<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                  FORM 10-KSB

(Mark One)

  X      Annual Report Pursuant to Section 13 or 15(d) of the  Securities 
------   Exchange Act of 1934 for the fiscal year ended December 31, 1996.

         Transition  report  under  Section 13 or 15(d) of the  Securities 
------   Exchange  Act of 1934 from the  transition period from _____ to _____

Commission File Number 0-10385


                          VOICE CONTROL SYSTEMS, INC.
                 (Name of small business issuer in its charter)

              DELAWARE                                 75-1707970
   (State or other jurisdiction of         (I.R.S. Employer Identification No.)
   incorporation or organization)

          14140 MIDWAY ROAD
            DALLAS, TEXAS                                  75244
   (Address of principal executive                        (Zip Code)
              offices)

                          Issuer's telephone number,
                      including area code: (972) 726-1200

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

                         COMMON STOCK, $0.01 PAR VALUE
                                (Title of Class)


Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months
(or 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 
         -----   -----

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]

The issuer's revenues for its most recent fiscal year $13,577,421.

The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 14, 1997, was $48,528,186.

The number of shares of the registrant's Common Stock outstanding as of March
14, 1997 was 11,088,490.

The following documents are incorporated by reference into this Annual Report
on Form 10-KSB: Portions of the registrant's Proxy Statement for its 1997
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Report.

                          Index to Exhibits on Page 23


<PAGE>   2


                               TABLE OF CONTENTS

<TABLE>
<CAPTION>

ITEM                                                                     Page
----                                 PART I                              ----
<S>      <C>                                                             <C>
1        DESCRIPTION OF BUSINESS                                            

         General                                                           3

         Speech Recognition                                                3

         Software Development/OEM                                          4

         Strategy                                                          7

         Products and Services                                             7

         Technology Development                                           14

         Sales and Marketing                                              14

         Manufacturing                                                    16

         Competition                                                      16

         Patents                                                          16

         Employees                                                        16

2        DESCRIPTION OF PROPERTIES                                        17

3        LEGAL PROCEEDINGS                                                17

4        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS              17

                                    PART II

5        MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Common Stock Prices                                              17

         Dividend Policy                                                  18

6        MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

         Results of Operations                                            

                  1996 vs 1995                                            19

                  1995 vs 1994                                            19

         Liquidity and Capital Resources                                  20

7        FINANCIAL STATEMENTS                                             20

8        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
         ACCOUNTING AND FINANCIAL DISCLOSURE                              20

                                    PART III

9        DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL             
         PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT       20

10       EXECUTIVE COMPENSATION                                           20

11       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
         AND MANAGEMENT                                                   20

12       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                   20

13       EXHIBITS AND REPORTS ON FORM 8-K                                 21


</TABLE>


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                                     PART I


ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

Voice Control Systems, Inc. ("VCS" or the "Company") was founded in September
1978 and was organized as a Texas corporation in May 1980. The Company
reincorporated as a Delaware corporation in January 1981 under the name "Scott
Instruments Corporation" ("Scott"). Effective August 11, 1994, VCS Industries,
Inc., an Illinois corporation ("Industries"), merged into the Company whereupon
the Company changed its name to Voice Control Systems, Inc. (the "Merger").
After the Merger, security holders of Industries owned, assuming the exercise
of all outstanding rights to purchase Common Stock, 76% of the outstanding
Common Stock of the Company and designees of Industries accounted for a
majority of the Company's Board of Directors. The Merger was accounted for as a
reverse acquisition. Effective November 4, 1996, Voice Processing Corporation,
a Delaware corporation ("VPC") was merged with and into the Company and the
separate corporate existence of VPC ceased. The transaction was accounted for
as a pooling-of-interests, and therefore all financial information (except for
stock prices) included herein is that of the Company and VPC.

VCS is a leading international supplier of speech recognition and related
speech input technologies. The Company believes that it offers the widest
selection of speech recognition and speaker verification products and
vocabulary libraries. These products employ a proprietary phonetic approach to
speech recognition developed by VCS over the past 18 years. VCS has a number of
commercial firsts in applying its technology in commercial applications,
including: (i) the first speaker-independent telephone speech recognizer PC
board; (ii) the first speaker-independent cellular telephone voice dialer;
(iii) the first switch-based cellular voice dialer; (iv) the first alphabet
recognizer; and (v) the first simultaneous speaker-independent speech
recognizer and speaker verification system. VCS believes it is the leading
provider of speech recognition technologies in telecommunications applications
worldwide, with more than 2.5 million speech recognizers distributed in 30
countries, and plans to expand into other speech recognition markets.

The Company markets its technologies to systems integrators and OEMs in
telecommunications, desktop computing and consumer electronics markets. VCS
technology has been successfully sold into many applications around the world,
including telephone network automation (1-800-COLLECT-U.S.), telephone banking
(National Westminster Bank, Ltd.-United Kingdom), government services (Revenue
Canada-Canada), computer multimedia sound boards (Creative Labs-U.S.), travel
information access systems (Lufthansa-Germany), network-based cellular
telephone voice dialing (AT&T Wireless Services' VoiceTouch) and
automotive-based cellular voice dialing (Mercedes-Benz-U.S.). Many of the
leading equipment manufacturers and systems integrators in their respective
industries incorporate the Company's technology into their products, including
Dialogic, Natural MicroSystems, InterVoice, Brite Voice Systems, Periphonics,
OKI Telecom, Hughes Network Systems, Creative Labs, and OKI Semiconductor. VCS
believes that, with its broad product offerings, extensive experience and
established distribution channels, it is well positioned to participate in the
projected growth of the speech recognition industry.

The Company's principal sources of revenue are from (i) sales of speech
recognition hardware and software products to system developers and original
equipment manufacturers, (ii) royalties and license fees generated from
licensing of speech technologies to system and product developers, and (iii)
providing specialized engineering services, principally to assist in the
integration of its technology into its customers' products and systems.

SPEECH RECOGNITION

Speech is the most natural and convenient means of human communication and,
therefore, a natural means for a person to communicate with a machine. Speech
recognition technology converts spoken inputs into digital electronic signals,
which are then translated by a computer processor into specific computer
instructions or data. For example, words such as "stop" and "go" may be
translated using speech recognition into corresponding digital computer
commands, and words such as "one" and "two" may be translated into numeric
data.

Speech recognition applications are usually divided into two categories by the
type of technology required: speaker-dependent and speaker-independent
applications. Speaker-dependent technology requires a user to train a device to
recognize a particular command. This training process has the disadvantage of
requiring some effort on the part of the user, but has the advantage of
permitting the user to choose his or her own words for any command. For
example, speaker-dependent technology is usually used in telephone
voice-dialing applications since it permits a user to create custom name lists.
Speaker-independent technology allows the recognizer to accept speech input
from virtually any user, regardless of gender, 


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age or regional accent, without user training. It has found acceptance in
applications used by the public, such as telephone-based automated banking or
telephone order entry.

Speech recognition systems or recognizers can require continuous or discrete
articulation of words. Continuous recognition permits users to speak a string
of digits without pausing, which is useful when entering a telephone or account
number. Discrete recognition requires speech to be said with short pauses
between words. This technology is useful in applications requiring single word
inputs, such as replying "yes" or "no" to questions. Discrete inputs might
include words, letters or numbers. Continuous recognizers require more computer
resources than discrete recognizers and, therefore, are more expensive.

Speaker verification technology converts speech into digital electronic signals
that are then analyzed by a computer processor for patterns of identifying
characteristics. These patterns are compared to stored memories of speech
patterns to determine if the patterns match. Matching patterns are used to
verify a subject's claimed identity. For example, a speaker verification system
could verify that a person reciting an employee identification number is in
fact that employee.

While various types of speech technology have existed for many years, early
speech technology applications were generally inadequate due to their
relatively high costs and low performance. However, as a result of the
decreased cost of computer processing hardware and the development of more
reliable and efficient technology, as well as increased public familiarity with
computer automated devices, speech recognition is now an accepted feature of
many telecommunications applications. The Company's technology is presently
used in the telecommunications industry and is also increasingly being accepted
into applications designed for desktop computing, including computer telephony
and consumer electronics. Recent implementations of speech recognition in
consumer electronics include control of personal computers, hands-free dialing
of car phones and transaction processing through interactive voice response
systems. The Company believes that speech-based control and operation of
electronic devices will be incorporated in an increasing variety of
applications as speech recognition becomes easier to use and more natural,
accurate and affordable.

VCS views the market for speech recognition as four horizontal or industry
segments and four vertical layers of distribution. The industry segments are
telecommunications, consumer electronics, desktop computing and dictation. VCS
believes that it is the leading provider of speech recognition technology
currently used in the telecommunications segment. The Company's technology is
also used in the desktop computing and consumer electronics segments. VCS does
not currently offer products for the dictation segment of the speech
recognition market and has no current plans to do so.

VCS views the four vertical layers of market distribution as: (i) licensing,
(ii) component sales, (iii) system sales and (iv) solution sales. Licensing
involves providing a core speech recognizer and any associated vocabulary
reference tables in software. Component sales involve selling the basic speech
recognizer embedded in component level hardware such as a semiconductor or a
printed circuit board. System sales consists of selling finished products which
use the recognition technology, and solution sales consists of selling speech
recognition solutions using integrated speech recognition systems.

VCS distributes its products and services primarily through licensing and
component sales. Its Ready Receptionist product is its only system sale. See
"--Products and Services." Based upon the Company's practical experience as a
leader in developing and commercializing speech recognition technology in the
telecommunications market and the quality and diversity of its current
technology, the Company believes that it is well positioned to continue to
participate in the growth of speech recognition in the telecommunications
market while expanding its initial penetration in the desktop computing and
consumer electronic markets.

SOFTWARE DEVELOPMENT/OEM

Delivering VCS speech recognition technology to end users requires that a
systems integrator or OEM first complete a product development program during
which the Company's speech technology is incorporated into a product. This
requires an investment of both time and resources on the part of the systems
integrator or OEM. The Company believes that successful completion of a product
development program with a systems integrator or OEM gives VCS an advantage at
that VCS account.





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<PAGE>   5




VCS first began commercial delivery of speech recognition in 1986. Since then
the Company's technology has been or is being integrated in many systems and
products including:

<TABLE>
<CAPTION>

     Systems Integrators/OEMs                   Typical Applications                Illustrative End Users/Products
     ------------------------                   --------------------                -------------------------------
<S>                                     <C>                                     <C>

Active Voice                          Voice mail                                0Distributors to small and medium businesses

Apex Voice Communication, Inc.        Virtual telephone network messaging       Telephone companies in developing nations
                                      system

Applied Voice Technology              Unified messaging on CTI platforms        Small and medium businesses

Aspect Telecommunications             ACD interactive voice response platform   Large business (banks, financial, travel)
                                                                                for call centers

Atlas Telecom                         Voice mail and voice dialing              Central office voice messaging

Boston Technology                     Voice mail and voice messaging            Medium and large businesses

Brite Voice Systems Inc.              Wireless network-based voice dialing,     Telephone companies and cellular and PCS
                                      telephone network voice processing        service providers:
                                      systems                                       AT&T Wireless VoiceTouch
                                                                                    Ameritech VoiceSelect

Centigram                             Voice mail and voice messaging            US telephone companies and international
                                                                                PTTs

CCS                                   Interactive voice response                Banks, financial institutions, healthcare
                                                                                organizations

Dialogic Corporation                  Call processing components for voice      Systems providers in voice mail, 
                                      processing systems in                     voice messaging, interactive voice
                                      telecommunications and computer           response and telephone network intelligent
                                      telephony                                 peripherals:
                                                                                    Digital Equipment Corp.
                                                                                    Offnet

Edify Corporation                     Application generation software for IVR   Large business call centers, banking,
                                                                                financial and travel applications

Glenayre                              Messaging platform for paging, one        Wireline and wireless telecom providers
                                      number, and voice mail

Hammer Technologies                   Testing platform                          Voice mail, voice messaging, voice
                                                                                dialing, interactive voice response

Hewlett Packard                       Enhanced services platform                Information service providers

Hughes Network Systems                Cellular, PCS and SMR voice-activated     Automobile manufacturers, cellular
                                      telephones                                equipment retailers and wireless telephone
                                                                                service providers:  1997 General Motors
                                                                                Cadillac

IBM Corporation                       General interactive voice response        Financial institutions, information
                                      systems                                   service providers, call center operators,
                                                                                airlines and the travel industry:
                                                                                DirectTalk

Intellivoice Communications           Wireless network-based voice dialing,     Telephone companies and cellular and PCS
                                      telephone network voice processing        service providers:
                                      systems                                       Bell Atlantic Nynex Easy Dial

InterVoice, Inc.                      Interactive voice response systems        Banks, brokerage firms, financial
                                      and intelligent peripherals in telephone  institutions, information service
                                      networks                                  providers, telephone companies, and
                                                                                airlines and travel related companies:
                                                                                    1-800-COLLECT

Natural MicroSystems                  Call processing components for            Voice mail, voice messaging, IVR system
                                      computer telephone, voice processing      providers for wireline and wireless
                                      and telecommunications                    communications

Octel Communications                  Voice mail platform                       Medium-large businesses and institutions,
                                                                                information service providers, telephone
                                                                                companies and wireless providers

OKI Semiconductor                     Speech recognition chip                   Manufacturers in the automotive, consumer
                                                                                electronics and computer industries:
                                                                                     MSM 6679 VRP

