UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

     [X]  ANNUAL  REPORT  PURSUANT  TO  SECTION  13 OR 15(d)  OF THE  SECURITIES
EXCHANGE ACT OF 1934

     For the fiscal year ended May 31, 1999

     [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
ACT OF 1934

                          Commission File No.: 0-25592

                             PERIPHONICS CORPORATION
             (Exact name of registrant as specified in its charter)

          Delaware                                       11-2699509
(State or other jurisdiction of                       (I.R.S. Employer
 incorporation or organization)                      Identification No.)

               4000 Veterans Memorial Highway, Bohemia, N.Y. 11716
               (Address of principal executive offices) (Zip Code)

     Registrant's telephone number, including area code: (516) 468-9000

     Securities registered pursuant to Section 12(b) of the Act: None.

     Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, par value $.01 per share
                                (Title of Class)

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for 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 [x] No [ ]

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]

     The aggregate market value of the 11,426,689 shares of Common Stock held by
non-affiliates of the Company as of August 27, 1999 is $315,662,284.

     The number of shares  outstanding  of each of the  registrant's  classes of
common equity as of August 27, 1999 is as follows:

   Class of Common Equity                             Number of Shares
   ----------------------                             ----------------

       Common Stock                                      13,250,090
      par value $.01

     The  information  required by Part III of this Form 10-K is incorporated by
reference from the Registrant's  definitive proxy statement to be filed with the
Commission on or before September 28, 1999.


<PAGE>


                                     PART I

     Item 1. BUSINESS

     General

     Periphonics  Corporation  (the  "Company") was originally  incorporated  in
Delaware in December  1969.  On January 31, 1983,  the Company was dissolved and
operated as a division of Gilbarco,  Inc., a  wholly-owned  subsidiary  of Exxon
Corporation. On July 26, 1984, the Company was reincorporated in Delaware and in
1986, 4000 VMH Corp., a company owned by persons who were then senior executives
of the Company,  purchased  all of the  outstanding  Common Stock of the Company
from Exxon  Corporation.  In March 1995, the Company completed an initial public
offering  ("IPO") of its Common  Stock.  Effective  upon the closing of the IPO,
4000 VMH Corp. was merged with and into the Company.

     The  Company  develops,  markets and  supports  products  and  professional
services for Computer  Telephony  Integration  ("CTI") and for Telecom  Enhanced
Network Services using  technologies such as interactive voice response ("IVR"),
advanced speech  processing with large  vocabulary  recognition  (LVR),  natural
language  processing  and  text-to-speech  conversion  as  well  as  interactive
processing  via web  browsers,  messaging  and fax. The  Company's  products and
services  automate  call  transaction  processing,  increase  call-center  agent
productivity, reduce operating cost and often can create new revenue streams for
its customers.

     The Company is a leading  supplier of  mid-to-large  scale call  processing
systems.  Systems have been  installed in more than 50 countries.  The Company's
staff of 901 employees (May 1999) serves customers from  Periphonics  offices in
Canada, Germany, Hong Kong, Korea, Mexico, Singapore, the United Kingdom and the
United States.

     The Market

     The Company's  products and services  represent an important element in the
telecommunications   and  data  processing   infrastructure   of  many  customer
service-oriented  organizations.   Typical  systems  enable  callers  to  use  a
touch-tone telephone, speech input or Internet access via a personal computer to
access  information in an  organization's  computer database and to receive that
information  verbally via high quality  digitally-stored  or synthesized speech,
via a browser or via facsimile.  In addition,  these systems enable customers to
execute  certain  transactions  on-line  without  the  intervention  of customer
service  personnel.  As a result,  these  systems  permit  businesses  and other
organizations  in both the public and  private  sectors  to better  utilize  the
capabilities  of their  telephone and computer  systems,  to provide new revenue
generating  services,  to increase the  productivity  of their customer  support
staff,  and to offer more  services to customers in less time and at lower cost.
These  systems  are used for a  variety  of  transaction  specific  applications
including accessing and managing customer accounts data, ordering of services or
products, providing enhanced telecommunications service such as pre-paid calling
services, checking the status of insurance claims or tax filings; obtaining loan
or credit card  balances  and/or rates;  registering  for college  courses;  and
retrieving descriptions of particular products or services.

     The Company's products  constitute a specialized segment of the call center
and  telecommunications  call and  transaction  processing  market,  which  also
includes  voice  messaging/voice  mail  systems,  automated  attendant  systems,
automated call distribution systems and outbound predictive dialing systems. The
Company believes that the increased use of these systems has been due to several
factors,  including  industry-wide  improvements  in  product  features,  public
acceptance of automated  systems to obtain  information or execute  transactions
and competitive  pressures on organizations to offer improved  customer services
at lower costs.

     International   sales  constitute  an  important  element  of  Periphonics'
business,  and Periphonics believes that international  markets will continue to
offer  attractive  growth  potential.  See  Note  11 of  Notes  to  Consolidated
Financial Statements for information  concerning the Company's industry segments
and operations by geographic area.

     Principal Markets, Customers and Applications

     Periphonics has manufactured and delivered systems to customers in the U.S.
and in more than 50 other countries.  Based on its installed  customer base, the
Company  believes  it is a leading  supplier of mid-size  and  large-scale  call
processing  systems.  In each of fiscal 1997,  1998 and 1999, no single customer
accounted for as much as 10% of the Company's  total  revenues.  In fiscal 1999,
the Company's top ten customers (one of which was a new customer)  accounted for
approximately  30% of total  revenues.  Five of  these  top ten  customers  were
telecommunications  companies,  three of them were financial services companies,
one  was a  transportation  company,  and  one was a  government  customer.  The
Company's system sales to customers outside the U.S.  contributed  approximately
41% of total system sales in fiscal 1999.

     Although the Company's vertical market focus includes additional industries
such as higher education,  healthcare services, electric and water utilities and
distribution companies, it expects that it will continue to derive a substantial
percentage of its system sales from  telecommunications  and financial  services
businesses. Accordingly,  unfavorable economic conditions or factors that relate
to these  industries,  particularly  any such  conditions  that might  result in
reductions in capital expenditures by the Company's target customers, could have
a material adverse affect on the Company's results of operations.

     Product Technology

     The Company's  products  generally consist of the following major elements:
(i) an  application  processor  platform  with  one  or  more  SPARC-based  RISC
processor(s) running UNIX or Intel Pentium processor(s) running Windows NT; (ii)
a computer  telephony  and/or a  telecommunications  signaling  server;  (iii) a
company  designed voice subsystem that contains one or more telephony  interface
boards,  voice storage,  and  optionally  one or more Digital Signal  Processing
(DSP) modules, (iv) company-designed transaction processing software modules and
(v) optional network monitoring and application development tools.

     The main  attributes of the products'  architecture  include its internally
distributed  client/server processing structure and function specific processing
via dedicated microprocessors. The major advantage of this approach is two fold:
first,  it allows for more  effective  system  implementation  by tailoring each
function as required;  second,  it allows for incorporation of new technology in
each  function as it becomes  available,  which is beneficial  since  technology
relating to  different  functions  improves at  different  rates over time.  The
result  of  the  architecture  is  a  system  that  can  be  tailored  for  many
configurations  and adapted to newer  technologies  in telephony and transaction
processing. By maintaining an unmodified operating system kernel and file system
(for both  UNIX or  Window  NT  environments),  the  Company's  system  software
delivers an open and scalable  client/server  implementation which can be easily
migrated to new UNIX or Win NT versions and provides  cross-platform support for
operating in a mixed operating system  configuration.  The architecture has been
designed  to  provide a systems  platform  that  supports  capacity  growth  and
technological evolution with modular upgrades.

     The  products,  like those of  several  other  competitors  (such as Lucent
Technologies,  formerly part of AT&T, IBM and InterVoice-Brite  Inc.,),  utilize
internally  developed telephony  interfaces and speech processing modules.  Many
other  competitors rely on telephony  interface and other modules purchased from
third  party  component  suppliers  (such as  Dialogic  Corporation  or  Natural
Microsystems,  Inc.).  The Company believes that designing its own telephone and
speech  processing  modules  gives it an advantage in evolving and upgrading its
systems in a logical and  compatible  manner,  thus  preserving  the  customer's
investment in the system over a longer period of time.

     Products

     The Company  develops and sells systems and software  application  products
for Computer Telephony Integration (CTI) and Telecom Enhanced Network services.

     The  Company's  products  include a family  of  scalable  call  transaction
processing  systems,  called the VPS Series,  which can be configured  for small
(8-24  ports),  mid-size  (25 to  120  ports),  or  large  scale  installations,
including a network of multiple  systems to handle thousands of telephone ports.
In addition,  the Company develops and sells software  application  products and
application    development   tools   that   provide   customers   with   various
administrative,  systems management and application development capabilities for
their systems.

     The Company's VPS Series products offer a wide range of telephone interface
and data connectivity  options. The telephone interface options supported by the
system include standard  digital  (including ISDN or DPNSS support for countries
including the United States,  Canada, UK, and Germany) and analog connections to
public  switched  networks  and to a variety of  PBX/ACD  systems  from  vendors
including Lucent Technologies, Northern Telecom, Rolm/Siemens, Rockwell, Aspect,
NEC,  Fujitsu,  Hitachi,  Ericsson and Alcatel.  The data  connectivity  options
supported by the system include interfaces for mainframe-based legacy systems as
well as LAN or  WAN-based  systems.  These  interfaces  can support a variety of
databases and Application Programming Interfaces ("APIs").

     All of the products share an open, flexible, modular architecture,  and the
same system software which allows application  software developed for any system
to operate  across the  Company's  entire  range of system  configurations.  The
Company provides  periodic software upgrades for its systems to deliver enhanced
features and maintenance updates. The current VPS Series system software release
version is 5.3 and has been available  since February  1998.  Periphonics'  call
processing systems are listed below:

     VPS/is.  This model provides enhanced  client/server  capabilities within a
UNIX Software  architecture  that features parallel  functional  processing with
flexible scalability. The VPS/is system is designed to handle applications, even
at peak loads,  and  accommodates  new feature and performance  upgrades through
incremental enhancements.

     VPS/mcp.  This model provides higher density systems that are optimized for
high volume  calling  services.  The system and  application  software for these
models are fully compatible with VPS/is systems.

     Depending  on  system  configuration,  optional  features  and  application
programming,  prices for the  Company's  systems can range from less than $1,000
per port to more than $4,000 per port, and  individual  systems can be purchased
for as little as $18,000 to more than $1 million.

     Periphonics  provides a number of optional  features to enhance its systems
capabilities.  Most of these optional  features are configured as  shared-system
resources and are utilized  only when needed,  thus  providing a  cost-effective
implementation  that is scalable to the  capacity  needs.  Each of the  optional
features  is  available  for  use on  each of the  VPS  Series  products,  where
appropriate. These features include:

     Basic Speech Recognition Devices.  This option offers recognition of spoken
numbers and control words by callers along with standard  touch-tone  input.  In
addition,  some versions of this option can recognize individual spoken words or
continuous numbers or multilingual speech.

     Large Vocabulary Recognition (LVR) Services. This option offers recognition
of hundreds to thousands of spoken words along with standard  touch-tone  input.
In  addition,   recognition  results  can  be  combined  with  natural  language
processing  to allow a very simple and  intuitive  caller  interface  for a wide
range of automated interactive services.

     Caller  Message  Recording.  This option allows the system to record spoken
information such as names and addresses from callers and link it with touch-tone
information  from the same caller and with data  retrieved  from a host computer
for later transcription by the system operator.

     Message Transfer Server.  This option offers centralized speech storage and
retrieval for a cluster of systems.  It includes a highly available and scalable
configuration  with  fault-tolerant  disk storage (using RAID) and redundant LAN
based message storage and playback.

     Facsimile  Interface.  This  option  allows  the  system to provide a paper
response,  such as a  confirmation  letter or account  statement,  via facsimile
transmission,  as part of an interactive  transaction.  The VPS Series digitally
stores graphical fax images, which are dynamically combined with caller-supplied
information  and host  database  information  and  transmitted  to the  caller's
facsimile machine under application control.

     Text-to-Speech.  This option allows VPS Series  products to convert textual
data obtained from a database into synthesized speech.

     PeriWeb. A software option that permits  Periphonics'  systems to support a
user's web browser in order to  accomplish  World Wide  Web-based  transactions;
instead of a voice  response,  the  interaction is provided via a dynamic visual
hypertext display.

     Periphonics also develops,  markets and supports optional system management
and application software development tools including:

     PeriView.   A  network   management   system  that   facilitates   control,
administration  and monitoring of multiple VPS/is systems from designated common
points in the network.

     PeriProducer.   An  icon-based   visual  software   development  tool  that
application  developers  can  utilize  to  construct  full-function   production
applications  for VPS Series systems without the need for API level  programming
experience or the use of conventional computer languages.

     PeriStudio. A tool that allows users to create, manage, and edit vocabulary
elements for VPS Series systems.  PeriStudio  employs a graphical user interface
with point-and-click  operation.  PeriStudio also supports file interchange with
Microsoft Windows, Apple and Sun Microsystems speech file formats.

     Periphonics also develops, markets and supports CTI Products including:

     CallSPONSOR(R)  A CTI server  product that  integrates  one or more PBX/ACD
systems,  IVR  systems  and  desktop  applications  to enable a more  productive
environment for call center agents.  CallSPONSOR(R)  provides call/data tracking
and  delivery  of  simultaneous  voice  and data  ("screen  pop")  to the  agent
desktops.

     CallView.  A CTI desktop  client  software  product  that  interfaces  with
CallSPONSOR(R)  and  enables  integration  with other  desktop  applications  to
provide seamless call transfers and software based control of PBX/ACD  telephone
functions.

     Periphonics  also  develops,  markets  and  supports  products  for Telecom
Enhanced Network Services including:

     Periphonics  Calling Card  Platform  ("PCCP").  This  application  software
product  includes  a  replicated   relational  database  and  a  wide  range  of
configuration  options that are activated  through easily set parameters.  It is
scalable over a wide range of sizes - from sizes suitable for small countries as
well as large countries.

     Common Channel Signaling Service ("CCSS").  This option allows a cluster of
systems to  interface to a switching  network via SS7 or C7 signaling  protocol.
These  protocols  are used by network  service  providers  to  connect  enhanced
service  equipment with more  flexibility.  The CCSS includes a highly available
and scalable configuration with redundant servers.



     Product Development

     Recent product development efforts have resulted in the introduction of new
speech recognition  features,  new CTI features to increase agent  productivity,
Periphonics Calling Card Platform and Common Channel Signaling  applications and
support  for  Microsoft  Windows  NT  operating  system  for VPS  systems  . The
Company's  present product  development  activities  include  integration of new
features  for  speech   recognition  and  other  voice   processing   functions;
development  of additional  graphical  application  development  and  management
tools;  interfaces to additional computer and telephone systems;  development of
programmable  switching  systems  with least cost  routing  options;  additional
application software products; and cost reducing design enhancements.

     The  Company's  research and  development  ("R&D")  management  is customer
oriented and regularly interacts with its major customers.  The Company monitors
applicable  industry  technology  developments,   including  proposals  for  new
standards  from  industry  groups (such as ECTF and TAPI) as part of its product
development efforts to provide state-of-the-art systems and related features.

     During fiscal 1997,  1998 and 1999, the Company spent $10.7 million,  $15.1
million and $18.3 million,  respectively,  on R&D. The Company  anticipates that
R&D expenditures will continue to represent a significant expense to the Company
on an ongoing basis.

