Company’s results of operations for the three months ended March      31, 2003, as if the acquisitions had taken place on January 1, 2003, with      comparative results of operations for the three months ended March 31, 2002. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                     |

|   |                                           |   |   | Three MonthsEndedMarch 31, 2003 |   |   | Three Months      endedMarch 31, 2002 |   |
|--------|------------------------------------------------|--------|--------|---------------------------------|--------|--------|---------------------------------------|--------|
||
|        |                                           |   |        |                                 |   |        |                                       |   |
|   | REVENUE                                        |   | $      | 2,679,484                       |   | $      | 2,591,903                             |   |
||
|   | COST OF REVENUE                                |   |   | 1,410,012                       |   |   | 1,475,404                             |   |
|        |                                           |   |        |                                 |   |        |                                       |   |
||
|   | GROSS PROFIT                                   |   | $      | 1,269,472                       |   |   | 1,116,499                             |   |
||
|   | OPERATING EXPENSES:                            |   |   |                            |   |   |                                  |   |
|   | Payroll and payroll related      expenses      |   |   | 870,648                         |   |   | 1,212,532                             |   |
|   | Selling and marketing                          |   |   | 94,779                          |   |   | 392,235                               |   |
|   | Depreciation and amortization                  |   |   | 35,638                          |   |   | 99,433                                |   |
|   | Loss on goodwill impairment                    |   |   | —                          |   |   | 624,859                               |   |
|   | Loss on website impairment                     |   |   | —                          |   |   | 300,000                               |   |
|   | Loss trademark impairment                      |   |   | —                          |   |   | 15,625                                |   |
|   | Loss on fixed assets impairment                |   |   | —                          |   |   | 95,067                                |   |
|   | Other general and administrative      expenses |   |   | 760,606                         |   |   | 884,253                               |   |
|        |                                           |   |        |                                 |   |        |                                       |   |
||
|   | Total Operating Expenses                       |   |   | 1,761,671                       |   |   | 3,624,004                             |   |
|        |                                           |   |        |                                 |   |        |                                       |   |
|   | Loss from Operations                           |   |   | (492,199                        | )      |   | (2,507,505                            | )      |

F-8

----

Back to Contents

**DIALOG GROUP, INC. AND SUBSIDIARIES  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  MARCH 31, 2003(Unaudited)**

 

| **NOTE 2 –** | **ACQUISITIONS (CONTINUED)**                     |
|-------------------|--------------------------------------------------|
|              |                                             |
|              | PRO-FORMA RESULTS OF OPERATIONS      (CONTINUED) |
|              |                                             |

|   | OTHER INCOME (EXPENSES)                                     |   |   |       |   |   |       |   |
|--------|-------------------------------------------------------------|--------|--------|------------|--------|--------|------------|--------|
|   | Interest expense                                            |   |   | (116,135   | )      |   | (52,811    | )      |
|   | Gain on sale of securities                                  |   |   | —     |   |   | 240,307    |   |
|   | Other income                                                |   |   | 252        |   |   | 430,704    |   |
|   | Other expenses                                              |   |   | —     |   |   | (5,634     | )      |
|        |                                                        |   |        |            |   |        |            |   |
|   | Net Other Income                                            |   |   | (115,883   | )      |   | 612,566    |   |
|   | NET LOSS                                                    |   | $      | (608,082   | )      | $      | (1,894,939 | )      |
|        |                                                        |   |        |            |   |        |            |   |
|        |                                                        |   |   |       |   |   |       |   |
|   | PRO-FORMA NET LOSS PER      SHARE – BASIC AND DILUTED  |   | $      | 0.02       |   | $      | 0.05       |   |
|        |                                                        |   |        |            |   |        |            |   |
|   | PRO-FORMA        WEIGHTED AVERAGE COMMON SHARES OUTSTANDING |   |   | 35,195,429 |   |   | 35,195,429 |   |
|        |                                                        |   |        |            |   |        |            |   |

 

| **NOTE 3 –** | **GOING CONCERN CONSIDERATIONS**                                                                                                                                                                                                                                                                                                                                                                            |
|-------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              |                                                                                                                                                                                                                                                                                                                                                                                                        |
|              | The accompanying condensed      consolidated financial statements have been presented assuming the continuity      of the Company as a going concern. However, the Company has incurred substantial      losses resulting in an accumulated deficit of $3,160,425 as of March 31,      2003. These conditions raise substantial doubt as to the ability of the      Company to continue as a going concern. |
|              |                                                                                                                                                                                                                                                                                                                                                                                                        |

|   | Management’s plans      with regards to this issue are as follows: |
|--------|--------------------------------------------------------------------------|
|   |                                                                     |

|   | LIQUIDITY |
|--------|-----------|
|   |      |

|   | • | The Company is continuing the sale of      its equity securities, as further discussed in Note 9. During the first      quarter of 2003, the Company raised approximately $842,000 in such activities      and has already contracted for additional sales of its securities. After      the end of the quarter, approximately $350,000 has been raised. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                     |

|   | • | The Company intends to obtain financing      from longer term debt and has already obtained loans, as further discussed      in Note 4 |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                   |

|   | PROFITABILITY |
|--------|---------------|
|   |          |

|   | The Company intends to develop      new and increased revenues and gross margins in all areas of operations.      Specifically, the Company intends to: |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|

F-9

----

Back to Contents

**DIALOG GROUP, INC. AND SUBSIDIARIES  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  MARCH 31, 2003(Unaudited)**

| **NOTE 3 –** | **GOING CONCERN CONSIDERATIONS      (CONTINUED)** |
|-------------------|---------------------------------------------------|
|              |                                              |   |
|              | •                                            | Restructure its sales organization to      allow for more effective sales processes. These steps include, among others,      consolidating sales operations for subscription sales in offices in Florida,      as well as expansion of sales organization. |
|              |                                              |   |

|   | • | Reduce expenses through office consolidation      and payroll reduction. |
|--------|--------|--------------------------------------------------------------------------|
|   |   |                                                                     |

|   | • | Enter into strategic relationships with      data suppliers that will return higher levels of match rate with a better      quality of data. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                         |

|   | Many of these profitability      objectives have been met early in the second quarter. |
|--------|----------------------------------------------------------------------------------------|
|   |                                                                                   |

|   | Presently, the Company cannot      ascertain the eventual success of management’s plans with any degree      of certainty. The accompanying condensed consolidated financial statements      do not include any adjustments that might result from the eventual outcome      of the risks and uncertainty described above. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                             |

| **NOTE 4 –** | **LOANS AND NOTES PAYABLE** |
|-------------------|-----------------------------|
|              |                        |

|   | Loans and notes payable      consisted of the following as of March 31, 2003 |
|--------|------------------------------------------------------------------------------|
|   |                                                                         |