</TABLE>

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<PAGE>   6

<TABLE>
<CAPTION>

Systems Integrators/OEMs                   Typical Applications                Illustrative End Users/Products
------------------------                   --------------------                -------------------------------
<S>                                     <C>                                     <C>
OKI Telecom                           Voice-activated wireless                 Automobile manufacturers, cellular
                                      telephones                               equipment retailers and wireless
                                                                                telephone service providers:
                                                                                    Mercedes-Benz 500 and 600 series

Periphonics Corporation               Interactive voice response systems        Banks, financial institutions,
                                      and intelligent peripherals               information service providers, telephone
                                                                                companies, airlines and travel related
                                                                                companies:

Precision Systems, Inc.               Telephone messaging systems,              Telephone companies, call center
                                      telephone network-based voice             operators, and wireless service providers:
                                      processing systems and call center            "Atlas" Personal Telecommunications     
                                      automation                                    Assistant                               
                                                                                                                            

Priority Call Management              Enhanced services platform for            Information service providers
                                      debit card, one number and voice
                                      activated dialing

Siemens, AG                           Voice activation in telephone             Telephone companies worldwide
                                      network switching systems

Syntellect.                           Pay-per-view automated order entry        Cable television companies and
                                                                                subscription television companies

Technically Speaking                  Application generator tools for           System providers
   (Brooktrout)                       interactive voice response applications


</TABLE>



                                       6
<PAGE>   7


STRATEGY

The Company's strategy is to capitalize on its strong base of technology,
practical experience, speech database libraries and established distribution
channels to participate in the increasing use of speech recognition in the
telecommunications market while expanding its presence in other developing
speech recognition markets. The specific elements of its strategy are as
follows:

Maintain leadership in the application of speech recognition technology in the
telecommunications industry

The Company believes it is the leading supplier of speech recognition
technology used in telecommunications. The Company plans to maintain this
position by developing and deploying new products primarily across its existing
distribution network. Dialogic has historically been the Company's largest
distributor/customer in the telecommunications market segment. While Dialogic
represents a large portion of VCS's revenues, speech recognition technology
presently is sold with only a small percentage of Dialogic's product sales. The
Company is working with Dialogic to increase the penetration of speech
recognition by developing new products and marketing programs targeted to
increase penetration of existing VCS products sold by Dialogic. The Company
also plans to increase penetration of its other telecommunications
distributors' sales by joint marketing programs, enhancement of existing
products and new product offerings.

Diversify its markets to include consumer electronics and desktop computer
applications

Presently the Company derives the majority of its sales by providing speech
recognition technology to the telecommunications market. The Company plans to
expand marketing of its technology to other markets in order to diversify its
revenue base. To this end, the Company has begun to market its technology to
the consumer electronics and desktop computer markets. The Company believes
that systems integrators and OEMs in these markets will increasingly use speech
recognition technologies in their products and that the Company's experience
and reputation in implementing speech recognition in the telecommunications
market positions it favorably to compete in these emerging markets.

Improve the man-machine interface

The Company is developing enhancements to its core technology to permit
recognition of more conversational speech. These enhancements will permit end
users to access larger vocabularies and, by spotting key words, to speak in a
more natural and conversational manner.

Emphasize software license revenues

The Company's products consist of implementations of its software-based speech
recognition technologies in software, hardware or computer chips. Historically,
the Company has developed both hardware and software for its customers.
However, as the markets for speech recognition technologies grow and mature,
the Company expects to increase its proportion of revenues from software sales
or licenses to systems integrators and OEMs who will design and manufacture
their own hardware.

Develop end user products

The Company has recently introduced a speech recognition-based auto attendant
system marketed indirectly, through telephone equipment distributors, to the
end user. Historically, the Company sold technology principally for integration
by systems integrators and OEMs into their products.

Expand its international presence

The Company's marketing and product strategy is to continue to develop its
products for use internationally. VCS currently has discrete digit and control
word vocabularies for telecommunications applications in 51 languages and
dialects.

PRODUCTS AND SERVICES

Core Technology Products

All VCS speech technology products are based upon VCS's proprietary speech
technology developed over the last 18 years and refined by VCS's field
experience gained by helping its customers implement speech recognition. Speech
input is typically the most natural and efficient means of human communication.
With the increase in the power of personal 



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<PAGE>   8

computers, low-cost digital signal processors ("DSPs") and microprocessors
("chips"), manufacturers of business and consumer products have begun to use
human speech as an interface to their products.

The Company's current technologies include speaker-independent (discrete and
continuous) and speaker-dependent speech recognition, as well as speaker
verification. The Company's speaker-independent speech recognition technology
is based on "phonetic unit identification." This technology examines the
features of a spoken word only to the point of recognizing the word's unique
components and disregards the characteristics of a particular speaker's voice,
such as pitch, inflection and accent. VCS's proprietary software then dissects
the word and examines its components to identify the word presented to it,
irrespective of the speaker. Although the Company has designed hardware on
which its recognition software resides, there is no unique hardware required to
use the Company's technology.

For the most demanding speaker-independent applications, including digit
vocabularies for telecommunications or cellular automotive vocabularies, VCS
collects many speech samples in the environment and language of the targeted
application. These speech samples are processed in the laboratory to develop
the specific vocabulary reference tables. The Company believes this methodology
permits a higher degree of accuracy than alternative methods of vocabulary
development. Because customers usually cannot create vocabulary words
themselves, VCS has processed discrete vocabularies in 51 languages,
alphanumeric vocabularies in 18 languages, and continuous vocabularies in 18
languages. For applications requiring custom speaker-independent vocabularies,
VCS offers a vocabulary development service program. In the last two years, VCS
has processed several hundred custom vocabularies in connection with this
program. The Company's Word Builder tool allows users to select and create
speaker-independent vocabularies using its phonetic dictionary technology. VCS
has collected British English, German, and U.S. English for use with Word
Builder. See "--Enhanced Technologies."

                     TELECOMMUNICATIONS LANGUAGES PROCESSED
<TABLE>
<CAPTION>

          Discrete Digits & Control Words                          Alphanumeric                 Continuous
-------------------------------------------------           ---------------------------    ---------------
<S>                         <C>                            <C>                              <C>
Afrikaans                  Hong Kong English                Australian English             Australian English
Argentine Spanish          Hungarian                        British English                Brazilian Portuguese
Australian English         Italian                          Canadian English               British English
Austrian German            Japanese                         Canadian French                Canadian English
Belgian French             Korean                           Dutch                          Canadian French
Brazilian Portuguese       Malaysian                        European French                Cantonese
British English            Malaysian English                Finnish                        Castilian
Canadian Cantonese         Mandarin                         German                         Dutch
Canadian English           N. American Spanish              German Military Alphabet       European French
Canadian French            Norwegian                        Greek                          European Portuguese
Cantonese                  Polish                           Hebrew                         Finnish
Castilian                  Puerto Rican English             Hong Kong English              German
Catalan                    Puerto Rican Spanish             Italian                        Hong Kong English
Croatian                   Russian                          N. American Spanish            Mexican Spanish
Czech                      Singapore English                S. American Spanish            New Zealand English
Danish                     S. African English               Singapore English              N. American Spanish
Dutch                      S. American Spanish              U.S. English                   S. American Spanish
European French            Swedish                          U.S. Military Alphabet         U.S. English
European Portuguese        Swiss French
Finnish                    Swiss German
Flemish                    Swiss Italian                           Phonetic
German                     Thai                             ------------------------
Greek                      Turkish                          British English
Hebrew                     U.S. English                     German
Hindi                      Vietnamese                       U.S. English
Hong Kong Cantonese                           
                                              
</TABLE>

The Company offers speaker-dependent speech recognition technology for
applications which are anticipated to be used by only one or a few speakers,
such as control of a personal computer or voice dialing a cellular phone.
Before using a speaker-dependent system, the user is prompted to introduce
himself to the system by speaking specific utterances; the speech is analyzed
to tune the recognition system to work well with that user. The Company
optionally offers speaker adaptation capabilities in its speaker-dependent
technology products. Speaker adaptation improves accuracy in speaker-dependent
applications by enabling a system to adjust to peculiarities in a user's voice
or pronunciation, such as may occur if the user is suffering from a cold or
hayfever. It may also be used to adapt the recognizer to use by several
persons.



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<PAGE>   9

The Company's speaker verification technology allows a system to verify that a
user is who he claims to be. Because it has been designed to run on the same
components as VCS's speech recognition technologies, no additional hardware is
required to implement speaker verification in a recognizer that already employs
the Company's technology.

The Company believes that its approach to speech recognition and speaker
verification delivers significant performance advantages in terms of the
requirements for processing power, memory and vocabulary size. The Company's
technology is capable of supporting the largest channel density of any
commercial product currently on the market.

                        CORE TECHNOLOGY PRODUCT SUMMARY

The following table sets forth certain summary information for the Company's
current core technology products.
<TABLE>
<CAPTION>

   Core Technology                                Options and                                             Customer
 Application       Features               Enhanced Technologies        Operating Environment            Vocabularies
---------------------------------------------------------------------------------------------------------------------------
<S>                 <C>                     <C>                          <C>                       <C>
Telecommunications  SI, SD, SA, SV          User selectable triggering   DSP embedded recognizer   51 languages-- discrete
                    Continuous speech input Voice activation             DSP library recognizer      digits
                    Discrete speech input   Word spotting                Microprocessor            18 languages-- alphabet
                    HMM decision strategy   High rejection vocabularies  embedded recognizer       18 languages --
                    Phonetic "front-end"    Phonetic dictionary          Fixed point support         continuous
                    Vocabulary masking      Cut-thru (barge-in)          Floating point support    9 languages -- cellular
                    High accuracy in tele-  Large vocabulary             Supported processors:     3 languages -- phonetic(u)
                    phone environment         capability(u)                Texas Instruments
                    Multi-channel/high      Alphabet recognition           Intel
                    density                 Custom vocabulary              NEC
                    Software-based          development service            OKI
                                            Type-in vocab creation         Siemens(u)

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

Desktop             SI, SD, SA,             Voice activation             Microprocessor            51 languages -- CT
Computing           Discrete input          Low memory option            embedded recognizer         digits
                    Continuous input(u)     Custom vocabulary            DOS-based system          18 languages -- CT
                    SAPI interface(u)       development service          OS/2-based system           alphabet(u)
                    HMM decision strategy(u)Telephone or                 Supported processors:     18 languages --
                    OLE format software(u)  desktop speech input           Intel                     continuous(u)
                    Accurate in high noise  Alphabet recognition           OKI                     PC control library
                    "Close talk" or "far                                   NEC
                    talk" microphone input
                                              
---------------------------------------------------------------------------------------------------------------------------

Consumer/           SI, SD, SA, SV          Alphabet recognition         DSP embedded recognizer   51 languages -- CT
Automotive          Discrete speech input   Voice activation             DSP library recognizer      discrete digits(u)
                    "Close talk" or "far    SI & SD operation            Microprocessor            18 languages -- CT
                    talk" microphone input  Celldial interface           embedded recognizer         alphabet(u)
                    Accurate in high noise  Custom vocabulary            Fixed point support       7 languages --
                    Low memory required     development service          Floating point support      automotive
                    Phonetic "front-end"                                 Supported processors:     PC control library
                    Low "horsepower"                                       Texas Instruments       military alphabet library
                    processor required                                     Intel                   machine control library
                                                                           NEC
                                                                           OKI
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

SI -- speaker-independent  SD -- speaker-dependent   SA -- speaker-adaptive  
SV -- speaker verification  u-- under development    CT -- computer telephony


                               GLOSSARY OF TERMS

"Back end" -- The portion of the speech recognition algorithm which determines
the word spoken. It uses the information from the "front end" to arrive at its
decision.

"Celldial" -- A VCS parametric-based programming interface to simplify voice
dialing application software.

"Close talk" -- Speaking into a microphone close to the mouth, such as a
telephone handset microphone.

"Far talk" -- Speaking into a microphone at a distance from the speaker, such
as a telephone speakerphone microphone.

"Front end" -- The feature extraction portion of a speech recognizer. The
"features" or speech characteristics desired are computed by this part of the
speech algorithm and passed to the "back end."



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<PAGE>   10

"HMM" -- Hidden Markov Modeling. A mathematical database search model which is
commonly used for complex computer database modeling problems, such as speech
recognition.

"OLE" -- Object linking and embedding. A programming environment that
simplifies application software development through the use of software
"libraries" that contain code to implement special program features.

"Phonetic" -- Relating to phonemes, the basic sounds or units of spoken
language.

"SAPI" -- Speech application program interface. This is a standard established
by Microsoft for programmers of speech applications to enable integration of
third party software products with other applications running in a Microsoft
environment.

"Software-based" -- Technology which is embodied in software only and is
thereby capable of operating in any hardware environment.

"Vocabulary masking" -- A technique by which a speech recognizer vocabulary is
divided into smaller sub-vocabularies in "real time" to improve recognition
accuracy.


Enhanced Technologies

As end users become more accustomed to interacting with products incorporating
speech recognition technologies, firms utilizing speech recognition in their
systems request advanced features, such as continuous digit input, the ability
to override outgoing system prompts with voice commands, natural language
capabilities and conversational speech. The Company currently has several
projects under development or in beta test which are aimed at providing these
enhanced speech recognition solutions.

Natural language refers to the capability of speaking digits combined with
other key numeric words, such as "hundred" or "thousand," in a continuous
manner. Speech recognition technology available today requires that the user
speak digits in a more structured manner. For example, a number such as 2400
must be spoken either discretely or continuously as "two-four-oh-oh." Natural
language technology permits the user to say "twenty-four hundred" or "two
thousand four hundred" as well. The Company currently has beta versions of
vocabularies to enable natural language input available in U.S. English.