     Customer Application Programming Services

     Implementing an IVR, LVR or CTI project usually  requires the creation of a
script,  recording and digitizing the  appropriate  words and phrases,  creating
desktop interface software for screen pop and writing  application  software for
the  system  that  links the  script and the  telephone  network  interface  and
provides  access  to  the  appropriate  database  information.  Periphonics  has
established    customer    project    implementation    groups   that   provides
customer-specific  programming  and  project  management  services  for  turnkey
projects  based  in the  United  States  (Bohemia,  New  York,  and  Pleasanton,
California), Mexico, the United Kingdom, Germany and Singapore.

     The Company licenses its application  software  development  tools to those
customers  who  prefer to carry out this  implementation  work  themselves,  and
provides software support, detailed documentation,  and a comprehensive hands-on
training program to such customers.

     Support Services and Maintenance

     The  Company  has  established  its own  call-center  facility  located  in
Bohemia,  New York, to provide  24-hour  direct  support to its  customers.  The
Company's  technical  support  specialists  can access a  customer's  system via
dial-up modem access and utilize  various remote  diagnostic and trace functions
which are built into the Company's systems.  In addition,  the technical support
staff also assists the Company's  field service staff in resolving  installation
and maintenance issues relating to the Company's  products.  Field service staff
are based at many locations around the United States, Canada, Mexico, the United
Kingdom,  Germany,  Singapore and Hong Kong.  Technical support  specialists are
based in the  United  States  (Bohemia,  New York and  Pleasanton,  California),
Mexico, the United Kingdom, Germany, Singapore and Hong Kong.

     In certain  instances,  technical support and maintenance for international
customers is provided by the Company's distributors.

     Periphonics'  products  and  services  are sold  with  limited  warranties,
generally  for 60 days.  After the  expiration  of the  warranty,  customers may
purchase a renewable 12-month maintenance contract.  Under these contracts,  the
Company agrees to provide upgrades of standard system  software,  on-site repair
or  replacement  of system  hardware  that does not perform in  accordance  with
specifications, and telephone consultation.

     Sales and Marketing

     The Company's sales,  marketing and pre-sales  technical  support personnel
are located in 18 cities in the United States and in Canada, the United Kingdom,
Germany, Hong Kong, Korea, Mexico and Singapore. The Company also has agreements
with VARs who purchase the Company's systems for integration into larger systems
as well as with marketing alliance partners, local distributors, and independent
sales representatives in a number of overseas markets.

     The  Company's  marketing  and sales  efforts  also  utilize  direct  mail,
seminars,  participation  in  numerous  trade  shows,  an  active  telemarketing
program, and trade publication advertising.

     The following  table  illustrates  the respective  amounts of the Company's
total revenue contributed by U.S. and international based customers:
<TABLE>
<CAPTION>

                                                          For Fiscal Year Ending May 31
                                                          -----------------------------
                                                             (dollars in thousands)
                                        1997                           1998                         1999
                              ---------------------          ----------------------        -----------------------
<S>                           <C>             <C>            <C>              <C>          <C>               <C>
U.S. customers                $  74,864       67.3%          $  78,964        67.3%        $  91,599         64.4%
International customers       $  36,380       32.7%          $  38,335        32.7%        $  50,658         35.6%
                               --------      ------           --------       ------         --------        ------
Total revenues                $ 111,244      100.0%          $ 117,229       100.0%        $ 142,257        100.0%
--------------                 ========      ======           =-======       ======         ========        ======
</TABLE>

     Manufacturing

     The  Company's  manufacturing   activities,   which  consist  primarily  of
production planning,  purchasing,  module assembly and testing,  system assembly
and quality assurance,  are conducted at its Bohemia, New York facility and, for
European, Middle Eastern and African sales, at its facility in Camberley, U.K.

     Risk Factors

     Variability of Quarterly Results; Limited Backlog

     The Company's  quarterly operating results have fluctuated and may continue
to  fluctuate as a result of a variety of factors,  including  the length of the
sales cycle,  the timing of orders from and  shipments to  customers,  delays in
development   and  customer   acceptance  of  software   applications,   product
development expenses,  new product introductions or announcements by the Company
or its competitors,  levels of market acceptance for new products and the hiring
and  training  of  additional  staff  as well as  general  economic  conditions.
Historically,  the  size  and  timing  of the  Company's  revenue  transactions,
including  international  revenues,  have varied  substantially  from quarter to
quarter with a substantial  percentage of orders and deliveries occurring in the
final weeks of a quarter.  The Company  expects such  variations may continue in
future periods.  The Company is typically able to deliver systems within 60 days
of receipt of the order and, therefore,  does not customarily have a significant
long-term  backlog.  However,  due to strong  order  bookings  during the fourth
quarter of fiscal 1999, the Company's backlog increased  significantly  entering
fiscal 2000. Because a significant portion of the Company's overhead is fixed in
the short-term,  the Company's  results of operations have been and may continue
to be  materially  adversely  affected  if  revenues  fall  below the  Company's
expectations.  Generally,  the  Company's  inventory  of  computer  hardware  is
determined  by the  Company's  forecasts  of sales  during  future  periods.  If
management's   forecasts   of  product   sales  and  product  mix  prove  to  be
substantially  inaccurate,  the  Company  may not have the  necessary  inventory
available  to  deliver  systems  in a timely  manner  which may have a  material
adverse effect on the Company's results of operations during such period.

     Risk of Rapid Technological Change and New Product Introduction

     The  market  for  the  Company's  products  and  professional  services  is
characterized  by rapid  continual  technological  change  and  improvements  in
hardware and software  technology and in the features and  capabilities of these
systems.  The Company's future success depends upon its ability to introduce new
products and to add new features and  enhancements to its existing  systems that
keep pace with  technological  and market  developments,  and that  address  the
increasingly  sophisticated  and demanding  needs of its customers.  In order to
remain  competitive,  the  Company  expects to  continue  to expend  significant
resources  for research  and  development.  There can be no  assurance  that the
Company will be  successful  in  developing  and  marketing,  on a timely basis,
product   modifications   or  enhancements  or  new  products  that  respond  to
technological  advances  by others,  or that such new or  enhanced  products  or
features will adequately and competitively address the needs of the marketplace.
In addition,  there can be no assurances that the Company will properly estimate
costs  under  fixed price  contracts  in  developing  application  software  and
otherwise tailoring its systems to customer-specific requests.

     The Company's  software  products,  like software programs  generally,  may
contain  undetected  errors  or bugs when  introduced,  or as new  versions  are
released. While the Company's current products have not experienced post-release
software errors that have had a significant  financial or operational  impact on
the Company,  there can be no assurance that such problems will not occur in the
future,  particularly as the Company's  systems  continue to become more complex
and  sophisticated.  Such  defective  software may result in loss of or delay in
market  acceptance  of the  Company's  products,  warranty  liability or product
recalls.


     Highly Competitive Market Environment

     The market for the Company's products and professional services in the U.S.
and  internationally  is highly  competitive  and competition may intensify from
existing suppliers and new market entrants.

     Certain of the Company's  competitors have substantially greater financial,
technical,  marketing  and sales  resources  than the  Company.  There can be no
assurance  that the  Company's  present  or  future  competitors  will not exert
increased competitive  pressures on the Company. In particular,  the Company may
in the future  experience  pricing pressures as the markets in which it competes
mature, as new technologies are introduced or for other reasons,  and such price
competition  could  adversely  affect the Company's  market share and results of
operations.

     In addition,  many  suppliers of voice mail systems and  telecommunications
systems have added IVR, CTI and Telecom enhanced service capabilities to some of
their  product  offerings  and offer such systems as a component or add-on of an
overall  sale  of a  voice  mail  system  or  a  telecommunications  switch.  As
internet-based  systems are enhanced for  transaction  processing  applications,
they may provide an  alternative  means of allowing  customers to interact  with
computer-based information, thereby reducing the need for IVR and other forms of
telephone  based  transactions  systems.  Although  the Company  believes it has
certain marketing,  technical and other advantages over many of its competitors,
maintaining such advantages will require continued  investment by the Company in
product innovation and development,  as well as in sales, marketing and customer
support.  There can be no assurance  that the Company will be successful in such
efforts.  If the Company is unable to maintain  such  advantages,  it may have a
material adverse effect on the Company's results of operations.

     Periphonics'   principal   competitors   in   the   U.S.   include   Aspect
Communications,    Inc.,    InterVoice-Brite    Inc.,   Edify,   Inc.,   Genesys
Telecommunications  Laboratories,  Inc., and Syntellect,  Inc., whose businesses
are substantially  focused on sales of interactive call processing systems,  and
large, diversified companies such as Lucent Technologies,  Geotel/CISCO, and IBM
for whom such systems are a small portion of their overall business.  In certain
specific  vertical  markets,   such  as  higher  education  or  employee-benefit
information systems,  the Company faces specialized  competition from one or two
smaller companies.

     In international markets,  Periphonics faces competition primarily from its
U.S. competitors and some locally based companies. Periphonics believes that the
principal   competitive   factors  are  supplier  and  product   reputation  and
reliability,  system features,  customer service, price and the effectiveness of
marketing and sales  efforts.  The Company  believes that it competes  favorably
with  respect  to  each of  these  factors  although  certain  of the  Company's
competitors  have  considerably  greater  financial,  technical  and  sales  and
marketing resources than the Company,

     International Sales

     System revenues to customers  outside the U.S.  accounted for approximately
37%, 38%, and 41% of the Company's system revenues in the fiscal years ended May
31, 1997, 1998 and 1999, respectively.  System revenues to customers outside the
United States, as a percentage of the Company's overall revenues,  may fluctuate
on a quarterly  basis,  and the  percentage  of such  revenues  in a  particular
quarter are not  indicative of the percentage of  international  revenues at the
end of the fiscal year.

     The  Company's  international  business  is  subject  to a number of risks,
including  compliance  with special  national  telecommunications  standards and
regulatory  requirements,  export regulations,  currency exchange rates, tariffs
and other  barriers,  difficulties in staffing and managing  foreign  subsidiary
operations, potentially adverse tax consequences, longer payment cycles, greater
difficulty  in  accounts  receivable   collections  and  specialized   inventory
requirements  applicable  to  particular  foreign  countries.  There  can  be no
assurance  that these  factors will not have an adverse  impact on the Company's
future  international  revenues  or  operating  results.  The  Company  does not
currently engage in international  currency hedging transactions.  To the extent
the  Company is unable to match  revenue  received  in foreign  currencies  with
expenses  paid in the  same  currency,  it is  exposed  to  possible  losses  on
international currency transactions.


     Dependence on Suppliers

     Most of the  components  and  parts  used  in the  Company's  products  are
available  from more than one supplier.  Certain  components  that are purchased
from one source can  generally  be  replaced  with  parts  available  from other
sources, after some re-engineering or design changes.

     In certain instances,  despite the availability of multiple supply sources,
the Company elects to procure  certain  components or parts from a single source
to  maintain  quality  control or to  develop a  strategic  relationship  with a
supplier.  Although the Company has entered into long-term supply contracts with
certain of its vendors,  the Company has no assurance that  components and parts
will be available as required,  or that prices of such components and parts will
not increase.  In certain  instances the  manufacture of components  used by the
Company in its products has been  discontinued  by suppliers and the Company has
been required to seek functionally similar substitutes or substantially increase
its  inventories of these  discontinued  components for its future use. To date,
when  components  have become  unavailable,  the Company has been able to obtain
either  sufficient  inventory  for  its own use or  other  functionally  similar
substitutes  and  to  accomplish  any  necessary  redesign  without  a  material
interruption  in  production,  although there can be no assurance that this will
remain the case in the future.  If the Company  were to  experience  significant
delays,  interruptions,  discontinuations or reductions in the supply of certain
components  and  parts  purchased  from  suppliers,  the  Company's  results  of
operations could be materially adversely affected.

     Limited Protection of Proprietary Technology

     The Company's  success is heavily  dependent upon its proprietary  software
technology.  The Company has no patents; it relies on a combination of copyright
and trade secret laws, employee and third-party  non-disclosure  agreements, and
license agreements to protect its proprietary software technology.  Nonetheless,
there can be no  assurance  that the steps  taken by the  Company to protect its
proprietary rights will be adequate to prevent  misappropriation  of such rights
or that other parties will not independently develop functionally  equivalent or
superior   software   technology.   The  Company  from  time  to  time  receives
correspondence  alleging  that its products  may infringe  patents held by other
parties  (refer to Item 3., Legal  Proceedings).  The Company  believes that its
products and other proprietary  rights do not infringe the proprietary rights of
other parties.  There can be no assurance,  however, that other parties will not
assert  infringement claims against the Company or that any such claims will not
require the Company to enter into license  arrangements  or result in protracted
and costly litigation,  regardless of the merits of such claims.  There also can
be no  assurance  that the Company  will be able to obtain  licenses to disputed
technology  or  that  such  licenses,  if  available,   would  be  available  on
commercially reasonable terms. The Company is aware that certain segments of the
voice processing industry,  particularly voice mail/voice messaging systems, are
affected by active and costly litigation.  There can be no assurance that as the
Company's interactive transaction processing systems evolve and provide features
which  extend their uses and  capabilities,  possibly to include  certain  voice
mail/voice messaging and/or additional  internet-related  features,  the Company
will not become involved in, or otherwise be affected by,  litigation  which may
or may not be meritorious.



<PAGE>


     Dependence on Key Personnel

     The Company's  success  during the  foreseeable  future will depend largely
upon the continued services of its executive officers,  each of whom has entered
into an  employment  agreement  with  the  Company.  Each  employment  agreement
contains  non-competition  covenants that extend for a period of up to two years
following  termination  of  employment.  The Company  does not have key-man life
insurance on its executive officers.  The Company's success also depends in part
on its ability to attract and retain qualified  managerial,  technical and sales
and marketing personnel in a timely fashion. The Company's results of operations
could be  materially  adversely  affected if the Company were unable to attract,
hire, assimilate and train these personnel in a timely manner.

     Anti-Takeover Provisions and Rights Plan

     Certain "anti-takeover" provisions of the Delaware General Corporation Law,
among other matters,  restrict the ability of certain  stockholders  to effect a
merger or business  combination or obtain  control of the Company.  In addition,
the Company's By-Laws provide for a classified Board of Directors with staggered
three-year  terms.  The Company has an authorized  class of 1,000,000  shares of
Preferred Stock, which may be issued by the Board of Directors on such terms and
with such rights,  preferences  and  designations  as the Board of Directors may
determine, without further stockholder action. Issuance of such Preferred Stock,
depending upon the rights,  preferences and designations  thereof,  may have the
effect of delaying,  deferring or preventing a change in control of the Company.
On July 15, 1996,  the Board of Directors of the Company  approved a Rights Plan
designed  to  protect  stockholders  in the event of an  unsolicited  attempt to
acquire  the  Company,  including a gradual  accumulation  of shares in the open
market,  a partial or two-tier tender offer that does not treat all stockholders
equally, and other takeover tactics which the Board of Directors believes may be
abusive and not in the best interests of stockholders. The implementation of the
Rights  Plan  increases  the  Board  of  Directors'  power  in the  event  of an
unsolicited  proposal  by  giving  the  Board  of  Directors  more  time and the
opportunity to evaluate an offer and exercise its good faith  business  judgment
to take  appropriate  steps to protect  and  advance  stockholder  interests  by
negotiating   with  the  bidder,   auctioning   the  Company,   implementing   a
recapitalization  or  restructuring  designed as an alternative to the offer, or
taking other action.

