<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D. C. 20459

                                    FORM 10K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]

                  For the fiscal year ended December 31, 1997


[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1994 [NO FEE REQUIRED] For the transition period
from _________ to _________


                          Commission File No. 0-23282

                       NATURAL MICROSYSTEMS CORPORATION
                       --------------------------------
            (Exact name of registrant as specified in its charter)


                 Delaware                                04-2814586
                 --------                                ----------
(State or other jurisdiction of incorporation         (I.R.S. employer
             or organization)                       identification number)

       100 Crossing Boulevard,                              01702
       Framingham, Massachusetts                            -----
       --------------------------                        (Zip code)
 (Address of principal executive office)                 


                        Registrant's telephone number,
                       including area code: 508-620-9300


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

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

                                             Name of each exchange
             Title of class                   on which registered
             --------------                   -------------------
      Common Stock, $.01 per share           Nasdaq National Market

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days.   YES [X]  NO [_]

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

As of March 6, 1998, the aggregate market value of the voting stock held by non-
affiliates of the registrant was approximately $437 million, based on the
closing price on such date of the registrant's Common Stock on The Nasdaq Stock
Market.  As of March 6, 1998, 10,846,163 shares of Common Stock, $.01 par value
per share were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of (i) the registrant's Annual Report for the fiscal year ended
December 31, 1997 are incorporated into Parts II and IV of this FORM 10K and
(ii) the registrant's Proxy Statement relating to the 1997 Annual Meeting of
Stockholders of the registrant are incorporated into Part III of this FORM 10K.

                           EXHIBIT INDEX ON PAGE 24

                                       1
<PAGE>
 
THE FOLLOWING ARE TRADEMARKS AND TRADENAMES OF THE COMPANY INDICATED.

AG, AG/2/, AGAccess, AG-Real Time, CTAccess, Distributed CTAccess, Diva, FMIC,
Fusion, ME Library, ME/2, ME/X, Multi-Line, Multi-Line Engine Library Series,
NaturalFax, NaturalMedia, NaturalPlatforms, NaturalRecognition, NaturalText,
Open Telecommunications, SwitchPath, Telephony Services Architecture, TSA, TX,
and VBX are trademarks, Alliance Generation and Watson are registered trademarks
and Natural MicroSystems is a trade name of the registrant.  Multi-Vendor
Integration Protocol and MVIP are trademarks of GO-MVIP, Inc.  VOX is a trade
name of, VOX S. A., a wholly owned subsidiary of the registrant.  This Form 10K
also includes references to trademarks and trade names of companies other than
the registrant, including OS/2(R), TouchTone(R), UNIX(R), and WindowsNT(R).

This Form 10K, future filings of the registrant, press releases of the
registrant, and oral statements made with the approval of an authorized
executive officer of the registrant may contain forward looking statements.
In connection therewith, please see the cautionary statements and risk factors
contained in Item 1,  "Business - Cautionary Statement" and "Business - Risk
Factors", which identify important factors which could cause actual results to
differ materially from those in any such forward-looking statements.


                                    PART I

ITEM 1.  BUSINESS.
         ---------
Overview

Natural MicroSystems Corporation (the Company) designs, manufactures and markets
integrated hardware and software products which enable its customers to develop
and implement high value telecommunications applications and systems based on
open, standards-based, client-server architectures, collectively referred to as
Open Telecommunications.  Use of the Company's products permits the direct
interaction of such applications and systems with the public switched telephone
networks (PSTN) and public or private data networks (e.g. the Internet), both
domestically and internationally, and with end-users' internal telephone and
data processing systems.  The principal functions provided by the Company's
products include connection to and monitoring of the PSTN and data networks,
call switching, call control, recognition and generation of TouchTone signals,
digital encoding and decoding of voice (store and forward and real-time),
integration of mixed media resources (facsimile, speech recognition and text-to-
speech), access to computer-based information, gateways and protocols to data
networks including TCP/IP, PPP, SNA, X.25, SS7, and the codification, framing
and real-time transport of circuit switched information over packet switched
networks.

The Company's customers are primarily original equipment manufacturers (OEMs),
independent software vendors (ISVs), value added resellers (VARs), and systems
integrators, which incorporate enhanced telecommunications services in a wide
variety of applications and systems; telecommunications service providers, which
offer services to commercial or other end-users; and international distributors.
These customers, utilizing the Company's enabling technology products, have
developed numerous applications and systems which automate tasks, enhance
productivity, reduce costs and improve customer service.  Such applications and
systems are generally in the areas of messaging, automated attendant,
interactive voice response (IVR), specialized switching, call centers and
computer telephony integration, enhanced network services, call and data
recording, infrastructure, IP (Internet Protocol) telephony, intelligent
networks (IN), toll bypass and IP to PSTN gateways.  Specific examples of these
applications are telephone banking, medical alert and prescription services,
hotel and hospital information systems, transaction card authorization,
telemarketing, help desks, school bulletin boards, long distance least-cost
routing and bypass, cellular and other wireless switching services, security
monitoring, and automated operator services.

