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, 1997

     [ ] 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 11,559,808 shares of Common Stock held by
non-affiliates of the Company as of August 15, 1997 is $149,555,016.

     The number of shares  outstanding  of each of the  registrant's  classes of
common equity as of August 25, 1997 is as follows:

     Class of Common Equity                           Number of Shares

         Common Stock                                    13,725,761
         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 30, 1997.



<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 high  performance  interactive
voice response ("IVR") systems,  based on industry  standard,  open architecture
computer  hardware and operating  system  software,  in combination with its own
proprietary IVR technology.  The nature of the Company's  business,  and the way
many people view the market,  is gradually  broadening  to  encompass  more than
basic IVR - and is now more appropriately  described as: development,  marketing
and support of products and services for Computer Telephony  Integration ("CTI")
and for Telecom Enhanced Network Services using technologies such as IVR, speech
input,  messaging,  fax and web browsers.  The  Company's  products and services
automate   call  and   transaction   processing,   increase  call  center  agent
productivity, and can create new revenue for our customers.

     The Company is a leading  supplier of mid-to-large  scale systems - systems
handling  hundreds to thousands of simultaneous  telephone  calls.  Systems have
been installed in more than 50 countries.  Our staff of 733 employees (May 1997)
serves customers from Periphonics offices in Canada, Germany, Hong Kong, Mexico,
Singapore, the United Kingdom and the USA.

     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 or speech input to access information in an organization's
computer  database  and to receive  that  information  verbally via high quality
digitally-stored  or  synthesized  speech 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 data regarding bank, mutual fund or brokerage
accounts; 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.

     IVR  systems  constitute  a  specialized   segment  of  the  overall  voice
processing/call  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 those 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  12 of  Notes  to  Consolidated
Financial  Statements for  information  concerning  the Company's  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  IVR
systems.  In each of fiscal,  1995, 1996 and 1997, no single customer  accounted
for as  much  as 10% of the  Company's  total  revenues.  In  fiscal  1997,  the
Company's  top ten  customers  (two of which were new  customers)  accounted for
approximately  36% of  total  revenues.  Six of  these  top ten  customers  were
telecommunications  companies,  three of them were financial  services companies
and one was a  government  customer.  The  Company's  system  sales to customers
outside the U.S.  contributed  approximately 37% of total system sales in fiscal
1997.

     Although 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,  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.  The Company  believes that in
recent periods certain of its competitors have  experienced  results below their
expectations  particularly  with respect to certain of their  telecommunications
customers.  There  can be no  assurance  that the  Company  will not  experience
similar  difficulties  with  its  telecommunications  or other  vertical  market
customers.

     Some of the representative  markets using Periphonics'  systems and typical
customer applications in these markets are described below:


<TABLE>
<CAPTION>

Market                           Typical Applications
<S>                              <C>    

Telecommunications               Trouble  Reporting,  Residential and Business Customer  Services,  Business
                                 Office and Account  Inquiry,  Repair  Service,  Order Entry,  Reverse  Directory
                                 Assistance, Paging, Collect Calling and Calling Card Services

Financial Services               Account  Inquiry,  Transaction  History,  Current  Loan and Deposit  Rates,
                                 Available Credit Line, Funds  Transfers,  Credit Card Inquiry,  Stock Quotes and
                                 Securities Trades, Bill Payment, Coverage Verification


Government                       Tax Filing, Employment Services, including Claims Reporting, Job Openings and Benefits; 
                                 Driver License Verification, Taxpayer Information


Higher Education                 Course Registration, Grade Reporting, Financial Aid Status, Admission Status

Other Markets                    Order Entry, Order Status, Frequent Flyer Inquiries, Flight Information, Outage Reporting,
                                 Account Balance, Payment Scheduling, Dealer Locator

</TABLE>

     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
processors;  (ii) a  proprietary  voice  subsystem  that  contains  one or  more
telephony  interface  boards,  voice  storage,  and one or more tone-  detection
modules, (iii) Company-designed transaction processing software modules and (iv)
optional 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  UNIX kernal and standard UNIX file
system,   the  Company's   system   software   delivers  an  open  and  scalable
client/server  implementation  which can be easily migrated to new UNIX versions
or to other hardware platforms.  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),  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.

     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 support for countries  including
the U.S., Canada 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-based
systems.  These  interfaces  can support a variety of databases and  Application
Programming Interfaces ("APIs").

     Products

     The Company's products include a family of scalable interactive transaction
processing  systems,  called the VPS Series,  which can be configured  for small
(8-24  ports),  mid-size  (24 to  120  ports),  or  large  scale  installations,
including a network of multiple  systems to handle thousands of telephone ports.
The  Company  also  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.

     All of the  products  in the VPS Series  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 5.2 and has been available since March 1997.
Periphonics' IVR systems are listed below:


                           Year of                           Port
     Model               Introduction                       Capacity

VPS/is (digital)             1995                         24/30-96/120

VPS/is (analog)              1995                          8-120

VPS/mcp                      1996                          192/240 - 384/480


     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  custom
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 option  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  Devices.  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  greeting,  the  response  is provided  via a dynamic  visual
hypertext display.

     Periphonics also develops, markets and supports CTI Products including:

     CallSponsor.  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 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 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  Oracle 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.

     Voice Activated Dialing ("VAD"). This application software product includes
speaker dependent recognition technology that is combined with a highly adaptive
application  to meet the needs of telecom  service  providers in a wide range of
configuration.

     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.

     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 extensive  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.

     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 VAD  applications.  The Company's present
product  development  activities include  integration of new features for speech
recognition  and other voice  processing  functions;  development  of additional
graphical  management  tools;  interfaces to  additional  computer and telephone
systems;  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 TSAPI and TAPI) as part of its product
development efforts to provide state-of-the-art systems and related features.

     During fiscal,  1995,  1996 and 1997, the Company spent $5.8 million,  $7.9
million and $10.7 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 or CTI  project  usually  requires  the  creation of a
script,  recording and digitizing the appropriate words and phrases, and writing
custom  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; Maintenance

     The Company  generally offers 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 17 cities in the U.S.A. and in Canada,  United Kingdom,  Germany,
Hong Kong,  Mexico and Singapore.  The Company also has agreements with VARs and
OEMs who purchase the Company's  systems for integration  into larger systems as
well as with local  distributors  and  independent  sales  representatives  in a
number of overseas markets.

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

     The following  table  illustrates  the respective  amounts of the Company's
system sales contributed by U.S. and international based customers:

<TABLE>
<CAPTION>


                          For Fiscal Year Ending May 31
                             (dollars in thousands)
                                          1995                      1996                    1997
                                  --------------------     --------------------     --------------------
<S>                              <C>             <C>        <C>          <C>        <C>          <C>

U.S. customers                    $33,885        65.5%      $45,989       64.1%     $54,540      63.3%
International customers           $17,862        34.5%      $25,811       35.9%     $31,604      36.7%
                                  -------        -----      -------      ------    -------      ------
Total system sales                $51,747       100.0%      $71,800      100.0%     $86,144     100.0%
------------------                =======       ======      =======      ======     =======     ======
</TABLE>



     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)
                                          1995                      1996                   1997
                                -----------------------    --------------------     ------------------
<S>                              <C>            <C>        <C>           <C>         <C>        <C>

U.S. customers                    $44,757        69.1%      $60,561       68.1%      $ 74,864    67.3%
International customers           $20,020        30.9%      $28,242       31.9%      $ 36,380    32.7%
                                  -------        -----      -------      ------        ------   ------
Total system sales                $64,777       100.0%      $88,803      100.0%      $111,244   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.

     Variability of Quarterly Results; Limited Backlog

     The Company's  quarterly  operating  results may 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 custom 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 sales transactions,  including international sales, have varied
substantially  from quarter to quarter with a  substantial  percentage of orders
and  deliveries  occurring  in the final  weeks of a  quarter,  and the  Company
expects such variations to 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. Because a significant
portion of the  Company's  overhead is fixed in the  short-term,  the  Company's
results of  operations  may be  materially  adversely  affected if revenues fall
below the  Company's  expectations.  During the fiscal year ended May 31,  1997,
26.7% of the  Company's  sales from IVR systems and 33.1% of the  Company's  net
earnings  occurred  in the  Company's  fourth  fiscal  quarter.  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 IVR, CTI and  automated  transaction  processing  systems 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.