|   |   | Demand promissory note dated      February 27, 2003, in the original amount of $183,400. The note is due on      May 28, 2003 and will bear interest at 12% per annum if not repaid at the      maturity date. In lieu of origination fees and interest on the loan, the      Company transferred 1,100,000 shares of the Company’s common stock      to the lender and warrants to issue 350,000 shares of the Company’s      Common Stock at $0.05 per share. The warrants expire in 3 years. See Note      5.                                                                                          |   | $      | 127,728        |   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|----------------|--------|
|   |   |
|   |   | Convertible      notes in the aggregate amount of $100,000 due to three former IP2M note      holders assumed by the Company. The notes are due August 31, 2004. The notes      bear interest at the rate of 10% per annum. The notes are convertible into      shares of the Company’s common stock. The number of shares to be issued      upon conversion will be determined by the closing bid price of the Company’s      common stock on the date of conversion. Each holder is entitled to convert      up to 25% of the initial balance of the note (including accrued interest)      each month. |   |   | 100,000        |   |
|   |   |
|   |   | Note payable to Axciom Corporation      in the original amount of $400,000. The maturity of the note was extended      to February 2003 and the note is now in default. The company is currently      in the process of extending the maturity of the note. The note bears interest      at 8% per annum.                                                                                                                                                                                                                                                                                                             |   |   |   400,000 |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |           |

F-10

----

Back to Contents

**DIALOG GROUP, INC. AND SUBSIDIARIES  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  MARCH 31, 2003(Unaudited)**

|  **NOTE 4 –** | **LOANS AND NOTES PAYABLE      (CONTINUED)** |
|-------------------------|----------------------------------------------|

|   |                                                                                                                                                                                                                                                               |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | $115,000      revolving credits agreement with a commercial bank renewable every year      until October 13, 2004. The line of credit bears interest at prime plus      2% per annum and is personally guaranteed by one of the Company’s      shareholders. |   |   | 94,935 |   |
|   |                                                                                                                                                                                                                                                               |   |   |   |   |
|   | Line      of credit agreement with Dell Financial Corporation for equipment purchase.      The agreement provides for monthly payments of $414.                                                                                                                    |   |   | 11,905 |   |
|        |                                                                                                                                                                                                                                                               |   |  |  |   |
|   | Total loans and notes payable                                                                                                                                                                                                                                      |   |   | 734,568 |   |
|   |                                                                                                                                                                                                                                                               |   |   |   |   |
|   | Less:      Current maturities                                                                                                                                                                                                                                      |   |   | (627,902 | ) |
|        |                                                                                                                                                                                                                                                               |   |  |  |   |
|   |                                                                                                                                                                                                                                                               |   |   |   |   |
|   | Long Tem Debt                                                                                                                                                                                                                                                      |   | $ | 106,666 |   |
|        |                                                                                                                                                                                                                                                               |   |  |  |   |
|   |                                                                                                                                                                                                                                                               |   |   |   |   |

|   | Maturities of long-term      debt consist of the following as of March 31, 2003: |
|--------|----------------------------------------------------------------------------------|
|   |                                                                             |

|   | 2004   |   | $      | 627,902 |   |
|--------|--------|--------|--------|---------|--------|
|   | 2005   |   |   | 106,666 |   |
|        |   |   |        |         |   |
|   | Total  |   | $      | 734,568 |   |
|        |        |        |        |         |        |

 

| **NOTE 5 –** | **EQUITY**                               |
|-------------------|------------------------------------------|
|              |                                     |
|              | SHARES ISSUED IN ACQUISITION      OF HCD |
|              |                                     |

|   | As discussed in Note 2,      during the quarter ended March 31, 2003, the Company issued net shares of      common stock of 26,575,219 in the HCD acquisition valued at $0.03 per share      and 183,235 shares of preferred stock valued at $1.20 per share. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                          |

|   | SHARES ISSUED IN ACQUISTION      OF IP2M |
|--------|------------------------------------------|
|   |                                     |

|   | As discussed in Note 2,      during the quarter ended March 31, 2003, the Company issued 6,780,739 shares      of common stock in the acquisition of IP2M value at $0.03 per share and      47,905 shares of preferred stock valued at $1.20 per share. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                    |

|   | SHARES OF COMMON STOCK IN      PRIVATE PLACEMENTS |
|--------|---------------------------------------------------|
|   |                                              |

|   | During the quarter ended      March 31, 2003, the Company sold the following shares of common stock in      private placements: |
|--------|---------------------------------------------------------------------------------------------------------------------------------|

F-11

----

Back to Contents

**DIALOG GROUP, INC. AND SUBSIDIARIES  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  MARCH 31, 2003(Unaudited)**

 

|  **NOTE 5 –** | **EQUITY (CONTINUED)** |
|-------------------------|------------------------|
|                    |                   |

|   | Number of Shares                     |   |   | Average Price      per Share |   |   | Total Proceeds                 |   |
|--------|--------------------------------------|--------|--------|------------------------------|--------|--------|--------------------------------|--------|
||
|   | 4,030,483                            |   |   | $0.15                        |   |   | $582,496                       |   |
|   | 2,233,333                            |   |   | $0.15                        |   |   |   335,000            |   |
|   |      20,000 |   |   | $0.50                        |   |   |     10,000 |   |
|        |                                      |   |   |                         |   |   |                                |        |
|   | 6,283,816                            |   |   |                         |   |   | $927,496                       |
|        |                                      |   |   |                         |   |   |                                |        |
|        |                                 |   |   |                         |   |   |                           |        |

|   | In connection with those      sales, the Company paid cash commissions aggregating approximately $58,250.      In addition the Company is to issue warrants to purchase 403,048 shares      of the Company’s common stock to consultants in connection with those      sales. The warrants were valued at $11,650. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                     |

|   | ISSUANCE OF COMMON STOCK      TO FORMER HDC SHAREHOLDERS |
|--------|----------------------------------------------------------|
|   |                                                     |

|   | During the quarter ended      March 31, 2003, an aggregate number of 1,238,599 shares of the Company’s      common stock were issued to former HCD shareholders for certain services      provided to the Company. These shares were issued at $0.03 per share, which      was the value of the shares issued in the acquisition of HCD. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                           |

|   | ISSUANCE OF COMMON STOCK      AND WARRANTS IN CONNECTION WITH BRIDGE LOAN |
|--------|---------------------------------------------------------------------------|
|   |                                                                      |

|   | As discussed in Note 4,      in connection with the bridge loan, the Company issued 1,100,000 shares      of common stock and warrants to issue 350,000 shares of common stock to      the lender, in lieu of origination fee and interest on the loan. The shares      and warrants were valued at $36,500, based on their fair value, and this      amount was charged to interest expense. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                          |