                                       2
<PAGE>
 
The Company believes it has been and continues to be a technology leader in Open
Telecommunications.  It pioneered the use of digital signal processing chips
(DSPs) for PC-based computer telephony applications with its Watson product,
which was introduced in 1984.  DSPs provide the processing power required for
signal computing algorithms used for real-time encoding and decoding of voice,
including compression, maintaining high quality tone detection, call control,
and other mixed media functions, while minimizing the use of the host computer's
processing resources.  In 1993, based on its long experience in using DSPs in
combination with its own proprietary algorithms, the Company introduced the
Alliance Generation (AG) product line, which the Company believes is the most
powerful, fully-featured, PC-based enabling technology currently available.  The
AG product line is fully compatible with Multi-Vendor Integration Protocol
(MVIP) and H.100 from the Enterprise Computer Telephony Forum (ECTF), widely-
adopted standards for interoperability and switching among telephony resources.
See "Standards".  The Company's Telecommunications Services Architecture (TSA)
provides a framework in which cost-effective Open Telecommunications products
can form the basis for high value applications and systems, which the Company
believes are characterized by one or more of the following attributes:

 . High capacity and performance

 . Sophisticated software-based switching capabilities

 . Mixed media support

 . Rapid time to market

 . High availability

TSA is designed to be open, standards-based, layered, operating system-
independent, modular and scaleable.  It encompasses integrated hardware,
software and media extension products which build upon the structure of the
Company's AG product line.  It is comprised of DSP platforms which provide the
developer with algorithm processing capabilities, software-based switching, and
telephone line interfaces (Natural Platforms); media extension software which
allows developers to use facsimile, speech recognition, and text-to-speech
capabilities (Natural Media); and software applications programming interfaces
(APIs) and development tools (Natural Access).  See "Products".

The Open Telecommunications Market

The first systems to integrate telephony and computer functions created
"Computer Telephony Integration (CTI) applications in the early 1980s.
Applications such as voice messaging and automated attendant were used primarily
by Fortune 500 companies.  These early systems used proprietary hardware and
software.  With the increased performance capabilities and general acceptance of
PCs, two trends emerged.  The first, the shift from closed proprietary hardware
and software to open, standards-based commodity computing PC architectures and
software, resulted in more cost-effective applications.  The second, the shift
from central office or centralized computing environments to distributed or
client-server computing architectures, resulted in more widespread adoption.  As
a result of these trends, application developers bring their products to market
more quickly and at lower cost, increasing the overall demand for Open
Telecommunications products and services.

The market for Open Telecommunications systems has grown substantially since it
began in the 1980s.  Presently the Company views the telecommunications
equipment market as having four segments:

--------------------------------------------------------------------------------
                         APPLICATIONS                    INFRASTRUCTURE
--------------------------------------------------------------------------------
NETWORK BASED       voice and fax messaging systems      wireless and wireline 
                    one number "follow me" systems       central office switches
                    international call back              system signaling 7
--------------------------------------------------------------------------------

                                       3
<PAGE>
 
--------------------------------------------------------------------------------
                   prepaid calling card systems
                   renumbering systems
-------------------------------------------------------------------------------
ENTERPRISE BASED   premise based voice and fax      private branch exchanges   
                   mail systems                     automatic call distributors
                   interactive voice response       IP gateways
                   systems (IVR)
                   call centers
-------------------------------------------------------------------------------

The first segment to adopt Open Telecommunications was enterprise based
applications (sometimes referred to as computer telephony integration),
specifically voice mail and IVR systems.  The Company believes that most new
entrants and many existing participants in this segment purchase enabling
technology rather than develop it themselves; accordingly, the segment is
primarily based on Open Telecommunications concepts.  The second segment to
adopt Open Telecommunications technology was Network based Applications.
Initial products were primarily messaging platforms for service provider
networks.  Other applications soon followed including one number "follow me"
systems, international call back, prepaid calling card systems and renumbering
systems.  The Company believes that most new entrants to this market purchase
enabling technology rather than develop it themselves.  Open Telecommunications
technology has been little used in the infrastructure segments to date. The
Company believes these segments require high availability systems.  The Company
anticipates these segments will accept Open Telecommunications products, in lieu
of proprietary technology, as platforms as high availability product offerings
become available.

The Company is focused on enabling technology which underlies the entire Open
Telecommunications applications and systems market. This enabling technology may
be further divided between open, standards-based commercially available products
of the type offered by the Company and proprietary enabling components developed
and used by some application developers.  There is a continuing trend among
developers who use proprietary enabling components to shift to commercially
available enabling technology products in lieu of updating their proprietary
components.  The momentum of Open Telecommunications and the pace of improvement
of the Company's offerings frequently surpass the resources and capabilities of
the proprietary component developers. The Company believes the enabling
technology market will experience strong growth due to the expansion of the
overall Open Telecommunications market and the continuing shift from proprietary
components to open, standards-based enabling technology products.

Strategy
The Company's strategy is to expand its business by concentrating product
development and marketing efforts in market segments worldwide which are
characterized by high value applications and systems. The Company concentrates
its marketing efforts on new entrants to these segments and on specific
potential customers currently using their own proprietary components or products
of the Company's competitors.

The Company's strategy requires it to offer a broad range of enabling technology
products not only for applications and systems in Enterprise markets but also
for the emerging markets of Network based Applications as well as Enterprise and
Network Infrastructure.  Rather than attempting to develop all such enabling
technologies with its own resources, the Company designs its products based on
interoperability and open standards, including MVIP and others such as H.100
promoted by the ECTF, International Telecommunications Union (ITU), the Voice
over IP Forum of the International Multimedia Consortium's H.323, Microsoft
Windows NT and UNIX.  In addition, the Company pursues development, supply and
licensing arrangements with companies which have developed complementary
technologies.  See "Products" and "Standards".