     A  portion  of  sales  of the  Company's  systems  depend,  in  part,  upon
customers'  belief that the  Company's  UNIX and  RISC-based  systems offer more
performance,  features and benefits than PC-based  systems offered by certain of
the Company's  competitors.  As PC hardware and operating  software  become more
powerful,  however,  the capabilities of PC-based systems are likely to increase
and may become increasingly  competitive  alternatives to the Company's products
in mid-size and large scale installations.

     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 IVR, CTI and automated transaction processing systems 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 capabilities to some of their product offerings and offer
IVR 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.  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 Brite Voice Systems,
Inc.,  InterVoice and  Syntellect,  Inc.,  whose  businesses  are  substantially
focused on sales of IVR systems, and large, diversified companies such as Lucent
Technologies,  and IBM for whom IVR and CTI is 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.

     Competition for small IVR systems (4-16 ports) is expected to increase over
the next several years from a range of companies offering PC-based systems. This
trend could extend to mid-size and large-scale systems.

     In international markets,  Periphonics faces competition primarily from its
U.S. competitors and several 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.  Although certain of the Company's competitors have
considerably greater financial, technical and sales and marketing resources than
the Company,  the Company  believes that it competes  favorably  with respect to
each of these factors.

     International Sales

     System sales to customers outside the U.S. accounted for approximately 35%,
36%, and 37% of the  Company's  total system sales in the fiscal years ended May
31, 1995, 1996 and 1997,  respectively.  Systems sales to customers  outside the
United States,  as a percentage of the Company's overall sales, may fluctuate on
a quarterly basis, and the percentage of such sales in a particular  quarter are
not indicative of the percentage of international sales 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 sales 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;  consequently it relies on a combination
of  copyright,  trademark  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 third  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 third parties.  The Company believes that its products
and other  proprietary  rights do not infringe the  proprietary  rights of third
parties. There can be no assurance,  however, that third parties will not assert
infringement  claims  against  the Company in the future 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 third party  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.

     The Company  believes that due to the rapid pace of  innovation  within the
telecommunications  industry (including the IVR and CTI segments of the market),
factors such as  technological  and creative  skill of personnel,  knowledge and
experience of management, reputation, maintenance and support and the ability to
develop and enhance systems,  software  products and services are more important
for establishing and maintaining a competitive position within the industry than
are patent, copyright and other legal protections for its technology.

     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.



                                       12


<PAGE>




     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. See "Price Range of Common Stock."

     Employees

     As of May 31, 1997,  Periphonics  employed 733 persons.  Approximately  100
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.

     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,  a New York City  suburb.  This  facility  consists of a
Company-owned  65,000 square-foot building located on a 3.9 acre site and 89,000
square feet leased in two nearby buildings (including an additional 7,000 square
feet which the Company leased during August 1997). The headquarters  contain the
Company's manufacturing, development, service 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  regional  sales  offices in Atlanta,
Charlotte,  Chicago,  Dallas,  Denver,  Grand Rapids, Los Angeles,  Minneapolis,
Ontario,  Pleasanton,  Providence,  San Francisco,  Seattle,  Tampa, Toronto and
Washington D.C.

     The  Company's  European  headquarters  in  Camberley,  U.K. is housed in a
17,000  square-foot  leased  space in two adjacent  buildings.  The Company also
leases a maintenance  support office of  approximately  1,500 square feet nearby
Manchester,   England.   Sales,  custom  application  development  and  on-going
maintenance  staff operates out of leased offices in Germany,  Hong Kong, Mexico
and Singapore.

     Item 3. Legal Proceedings

     The Company is not a party to any litigation  that it believes could have a
material adverse effect on the Company or its business.

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

     None


                                       13


<PAGE>





                                     PART II

     Item 5. Market for Common Equity and Related Stockholder Matters

     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 period March 31, 1995,  the date of the  Company's  initial
public offering, through May 31, 1997, as reported by NASDAQ:

<TABLE>
<CAPTION>

                       Fiscal 1995                                                  Sales Prices
                       -----------                                                  ------------

                                                                        High                            Low
                                                                        ----                            ---
<S>                                                                    <C>                              <C>    

Quarter Ended May 31, 1995                                              8 5/8                          7 3/8

                       Fiscal 1996
                       -----------

Quarter Ended August 31, 1995                                          12 1/4                          7 3/8
Quarter Ended November 30, 1995                                        14 3/4                          11 3/4
Quarter Ended February 29, 1995                                        13 7/8                          10 1/2
Quarter Ended May 31, 1996                                               18                            10 3/8

                       Fiscal 1997
                       -----------

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

</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 26, 1997
is  approximately  349.  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, 1997 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, 1997 and
1996,  and for each of the  three  years in the  period  ended  May 31,  1997 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.

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

<TABLE>
<CAPTION>


                                                         1993         1994         1995 (1)        1996         1997
                                                         ----         ----         ----            ----         ----
<S>                                                    <C>          <C>            <C>           <C>           <C>   

System sales........................................   $29,906      $41,192       $51,747       $71,800      $86,144
Service revenues....................................     9,492       10,293        13,030        17,003       25,100
                                                       -------      -------        ------        ------      -------
  Total revenues....................................    39,398       51,485        64,777        88,803      111,244
                                                       -------      -------        ------        ------      -------
Cost of system sales................................    13,677       18,653        23,686        32,798       38,858
Cost of service revenues............................     6,750        7,748         8,387        10,956       14,924
                                                       -------      -------        ------        ------      -------
  Total cost of revenues............................    20,427       26,401        32,073        43,754       53,782
                                                       -------      -------        ------        ------      -------
Gross profit........................................    18,971       25,084        32,704        45,049       57,462
                                                       -------      -------        ------        ------      -------
Selling, general and
 administrative.....................................    13,062       15,249         18,749       22,587       27,737
Research and development............................     4,406        4,961          5,831        7,933       10,698
Non-recurring, noncash compensation charge (1)......       -            -            1,250          -             -
                                                        --------     --------      -------       ------      -------
  Total operating expenses..........................    17,468       20,210         25,830       30,520       38,435
                                                       -------      -------       --------       ------      -------
Earnings from operations............................     1,503        4,874          6,874       14,529       19,027
                                                       -------      -------       --------       ------      -------
Interest expense....................................      (673)        (936)         (992)          -             -
Interest and other income...........................       117          159           170           885        1,242
Foreign exchange gain (loss)........................       175         (464)           88          (345)         (49)
                                                       -------      --------      -------        -------     -------
  Total other expenses..............................     (381)       (1,241)         (734)          540        1,193
                                                       -------      --------      --------       ------      -------
Earnings before provision for income
 taxes and cumulative effect of
 change in accounting principle ....................     1,122         3,633        6,140        15,069       20,220
Provision for income taxes..........................       579         1,599        2,956         5,854        7,583
                                                       -------      --------      -------        ------      -------
Earnings before cumulative effect
 of change in accounting principle .................       543         2,034        3,184         9,215       12,637
Cumulative effect of change
 in accounting principle (2) .......................       -              83         -             -              -
                                                       ---------    ---------     -----------   ------------ -------
Net earnings........................................   $   543      $  1,951      $ 3,184       $ 9,215      $12,637
                                                       =======      ========      =======       =======      =======

Earnings per Common and Common Equivalent Share:
Earnings before cumulative effect
 of change in accounting principle..................   $  0.05      $   0.22      $  0.33       $  0.69     $  0 .90
Cumulative effect of change in
 accounting principle...............................       -           (0.01)         -             -            -
                                                       ---------    ---------     ----------    -----------  -------
Earnings per common share...........................   $  0.05      $   0.21      $  0.33       $ 0 .69    $   0 .90
                                                       =======      ========      =======       ========     =======
Weighted average number of common 
 and common equivalent shares.......................     7,864         9,228         9,778       13,260       14,005
                                                       =======      ========       =======       ========    =======

</TABLE>




                                       16


<PAGE>





<TABLE>
<CAPTION>


                                                          1993         1994        1995             1996           1997
                                                          ----         ----        ----             ----           ----
<S>                                                     <C>         <C>          <C>             <C>            <C>

Balance Sheet Data:
Working capital......................................  $14,574      $13,837      $27,550         $48,476        $55,200
Total assets.........................................   28,460       33,714       47,722          75,103         93,583
Total debt...........................................   11,285       10,032          -               -               -
Redeemable cumulative convertible preferred stock
 issued by subsidiary                                    1,215        1,215        1,215             -               -
Redeemable cumulative convertible preferred stock....    4,500        4,500          -               -               -
Common stockholders' equity..........................    5,337        6,289       33,576          58,781         72,208

</TABLE>


     (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. See Note
10 of notes to consolidated financial statements.