|   | DEBT CONVERSION |
|--------|-----------------|
|   |            |

|   | During the quarter ended      March 31, 2003, Carter Barnard converted $2,354,815 of debt into 9,274,280      shares of the Company’s common stock, immediately prior to the acquisition      of HCD and IP2M. This conversion was accounted for as of December 31, 2002. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                            |

|   | CONVERSION OF PREFERRED      STOCK INTO COMMON STOCK |
|--------|------------------------------------------------------|
|   |                                                 |

|   | During the quarter ended      March 31, 2003, 151,060 shares of the Company’s Class B preferred      stock were converted into 6,042,400 shares of the Company’s common      stock. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                            |

|   | CREATION OF CLASS D CONVERTIBLE      PREFERRED STOCK |
|--------|------------------------------------------------------|
|   |                                                 |

|   | On February 25, 2003, The      Company’s Certificate of Incorporation was amended to create and authorize      a series of preferred stock of 4,000 shares entitled Class D Convertible      Preferred Stock. The Class D Convertible preferred stock has no voting rights.      Each share is convertible, at the option of the holder, into 10,000 shares      of the Company’s common stock only in the event the Class D preferred      stock is pledged as collateral for any debt of the Company, and the Company      is in default of such debt obligation. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

F-12

----

Back to Contents

**DIALOG GROUP, INC. AND SUBSIDIARIES  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  MARCH 31, 2003(Unaudited)**

 

| **NOTE 6 –** | **RELATED PARTY TRANSACTIONS** |
|-------------------|--------------------------------|
|              |                           |
|              | MANAGEMENT FEES                |
|              |                           |

|   | During the quarter ended      March 31, 2003, the Company paid $30,000 to Carter Barnard USA, a Company      owned by Carter Barnard, for office facilities and other services performed      on behalf of the Company during January and half of February 2003. Carter      Barnard USA no longer provides such services. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                       |

|   | DUE TO RELATED PARTIES                                                                                                                                                                                                                                                                      |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                        |
|   | As of March 31, 2003, the      Company was indebted to four shareholders in the aggregate amount of $188,814.      The loans bear interest at the rate of 10.5% per annum and are due on demand.      The remaining balance of $19,792 due to a related party is non-interest      bearing. |
|   |                                                                                                                                                                                                                                                                                        |

|   | DEBT FORGIVENESS |
|--------|------------------|
|   |             |

|   | As of December 31, 2001,      the Company owed approximately $75,000 to a related party. The debt was      forgiven by the related party during the quarter ended March 31, 2002. As      a result, the Company recognized a gain of $75,000 which is included in      other income in the accompanying consolidated financial statements |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                      |

|   | RENT FROM RELATED PARTIES |
|--------|---------------------------|
|   |                      |

|   | The Company leases an apartment      from a company controlled by two of its shareholders and executives. Rent      expense paid to these related parties amounted to $7,600 during the quarter      ended March 31, 2003. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                       |

| **NOTE 7 –** | **AGREEMENTS**                                                                                  |
|-------------------|-------------------------------------------------------------------------------------------------|
|              |                                                                                            |
|              | The company entered into      the following agreements during the quarter ended March 31, 2003: |
|              |                                                                                            |

|   | EMPLOYMENT AGREEMENTS |
|--------|-----------------------|
|   |                  |

|   | Effective March 1, 2003,      the Company entered into employment agreements with 3 former HCD executives      and 1 former IP2M executive. Each agreement has an initial term which ends      on December 31, 2004 and provides for automatic annual renewals thereafter.      Total annual salaries under these agreements amount to $700,000. The agreements      also provide, among other things, for annual bonuses of 25% of the base      salary if the executives meet certain performance goals fixed annually by      the Board of Directors. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

F-13

----

Back to Contents

**DIALOG GROUP, INC. AND SUBSIDIARIES  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  MARCH 31, 2003(Unaudited)**

 

| **NOTE 7 –** | **AGREEMENTS (CONTINUED)**                                                |
|-------------------|---------------------------------------------------------------------------|
|              |                                                                      |
|              | CONSULTING AGREEMENT WITH      GRIFFIN SECURITIES, INC. (A RELATED PARTY) |
|              |                                                                      |

|   | On February 25, 2003, the      Company entered into a consulting agreement with Griffin Securities, Inc.      (the “Advisor”) whereas the Advisor is to introduce the Company      to prospective investors and to achieve a listing for the Company’s      shares on the American Stock Exchange or NASDAQ Small Cap. Should the Company      achieve such listing, the Company agreed to compensate the Advisor with      a cash fee of $75,000 payable at listing. Should the Company raise any equity      financing in excess of $1,650,000 from investors introduced by the Advisor,      the Company agreed to compensate the Advisor with a cash fee at the closing      of such financing at a rate of 8% of the money raised. In addition, the      Company agreed to issue financing warrants to the Advisor to purchase equity      in the Company equal to 10% of the number of Common shares and/or warrants      issued in the equity financing at a strike price equal to 110% of the price      paid by the investors. The warrants should be exercisable over a 5 years      period at a price per share equal to the price at which the Company raises      funds under such offering. The term of the agreement is for one year |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

|  **NOTE 8 –** | **SEGMENT DISCLOSURES** |
|-------------------------|-------------------------|
|                    |                    |

|   | The Company’s reportable      operating segments include HCD and its wholly-owned subsisiaries, PVD, CLP      and QD, Findstar and its subsidiary, Panda Software (UK) Limited, TDMI and      its subsidiary, DMQ, and IP2M |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                              |

|   | • | HCD and its subsidiaries provide pharmaceutical      companies with interactive, strategic and creative services. PVD provides      full-service creative and strategic healthcare marketing services. CLP provides      multimedia graphic design and production services. QD manages sophisticated      promotional websites, provides interactive training and education CD-ROMs,      and generates Internet marketing and e-mail campaigns. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                             |

|   | • | Findstar’s business consists of      the distribution of anti-virus software known as Panda Software, one of      the United Kingdom’s leading anti-virus software systems. The Panda      Software is also distributed outside the United Kingdom. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                            |

|   | • | TDMI designs, develops and distributes      products and services that automate and streamline direct marketing and      customer relationship management processes. DMQ, is an online market place      for sellers of direct mail, providing leads, website applications, mailing      lists, mailing supplies as well as other products and services. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                     |

|   | • | IP2M is a marketing company that has      developed a marketing platform in healthcare that integrates radio, television,      and the Internet to assist clients in targeting consumers. IP2M offers a      national solution using the existing loyalty of |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                         |