The following are key features of the Company's strategy:

Provide Open Computing Platforms

                                       4
<PAGE>
 
The Company's objective is to support open architectures, allowing developers to
utilize standards-based products or components from multiple vendors, thereby
reducing development time and obtaining the advantages of advances made in
complementary technologies.  These products must be accessible to developers and
other third parties allowing them, through the use of the Company's software
development kits, to develop software and algorithms for its platforms.  The
Company's products must provide support for different programming models and
platforms, allowing developers to build applications and systems utilizing
existing development skills and tools as well as support multiple operating
systems.

Focus on High Value Applications and Systems
The Company's objective is to provide its customers with a broad range of
enabling technology that support the creation of applications and systems with
the following characteristics:


 . High capacity and high performance, enabling developers to build highly cost-
  effective applications and systems that accommodate large numbers of telephone
  lines in a single P.C. slot, in a single computer chassis or through networked
  or multi-chassis systems with the lowest use of host processor resources.

 . Mixed media support, enabling developers to build applications and systems
  incorporating different media types such as voice, facsimile, speech
  recognition, text-to-speech, and data.

 . Sophisticated software-based switching, enabling developers to easily and
  automatically route signals to and effectively utilize the appropriate system
  resources.

 . Time to market support, providing developers with an easy to use software
  development environment and complementary services that promote a rapid time
  to market for our developers products.

 . High availability systems, a currently emerging capability, will enable
  developers to build Infrastructure applications and systems.


Partnership Based Distribution Model
The Company provides enabling technology products to a broad network of OEMs,
VARs, ISVs, systems integrators and telephony service providers for
incorporation into the products and services they deliver to end-users.  The
Company believes this multi-channel distribution strategy leverages the
significant development, marketing, and distribution expertise of its customers.
The Company intends to expand this network with aggressive investment in
developer support, services, communications, and partner marketing programs.


Global Presence
The Company believes that its products must be developed for global markets,
allowing developers to integrate their applications and systems into a wide
variety of telephone and data networks using Company products which are
compatible with signaling protocols approved for use in numerous countries. The
Company believes that it must have a presence in the fastest growing and largest
international markets.  The Company uses its technological expertise, open
architecture, and familiarity with international regulatory requirements to
obtain the approvals required for use of its products in principal foreign
markets.  As of the date hereof, the Company's products have been incorporated
into products sold to end-users in over 40 countries around the world


Pursue High Growth Markets
The Company is focusing its marketing and business development efforts in areas
where significant growth opportunities exist. These include:

 . Enterprise based Applications.  This market accounts for a significant portion
  of the Company's current revenues.  The Company continues to believe the
  transition of computer telephony applications (such as messaging, IVR, and
  call centers) from proprietary to open enabling technology represents a high
  growth opportunity. The Company actively pursues new entrants to these
  segments as well as existing entities who are considering a move to open
  architectures or from competing vendors' products.

                                       5
<PAGE>
 
 . Network based Applications.  Systems and applications which are part of a
  service provider's network. Virtually all new offerings are based upon open
  enabling technology. This is a high growth opportunity as it supports the
  network operators' strategy of differentiating their services offerings.

 . Enterprise and Network Infrastructure.  The Company's products are currently
  used by customers developing next generation wireless and wireline network
  equipment, and next generation PBX's (private branch exchanges).  The
  Company's products are used for routing and switching, and transcoding of
  signals. The Company believes this is a large, untapped market that will be
  addressable as high availability PC-based systems emerge.


Products
The Company's products are integrated hardware and resident software, mixed
media extensions, development tools, and communication protocols which enable
its customers to develop and implement Open Telecommunications applications and
systems.  The Company's integrated hardware and software products use DSPs
combined with proprietary and third party algorithms and proprietary control
software to optimize computing power.  The products are based upon open
architectures and industry standards such as MVIP, the PCI and ISA buses and the
WindowsNT and certain UNIX operating systems.  The products are interoperable
and scaleable, permitting physical expansion of telephone line capacity without
software modification.  The combination of high computing power and open,
standards-based and scaleable features enables developers to efficiently produce
applications with high quality speech and other high performance functions.  The
Company's platform products consist of printed circuit boards containing DSPs,
analog or digital telephone network interfaces, memory, DSP algorithms,
communications protocols, and other software.

TSA is open, standards-based, layered, operating system-independent, modular and
scaleable. The Company believes TSA saves developers time and effort when
developing sophisticated applications and systems. The elements of TSA include:
the Company's integrated hardware and software platforms which are referred to
collectively as Natural Platforms; mixed media extensions for facsimile, speech
recognition and text-to-speech, referred to collectively as NaturalMedia and
including Natural Fax, Natural Recognition and Natural Text; and a software
product line called Natural Access, an API for telephony applications.  The
relationship between various elements of TSA are shown in the following
illustration.