     Potential Volatility of Stock Price

     The market price of the shares of the Company's  Common Stock may be highly
volatile.  Factors such as  fluctuations  in the Company's  quarterly  operating
results,  announcements of technological  innovations or new commercial products
by the Company or its  competitors,  and  conditions in the markets in which the
Company and its customers  compete may have a  significant  effect on the market
price and marketability of the Common Stock.  Prices for many technology company
stocks,  including  the Common Stock,  may  fluctuate  widely as a result of the
factors  cited  above  or for  reasons  that  are not  directly  related  to the
operating performance of such companies, including general fluctuations in stock
prices and  changes in  earnings  estimates  or  recommendations  by  securities
analysts.  Refer to item 5 "Market  for Common  Equity and  Related  Stockholder
Matters", on page 13.


     Employees

     As of May 31,  1999,  Periphonics  had  901  employees.  Approximately  148
employees  are  located  outside the U.S.  None of the  Company's  employees  is
covered by collective  bargaining  agreements.  The Company considers  relations
with its employees in general to be excellent.


     Year 2000

    The Year  2000  (Y2K)  issue  exists  because  many  computer  systems  and
applications have used two-digit date fields to designate a year. As the century
date change occurs,  date sensitive systems (if they have not been appropriately
modified) may not be able to recognize the year 2000 or may do so incorrectly as
the year 1900.  This inability to recognize or properly  interpret the year 2000
may result in the incorrect processing of financial and operational information.
This issue is  discussed  below in regard to both the  Company's  products,  the
Company's  administrative/internal systems and the possible impact on the timing
of sales of the Company's systems.

     The Company is in the final stages of a program to inspect,  upgrade  where
necessary,  and  verify its  internal  information  systems  to address  any Y2K
compliance issues.  This program includes a focus on internal policies,  methods
and tools, as well as coordination with customers and suppliers. The Company has
completed substantially all upgrades to its mission critical information systems
to achieve  Y2K  compliance.  The  Company is  continuing  and will  continue to
further test its internal  information systems for Y2K compliance and expects to
continue  to conduct  such  tests  through  October  1999.  Because  most of the
expenses  associated with the Company's Y2K compliance upgrade program have been
made and will be incurred in the ordinary  course of business,  the Company does
not anticipate  that such expenses will have a material  impact on the Company's
financial condition.

     As a result of the program to upgrade mission critical internal information
systems to Y2K compliance, the Company believes that said systems are already or
will be Y2K compliant  prior to the year 2000.  The Company cannot be completely
certain that it has identified  and will resolve all Y2K compliance  issues with
its internal  information systems in a timely manner, in which case the expenses
associated with such efforts could become significant,  or that such issues will
not have a material adverse effect on the Company's business,  operating results
and financial condition.

     The  Company  has made a thorough  analysis  and test of its  products  and
believes  that its  current  products  are Year 2000  compliant.  The  Company's
assessment of its current  products is partially  dependent upon the accuracy of
representations  concerning Year 2000 compliance made by suppliers,  such as Sun
and Microsoft, among others. Many of the Company's customers are, however, using
earlier  versions  of  the  Company's  products,  which  may  not be  Year  2000
compliant.  The Company has  implemented  programs  to  proactively  notify such
customers  of the risks  associated  with using these  products  and to actively
encourage  such  customers  to upgrade to the  Company's  current  products  and
perform applications audits.

     The  Company's  products  are  generally  integrated  within  a  customer's
enterprise  system,  which usually  involves  products and systems  developed by
other  vendors.  A customer may  mistakenly  believe  that Year 2000  compliance
problems with its enterprise system are attributable to products provided by the
Company. The Company may, in the future, be subject to claims based on Year 2000
compliance  issues related to a customer's  enterprise  system or other products
provided by third parties,  custom  modifications to the Company's products made
by third  parties,  or issues  arising  from the  integration  of the  Company's
products  with  other  products.  The  Company  has  not  been  involved  in any
proceeding  involving  its  products or services in  connections  with Year 2000
compliance,  however,  there is no  assurance  that the Company will not, in the
future,  be  required to defend its  products  or  services in such  proceedings
against claims of Year 2000 compliance  issues,  and any resulting  liability of
the Company for damages  could have a material  adverse  effect on the Company's
business, operating results and financial condition.

     Through discussions with current and potential  customers,  the Company has
determined  that Y2K  readiness  issues for these  companies  may  influence the
timing  of  purchase  decisions  and  deployment  schedules.  Concerns  over Y2K
readiness  may cause some  customers  to  accelerate  the  purchase of new,  Y2K
compliant  systems or upgrades to existing  systems to ensure that they have Y2K
compliant  systems in place prior to year 2000.  Conversely,  some customers may
delay purchase  decisions  and/or  deployment  schedules due to the diversion of
resources  (people  and/or  budget) to Y2K  upgrade  projects  unrelated  to the
Company's products.  Similarly,  some customers may delay purchase decisions and
or deployment  schedules due to the need to stabilize their internal  operations
and reduce the risk of  introducing  new systems  immediately  prior to the year
2000  conversion  occurring  during  the  typical  peak  business  period of the
calendar fourth  quarter.  If Y2K concerns result in a net reduction in customer
orders and/or delays in deployments,  the Company's revenues for the period of a
few months  before and after January 1, 2000 could be reduced  thereby  having a
material adverse effect on the Company's financial results.


     Disclosures Regarding Forward Looking Statements

     This report on Form 10-K includes  "forward-looking  statements" within the
meaning of Section 27A of the  Securities  Act of 1933, as amended,  and Section
21E of the Securities  Exchange Act of 1934, as amended.  All  statements  other
than statements of historical  facts included in this Form 10-K  including,  but
not  limited  to,  statements   contained  in  this  "Business,"   "Management's
Discussion  and  Analysis"  and "Notes to  Consolidated  Financial  Statements,"
located elsewhere herein regarding the Company's  financial  position,  business
strategy,  plans  and  objectives  of  management  of  the  Company  for  future
operations,  and industry conditions, are forward-looking  statements.  Although
the Company  believes that the  expectations  reflected in such  forward-looking
statements are reasonable,  it can give no assurance that such expectations will
prove correct.

     Item 2. Properties

The Company's  corporate  headquarters and manufacturing  facility is located in
Bohemia,  New York. This facility consists of a Company-owned 65,000 square-foot
building located on a 3.9 acre site and 108,000 square feet leased in two nearby
buildings.  The  headquarters  contain the  Company's  manufacturing,  sales and
marketing,  and administration  departments,  as well as a  professional-quality
recording studio.  The Company also owns  approximately 3.4 acres of vacant land
for future development  adjacent to its headquarters.  The Company believes that
suitable  additional space will be available in the area as needed in the future
on commercially reasonable terms.

     In addition,  the Company has leased offices for professional  services and
technical  support  staff in  Pleasanton,  CA (11,000  sq.  ft) and in  Laurence
Harbor, NJ (8,700 sq. ft).

     The  Company  has  leased  regional  sales  and/or  maintenance  offices in
Atlanta,  Charlotte,   Chicago,  Dallas,  Denver,  Grand  Rapids,  Los  Angeles,
Minneapolis,  Ontario,  Phoenix,  Providence,  San  Francisco,  Seattle,  Tampa,
Toronto and Washington D.C.

     The  Company's  European  headquarters  in  Camberley,  U.K. is housed in a
21,000  square-foot leased space in three adjacent  buildings.  The Company also
leases a  maintenance  support  office of  approximately  1,500 square feet near
Manchester,  England.  Sales,  professional services and technical support staff
operates  out of leased  offices  in  Germany,  Hong  Kong,  Korea,  Mexico  and
Singapore.


     Item 3. Legal Proceedings

     On July 7, 1998  Lucent  Technologies,  Inc.  filled a patent  infringement
action in the United States District Court for the District of Delaware alleging
that Periphonics  infringed some nine patents of Lucent  Technologies,  Inc. The
Company  believes the claims  contained in the lawsuit are without merit and, in
an answer  filed on  September  24,  1998,  denied the  substantive  elements of
Lucent's  lawsuit  and set forth  affirmative  defenses  and made  counterclaims
against  Lucent.  There can be no  assurance  as to the  outcome  of this  legal
action.  The Company is involved  in certain  other legal  matters in the normal
course of business. The Company's management does not believe that resolution of
these  other  matters  will have a  material  adverse  effect  on the  Company's
consolidated financial statements.


     Item 4. Submission of Matters to a Vote of Security Holders

     None


<PAGE>



                                     PART II

     Item 5. Market for Common Equity and Related Stockholder Matters

     (a) The  Company's  Common  Stock,  par value $.01 per share  (the  "Common
Stock"),  trades on the NASDAQ Stock Market under the symbol PERI. The following
table sets forth for each period  indicated the high and low closing  prices for
the Common Stock for the Company's  fiscal quarters during fiscal 1997, 1998 and
1999, as reported by NASDAQ:

<TABLE>
<CAPTION>

                                                                                 Sales Price
                                                                                 -----------
                       Fiscal 1997                                    High                         Low
                       -----------                                    ----                         ---
<S>                                                                     <C>                         <C>
Quarter Ended August 31, 1996                                           20 1/8                      12 7/8
Quarter Ended November 30, 1996                                         21                          17 1/4
Quarter Ended February 28, 1997                                         34 3/4                      11 1/4
Quarter Ended May 31, 1997                                              19 1/2                      11


                       Fiscal 1998
                       -----------
Quarter Ended August 31, 1997                                           22 1/4                      12 3/4
Quarter Ended November 30, 1997                                         14 1/2                       8 5/8
Quarter Ended February 28, 1998                                         12 3/4                       7 13/16
Quarter Ended May 31, 1998                                              14 1/8                       9 5/16


                       Fiscal 1999
                       -----------
Quarter Ended August 31, 1998                                          12 9/16                       5 1/8
Quarter Ended November 30, 1998                                        11 1/2                        4 7/8
Quarter Ended February 28, 1999                                        14 7/16                      10 1/8
Quarter Ended May 31, 1999                                             11 7/16                       6 5/16
</TABLE>


     The foregoing  over-the-counter  market quotations  represent  inter-dealer
prices,  without  retail  mark-up,  markdown or commission and may not represent
actual transactions.

     Prices for the shares have been  adjusted to reflect a two for one split of
the  Company's  Common Stock  effected as a stock  dividend  paid on October 31,
1996.

     (b) The number of  recordholders  of the Common Stock as of August 27, 1999
is  approximately  506.  The  Company  believes  that there are a  substantially
greater number of beneficial owners of shares of its Common Stock.

     (c) The Company  currently intends to retain all future earnings for use in
the operations of its business and,  therefore,  does not anticipate paying cash
dividends  on its  Common  Stock  in the  foreseeable  future.  The  payment  of
dividends  is  within  the  discretion  of the  Board of  Directors  and will be
dependent,  among other things, upon earnings,  capital requirements,  financing
agreement covenants, the financial condition of the Company and applicable law.

     Item 6. Selected Financial Data

     The following  selected  consolidated  financial data as of and for each of
the five fiscal years in the period ended May 31, 1999 has been derived from the
consolidated  financial  statements  of the Company,  which have been audited by
Deloitte & Touche LLP, independent auditors, whose report as of May 31, 1999 and
1998,  and for each of the  three  years in the  period  ended  May 31,  1999 is
included  elsewhere herein. The selected  consolidated  financial data should be
read in  conjunction  with and is  qualified  in its  entirety by the  Company's
consolidated financial statements, related notes and other financial information
included elsewhere herein.
<PAGE>

<TABLE>
<CAPTION>

                                                                    Fiscal Year Ended May 31,
                                                       -----------------------------------------------------
                                                            (in thousands except share and per share data)

                                                           1999       1998      1997       1996    1995 (1)
                                                           ----       ----      ----       ----    ----
<S>                                                    <C>         <C>        <C>        <C>        <C>
System revenues..................................      $107,364    $87,618    $86,144    $71,800    $51,747
Maintenance revenues.............................        34,893     29,681     25,100     17,003     13,030
                                                         ------     ------     ------     ------     ------
Total revenues...................................       142,257    117,299    111,244     88,803     64,777
                                                        -------    -------    -------     ------     ------
Cost of system revenues..........................        51,646     43,437     38,858     32,798     23,686
Cost of maintenance revenues.....................        18,212     16,988     14,924     10,956      8,387
                                                         ------     ------     ------     ------     ------
Total cost of revenues...........................        69,858     60,425     53,782     43,754     32,073
                                                         ------     ------     ------     ------     ------
Gross profit.....................................        72,399     56,874     57,462     45,049     32,704
                                                         ------     ------     ------     ------     ------
Selling, general and  administrative.............        41,650     36,111     27,737     22,587     18,749
Research and development.........................        18,303     15,068     10,698      7,933      5,831
Non-recurring, noncash compensation charge (1)...        -          -           -          -          1,250
                                                         ------     ------     ------     ------     ------
  Total operating expenses.......................        59,953     51,179     38,435     30,520     25,830
                                                         ------     ------     ------     ------     ------
Earnings from operations.........................        12,446      5,695     19,027     14,529      6,874
                                                         ------     ------     ------     ------     ------
Interest expense.................................        -          -          -          -            (992)
Interest and other income........................         1,182      1,272      1,242        885        170
Foreign exchange gain (loss).....................          (332)      (547)       (49)      (345)        88
                                                         ------     ------     ------     ------     ------
  Total other expenses...........................           850        725      1,193        540       (734)
                                                         ------     ------     ------     ------     ------
Earnings before provision for income taxes .....         13,296      6,420     20,220     15,069      6,140
Provision for income taxes.......................         4,388      1,990      7,583      5,854      2,956
                                                         ------     ------     ------     ------     ------
Net earnings.....................................       $ 8,908     $4,430    $12,637    $ 9,215    $ 3,184
                                                         ======      =====     ======     ======     ======
Per share data: (2)
 Basic earnings..................................       $  0.66    $  0.32  $    0.93   $   0.71   $   0.39
                                                         ======     ======   ========    ========   =======
 Diluted earnings................................       $  0.65    $  0.32  $    0.90   $   0.70   $   0.33
                                                         ======     ======   ========    =======    =======
Weighted average shares:
 Basic...........................................        13,443     13,765     13,641     12,890      8,270
                                                         ======     ======     ======     ======      =====
 Diluted.........................................        13,690     13,947     14,020     13,258      9,778
                                                         ======     ======     ======     ======      =====
Balance Sheet Data:
Working capital...................................       $60,781   $58,083    $55,200    $48,476    $27,550
Total assets......................................       113,047   100,607     93,583     75,103     47,722
Redeemable cumulative convertible preferred stock
  issued by subsidiary ...........................       -         -           -          -           1,215
Common stockholders' equity.......................       81,210     77,860     72,208     58,781     33,576


<FN>
(1)      On  February  1,  1995,  the  Company  accelerated  the  vesting of all
         outstanding  stock options under its 1986  Incentive  Stock Option Plan
         (the "1986 Plan"), thereby allowing all such options to be fully vested
         at such date.  The Company also  relinquished  its right to  repurchase
         shares  obtained by  employees  under the 1986 Plan.  As a result,  the
         Company  recorded  a  non-recurring,  noncash  compensation  charge  of
         approximately $1.25 million, or $0.13 per share.