     (2) During fiscal 1994,  the Company  changed its method of accounting  for
income taxes to conform to Statement of Financial Accounting Standards No. 109.

     (3) Earnings per common and common  equivalent  share has been  computed by
dividing net  earnings,  after  reduction for preferred  stock  dividends,  when
applicable,  by  the  weighted  average  number  of  common  shares  and  common
equivalent  shares  outstanding.   Common  equivalent  shares  included  in  the
computation represent common equivalent shares from convertible preferred stock,
when applicable, and dilutive common equivalent shares from stock options (using
the  treasury  stock  method).  See Note 2 of notes  to  consolidated  financial
statements.

     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.

     Fiscal Years Ended May 31, 1996 and 1997

     Total Revenues.  Total revenues  increased by 25.3%,  from $88.8 million in
fiscal 1996 to $111.2 million in fiscal 1997.  System sales  increased by 20.0%,
from $71.8 million in fiscal 1996 to $86.1 million in fiscal 1997.  The increase
in  system  sales  was due to a 18.6%  increase  in  domestic  sales and a 22.4%
increase in  international  sales  primarily due to continued  growth in new and
upgraded system requirements.  The increase in system sales was primarily due to
increases in unit sales volume.  Service revenues increased by 47.6%, from $17.0
million in fiscal 1996 to $25.1  million in fiscal  1997,  primarily  due to the
addition of units to the service  base,  as well as an increase in  installation
revenues.

     Gross Profit.  The Company's  gross profit  increased by $12.4 million from
$45.0 million in fiscal 1996 to $57.5 million in fiscal 1997.  Gross profit as a
percentage  of total  revenues  increased  from 50.7% in fiscal 1996 to 51.7% in
fiscal 1997.  Gross profit on system sales increased by $8.3 million,  or 21.2%,
from $39.0 million in fiscal 1996 to $47.3 million in fiscal 1997.  Gross margin
on system  sales  increased  from 54.3% in fiscal 1996 to 54.9% in fiscal  1997.
Gross profit on service revenues increased by $4.1 million,  or 68.3%, from $6.0
million in fiscal 1996 to $10.2 million in fiscal 1997.  Gross margin on service
revenues was 35.6% and 40.5% in fiscal years 1996 and 1997, respectively.

     Selling,  General  and  Administrative   Expenses.   Selling,  general  and
administrative ("SG&A") expenses were $22.6 million and $27.7 million for fiscal
1996 and 1997, respectively, or 25.4% and 24.9% of total revenues, respectively.
The  increase in the dollar  amount of the SG&A  expenses was  primarily  due to
expansion  of the  sales  effort in both  domestic  and  international  markets,
increased sales  commissions due to higher revenues and increases in expenses to
support the increased level of sales. SG&A expenses decreased as a percentage of
total revenues due to the Company's  ability to leverage  certain fixed expenses
over its growing revenue base.

     Research  and  Development  Expenses.   Research  and  development  ("R&D")
expenses  were  $7.9  million  and  $10.7  million  for  fiscal  1996 and  1997,
respectively, or 8.9% and 9.6% of total revenues,  respectively. The increase in
the dollar  amount of research and  development  expense  reflects the continued
expansion of the Company's R&D staff which increased from 101 to 128 between May
31, 1996 and 1997.  R&D expenses  are charged to  operations  as  incurred,  and
software  development costs have not been capitalized.  The Company expects such
expenditures to continue to increase,  although such expenses as a percentage of
total revenues may vary from period to period.

     Other  Income  (Expense).  Other income was $1.2 million for fiscal 1997 as
compared to $0.5  million in fiscal 1996.  Interest  income was $0.9 million and
$1.2 million in fiscal 1996 and fiscal 1997, respectively. Foreign exchange gain
(loss) decreased from a loss of $0.4 million in fiscal 1996 to no loss in fiscal
1997.

     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  resulted 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 38.8% and 37.5%
for fiscal 1996 and fiscal 1997, respectively.

     Foreign  Operations.  The Company's  European  subsidiary  had an operating
profit of $0.4 million during fiscal 1997 as compared to an operating  profit of
$0.8 million during fiscal 1996 (see Note 12 of notes to consolidated  financial
statements).  The  decline in  profitability  was  primarily  due to lower gross
margins on system sales and higher SG&A expenses  associated with infrastructure
growth.  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  $0.6
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 1996 and fiscal 1997, respectively.

     Fiscal Years Ended May 31, 1995 and 1996

     Total Revenues.  Total revenues  increased by 37.1%,  from $64.8 million in
fiscal 1995 to $88.8  million in fiscal 1996.  System sales  increased by 38.8%,
from $51.7 million in fiscal 1995 to $71.8 million in fiscal 1996.  The increase
in  system  sales  was due to a 35.8%  increase  in  domestic  sales and a 44.5%
increase in  international  sales and was in part related to the introduction of
the VPS/is  system,  a new RISC and UNIX based  product.  The increase in system
sales was  primarily  due to increases in unit sales  volume.  Service  revenues
increased by 30.5%, from $13.0 million in fiscal 1995 to $17.0 million in fiscal
1996,  primarily due to the addition of units to the service base, as well as an
increase in installation revenues.

     Gross Profit.  The Company's  gross profit  increased by $12.3 million from
$32.7 million in fiscal 1995 to $45.0 million in fiscal 1996.  Gross profit as a
percentage  of total  revenues  increased  from 50.5% in fiscal 1995 to 50.7% in
fiscal 1996. Gross profit on system sales increased by $10.9 million,  or 39.0%,
from $28.1 million in fiscal 1995 to $39.0 million in fiscal 1996.  Gross margin
on system  sales  increased  from 54.2% in fiscal 1995 to 54.3% in fiscal  1996.
Gross profit on service revenues increased by $1.4 million,  or 30.2%, from $4.6
million in fiscal 1995 to $6.0 million in fiscal  1996.  Gross margin on service
revenues was 35.6% in both fiscal 1995 and fiscal 1996.

     Selling,  General  and  Administrative   Expenses.   Selling,  general  and
administrative ("SG&A") expenses were $18.7 million and $22.6 million for fiscal
1995 and 1996, respectively, or 28.9% and 25.4% of total revenues, respectively.
The  increase in the dollar  amount of the SG&A  expenses was  primarily  due to
expansion  of the  sales  effort in both  domestic  and  international  markets,
increased  sales  commissions  due to the  significant  increase in revenues and
increases in expenses to support the  increased  level of sales.  SG&A  expenses
decreased as a percentage  of total  revenues  due to the  Company's  ability to
leverage certain fixed expenses over its growing revenue base.

     Research  and  Development  Expenses.   Research  and  development  ("R&D")
expenses  were  $5.8  million  and  $7.9  million  for  fiscal  1995  and  1996,
respectively, or 9.0% and 8.9% of total revenues,  respectively. The increase in
the dollar  amount of research and  development  expense  reflects the continued
expansion of the Company's R&D staff which  increased from 69 to 101 between May
31, 1995 and 1996.  R&D expenses  are charged to  operations  as  incurred,  and
software  development costs have not been capitalized.  The Company expects such
expenditures to continue to increase,  although such expenses as a percentage of
total revenues may vary from period to period.