                    TELECOMMUNICATIONS SERVICES ARCHITECTURE

 
<TABLE> 
<CAPTION>

---------------------------------------------------------------------------------------------------
Product Families                    Functions                         Key Products
----------------------              ------------------------          -------------------- 
<S>                                 <C>                               <C> 
Natural Access                      Application Programming           CTAccess
Software Development                Interfaces                        Active AG
Environments                        Development Tools
                                    Switching Software
                                    Libraries
----------------------              --------------------              --------------------
Natural Media                       Facsimile                         Natural Fax
Mixed Media Extensions              Speech Recognition                Natural Recognition
                                    Text-to-Speech                    Natural Text
----------------------              --------------------              --------------------
Natural Platforms                   Digital Signal Processing         AG Quad T1/E1
DSP Hardware &                      Switching                         Fusion
Software                            Network Interface                 AG T1/E1
                                    IP network routing                TX-2000/3000
                                    SS-7 protocols                    AGConnect
                                                                      Unity-4
---------------------------------------------------------------------------------------------------
</TABLE>

                                       6
<PAGE>
 
Natural Platforms
NaturalPlatforms are integrated hardware and software products with DSP
resources, telephone network interface technology, and a software-based
switching fabric. The principal product line within Natural Platforms is the AG
family.

The Alliance Generation
Introduced in 1993, the AG family consists of a set of full-function
configurations, including platform or "mother" boards.  Each AG mother board
includes connectors for a "daughter" board which either expands the number of
ports or adds mixed media functionality.  AG platforms use powerful DSPs
characterized by the capacity to process multiple tasks, including dynamic
allocation of ports, on each DSP.  Each AG product includes an Intel x86 family
co-processor which controls the assignment of DSP functions and minimizes
diversion of the host processor.  AG products which do not include on-board
telephone network interfaces are deployed with analog or digital network
interface cards.  All AG products include an MVIP or H.100 interface which
provide switching fabrics and the capability to inter-operate with third party
products.


 . The Unity-4 provides call processing for up to four analog network interfaces,
  supports NaturalFax and Natural Recognition, and a single chip implementation
  of the H.100 circuit . The list price for an Unity-4 is $995.

 . The AG-8 provides call processing for up to eight analog network interfaces
  and a single chip implementation of the MVIP circuit. The list price for an 
  AG-8 is $2,495.

 . The AG-T1/E1 provides T1 (24 port) or E1 (30 port) service and is configured
  with an on-board digital network interface at a list price of $5,995 for T1
  and $6,495 plus a $750 protocol runtime license for E1.

 . The AG-24/30 provides voice processing for T1 or E1 service without on-board
  analog or digital network interface at a list price of $4,600 for T1 and
  $5,500 plus a $750 protocol runtime license for E1.

 . The AG Quad-T1/E1 provides four T1 (96 port) or four E1 (120 port) service
  utilizing only one PCI slot in a PC chassis and is configured with an on-board
  digital network interface at a list price of $10,100 for T1 and $11,100 plus a
  $750 protocol runtime license for E1.

 . The Company offers a series of daughter boards in the AG product line. The
  Ally serves either to increase the number of ports on AG platforms or to
  provide increased processing power for other third party algorithms. The AG-
  Real Time allows up to 24 lines of low latency transcoding of wireless signals
  or real-time compression of voice for packetizing for transport to an IP
  router for IP telephony applications. The Diva I and II daughter boards
  provide the means to implement high capacity speech recognition and text-to-
  speech capabilities by providing additional DSP resources in AG products.
  These capabilities are currently being implemented on the Diva I and II under
  licenses granted by Voice Control Systems, Inc. (speech recognition) and
  Lernout and Hauspie Communications Corporation (text-to-speech). The Ally, the
  AG-Real Time and the Diva I and II have list prices of $3,100, $4,500, $2,500
  and $7,995, respectively.


Network Interfaces
Additional products within the NaturalPlatforms product family include analog
line and station interface boards (AGConnect) for between eight and 24 lines
with list prices ranging from $1,735 to $5,625. The Company has implemented the
MVIP multi-chassis standard on its own MC-1 platform for multi-chassis switching
with a list price of $1,795.

                                       7
<PAGE>
 
Natural Media Extensions
To support mixed media applications, the Company provides facsimile, speech
recognition and text-to-speech conversion technologies through integration of
the following NaturalMedia extension products with NaturalPlatforms:

 . Natural Fax
  Natural Fax is a software-only extension to the AG platforms with a list price
  of $375 per port.  Applications include fax-back order confirmation, inquiry
  response and facsimile broadcasting.

 . Natural Recognition
  Natural Recognition is a software extension to the AG platform line which is
  implemented on the Diva I and II daughter boards pursuant to a license granted
  by Voice Control Systems, Inc. with list price of $850 per port.  Applications
  using this technology provide, among other things, speaker identification and
  an alternative to TouchTone input.

 . Natural Text
  Natural Text is a software extension to the AG platform line offered by the
  Company which is implemented on the Diva I and II daughter boards pursuant to
  a license granted by Lernout and Hauspie a list price of $875 per port.
  Applications include telephone access to e-mail, stored facsimile messages, or
  other data.


Natural Access Software
The Company offers and is developing a variety of software APIs and development
tools to facilitate the development of Open Telecommunications systems and
applications.  These tools allow developers, working with common programming
languages and different programming models, independent of host platforms and
operating systems, to incorporate computer telephony functionality without
writing low-level code.  The TSA elements in this layer are:

 . CTAccess
  CTAccess is an advanced development kit that includes AGAccess plus interfaces
  to other platforms, MVIP and H.100 switching and mixed media extensions.
  CTAccess is a layered development toolkit for OEMs, VARs and systems
  integrators that build applications and systems using media other than that
  available on AG products and third party APIs.  CTAccess development kits are
  available at a list price of $1,995 and run-time licenses are available at a
  list price of $225 per platform.