(2)      In the third quarter of the fiscal 1998, the Company adopted  Statement
         of Financial  Accounting  Standards No. 128 "Earnings Per Share". Basic
         income per share is  determined  using the weighted  average  number of
         shares of common stock outstanding  during each period.  Diluted income
         per share further assumes the issuance of common shares for all diluted
         securities including stock options.
</FN>
</TABLE>
<PAGE>
     Item 7. Management's Discussion and Analysis

     Overview

     Disclosures Regarding Forward Looking Statements

     This report on Form 10-K includes  "forward-looking  statements" within the
meaning of Section 27A of the  Securities  Act of 1933, as amended,  and Section
21E of the Securities  Exchange Act of 1934, as amended.  All  statements  other
than statements of historical  facts included in this Form 10-K  including,  but
not  limited to,  statements  contained  in this  "Management's  Discussion  and
Analysis," "Business" and "Notes to Consolidated  Financial Statements," located
elsewhere herein regarding the Company's financial position,  business strategy,
plans and  objectives of management  of the Company for future  operations,  and
industry  conditions,  are  forward-looking  statements.  Although  the  Company
believes that the expectations reflected in such forward-looking  statements are
reasonable, it can give no assurance that such expectations will prove correct.


<PAGE>


     Management's Discussion and Analysis

     Overview

     The  Company  develops,  markets and  supports  products  and  professional
services for Computer  Telephony  Integration  ("CTI") and for Telecom  Enhanced
Network Services using  technologies such as interactive voice response ("IVR"),
advanced speech  processing with Large  Vocabulary  Recognition  (LVR),  natural
language  processing  and  text-to-speech  conversion  as  well  as  interactive
processing  via web  browsers,  messaging  and fax. The  Company's  products and
services  automate  call  transaction  processing,  increase  call-center  agent
productivity,  reduce  operating  costs and often can create new revenue streams
for its customers.

     Historically,  the size and timing of the  Company's  revenue  transactions
have varied  substantially from quarter to quarter, and the Company expects such
variations  may continue into the future.  Because a significant  portion of the
Company's  overhead  is  fixed  in the  short-term,  the  Company's  results  of
operations  may be  adversely  affected  if  revenues  fall below the  Company's
expectations.  The Company is typically  able to deliver a system within 60 days
of receipt of the order and, therefore,  does not customarily have a significant
long-term  backlog.  However,  due to strong  order  bookings  during the fourth
quarter of fiscal 1999, the company's backlog increased  significantly  entering
fiscal 2000.

     Results of Operations

     The following table sets forth,  for the periods  indicated,  certain items
from  the  Company's  consolidated  statements  of  earnings,   expressed  as  a
percentage of total revenues,  and the percentage change in the dollar amount of
such items compared to the prior comparable period.
<TABLE>
<CAPTION>

                                               Percentage of Total Revenues           Percentage Increase (Decrease)
                                                 Fiscal Year Ended May 31,            Fiscal 1998         Fiscal 1999
                                                                                      Over Fiscal         Over Fiscal
                                           1997            1998           1999           1997                 1998
<S>                                        <C>             <C>            <C>            <C>                  <C>
Statement of Earnings Data:
System revenues                            77.4%           74.7%          75.5%          1.7%                22.5%
Maintenance revenues                       22.6            25.3           24.5          18.3                 17.6

                                          -----           -----          -----
   Total revenues                         100.0           100.0          100.0           5.4                 21.3
                                          -----           -----          -----
Cost of system revenues                    34.9            37.0           36.3           11.8                18.9
Cost of maintenance revenues               13.4            14.5           12.8           13.8                 7.2
                                          -----           -----          -----
  Total cost of revenues                   48.3            51.5           49.1           12.4                15.6
                                          -----           -----          -----
Gross profit                               51.7            48.5           50.9           (1.0)               27.3
Selling, general and administrative        24.9            30.8           29.3           30.0                15.3
Research and development                    9.6            12.8           12.9           40.8                21.5
                                          -----           -----          -----
Earnings from operations                   17.1             4.9            8.7          (70.1)              118.5
Other income (expense), net                 1.1             0.6            0.6          (39.2)               17.2
                                          -----           -----          -----
Earnings before provisions for
   income taxes                            18.2             5.5            9.3          (68.2)              107.1
Provision for income taxes                  6.8             1.7            3.1          (73.8)              120.5
                                          -----           -----          -----
 Net earnings                              11.4%            3.8%           6.3%        (64.9%)              101.1%
                                          -----           -----          -----
</TABLE>

     Fiscal Years Ended May 31, 1999 and 1998

     Total  Revenues.  Total  revenues  for the fiscal  year ended May 31,  1999
increased  21.3% to $142.3 million  compared with $117.3 million in fiscal 1998.
System  revenues for the year increased  22.5% to $107.4  million  compared with
$87.6  million in fiscal 1998  primarily  due to an  increase in volume.  System
revenues  of  the  company's  newest  products  and  features,  including  Large
Vocabulary Speech Recognition (LVR),  CallSPONSOR(R) call center CTI application
suite,  Periphonics  Calling  Card  Platform  (PCCP)  and the  PeriWeb  internet
interface  feature,  continued  to grow  substantially  during  1999.  These new
products  generated  $24.4 million or 22.7% of total system  revenues during the
year,  compared with $13.3  million or 15.2% of total system  revenues in fiscal
1998.  Maintenance revenues increased 17.6% to $34.9 million compared with $29.7
million in the prior fiscal year primarily due to the growth in the  maintenance
base.

     Domestic  system  revenues for fiscal 1999 increased 17.4% to $63.8 million
compared with $54.4 million in fiscal 1998.  Domestic  maintenance  revenues for
fiscal 1999  increased  12.8% to $27.8  million  compared  with $24.6 million in
fiscal 1998.  International  revenues for fiscal 1999  increased  32.1% to $50.7
million  or 35.6% of total  revenues  compared  with  $38.3  million or 32.7% in
fiscal 1998.  Revenues from Europe,  the Middle East and Africa increased 109.5%
to $32.9 million offsetting lower revenues from the Pacific Rim and the Americas
(excluding  U.S.) which declined 36.7% to $7.9 million and 3.0% to $9.8 million,
respectively, compared with the prior year.

     Gross Profit.  The Company's gross profit for the year was $72.4 million or
50.9% of total revenues,  compared with $56.9 million or 48.5% of total revenues
in the prior year. Gross profit on system revenues increased by $11.5 million to
$55.7  million or 51.9% of system  revenues in fiscal 1999 from $44.2 million or
50.4% of system revenues in the prior year. Gross profit on maintenance revenues
increased  by  $4.0  million  to  $16.7  million  in  fiscal  1999 or  47.8%  of
maintenance  revenue from $12.7 million or 42.8% of  maintenance  revenue in the
prior fiscal year.

     Selling,  General  and  Administrative   Expenses.   Selling,  general  and
administrative  ("SG&A") expenses for fiscal 1999 were $41.7 million or 29.3% of
total  revenues  compared with $36.1  million or 30.8% of total  revenues in the
prior year.  The increased  expense  level can be attributed  primarily to costs
associated with supporting an increased level of sales volume and an increase in
legal costs due to the Lucent patent litigation.

     Research  and  Development  Expenses.   Research  and  development  ("R&D")
expenses,  primarily  for new products and  features,  increased  21.5% to $18.3
million or 12.9% of total revenues compared with $15.1 million or 12.8% of total
revenues  in fiscal  1998.  The  increase in the dollar  amount of research  and
development  expense  reflects  the  continued  expansion of the  Company's  R&D
efforts to broaden the scope of its product offerings in order to address growth
opportunities  in the  market  place.  The R&D staff  increased  to 179 from 171
between  May 31,  1999 and 1998.  R&D  expenses  are  charged to  operations  as
incurred,  and no software development costs have been capitalized.  The Company
expects such expenditures to remain at approximately  12%-13% of total revenues,
though they may fluctuate from quarter to quarter.

     Other  Income  (Expense).  Other  income was $0.9  million  for fiscal 1999
compared  with $0.7 million in fiscal  1998.  Interest and other income was $1.2
million for fiscal  1999  compared  with $1.3  million in fiscal  1998.  Foreign
exchange loss decreased to a loss of $0.3 million in fiscal 1999 compared with a
loss of $0.5 million in the prior year.

     Income  Taxes.   Variations  in  the  customary  relationship  between  the
provision for income taxes and the statutory income tax rate during the past two
years  primarily  result from the  utilization of research and  development  tax
credits, state and local income taxes and exempt income of the Company's foreign
sales corporation. The Company's effective income tax rates were 33.0% and 31.0%
for fiscal 1999 and fiscal 1998, respectively.

     Foreign  Operations.  The Company's  European  subsidiary  had an operating
profit of $9.2 million  during fiscal 1999 compared with an operating  profit of
$0.6 million during fiscal 1998 (see Note 11 of notes to consolidated  financial
statements).  Transfers  from the  Company's  North  American  operations to its
European  subsidiary are accounted for at cost,  plus a reasonable  profit.  The
cost of revenues for the Company's European  subsidiary  includes  approximately
$2.2  million  and $0.8  million  of  intercompany  gross  profit  earned by the
Company's North American  operations on system sales by the European  subsidiary
to third parties during both fiscal 1999 and fiscal 1998, respectively.


     Fiscal Years Ended May 31, 1998 and 1997

     Total  Revenues.  Total  revenues  for the fiscal  year ended May 31,  1998
increased  5.4% to $117.3  million  compared with $111.2 million in fiscal 1997.
System revenues for the year increased 1.7% to $87.6 million compared with $86.1
million in fiscal 1997.  System  revenues of the company's  newest  products and
features,  including Large Vocabulary Speech Recognition  (LVR),  CallSPONSOR(R)
call center CTI application suite,  Periphonics Calling Card Platform (PCCP) and
the PeriWeb internet interface feature,  continued to grow substantially  during
1998. These new products generated $13.3 million or 15% of total system revenues
during the year,  compared  with $5.9 million or 7% of total system  revenues in
fiscal 1997. Maintenance revenues increased 18.3% to $29.7 million compared with
$25.1  million  in the prior  fiscal  year  primarily  due to the  growth in the
maintenance base.

     Domestic system revenues for fiscal 1998 remained  relatively  unchanged at
$54.4 million compared with $54.6 million in fiscal 1997.  Domestic  maintenance
revenues for fiscal 1998  increased  21.0% to $24.6 million  compared with $20.3
million in fiscal 1997. International revenues for fiscal 1998 increased 5.4% to
$38.3 million or 32.7% of total revenues compared with $36.4 million or 32.7% in
fiscal 1997. Revenues from Europe, the Middle East and Africa increased 38.4% to
$15.7  million  despite  lower  revenues  from the Pacific Rim and the  Americas
(excluding  U.S.)  which  declined  8.4% to  $12.5  million  and  11.4% to $10.1
million, respectively, compared with the prior year.

     Gross Profit.  The Company's gross profit for the year was $56.9 million or
48.5% of total revenues,  compared with $57.5 million or 51.7% of total revenues
in the prior year. Gross profit on system revenues  decreased by $3.1 million to
$44.2  million or 50.4% of system  revenues in fiscal 1998 from $47.3 million or
54.9% of systems  revenues in the prior  year.  The lower  gross  profit  margin
primarily  reflects product mix,  including a higher  percentage of lower margin
custom  programming  revenue  and  the  continued   investments  in  application
development  resources to pursue  growth  opportunities  in all  markets.  Gross
profit on  maintenance  revenues  increased by $2.5 million to $12.7  million in
fiscal  1998 or 42.8% of  maintenance  revenue  from  $10.2  million or 40.5% of
maintenance revenue in the prior fiscal year.

     Selling,  General  and  Administrative   Expenses.   Selling,  general  and
administrative  ("SG&A") expenses for fiscal 1998 were $36.1 million or 30.8% of
total  revenues  compared with $27. 7 million or 24.9% of total  revenues in the
prior year.  The  increased  expense  level can be  attributed  primarily to the
company's  expansion of its sales and marketing efforts designed to increase its
market penetration and market share on a global basis.

     Research  and  Development  Expenses.   Research  and  development  ("R&D")
expenses,  primarily  for new products and  features,  increased  40.8% to $15.1
million or 12.8% of total revenues  compared with $10.7 million or 9.6% of total
revenues  in fiscal  1997.  The  increase in the dollar  amount of research  and
development  expense  reflects  the  continued  expansion of the  Company's  R&D
efforts to broaden the scope of its product offerings in order to address growth
opportunities  in the  market  place.  The R&D staff  increased  to 171 from 128
between  May 31,  1998 and 1997.  R&D  expenses  are  charged to  operations  as
incurred,  and no software development costs have been capitalized.  The Company
expects such  expenditures  to remain at  approximately  13% of total  revenues,
though it may fluctuate from quarter to quarter.

     Other  Income  (Expense).  Other  income was $0.7  million  for fiscal 1998
compared  with $1.2 million in fiscal  1997.  Interest and other income was $1.3
million for fiscal  1998  compared  with $1.2  million in fiscal  1997.  Foreign
exchange gain (loss) increased to a loss of $0.5 million in fiscal 1998 compared
with no gain or (loss) in the prior year.

     Income  Taxes.   Variations  in  the  customary  relationship  between  the
provision for income taxes and the statutory income tax rate during the past two
years  primarily  result from the  utilization of research and  development  tax
credits, state and local income taxes and exempt income of the Company's foreign
sales corporation. The Company's effective income tax rates were 31.0% and 37.5%
for fiscal 1998 and fiscal 1997, respectively.

     Foreign  Operations.  The Company's  European  subsidiary  had an operating
profit of $0.6 million  during fiscal 1998 compared with an operating  profit of
$0.4 million during fiscal 1997 (see Note 11 of notes to consolidated  financial
statements).  Transfers  from the  Company's  North  American  operations to its
European  subsidiary are accounted for at cost,  plus a reasonable  profit.  The
cost of revenues for the Company's European  subsidiary  includes  approximately
$0.8  million  and $0.6  million  of  intercompany  gross  profit  earned by the
Company's North American  operations on system sales by the European  subsidiary
to third parties during both fiscal 1998 and fiscal 1997, respectively.

     Liquidity and Capital Resources

     The Company's  principal cash  requirement to date has been to fund working
capital and  capital  expenditures  in order to support the growth of  revenues.
Historically,  the Company has primarily financed this requirement  through cash
flow  from  operations  and bank  borrowings  and two  Public  Offerings  of the
Company's  Common Stock in 1995, which resulted in an aggregate of $41.1 million
of net proceeds to the Company. Cash flow from operations was $7.3 million, $7.2
million  and $13.8  million in fiscal  1997,  1998 and 1999,  respectively.  The
Company's  investing  activities  included  purchases  of  capital  expenditures
totaling $10.3 million,  $7.7 million and $6.5 million during fiscal 1997,  1998
and 1999,  respectively.  Financing  activities  during fiscal 1999 included the
repurchase  of  856,800  shares  of the  Company's  common  stock  at a cost  of
approximately $6.5 million,  pursuant to authorization by its Board of Directors
during fiscal 1999 to repurchase up to 1,300,000 shares.

     At May 31,  1999,  the  Company  had  working  capital  of  $60.8  million,
including   $27.6  million  of  cash  and  cash   equivalents,   and  short-term
investments.  The Company  expects its working  capital needs to increase  along
with planned future revenue growth.

     The  Company  believes  that its  existing  sources of working  capital and
borrowings  available  under its revolving  line of credit will be sufficient to
fund its operations and capital expenditures for at least 12 months. The Company
does not currently have any material commitments for capital  expenditures.  The
Company has a $15.0 million  unsecured line of credit with a bank, which expires
on November 30,  1999.  As of May 31, 1999 the Company had no  borrowings  under
this line of credit. Any borrowings under this line of credit will bear interest
at the prime rate or LIBOR plus 125 basis points.