F-14

----

Back to Contents

**DIALOG GROUP, INC. AND SUBSIDIARIES  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  MARCH 31, 2003(Unaudited)**

|  **NOTE 8 –** | **SEGMENT DISCLOSURES (CONTINUED)** |
|-------------------------|-------------------------------------|
|                    |                                |

|   |   | the local radio and television      stations to drive traffic to the client’s content and advertising      within the IP2M platform. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                       |

|   | The Company allocates the      costs of revenues and direct operating expenses to these segments. |
|--------|---------------------------------------------------------------------------------------------------|
|   |                                                                                              |

|   | Information regarding the      Company’s operating segments for the quarter ended March 31, 2003      and 2002 are being presented on a pro-forma basis because management believes      that the results of operations for the three months ended March 31, 2003      and 2002 are more meaningful than the actual results of operations that      include only the month of March 2003 for the accounting acquirees. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                         |

|   | Quarter ended March 31,      2003 (Pro-Forma) |
|--------|-----------------------------------------------|
|   |                                          |

|   |                               |   |   | **HCD**  |   |   | **Findstar** |   |   | **TDMI** |   |   | **IP2M** |   |   | **Corporate** |   |   | **Total**  |   |
|--------|------------------------------------|--------|--------|----------|--------|--------|--------------|--------|--------|----------|--------|--------|----------|--------|--------|---------------|--------|--------|------------|--------|
||
|        |                               |   |        |          |   |        |              |   |        |          |   |        |          |   |        |               |   |        |            |        |
|   | Revenues                           |   | $      | 670,926  |   | $      | 462,494      |   | $      | 912,480  |   | $      | 633,584  |   | $      | —        |   | $      | 2,679,484  |   |
||
|   | Cost of revenues                   |   |   | (346,422 | )      |   | (175,166     | )      |   | (475,576 | )      |   | (412,848 | )      |   | —        |   |   | (1,410,012 | )      |
|        |                               |   |        |          |   |        |              |   |        |          |   |        |          |   |        |               |   |        |            |        |
|   | Gross profit                       |   | $      | 324,504  |   | $      | 287,328      |   | $      | 436,904  |   | $      | 220,736  |   | $      | —        |   | $      | 1,269,472  |   |
|        |                               |   |        |          |   |        |              |   |        |          |   |        |          |   |        |               |   |        |            |        |
||
|   | Depreciation      and amortization |   | $      | 7,374    |   | $      | 7,217        |   | $      | 10,047   |   | $      | 11,000   |   | $      | —        |   | $      | 35,638     |   |
|        |                               |   |        |          |   |        |              |   |        |          |   |        |          |   |        |               |   |        |            |        |
||
|   | Total assets                       |   | $      | 552,881  |   | $      | 500,242      |   | $      | 370,705  |   | $      | 158,339  |   | $      | —        |   | $      | 1,582,167  |   |
|        |                               |   |        |          |   |        |              |   |        |          |   |        |          |   |        |               |   |        |            |        |
|   |                               |   |   |

|   | Quarter ended March 31,      2002 (Pro-Forma) |
|--------|-----------------------------------------------|
|   |                                          |

|   |                          |   |   | **HCD**   |   |   | **Findstar** |   |   | **TDMI** |   |   | **IP2M** |   |   | **Corporate** |   |   | **Total**  |   |
|--------|-------------------------------|--------|--------|-----------|--------|--------|--------------|--------|--------|----------|--------|--------|----------|--------|--------|---------------|--------|--------|------------|--------|
||
|        |                          |   |        |           |   |        |              |   |        |          |   |        |          |   |        |               |   |        |            |        |
|   | Revenues                      |   | $      | 1,110,790 |   | $      | 221,552      |   | $      | 776,225  |   | $      | 483,336  |   | $      | —        |   | $      | 2,591,903  |   |
||
|   | Cost of revenues              |   |   | (637,516) |   |   | (80,491      | )      |   | (466,181 | )      |   | (291,216 | )      |   | —        |   |   | (1,475,404 | )      |
|        |                          |   |        |           |   |        |              |   |        |          |   |        |          |   |        |               |   |        |            |        |
|   | Gross profit                  |   | $      | 473,274   |   | $      | 141,061      |   | $      | 310,044  |   | $      | 192,120  |   | $      | —        |   | $      | 1,116,499  |   |
|        |                          |   |        |           |   |        |              |   |        |          |   |        |          |   |        |               |   |        |            |        |
||
|   | Depreciation and amortization |   |   | $ 9,046   |   | $      | 15,080       |   | $      | 57,307   |   | $      | 18,000   |   | $      | —        |   | $      | 99,433     |   |
|        |                          |   |        |           |   |        |              |   |        |          |   |        |          |   |        |               |   |        |            |        |
||

F-15

----

Back to Contents

**DIALOG GROUP, INC. AND SUBSIDIARIES  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  MARCH 31, 2003(Unaudited)**

|  **NOTE 9 –** | **SUBSEQUENT EVENTS** |
|-------------------------|-----------------------|
|                    |                  |

|   | ACQUISITIONS |
|--------|--------------|
|   |         |

|   | On April 18, 2003, the Company      acquired the remaining outstanding shares of Healthcare Horizons, Inc. (“HCH”),      a company that was partially owned by HCD, and the assets of Azimuth Target      Marketing, Inc. (“Azimuth”). HCH and Azimuth are owners and      distributors of demographic, disease, and healthcare information. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                 |

|   | The acquisition price was      5,307,392 shares of the Company’s common stock and 32,336 shares of      the Company’s preferred stock. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                               |

|   | SALES OF COMMON STOCK |
|--------|-----------------------|
|   |                  |

|   | Subsequent to March 31,      2003, the Company sold shares of its common stock in private placements      and raised approximately $350,000. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------|

F-16

----

Back to Contents

**Item 2. Management’s Discussion and Analysis or Plan of Operation.**

*General*

     Dialog Group, Inc. (formerly IMX Pharmaceuticals, Inc.) (“Company” or “DGI”) is a publicly traded corporation (OTCBB:DLGG) with headquarters in New York City and offices in Burbank, California; Sunrise, Florida; Houston, Texas and Cambridge, United Kingdom. 

     During this quarter, the Company completed its acquisition of Healthcare Dialog, Inc. (“HCD”) and IP2M, Inc. (“IP2M”). At the beginning of the second quarter, DGI completed the acquisition of Healthcare Horizons, Inc (“HCH”) and the assets of Azimuth Target Marketing, Inc. As a result, DGI can conceive and implement a comprehensive program for its health care and other clients and execute it with DGI’s specialized data bases and services and unique channel of communication. The new, united company combines depth of healthcare knowledge and broad strategic and creative services with the information and channels to quickly achieve their clients’ objectives. 