Phonetic dictionary technology is another advanced feature being requested by
experienced systems integrators. Using a "phonetic dictionary," a word can be
entered into a speaker-independent system by selecting and linking "phonemes"
(i.e., individual units of sound) from a "dictionary" rather than sampling
hundreds of people speaking the word. In order to develop its phonetic
dictionary technology, the Company must collect thousands of samples of
phonetically rich speech in each language. These samples are processed into a
phonetic dictionary of all the sounds (phonemes) in a language. This technology
will enable a wider distribution of speech recognition in new applications that
require larger vocabularies of custom or semi-custom words, such as product
names or proper names. This technology will be particularly useful in
applications where the list of vocabulary words changes regularly, such as
employee names in a voice mail/auto attendant system. PhoneticVR(TM), a
1000-word recognizer using phonetic dictionary technology is currently available
in beta form from the Company in U.S. English, UK English and German with
commercial availability of these and other languages expected in 1997.

To support "type-in" phonetic dictionary implementations, the Company developed
Word Builder, a tool which allows users to easily create new
speaker-independent vocabularies. WordBuilder(TM) automatically translates typed
input into one or more phonetic transcriptions of the different ways a word is
pronounced. An application developer can select and test the appropriate
phonetic transcriptions of the typed word through a unique speech-driven
process. WordBuilder is currently available in U.S. English with additional
languages planned for 1997.

Large speech recognition vocabularies, in excess of 2,000 active words, are
becoming increasingly feasible due to technology advancements, such as phonetic
dictionary. The Company has demonstrated PhoneticVX (TM), a speaker-independent
speech recognition capability for 10,000+ words and its objective is to make
PhoneticVX commercially available during 1997.

Conversational speech recognition is a sophisticated implementation of the
speech recognition products described above, combined with additional
application software. Context and grammar rules, which take advantage of
knowledge of a specific application, are implemented in a software layer above
the core recognizer, which aids and guides the recognition process. Today,
conversational speech systems require extremely expensive hardware to operate
and are inherently inflexible and difficult to maintain in changing application
environments. However, the Company believes conversational speech recognition
has great potential for being the most accepted technology for automated
information systems. VCS has announced that during 1997 it will offer a variety
of Conversational SpeechBlocks(TM) designed to aid in building applications by
reducing the new application code necessary for significant portions of speech
recognition applications. Often referred to 


                                      10
<PAGE>   11

as middleware, Conversational SpeechBlocks are intended to be easy-to-use
software modules for building applications that include vocabularies, grammars,
and conversational flow logic.

Telecommunications Products

VCS licenses software and sells several speech recognizer hardware products for
use in telecommunications environments. VCS speech recognition boards provide
the hardware and software necessary to permit speech recognition and speaker
verification in telecommunications systems. These boards will operate the
Company's speaker-independent and speaker-dependent speech recognition
technologies to provide reliable speech recognition over local and long
distance telephone lines. The boards may be used in analog or digital
environments and in a variety of applications, including customer service,
voice mail, home banking, audiotext, order processing, telemarketing and
telephone company operator services. They are designed for easy incorporation
into most interactive voice processing systems to permit use of these systems
from any touch-tone or rotary dial telephone. This is particularly important
internationally where the touch-tone penetration rate is significantly lower
than in the United States, making speech recognition an enabling factor for
many international voice processing applications. In addition, the Company's
latest technologies, including alphanumeric recognition, phonetic dictionary,
and speaker verification, expand the range of opportunities for automation with
voice processing systems.

The same VCS speech recognition software available on its hardware products is
also available under license agreements to persons who wish to integrate the
technology into their own hardware platforms. The available software technology
includes speaker verification as well as discrete, continuous and alphanumeric
vocabularies in a variety of languages. VCS also licenses its enhanced
technologies directly to persons who may have acquired the Company's basic
speech recognition technology from one of the Company's distributors/customers.

The Company also offers its Voice Cut-Thru(TM) technology for use with its
discrete, continuous and phonetic technologies. Voice Cut-Thru allows callers
to override outgoing system prompts with voice commands. Recognition actually
takes place during the prompting sequence. This is an advance from the previous
VCS "voice-stop" technology in which the caller must stop the prompt by saying
"stop" and then is required to speak the desired number or command.

Dialogic's Signal Computing System Architecture or "SCSA," is designed with an
open DSP platform for speech recognition called Antares. Dialogic has licensed
VCS speech recognition to sell with its Antares product. VCS developed a new
line of software products, VCS Antares Software, for Dialogic to market under
this license agreement. VCS customized its continuous and discrete speech
recognition technology with Cut-Thru technology capabilities for this program.
VCS Antares Software is currently commercially available in Windows NT, DOS,
UNIX and OS/2 operating environments with additional operating systems under
development. As a result of adopting an open architecture platform, the
technology of the Company's competitors will be available as an alternative to
VCS's technology in products incorporating the Antares product. However, VCS
technology will be the only speech recognition technology available across
Dialogic's entire product line. VCS believes this is a competitive advantage
since it provides systems integrators a seamless product and programming
interface across all Dialogic speech recognition products.

In February 1997, Dialogic introduced DM3(TM) mediastream resource
architecture. The DM3 mediastream resource architecture is a set of
specifications and core firmware modules that govern how new Dialogic computer
telephony products are designed. Its features include graphical open
development tools, widely adopted real time operating systems, DSP kernels, and
reusable and mixable media processing software modules, such as VCS' speech
recognition products. DM3 will allow VCS' broad family of speech recognition
products to even more effectively meet the needs of customers, especially large
telecommunications companies. VCS has been working with Dialogic during the
development of the DM3 architecture to incorporate VCS speech recognition
products. The Company does not expect to achieve wide deployment of its
products in the DM3 product line until 1998.

During 1997, the Company plans to introduce Ready Receptionist(TM), a speech
driven automated attendant. Ready Receptionist will answer incoming calls and
route them to the proper extension by the spoken command of the caller. The
system is also useful for routing internal office calls, eliminating the need
to remember employee extensions and publish expensive internal directories. The
Company plans to offer Ready Receptionist through PBX and key system
distributors (interconnects). For those companies who want to incorporate the
software features of Ready Receptionist into existing products, VCS will offer
a Ready Receptionist SDK and consulting services.

Computer/Desktop Products

The Company sells a software recognizer capability based upon a proprietary
application programming interface for software developers. This capability 
uses a custom made core recognizer incorporating a VCS-specified API. Because 
each project is custom 


                                      11
<PAGE>   12

developed, this offering provides software developers with the most flexibility
in choosing any functionality from VCS's broad range of capabilities in speech
technology.

VCS also supports Microsoft's standard for speech applications, SAPI, which will
be implemented in Microsoft operating systems. The Company has developed a
speech engine (i.e., a speech recognizer) that is SAPI compliant. This speech
engine is marketed to software developers whose applications use speech
recognition in Microsoft's Windows 95 and Windows NT operating systems. The
speech recognition engine initially supports desktop and telephone speech input,
making it suitable for both desktop and computer telephony applications. These
applications might include any voice driven interactive software applications,
such as interactive games, interactive learning software, interactive multimedia
software, soft telephones (software with telephone capabilities in the PC),
PC-based answering machines, PC-based voice dialers, voice accessed rolodex
software, voice driven window and menu operation and voice driven access to
communications software, such as that used to access the Internet.

Cellular/Automotive and Consumer Electronics Products

The Company markets speech recognition for cellular telephones, consumer
electronics and automotive applications. VCS has targeted wireless/cellular
telephones, answering machines, VCRs, televisions, personal organizers,
cordless telephones and video games as potential high volume applications of
VCS's speech recognition. Manufacturers can obtain VCS's speech recognition for
these applications either by licensing software or buying chip sets that embody
the recognition software from VCS. Each customer typically also purchases
support and design consulting from VCS in order to develop a product using the
technology.

The Company has developed a state-of-the-art speech recognizer incorporating
VCS's speaker-independent and speaker-dependent speech recognition technologies
for low cost applications. The Company currently markets this recognizer for
both automotive and consumer electronics applications. The recognizer is used
today in cellular telephone voice dialers sold as part of built-in car phones.
Both the 1997 Cadillac and Mercedes-Benz line of automobiles are sold with
these telephones as either standard or optional accessories. VCS also provides
recognizers that enable voice control of non-critical automobile functions,
such as seats, windshield wipers, windows, radios and mirrors. Using the
Company's voice activation vocabulary provides for total "hands-free" operation
of the target accessory thus increasing safety and convenience. To date, these
recognizers have been implemented only in concept cars.

Historically, manufacturers have been required to use a chip set consisting of
several single purpose chips in order to implement all of the necessary
functions for speech recognition. In 1994, OKI Semiconductor introduced a new
single chip speaker-independent speech recognition microcontroller, the MSM6679
Voice Recognition Processor ("VRP"), which incorporates VCS technology. This
offers an integrated "one-chip" implementation for OEMs desiring to add speech
recognition to their products. With the OKI Semiconductor VRP, the necessary
functions for speech recognition are combined on a single chip, which should
reduce cost. OKI Semiconductor is using its international distribution
capabilities to market the VRP to systems developers and OEMs for development
of applications using the VRP in the automotive, personal computer,
telecommunications and consumer electronics industries. OKI Semiconductor plans
to introduce a cost-reduced version of the VRP during 1997.



                                      12
<PAGE>   13


                              VCS PRODUCT SUMMARY

The following table sets forth certain summary information for certain of the
Company's products.

<TABLE>
<CAPTION>

                                                           Options and
Product Name/ Description         Features             Enhanced Technologies    Architecture           Vocabularies
---------------------------------------------------------------------------------------------------------------------------
<S>                          <C>                       <C>                   <C>                     <C>
VCS Antares                  Speaker-independent      Speaker-dependent      DOS, UNIX, OS/2,        51 languages --
Software(D)                  2 to 32 recognizers      Speaker-adaptive       NT                        discrete digits
                             2 to 8 recognizers/DSP   Speaker verification   SCSA interface          18 languages --
Speech recognition for        continuous              Word spotting          TI 320C31                 alphabet(u)
   Dialogic Antares SCSA     8 recognizers/DSP        Hi-rejection             firmware              8 languages --
   products                    discrete               Phonetic dictionary                              cellular
                             4 recognizers/DSP        Voice activation                               18 languages --
                               discrete w/cut-thru    Cut-thru                                         continuous
                             2 recognizers/DSP        Alphabet recognition
                               phonetic
---------------------------------------------------------------------------------------------------------------------------
VR/160p(D)                   Speaker-independent      Speaker-dependent      DOS, UNIX, OS/2         51 languages --
                             Discrete input           Speaker-adaptive       PEB interface             discrete digits
Speech recognition           Continuous input         Speaker verification   Single PC slot          18 languages --
   platform for Dialogic     Phonetic approach        Word spotting          TI 320C25 or               alphabet
   PEB products              2 to 16 recognizers      Hi-rejection           TI 320C31               8 languages -- cellular
                             Shared resource          Phonetic dictionary    daughtercard            18 languages --
                               switching              Voice activation                                 continuous
                             HMM decision strategy    Cut-thru
                                                      Alphabet recognition
---------------------------------------------------------------------------------------------------------------------------
PRL                          Speaker-independent      Alphabet recognition   TI 320C31               51 languages --
                             Discrete input           Custom vocabulary                                discrete digits
Portable speech recognition  Continuous input           development service                          18 languages --
library for implementation   Phonetic approach        Speaker-dependent                                 alphabet
in proprietary platforms     1 to N recognizers       Speaker-verification                            8 languages --
                                customer hardware     Voice activation                                 cellular
                                dependent
---------------------------------------------------------------------------------------------------------------------------
VRSoft(D)                    Speaker-independent       Speaker-dependent(u)     DOS, OS/2(u)             51 languages --
                             Discrete input           Speaker-adaptive(u)       Intel or equivalent PC  discrete digits
PC host processor-based      No additional            Alphabet recognition(u)   AEB interface           18 languages --
   low density Dialogic      hardware required                                                          alphabet(u)
   AEB speech recognizer     2 or 4 recognizers
                               per PC system
---------------------------------------------------------------------------------------------------------------------------
DVM2(c) and DVM4(s)              Speaker-independent      Speaker-dependent      1/4 PC board            51 languages --
                             2 recognizers/PCB        Speaker-adaptive         form-factor             discrete digits
Speech recognition             continuous             Speaker verification   Flexible VCS API        18 languages --
   hardware for proprietary  8 recognizers/PCB        Word spotting          Operating system          alphabet
   architecture voice          discrete               Hi-rejection             independent           8 languages --
   processing systems        4 recognizers/PCB        Phonetic dictionary                              cellular
                               discrete w/cut-thru    Voice activation(u)                             18 languages --
                             2 recognizers/PCB        Cut-thru                                         continuous
                               phonetic               Alphabet recognition
---------------------------------------------------------------------------------------------------------------------------
VPro-42, VPro-84             Speaker-independent      Speaker verification   DOS, OS/2, UNIX, NT     51 languages --
and VPro-88                  Speaker-dependent        Word spotting          ISA bus compliant         discrete digits(u)
                             4 to 8 recognizers/PCB   Alphabet recognition   PEB interface           18 languages --
Speech recognition           continuous and discrete  Cut-thru               MVIP interface            alphabet(u)
   platform for Dialogic                              Voice activation       TI 320C31               18 languages -
   PEB products and                                                                                    continuous(u)
   Natural MicroSystems
   MVIP products
---------------------------------------------------------------------------------------------------------------------------
OKI MSM 6679 VRP             Speaker-independent      VCS "phonetic"         Stand-alone speech      51 languages --(CT)
                             Speaker-dependent          front- end           recognition processor     discrete digits(u)
Single chip integrated       Speaker-adaptive         High noise accuracy    Meets SAE               18 languages -- (CT)
   speech recognition        Single chip operation(u)  Single chip package      specifications          alphabet(u)
   processor                 Discrete input           Low cost "on-board"    Parallel or serial      Machine control
                                                        25 word vocabulary     interface               library(u)
                                                      Modular 20 word                                PC control library
                                                        vocab. expansion                             7 languages --
                                                      Built-in OKI                                     automotive(u)
                                                      synthesizer control
                                                      Voice activation(u)
                                                      Alphabet recognition
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

 D -- Sold exclusively by Dialogic             PCB -- Printed Circuit Board    
(u)-- under development                         CT -- computer telephony





                                      13
<PAGE>   14

TECHNOLOGY DEVELOPMENT

The Company believes that enhancements of and improvements to its existing
technologies are critical to its future success. The Company has made
substantial investments in research and development in each of the last two
years. During 1996, the Company spent $6,006,000 (44% of revenues) on Company
sponsored research and development. The Company spent $5,751,000 (36% of
revenues) on Company sponsored research and development activities during 1995.
Currently, the Company employs 23 full-time people in research and development
and 36 people in product development, application engineering and customer
support. Many of the research and development projects on which the Company
works span more than one year.