     At May 31, 1999,  current  assets  increased by $11.8 million while current
liabilities  increased  by $9.1  million as  compared to May 31,  1998.  Current
assets increased principally as a result of increases in accounts receivable and
inventories  due to  higher  operating  levels.  Current  liabilities  increased
primarily due to increased accrued expenses and other current liabilities.

     The  average  days'  sales  outstanding  (calculated  by  dividing  the net
accounts  receivable at the balance sheet date) were approximately 111 days, 107
days and 94 days at May 31, 1997, 1998 and 1999, respectively.


     Year 2000 Compliance

     The Year  2000  (Y2K)  issue  exists  because  many  computer  systems  and
applications have used two-digit date fields to designate a year. As the century
date change occurs,  date sensitive systems (if they have not been appropriately
modified) may not be able to recognize the year 2000 or may do so incorrectly as
the year 1900.  This inability to recognize or properly  interpret the year 2000
may result in the incorrect processing of financial and operational information.
This issue is  discussed  below in regard to both the  Company's  products,  the
Company's  administrative/internal systems and the possible impact on the timing
of sales of the Company's systems.

     The Company is in the final stages of a program to inspect,  upgrade  where
necessary,  and  verify its  internal  information  systems  to address  any Y2K
compliance issues.  This program includes a focus on internal policies,  methods
and tools, as well as coordination with customers and suppliers. The Company has
completed substantially all upgrades to its mission critical information systems
to achieve  Y2K  compliance.  The  Company is  continuing  and will  continue to
further test its internal  information systems for Y2K compliance and expects to
continue  to conduct  such  tests  through  October  1999.  Because  most of the
expenses  associated with the Company's Y2K compliance upgrade program have been
made and will be incurred in the ordinary  course of business,  the Company does
not anticipate  that such expenses will have a material  impact on the Company's
financial condition.

     As a result of the program to upgrade mission critical internal information
systems to Y2K compliance, the Company believes that said systems are already or
will be Y2K compliant  prior to the year 2000.  The Company cannot be completely
certain that it has identified  and will resolve all Y2K compliance  issues with
its internal  information systems in a timely manner, in which case the expenses
associated with such efforts could become significant,  or that such issues will
not have a material adverse effect on the Company's business,  operating results
and financial condition.

     The  Company  has made a thorough  analysis  and test of its  products  and
believes  that its  current  products  are Year 2000  compliant.  The  Company's
assessment of its current  products is partially  dependent upon the accuracy of
representations  concerning Year 2000 compliance made by suppliers,  such as Sun
and Microsoft, among others. Many of the Company's customers are, however, using
earlier  versions  of  the  Company's  products,  which  may  not be  Year  2000
compliant.  The Company has  implemented  programs  to  proactively  notify such
customers  of the risks  associated  with using these  products  and to actively
encourage  such  customers  to upgrade to the  Company's  current  products  and
perform applications audits.

     The  Company's  products  are  generally  integrated  within  a  customer's
enterprise  system,  which usually  involves  products and systems  developed by
other  vendors.  A customer may  mistakenly  believe  that Year 2000  compliance
problems with its enterprise system are attributable to products provided by the
Company. The Company may, in the future, be subject to claims based on Year 2000
compliance  issues related to a customer's  enterprise  system or other products
provided by third parties,  custom  modifications to the Company's products made
by third  parties,  or issues  arising  from the  integration  of the  Company's
products  with  other  products.  The  Company  has  not  been  involved  in any
proceeding  involving  its  products or services in  connections  with Year 2000
compliance,  however,  there is no  assurance  that the Company will not, in the
future,  be  required to defend its  products  or  services in such  proceedings
against claims of Year 2000 compliance  issues,  and any resulting  liability of
the Company for damages  could have a material  adverse  effect on the Company's
business, operating results and financial condition.

     Through discussions with current and potential  customers,  the Company has
determined  that Y2K  readiness  issues for these  companies  may  influence the
timing  of  purchase  decisions  and  deployment  schedules.  Concerns  over Y2K
readiness  may cause some  customers  to  accelerate  the  purchase of new,  Y2K
compliant  systems or upgrades to existing  systems to ensure that they have Y2K
compliant  systems in place prior to year 2000.  Conversely,  some customers may
delay purchase  decisions  and/or  deployment  schedules due to the diversion of
resources  (people  and/or  budget) to Y2K  upgrade  projects  unrelated  to the
Company's products.  Similarly,  some customers may delay purchase decisions and
or deployment  schedules due to the need to stabilize their internal  operations
and reduce the risk of  introducing  new systems  immediately  prior to the year
2000  conversion  occurring  during  the  typical  peak  business  period of the
calendar fourth  quarter.  If Y2K concerns result in a net reduction in customer
orders and/or delays in deployments,  the Company's revenues for the period of a
few months  before and after January 1, 2000 could be reduced  thereby  having a
material adverse effect on the Company's financial results.


     Recent Financial Accounting Standards Board Statements

     In fiscal 1999,  the Company  adopted  Statement  of  Financial  Accounting
Standards No. 130, "Reporting  Comprehensive  Income" ("SFAS 130") and Statement
of Financial  Accounting  Standards No. 131,  "Disclosures  About Segments of an
Enterprise  and Related  Information"  ("SFAS  131").  Each of these  statements
required  additional   disclosure  in  the  Company's   consolidated   financial
statements.  SFAS 130 had no effect on the Company's financial statements as the
Company  had no  components  of  comprehensive  income.  SFAS 131 did not have a
material effect on the Company's  consolidated  financial position or results of
operations.

     Effective  June 1, 1998 and December 15,  1998,  respectively,  the Company
adopted Statement of Position 97-2 "Software Revenue  Recognition"  ("SOP 97-2")
and  Statement of Position  98-9  "Modification  of SOP 97-2,  Software  Revenue
Recognition,   With  Respect  to  Certain   Transactions"   ("SOP  98-9").   The
implementation  of these  pronouncements  did not have a material  effect on the
Company's financial statements.  However, detailed implementation guidelines for
this standard  have not yet been issued.  Once issued,  such  detailed  guidance
could lead to unanticipated  changes in the Company's current revenue accounting
practices and material  adverse changes in the Company's  reported  revenues and
earnings.  In the event  implementation  guidance is  contrary to the  Company's
revenue accounting practices,  the Company believes it may be possible to change
its  current  business  practices  to comply  with this  guidance  and avoid any
material adverse effect on reported revenues and earnings. However, there can be
no assurance this will be the case.

     Recent  pronouncements of the Financial Accounting Standards Board ("FASB")
which  are not  required  to be  adopted  at this  date  include,  Statement  of
Financial  Accounting  Standards No. 133 "Accounting for Derivative  Instruments
and Hedging  Activities"  ("SFAS 133") and  Statement  of  Financial  Accounting
Standards  No.  137,   "Accounting   for  Derivative   Instruments  and  Hedging
Activities--Deferral  of the  Effective  Date  of  FASB  Statement  No.  133--an
amendment of FASB  Statement  No. 133" ("SFAS  137").  SFAS 137 is effective for
fiscal years beginning after June 15, 2000. Based upon current data the adoption
of this pronouncement is not expected to have a material impact on the Company's
consolidated financial statements.


     Inflation

     In the opinion of  management,  inflation has not had a material  effect on
the operations of the Company.


     Forward Looking Statements

     The  litigation  Reform  Act of 1995  provides a safe  harbor  for  certain
forward-looking   statements.   The  Annual  Report   contains   forward-looking
statements that reflect the Company's current news with respect to future events
and financial performance,  including, without limitation, statements containing
the words "believes,"  "anticipates," "expects," "intends," "should," "seeks to"
and similar words. These forward-looking statements are subject to certain risks
and  uncertainties  which could cause actual results to differ  materially  from
historical  results or those  anticipated.  Readers are  cautioned  not to place
undue reliance on these  forward-looking  statements.  The Company undertakes no
obligation to publicly update or revise any forward-looking statements,  whether
as a result of new information, future events or otherwise.


     Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     The Company's  current Credit Agreement  provides for borrowings which bear
interest  at the prime rate or LIBOR plus 125 basis  points.  The Company had no
borrowings outstanding under their line of credit at the end of fiscal 1999. The
Company currently believes that the effect, if any, of changes in interest rates
on the Company's financial position, results of operations, and cash flows would
not be material.

     The Company transacts business in various foreign currencies.  Accordingly,
the Company is subject to exposure  from adverse  movements in foreign  currency
exchange rates. The Company does not currently engage in international  currency
hedging transactions to mitigate its foreign currency exposure.  Included in the
foreign  exchange gain (loss) are unrealized  foreign  exchange gains and losses
resulting from the currency remeasurement of the financial statements (primarily
inventories,   accounts   receivable  and  intercompany  debt)  of  the  foreign
subsidiaries  of the  Company  into U.S.  dollars.  To the extent the Company is
unable to match revenue received in foreign currencies with expenses paid in the
same  currency,  it is  exposed to  possible  losses on  international  currency
transactions.  A 5% hypothetical  strengthening  or weakening of the U.S. dollar
against those foreign  currencies  could have had  approximately  a $0.7 million
impact on the net pre-tax operations of the Company.



     Item 8. Consolidated Financial Statements

     The information is contained on Pages F-1 through F-17 hereof.


     Item 9. Changes in and  Disagreements  with  Accountants  on Accounting and
Financial Disclosure

     None.


<PAGE>


                                     PART IV

     Item 14. Exhibits, Financial Statement Schedule and reports on Form 8-K
<TABLE>
<CAPTION>

(a)(1)   CONSOLIDATED FINANCIAL STATEMENTS                                                          PAGE(S)

<S>                                                                                                 <C>
Index to Consolidated Financial Statements..........................................................F-1

Independent Auditors' Report........................................................................F-2


Consolidated Balance Sheets as of May 31, 1999 and 1998.............................................F-3


Consolidated Statements of Earnings for the years ended
  May 31, 1999, 1998 and 1997.......................................................................F-4


Consolidated Statements of Stockholders' Equity for the years
  ended May 31, 1999, 1998 and 1997.................................................................F-5


Consolidated Statements of Cash Flows for the years ended
  May 31, 1999, 1998 and 1997.......................................................................F-6


Notes to Consolidated Financial Statements....................................................F-7 - F-17


(a)(2)  FINANCIAL STATEMENT SCHEDULE

Schedule II - Valuation and Qualifying Accounts.....................................................S-1
</TABLE>

     (a)(3) EXHIBITS

     23   Consent of Deloitte & Touche LLP
     27   Financial Data Schedule


     (b)(1) REPORTS ON FORM 8-K

     The Registrant did not file any reports on Form 8-K during the last quarter
of its fiscal year ended May 31, 1999.



<PAGE>


                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                        PERIPHONICS CORPORATION
                                              Registrant

                                     By:/s/ Peter J. Cohen
                                        ------------------
                                        Peter J. Cohen, President

Dated:  August 30, 1999

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>

             Signature                                        Title                                  Date

<S>                                    <C>                                                      <C>
 /s/ Peter J. Cohen                    Chairman of the Board, President and Chief               August 30, 1999
-------------------                    Executive Officer (Principal Operating Officer)
Peter J. Cohen

/s/ Richard A. Daniels                 Senior Vice President, Treasurer and Director            August 30, 1999
----------------------
Richard A. Daniels

/s/ Kevin J. O'Brien                   Chief Financial Officer, Vice President-Finance          August 30, 1999
--------------------                   and Administration (Principal Accounting and
Kevin J. O'Brien                       Financial Officer), Secretary and Director

 /s/ Jayandra Patel                    Sr. Vice President-Product Development, Assistant        August 30, 1998
-------------------                    Treasurer and Director
Jayandra Patel

/s/ Edward H. Blum                     Director                                                 August 30, 1999
------------------
Edward H. Blum

/s/ Peter Breitstone                   Director                                                 August 30, 1999
--------------------
Peter Breitstone
</TABLE>
<PAGE>

PERIPHONICS CORPORATION AND SUBSIDIARIES

INDEX TO consolidated FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                                                         Page
                                                                                                         ----

<S>                                                                                                        <C>
Independent Auditors' Report                                                                               F-2

Consolidated Balance Sheets as of May 31, 1999 and 1998                                                    F-3

Consolidated Statements of Earnings for the years
  ended May 31, 1999, 1998 and 1997                                                                        F-4

Consolidated Statements of Stockholders' Equity for
  the years ended May 31, 1999, 1998 and 1997                                                              F-5

Consolidated Statements of Cash Flows for the years
  ended May 31, 1999, 1998 and 1997                                                                        F-6

Notes to Consolidated Financial Statements                                                             F-7 - F-18


Schedule II - Valuation and Qualifying Accounts                                                            S-1

</TABLE>

<PAGE>


INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders of
Periphonics Corporation
Bohemia, New York

     We have audited the accompanying consolidated balance sheets of Periphonics
Corporation  and  subsidiaries  as of May 31,  l999 and  1998,  and the  related
consolidated  statements  of earnings,  stockholders'  equity and cash flows for
each of the three  years in the  period  ended May 31,  1999.  Our  audits  also
included the financial  statement  schedule  listed in the Index at item 14(a)2.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these  consolidated  financial  statements  and  financial  statement
schedule based on our audits.

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

     In our opinion,  such consolidated  financial statements present fairly, in
all material  respects,  the financial  position of Periphonics  Corporation and
subsidiaries  as of May 31, 1999 and 1998,  and the results of their  operations
and their  cash flows for each of the three  years in the  period  ended May 31,
1999 in conformity with generally accepted accounting  principles.  Also, in our
opinion,  such financial statement schedule,  when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.