     Through its four operating divisions, DGI provides its clients a suite of products that are available as either a turnkey solution or as a component for their marketing plan.  DGI provides proprietary online and offline support for the healthcare, small business, telephone service bureau, financial services and direct marketing industries in the United States, and software in the United Kingdom.  Current and past healthcare clients include Novartis AG, Schering-Plough, GlaxoSmithKline, Johnson and Johnson, Boehringer-Ingelheim and Forest Laboratories.  Partners and strategic relationships include the United States Post Office, Clear Channel Communications, ABC Radio, McGraw-Hill Television, Acxiom, Claritas, National Association of Insurance and Financial Advisors, and Microsoft.

*Description of Healthcare Dialog, Inc. (HCD)*

     Healthcare Dialog,  Inc. is a leading provider of relationship marketing communications services  to the healthcare industry. Healthcare Dialog provides pharmaceutical companies  with a suite of integrated healthcare-specific campaign creation and management  capabilities — including strategic and creative services, interactive communication  services, patient/consumer target identification, and database enhancement and  management services. Combining these services into 5 intergrated programs, Healthcare  Dialog creates, launches, and continually upgrades a wide range of targeted  and highly customizable direct and interactive marketing campaigns. Clients  rely on Healthcare Dialog to help establish and build more valuable and longer  lasting relationships with physicians, patients, and consumers over a broad  array of permission-based contact points, including Internet websites, opt-in  e-mails, digital, on-demand print, direct mail and telemarketing. Healthcare  Dialog provides clients with comprehensive healthcare expertise, access to databases  of more than 100 million households, experience in scalable mass personalization  distribution technology, capabilities in syndicated marketing campaigns and  track record of successfully delivering professional results.

     Past and present Healthcare Dialog clientele includes global pharmaceutical leaders such as Novartis AG and Schering-Plough Corp. and healthcare product retailers such as 

 

----

Back to Contents

the Rite Aid drugstore chain. Healthcare Dialog  partners with numerous client-side brand teams and sales force management teams  and wide ranging experience with both mass market and niche client brands, including  such household names as Allegra® and Coppertone®. Because of it’s  in-house content development and media production capabilities, Healthcare Dialog  also provides its services to other industries, including Insurance, Hotel and  Hospitality Services, etc., including companies such as Assurant, Progressive  Insurance and Marriott Vacation Clubs.

*Description of IP2M*

     IP2M is a marketing company that has developed a unique marketing platform in healthcare that integrates radio, television, and the Internet to assist clients in targeting consumers. IP2M offers a national solution using the existing loyalty of the local radio and television stations to drive traffic to the client's content and advertising within the IP2M platform. 

     IP2M offers its clients 

     •  Specialized  advertising, marketing, and promotional programs to targeted consumers at competitive  rates

     •  Broad coverage through exclusive content partnerships with leading media companies (including Clear Channel Radio, Morris Communications, Nassau Media Partners, Hispanic Broadcasting, Granite Broadcasting Corp. and through Internet Broadcasting Systems (IBS) with Hearst Television, Post Newsweek Television, McGraw Hill Television, and Freedom Television.) 

     •  Proprietary content and distribution technology.

     Typically, IP2M will providehealthcare-related content to a media partners’ branded website and sell the entire “package” ofradio, television and online media to its healthcare customers.  Through its mediapartnerships, IP2M has immediate access to over 1,000 radio and television stations and an audiencein excess of 100,000,000 people.  Each of these radio and television stations is sendingconsumers to their websites. Thus, IP2M receives the benefit of its mediapartners’ existing website viewers.  IP2M’s unique technology allows it to distributedifferent content and advertising to each site based on market and demographics in ascalable manner.  Through its network of thousands of websites, radio and televisionstations, IP2M is able to reach and specifically target millions of consumers on a nation-wide basisand provide customization based on product and market segmentation.  As IP2M integratesall media, it has become a "one stop shop" offering clients cost-efficiencies that they cannotfind anywhere else in the $15 billion healthcare advertising market.

     IP2M tracks results, supplies objective performance measures, and is able to maximize its clients’ return on investment.  Clients have found IP2M’s health channel to be 5 times more effective than print media alone and 10 times more effective than the Internet without any broadcast support in directing viewers to the clients’ own website.  

     IP2M’s clients  for 2002 included Roche Pharmaceutical, Pfizer, GlaxoSmithKline, Depuy Johnson  & Johnson, Takeda Pharmaceuticals, Novartis, St Luke's Hospital and Quality  Medical 

----

Back to Contents

Management*.* Each client has extended  its campaign, engaged IP2M for additional brands, or placed IP2M on its 2003  media plan.

*Description of HCH and Azimuth*

     HCH and Azimuth are owners and distributors of demographic, disease, and healthcare information. Their permission-based data acquisition and management system offers their clients a superior level of market intelligence providing them with an unprecedented opportunity to market on a one-to-one basis.

*Description of TDMI and Findstar*

     TDMI is a US company that provides businesses the ability to target, create, print and execute a direct marketing campaign online from their desktop computer.  TDMI offers online subscribers access to consumer and business databases containing opt-in information on over 100 million US consumers that can be searched both geographically, demographically, income, and other personal profiles. In addition to its subscription products TDMI offers thousands of specialized consumer lists from the nation’s largest data compilers including Acxiom, InfoUSA, and Equifax.  To complement these data services TDMI has made available to its customers the ability to use its online mailing solutions to execute direct mail campaigns from the desktop. 

     TDMI Partners include: United States Postal Service (which has access to approximately 250 million households and 16 million businesses); Microsoft, a worldwide leader in software, services and Internet technologies for personal and business computing; Avery Dennison, a global leader in label & office products; Claritas, a leading provider of marketing information solutions, including marketing databases, industry-expertise, data access and analysis; U.S.A. Direct, a provider of direct mail production services including design, printing, inserts; National Association of Insurance and Financial Advisors (NAIFA) consisting of approximately 70,000 insurance and financial advisors worldwide; National Restaurant Association, the leading business association for the restaurant industry, comprised of 858,000 restaurants; Artisoft, a provider of computer telephony systems; and Interactive Intelligence, a developer of enterprise software for call centers. 

     TDMI’s direct mail, mailing services, and telemarketing products are specifically tailored to provide a cost-effective and powerful direct marketing solution for new customer acquisition and customer retention to the more than 20 million small and medium size businesses in the United States. Products and services are delivered from the Company’s web site and sales offices in the U.S.

     In April 2001,  TDMI completed the acquisition of DirectMailQuotes, LLC (“DMQ”)  to further expand into direct product sales to the letter shop channel. DMQ,  through its MailMogul professional brand, provides mailing list acquisition,  mailing supplies, National Change of Address (NCOA) for data cleansing and enhancement  and the industries premier lead generation service, Directmailquotes.com, for  the letter shop channel. As DMQ was also one of the five USPS partners, the  acquisition consolidated TDMI’s position as the Postal Services leading  affiliate.