     Non-recurring  Noncash Stock Option  Compensation  Expense.  On February 1,
1995, the Company accelerated the vesting on 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,  equal to the difference between the formula price
as of February 1, 1995 (which was calculated  utilizing a formula based upon the
book value of the  Company's  Common  Stock) of all  outstanding  stock  options
issued  subsequent to January 28, 1988 and their  estimated value on February 1,
1995 (based upon the  initial  public  offering  price of the  Company's  Common
Stock).

     Other  Income  (Expense).  Other income was $0.5 million for fiscal 1996 as
compared  to other  expense of $0.7  million in fiscal  1995.  Interest  expense
decreased  from $1.0  million in fiscal  1995 to $0 in fiscal  1996,  due to the
elimination  of debt by the use of proceeds  from the Company's  initial  public
offering.  Interest  income was $0.2 million and $0.9 million in fiscal 1995 and
fiscal 1996.  Foreign exchange gain (loss) decreased from a gain of $0.1 million
in fiscal 1995 to a loss of $0.4 million in fiscal 1996.

     Income  Taxes.   Variations  in  the  customary  relationship  between  the
provision for income taxes and the statutory  income tax rate  primarily  result
from foreign  subsidiaries'  net operating  losses which did not produce current
tax benefits,  the utilization of research and development tax credits and state
and local income taxes. The Company's  effective income tax rates were 48.1% and
38.8% for fiscal 1995 and fiscal 1996, respectively. Excluding the effect of the
non-recurring  noncash  compensation  charge the  effective  income tax rate for
fiscal 1995 would have been 40.0%. See Note 8 of notes to consolidated financial
statements.

     Foreign  Operations.  The Company's  European  subsidiary  had an operating
profit of $0.8 million  during  fiscal 1996 as compared to an operating  loss of
$0.2 million during fiscal 1995 (see Note 12 of notes to consolidated  financial
statements).  The increase in profitability  was primarily due to an increase in
the gross margin on increased  system sales.  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  $0.9  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  fiscal  1995 and  fiscal  1996,
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 $0.2 million, $9.6
million and $7.3 million in fiscal 1995, 1996 and 1997, respectively. At May 31,
1997, the Company had working capital of $55.2 million,  including $25.1 million
of cash and cash  equivalents.  The Company expects its working capital needs to
increase along with future revenue growth.

     At May 31, 1997,  current  assets  increased by $11.9 million while current
liabilities  increased  by $5.1  million as  compared to May 31,  1996.  Current
assets  increased  principally  as a result  of  increases  in  inventories  and
accounts receivable due to higher operating levels.

     The  average  days'  sales  outstanding  (calculated  by  dividing  the net
accounts  receivable at the balance sheet date) were  approximately  98 days, 83
days and 111 days at May 31, 1995, 1996 and 1997, respectively.

     In January 1995,  the Company  increased its line of credit to $8.0 million
with interest  charged at the prime rate plus 0.25%.  The line of credit expires
on November 30, 1997. As of May 31, 1997,  the Company had no  borrowings  under
this line of credit

     The Company made capital expenditures  totalling $2.4 million, $5.9 million
and $10.3 million during fiscal 1995, 1996 and 1997, respectively.

     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.

     Recent Financial Accounting Standards Board Statements

     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.  131,  "Disclosures  about  Segments of an
Enterprise  and  Related  Information  ("SFAS  131"),   Statement  of  Financial
Accounting  Standards No. 130,  "Reporting  Comprehensive  Income" ("SFAS 130"),
Statement of Financial  Accounting Standards No. 129, "Disclosure of Information
about Capital  Structure"  ("SFAS 129"),  and Statement of Financial  Accounting
Standards No. 128,  "Earnings per Share" ("SFAS 128"). SFAS 131 and SFAS 130 are
effective for fiscal years  beginning  after  December 15, 1997 and SFAS 129 and
128 are  effective  for fiscal years ending  December 31, 1997.  The adoption of
these  pronouncements is not expected to have a material impact on the Company's
consolidated financial statements.

     Foreign Currency Transaction

     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.

     Inflation

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

     Item 8. Consolidated Financial Statements

     The information is contained on Pages F-1 through F-19 hereof.

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

     None.


                                       17


<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, 1997 and 1996...................................................F-3


Consolidated Statements of Earnings for the years ended
  May 31, 1997, 1996 and 1995.............................................................................F-4


Consolidated Statements of Stockholders' Equity for the years
  ended May 31, 1997, 1996 and 1995.......................................................................F-5


Consolidated Statements of Cash Flows for the years ended
  May 31, 1997, 1996 and 1995.............................................................................F-6


Notes to Consolidated Financial Statements.........................................................F-7 - F-19


(a)(2)  FINANCIAL STATEMENT SCHEDULE

Schedule II - Valuation and Qualifying Accounts...........................................................S-1


(a)(3)  EXHIBITS

 *3.1          Form of Amended and Restated Certificate of Incorporation
 *3.2          Form of Amended and Restated By-Laws
 *4.1          Form of Common Stock Certificate
*10.1          1986 Incentive Stock Option Plan
*10.2          1995 Stock Option Plan
*10.3          1995 Non-Employee Director Stock Option Plan
*10.13         Performance Incentive Plan
 11            Statement re computation of per share earnings
*22.1          List of Subsidiaries
 23            Consent of Deloitte & Touche LLP
 27            Financial Data Schedule

</TABLE>


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

     *Incorporated  by reference to the Registrant's  Registration  Statement on
Form S-1, Registration Number 33-89294.

     (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, 1997.



                                       18


<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 28, 1997

     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
------------------------         Executive Officer (Principal Operating Officer)           August 28, 1997     
Peter J. Cohen


/s/Richard A. Daniels            Senior Vice President, Treasurer and Director             August 28, 1997
------------------------
Richard A. Daniels                


/s/Kevin J. O'Brien              Chief Financial Officer, Vice President-Finance           August 28, 1997
------------------------         and Administration (Principal Accounting and 
Kevin J. O'Brien                 Financial Officer), Secretary and Director

/s/Jayandra Patel                Sr. Vice President-Product Development, Assistant         August 28, 1997
------------------------         Treasurer and Director
Jayandra Patel


                                 Director                                                  August __, 1997
------------------------
Edward H. Blum                         


                                                                                                 
                                 Director                                                  August __, 1997
------------------------
Peter Breitstone

</TABLE>

                                       19


<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, 1997 and 1996                                             F-3

Consolidated Statements of Earnings for the years
  ended May 31, 1997, 1996 and 1995                                                                 F-4

Consolidated Statements of Stockholders' Equity for
  the years ended May 31, 1997, 1996 and 1995                                                       F-5

Consolidated Statements of Cash Flows for the years
  ended May 31, 1997, 1996 and 1995                                                                 F-6

Notes to Consolidated Financial Statements                                                      F-7 - F-19


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

                                       F-1


<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,  l997 and  1996,  and the  related
consolidated  statements  of earnings,  stockholders'  equity and cash flows for
each of the three  years in the  period  ended May 31,  1997.  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, 1997 and 1996,  and the results of their  operations
and their  cash flows for each of the three  years in the  period  ended May 31,
1997 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 14, 1997


                                       F-2


<PAGE>



PERIPHONICS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)


<TABLE>
<CAPTION>

                                                                                                  May 31,
ASSETS                                                                               1997                 1996
------                                                                            ----------           -------
<S>                                                                               <C>                 <C>

CURRENT ASSETS:
   Cash and cash equivalents                                                       $25,092             $18,664
   Short-term investments                                                             -                  8,603
   Accounts receivable, less allowance for doubtful accounts
     of $1,000 and $890, respectively (Note 3)                                      35,735              23,829
   Inventories (Note 4)                                                             12,858              11,097
   Deferred income taxes (Note 8)                                                    1,357               1,261
   Prepaid expenses and other current assets                                         1,211                 935
                                                                                   -------             -------
                  Total Current Assets                                              76,253              64,389

PROPERTY, PLANT AND EQUIPMENT, net
   (Note 5)                                                                         16,952              10,426

OTHER ASSETS                                                                           378                 288

                                                                                   $93,583             $75,103
                                                                                   =======             =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
   Accounts payable                                                                $ 5,928             $ 4,247
   Accrued expenses and other current liabilities (Note 6)                          15,125              11,666
                                                                                   -------             -------
                  Total Current Liabilities                                         21,053              15,913

DEFERRED INCOME TAXES (Note 8)                                                         322                 409
                                                                                   -------             -------
                                                                                    21,375              16,322
                                                                                   -------             -------

COMMITMENTS AND CONTINGENCIES
   (Notes 7 and 11)

STOCKHOLDERS' EQUITY (Notes 10 and 11):
   Preferred stock, par value $.01 per share, 1,000,000
     shares authorized, none issued                                                  -                  -
   Common stock, par value $.0l per share; authorized:  30,000,000
     shares, outstanding:  13,693,758 and 13,598,164 shares, respectively              137                 136
   Additional paid-in capital                                                       42,559              41,770
   Retained earnings                                                                29,512              16,875
                                                                                   -------             -------
                                                                                    72,208              58,781
                                                                                   -------             -------
                                                                                   $93,583             $75,103
                                                                                   =======             =======

</TABLE>






     See notes to consolidated financial statements.