DELOITTE & TOUCHE LLP


Jericho, New York
July 8, 1999
                                      F-2
<PAGE>


PERIPHONICS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>


                                                                                              May 31,
ASSETS                                                                               1999                 1998
------                                                                            ----------           ----------
CURRENT ASSETS:
<S>                                                                                <C>                 <C>
   Cash and cash equivalents                                                       $26,564             $14,810
   Short-term investments                                                            1,000              11,033
   Accounts receivable, less allowance for doubtful accounts
     of $1,783 and $1,266, respectively (Note 3)                                    45,187              37,721
   Inventories (Note 4)                                                             16,078              14,066
   Deferred income taxes (Note 8)                                                    1,852               1,687
   Prepaid expenses and other current assets                                         1,833               1,367
                                                                                  --------             -------
                  Total Current Assets                                              92,514              80,684

PROPERTY, PLANT AND EQUIPMENT, net
   (Note 5)                                                                         20,072              19,498

OTHER ASSETS                                                                           461                 425
                                                                                  --------             -------

                                                                                  $113,047            $100,607
                                                                                  ========            ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
   Accounts payable                                                               $  8,250           $   8,273
   Accrued expenses and other current liabilities (Note 6)                          23,483              14,328
                                                                                  --------           ---------
                  Total Current Liabilities                                         31,733              22,601

DEFERRED INCOME TAXES (Note 8)                                                         104                 146
                                                                                  --------           ---------
                                                                                    31,837              22,747
                                                                                  --------           ---------

COMMITMENTS AND CONTINGENCIES
   (Notes 7 and 10)

STOCKHOLDERS' EQUITY (Notes 9 and 10):
   Preferred stock, par value $.01 per share, 1,000,000
     shares authorized, none issued                                                     -                   -
   Common stock, par value $.0l per share, 30,000,000
     shares authorized, 13,999,190 issued and 13,142,390
     shares outstanding as of  May 31, 1999; 13,843,305
     shares issued and outstanding as of May 31, 1998                                  140                 138
   Additional paid-in capital                                                       44,718              43,780
   Retained earnings                                                                42,850              33,942
                                                                                  --------           ---------
                                                                                    87,708              77,860
   Treasury stock at cost, 856,800 shares                                           (6,498)                 -
                                                                                  --------           ---------
                                                                                    81,210              77,860
                                                                                  --------           ---------

                                                                                  $113,047           $ 100,607
                                                                                  ========           =========

<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
                                      F-3
<PAGE>


PERIPHONICS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands)

<TABLE>
<CAPTION>

                                                                                   Year Ended May 31,
                                                                           1999          l998          1997
                                                                        -------------------------------------
<S>                                                                     <C>           <C>           <C>
System revenues                                                         $ 107,364     $  87,618     $  86,144
Maintenance revenues                                                       34,893        29,681        25,100
                                                                        ---------     ---------     ---------
     Total revenues                                                       142,257       117,299       111,244
                                                                        ---------     ---------     ---------

Cost of system revenues                                                    51,646        43,437        38,858
Cost of maintenance revenues                                               18,212        16,988        14,924
                                                                        ---------     ---------     ---------
     Cost of revenues                                                      69,858        60,425        53,782
                                                                        ---------     ---------     ---------

Gross profit                                                               72,399        56,874        57,462
                                                                        ---------     ---------     ---------

Operating expenses:
  Selling, general and administrative                                      41,650        36,111        27,737
  Research and development                                                 18,303        15,068        10,698
                                                                        ---------     ---------     ---------

                                                                           59,953        51,179        38,435
                                                                        ---------     ---------     ---------

Earnings from operations                                                   12,446         5,695        19,027
                                                                        ---------     ---------     ---------

Other income (expense):
  Interest and other income                                                 1,182         1,272         1,242
  Foreign exchange loss                                                      (332)         (547)          (49)
                                                                        ---------     ---------     ---------
                                                                              850           725         1,193
                                                                        ---------     ---------     ---------
Earnings before provision for income taxes                                 13,296         6,420        20,220

Provision for income taxes (Note 8)                                         4,388         1,990         7,583
                                                                        ---------     ---------     ---------

Net earnings                                                            $   8,908     $   4,430     $  12,637
                                                                        =========     =========     =========

Per share data (Note 12):
  Basic earnings                                                        $    0.66     $    0.32     $    0.93
                                                                        =========      ========     =========

  Diluted earnings                                                      $    0.65     $    0.32     $    0.90
                                                                        =========      ========     =========


Weighted average shares (Note 12):
  Basic                                                                    13,443        13,765        13,641
                                                                        =========     =========     =========

  Diluted                                                                  13,690        13,947        14,020
                                                                        =========     =========     =========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
                                      F-4
<PAGE>


PERIPHONICS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>


                                                                     Additional                                 Total
                                              Common Stock            Paid-In     Treasury     Retained      Stockholders'
                                          Shares        Amount        Capital      Stock       Earnings         Equity
                                          ------        ------        -------      -----       --------         ------
<S>                                      <C>              <C>         <C>         <C>          <C>           <C>
BALANCE, June 1, 1996                    13,598,164       $136        $41,770     $ -          $ 16,875      $  58,781

Net earnings                                  -             -           -           -            12,637         12,637

Exercise of stock options and
  stock issued under employee
  stock purchase plan (Note 9)               95,594          1            622       -             -                623

Tax benefit relating to
  employee stock options                      -             -             167       -             -                167
                                       ------------       ----        -------     -------      --------      ---------

BALANCE, May 31, 1997                    13,693,758        137         42,559       -            29,512         72,208

Net earnings                                  -             -           -           -             4,430          4,430

Exercise of stock options and
  stock issued under employee
  stock purchase plan (Note 9)              149,547          1          1,175       -             -              1,176

Tax benefit relating to
  employee stock options                      -             -              46       -             -                 46
                                       ------------       ----        -------     -------      -------       ---------

BALANCE, May 31, 1998                    13,843,305        138         43,780       -            33,942         77,860

Net earnings                                  -             -           -           -             8,908          8,908

Exercise of stock options and
  stock issued under employee
  stock purchase plan (Note 9)              155,885          2            902       -             -                904

Tax benefit relating to
  employee stock options                      -             -              36       -             -                 36

Purchase of Treasury stock -
  net                                         -             -           -          (6,498)        -             (6,498)
                                       ------------       ----        -------     -------      --------      ---------

BALANCE, May 31, 1999                    13,999,190       $140        $44,718     $(6,498)     $ 42,850      $  81,210
                                       ============       ====        =======     =======      ========      =========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
                                      F-5
<PAGE>


PERIPHONICS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>

                                                                                        Year Ended May 31,
                                                                                        ------------------
                                                                                   1999         1998        1997
                                                                                   ----         ----        ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                             <C>          <C>         <C>
  Net earnings                                                                  $  8,908     $  4,430    $12,637
  Adjustments to reconcile net earnings to net cash
  and cash equivalents provided by operating activities:
    Depreciation and amortization                                                  5,983        5,128      3,725
    Provision for losses on accounts receivable                                      565          266        110
    Provision for inventory reserves                                               1,454          449        418
    Deferred income taxes                                                           (207)        (506)      (183)
    Changes in operating assets and liabilities:
      Increase in accounts receivable                                             (8,031)      (2,252)   (12,016)
      Increase in inventories                                                     (3,466)      (1,657)    (2,179)
      Increase in prepaid expenses and other current assets                         (466)        (156)      (276)
      Increase in other assets                                                       (71)         (68)       (90)
      Increase in accounts payable and accrued expenses and
        other current liabilities                                                  9,132        1,548      5,140
                                                                                --------     --------    -------

         Net cash and cash equivalents provided by
            operating activities                                                  13,801        7,182      7,286
                                                                                --------     --------    -------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property, plant and equipment, net                                 (6,522)      (7,653)   (10,251)
  Purchases of short-term investments                                            (17,785)     (21,723)    (6,283)
  Proceeds from the sale of short term investments                                27,818       10,690     14,886
                                                                                --------     --------    -------

         Net cash and cash equivalents provided by (used in)
           investing activities                                                    3,511      (18,686)    (1,648)
                                                                                --------     --------    --------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Purchase of treasury stock                                                      (6,498)       -          -
  Proceeds from stock options exercised including related
    tax benefits                                                                     940        1,222        790
                                                                                --------     --------    -------

         Net cash and cash equivalents (used in) provided
            by financing activities                                               (5,558)       1,222        790
                                                                                --------     --------    -------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                              11,754      (10,282)     6,428

CASH AND CASH EQUIVALENTS, beginning of year                                      14,810       25,092     18,664
                                                                                --------     --------    -------

CASH AND CASH EQUIVALENTS, end of year                                          $ 26,564     $ 14,810    $ 25,092
                                                                                ========     ========     =======

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
    Cash paid during the year for:
    Income taxes                                                                $  2,106     $  3,976    $ 5,211
                                                                                ========     ========    =======


<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
                                      F-6
<PAGE>


PERIPHONICS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

     1. DESCRIPTION OF BUSINESS

     Periphonics Corporation and subsidiaries (the "Company") develops,  markets
and  supports  products  and  professional   services  for  Computer   Telephony
Integration  (CTI) and for Telecom Enhanced Network Services using  technologies
such as interactive voice response (IVR), speech input, messaging,  fax, and web
browsers.   The  Company's  products  and  services  automate  call  transaction
processing,  increase  call-center  agent  productivity,  and often  create  new
revenue streams for its customers.

     2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     a. Principles of  consolidation  - The  consolidated  financial  statements
include  the  accounts  of  Periphonics   Corporation  and   subsidiaries.   All
significant  intercompany  balances and  transactions  have been  eliminated  in
consolidation.

     b. Revenue  recognition - Sales of standard  products are  recognized  when
products are shipped.  Sales of custom  software  (either as a portion of system
orders or as add-on orders) are recognized  upon customer  acceptance.  For both
standard  products  and custom  software,  sales are  recorded  only after it is
determined  that  the  Company  has no  significant  remaining  obligations  and
collectibility  of the resulting  receivable is probable.  Maintenance  revenues
(including postcontract customer support) and other revenues (including revenues
relating  to  insignificant  obligations  at the time  sales are  recorded)  are
recognized  ratably  over  applicable  contractual  periods  or  as  service  is
performed.

     Standard  products and custom  software  are sold with limited  warranties,
generally for 60 days. Warranty expense for the fiscal years ended May 31, 1999,
1998 and 1997 was not material.

     c.  Inventories  - Inventories  are valued at the lower of cost  (first-in,
first-out  method) or market.  Reserves are established to record provisions for
excess and  obsolete  inventories  in the period in which it becomes  reasonably
evident that the product is not salable or the market value is less than cost.

     d.  Cash  and  cash  equivalents  - The  Company  considers  all  cash  and
investments  with  original  maturity  dates  of  three  months  or  less  to be
components of cash and cash equivalents.

     e.  Investments  - The  Company  follows the  provisions  of  Statement  of
Financial  Accounting  Standards No. 115, "Accounting For Certain Investments In
Debt and Equity Securities." At May 31, 1999 and 1998, the Company's investments
consisted  of U.S.  Government  and Agency  bonds with  original  maturities  of
greater than three months and remaining  maturities of less than one year.  Such
debt securities are classified as  held-to-maturity  because the Company has the
positive   intent   and   ability   to  hold  the   investments   to   maturity.
Held-to-maturity   investments  are  stated  at  amortized  cost,  adjusted  for
amortization of premiums and accretion of discounts.

     f. Property,  plant and equipment - Property, plant and equipment is stated
at cost less accumulated  depreciation  and is depreciated on the  straight-line
method over the estimated useful lives of related assets. Leasehold improvements
are  amortized  over the life of the lease or the  estimated  life of the asset,
whichever is less.

                                      F-7
<PAGE>
  g. Software  development  costs - The development of new software  products
and   enhancements   to  existing   products  are  expensed  as  incurred  until
technological feasibility has been established.  After technological feasibility
is  established,  any additional  costs would be capitalized in accordance  with
Statement of Financial  Accounting Standards No. 86, "Accounting for the Cost of
Computer  Software  to Be Sold,  Leased  or  Otherwise  Marketed."  To date,  no
internal  software  development  costs  have  been  capitalized  as the  Company
believes  its  current  process for  developing  this  software  is  essentially
completed concurrently with the establishment of technological feasibility.

     h.  Impairment  of  Long-Lived  Assets - In  accordance  with  Statement of
Financial  Accounting  Standards  No.  121  ("SFAS  121"),  "Accounting  for the
Impairment of Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed Of,"
the  Company  reviews  its  long-lived  assets,  including  property,  plant and
equipment,   identifiable   intangibles  and  software   development  costs  for
impairment  whenever  events  or  changes  in  circumstances  indicate  that the
carrying  amounts  of the  assets  may not be fully  recoverable.  To  determine
recoverability of its long-lived  assets,  the Company evaluates the probability
that future undiscounted net cash flows, without interest charges,  will be less
than the carrying amount of the assets. Impairment is measured at fair value. No
impairment  losses  have  been  recognized  in  the  accompanying   consolidated
financial statements.

     i. Foreign currency  translation - The functional currency of the Company's
foreign subsidiaries is the US dollar. Therefore,  assets and liabilities of the
foreign   subsidiaries  are  remeasured  using  a  combination  of  current  and
historical  rates.  Income and expense  accounts are remeasured  primarily using
average rates in effect during the year.  Unrealized  foreign exchange gains and
losses  resulting from the  remeasurement  of these entities are included in the
results of operations.  The Company does not currently  engage in  international
currency hedging transactions.

     j.  Income  taxes - The Company  follows the  provisions  of  Statement  of
Financial  Accounting  Standards No. 109,  "Accounting  for Income Taxes" ("SFAS
109") which requires  recognition of deferred tax assets and liabilities for the
expected  future  tax  consequences  of events  that have been  included  in the
Company's financial statements or tax returns.  Under this method,  deferred tax
assets and  liabilities  are  determined  based on the  differences  between the
financial  accounting and tax bases of assets and liabilities  using enacted tax
rates in effect for the year in which the  differences  are expected to reverse.
Tax credits are accounted for under the flow-through method.

     k.  Earnings per share - Basic  earnings per share is based on the weighted
average number of shares of common stock outstanding during the period.  Diluted
earnings per share is based on the weighted  average  number of shares of common
stock and the  dilutive  effect of options and warrants  outstanding  during the
period, computed in accordance with the treasury stock method.

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

     m. Fair Value of  Financial  Instruments  - Financial  instruments  consist
primarily of  investments in cash  equivalents,  short-term  investments,  trade
accounts receivable,  accounts payable and accrued expenses. At May 31, 1999 and
1998, the carrying amount for each of these financial  instruments is assumed to
approximate fair value because of the short maturities of these instruments.

                                      F-8
<PAGE>
     n. Stock-based  Compensation - The Company accounts for stock-based  awards
to employees  using the intrinsic  value method in  accordance  with APB No. 25,
"Accounting for Stock Issued to Employees" ("APB 25").

     o. Comprehensive  Income - In fiscal 1999, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting  Comprehensive Income" ("SFAS
130").  This  statement  establishes  rules for the  reporting of  comprehensive
income  and its  components.  The  adoption  of SFAS  130 had no  impact  on the
Company's consolidated financial statements.

3.   ACCOUNTS RECEIVABLE
                                                        1999              1998
                                                        ----              ----
     Billed                                        $   34,558       $   23,957
     Unbilled                                          10,629           13,764
                                                   ----------       ----------
                                                   $   45,187       $   37,721
                                                   ==========       ==========

     Unbilled  receivables  primarily  relate  to  sales  recorded  on  standard
products which have been shipped,  but have not yet been finally accepted by the
customer. The Company has no significant remaining obligations relating to these
unbilled receivables and collectibility is probable (see Note 2b). Substantially
all unbilled  receivables as of May 31, 1998 were collected  during fiscal 1999.
All unbilled receivables as of May 31, 1999 are expected to be collected in less
than one year.

4.   INVENTORIES
                                                        1999              1998
                                                        ----              ----
     Raw materials                                 $    8,730        $   8,528
     Work-in-process                                    7,348            5,538
                                                   ----------        ---------
                                                   $   16,078        $  14,066
                                                   ==========        =========

5.   PROPERTY, PLANT AND EQUIPMENT, net
<TABLE>
<CAPTION>

                                                                 Useful Lives         1999              1998
                                                                 ------------         ----              ----
                                                                  (in years)
<S>                                                                   <C>          <C>              <C>
     Land                                                                          $      906       $      906
     Building and improvements                                        40                7,877            7,156
     Machinery, equipment, furniture and fixtures                    3-10              30,370           25,674
     Customer service equipment                                        5                7,454            7,157
                                                                                   ----------       ----------
                                                                                       46,607           40,893
     Less accumulated depreciation                                                     26,535           21,395
                                                                                   ----------       ----------
                                                                                   $   20,072       $   19,498
                                                                                   ==========       ==========
</TABLE>

     Depreciation expense relating to property,  plant and equipment amounted to
     approximately  $5,948,  $5,107 and $3,702 for the years ended May 31, 1999,
     1998 and 1997, respectively.