 . ActiveAG is an 32-bit ActiveX control exposing the AG telecommunication
  features.  ActiveX is a Microsoft software technology that simplifies
  application development integration, reducing development cost and time when
  integrating telephony features with Microsoft's Exchange messaging server and
  Outlook client as well as Microsoft's database software products.  ActiveAG
  also enables telephony features to be seamlessly integrated with horizontal
  Rapid Application Development tools such as Microsoft VisualBasic, Sybase
  PowerBuilder, and Borland Delphi.


TX2000/3000 Platforms
The TX2000/3000 are single slot platforms for data communications and networking
applications with a number of protocols, including SS7, X.25, TCP/IP and SNA.
The TX2000/3000 are MVIP compliant, and configurable network interface protocols
including dual T1/E1, Ethernet, and V.24 and V.35.  The TX2000/3000 is available
at list prices of $2,375 to $8,450 dependent on configuration and protocol
selected.

Fusion
The Company believes that the Fusion platform is the first open scaleable
enabling technology product for IP telephony also referred to as "voice over the
Internet".  Fusion provides 

                                       8
<PAGE>
 
developers with the scaleability, openness and programmability required for
building server-based IP telephony applications, such as toll by-pass or Web
enabled call centers. Fusion is MVIP compliant and comprised of a set of
integrated hardware and software platforms with a Windows-NT based set of APIs.
Fusion is comprised of three existing products, the AG-T1/E1 or AG - 8, an AG-
Real Time, and the TX2000/3000.

Since each of Fusion's components contain on board processors, the host PC
processor is freed up to run IP telephony applications.   Using Fusion's AG-Real
Time, compressed speech does not use host PC resources, including memory, CPU or
communications bus, reducing latency.  Additionally, Fusion is programmable
allowing it to be updated to support emerging industry software standards for
Internet telephony without a requirement to change hardware.

The VOX Product Line
The VOX product line is compatible and complementary with the AG product line.
Common characteristics include the use of DSPs, open standards-based
architecture, interoperability, MVIP compliance and scaleability.  VOX products
complement the Company's product lines by offering cost-effective
implementations of one, two and four port capacities.

All of the Company's products are discounted for volume purchases.  Prices for
all VOX products set forth above have been converted from French francs to
United States dollars based on current exchange rates.

Standards
The Company develops its products to support industry standards such as MVIP,
ISA and PCI buses, protocols approved by the ITU and American National Standards
Institute (ANSI), and application programming interfaces such as Telephony
Application Programmer Interface (TAPI) from Microsoft Corporation and ECTF.
The Company was one of the original promoters of MVIP, a widely-adopted standard
for interoperability and switching among computer telephony resources, including
network line interfaces, voice, facsimile, speech recognition, text-to-speech,
video and data.

Customers and Applications
In support of its standards work, the Company participates in GO-MVIP, the ECTF,
the Asynchronous Transfer Mode Forum, Asymmetric Digital Subscriber Line Forum,
Intelligent Network Forum, the International Multimedia Telecommunications
Consortium, PCI Industrial Computer Manufacturers Group and Internet Telephony
Interoperability Consortium.  In addition, a number of its employees are members
of the Institute of Electrical and Electronic Engineers and Association for
Computing Machinery and the Company monitors the activities of the ITU, ANSI and
Telecommunications Industry Association.

Customers
The Company has developed strong relationships with a diverse array of
customers. The following chart lists representative customers within the markets
the Company serves as defined above by the type of applications and systems each
create using the Company's enabling products.

                                       9
<PAGE>
 
<TABLE>
<CAPTION>


ENTERPRISE APPLICATIONS                  ENTERPRISE INFRASTRUCTURE
-----------------------                  -------------------------
<S>                                      <C> 
Aspect Telecommunications                Inter-Tel
Alcatel Business Systems                 Lucent Technologies
Centigram Communications                 Netspeak
Edify                                    
Homisco                                  
Ontario Systems                          
Smart Dial                               
                                         
NETWORK APPLICATIONS                     NETWORK INFRASTRUCTURE
--------------------                     ----------------------
Atlas Telecom                            Alphanet Telecom
Boston Technology                        Clarent
Centigram Communications                 Inter-Tel
France Telecom                           Lucent Technologies
Park & View                              Netspeak
Tecnet Teleinformacia                    Uniden America
</TABLE>

The customers appearing in the above chart accounted in the aggregate for
approximately 47.6% of the Company's total revenues in 1997.

During 1997, no customer accounted for 10% of the Company's revenue.  During
1996 one customer, Centigram Communications Corporation accounted for 13.9% of
the Company's revenue.  For 1995, Alcatel Business Systems (Alcatel), accounted
for 11.9% of the Company's revenue. The Company currently receives manufacturing
license revenue from another customer and may from time to time grant
manufacturing rights to certain customers.

Developer support, which the Company recognizes as an important element in
maintaining and enhancing customer relationships, is provided by a customer
support group of 17 employees located at the Company's Framingham, MA, Hong
Kong, and Paris, France facilities.  These employees assist customers in the
development of their products by providing advice and solutions, not only with
respect to the Company's products but also regarding telephone networks and
complementary technology and products.