                                       F-3


<PAGE>



PERIPHONICS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands)

<TABLE>
<CAPTION>

                                                                                     Year Ended May 31,
                                                                                     ------------------
                                                                            1997          l996          1995
<S>                                                                          <C>          <C>           <C>



System sales                                                            $  86,144     $  71,800     $  51,747
Service revenues                                                           25,100        17,003        13,030
                                                                        ---------     ---------     ---------
     Total revenues                                                       111,244        88,803        64,777
                                                                        ---------     ---------     ---------

Cost of system sales                                                       38,858        32,798        23,686
Cost of service revenues                                                   14,924        10,956         8,387
                                                                        ---------     ---------     ---------
     Cost of revenues                                                      53,782        43,754        32,073
                                                                        ---------     ---------     ---------

Gross profit                                                               57,462        45,049        32,704
                                                                        ---------     ---------     ---------

Operating expenses:
  Selling, general and administrative (Note 10)                            27,737        22,587        18,749
  Research and development                                                 10,698         7,933         5,831
  Nonrecurring, non-cash compensation charge (Note 10)                      -             -             1,250
                                                                        ---------     ---------     ---------

                                                                           38,435        30,520        25,830
                                                                        ---------     ---------     ---------

Earnings from operations                                                   19,027        14,529         6,874
                                                                        ---------     ---------     ---------

Other income (expense):
  Interest expense                                                          -             -              (992)
  Interest and other income                                                 1,242           885           170
  Foreign exchange (loss) gain                                                (49)         (345)           88
                                                                        ---------     ---------     ---------
                                                                            1,193           540          (734)
                                                                        ---------     ---------     ---------
Earnings before provision for income taxes                                 20,220        15,069         6,140

Provision for income taxes (Note 8)                                         7,583         5,854         2,956
                                                                        ---------     ---------     ---------

Net earnings                                                            $  12,637     $   9,215     $   3,184
                                                                        =========     =========     =========

Net earnings per common and common
  equivalent share                                                      $   0.90      $    0.69     $    0.33
                                                                        ========      =========     =========

Weighted average number of common and
  common equivalent shares (Note 10c)                                      14,005        13,260         9,778
                                                                        =========     =========     =========



</TABLE>







     See notes to consolidated financial statements.


                                       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    Retained          Treasury Stock     Stockholders'
                                  Shares      Amount     Capital    Earnings        Shares     Amount       Equity
<S>                              <C>           <C>       <C>         <C>            <C>       <C>

BALANCE, June 1, 1994            7,500,000     $ 75     $  1,592     $ 4,622           -      $   -        $  6,289
Book value stock
 options (Note 10)                   -           -         1,274       -               -          -           1,274
Net earnings                         -           -         -           3,184           -          -           3,184
Conversion of Series A
   preferred stock (Note 9)      1,500,000       15        4,485       -               -          -           4,500
Purchase of treasury
  stock (Note 9)                     -           -         -           -          (1,540,000)  (8,862)       (8,862)
Initial public offering of
  common stock (Note 1)          2,800,000       28       18,287       -           1,500,000    8,789        27,104
Exercise of stock options          290,000        2          231       -               -          -             233
Retirement of treasury stock       (40,000)      -           (73)      -              40,000       73           -
Dividends declared and paid
  on preferred stock (Note 9)        -           -         -            (146)          -          -           (146)
                                 ----------     ----     --------    -------    ------------   -------     --------
                                                                                                              
BALANCE, May 31, 1995           12,050,000      120       25,796       7,660           -          -         33,576
Net earnings                         -            -        -           9,215           -          -          9,215
Secondary public offering
  of common stock (Note 1)       1,200,000       12       13,947       -               -          -         13,959
Exercise of stock options and
  stock issued under employee
  stock purchase plan (Note 10)    269,914        4          442       -               -          -            446

Tax benefit relating to
  employee stock options             -            -          370       -               -          -            370

Conversion of preferred
  stock held by subsidiary
  (Note 9)                          78,250        -        1,215       -               -          -          1,215
                              ------------     -----    --------     -------    ------------  ----------- --------
BALANCE, May 31, 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 10)                    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
                              ============     ======   ========     =======    ============  =========  =========
</TABLE>


See notes to consolidated financial statements.

                                       F-5


<PAGE>



PERIPHONICS CORPORATION AND SUBSIDIARIES

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


                                                                                        Year Ended May 31,
                                                                                   1997         1996        1995
                                                                                   ----         ----        ----

<S>                                                                             <C>          <C>          <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
  Net earnings                                                                  $ 12,637     $  9,215    $ 3,184
  Adjustments to reconcile net earnings to net cash
    and cash equivalents provided by operating activities:
    Depreciation and amortization                                                  3,725        2,867      2,216
    Provision for losses on accounts receivable                                      110          140        484
    Provision for inventory reserves                                                 418          450        765
    Deferred income taxes                                                           (183)        (323)      (253)
    Stock option compensation expense                                              -             -         1,274
    Changes in operating assets and liabilities:
      Increase in accounts receivable                                            (12,016)      (1,892)    (8,459)
      Increase in inventories                                                     (2,179)      (4,104)      (490)
      Increase in prepaid expenses and other current assets                         (276)         (20)      (262)
      Increase in other assets                                                       (90)         (76)      (189)
      Increase in accounts payable and accrued expenses and
        other current liabilities                                                  5,140        3,364      1,896
                                                                                --------     --------    -------
         Net cash and cash equivalents provided by
            operating activities                                                   7,286        9,621        166
                                                                                --------     --------    -------

CASH FLOWS FROM INVESTING ACTIVITIES -
  Purchases of property, plant and equipment, net                                (10,251)      (5,882)    (2,449)
  Purchases of short-term investments                                             (6,283)      (8,603)     -
  Proceeds from the sale of short term investments                                14,886        -          -
                                                                                --------     --------    -------

         Net cash and cash equivalents used in
           investing activities                                                   (1,648)     (14,485)    (2,449)
                                                                                ---------    --------    --------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from public offering of common stock                                    -           13,959     27,104
  Purchase of treasury stock                                                       -            -         (8,862)
  Proceeds from long-term debt                                                     -            -         11,045
  Principal repayments of long-term debt                                           -            -        (21,077)
  Payment of dividends                                                             -            -         (1,181)
  Proceeds from stock options exercised including related
    tax benefits                                                                     790          816        233
                                                                                --------     --------    -------

         Net cash and cash equivalents provided
            by financing activities                                                  790       14,775      7,262
                                                                                --------     --------    -------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                          6,428        9,911      4,979

CASH AND CASH EQUIVALENTS, beginning of year                                      18,664        8,753      3,774
                                                                                --------     --------    -------

CASH AND CASH EQUIVALENTS, end of year                                          $ 25,092     $ 18,664    $ 8,753
                                                                                ========     ========    =======

SUPPLEMENTAL DISCLOSURES OF CASH
  FLOW INFORMATION:
    Cash paid during the year for:
    Interest                                                                    $ -          $  -        $   992
                                                                                ========     ========    =======
    Income taxes                                                                $  5,211     $  6,079    $ 2,150
                                                                                ========     ========    =======

</TABLE>

See notes to consolidated financial statements.