The Company's technology development activities are directed at continued
improvements to its existing core technologies, enhancements to these
technologies and improved implementations of the technologies to reduce the
cost of the hardware required for speech recognition. VCS is currently
developing and commercializing new products, including a large vocabulary
phonetic recognizer, improved word spotting technology, improved voice
activation, natural language understanding and Conversational SpeechBlocks. In
addition, the Company has active programs to develop new languages for its
phonetic dictionary technology. The Company believes that the timely
development and enhancement of its technologies is necessary to remain
competitive in the industry. Delays or inabilities to develop new technology
features, enhancements or products could have a material adverse effect on the
Company's business, operating results and financial condition.

SALES AND MARKETING

The Company markets its core speech recognition technologies to systems
integrators and OEMs for incorporation into their products as well as to the
buyers of their products. VCS sells to systems integrators and OEMs through its
own sales force. When marketing to the buyers of their products, the Company
frequently coordinates its selling efforts with the sales force of a systems
integrator or OEM.

The Company's principal marketing activities include participation in industry
trade shows and seminars, advertising in selected trade publications, public
relations activities with the trade and business press, publication of
technical articles and distribution of sales literature. The manner in which
the Company sells technology and products for use in various markets is
summarized below:

Telecommunications Market

VCS provides hardware and software speech recognition products to address the
telecommunications market. For software products, the Company receives license
fees or royalty payments based on the number of recognizers incorporated in the
end user product. All of VCS's hardware products sold include a license for the
software to enable speech recognition on the hardware purchased. VCS
distributes its technology products for the telecommunications market either
through OEM arrangements or through licensing arrangements with systems
integrators. The Company sells telecommunications hardware and software
products to Dialogic and Natural MicroSystems, which in turn sells to systems
integrators who design and sell systems. These sales typically have a
significant lead time between the initial sale and volume purchases by systems
integrators due to the product development cycle required to develop
applications that incorporate the Company's speech recognition technology
products.

Computer/Desktop Markets

In computer and desktop applications, the Company generally licenses its
technology to hardware manufacturers, such as Creative Labs and Micronics
(Orchid Technology). The Company receives either a fixed fee or a royalty for
each copy of the technology shipped with the integrated product.

Cellular and Consumer Electronics Markets

The Company sells its technology products directly to cellular telephone
manufacturers, such as OKI Telecom and Hughes Network Systems, for integration
into end user products. The cellular telephone manufacturer typically either
purchases an enabling computer chip or licenses technologies directly from the
Company. When the Company sells a computer chip, a software license for the
single copy of the Company's technology is included with the chip. Under
licensing agreements, customers of the Company pay a royalty for each product
sold that incorporates the Company's technology.





                                      14
<PAGE>   15


Other Emerging Markets

The Company and OKI Semiconductor jointly integrated the Company's speech
recognition technology into the VRP, a low-cost chip being manufactured and
sold by OKI Semiconductor. OKI Semiconductor has indicated to the Company that
it is targeting customers for cellular, automotive and personal computer
applications for which the prior implementation of speech recognition was too
expensive or unworkable.

Significant Customers

The Company's largest customers have historically been Dialogic and
Periphonics. Sales of hardware to Periphonics are made pursuant to purchase
orders, the form of which are updated from time to time. Sales of technology or
products to Dialogic are generally made under agreements that do not obligate
Dialogic to make purchases but set forth the terms under which purchases will
be made.

Sales of hardware products incorporating licensed technologies pursuant to
various agreements between the Company and Dialogic have historically accounted
for most sales to Dialogic. While the Company historically has sold hardware
products incorporating licensed technologies to Dialogic, Dialogic has the
right to manufacture such hardware products. If Dialogic chooses to manufacture
hardware products incorporating licensed technologies, Dialogic will pay
royalties to the Company for each port of recognition incorporated and sold by
Dialogic. It is anticipated that future Dialogic products incorporating
licensed technologies will be manufactured by Dialogic and the Company will
receive royalties for VCS speech recognition technologies incorporated and sold
by Dialogic. While gross sales to Dialogic will decrease with the transition
from hardware sales to royalty revenue, cost of sales will also decrease as the
hardware cost component will be eliminated.

The Company's technology is used by many customers in telecommunications,
desktop and consumer electronics markets. A partial list of the Company's
customers/integrators is as follows:

<TABLE>
<CAPTION>

                               TELECOMMUNICATIONS
<S>                                            <C>                                     <C> 

Active Voice                                   Enhanced Systems                         Octel Communications
AG Communication Systems                       Glenayre                                 Periphonics Corporation
Apex Voice Communication, Inc.                 Global Communications, Ltd.              Precision Systems, Inc.
Applied Voice Technology                       Group 2000                               Priority Call Management
Atlas Network Systems                          Hammer Technologies                      Siemens, AG
Aspect Telecommunications                      Hewlett Packard Company                  Stylus Innovation, Inc.
Brite Voice Systems, Inc.                      IBM Corporation                          Syntellect, Inc.
Centigram                                      Intellicall                              TALX Corporation
Comverse Technology, Inc.                      Intellivoice                             Telecorp Systems, Inc.
Dialogic Corporation                           InterVoice, Inc.                         Vicorp Interactive Systems, Inc.
Digital Equipment Corporation                  MicroLog Corporation                     VoiceTech Communications
Deutsche Telekom AG                            Natural MicroSystems                     Voicetek Corporation
Edify Corporation                              Nortel                                   West Interactive Corporation

                       CELLULAR AND CONSUMER ELECTRONICS

HighwayMaster Communications, Inc.           NEC (U.K.)                                 OKI Telecom
Hughes Network Systems                       OKI Semiconductor                          Pacific Communication Sciences,
                                                                                           Inc. (PCSI)

                                COMPUTER/DESKTOP

Auralog                                      Creative Labs                              Micronics Computers, Inc.
                                                                                           (Orchid Technology)
</TABLE>




                                      15
<PAGE>   16

MANUFACTURING

VCS does not engage in any manufacturing operations and does not plan to do so
in the foreseeable future. The Company contracts out the manufacture and
assembly of hardware. VCS's current suppliers include The Gammon Group,
Hamilton/Hallmark Electronics and NEC America.

COMPETITION

The speech recognition industry is highly competitive and characterized by
rapidly advancing technology. In order to maintain or improve its position in
the industry, the Company must continually enhance its current products and
develop and introduce new products which address the rapidly changing needs of
the marketplace.

Speech recognition is a developing field, and competition is largely based on
technological superiority. Examples of the differentiation in technology
include the ability to operate over telephone lines, size of vocabulary,
ability of the user to create speaker-independent vocabularies, noise
suppression and computational efficiency. The cost of speech recognition
technology can also be an important competitive factor.

While certain of the Company's competitors have developed speech recognition
technology comparable to the Company's technology, the Company believes that,
with respect to markets targeted by the Company, it has a competitive advantage
in implementing its technology based on the technical knowledge and practical
experience it has gained in commercializing technology solutions used in the
telecommunications market.

Competitors include entities engaged in a variety of businesses, including:
computer and semiconductor manufacturers, such as Apple Computer, IBM and
Toshiba; telecommunications and cellular equipment suppliers, such as AT&T,
Motorola and Nortel; affiliates of foreign telephone companies, such as British
Telecom, CNET, CSELT, Telefonica de Espana SA and Vocalis; system suppliers,
such as Parlance, Dragon Systems, Marconi Speech and Information Systems,
Microsoft and Texas Instruments; and pure speech recognition companies, such as
Altech, Nuance Communications, Lernout & Hauspie Speech Products, Pure Speech,
Inc., Speech Systems, Inc., and Verbex, Inc. Many of the Company's competitors
are substantially larger than the Company, are well established and have
greater financial, technical, marketing, service and operating resources than
the Company. These competitors can be expected to continue to make substantial
commitments to research and product development.

PATENTS

The Company does not apply for patents on its speech recognition techniques
that it maintains as trade secrets because of the disclosure requirements in
doing so. The Company holds ten patents relating to certain methods or systems
by or in which speech recognition or speaker verification may be implemented.
The issuance of a patent is not conclusive as to its validity or
enforceability, nor does it prevent another party from designing around the
claimed invention. Much of the Company's proprietary technology is implemented
in software that is protected under copyright and trade secret law and subject
to licensing agreements.

During 1995, the Company commenced litigation against a company it believes is
infringing on a patent owned by the Company. See "Legal Proceedings."

EMPLOYEES

As of December 31, 1996, the Company had 101 employees, of which 23 are engaged
in research and development, 36 in product development, application engineering
and customer support, 22 in sales and marketing and 20 in finance,
administration and information systems. In addition, the Company employs three
people on a part-time basis to assist with speech data processing. All of the
Company's employees sign agreements containing standard non-disclosure and
invention assignment provisions. The Company's future success will depend on
its ability to attract, train, retain and motivate highly qualified employees,
who are in great demand. The Company's employees are not represented by any
collective bargaining organization, and the Company has never experienced a
work stoppage. The Company believes that its employee relations are good.






                                      16
<PAGE>   17

ITEM 2.  DESCRIPTION OF PROPERTIES

The Company leases 20,581 square feet for its headquarters facility, pursuant
to a lease that expires September 30, 2000, at 14140 Midway Road, Dallas, Texas
75244. The Company also leases 18,000 square feet of office space at One Main
Street, Cambridge, Massachusetts. In addition, the Company leases an office in
Waterlooville, Hampshire, England for use by sales and marketing personnel.

ITEM 3.  LEGAL PROCEEDINGS

On November 6, 1995, the Company filed a complaint in the U. S. District Court
for the North District of Texas. VoiceTech Communications, Inc. of Elmhurst,
Illinois was named as the defendant and is alleged to have infringed, directly,
by inducement or by contribution, a Company patent titled "Speech Recognition
System for Electronic Switches in a Cellular Telephone or Personal
Communications Network." The Company is currently negotiating with VoiceTech
Communications to settle the litigation and believes such settlement will occur
in 1997.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a)   On October 29, 1996, the Company held a Special Meeting of Stockholders.

(c)   The Stockholders approved:

              1)  The Agreement and Plan of Merger between Voice Control
                  Systems, Inc. and Voice Processing Corporation by a vote of
                  3,773,654 for, 27,734 against and 21,665 abstaining.

              2)  A proposal to adopt an amendment to the Company's 1992 Stock
                  Option Plan to increase the number of shares reserved for
                  issuance upon the exercise of options granted under the plan
                  from 900,000 to 1,300,000 shares by a vote of 3,614,337 for,
                  179,468 against and 29,206 abstaining.


                                    PART II

ITEM 5.       MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

COMMON STOCK PRICES

Prior to February 14, 1996, VCS's Common Stock traded on the American Stock
Exchange/Emerging Company Marketplace ("AMEX/ECM"), originally under the ticker
symbol SIC.EC. On August 11, 1994, the Company's ticker symbol was changed to
VPS.EC. In February 1996, the Company filed an application to delist from the
American Stock Exchange with the Securities and Exchange Commission. Effective
February 14, 1996, the Company's Common Stock began trading on The Nasdaq
National Market under the symbol "VCSI,". The following table sets forth the
quarterly high and low sales prices on the AMEX/ECM or on The Nasdaq National
Market, as applicable, for the periods indicated.

<TABLE>
<CAPTION>

FISCAL 1995:                     High            Low
------------                     ----            ---
<C>                         <C>             <C>     
1st Quarter                 $    3.69       $   2.81
2nd Quarter                      4.38           2.50
3rd Quarter                      5.75           2.69
4th Quarter                     12.50           5.31

<CAPTION>

FISCAL 1996:                     High            Low
------------                     ----            ---
<C>                         <C>             <C>     
1st Quarter                 $   14.00       $   7.00
2nd Quarter                     15.13           8.88
3rd Quarter                      9.25           5.00
4th Quarter                      9.50           5.63
</TABLE>

As of March 14, 1997, there were 1,846 holders of record of outstanding Common
Stock of the Company.





                                      17
<PAGE>   18

DIVIDEND POLICY

No dividends have been declared or paid on the Company's Common Stock to date.
The declaration of dividends is subject to the discretion of the Company's
Board of Directors and will depend on a number of factors including the cash
position, earnings, financial position and anticipated financial requirements
of the Company and other factors deemed relevant by the Board of Directors. The
Company is limited by law to paying dividends on its Common Stock (i) out of
its surplus, which is the excess, if any, of the net assets over the stated
capital, or (ii) in case the Company has no surplus, out of its net profits for
the fiscal year in which the dividend is declared and/or the preceding fiscal
year.