Sales, Marketing and Distribution
The Company focuses its sales and marketing efforts on OEMs, VARs, ISVs, systems
integrators, telephony service providers and international distributors.  The
Company markets its products in North America through a sales and marketing
organization of 57 employees, 47 of whom are located at the Company's
headquarters in Framingham, and the others in regional sales offices located in
Atlanta, GA, Dallas and Houston, TX, Red Bank, NJ, Schaumburg, IL, Los Angeles
and San Jose, CA, and Vienna, VA.  The Company markets its products outside
North America through a direct sales and support organization of 17 employees
and through international distributors.  The Company has European, Latin
American and Asian subsidiaries, with direct sales offices in Paris, Frankfurt,
Madrid, Buenos Aires, Tokyo, Singapore, Hong Kong and Cambridge,UK.  These
offices are responsible for developing customers, including distributors, and
for providing customer and sales support.  The Company markets its products in
Japan through a distribution relationship with Nippon Telephone and Telegraph.

The Company believes that its international presence enhances its ability to
sell its products and to obtain necessary regulatory approvals for the
interconnection of the Company's products to foreign telephone networks under
applicable government electrical safety standards and signaling protocols.  The
Company's current product lines have been incorporated into products

                                       10
<PAGE>
 
sold to end-users in approximately 40 foreign countries, including Brazil,
France, Germany, Japan, the United Kingdom and China. During 1997, 27.9% of the
Company's revenues were from sales outside North America, including
approximately 15.1% from sales to customers in Europe.

Competition
The market for the products of the type supplied by the Company is highly
competitive.  The Company has numerous competitors whose products compete with
one or more of the Company's products. The products of one competitor, Dialogic
Corporation, which is larger than the Company and has greater resources
available to it, compete directly against the Company's full range of products.
As the Company enters new markets, it expects to encounter competition from
additional competitors, some of which may have greater resources than the
Company.  In addition, certain large applications and systems developers use
their own proprietary computer telephony enabling components as an alternative
to purchasing commercially available products such as those sold by the Company.
The principal factors affecting competition in Open Telecommunications enabling
technology include reliability, scaleability, ease of use, price/performance,
port capacity, quality, network and call management, the ability to accommodate
customer requirements, service, support, engineering expertise, regulatory
approval, and product availability.  The Company believes that it currently
competes favorably with respect to these factors.

Research and Development
The Company believes that extension and enhancement of existing products,
development of new products and support of joint product development activities
are critical to its future success.  During 1997, 1996, and 1995, the Company
spent $14.9, $10.3 and $6.9 million, respectively, on research and development,
equal to 19.7%, 20.1% and 20.9%, respectively, of its revenues for such years.

The Company's current research and development is conducted by 125 employees
located at its headquarters in Framingham as well as in Schaumburg and Paris.
The Company's current research and development is focused on Natural Access
software, the next generation of its NaturalPlatforms product line, the AG-
family, its IP telephony products, Fusion and associated vocoders, network
integration, internationalization of products, data communications and
intelligent network protocols and platforms, and new low cost architectures.

Operations
The Company's manufacturing operations consist primarily of quality control and
testing of completed products.  In each of North America and Europe, the Company
relies on a single ISO 9002 certified contract manufacturer to assemble printed
circuit boards of the AG and VOX product lines.  The TX product family is
assembled in North America by a qualified contract manufacturer who is not yet
ISO 9002 certified.  In each case the Company has identified a second source for
assembly of its circuit boards, but if any of its current manufacturers became
unable or unwilling to manufacture such boards, the process of transitioning to
an alternative manufacturer would take up to several months which could have a
short-term adverse effect on the Company's business.  During 1996, the Company
received ISO 9002 certification for its Framingham facility.

The Company seeks to use industry standard components for its products.  Many of
these components are generally available from multiple sources; however, certain
custom integrated circuits and other devices which are components on one or more
of the Company's products are acquired by the Company from single-source
suppliers.  Although the Company believes it could develop other sources for
each of these custom devices, the process could take several months, and the
inability or refusal of any such sources to continue to supply devices could
have a material adverse effect on the Company pending the development of an
alternative source.

                                       11
<PAGE>
 
Intellectual Property
The Company's success is dependent upon proprietary technology.  The Company has
no patents and depends primarily upon a combination of copyrights and
restrictions on access to its trade secrets to protect its proprietary rights.
The Company distributes its software products under license agreements which
grant customers a non-exclusive license to use the software and contain certain
terms and conditions prohibiting its unauthorized reproduction or transfer.  In
addition, the Company generally enters into confidentiality agreements with its
employees and limits access to its proprietary information.  Despite these
precautions, it may be possible for unauthorized third parties to copy aspects
of the Company's products or to obtain information that the Company regards as
proprietary.  The laws of some foreign countries in which the Company sells or
may sell its products do not protect the Company's proprietary rights in the
products to the same extent as do the laws of the United States and France.  The
Company believes that, due to the rapid pace of innovation within the industry
in which it participates, factors such as the technological and creative skills
of its personnel and ongoing reliable product maintenance and support are more
important in establishing and maintaining a leadership position within the
industry than are the various legal protections for its technology.  There can
be no assurance that the steps taken by the Company to protect its proprietary
rights will be adequate to prevent the misappropriation of its technology or the
independent development by others of similar technology. Although the Company
believes that its products and technology do not infringe on any existing
proprietary rights of others, there can be no assurance that third parties will
not assert infringement claims.  If infringement is alleged, there can be no
assurance that the Company would prevail or that any necessary licenses would be
available on acceptable terms, if at all.  In any event, patent and other
intellectual property litigation can be extremely protracted and expensive.