----

Back to Contents

     Findstar plc is a sales led organization with telemarketing capabilities currently selling and distributing on an exclusive basis the Panda Software anti-virus software and products in the UK. 

     Panda UK holds the exclusive distribution license for the sale, marketing, and distribution of Panda Software products through out England, as well as in Scotland and Wales. The licence has a five-year term ending in January 2005 with an option for an additional two years. The license may be renewed for additional periods.

     Panda UK was established in 1999 to acquire the exclusive licence for Panda Software products. Panda Antivirus was established in 1999 as a reseller of Panda Software products under an arrangement with Panda UK. Findstar was incorporated in January 2001 as the holding company for Panda UK and Panda Antivirus.

 

----

Back to Contents

*Results of Operations*

 The Company’s consolidated operationsreflected in this quarter’s financial statements include all four subsidiaries, HCD, IP2M,Findstar, and TDMI. The operations conducted by HCH and Azimuth are not included as they wereacquired after the end of this quarter. The consolidated results of operations for the quarterended March 31, 2003 are being presented on a pro-forma basis because management believes thatthe results of operations for the three months ended March 31, 2003 and 2002 are more meaningfulthen the accrual results of operations that include only the month of March 2003 for the accountingacquiree.

*Healthcare Dialog*

For the three months ended March 31, 2003, HCD’s total consolidated revenues were approximately $670,926 as compared to approximately $1,110,790 for the same period ended March 31, 2002, a decrease of about $439,864 or about 40%. The reduction due to two major marketing programs the company sold to a pharmaceutical client being in the production stage simultaneously. These programs are ongoing in the first quarter of 2003, but are now in the management stage which produces less in revenue, but at higher margins. The company’s qd.online subsidiary in quarter one 2002 produced $156,325 in revenue compared to none during the same period of 2003.

HCD’s gross margin on sales for the first quarter of 2003 was almost 48%, up 5 point from the 2002 level of 43%.

HCD’s consolidated total    operating expenses were approximately $242,596 for the three months ended    March 31, 2003. This compares with approximately $1,438,057 for the same period    ended March 31, 2002. The decrease between periods resulted from management’s    decision in 2002 to write down $624,859, $300,000 and $95,067 in “loss    on goodwill impairment”, “loss on website impairment” and    “loss on fixed assets disposal” respectively.

For the three months ended March 31, 2003, HCD’s consolidated net gain from operations was approximately $91,129. This represents an improvement from net losses of about $(897,404) in the period ending March 31, 2002. While sales during this period were off, the write down of assets in 2002 combined with reduced marketing and administrative expenses combined to improve the bottom line by almost $1 million.

*IP2M*

For the three months ended March 31, 2003, IP2M’snet revenues were approximately $634,000 as compared to approximately $483,000 for the same period endedMarch 31, 2002, an increase of about $150,000 or over 30%.  The increase is due to customersrenewing their business or expanding their campaign combined with new sales resulting from increasedacceptance of IP2M’s programs.

----

Back to Contents

IP2M’s gross margin on sales for the first quarter of 2003 was almost 35%, as compared to 39% during this quarter in 2002. This is attributable to the relatively faster growth of IP2M’s media purchasing division, which has a smaller gross margin. 

IP2M’s consolidated total operating expenses wereapproximately $265,000 for the three months ended March 31, 2003. This compares with approximately$684,000 for the same period ended March 31, 2002.  Decreasing the core personnel and outsourcingadditional work to meet our clients’ demands and expanding business accomplished this. Additionally, with the merger, the need for investment banker fees has decreased as well as theprofessional fees associated with such activities.

For the three months ended March    31, 2003, IP2M’s consolidated net loss from operations was approximately    $(44,000). This represents an improvement from net losses of about $(492,000)    in the quarter ended March 31, 2002.  This is due to improvements in    optimizing our platform, increasing sales, and planning for a consolidation    with Healthcare dialogue.

*TDMI:*

TDMI’s consolidated revenues (including DMQ) were approximately $912,000 for the three months ended March 31, 2003 as compared to approximately $776,000 for the same period ended March 31, 2002, an increase of about $136,000 or more than 15%. The improved results, which occurred despite the dislocations inherent in the relocation of TDMI’s sales offices, are due to new customers as well as increased revenues from existing customers and the introduction and rollout of the batch version of TDMI’s DigitalData service. 

TDMI’s gross margin on sales for the first quarter of 2003 was almost 48%, approximately the same during this quarter in 2002.

TDMI’s consolidated total operating expenses were approximately $569,000 for the three months ended March 31, 2003. This compares with approximately $994,000 for the same period ended March 31, 2002. The decrease between periods, quarter to quarter at a time of greatly overall sales was accomplished by a reduction of executive positions, consolidation of staff, specifically technology and management staffing, and closure of offices.

For the three months ended March 31, 2003, TDMI’s consolidated net loss from operations was approximately $(140,000). This represents an improvement from net losses of about $(690,000) in the period ending March 31, 2002. Increased sales during this period combined with reduced salary, marketing, and administrative expenses continued to improve the bottom line. 

*Findstar:    *

For the three ended March 31, 2003, the Findstar’sconsolidated net sales were approximately $462,000 as compared to $222,000 for the same period endedMarch 31, 2002. This increase, representing a doubling of sales, is attributable to the aggressiveapproach of the management

----

Back to Contents

in opening up new salesroutes and the continuing expansion of channelsales through resellers anddistributors.

The Findstar’s gross profit margin for the three months ended March 31, 2003 was approximately 62%, almost the same as the 63.8% margin for the three months to March 31, 2002.

The Findstar’s total operating expenses were approximately $295,000 for the three months ended March 31, 2003 compared with $274,000 for same period in 2003 an increase of less than 8% while sales were increasing by 100%. This is because of a change in selling methods resulting in a reduction in commissions paid and a minimal increase in staff to service the increased turnover.

As a result of these actions, Findstar’s net (loss) from operations for the three months ended March 31, 2003 was reduced to approximately $(7,615) from $(132,914) for the three months to March 31, 2002.

*DGI Administrative Costs:*

DGI’s central administrative costs reflect the growth of the Company’s financing and management responsibilities. They were $398,000 during the first quarter of 2003. In addition, during 2003, over $48,000 in interest costs were incurred. Administrative costs for the same period during 2002 were $217,000.

*Liquidity & Capital Resources*

DGI had a consolidated working capital deficit of approximately $(3,940,000) on March 31, 2003 as compared to a deficit of approximately $(3,121,000) at December 31, 2002. The year end deficit did not include the December 31, 2002 working capital deficits of the two acquired companies, HCD and IP2M. Their working capital deficits as year end were approximately $(908,000) and $(1,379,000), respectively. During the quarter ended March 31 2003, the Company raised over $870,000 through the sale of its stock.