Recent Sales of Unregistered Securities

In January 1996, the Company's general counsel exercised a non-assignable
option to purchase 4,897 shares of Common Stock for an aggregate purchase price
of $7,500 in a transaction exempt from registration pursuant to Section 4(2) of
the Securities Act of 1993, as amended (the "Securities Act").

In March and September, 1996, Dialogic Investment Corporation, a wholly owned
subsidiary of Dialogic Corporation, converted $4,601 and $86,379, respectively,
of accrued but unpaid interest on its convertible note into 5,008 and 94,013
shares, respectively, of the Company's Common Stock in a transaction exempt
from registration pursuant to Section 4(2) of the Securities Act.





                                      18
<PAGE>   19


ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
         RESULTS OF OPERATIONS

OVERVIEW

Since its inception, the Company has focused on the development,
commercialization and application of speech recognition technologies. The
Company's principal sources of revenues are from: (i) sales of speech
recognition hardware and software products to systems integrators and OEMs,
(ii) licensing of speech technology to system and product developers and (iii)
providing specialized engineering services to systems integrators, principally
to assist in the integration of the Company's technology into its customers'
products and systems. Customers who choose to integrate the Company's speech
recognition technologies into products usually pay a license fee for the right
to integrate the technology and a per unit royalty for each speech recognizer
incorporated into products. The Company introduced its commercial speech
recognition hardware product for telecommunications applications in 1987. Today
approximately 98% of the Company's sales are from the telecommunications market
segment. A significant percentage of the Company's sales are made under
agreements with major customers. See "Sales and Marketing."

The Company's sales and profitability may vary significantly from quarter to
quarter due to a variety of factors, including the Company's dependence upon a
small number of customers, timing of customer orders, and changes in the
Company's product and customer mix. The Company typically operates with
relatively little backlog and substantially all of its revenues in each quarter
results from orders and royalty payments received in that quarter.

The Company's sales to Dialogic are expected to shift over time from
predominantly hardware to predominantly software, as the market demand for
Dialogic SCSA products increases. With the shift from hardware sales to
software sales, the Company's gross revenue from Dialogic may decrease while
increased royalty revenue should improve gross margins. See "Products and
Services--Telecommunications Products".

RESULTS OF OPERATIONS

Comparison of Results for Fiscal Years Ended December 31, 1996 and 1995

Sales decreased 16% from $16,096,000 during 1995 to $13,577,000 during 1996.
Two customers, Dialogic and Periphonics, accounted for 25% and 12%,
respectively, of total sales in 1996. One customer, Dialogic, accounted for 40%
of total sales for 1995. Hardware sales, which decreased 27% from 1995, were
65% of revenues in 1996. The decrease in hardware sales accounted for 100% of
the decrease in total sales. Virtually all of the decrease in hardware sales
resulted from a decrease in telecommunications speech recognition board sales
to Dialogic. This decrease is a result of the Company's continued conversion
from primarily being a supplier of hardware/software to becoming primarily a
supplier of software. Royalty, development and license fees, which increased
14% over 1995, were 31% of total sales for 1996. This increase resulted
primarily from increased revenues from processing custom vocabularies for
existing customers, as well as increased development revenue from several new
and previous customers.

Cost of sales includes the cost of components and subcontracted manufacturing
related to hardware products. Gross profit as a percent of sales increased from
69% in 1995 to 80% in 1996 as a result of the decrease in hardware sales and
the increase in royalty, development and license fees.

Research and development expenses increased 4% from $5,751,000 in 1995 to
$6,006,000 in 1996. This increase reflects costs associated with the retention
and recruitment of qualified employees in research and product development.

Selling, general and administrative expenses decreased 2% from $6,981,000 in
1995 to $6,818,000 in 1996. Selling, general and administrative expenses as a
percent of sales increased 7%, as a result of decreased sales during 1996.

Expenses related to the merger with VPC totaled approximately $1,377,000, with
approximately $445,000 related to employee reductions and severance, $395,000
for investment banking fees, $229,000 for legal fees, $122,000 for accounting
fees, $116,000 for the special meeting of stockholders, $44,000 for merger
related travel, and $25,000 for SEC and NASDAQ fees.

The combined net operating loss (NOL) carryforwards of the merged Company
expire from 1997 to 2011 and total approximately $24,800,000 as of December 31,
1996. The Company has provided an allowance against its entire deferred tax
asset relating primarily to NOL carryforwards of approximately $8,432,000.
Effective as of August 11, 1994, the Company had an ownership change as defined
by Internal Revenue Code Section 382 (IRC 382). The effect of such change
limited the use of the Company's NOL in future years to approximately
$1,355,000 annually. In connection with the merger with VPC, VPC had an
ownership change as defined by IRC 382. The effect of such change limits the
use of VPC's NOL in future years 


                                      19
<PAGE>   20

to approximately $850,000 annually. On a combined basis, the NOL of the Company
is limited in its use against future earnings, if any, to approximately
$2,205,000 annually.

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal cash requirements to date have been to fund working
capital and capital expenditures in order to support its sales growth. Net
working capital at December 31, 1996 and December 31, 1995 was $14,684,000 and
$3,246,000, respectively. In the past, the Company's working capital needs were
financed primarily through cash flow from operations and proceeds from the
exercise of warrants and stock options. A stock offering was completed during
the first quarter of 1996 that provided net proceeds of $14,408,000 to the
Company.

At December 31, 1996 and 1995, the Company had $15,227,000 and $2,557,000,
respectively, in cash and cash equivalents. Cash and cash equivalents are
invested in institutional cash investment accounts with preservation of capital
being the primary consideration. All investments currently have overnight
liquidity. Historically, the Company's primary source of liquidity has been the
timely collection of its accounts receivable. The average days sales in
accounts receivable were 63 days and 44 days at December 31, 1996 and 1995,
respectively.

The Company's inventory as of December 31, 1996 and December 31, 1995 was
$453,000 and $835,000, respectively. Inventory for non-telecom products
decreased by $136,000 and $200,000 was reserved for obsolete inventory.

The Company's debt at December 31, 1996 consisted of a convertible promissory
note due to Dialogic on January 1, 1997. Dialogic converted accrued interest on
its note to Common Stock during 1996.

The Company's capital expenditures were $604,000 and $503,000 for the years
ended December 31, 1996 and 1995, respectively. The Company has no specific
commitments with regard to capital expenditures.

ITEM 7.  FINANCIAL STATEMENTS

The financial statements required by this Item begin at page F-1 hereof.


ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
         FINANCIAL DISCLOSURE

None

                                    PART III

ITEM 9   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

The discussion under "Directors, Executive Officers, promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act" in the Company's
definitive Proxy Statement for its 1997 Annual Meeting of Stockholders is
incorporated herein by reference.

ITEM 10  EXECUTIVE COMPENSATION

The discussions under "Compensation of Directors" and "Executive Compensation"
in the Company's definitive Proxy Statement for its 1997 Annual Meeting of
Stockholders is incorporated herein by reference.

ITEM 11  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The discussion under "Security Ownership of Certain Beneficial Owners and
Management" in the Company's definitive Proxy Statement for its 1997 Annual
Meeting of Stockholders is incorporated herein by reference.

ITEM 12  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The discussion under "Certain Relationships and Related Transactions" in the
Company's definitive Proxy Statement for its 1997 Annual Meeting of
Stockholders is incorporated herein by reference.





                                      20
<PAGE>   21


ITEM 13  EXHIBITS AND REPORTS ON FORM 8-K

         (a)    The following documents are filed as part of the Annual Report 
                on Form 10-KSB.

          1.    Financial Statements

                The financial statements filed as part of the Annual Report on
                Form 10-KSB are listed in the "Index to Financial Statements"
                on page F-1 hereof.

          2.    Exhibits

                The exhibits filed as part of the Annual Report on Form 10-KSB
                are listed in the "Index to Exhibits" on page 23 hereof.

          (b)   Reports on Form 8-K

                A report on Form 8-K was filed November 13, 1996 reporting the
                completion of the merger of Voice Control Systems, Inc. and
                Voice Processing Corporation pursuant to the Agreement and Plan
                of Merger.




                                      21
<PAGE>   22


                                   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.

                                         VOICE CONTROL SYSTEMS, INC.

Date:  March 27, 1997
                                         By:/s/Peter J. Foster
                                            ----------------------------------
                                         Peter J. Foster,
                                         President and Chief Executive Officer

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>

Signatures                                                                              Date
----------                                                                              ----
<S>                                                                                    <C>
/s/ John B. Torkelsen                                                                  March 27, 1997
---------------------------------------------
John B. Torkelsen
Chairman and Director


/s/ Peter J. Foster                                                                    March 27, 1997
---------------------------------------------
Peter J. Foster
President, Chief Executive Officer and Director


/s/ Kim S. Terry                                                                       March 27, 1997
---------------------------------------------
Kim S. Terry
Vice President Finance and Corporate Secretary
(Principal Financial and Accounting Officer)


/s/ Melvyn J. Goodman                                                                  March 27, 1997
---------------------------------------------
Melvyn J. Goodman
Director


/s/ John Lucas-Tooth                                                                   March 27, 1997
---------------------------------------------
John Lucas-Tooth
Director


/s/ Neal J. Robinson                                                                   March 27, 1997
---------------------------------------------
Neal J. Robinson
Director


                                                                                       March 27, 1997
---------------------------------------------
Merrill Solomon
Director


/s/ Stanley Westreich                                                                  March 27, 1997
---------------------------------------------
Stanley Westreich
Director


</TABLE>


                                      22
<PAGE>   23

                          VOICE CONTROL SYSTEMS, INC.
                         INDEX TO FINANCIAL STATEMENTS
                                  ITEM 13 (a)



                                    CONTENTS
<TABLE>
<CAPTION>
                                                                            
                                                                              Page
                                                                              ----
<S>                                                                           <C>
Independent Auditors Report                                                    F-2
                                                                            
Balance Sheet as of December 31, 1996                                          F-3
                                                                            
Statements of Operations for Each of the Two Years in the                   
  Period Ended December 31, 1996                                               F-4
                                                                            
Statements of Stockholders' Equity for Each of the Two Years                
  in the Period Ended December 31, 1996                                        F-5
                                                                            
Statements of Cash Flows for Each of the Two Years in the                   
  Period Ended December 31, 1996                                               F-6
                                                                            
Notes to Financial Statements                                                  F-7

</TABLE>



                                      F-1
<PAGE>   24


                          Independent Auditors' Report


The Board of Directors and Stockholders
Voice Control Systems, Inc.
Dallas, Texas


     We have audited the accompanying balance sheet of Voice Control Systems,
Inc. as of December 31, 1996, and the related statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The financial statements give
retroactive effect to the merger of Voice Processing Corporation which has been
accounted for as a pooling of interests as described in Note 2 to the financial
statements. We did not audit the statements of operations, stockholders' equity
and cash flows of Voice Processing Corporation for the year ended September 30,
1995. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Voice Processing Corporation for its year ended September 30, 1995, is based
solely on the report of such other auditors.

     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, based on our audits and the report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Voice Control Systems, Inc. as of December
31, 1996, and the results of their operations and their cash flows for each of
the two years in the period then ended in conformity with generally accepted
accounting principles.


                                                           /s/ BDO Seidman, LLP



February 22, 1997




                                      F-2
<PAGE>   25

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Voice Processing Corporation:

        We have audited the statements of operations, stockholders' equity and
cash flows of Voice Processing Corporation (a Massachusetts corporation) for
the year ended September 30, 1995. These financial statements, not included
herein, are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our audit.

        We conducted our audit 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 audit provides a reasonable basis
for our opinion. 

        In our opinion, the financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Voice Processing Corporation for the year ended September 30, 1995, in
conformity with generally accepted accounting principles.


                                             /s/  ARTHUR ANDERSEN
                                             ----------------------------------
                                                  Arthur Andersen


Boston, Massachusetts
December 8, 1995 (except with respect
  to the matter discussed in Note 8, as 
  to which the date is June 17, 1996)



                                      F-3
<PAGE>   26


                                                    VOICE CONTROL SYSTEMS, INC.

                                                                  BALANCE SHEET
                                                              DECEMBER 31, 1996
===============================================================================
<TABLE>
<CAPTION>

                                     ASSETS

CURRENT ASSETS:
<S>                                                                      <C>         
     Cash and cash equivalents                                           $ 15,226,824
     Accounts receivable (net of allowance
        for doubtful accounts of $113,000                                   2,507,763
     Inventory (Note 4)                                                       452,678
     Prepaid expenses                                                          97,590
                                                                         ------------

              TOTAL CURRENT ASSETS                                         18,284,855

NET PROPERTY AND EQUIPMENT (NOTE 5)                                         1,467,762

OTHER ASSETS                                                                   51,853
                                                                         ------------
                                                                         $ 19,804,470
                                                                         ============
                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT:
     Accounts payable and accrued expenses (Note 7)                      $  1,013,698
     Deferred revenue                                                       1,425,763
     Convertible note (Note 3)                                              1,161,799
                                                                         ------------

              TOTAL CURRENT LIABILITIES                                     3,601,260

LONG TERM DEBT (NOTE 3)                                                          --
                                                                         ------------

              TOTAL LIABILITIES                                             3,601,260
                                                                         ------------

COMMITMENTS AND CONTINGENCIES (NOTES 8 AND 10)

STOCKHOLDERS' EQUITY (NOTES 2, 3, 6 AND 12):
     Preferred stock; $1.00 par value; 300,000 shares authorized;                --
         none issued
     Common stock, $.01 par value:  20,000,000 shares
         authorized; 9,715,056 issued and outstanding shares                   97,151
     Paid-in capital                                                       35,781,937
     Receivable from shareholders                                            (118,755)
     Deficit                                                              (19,557,123)
                                                                         ------------

              TOTAL STOCKHOLDERS' EQUITY                                   16,203,210
                                                                         ------------

                                                                         $ 19,804,470
                                                                         ============
</TABLE>


                 See accompanying notes to financial statements

                                      F-4
<PAGE>   27


                                                    VOICE CONTROL SYSTEMS, INC.