The Company depends upon development, supply, marketing, licensing and other
relationships with companies for complementary technologies necessary for the
Company to offer a broad range of products.  These relationships are generally
non-exclusive and terminable at will, and there can be no assurance that the
Company will be able to maintain these relationships or to initiate additional
similar relationships.

Employees
As of December 31, 1997, the Company had 280 full-time employees, including 34
in sales, 23 in marketing, 125 in research and development, 17 in developer
support, 36 in operations, 8 in sales engineering and 37 in administration and
finance.  None of the employees is represented by a labor union.  The Company
has never experienced a work stoppage and considers its relations with its
employees to be good.

Cautionary Statement
When used anywhere in this Form 10K and in future filings by the Company with
the Securities and Exchange Commission, in the Company's press releases and in
oral statements made with the approval of an authorized executive officer of the
Company, the words or phrases "will likely result", "are expected to", "will
continue", "is anticipated", "estimated", "project", or "outlook" or similar
expressions (including confirmations by an authorized executive officer of the
Company of any such expressions made by a third party with respect to the
Company) are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995.  Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected.  The Company cautions readers not to place undue
reliance on any such forward-looking statements, which speak only as of the date
made.  Readers are advised that the various risk factors described below in this
Form 10K could cause the Company's actual results for future periods to differ
materially from any opinions or statements expressed with respect to future
periods in any current statements.  The Company specifically declines any
obligation to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.

                                       12
<PAGE>
 
Risk Factors
Variations in Operating Results.  The Company's results of operations have 
varied from quarter to quarter and, in recent quarters, more than half of its 
revenue has been received in the final month.  These variations result from a 
number of factors, including timing of customer orders, adjustments of delivery 
schedules to accommodate customer or regulatory requirements, availability of 
components from suppliers, timing and level of international sales, mix of 
products sold, and timing and level of expenditures for sales, marketing and new
product development. The Company has historically operated with little backlog
and substantially all of its revenues in each quarter have resulted from orders
received in that quarter. If short-term demand for the Company's products
declines, or if the Company is unable to secure adequate materials from its
suppliers, the Company's results of operations for that quarter would be
adversely affected. No assurance can be given that these quarterly variations
will not occur in the future and, accordingly, the results of any one quarter
may not be indicative of the operating results for future quarters.

Competition.  The market for products of the type supplied by the Company is 
highly competitive.  The Company has numerous competitors whose products compete
with one or more of the Company's products.  The products of one competitor, 
Dialogic Corporation, which is significantly larger than the Company and has 
significantly greater resources available to it, compete directly against the 
Company's full range of products.  As the Company enters new market segments in 
Open Telecommunications, it expects to encounter competition from additional 
competitors, some of whom may have greater resources than the Company.  In 
addition, certain large applications and systems developers use their own 
proprietay computer telephony enabling components as an alternative to 
purchasing commercially available products such as those sold by the Company.

Market Acceptance of Products; Technological Changes.  The market for the
Company's products is characterized by rapidly changing technology, evolving
industry standards and frequent new product introductions.  The Company's near
term success and future growth is substantially dependent upon continuing market
acceptance of its products.  The Company's future success will in large part
depend on its continued ability to enhance its existing products and to develop
new products to meet changing customer requirements and emerging industry
standards.  There can be no assurance that the Company will successfully develop
new products and enhancements, including its Natural Access software line, Quad
T1, Quatro, Fusion, and SS7 products, on a timely basis or that such products
and enhancements will achieve market acceptance.  Delay in the development of
these products and enhancements or their failure to achieve market acceptance
could adversely affect the Company's business.  In addition, there can be no
assurance that products or technologies developed by others will not render the
Company's products or technologies noncompetitive or obsolete.  A recently
concluded standards effort within the Enterprise Computer Telephony Forum (ECTF)
has specified a single interconnection protocol, H.100, which is intended to
unify future products, at least at the level of hardware interconnection and
switching.  The Company is an early endorser of the ECTF's H.100 specification
and is designing future products to this specification.  There can be no
assurance that H.100 will be widely adopted or that it will be adopted in a time
frame beneficial to the Company.  Use of alternative standards or a delay in the
adoption of H.100 could adversely affect the Company's business

Integration of Acquisitions.  The successful integration of the operations of
its acquisitions with those of the Company will continue to require, among other
things, the coordination of the respective product offerings of the Company and
those of its acquisitions and related sales, marketing, development and
administrative activities.  There can be no assurance that the Company will not
encounter unexpected difficulties in such integrations or that the expected
benefits will be realized.  Any unexpected delays or costs incurred in such
integration could have a material adverse effect upon the Company.

Limited Protection of Proprietary Technology.  The Company's success is
dependent upon proprietary technology.  The Company currently has no patents and
protects its technology primarily through copyrights and trade secrets.  There
can be no assurance that the steps taken

                                       13
<PAGE>
 
by the Company to protect its proprietary rights will be adequate to prevent the
misappropriation of its technology or the independent development by others of
similar technology. Although the Company believes that its products and
technology do not infringe on any existing proprietary rights of others, there
can be no assurance that third parties will not assert infringement claims. If
infringement is alleged, there can be no assurance that the Company would
prevail or that any necessary licenses would be available on acceptable terms,
if at all. In any event, patent and other intellectual property litigation can
be extremely protracted and expensive.