On March 31, 2003, HCD’s financial condition included a working capital deficit, of about $(798,000) as compared to a deficit of approximately $(908,000) at December 31, 2002.

At the end of March, IP2M had a working capital deficit of approximately $(258,000) as compared to a deficit of about $(1,379,000) on December 31, 2002.

On March 31, 2003, Findstar’s consolidated financial condition included a working capital deficit, excluding inter-company items, of about $(469,000) as compared to a deficit of approximately $(764,000) at December 31, 2002.

At the end of March, TDMI had a working capital deficit of approximately $(1,906,000) as compared to a deficit of about $(1,908,000) on December 31, 2002.

 

----

Back to Contents

*Inflation*

          Inflation rates in the United States have not had a significant impact on operating results for the periods presented.

*Cautionary Statement Regarding Forward-Looking Statements*

          Certain statements contained in this item andelsewhere in this report regarding matters that are not historical facts are forward-lookingstatements (as such term is defined in the Private Securities Litigation Reform Act of 1995).Because such forward-looking statements include risks and uncertainties, actual resultsmay differ materially from those expressed or implied by such forward-looking statements.All statements that address operating performance, events or developments that managementexpects or anticipates to incur in the future, including statements relating to sales andearnings growth or statements expressing general optimism about future operating results,are forward-looking statements.  The forward-looking statements are based onmanagement’s current views and assumptions regarding future events and operating performance.Many factors could cause actual results to differ materially from estimates contained inmanagement’s forward-looking statements.  The differences may be caused by a variety of factors, including but not limited to adverse economic conditions, competitive pressures, inadequate capital, unexpected costs, lower revenues and net incomes and forecasts, the possibility of fluctuation and volatility of the Company’s operating results and condition, inability to carry out marketing and sales plans, and loss of key executives,among other things.

**Item 5.  Election of Director**

On April 7, 2003, Stephen Dean resigned as a Directorand as the Chairman of the Board of Directors. He will not be replaced until the Annual Meeting onMay 28, 2003 at which time two independent directors will be elected. Mr. Dean’s resignation wasnot the result of any policy dispute.

 

----

Back to Contents

**Item 6. Exhibits and Reports on Form 8-K**

 

|      (a) | Exhibits |
|-----------------------------------|----------|

| Exhibit  Number | Description |
|---------------------------|-------------|
|                      |        |
| None                      |        |

 

|      (b) | Reports on Form 8-K |
|-----------------------------------|---------------------|

     A report on Form 8-K (items 2 and 5) reporting on the acquisition of Healthcare Dialog, Inc. and IP2M, Inc. was filed on March 14, 2003. 

     A report on  Form 8-K/A (items 2 and 7) containing the financial statements required  by the acquisition of Healthcare Dialog, Inc. and IP2M, Inc. (initially reported  on a Form 8-K filed on March 14, 2003) was filed on May 15, 2003.

 

----

Back  to Contents

**Part II. Other Informati****on**

Items 1, 3, 4, and 5 are omitted as they are eithernot applicable or have been included in Part I.

**Item 2    (c) Recent Sales of UnregisteredSecurities**

*Acquisition Transactions*

Upon consummation of the merger    between Healthcare Dialog and a wholly owned subsidiary of DGI, the Registrant    issued 30,075,219 shares of its Common and 183,235 shares of its Class B-1    Preferred to the present Healthcare Dialog shareholders. This is intended    to equal the number of outstanding before the transaction plus an estimated    number of shares that will be issued to complete DGI’s financing program.

The amended agreement called    for an additional $1,650,000 in financing. Cater Barnard has agreed to assure    that at least $650,000 will be raised and has agreed to post negotiable collateral    against its obligation to purchase up to 3,513,514 shares of DGI Common Stock.    On April 7, 2003 Cater Barnard was released from this obligation in exchange    for the cancellation of 3,500,000 of its shares of DGI Common Stock

Upon consummation of the merger    between IP2M and a wholly owned subsidiary of DGI, the Registrant issued 6,191,029    shares of its Common Stock and 44,312 shares of its Class B-1 Preferred to    the present IP2M shareholders. This is intended to approximate ten (10%) percent    of the number of shares of each class outstanding after these transactions.    After the closing, the IP2M shareholders may share approximately 700,000 additional    shares of Common Stock if certain financial goals are met. In addition, upon    the consummation of the HCH/Azimuth acquisition, an additional 589,710 shares    of Common Stock and 3,593 shares of Class B-1 Preferred Stock were issued    to the IP2M shareholders. All the shares issued for the IP2M owners are held    in escrow to secure the accuracy of their representations.

Both of these transactions    were accomplished by means of a statutory merger. Pursuant to Rule 145, the    securities issued were treated as restricted securities and were, therefore,    subjected to stop orders with the Company’s transfer agent and the certificates    include a legend indicating that they may not be transferred without registration    or the existence of an exemption. Therefore, this issuance was exempt from    registration under the provisions of Section 4(2) of the Securities Act.

At the end of the previous    fiscal year, as a condition precedent to the acquisitions, Cater Barnard agreed    to convert all of Dialog Group’s debt to it into Common Stock. In exchange    for cancellation of the principal and all interest due on the Company’s    notes dated June 27, 2002, August 1, 2002, and September 3, 2002 and a portion    of the year end open accounts aggregating $2,354,815 on the Company’s    records, DGI issued 9,274,280 shares of its Common Stock to Cater Barnard.

 

----

Back to Contents

This transaction is exempt    from the registration requirements of Section 5 of the Securities Act under    Section 4(2) of the Securities Act it did not involve a public distribution    of the Company’s securities.

*Regulation S Transactions*

On October 4, 2002 the Company    authorized Starz Investments Limited to sell up to 10,000,000 shares of its    Common Stock to investors located outside of the United States. The shares    were offered pursuant to an exemption from registration afforded by Regulation    S to the Securities Act of 1933. Shares sold pursuant to Regulation S are    deemed restricted and may not be sold to any U.S. Person (as that term is    defined in the Regulation) for a period of one (1) year from date of sale.    Last year 181,465 shares were issued to the nominee designated by Starz. The    purchase price for that lot was approximately $35,000. During the quarter,    an additional 3,470,450 shares were issued for a total consideration of $524,244.    Since the end of the quarter, 1,892,542 additional shares have been issued    for a total of $144,268.

On March 28, 2003 the Company    authorized Californian Securities S.A to sell up to 4,000,000 shares of its    Common Stock outside the United States, also pursuant to Regulation S, at    a price of $0.06 per share. Through the end of the quarter, no shares had    been issued. Since the end of the quarter, 3,550,752 shares have been sold    for a total of $213,337. 