                                       F-6


<PAGE>



PERIPHONICS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

     1.  DESCRIPTION  OF  BUSINESS,  BASIS OF  PRESENTATION  AND INITIAL  PUBLIC
OFFERING

     Periphonics Corporation and subsidiaries (the "Company") develops,  markets
and supports high performance  interactive voice response ("IVR") systems, based
on industry-standard,  open architecture hardware and operating system software,
in combination with its own proprietary IVR technology that address the needs of
mid-size and large-scale customer installations. During 1986, the Company became
a  wholly-owned  subsidiary of 4000 VMH Corp. as a result of the purchase of all
of the Company's  outstanding  common stock from Exxon Corporation  ("Exxon") by
4000 VMH Corp. The  transaction  was accounted for using the purchase  method of
accounting.  The aggregate purchase price of $5,542  approximated the net assets
of the Company at the closing date. Effective March 30, 1995, 4000 VMH Corp. was
merged into the Company (the "Merger"). The accompanying  consolidated financial
statements  have been  prepared  giving  effect  to the  Merger.  The  financial
position  and results of  operations  of 4000 VMH Corp.  are not material to the
accompanying consolidated financial statements.


     On March 30, 1995, the Company  consummated  an initial public  offering of
common stock (the "Public Offering").  In the Public Offering,  the Company sold
4,300,000 shares of common stock and selling  stockholders sold 1,200,000 shares
of common  stock at $7.00 per share.  The  Company  did not  receive  any of the
proceeds from the sale of common stock by the selling stockholders. Net proceeds
of $27,104  (after  underwriters  discounts of $2,107 and  offering  expenses of
$889) were  received by the Company and were used to repay  borrowings  totaling
$14,248 pursuant to various credit agreements and to reacquire  1,500,000 shares
of its common  stock from Exxon for  approximately  $8,789  (plus the payment to
Exxon of approximately $207 of accumulated dividends) with the balance of $3,860
to be used for general corporate purposes.

     In April 1995, the underwriters  exercised their  over-allotment  option to
purchase an additional 825,000 shares from the selling stockholders. The Company
did not receive any of the proceeds.

     On November 17, 1995, the Company  consummated a secondary  public offering
of common stock (the  "Secondary  Offering").  In the  Secondary  Offering,  the
Company  sold  1,200,000  shares of common stock and selling  stockholders  sold
1,310,000  shares of common  stock at $12.75  per  share.  The  Company  did not
receive  any of the  proceeds  from the  sale of  common  stock  by the  selling
stockholders.   Net  proceeds  of  approximately   $13,959  (after  underwriting
discounts  of $876 and offering  expenses of $465) were  received by the Company
and are to be used for general  corporate  purposes,  including working capital,
facilities expansion, and possible acquisitions of businesses,

                                      F-7


<PAGE>


products, or technologies complementary to the Company's business.

     On November 22,  1995,  the  underwriters  exercised  their  over-allotment
option to purchase an additional  376,500 shares from the selling  shareholders.
The Company did not receive any of the proceeds.

     Amounts of shares and per share  amounts in this note have been adjusted to
reflect the stock split (See Note 10c).

     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.  Service
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, 1997,
1996 and 1995 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 saleable 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,  1996,  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
six months. 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

                                       F-8


<PAGE>



the life of the lease or the  estimated  life of the  asset,  whichever  is
less.

     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.
SFAS 121 had no effect on the Company's 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 common and common  equivalent  share - Earnings per common
and common  equivalent  share has been  computed by dividing net earnings by the
weighted   average  number  of  common  shares  and  common  share   equivalents
outstanding.  Common share  equivalents  included in the  computation  represent
common share equivalents from convertible preferred stock, when applicable,  and
dilutive common  equivalent  shares from stock options (using the treasury stock
method).


                                      F-9


<PAGE>



     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,  and accounts payable.  At May 31, 1997 and 1996, the fair
value of the Company's financial instruments approximated the carrying value.

     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").

     3. ACCOUNTS RECEIVABLE

                                                   1997              1996
                                                   ----              ----
     Billed                                    $   27,003       $   16,055
     Unbilled                                       8,732            7,774
                                                ----------       ----------
                                               $   35,735       $   23,829
                                                ==========       ==========

     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, 1996 were collected  during fiscal 1997.
All unbilled receivables as of May 31, 1997 are expected to be collected in less
than one year.

     4.  INVENTORIES

                                                   1997              1996
                                                   ----              ---- 
Raw  materials                                 $  7,624           $  6,218
Work-in-process                                   5,234              4,879
                                              ----------         --------- 
                                               $ 12,858           $ 11,097
                                              ==========         =========

     5. PROPERTY, PLANT AND EQUIPMENT, net

<TABLE>
<CAPTION>

                                                                 Useful Lives         1997              1996
                                                                 ------------         ----              ----
                                                                  (in years)
<S>                                                               <C>                 <C>             <C>    

     Land                                                                          $      906       $      156
     Building and improvements                                        40                5,446            3,891
     Machinery, equipment, furniture and fixtures                    3-10              20,093           13,948
     Customer service equipment                                        5                6,796            4,927
                                                                                   ----------       ----------
                                                                                       33,241           22,922

     Less accumulated depreciation                                                     16,289           12,496
                                                                                   ----------       ----------
                                                                                   $   16,952       $   10,426
                                                                                   ==========       ==========
</TABLE>



                                      F-10


<PAGE>




     Depreciation expense relating to property,  plant and equipment amounted to
approximately  $3,702,  $2,833 and $2,063 for the years ended May 31, 1997, 1996
and 1995, respectively.

                                      F-11


<PAGE>



     6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>

                                                                                      1997              1996
                                                                                      ----              ----
<S>                                                                                 <C>               <C>

     Customer advance payments                                                     $    6,173       $   6,130
     Accrued payroll, commissions, bonuses,
       fringe benefits and payroll taxes                                                4,211           3,257
     Income taxes payable                                                               2,864             610
     Other accrued expenses                                                             1,877           1,669
                                                                                   ----------       ---------
                                                                                   $   15,125       $  11,666
                                                                                   ==========       =========
</TABLE>

     7. LINE OF CREDIT

     The  Company  has an  $8,000  unsecured  line of credit  with a bank  which
expires on November  30,  1997.  There were no  borrowings  against such line of
credit at May 31, 1997 or 1996.  Any borrowings on this line of credit will bear
interest  at the prime rate  (8.50  percent  at May 31,  1997) plus  one-quarter
percent.

     8. INCOME TAXES

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

                                                                     1997             1996               1995
                                                                     ----             ----               ----
<S>                                                                <C>              <C>                <C>   

     Current:
       Federal                                                    $  5,880          $  4,574           $ 2,410
       State and local                                               1,827             1,596               799
       Foreign                                                          59                 7               -
                                                                  --------          --------           -------

                                                                     7,766             6,177             3,209
                                                                  --------          --------           -------
     Deferred:
       Federal                                                        (136)             (240)             (200)
       State and local                                                 (47)              (83)              (53)
                                                                  --------          --------           -------
                                                                      (183)             (323)             (253)
                                                                  --------          --------           -------

              Total                                               $  7,583          $  5,854           $ 2,956
                                                                  ========          ========           =======
</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>

                                                                       1997             1996              1995
                                                                       ----             ----              ----
<S>                                                                   <C>              <C>               <C> 


     Statutory Federal income tax rate                                 34.0%            34.0%             34.0%
     Foreign subsidiaries' net operating losses not producing
       current tax benefit                                              -                -                 2.6
     State and local income taxes (net of Federal tax benefit)          5.8              6.6               8.0
     Exempt income of foreign sales corporation                       (1.4)            (1.8)              (1.2)
     Research and development tax credits                             (1.9)              -                (2.2)
     Non-deductible stock option compensation expense                   -                -                 7.1
     Other                                                              1.0              -                 (.2)
                                                                      -----            -----             ------
     Effective tax rate                                                37.5%            38.8%             48.1%
                                                                      =====            =====             ======
</TABLE>