                                                       STATEMENTS OF OPERATIONS
===============================================================================

<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                                     -----------------------
                                                      1996           1995
                                                      ----           ----
<S>                                               <C>             <C>
SALES (NOTE 11)                                   $ 13,577,420    $ 16,096,127

COST OF SALES                                        2,721,934       4,980,278
                                                  ------------    ------------

     GROSS PROFIT                                   10,855,486      11,115,849

COSTS AND EXPENSES:

     OPERATING EXPENSES:
     Research and development                        6,005,644       5,751,220
     Selling, general and administrative             6,817,599       6,980,704
     Merger costs                                    1,376,533            --
                                                  ------------    ------------
              TOTAL OPERATING EXPENSES              14,199,776      12,731,924

     OTHER EXPENSES (INCOME):
     Interest expense (Income), net                   (669,378)        (64,409)
     Interest, to affiliates (Notes 3 and 6)           119,661         141,428
                                                  ------------    ------------
         TOTAL OTHER EXPENSES (INCOME)                (549,717)         77,019

              TOTAL COSTS AND EXPENSES              13,650,059      12,808,943
                                                  ------------    ------------

NET LOSS BEFORE TAXES                               (2,794,573)     (1,693,094)
                                                  ------------    ------------

INCOME TAXES (NOTE 9)                                     --            11,000
                                                  ------------    ------------

NET LOSS                                          $ (2,794,573)   $ (1,704,094)
                                                  ============    ============

NET LOSS PER SHARE:                               $      (0.34)   $      (0.32)
                                                  ============    ============

WEIGHTED AVERAGE OUTSTANDING SHARES:                 8,274,984       5,255,400
                                                  ============    ============


</TABLE>


                 See accompanying notes to financial statements

                                      F-5
<PAGE>   28

                                                     VOICE CONTROL SYSTEMS, INC.

                                              STATEMENTS OF STOCKHOLDERS' EQUITY
================================================================================

<TABLE>
<CAPTION>

                                                                                          NOTE
                                                                                        RECEIVABLE
                                PREFERRED STOCK        COMMON STOCK       PAID-IN         FROM
                               STOCK     DOLLARS    STOCK      DOLLARS    CAPITAL      STOCKHOLDERS     DEFICIT      TOTAL
------------------------------------------------------------------------------------------------------------------------------------
<S>              <C>           <C>       <C>       <C>        <C>         <C>            <C>          <C>             <C>       
BALANCE, January 1, 1995       629,270   $6,293     5,093,340    $50,934  $18,348,897    $(144,381)   $(15,058,456)   $3,203,287

Issuance of 50,633
     shares in exchange for
     Convertible Debt and
     accrued interest                                 185,360      1,854      321,933                                    323,787

Sale of Series A preferred     251,708    2,517                               997,483                                  1,000,000

Exercised Options and
     Warrants                                         322,248      3,222      783,691      (10,000)                      776,913

Net Loss                            --       --            --         --          --          --        (1,704,094)   (1,704,094)
                              --------   -------    ---------    -------  -----------   ----------    -------------  -----------

BALANCE, December 31, 1995     880,978    8,810     5,600,948     56,010   20,452,004     (154,381)    (16,762,550)    3,599,893

Issuance of shares in exchange
 for accrued interest (Note 3)                        131,903      1,319      119,874                                    121,193

Exercised Options and
     Warrants                                       1,262,962     12,630    1,282,180                                  1,294,810

Collection of note receivable
     from Stockholder                                                                       35,626                        35,626

Issuance of shares in
     exchange for Convertible                                                                                            
     Debt (Notes 2 and 3)                             348,363      3,483      496,517                                    500,000

Issuance of shares in
     public offering                                1,489,902     14,899   13,431,362                                 13,446,261

Conversion of Series A
     preferred to common
     stock (Note 2)           (880,978)  (8,810)      880,978      8,810                                                   --

Net Loss                            --       --            --         --          --          --        (2,794,573)   (2,794,573)
                              --------   -------    ---------    -------  -----------   ----------    -------------  -----------
BALANCE, December 31, 1996          --       --     9,715,056    $97,151  $35,781,937    $(118,755)   $(19,557,123)  $16,203,210
                              ========   =======    =========    =======  ===========    ==========   =============  ===========
</TABLE>


                 See accompanying notes to financial statements

                                      F-6
<PAGE>   29

                                                    VOICE CONTROL SYSTEMS, INC.

                                                       STATEMENTS OF CASH FLOWS
===============================================================================

<TABLE>
<CAPTION>

                                                                   Year Ended December 31,
                                                                ----------------------------
                                                                     1996            1995
                                                                ------------    ------------       

CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                             <C>             <C>          
     Net loss                                                   $ (2,794,573)   $ (1,704,094)
     Adjustments to reconcile net loss to
         net cash provided by operating activities:
              Depreciation and amortization                          460,962         434,803
              Provision for bad debts                                125,122          51,725
              Changes in operating assets and liabilities:
                  Accounts receivable                               (654,797)       (306,514)
                  Other assets                                       143,587         (31,669)
                  Prepaid expenses                                    27,750         (37,739)
                  Inventory                                          382,338        (411,437)
                  Accounts payable and accrued expenses              193,832         279,180
                  Deferred revenue                                   109,852         172,252
                                                                ------------    ------------

NET CASH USED IN OPERATING ACTIVITIES                             (2,005,927)     (1,553,493)
                                                                ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Capital expenditures                                           (600,663)       (497,177)
     Proceeds from sale of building                                     --           150,000
                                                                ------------    ------------

NET CASH USED IN INVESTING ACTIVITIES                               (600,663)       (347,177)
                                                                ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Principal payments under capital lease
         obligations and notes payable                                  --          (121,665)
     Proceeds from notes payable                                     500,000       1,000,000
     Proceeds from repayment of stockholder loan                      35,626            --
     Proceeds from sale of series A preferred stock                     --         1,000,000
     Proceeds from issuance of common stock                       13,446,261            --
     Proceeds from exercise of stock options                       1,294,810         776,913
                                                                ------------    ------------

NET CASH PROVIDED BY FINANCING ACTIVITIES                         15,276,697       2,655,248
                                                                ------------    ------------

NET INCREASE IN CASH AND CASH EQUIVALENTS                         12,670,107         754,578

CASH AND CASH EQUIVALENTS at beginning of year                     2,556,717       1,802,139
                                                                ------------    ------------

CASH AND CASH EQUIVALENTS at end of year                        $ 15,226,824    $  2,556,717
                                                                ============    ============

SUPPLEMENTAL CASH FLOWS INFORMATION
         Interest paid                                          $       --      $     16,275
         Income taxes paid                                              --            11,000
     Non Cash Investing and Financing Activities:
         Conversion of debt and accrued interest to
              480,266, and 185,360 shares of stock--
              all issued to affiliates (Notes 3 and 6)               621,193         323,787
         Conversion of note payable to an affiliate
              to a prepaid royalty                                 1,000,000            --
         Conversion of series A preferred stock to
              880,978 shares of common stock                         880,978            --

</TABLE>

                 See accompanying notes to financial statements


                                      F-7
<PAGE>   30

                                                    VOICE CONTROL SYSTEMS, INC.

                                                  NOTES TO FINANCIAL STATEMENTS
===============================================================================




NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Nature of Business and Presentation

     Voice Control Systems, Inc. (the "Company") engages in the design of
speech recognition systems which allow for the voice control of electronic
machines and/or devices. The Company's revenues are historically derived from
the design of speech recognition systems as value added features for products
manufactured and marketed by others, both domestically and internationally. In
addition to this source of revenue, the Company is currently marketing products
on its own behalf, principally in the telecommunications industry.

     Effective August 11, 1994, the Company acquired all of the stock of VCS
Industries, Inc. ("Industries") in a reverse acquisition accounted for using
the purchase method of accounting. Each outstanding share of Industries common
stock was converted into and exchanged for .65302 shares of VCS common stock.
The conversion rate of .6530225 also applied to all options and convertible
securities of Industries.

     The Company and Voice Processing Corporation ("VPC") entered into an
Agreement and Plan of Merger, approved on October 29, 1996 by each Company's
stockholders of record, pursuant to which VPC was merged into the Company. The
merger was effective as of November 4, 1996. The transaction was accounted for
as a pooling-of-interests.

     Revenue Recognition

     Other than for long-term contracts, revenue is generally recorded when
products are shipped to customers. Warranty expense is insignificant.

     Technology and prototype development revenue, derived from long-term
contracts, is recognized when earned under the terms of the related contract.
The intent of the contracts is to develop the application of the Company's
technology to products to be manufactured and marketed by others. Such programs
usually culminate in the delivery of a prototype unit. The contracts for such
programs generally provide for the payment of a specified portion of the total
fee at certain stages in the completion of the project, and sometimes provide
for an advance payment at the commencement of the project. Accordingly, fees
billed or received prior to the completion of the related stage of the project,
and those subject to forfeiture in the event of a delay in project completion,
are presented as deferred revenue in the accompanying balance sheets.

     The Company also grants licenses to customers to use the Company's
technologies in their products. Depending on the type of license, customers pay
annual or one-time license fees. Licensees pay royalties to the Company based
on the volume of products sold by the licensee utilizing the licensed
technology. Royalty revenue is reported to the Company by licensees pursuant to
contractual obligations, monthly or quarterly, and is recognized as revenue
when reported by the customer.

     Property and Equipment

     Property and equipment are recorded at cost. Additions and major
improvements are capitalized while expenditures for maintenance and repairs are
charged to expense when incurred. Depreciation is provided by the straight-line
method over estimated useful lives ranging from three to five years.

     Inventory

     Inventory consists of speech recognition products and raw materials used
in the construction of speech recognition products. Inventory is stated at the
lower of cost or market value. Cost is determined on a first-in, first-out
basis.

     Income Taxes

     Effective January 1, 1993, the Company adopted  Statement of Financial  
Accounting  Standards No. 109,  Accounting for Income Taxes (SFAS No. 109).





                                      F-8
<PAGE>   31
                                                    VOICE CONTROL SYSTEMS, INC.

                                                  NOTES TO FINANCIAL STATEMENTS
===============================================================================

     Income Taxes (continued)

     Under SFAS No. 109, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable for the period and the
change during the period in deferred tax assets and liabilities.

     Earnings Per Share

     Net income (loss) per share is based on the weighted average number of
shares of common stock outstanding. Options, warrants and conversion rights to
acquire stock are included as common stock equivalents, when dilutive, using
the treasury stock method. Primary earnings per share is calculated by
measuring dilution applicable to common stock equivalents based on the average
share value for the period, while fully diluted earnings per share measures
dilution based on the share value at the end of the period and assumes the
conversion of the convertible debt due to a customer.

     The Financial Accounting Standards Board recently adopted, Statement of
Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128). SFAS 128
requires a calculation of book "Basic" and "Diluted" earnings per share. Basic
earnings per share includes no dilution. As the Company incurred a loss in both
1996 and 1995, the adoption of SFAS 128 would have no impact on the calculation
of "Basic"earnings per share as any common stock equivalents would be
antidilutive and thus would not be included in the Company's "Basic" earnings
per share calculations. The Company computation of net loss per share, as
calculated, does not include any common stock equivalents.

     Cash Flows

     For purposes of the statement of cash flows, the Company considers money
market instruments with original maturities of three months or less to be cash
equivalents.

     Concentration of Credit Risk

     The Company sells products and licenses technology to customers in
diversified industries. A significant portion of the Company's sales are to two
customers (see Note 11). The Company performs periodic credit evaluations of
its customers' financial condition and generally does not require collateral.
Receivables are generally due within 30 days. Credit losses from customers have
been within management's expectations, and management believes the allowance
for doubtful accounts adequately provides for any expected losses.

     Almost 100% of the Company's cash and cash equivalents are in one bank.
Thus, the balance over $100,000 exceeds the federally insured deposit limit.

NOTE 2 -- BUSINESS ACQUISITION

     Effective November 4, 1996, the Company acquired VPC in a transaction
accounted for using the pooling-of-interests method of accounting (see Note 1).
Immediately prior to the transaction, all of VPC's convertible preferred stock
and its convertible notes were converted to common stock of VPC. Each
outstanding share of VPC common stock was converted into and exchanged for
0.87091 shares of VCS common stock. In addition, all options and warrants to
purchase VPC shares were exchanged for options and warrants to purchase VCS
shares at the .87091 exchange rate. The stock conversion referred to above has
been retroactively reflected in the financial statements for all periods
presented.





                                      F-9
<PAGE>   32
                                                    VOICE CONTROL SYSTEMS, INC.