*Bridge Loan Transaction*

In connection with a bridge    loan associated with the closing of the HCD and IP2M acquisition, DGI issued    1,100,000 shares of its Common Stock to Californian Securities, S.A. and granted    A Street Capital Corp. a warrant to purchase 350,000 of its shares at a price    of $0.05 per share.

*Related Purchases*

In connection with the acquisitions    described above, 13 individuals who are associated with the principal owners    of IP2M and who represented themselves as accredited investors purchased 2,333,333    shares of Common Stock for a total purchase price of $335,000. In addition,    Peter V. DeCrescenzo, Cindy Lanzendoen, Vincent DeCrescenzo, Sr., and Robin    Smith, all officers of the acquired companies, acquired 410,933, 233,333,    344,333, and 250,000 shares of Common Stock, respectively. The purchase price    for these shares was $410.93, $233.33, $344.33, and $250.00, respectively.    All of these transactions were exempt from registration under the Securities    Act pursuant to section 4(2) because they were private sales to individuals    who were not intending to redistribute the securities. All purchasers agreed    to the placement of a restrictive legend on their certificates and the filing    of a stop order with the Company’s transfer agent.

*Other issuances*

During January, 2003, one additional    investor purchased 20,000 shares of the Company’s Commons Stock at 0.50    per share. He represented himself in writing to be an accredited investor    

 

----

Back to Contents

who was purchasing these shares for his own investment and agreed to restrictions on resale placed with the Company’s transfer agent and the printing of a legend on his certificate. Because of these factors, this sale is exempt from registration under the Securities Act as not involving a public distribution under section 4(2).

On November 1, 2002 the Company entered into consulting agreements with Kuma Consulting, Inc. Under these agreements the Company agreed to pay Kuma $47,500 and to issue a total of 400,000 shares of its common stock for Kuma’s consulting services. $47,500 has been paid and 338,000 shares had been issued to Kuma or its designees. The remaining 62,000 shares were issued to Kuma during the second quarter. The shares issued to Kuma are exempt from registration under section 4(2) of the Securities Act as private transactions because they were acquired for investment and are subject to stop orders and restrictive legends.

On February 12th, 2003 the Company agreed to issue 200,000 shares to Knightsbridge Capital for consulting services. After the close of the quarter, 67,600 shares were issued to Knightsbridge’s designees. The issuance of these shares is exempt from registration under section 4(2) of the Securities Act as a private transaction because the shares were acquired for investment and the certificates bear restrictive legends and are subject to stop orders.

The proceeds of all shares issued for cash were used for general business purposes.

*Conversions*

During this quarter, a former TDMI shareholder converted 8,250 shares of Class B Preferred Stock into 330,000 shares of Common Stock. After the close of the quarter, Cater Barnard converted all its 142,810 shares of Class B Preferred Stock into 5,712,400 shares of Common Stock and another former TDMI shareholder converted 343 shares of Class B Preferred Stock into 13,720 shares of Common Stock. All the certificates issued upon conversion bore Securities Act legends and stop orders have been recorded with the transfer agent. These transactions were exempt from registration under Section 4(2) of the Securities Act of 1933 because they did not involve any distribution of DGI’s securities to the public.

5

----

Back to Contents

**SIGNATURES**

     In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has caused this quarterly report on Form 10-QSB to be signed in its behalf by the undersigned thereunto duly authorized on the 20th day of May 2003.

     

By: /s/ Peter    V. DeCrescenzoPeter V. DeCrescenzo,    Chairman, President & CEO

 
**CERTIFICATIONS**

Chief Executive Officer

I, Peter V. DeCrescenzo, certify that: 
1.I have reviewed this annual report on      Form 10-QSB of Dialog Group, Inc.; 2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;4.The registrant’s other certifying officers      and I are responsible for establishing and maintaining disclosure controls      and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)      for the registrant and have: a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b)evaluated the effectiveness of the registrant’s disclosurecontrols and procedures as of a date within 90days prior to the filing date of this annual report(the “Evaluation Date”); and c)presented in this annual      report our conclusions about the effectiveness of the disclosure controls      and procedures based on our evaluation as of the Evaluation Date; 5.The registrant’s other certifying officers      and I have disclosed, based on our most recent evaluation, to the registrant’s      auditors and the audit committee of registrant’s board of directors (or      persons performing the equivalent functions): 
      

Back to Contents

    
a)all significant deficiencies in      the design or operation of internal controls which could adversely affect      the registrant’s ability to record, process, summarize and report financial      data and have identified for the registrant’s auditors any material weaknesses      in internal controls; and b)any fraud, whether or not material,      that involves management or other employees who have a significant role      in the registrant’s internal controls; and 5.The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 
Date: May 20, 2003 

/s/ Peter V. DeCrescenzo    Peter V. DeCrescenzo, CEO
Chief Financial Officer

I, Vincent DeCrescenzo, Sr., certify that:  
1.I have reviewed this annual report on      Form 10-QSB of Dialog Group, Inc.; 2.Based on my knowledge, this      annual report does not contain any untrue statement of a material fact or      omit to state a material fact necessary to make the statements made, in      light of the circumstances under which such statements were made, not misleading      with respect to the period covered by this annual report; 3.Based on my knowledge, the financial      statements, and other financial information included in this annual report,      fairly present in all material respects the financial condition, results      of operations and cash flows of the registrant as of, and for, the periods      presented in this annual report; 4.The registrant’s other certifying      officers and I are responsible for establishing and maintaining disclosure      controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)      for the registrant and have: a)designed such disclosure controls      and procedures to ensure that material information relating to the registrant,      including its consolidated subsidiaries, is made known to us by others within      those entities, particularly during the period in which this annual report      is being prepared; b)evaluated the effectiveness      of the registrant’s disclosure controls and procedures as of a date within      90 days prior to the filing date of this annual report (the “Evaluation      Date”); and c)presented in this annual      report our conclusions about the effectiveness of the disclosure controls      and procedures based on our evaluation as of the Evaluation Date; 
 

Back to Contents

 
5.The registrant’s other      certifying officers and I have disclosed, based on our most recent evaluation,      to the registrant’s auditors and the audit committee of registrant’s      board of directors (or persons performing the equivalent functions);a)all significant deficiencies in the design      or operation of internal controls which could adversely affect the registrant’s      ability to record, process, summarize and report financial data and have      identified for the registrant’s auditors any material weaknesses in internal      controls; and b)any fraud, whether or not material, that      involves management or other employees who have a significant role in the      registrant’s internal controls; and 6.The registrant’s other certifying      officers and I have indicated in this annual report whether there were significant      changes in internal controls or in other factors that could significantly      affect internal controls subsequent to the date of our most recent evaluation,      including any corrective actions with regard to significant deficiencies      and material weaknesses. 
 

Date: May 20, 2003
Vincent DeCrescenzoVincent DeCrescenzo, Sr. CFO