6.   ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
                                                                                       1999              1998
                                                                                       ----              ----
<S>                                                                                <C>              <C>
     Customer advance payments                                                     $    9,929       $   7,611
     Accrued payroll, commissions, bonuses,
       fringe benefits and payroll taxes                                                4,970           2,661
     Income taxes payable                                                               3,792           1,337
     Other accrued expenses                                                             4,792           2,719
                                                                                   ----------       ---------
                                                                                   $   23,483       $  14,328
                                                                                   ==========       =========
</TABLE>


                                      F-9
<PAGE>


     7. LINE OF CREDIT

     In November 1997,  the Company  increased its unsecured line of credit from
$8 million to $15 million.  There were no borrowings against such line of credit
at May 31,  1999 or 1998.  Any  borrowings  on this  line of  credit  will  bear
interest at the prime rate (7.75 percent at May 31, 1999) or the LIBOR rate plus
1.25 percent. The line of credit expires on November 30, 1999.

     8. INCOME TAXES

     The provision for income taxes consists of the following:
<TABLE>
<CAPTION>

                                                                     1999             1998              1997
                                                                     ----             ----              ----
     Current:
<S>                                                               <C>               <C>                <C>
       Federal                                                    $   1,331         $  1,809           $ 5,880
       State and local                                                  365              596             1,827
       Foreign                                                        2,899               45                59
                                                                  ---------         --------           -------

                                                                      4,595            2,450             7,766
                                                                  ---------         --------           -------
     Deferred:
       Federal                                                         (197)            (368)             (136)
       State and local                                                  (10)             (92)              (47)
                                                                  ---------         --------           -------
                                                                       (207)            (460)             (183)
                                                                  ---------         --------           -------

              Total                                               $   4,388         $  1,990           $ 7,583
                                                                  =========         ========           =======
</TABLE>

     Domestic and foreign components of income before income taxes for the years
ended May 31, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>

                                                                     1999             1998              1997
                                                                     ----             ----              ----

<S>                                                               <C>               <C>                <C>
     Domestic                                                     $   4,741         $  6,513           $ 19,489
     Foreign                                                          8,555              (93)               731
                                                                  ---------         --------           --------

     Total                                                        $  13,296         $  6,420           $ 20,220
                                                                  =========         ========           ========
</TABLE>

     The  difference  between the  statutory  Federal tax rate and the Company's
     effective tax rate is as follows (as a percentage of pretax earnings):
<TABLE>
<CAPTION>

                                                                       1999             1998              1997
                                                                       ----             ----              ----
<S>                                                                    <C>             <C>                <C>
     Statutory Federal income tax rate                                 34.0%           34.0%              34.0%
     State and local income taxes (net of Federal tax benefit)          1.8              6.1               5.8
     Exempt income of foreign sales corporation                        (1.3)            (1.0)             (1.4)
     Research and development tax credits                              (5.1)           (11.6)             (1.9)
     Other                                                              3.6              3.5               1.0
                                                                      -----            -----             -----

     Effective tax rate                                               33.0%            31.0%              37.5%
                                                                      ====             ====              =====
</TABLE>
                                      F-10
<PAGE>

     At May 31, 1999,  1998 and 1997,  the  deferred tax assets and  liabilities
consisted of:
<TABLE>
<CAPTION>

                                            1999                          1998                    1997
                                ----------------------------     ----------------------   ----------------------
                                     Net             Net             Net         Net          Net        Net
                                   Current        Long-term        Current    Long-term     Current   Long-term
                                  Deferred        Deferred        Deferred    Deferred     Deferred   Deferred
                                     Tax             Tax             Tax         Tax          Tax        Tax
                                   Assets        Liabilities       Assets    Liabilities    Assets    Liabilities
                                  --------       -----------      --------   -----------   --------   -----------
<S>                               <C>             <C>            <C>          <C>         <C>           <C>
     Accounts receivable          $  618          $    -         $   467      $     -     $   397       $    -
     Inventories                     725               -             751            -         710            -
     State tax credit
       carryforwards                  32               -              32            -          32            -
     Unrealized foreign
       exchange losses               477               -             391            -         218            -
     Property, plant, and
       equipment                       -             104               -          156           -          332
     Other                             -               -              53          (10)         53          (10)
     Net operating loss carry-
       forwards of foreign
       subsidiaries                  175               -             100            -         366            -
                                  ------          ------          ------      -------      ------       ------
                                   2,027             104           1,794          146       1,776          322
       Less valuation allowance      175               -             107            -         419            -
                                  ------          ------          ------      -------      ------       ------
     Total                        $1,852          $  104         $ 1,687      $   146     $ 1,357       $  322
                                  ======          ======         =======      =======     =======       ======
</TABLE>

     The valuation  allowance  increased by approximately $68 during fiscal 1999
and decreased by $312 in fiscal 1998. This is primarily the result of the change
in net operating loss carryforwards of a foreign subsidiary.

     9. STOCKHOLDERS' EQUITY

     a. Stock  option  plans - The  Company  maintains  two stock  option  plans
pursuant to which an aggregate of approximately 2,400,000 shares of common stock
may be granted.

     The 1995 Stock Option Plan (the "1995 Plan") has 2,200,000 shares of common
stock  reserved for issuance  upon the exercise of options  designated as either
[i] incentive  stock options  ("ISOs") under the Internal  Revenue Code, or [ii]
non-qualified  options. ISOs may be granted under the 1995 Plan to employees and
officers of the Company.  Non-qualified  options may be granted to  consultants,
directors  (whether  or not they are  employees),  employees  or officers of the
Company. Each option vests in four annual installments of 25 percent each on the
first,  second,  third and  fourth  anniversary  of the date of  grant.  Options
granted  under the 1995  Option Plan may not be granted at a price less than the
fair market  value of the  Company's  common  stock on the date of grant (or 110
percent of fair market  value in the case of persons  holding 10 percent or more
of the voting  stock of the Company) and expire not more than ten years from the
date of grant  (five  years in the case of ISOs  granted to  persons  holding 10
percent or more of the voting stock of the Company).

     On September 23, 1998,  the Board of Directors  approved a plan to offer to
the  holders of certain  outstanding  stock  options,  excluding  all  executive
officers and members of the Board of Directors,  the opportunity to cancel their
existing  options and receive new options for the same number of shares but with
an exercise  price per share at the then  current fair market value and with new
vesting requirements.  As a result as of October 8, 1998,  approximately 576,700
options  with  exercise  prices  ranging  from  $7.00 to $31.00  per share  were
exchanged for new options with an exercise price of $6.75 per share.

                                      F-11
<PAGE>
<TABLE>
<CAPTION>
                                                                                               Weighted
                                                  Shares              Option Price           Average Price
                                                  ------              ------------           -------------
<S>                                                 <C>            <C>       <C>               <C>
         Balance, June 1, 1997                      670,900        $  1.00 - $31.00            $    10.23

         Options granted                            278,000        $  8.75 - $20.50            $    12.80
         Options exercised                          (46,000)       $  7.00 - $15.50            $     8.22
         Options canceled                            22,500        $  8.75 - $15.50            $    12.10
                                                    -------        ----------------            ----------

         Balance, May 31, 1998                      880,400        $  1.00 - $31.00            $    11.38

         Options exercisable at
           May 31, 1998                             302,200        $  1.00 - $31.00            $     8.08

         Options granted                          1,159,200        $  6.63 - $12.63            $     7.28
         Options exercised                          (14,000)       $  1.68 - $ 7.00            $     4.34
         Options canceled                          (637,700)       $  6.75 - $31.00            $    12.44
                                                  ---------        ----------------            ----------

         Balance, May 31, 1999                    1,387,900        $  1.68 - $15.50            $     7.72
                                                  =========        ================            ==========

         Options exercisable at
           May 31, 1999                             276,700        $  1.68 - $15.50            $     7.39
                                                  =========        ================            ==========
</TABLE>
<TABLE>
<CAPTION>

                                                    Options Outstanding              Options Exercisable
                                                    -------------------              -------------------
                                                Weighted Avg.      Weighted                         Weighted
                                                  Remaining        Average                          Average
                                Number           Contractual       Exercise         Number          Exercise
         Exercise Prices     Outstanding          Life (yrs)         Price        Exercisable         Price
         ---------------     -----------       -------------       --------       -----------       --------

<S>            <C>                 <C>              <C>            <C>                  <C>          <C>
               $  1.68             68,000           3.89           $   1.68             68,000       $   1.68
          $  6.63 - $  6.76       568,700           4.37           $   6.75                  0       $      -
          $  6.94 - $  7.63       537,000           3.78           $   7.43            120,500       $   7.00
          $  8.53 - $ 11.75        86,200           2.64           $  10.15             34,950       $   9.94
          $ 12.63 - $ 12.88        67,000           3.03           $  12.63             20,250       $  12.80
          $ 14.00 - $ 14.13        35,000           2.59           $  14.43             20,000       $  14.05
              $ 15.50              26,000           2.03           $  15.50             13,000       $  15.50
                              -----------                                          -----------

                                1,387,900                                              276,700
                              ===========                                          ===========
</TABLE>

     There are 813,000 shares available for future grant under the 1995 plan.

     In February  1995,  the Board  adopted  and the  stockholders  approved,  a
Non-Employee  Director Stock Option Plan (the "Directors  Plan").  The Directors
Plan has 200,000  shares of common stock reserved for issuance from which grants
of  non-qualified  stock  options  covering  15,000  shares and 10,000 shares of
common stock are automatically  made on the election of a non-employee  Director
to the Board and the date of each  annual  meeting  of  shareholders  to certain
non-employee  Directors of the Company,  respectively.  The exercise price under
each option is the fair market value of the  Company's  common stock on the date
of grant. Each option has a five-year term and vests in four annual installments
of 25 percent each on the first,  second,  third and fourth  anniversary  of the
date of grant.  The non-vested  portion of an option  terminates if the Director
ceases to be a member of the Board.

                                      F-12
<PAGE>


<TABLE>
<CAPTION>

                                                                                               Weighted
                                                   Shares             Price Range            Average Price
                                                   ------             -----------            -------------
<S>                                                    <C>         <C>                       <C>
         Balance, May 31, 1997                         66,250      $ 8.88 - $ 19.25          $    13.33
         Options granted                               20,000             $9.50              $     9.50
                                                 ------------      ----------------          ----------

         Balance, May 31, 1998                         86,250      $ 8.88 - $ 19.25          $    12.44

         Options granted                               20,000            $ 7.88              $     7.88
                                                 ------------      ----------------          ----------

         Balance, May 31, 1999                        106,250      $ 7.88 - $ 19.25          $    11.58
                                                 ============      ================          ==========

         Options exercisable at
           May 31, 1999                                48,750      $ 8.88 - $ 19.25          $    12.41
                                                 ============      ================          ==========
</TABLE>
<TABLE>
<CAPTION>

                                                     Options Outstanding              Options Exercisable
                                                     -------------------              -------------------
                                                 Weighted Avg.     Weighted                         Weighted
                                                  Remaining         Average                          Average
                                Number           Contractual       Exercise         Number          Exercise
         Exercise Prices     Outstanding          Life (yrs)         Price        Exercisable         Price
         ---------------     -----------         ------------      --------       -----------       --------
<S>           <C>                 <C>                <C>           <C>                     <C>       <C>
               $  7.88            20,000             4.40          $  7.88                 0         $  7.88
               $  8.88            26,250             1.07          $  8.88            18,750         $  8.88
               $  9.50            20,000             3.45          $  9.50             5,000         $  9.50
               $ 13.25            20,000             1.41          $ 13.25            15,000         $ 13.25
               $ 19.50            20,000             2.44          $ 19.50            10,000         $ 19.50
                              ----------                                           ---------

                                 106,250                                              48,750
                              ==========                                           =========
</TABLE>

     There are 90,000  shares  available  for future  grants under the Directors
Plan. No options have been canceled under this plan.

     b. Additional  Stock Plan Information - As discussed in Note 2, the Company
continues to account for its stock-based awards using the intrinsic value method
in  accordance  with APB 25 and its  related  interpretations.  Accordingly,  no
compensation  expense  has  been  recognized  in the  financial  statements  for
employee stock arrangements.

     Statement  of  Financial  Accounting  Standards  No. 123,  "Accounting  for
Stock-Based Compensation," ("SFAS 123") requires the disclosure of pro forma net
income and earnings  per share had the Company  adopted the fair value method as
of the beginning of fiscal 1996.  Under SFAS 123, the fair value of  stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable  options without vesting  restrictions,  which  significantly
differ from the  Company's  stock  options  awards.  These  models also  require
subjective  assumptions,  including  future stock price  volatility and expected
time to exercise,  which greatly  affect the  calculated  values.  The Company's
calculations  were made using the  Black-Scholes  option  pricing model with the
following weighted average  assumptions for 1999, 1998 and 1997:  expected life,
1.25 years following vesting; stock volatility of 77 percent in 1999, 73 percent
in 1998 and 78 percent in 1997,  risk free  interest rate of 5.4 percent in 1999
and 6.0 percent in 1998 and 1997 and no dividends  during the expected term. The

                                      F-13
<PAGE>
Company's  calculations  are based on a  multiple  option in 1999 and  valuation
approach and forfeitures are recognized as they occur. The impact of outstanding
non-vested  stock  options  granted prior to June 1, 1995 has been excluded from
the pro forma calculation; accordingly, pro forma adjustments are not indicative
of future period pro forma  adjustments,  when the calculation will apply to all
applicable stock options.
<TABLE>
<CAPTION>

                                                                            Fiscal Year Ended May 31,
                                                                            -------------------------
                                                                     1999             1998              1997
                                                                     ----             ----              ----
<S>                                                               <C>               <C>                <C>
         Net income:
           As reported                                            $  8,908          $  4,430           $ 12,637
           Pro forma                                              $  7,645          $  3,238           $ 11,872
         Basic earnings per share:
           As reported                                            $   0.66          $   0.32           $   0.93
           Pro forma                                              $   0.57          $   0.24           $   0.87
         Diluted earnings per share:
           As reported                                            $   0.65          $   0.32           $   0.90
           Pro forma                                              $   0.56          $   0.23           $   0.85
</TABLE>

     c. Stock Split and Changes in  Authorized  Capital - On September 20, 1996,
the Board of Directors approved a two-for-one split of its common stock effected
as a stock dividend on October 31, 1996 to  shareholders  of record at the close
of  business  on  October  15,  1996.  All  historical  share and per share data
appearing in the consolidated  financial  statements and notes thereto have been
retroactively adjusted for the stock split, unless otherwise noted.