                                                      F-12


<PAGE>



     At May 31, 1997,  1996 and 1995,  the  deferred tax assets and  liabilities
consisted of:

<TABLE>
<CAPTION>

                                                    1997                        1996                    1995
                                ----------------------------     ----------------------   ------------------
                                     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         $    397         $    -         $   310        $ -      $   302      $ -
     Inventories                      710              -             691          -          483        -
     State tax credit
       carryforwards                   32              -              32          -           32        -
     Unrealized foreign 
       exchange losses                218              -             228          -           94        -
     Property, plant, and
       equipment                     -                332              -         419           -       323
     Other                             53             (10)            67         (10)         75       (10)
     Net operating loss carry-
       forwards of foreign
       subsidiaries                   366             -              404           -          625        -
                                 --------         ----------     -------      -------     -------     -----
                                    1,776             322          1,732         409        1,611      313
        Less valuation allowance      419             -              471           -          700       69
                                 --------         ----------     -------      -------     -------     -----
     Total                       $  1,357         $   322        $ 1,261      $  409      $   911  $   382
                                 ========         =========      =======      =======     =======   =======
</TABLE>


     The  valuation  allowance  decreased by  approximately  $52 and $298 during
fiscal 1997 and 1996, respectively,  primarily as a result of the utilization of
net operating loss carryforwards of foreign subsidiaries.

     9. REDEEMABLE CUMULATIVE CONVERTIBLE PREFERRED STOCK

     a. Series A Preferred  Stock Issued to Exxon - In May 1994, the Company and
Exxon,  the  former  holder  of the  Company's  Series A  Preferred  Stock  (the
"Preferred  Stock"),  entered  into  an  agreement  which  restructured  certain
conversion,  dividend and  redemption  rights  relating to the Preferred  Stock.
Pursuant to the terms of such  agreement,  the  Company was  required to pay all
unpaid  accrued  cumulative  dividends  as of May  31,  1994  ($1,035)  in  five
quarterly  installments  of $207  beginning  June 1, 1994 and to pay all  future
dividends as they are incurred.  The  redemption  price,  as well as liquidation
value,  of the  Preferred  Stock  under the  agreement  was  $1,000  per  share.
Dividends on this Preferred Stock,  which were  cumulative,  were payable at $10
per share per quarter.

     On March 30, 1995, the effective date of the Public  Offering,  the Company
and  Exxon  executed  a Stock  Redemption  Agreement  pursuant  to which (i) the
Company paid Exxon approximately $207 in accumulated  dividends on the Preferred
Stock;  (ii) Exxon converted all of its shares of Preferred stock into 1,500,000
shares of the Company's Common Stock pursuant to existing conversion rights; and
(iii) the Company  reacquired  such  shares of Common  Stock at a price equal to
$5.86 per share. The Stock Redemption  Agreement  further provided that upon the
completion of the Company's reacquisition of the Common Stock held by Exxon, all
of Exxon's  rights as a  stockholder  of the  Company  were  terminated  and the
Company and Exxon  released and  discharged  all  obligations to the other party
arising out of Exxon's ownership of the Preferred Stock.

                                      F-13


<PAGE>




     b. Preferred  Stock Issued By Subsidiary - The Company had preferred  stock
issued by a subsidiary  of the Company,  which  consisted of 900,000  authorized
shares,  625,999 shares of which were issued in conjunction with the purchase of
certain assets of Autophon U.K. in July 1990. This preferred stock was stated at
$1,215 based upon the fair market value of the assets  acquired.  The  preferred
stock was convertible  into either common stock of Periphonics  Voice Processing
Systems  Limited (a subsidiary of the Company) at a ratio of 1,000 to 1, or into
78,250 shares of common stock of the Company  through the exercise of a warrant.
Effective May 31, 1996, the holder of this preferred stock exercised the warrant
to convert such shares into 78,250 shares of common stock of the Company.

     10. STOCKHOLDERS' EQUITY

     a. Stock  option  plans - The l986  Incentive  Stock Option Plan (the "1986
Plan")  allowed for the  issuance  of options  to  purchase
1,000,000  shares  of  common  stock by  employees.  Options  were  issued at an
exercise  price which was  calculated  utilizing  a formula  based upon the book
value of the Company's common stock at the date of grant (the "Formula  Price").
Options under the 1986 Plan are exercisable in 25 percent  increments  beginning
one year  after the date of grant and  expire up to ten years  after the date of
grant.  While the Company was privately  held, it  maintained  the right,  under
certain  conditions,  to repurchase  shares obtained by employees under the 1986
Plan at the Formula Price  calculated at the date of repurchase.  As of the date
of the Public  Offering,  the Company no longer has the right to repurchase such
shares.  The Company's  Board of Directors  (the "Board") has  determined not to
make further  grants under the 1986 Plan and to make any future  grants from the
1995 Stock Option Plan (the "1995 Plan").

     For those  options  issued  under the 1986 Plan  subsequent  to January 28,
1988, compensation expense has been recognized for the difference in the Formula
Price at the date of grant and the Formula  Price  calculated at the end of each
reporting period through February 1, 1995. Such compensation expense was $24 for
the  year  ended  May  31,  1995,  and  is  included  in  selling,  general  and
administrative   expenses  on  the  accompanying   consolidated   statements  of
operations.  On February 1, 1995,  the  Company  accelerated  the vesting on all
outstanding  stock options under 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 Plan. As a result, the Company
recorded a nonrecurring,  non-cash  compensation charge of approximately $1,250,
equal to the  difference  between the  Formula  Price of all  outstanding  stock
options  issued  subsequent  to January  28, 1988 and their  estimated  value on
February 1, 1995 (based upon the expected initial public offering price).

     The 1995 Plan has  1,200,000  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

                                     F-15


<PAGE>



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).

<TABLE>
<CAPTION>
                                                                                               Weighted
                                                  Shares              Option Price           Average Price
<S>                                             <C>                 <C>                    <C>    

         Balance, June 1, 1994                  680,000           $  0.75 - $  1.68         $      0.93
         Options granted                        208,000                $  7.00              $      7.00
         Options exercised                     (290,000)          $  0.75 - $  1.25         $      0.80
         Options canceled                        (4,000)               $  7.00              $      7.00
                                               ------------       -------------------       -----------
         Balance, May 31, 1995                  594,000           $  0.75 - $  7.00         $      3.12
         Options granted                        218,000           $  8.53 - $14.13          $     10.54
         Options exercised                      257,000)          $  0.75 - $  7.00         $      1.19
         Options canceled                       (30,000)          $  7.00 - $12.00          $      9.92
                                               ------------       -------------------       -----------
         Balance, May 31, 1996                  525,000           $  0.75 - $14.13          $      6.76

         Options granted                        241,000           $ 11.50 - $31.00          $     16.47
         Options exercised                      (77,800)          $  0.75 - $10.13          $      4.97
         Options canceled                       (24,000)          $  7.00 - $15.50          $     13.79
                                               ------------       -------------------       -----------
         Balance, May 31, 1997                  664,200           $  1.00 - $31.00          $     10.23
                                               ============       ===================       ===========
         Options exercisable at
           May 31, 1997                         200,700           $  1.00 - $14.13          $      4.57
                                               ============       ===================       ===========
</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>   

      $  1.00 - $1.67         108,000             5.86           $   1.63          108,000       $   1.63
           $  7.00            164,000             2.83           $   7.00           68,000       $   7.00
       $8.53 - $10.13         137,200             3.15           $  10.03           17,200       $   9.94
      $11.25 - $13.00          32,000             4.12           $  12.15            5,000       $  11.93
      $14.00 - $15.50         188,000             4.14           $  15.21            2,500       $  14.13
      $17.06 - $19.50          15,000             4.24           $  17.86              -               -
      $26.25 - $31.00          20,000             4.65           $  28.83              -               -
                            -----------                                          -----------

                              664,200                                              200,700
                            ===========                                          ===========
</TABLE>

         There are  591,000  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

                                                      F-16


<PAGE>



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.