                                                  NOTES TO FINANCIAL STATEMENTS
===============================================================================

NOTE 2 -- BUSINESS ACQUISITION (CONTINUED)

     Separate results of operations, excluding merger costs of $1,377,000, for
the periods prior to the merger with VPC are provided below. The results
provided for VPC are for the calendar year ended December 31, 1995 and not for
its fiscal year ended September 30, 1995.
<TABLE>
<CAPTION>
 
                                 TEN MONTHS ENDED           YEAR
REVENUES:                        OCTOBER 29,1996         ENDED 12/31/95
                                 ----------------        --------------
<S>                               <C>                     <C>         
VCS                               $  7,048,425            $ 10,737,301
VPC                                  4,650,168               5,358,826
                                  ------------            ------------
COMBINED:                           11,698,593              16,096,127

NET INCOME (LOSS):
VCS                               $    584,563            $    967,480
VPC                                 (1,682,934)             (2,671,574)
                                  ------------            ------------
COMBINED:                         $ (1,098,371)           $ (1,704,094)
                                  ============            ============
</TABLE>

NOTE 3 -- ISSUANCE OF CONVERTIBLE DEBT

     In September 1991, the Company issued a three year convertible promissory
note to a major customer (the "Lender") in the principal amount of $1,161,799
in exchange for certain demand notes previously issued by the Company. The
conversion price was set at the Company's then market value per share. The note
bears interest at a floating rate with a New Jersey bank plus 2%; interest is
payable annually and principal was due on September 20, 1994. On March 14,
1994, the due date of the note was extended to January 1997. Interest in the
amount of $121,193 was converted to 131,903 shares of stock in 1996. The
promissory note and accrued interest was converted to 1,300,694 shares of
common stock on January 1, 1997.

     In March 1996, prior to merger discussions with the Company, VPC issued
convertible notes to stockholders in the amount of $500,000. The notes earned
interest at a rate of 7% per year and were convertible into common stock at a
rate of $1.4352 per share, VPC's then market value per share. The notes were
due on July 31, 1996 and converted to 348,363 shares of common stock on July
31, 1996.

NOTE 4 -- INVENTORY

Inventory consists of the following at December 31, 1996:

<TABLE>

<S>                                        <C>      
Finished goods                             $ 652,678
Reserve for excess and obsolescence         (200,000)
                                           ---------
                                           $ 452,678
                                           =========
</TABLE>

NOTE 5 -- PROPERTY AND EQUIPMENT

Property and equipment consists of the following at December 31, 1996:

<TABLE>

<S>                                        <C>        
Research and development equipment         $ 3,115,993
Furniture and fixtures                         571,793
                                           -----------
                                             3,687,786
Less accumulated depreciation               (2,220,024)
                                           -----------
                                           $ 1,467,762
                                           ===========
</TABLE>





                                      F-10
<PAGE>   33
                                                    VOICE CONTROL SYSTEMS, INC.

                                                  NOTES TO FINANCIAL STATEMENTS
===============================================================================

NOTE 6 -- NOTES PAYABLE

     On August 31, 1993, the Company issued unsecured, convertible debentures
to affiliates totaling $380,000 in exchange for previously issued debentures
and demand notes. The debentures were due in August 1994 and earned interest at
prime plus 4 percent. The debentures were convertible at one share for each
$3.95 in principal and interest converted. In August 1994, the Company issued
45,997 shares of common stock to affiliates in exchange for convertible debt
and accrued interest totaling $181,726. In October, 1994, the remaining
$200,000 convertible debt due to an officer was extended to August 1, 1995. On
August 1, 1995, the Company issued 50,633 shares of common stock to an officer
in exchange for convertible debt.

     During 1995, VPC received advances from Creative Technology Ltd., a
customer and stockholder, based on arrangements included in a development
agreement. In connection with the merger described in Note 2, Creative agreed
to convert the payable to prepaid royalties against future product sales.

NOTE 7 -- ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following at December 31,
1996:

<TABLE>

<S>                                   <C>       
Trade accounts payable                $  460,521
Accrued payroll                          105,976
Accrued interest payable                  33,279
Other accrued expenses                   413,922
                                      ----------
                                      $1,013,698
                                      ==========
</TABLE>

NOTE 8 -- COMMON STOCK

     STOCK OPTIONS

     At the Annual Meeting of Stockholders in May 1992, the stockholders
approved the 1992 Stock Option Plan (the "1992 Plan"). Under the 1992 Plan,
1,300,000 shares are available for grant; the exercise price per share of
options granted cannot be less than the fair market value of the Company's
common stock at the date of grant; the exercise period of options granted is up
to ten years and options vest between 20% and 25% per year beginning one year
from date of grant, unless vesting is changed by the Board of Directors.
Information relating to stock options granted to employees is as follows:
<TABLE>
<CAPTION>
                                               
                                                        Number of                      Exercise
                                                         Shares                   Price per Share
                                                        ---------                 -----------------
<S>                                                       <C>                      <C>      <C>    
     Balance, January 1, 1995                             397,613                  $3.00  - $  8.00
         Options granted                                  178,000                  $3.00  - $  5.38
         Options cancelled or forfeited                   156,467                  $3.00  - $  8.00
         Options exercised                                     --
                                                          -------
     Balance, December 31, 1995                           419,146                  $3.00  - $  8.52
         Options granted                                  606,250                  $6.00  - $ 10.94
         Options cancelled or forfeited                   125,554                  $3.00  - $  8.00
         Options exercised                                 48,105                          --
                                                          -------                
     Balance, December 31, 1996                           851,737                  $3.00  - $ 10.94
                                                          =======
                                               
              Options exercisable                         118,447                  $3.00  - $  8.52
                                                          =======
</TABLE>                                       





                                     F-11
<PAGE>   34
                                                    VOICE CONTROL SYSTEMS, INC.

                                                  NOTES TO FINANCIAL STATEMENTS
===============================================================================


NOTE 8 -- COMMON STOCK (CONTINUED)

     STOCK OPTIONS (CONTINUED)

     As of August 11, 1994, the Company assumed as a result of the Industries
acquisition described in Note 1, stock options totalling 1,166,490 at an
exercise price ranging from $1.15 to $1.53 per share. At December 31, 1996,
there were 619,265, options outstanding of which 595,043 were exercisable, at
prices ranging from $1.15 to $1.53 per share.

     In 1989 and 1996, VPC established incentive stock plans. VPC granted 
employees options at exercise prices not less than the fair market value of the
shares on the date of grant. The shares generally vest over a 4-year period. As
of November 4, 1996, as a result of the merger described in Note 2, the Company
assumed stock options totalling 1,309,060 at exercise prices ranging from $.57
to $3.97. At December 31, 1996 there were 1,309,060 options outstanding of which
918,189 were exercisable at prices ranging from $.57 to $3.97.

     STOCK WARRANTS

     As of January 1, 1995, the Company had outstanding warrants to purchase
322,500 shares of common stock at prices ranging from $3.375 to $8.00.

     Pursuant to a director compensation plan discussed in 1995 and adopted in
March 1996, the Company issued five year warrants to certain Directors to
purchase 40,000 shares of the Company's common stock for $5.63 per share. At
December 31, 1996 warrants to purchase 306,250 shares of the Company's common
stock were outstanding at prices from $3.38 to $8.00 per share.

     The warrant agreements require that the exercise price per share of
warrants granted cannot be less than the fair market value of the Company's
stock at the date of grant and provide for adjusting both the exercise price
and the number of shares purchasable based on various criteria, including the
Company's issuing shares of common stock, convertible securities, or certain
options at less than market price or the warrant exercise price.

     As a result of the merger with VPC, the Company assumed 99,975 warrants
with exercise price of $2.07 which expire September 30, 1998.

NOTE 9 --  INCOME TAXES

     Federal and state income taxes consist of the following at December 31:

<TABLE>
<CAPTION>
                         1996    1995
                       -------   -------
<S>                    <C>       <C>    
Current
Federal                $  --     $11,000
State                     --        --
                       -------   -------
                       $  --     $11,000
                       =======   =======
</TABLE>


     The following reconciles income tax expense at the federal statutory rate
to the actual tax expense.

<TABLE>
<CAPTION>

                                            1996      1995
                                           -------  --------
<S>                                        <C>       <C>  
Income taxes at the statutory rate         $  --     $  --
Effect on taxes resulting from:
Utilization of NOL carryforwards              --        --
Federal alternative minimum taxes             --      11,000
State taxes                                   --        --
                                           -------   -------
                                           $  --     $11,000
                                           =======   =======
</TABLE>



                                     F-12
<PAGE>   35
                                                    VOICE CONTROL SYSTEMS, INC.

                                                  NOTES TO FINANCIAL STATEMENTS
===============================================================================

NOTE 9 --  INCOME TAXES (CONTINUED)

     Significant components of the Company's net deferred tax assets for
federal and state income taxes are as follows:
<TABLE>
<CAPTION>

                                     1996               1995
                                   -----------      -----------
<S>                                <C>              <C>        
Net operating losses               $ 8,432,000      $ 7,482,000
Valuation allowance                 (8,432,000)      (7,482,000)
                                   -----------      -----------
                                   $        --      $        --
                                   ===========      ===========
</TABLE>

     The combined net operating loss (NOL) carryforwards of the merged Company
expire from 1997 to 2011 and total approximately $24,800,000 as of December 31,
1996. The Company has provided an allowance against its entire deferred tax
asset relating primarily to NOL carryforwards of approximately $8,432,000. In
connection with the Industries acquisition, effective as of August 11, 1994,
the Company had an ownership change as defined by Internal Revenue Code Section
382 (IRC 382). The effect of such change limited the use of the Company's NOL
in future years to approximately $1,355,000 annually. In connection with the
merger with VPC, VPC had an ownership change as defined by IRC 382. The effect
of such change limits the use of VPC's NOL in future years to approximately
$850,000 annually. On a combined basis, the NOL of the Company is limited in
its use against future earnings, if any, to approximately $2,205,000 annually.

     The Company has provided an allowance for its entire deferred tax asset as
its realization is dependent upon the future generation of taxable income,
which is not assured. Until such realization can be reasonably determined based
on established sources of earnings sufficient to utilize the NOL carryforward,
management will continue to provide an allowance for the entire deferred tax
asset.

NOTE 10 -- COMMITMENTS AND CONTINGENCIES

     The Company rents offices and equipment under noncancelable and cancelable
operating agreements. Minimum future rental obligations under noncancelable
agreements as of December 31, 1996 are $211,066 annually through 1999 for
Dallas office space and a separate lease of $504,132 annually through 2000 for
Cambridge office space.

NOTE 11 -- MAJOR CUSTOMERS

     In 1996, two customers accounted for 25% and 12% of total sales revenue.
One customer accounted for 40% of total sales revenue for the year ended
December 31, 1995. The Company's largest customer is also the holder of the
convertible debt and option agreement described in Note 3. Accounts receivable
from the largest customer were 4% and 3% of the total receivable balance at
December 31, 1996 and 1995, respectively.

NOTE 12 - FAS 123

     The Financial Accounting Standards Board (FASB) Issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." The Company has elected to continue using the intrinsic value
based method of accounting prescribed in Accounting Principles Board Opinion
No. 25. "Accounting for Stock Issued to Employees," as permitted by SFAS No.
123.

     Options to purchase the Company's common stock have been granted to
directors, officers and most classes of employees working for the Company.
Options generally become exercisable in 20% cumulative annual increments
beginning with the date of grant and expire at the end of ten years. At
December 31, 1996 and 1995, 409,008 and 1,070,657 shares, respectively, were
granted under the plans. All figures include, on a pro forma basis, options
issued by VPC, using the applicable exchange rate, due to the merger with the
Company.

     Pro forma information is required by SFAS No. 123 to reflect the estimated
effect on net income and net income per share as if the company had accounted
for the stock options and other awards granted using the fair value method
described in the statement. The fair value was estimated at the date of grant
using the Black-Scholes options pricing model and with the following
assumptions: risk-free interest rate of 6.4%; dividend yield of 0%; volatility
factor of 82.2%; weighted-average expected life of 6.5 years and a forfeiture
rate of 20%. The following effects on net income, if SFAS No. 123 had been
adopted, may not be reliable and are based on subjective assumptions.




                                     F-13
<PAGE>   36
                                                    VOICE CONTROL SYSTEMS, INC.

                                                  NOTES TO FINANCIAL STATEMENTS
===============================================================================


NOTE 12 - FAS 123 (CONTINUED)

<TABLE>
<CAPTION>

                                                      1996                 1995
                                                  -------------      --------------
<S>                                               <C>                <C>           
Net Loss (As Reported)                            $ ( 2,794,573)     $  (1,704,094)
Net Earnings (Under SFAS No. 123)                 $ ( 4,752,858)     $  (2,229,400)
Earnings Per Share (As Reported)                  $       (0.34)     $       (0.32)
Earnings Per Share (Under SFAS No. 123)           $       (0.57)     $       (0.42)
</TABLE>




                                     F-14
<PAGE>   37

                               INDEX OF EXHIBITS
<TABLE>
<CAPTION>

Exhibit No.       Exhibit Description
-----------       -------------------
<S>               <C>  
2.1               Agreement and Plan of Reorganization between Voice Control
                  Systems, Inc. and Voice Processing Corporation dated July 16,
                  1996, (filed with the Securities and Exchange Commission on
                  September 4, 1996 as Exhibit 2.1 to the Company's
                  Registration Statement on Form S-3 dated September 4, 1996
                  Registration No. 333-11367, and amendment thereto filed on
                  September 24, 1996, as Exhibit 2.1 to the Company's Amendment
                  No. 1 to the Registration Statement on Form S-3 dated
                  September 24, 1996, Registration No. 333-11367, and
                  incorporated by reference herein).