     Also, on September 20, 1996, the Board of Directors determined it advisable
to amend the Company's  Certificate of  Incorporation  to increase the number of
authorized shares of Common Stock from 15,000,000  shares to 30,000,000  shares.
The proposed amendment to the Amended and Restated  Certificate of Incorporation
was submitted for shareholder  approval.  Shareholder  approval was announced on
November 8, 1996 at the 1996 Annual Meeting of Stockholders.

     d.  Employee  Stock  Purchase  Plan - During 1996,  the Company  adopted an
Employee  Stock  Purchase Plan to provide  eligible  employees an opportunity to
purchase  shares of its  common  stock  through  payroll  deductions  during two
offering  periods,  December 1 through  May 31 and June 1 through  November  30.
During 1998, the Company revised the offering periods to October 1 through March
31 and April 1 through  September  30. The purchase  price is an amount equal to
85% of the fair market value of a share of common stock on the first or last day
of the offering  period,  whichever  is lower.  The  aggregate  number of shares
purchased  by an  employee  may not  exceed a number  of  shares  determined  by
dividing  $12,500 by the fair market  value of a share of the  Company's  common
stock on the first day of the offering  period.  The stock purchase plan expires
on August 10, 2005. A total of 800,000  shares are available for purchase  under
the plan. 141,885 shares, 103,609 shares and 14,744 shares were issued under the
plan during fiscal years 1999, 1998 and 1997 at an average price of $6.03, $9.84
and $14.24, respectively.

     e. Stock Purchase  Rights - In July 1996, the Company adopted a Stockholder
Rights Plan (the "Plan") and declared a dividend  distribution  of one preferred
share  purchase  right (the  "Right") at the rate of one Right for each share of
common  stock  held as of the close of  business  on July 31,  1996.  Each Right
entitles the holder to purchase from the Company one one-hundredth of a share of
Series A Junior  Participating  Preferred Stock, par value $0.01 per share, at a
price of $100 per one  one-hundredth  of a preferred  share.  The Rights are not
exercisable  until certain  events occur,  as defined in the Plan, and expire on
July 31, 2006. The Rights are also redeemable,  under certain circumstances,  by
the Board of Directors at a price of $0.01 per Right.

                                      F-14
<PAGE>



     10. COMMITMENTS AND CONTINGENCIES

     a. Deferred  compensation  plan - The Company  maintains a 40l(k)  deferred
compensation  plan for all employees meeting certain service  requirements.  The
Company has made no matching contribution to amounts deferred by employees.  The
Company pays the administrative costs of the plan.

     b.  Employment  contracts - The Company has employment  contracts with five
officers. The contracts terminate on May 31, 2002 and allow for aggregate annual
base  compensation as well as annual bonuses to be determined in accordance with
the provisions of the Company's performance  incentive plan. In addition,  these
employment  contracts  automatically  self renew for  consecutive two year terms
unless at least one year prior to the  expiration  of the  existing  term either
party gives notice of cancellation.

     c. Stock  repurchase  agreements - The Company has agreements  with certain
stockholders of the Company. The agreements require the Company to maintain life
insurance  on the  life of each of the  specified  stockholders  in  amounts  as
defined in the  agreement  and grant the estate of a deceased  stockholder a put
option  which  would  require  the  Company to redeem a portion of the shares of
common  stock  owned by the  estate.  The  maximum  number of such  shares to be
redeemed shall be determined by dividing the fair market value of a share on the
date of death into the net life insurance  proceeds received by the Company upon
the death of such deceased  stockholder.  The stock  repurchase  agreements were
terminated subsequent to year-end.

     d. Legal matters - On July 7, 1998, Lucent  Technologies,  Inc.  ("Lucent")
filed a patent  infringement  action in the United States  District Court in the
District of Delaware  alleging that the Company  infringed  some nine patents of
Lucent.  The Company  believes  the claims  contained in the lawsuit are without
merit and, in an answer filed on  September  24,  1998,  denied the  substantive
elements  of  Lucent's  lawsuit  and set  forth  affirmative  defenses  and made
counterclaims  against  Lucent.  The Company is involved in certain  other legal
matters in the normal  course of business.  The  Company's  management  does not
believe that resolution of these matters will have a material  adverse effect on
the Company's consolidated financial statements.

     e. Concentration of industry and credit risk - The Company grants credit to
geographically  diversified  customers primarily in the  telecommunications  and
financial services industry. The Company is broadening its vertical market focus
to  include  additional   industries  such  as  government,   higher  education,
healthcare   services,   transportation,   electric  and  water   utilities  and
distribution  companies.  No one customer  accounted for more than 10 percent of
total revenues during fiscal 1999, 1998 and 1997.

     f. Lease  agreements  - The Company has entered into  operating  leases for
certain sales and service  locations,  automobiles and office equipment.  Future
minimum annual lease payments under noncancelable operating leases are:

           Year Ending May 31,
           -------------------
                 2000                                         $    3,152
                 2001                                              2,291
                 2002                                              2,108
                 2003                                              1,597
                 2004                                                968
                 Thereafter                                        4,100
                                                                  ------
                                                              $   14,216
                                                                  ======
                                      F-15
<PAGE>

     Rental expense was $3,098, $2,860 and $1,065 during the years ended May 31,
1999, 1998 and 1997, respectively.

     11. INDUSTRY SEGMENTS AND OPERATIONS BY GEOGRAPHIC AREA

     In 1997,  the  Financial  Accounting  Standards  Board issued SFAS No. 131,
"Disclosures  about  Segments of an Enterprise and Related  Information,"  which
established  standards for the way in which public business  enterprises  report
information about operating segments in annual financial statements.

     The Company operates in two reportable  segments:  sales and maintenance of
interactive voice response systems.  Summarized financial information concerning
the  Company's  reportable  segments  is  shown  in  the  following  table.  The
accounting  policies  of the  segments  are the same as those  described  in the
summary of significant  accounting  policies.  The  "Corporate"  Column includes
corporate related items not allocated to reportable segments and the elimination
of  intercompany  transactions.  Identifiable  assets  are  those  tangible  and
intangible assets used in operations in each reportable segment.
<TABLE>
<CAPTION>

                                                            System         Maintenance     Corporate        Total
                                                            ------         -----------     ---------        -----
<S>                                                       <C>             <C>            <C>             <C>
      Year Ended May 31, 1999

      Total Revenues                                      $   107,364     $   34,893     $         -     $    142,257
                                                          ===========     ==========     ===========     ============
      Interest Income                                     $         -     $        -     $     1,182     $      1,182
                                                          ===========     ==========     ===========     ============
      Depreciation and amortization expense               $     2,366     $    1,741     $     1,876     $      5,983
                                                          ===========     ==========     ===========     ============
      Earnings before provision for income taxes          $    11,447     $   12,192     $   (10,343)    $     13,296
                                                          ===========     ==========     ===========     ============
      Income Tax Expense                                  $     3,778     $    4,024     $    (3,414)    $      4,388
                                                          ===========     ==========     ===========     ============
      Capital Expenditures                                $     2,597     $    1,622     $     2,303     $      6,522
                                                          ===========     ==========     ===========     ============
      Identifiable assets                                 $    57,617     $   11,570     $    43,860     $    113,047
                                                          ===========     ==========     ===========     ============

      Year Ended May 31, 1998
      Total Revenues                                      $    87,618     $   29,681     $         -     $    117,299
                                                          ===========     ==========     ===========     ============
      Interest Income                                     $         -     $        -     $     1,272     $      1,272
                                                          ===========     ==========     ===========     ============
      Depreciation and amortization expense               $     1,847     $    1,476     $     1,805     $      5,128
                                                          ===========     ==========     ===========     ============
      Earnings before provision for income taxes          $     6,594     $    8,880     $    (9,054)    $      6,420
                                                          ===========     ==========     ===========     ============
      Income Tax Expense                                  $     2,044     $    2,753     $    (2,807)    $      1,990
                                                          ===========     ==========     ===========     ============
      Capital Expenditures                                $     2,766     $    1,225     $     3,662     $      7,653
                                                          ===========     ==========     ===========     ============
      Identifiable assets                                 $    49,299     $    9,873     $    41,435     $    100,607
                                                          ===========     ==========     ===========     ============

      Year Ended May 31, 1997
      Total Revenues                                      $    86,144     $   25,100     $         -     $    111,244
                                                          ===========     ==========     ===========     ============
      Interest Income                                     $         -     $        -     $     1,242     $      1,242
                                                          ===========     ==========     ===========     ============
                                      F-16
<PAGE>
      Depreciation and amortization expense               $     1,471     $    1,173     $     1,081     $      3,725
                                                          ===========     ==========     ===========     ============
      Earnings before provision for income taxes          $    19,678     $    7,792     $    (7,220)    $     20,220
                                                          ===========     ==========     ===========     ============
      Income Tax Expense                                  $     7,380     $    2,911     $    (2,708)    $      7,583
                                                          ===========     ==========     ===========     ============
      Capital Expenditures                                $     3,224     $    2,565     $     4,462     $     10,251
                                                          ===========     ==========     ===========     ============
      Identifiable assets                                 $    47,360     $    8,864     $    37,359     $     93,583
                                                          ===========     ==========     ===========     ============

</TABLE>

     Information about the Company's operations in different geographic areas at
May 31, 1999, 1998 and 1997, and the years then ended is presented below:
<TABLE>
<CAPTION>

                                                                                    Year Ended May 31,
                                                                                    ------------------
                                                                           1999            1998            1997
                                                                           ----            ----            ----
<S>                                                                      <C>            <C>              <C>
     System Revenue and Maintenance Revenue:
     Sales to unaffiliated customers from:
       North America                                                     $ 109,339      $ 101,590        $  99,895
       Europe                                                               32,918         15,709           11,349
                                                                         ---------      ---------        ---------
     Total revenues to unaffiliated customers                              142,257        117,299          111,244
                                                                         ---------      ---------        ---------
     Transfers between geographic areas from:
       North America                                                        13,122          4,167            3,815
       Europe                                                                    -          -                -
                                                                         ---------      ---------        ---------
     Total transfers between geographic areas                               13,122          4,167            3,815
                                                                         ---------      ---------        ---------
     Eliminations                                                          (13,122)        (4,167)          (3,815)
                                                                         ----------     ---------        ---------
     Total revenues                                                      $ 142,257      $ 117,299        $ 111,244
                                                                         =========      =========        =========

     Earnings from Operations:
       North America                                                     $   3,350      $   5,030        $  18,686
       Europe                                                                9,240            625              428
       Eliminations                                                           (144)            40              (87)
                                                                         ----------     ---------        ---------
     Total earnings from operations                                      $  12,446      $   5,695        $  19,027
                                                                         =========      =========        =========
     Identifiable Assets:
       North America                                                     $ 113,534      $ 109,057        $  99,038
       Europe                                                               21,113         13,919           10,279
       Eliminations                                                        (21,600)       (22,369)         (15,734)
                                                                         ---------      ---------        ---------
     Total identifiable assets                                           $ 113,047      $ 100,607        $  93,583
                                                                         =========      =========        =========
</TABLE>


     The activities of the Company's Mexican  operation,  which are not material
for separate disclosure, are included in North America.

     Transfers  between  geographic  areas  are  accounted  for at cost,  plus a
reasonable  profit.  European cost of revenues for the years ended May 31, 1999,
1998 and 1997 includes  approximately  $2,165, $769 and $589,  respectively,  of
intercompany  gross profit  earned by North America on system sales by Europe to
third parties.

     Total  revenues to customers  outside the U.S.  were  $50,658,  $38,335 and
$36,380 for the years ended May 31, 1999, 1998, and 1997, respectively.

                                      F-17
<PAGE>
     Export sales from the Company's  United States  operations to  unaffiliated
customers were as follows:
<TABLE>
<CAPTION>

                                                                     Year Ended May 31,
                                                          1999              1998             1997
                                                     -------------     -------------    -------------

<S>                                                    <C>               <C>              <C>
         Pacific Rim                                   $   7,900         $  12,477        $  13,532
         The Americas (excluding the
           United States)                                  9,840            10,149           11,499
                                                       ---------         ---------        ---------
         Total                                         $  17,740         $  22,626        $  25,031
                                                       =========         =========        =========
</TABLE>

     12. RECONCILIATION OF BASIC EARNINGS PER SHARE

     In  accordance  with SFAS No.  128,  basic  earnings  per common  share are
computed  based on the  weighted-average  number  of common  shares  outstanding
during each period.  Diluted earnings per common share are computed based on the
weighted-average  number of common shares, after giving effect to diluted common
stock equivalents outstanding during each period. The following table provides a
reconciliation between basic and diluted earnings per share:
<TABLE>
<CAPTION>

                                                              Fiscal Year Ended May 31,
                                                      (In thousands, except per share amounts)
                                         1999                           1998                          1997
                               -------------------------     ------------------------     ---------------------------
                                                    Per                           Per                            Per
                                Income  Shares     Share     Income    Shares   Share      Income    Shares     Share

<S>                             <C>      <C>       <C>       <C>      <C>       <C>       <C>       <C>       <C>
Basic EPS:
  Income available to
    common stockholders         8,908    13,443    $0.66     $4,430   13,765    $ 0.32    $12,637    13,641   $  0.93
Effect of dilutive securities:
  Options/warrants                  -       247    (0.01)         -      182         -          -       379     (0.03)
                                -----    ------    ------     -----   ------      ----    -------    ------   -------

Diluted EPS:
  Income available to
    common stockholders
    plus assumed
    exercises                   8,908    13,690    $0.65     $4,430   13,947    $ 0.32    $12,637    14,020   $  0.90
                               ======    ======    =====     ======   ======    ======    =======    ======   =======
</TABLE>

     13. SUBSEQUENT EVENT (UNAUDITED)

     On August 24,  1999,  the  Company  and Nortel  Networks  Corp.  ("Nortel")
entered  into a  definitive  merger  agreement,  pursuant to which  Nortel would
acquire the common  stock of the Company and the Company  would  become a wholly
owned subsidiary of Nortel.

     The consideration will consist of newly issued Nortel common stock,  having
an aggregate market value of approximately $436 million.  Under the terms of the
agreement,  each share of the  Company  will be  converted  into a fraction of a
share of Nortel.  The exchange  ratio is equal to $29.23  divided by the average
price of a Nortel share during a certain  period before  closing,  in a range of
0.62 to 0.76.  During  this time,  if the  average  Nortel  share price is above
$47.15,  the exchange  ratio will be 0.62.  If the average  share price is below
$38.46, the exchange ratio will be 0.76.

     The Company's Board of Directors has approved the agreement. The completion
of the transaction is subject to approval of the Periphonics' shareholders,  and
the receipt of all necessary regulatory approvals.

                                      F-18
<PAGE>



                                                                     SCHEDULE II


PERIPHONICS CORPORATION AND SUBSIDIARIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)

<TABLE>
<CAPTION>



       COLUMN A                         COLUMN B                 COLUMN C                  COLUMN D       COLUMN E
       --------                         --------                 --------                  --------       --------
                                                                 Additions
                                                                 ---------
                                                                       Charged to
                                       Balance at        Charged to       Other                           Balance
                                        beginning         Cost and      Accounts -       Deductions -     at end of
     Descriptions                       of Period         Expenses       describe           describe       Period
     ------------                      ----------        ----------    -----------       ------------     ---------

<S>                                      <C>                <C>            <C>              <C>            <C>
Year ended May 31, 1999:
  Allowance for doubtful accounts        $ 1,266            $   565        $-               $ (48)(1)      $ 1,783
                                         =======            =======        ===              ======         =======
  Reserve for excess and
    obsolete inventory                   $ 1,232            $1,454         $-               $(166)(1)      $ 2,520
                                         =======            ======         ===              ======         =======

Year ended May 31, 1998:
  Allowance for doubtful accounts        $ 1,000            $266           $-               $ -            $ 1,266
                                         =======            ====           ===              =====          =======
  Reserve for excess and
    obsolete inventory                   $ 1,150            $449           $-               $(367)(1)      $ 1,232
                                         =======            ====           ===              =====          =======


Year ended May 31, 1997:
  Allowance for doubtful accounts        $   890            $110           $ -              $-             $ 1,000
                                         =======            ====           ===              =====          =======
  Reserve for excess and
    obsolete inventory                   $ 1,100            $418           $ -              $(368)(1)      $ 1,150
                                         =======            ====           ===              =====          =======
<FN>
(1)  Amounts written off or disposed of.
</FN>
</TABLE>


                                       S-1