<TABLE>
<CAPTION>
                                                                                               Weighted
                                                   Shares             Price Range            Average Price
<S>                                               <C>              <C>                       <C> 


         Balance, June 1, 1995                      -              $      -                      -
         Options granted                               50,000      $ 8.88 - $13.25           $     10.63
                                                 ------------      -----------------         -----------
         Balance, May 31, 1996                         50,000      $ 8.88 - $13.25           $     10.63
         Options granted                               20,000             $19.25             $     19.25
         Options exercised                             (3,750)           $  8.88             $      8.88
                                                 ------------      -------------------       ------------

         Balance, May 31, 1997                         66,250      $ 8.88 - $19.25           $     13.33
                                                 ============      ===============           ===========

         Options exercisable at
           May 31, 1997                                 8,750      $ 8.88 - $13.25           $     11.38
                                                 ============      =================         ===========
</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>

               $ 8.88             26,250             3.07           $ 8.88          3,750          $ 8.88
               $13.25             20,000             3.41           $13.25          5,000          $13.25
               $19.25             20,000             4.44           $19.25            -                 -
                              ----------                                         ---------

                                  66,250                                            8,750
                              ==========                                         =========
</TABLE>


     There are 130,000  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

                                      F-17


<PAGE>



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 1996 and 1997:  expected
life, 1.25 years following  vesting;  stock  volatility,  78 percent,  risk free
interest  rate of 6.0 percent and no  dividends  during the expected  term.  The
Company's  calculations  are based on a multiple option  valuation  approach and
forfeitures  are  recognized as they occur.  The weighted  average fair value of
options  granted  during  1997  and 1996  were  $9.22  and  $5.43,  per  option,
respectively.  If the computed  fair values of the 1997 and 1996 awards had been
amortized to expense over the vesting period of the awards, pro forma net income
would have been  approximately  $11,872  ($0.85 per share) and $8,927 ($0.67 per
share),  respectively.  However,  the  impact of  outstanding  non-vested  stock
options  granted  prior to June 1,  1995 has been  excluded  from the pro  forma
calculation;  accordingly,  the  1996 and 1997  pro  forma  adjustments  are not
indicative of future period pro forma  adjustments,  when the  calculation  will
apply to all applicable stock options.

     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 thru May 31 and  June 1 thru  November  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 400,000  shares are
available for purchase under the plan.  14,744 shares were issued under the plan
during fiscal 1997 at $14.24.

     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

                                      F-18


<PAGE>



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-19


<PAGE>



11.  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 had entered into employment contracts
with seven officers expiring through December 31, 1996. These agreements allowed
for  aggregate  annual  base  compensation  of $1,698 as well as  bonuses  based
primarily  on the profit  growth of the  Company,  as  defined in the  Company's
performance incentive plan. On March 30, 1995, the Company terminated certain of
the employment  contracts and replaced them with revised contracts.  The revised
contracts  terminate  on May 31,  1998  and  allow  for  aggregate  annual  base
compensation  consistent with the previous  agreements as well as annual bonuses
to be determined in accordance with the provisions of the Company's  performance
incentive plan. In addition,  these revised 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  had  entered  into stock
repurchase  agreements  with the  stockholders  of 4000 VMH Corp. The agreements
required the Company to repurchase, from the estate of a deceased stockholder or
from a disabled  stockholder,  all of the shares owned by the  stockholder.  The
purchase  price for the shares would be  determined  and paid as provided for in
the  agreements.  To fully fund its  obligations  under  these  agreements,  the
Company had acquired certain  disability  income and life insurance  policies on
its stockholders.  On March 30, 1995, the Company terminated the agreements. The
Company  entered into new agreements  with certain  stockholders of the Company.
The new 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.

     d. Legal  matters - The Company is involved in certain legal matters in the
normal  course of  business.  The  Company's  management  does not believe  that
resolution  of these  matters  will  have a  materially  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 1997, 1996 and 1995.

                                      F-20

     
<PAGE>



     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 noncancellable operating leases are:

               Year Ending May 31,
                      1998                                      $  2,336
                      1999                                         1,763
                      2000                                           979
                      2001                                           379
                      2002                                           344
                    Thereafter                                     2,980
                                                                 --------
                                                                $  8,781
                                                                 ========

     Rental  expense was $2,003,  $1,045 and $740 during the years ended May 31,
1997, 1996 and 1995, respectively.

12.  OPERATIONS BY GEOGRAPHIC AREA

     The  Company is  engaged  in only one  segment  and line of  business,  the
design,  manufacture  and service of interactive  voice response  systems.

                                                        Year Ended May 31,
                                                    1997       1996       1995
                                                    ----       ----       ----
 System  Sales and Service  Revenues:
Sales to unaffiliated  customers from: 
 North America                                   $ 99,895   $ 79,997   $ 57,488
Europe                                             11,349      8,806      7,289 
                                                ---------  ---------  ---------
Total  revenues to unaffiliated  customers        111,244     88,803     64,777
                                                ---------  ---------  ---------
Transfers between  geographic areas from:
 North America                                      3,815      3,665      2,635
 Europe                                                -        -           -
                                                ---------  ---------  ---------
 Total transfers between  geographic areas          3,815      3,665      2,635
                                                ---------  --------- ---------- 
 Eliminations                                      (3,815)    (3,665)    (2,635)
                                                ---------  ---------  --------- 
 Total  revenues                               $  111,244  $  88,803   $ 64,777 
                                                =========  ========= ========== 
Earnings from Operations: 
 North America                                   $ 18,686  $  13,696   $  6,791
  Europe                                              428        840       (256)
 Eliminations                                         (87)        (7)       339
                                                ---------  ---------   --------
Total earnings from  operations                 $ 19,027   $  14,529    $ 6,874
                                                 =========  =========  =========
 Identifiable  Assets:
  North America                                  $ 99,038  $78,393     $ 50,778
 Europe                                            10,279    8,051        5,580
 Eliminations                                     (15,734) (11,341)      (8,636)
                                                 ---------  ---------  ---------
  Total  identifiable  assets                    $ 93,583 $ 75,103      $47,722
                                                 =========  ========= ==========

     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, 1997,
1996 and 1995  includes  approximately  $589,  $565 and $928,  respectively,  of
intercompany  gross profit  earned by North America on system sales by Europe to
third parties.

                                      F-21


<PAGE>



     Total  revenues to customers  outside the U.S.  were  $36,380,  $28,242 and
$20,020 for the years ended May 31, 1997, 1996, and 1995, respectively.

     Export sales from the Company's  United States  operations to  unaffiliated
customers were as follows:

<TABLE>
<CAPTION>

                                                                     Year Ended May 31,
                                                          1997              1996             1995
                                                     -------------     -------------    ---------
<S>                                                    <C>                   <C>            <C>    

         Pacific Rim                                 $      13,532       $  15,907        $   7,278
         The Americas (excluding the
           United States)                                   11,499           2,836            4,892
                                                     -------------       ---------        ---------
         Total                                       $      25,031       $  18,743        $  12,170
                                                     =============       =========        =========
</TABLE>



                                                     * * * * *


                                      F-22


<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, 1997:
  Allowance for doubtful accounts        $   890            $110           $ -              $-             $ 1,000
                                         =======            ====           ===              =====          =======
  Reserve for excess and
    obsolete inventory                   $ 1,100            $418           $ -              $(368)(1)      $ 1,150
                                         =======            ====           ===              =====          =======


Year ended May 31, 1996:
  Allowance for doubtful accounts        $   750            $140           $ -              $-             $   890
                                         =======            ====           ===              =====          =======
  Reserve for excess and
    obsolete inventory                   $   950            $450           $ -              $(300)(1)      $ 1,100
                                         =======            ====           ===              =====          =======


Year ended May 31, 1995:
  Allowance for doubtful accounts        $   266            $484           $ -              $-             $   750
                                         =======            ====           ===              =====          =======
  Reserve for excess and
    obsolete inventory                   $   185            $765           $ -              $-             $   950
                                         =======            ====           ===              =====          =======

</TABLE>




     (1) Amounts written off or disposed of.