2.2               Agreement and Plan of Reorganization between Scott
                  Instruments Corporation and VCS Industries, Inc. dated April
                  11, 1994, as amended (filed with the Securities and Exchange
                  Commission on April 11, 1994 as Exhibit 2.1 to the Company's
                  Registration Statement on Form S-4 dated April 11, 1994,
                  Registration No. 33-77658, and amendment thereto filed on
                  June 1, 1994, as Exhibit 2.1a to the Company's Amendment No.
                  1 to the Registration Statement on Form S-4 dated June 1,
                  1994, Registration No. 33-77658, and amendment thereto filed
                  on July 12, 1994, as Exhibit 2.1b to the Company's Amendment
                  No. 2 to the Registration Statement on Form S-4 dated July
                  12, 1994, Registration No. 33-77658, and incorporated by
                  reference herein).

3.1               Certificate of Incorporation of the Company, as amended
                  (filed with the Securities and Exchange Commission on March
                  11, 1986, as Exhibit 3.1 to the Company's Annual Report on
                  Form 10-K for the fiscal year ended December 31, 1985, and
                  amendment thereto filed on March 30, 1987, as Exhibit 3.1 to
                  the Company's Annual Report on Form 10-K for the fiscal year
                  ended December 31, 1986, and amendments thereto filed July 8,
                  1993 as Exhibit 4.3 to Form S-8 Registration Statement of
                  Scott, as further amended by the Certificate of Merger
                  between Scott Instruments and VCS Industries, Inc., dated
                  August 9, 1994 filed on March 23, 1995, as Exhibit 3.1 to the
                  Company's Annual Report on Form 10-KSB for the fiscal year
                  ended December 31, 1994 and incorporated by reference
                  herein).

3.2               By-Laws of the Company (filed with the Securities and
                  Exchange Commission on March 11, 1986, as Exhibit 3.2 to the
                  Company's Annual Report on Form 10-K for the fiscal year
                  ended December 31, 1985, and amendment thereto filed on March
                  30, 1987, as Exhibit 3.2 to the Company's Annual Report on
                  Form 10-K for the fiscal year ended December 31, 1986, and
                  amendment thereto filed on March 23, 1995, as Exhibit 3.2 to
                  the Company's Annual Report on Form 10-KSB for the fiscal
                  year ended December 31, 1994, and incorporated by reference
                  herein).

4.1               Specimen certificate representing shares of the Company's
                  Common Stock, $0.01 par value (filed with the Securities and
                  Exchange Commission on December 8, 1995 as Exhibit 4.1 to the
                  Company's Registration Statement on Form SB-2 dated December
                  8, 1995, Registration No. 33-64835, and incorporated by
                  reference herein).

4.2               Promissory Note dated September 20, 1991 in the principal
                  amount of $1,161,798.90 executed by the Company and payable
                  to Dialogic Corporation (filed with the Securities and
                  Exchange Commission on April 11, 1994 as Exhibit 10.27 to the
                  Company's Registration Statement on Form S-4 dated April 11,
                  1994, Registration No. 33-77658, and incorporated by
                  reference herein).

4.3               Loan and Security Agreement dated September 20, 1991 by and
                  between the Company and Dialogic Corporation (filed with the
                  Securities and Exchange Commission on April 11, 1994 as
                  Exhibit 10.28 to the Company's Registration Statement on Form
                  S-4 dated April 11, 1994, Registration No. 33-77658, and
                  incorporated by reference herein).

4.4               Omnibus Amendment Agreement dated March 14, 1994 between the
                  Company and Dialogic Corporation (filed with the Securities
                  and Exchange Commission on April 11, 1994 as Exhibit 10.35 to
                  the Company's Registration Statement on Form S-4 dated April
                  11, 1994, Registration No. 33-77658, and incorporated by
                  reference herein).

10.1              1992 Stock Option Plan of the Company (filed with the
                  Securities and Exchange Commission on March 30, 1993 as
                  Exhibit 10.25 to the Company's Annual Report on Form 10-KSB
                  for the fiscal year ended December 31, 1992 and incorporated
                  by reference herein).

10.2              1992 Stock Option Agreement of the Company (filed with the
                  Securities and Exchange Commission on March 30, 1993 as
                  Exhibit 10.26 to the Company's Annual Report on Form 10-KSB
                  for the fiscal year ended December 31, 1992 and incorporated
                  by reference herein).

10.3              Industries 1986 Incentive Stock Plan (filed with the
                  Securities and Exchange Commission on April 11, 1994 as
                  Exhibit 10.37 to the Company's Registration Statement on Form
                  S-4 dated April 11, 1994, Registration No. 33-77658, and
                  incorporated by reference herein).

10.4              Form of 1986 Incentive Stock Option Agreement of Industries,
                  (filed with the Securities and Exchange Commission on April
                  11, 1994 as Exhibit 10.38 to the Company's Registration
                  Statement on Form S-4 dated April 11, 1994, Registration No.
                  33-77658, and incorporated by reference herein).

</TABLE>



                                       23
<PAGE>   38
<TABLE>
<S>               <C> 

10.5              Form of Stock Option Agreement between Industries and various
                  non-employee option holders (filed with the Securities and
                  Exchange Commission on April 11, 1994 as Exhibit 10.39 to the
                  Company's Registration Statement on Form S-4 dated April 11,
                  1994, Registration No. 33-77658, and incorporated by
                  reference herein).

10.6              Form of Warrant Agreement between the Company and various
                  directors, officers and affiliates (filed with the Securities
                  and Exchange Commission on March 31, 1994 as Exhibit 10.18 to
                  the Company's Registration Statement on Form S-4 dated April
                  11, 1994, Registration No. 33-77658, and incorporated by
                  reference herein).

10.7              Stock Option Agreement dated September 20, 1991 executed by
                  the Company in favor of Dialogic Corporation (filed with the
                  Securities and Exchange Commission on April 11, 1994 as
                  Exhibit 10.29 to the Company's Registration Statement on Form
                  S-4 dated April 11, 1994, Registration No. 33-77658, and
                  incorporated by reference herein).

10.8              Form of Convertible Note between the Company and an officer
                  (filed with the Securities and Exchange Commission on March
                  23, 1995, as Exhibit 10.15 to the Company's Annual Report on
                  Form 10-KSB for the fiscal year ended December 31, 1994, and
                  incorporated by reference herein).

10.9              Form of subscription agreement for the private offering of
                  the Company's Common Stock in March and June 1994 (filed with
                  the Securities and Exchange Commission on April 11, 1994 as
                  Exhibit 10.43 to the Company's Registration Statement on Form
                  S-4 dated April 11, 1994, Registration No. 33-77658, and
                  incorporated by reference herein).

10.10             Employment agreement dated June 18, 1993 between the Company
                  and Peter J. Foster (filed with the Securities and Exchange
                  Commission on April 11, 1994 as Exhibit 10.15 to the
                  Company's Registration Statement on Form S-4 dated April 11,
                  1994, Registration No. 33-77658, and incorporated by
                  reference herein).

10.11             Amendment to employment agreement dated November 14, 1995
                  between the Company and Peter J. Foster (filed with the
                  Securities and Exchange Commission on December 8, 1995 as
                  Exhibit 10.11 to the Company's Registration Statement on Form
                  SB-2 dated December 8, 1995 Registration No. 33-64835, and
                  incorporated by reference herein).

10.12             Employment agreement dated June 18, 1993 between the Company
                  and Thomas B. Schalk (filed with the Securities and Exchange
                  Commission on April 11, 1994 as Exhibit 10.16 to the
                  Company's Registration Statement on Form S-4 dated April 11,
                  1994, Registration No. 33-77658, and incorporated by
                  reference herein).

10.13             Amendment to employment agreement dated July 20, 1995 between
                  the Company and Thomas B. Schalk (filed with the Securities
                  and Exchange Commission on November 15, 1995 as Exhibit 10.2
                  to the Company's Quarterly Report on Form 10-QSB, and
                  incorporated by reference herein).

10.14*            License Agreement dated June 8, 1990 by and between the
                  Company and Dialogic Corporation (filed with the Securities
                  and Exchange Commission on April 11, 1994 as Exhibit 10.30 to
                  the Company's Registration Statement on Form S-4 dated April
                  11, 1994, Registration No. 33-77658, and incorporated by
                  reference herein).

10.15*            Amendment to License Agreement dated September 20, 1991
                  between the Company and Dialogic Corporation (filed with the
                  Securities and Exchange Commission on April 11, 1994 as
                  Exhibit 10.31 to the Company's Registration Statement on Form
                  S-4 dated April 11, 1994, Registration No. 33-77658, and
                  incorporated by reference herein).

10.16*            Amendment No. 2 to the Licensee Agreement dated September 20,
                  1991 between the Company and Dialogic Corporation (filed with
                  the Securities and Exchange Commission on April 11, 1994 as
                  Exhibit 10.32 to the Company's Registration Statement on Form
                  S-4 dated April 11, 1994, Registration No. 33-77658, and
                  incorporated by reference herein).

10.17*            Amendment No. 4 to the License Agreement dated October 1,
                  1995 between the Company and Dialogic Corporation (filed with
                  the Securities and Exchange Commission on December 8, 1995 as
                  Exhibit 10.17 to the Company's Registration Statement on Form
                  SB-2 dated December 8, 1995 Registration No. 33-64835, and
                  incorporated by reference herein).

10.18*            License Agreement dated October 7, 1994 between the Company
                  and Dialogic Corporation (filed with the Securities and
                  Exchange Commission on December 8, 1995 as Exhibit 10.18 to
                  the Company's Registration Statement on Form SB-2 dated
                  December 8, 1995 Registration No. 33-64835, and incorporated
                  by reference herein).

10.19*            Support Agreement dated September 20, 1991 between the
                  Company and Dialogic Corporation (filed with the Securities
                  and Exchange Commission on April 11, 1994 as Exhibit 10.33 to
                  the Company's Registration Statement on Form S-4 dated April
                  11, 1994, Registration No. 33-77658, and incorporated by
                  reference herein).

10.20*            Addendum No. 1 to the Support Agreement dated January 31,
                  1993 between the Company and Dialogic Corporation (filed with
                  the Securities and Exchange Commission on April 11, 1994 as
                  Exhibit 10.34 to the Company's Registration Statement on Form
                  S-4 dated April 11, 1994, Registration No. 33-77658, and
                  incorporated by reference herein).

</TABLE>




                                       24
<PAGE>   39
<TABLE>

<C>               <C>    
10.21*            Addendum No. 3 to the Support Agreement dated October 1, 1995
                  between the Company and Dialogic Corporation (filed with the
                  Securities and Exchange Commission on December 8, 1995 as
                  Exhibit 10.21 to the Company's Registration Statement on Form
                  SB-2 dated December 8, 1995 Registration No. 33-64835, and
                  incorporated by reference herein).

10.22*            Omnibus Amendment Agreement dated March 14, 1994 between the
                  Company and Dialogic Corporation (filed with the Securities
                  and Exchange Commission on April 11, 1994 as Exhibit 10.35 to
                  the Company's Registration Statement on Form S-4 dated April
                  11, 1994, Registration No. 33-77658, and incorporated by
                  reference herein).

10.23*            VR/xx-PEB letter agreement dated January 31, 1992 between the
                  Company and Dialogic Corporation (filed with the Securities
                  and Exchange Commission on April 11, 1994 as Exhibit 10.36 to
                  the Company's Registration Statement on Form S-4 dated April
                  11, 1994, Registration No. 33-77658, and incorporated by
                  reference herein).

10.25             Office Lease Agreement between the Company and Laborers
                  National Pension Fund dated July 17, 1986 (filed with the
                  Securities and Exchange Commission on March 23, 1995, as
                  Exhibit 10.30 to the Company's Annual Report on Form 10-KSB
                  for the fiscal year ended December 31, 1994, and incorporated
                  by reference herein).

10.26             Amendment to Office Lease Agreement between the Company and
                  Laborers National Pension Fund dated March 25, 1994 (filed
                  with the Securities and Exchange Commission on March 23,
                  1995, as Exhibit 10.31 to the Company's Annual Report on Form
                  10-KSB for the fiscal year ended December 31, 1994, and
                  incorporated by reference herein).

10.27             Addendum to Office Lease Agreement between the Company and
                  Laborers National Pension Fund dated September 8, 1995 (filed
                  with the Securities and Exchange Commission on November 15,
                  1995, as Exhibit 10.1 to the Company's Quarterly Report on
                  Form 10-QSB, and incorporated by reference herein).

10.28             Employment and Consulting Agreement between Voice Processing
                  Corporation and Merrill Solomon (filed with the Securities
                  and Exchange Commission on September 4, 1996 as Exhibit 10.28
                  to the Company's Registration Statement on Form S-3 dated
                  September 4, 1996 Registration No. 333-11367, and amendment
                  thereto filed on September 24, 1996, as Exhibit 10.28 to the
                  Company's Amendment No. 1 to the Registration Statement on
                  Form S-3 dated September 24, 1996, Registration No.
                  333-11367, and incorporated by reference herein).

10.29             Voice Processing Corporation 1989 Stock Option Plan (filed
                  with the Securities and Exchange Commission on January 6,
                  1997 as Exhibit 4.1 to the Company's Registration Statement
                  on Form S-8, Registration No. 333-19309, and incorporated 
                  by reference herein).

10.30             Voice Processing Corporation 1996 Stock Option Plan (filed
                  with the Securities and Exchange Commission on January 6,
                  1997 as Exhibit 4.2 to the Company's Registration Statement
                  on Form S-8, Registration No. 333-19309, and incorporated 
                  by reference herein).

23.1#             Consent of BDO Seidman, LLP

23.2#             Consent of BDO Seidman, LLP

27                Financial Data Schedule

99**              1997 Proxy Statement of the Company
</TABLE>

 *  Confidential treatment has been requested for a portion of this exhibit.
**  To be filed with the Commission no later than April 29, 1997.
 #  Filed herewith.