Dependence on Market Success of Third Parties.  The Company's customers are
primarily original equipment manufacturers (OEMs), value added resellers (VARs),
systems integrators, telephony service providers, and international
distributors.  The Company's revenues are dependent upon the ability of its
customers to develop and sell computer telephony applications and systems to
end-users.  Factors affecting the ability of the Company's customers to develop
and sell their products include competition, regulatory restrictions, patent and
other intellectual property issues, and overall economic conditions.  No
customer accounted for more than 10% of the Company's revenue in 1997.  One
customer accounted for 13.9% of the Company's revenue in 1996 and a second
customer accounted for 11.9% of the Company's revenues in 1995.  There can be no
assurance that these customers or any customer will continue to purchase similar
volumes of the Company's products.

Dependence on Outside Suppliers and Contract Assembly Manufacturers.  The
Company relies on various suppliers of components for its products.  Many of
these components are standard and generally available from multiple sources.
However, certain custom integrated circuits and other devices which are
components of one or more of the Company's products are acquired by the Company
from single source suppliers.  Although the Company believes it could develop
other sources for each of these custom devices, the process could take several
months, and the inability or refusal of any such source to continue to supply
devices could have a material adverse effect on the Company pending the
development of an alternative source.  The Company also currently relies on a
single contract manufacturer to assemble printed circuit boards for its European
operations.  The Company also currently relies on two sole source contract
manufacturers to assemble printed circuit boards for each of its North American
computer telephony and intelligent network operations.  Although a number of
such contract manufacturers exist, the interruption or termination of the
Company's current manufacturing relationships could have a short-term adverse
effect on the Company's business.

Risks Associated with International Operations.  The Company's sales to
customers outside North America accounted for 27.9% of the Company's revenues in
1997.  In addition, the Company believes that a material portion of its domestic
sales ultimately result in the use of the Company's products outside North
America.  Accordingly, a significant portion of the Company's revenues are
subject to the risks associated with international sales.  The Company has
significant assets denominated in French currency and has denominated a
significant portion of its sales in French currency.  Further, customers
generally evaluate the purchase of the Company's products based on the purchase
price expressed in the customer's currency.  Therefore, changes in foreign
currency exchange rates may adversely affect the sale of the Company's products.
The Company does not currently engage in currency hedging transactions to offset
the risks associated with variations in currency exchange rates.  In addition,
international markets have different regulatory environments than those of the
United States, and the Company is required to obtain approval for its products
prior to their use in other countries.  There can be no assurance that changes
will not occur in such regulations or that, if such changes occur, the Company
will be able to continue to sell its products into the affected markets.  In
addition, the Company's international business may be adversely affected by
risks such as political instability, trade and tariff regulations, difficulty in
obtaining export licenses, difficulties or delays in collecting accounts
receivable, and difficulties in staffing and managing international operations.

Possible Volatility of Stock Price.  Factors such as announcements of
technological innovations or new products by the Company, its competitors and
other third parties, as well as quarterly

                                       14
<PAGE>
 
variations in the Company's results of operations and market conditions in the
industry, may cause the market price of the Common Stock to fluctuate
significantly. In addition, the stock market in general has recently experienced
extreme price and volume fluctuations, which have particularly affected the
market prices of many high technology companies and which have often been
unrelated to the operating performance of such companies. These broad market
fluctuations may adversely affect the market price of the Common Stock.

Dependence on Key Personnel.  The Company is highly dependent on certain key
executive officers and technical employees, the loss of any of whom could have
an adverse impact on the future operations of the Company.  In addition, the
Company will need to hire additional skilled personnel to support the continued
growth of its business and the market for skilled personnel, especially those
with the technical abilities required by the Company, is currently very
competitive.  There can be no assurance that the Company will be able to retain
its existing personnel or attract additional qualified employees.

Certain Charter Provisions with Anti-Takeover and Other Effects.  The Company's
Board of Directors has the power to issue shares of Common Stock and Preferred
Stock which, if issued, could dilute and adversely affect various rights of the
holders of Common Stock and, in addition, could be used to discourage an
unsolicited attempt to acquire control of the Company.  The Company's
Certificate of Incorporation also provides for a classified board of directors
and contains other provisions which may also discourage an unsolicited takeover
attempt.  These provisions could limit the price that investors might be willing
to pay in the future for shares of Common Stock and could make it more difficult
for stockholders of the Company to effect certain corporate actions.


ITEM 2.  PROPERTIES.
         -----------

The Company's headquarters are located in Framingham and consist of
approximately 100,000 square feet of space under a lease which expires in May,
2012.  Base rent in 1997 for the Framingham headquarters was approximately
$976,000.  Annualized base rent for this facility is approximately $893,000
initially, increasing to $1.4 million in year 15.

The Company's main European facilities are located in Paris and consist of
approximately 10,600 square feet of space under a lease expiring November 1998
with an extension option to January 2001.  Base rent in 1997 was approximately
$105,000.  The Company's Schaumburg, IL facilities consist of approximately
10,000 square feet of space leased until the year 2000 with an option to extend
to January 2004.  Annualized base rent in 1997 was approximately $142,000.

The Company also leases and occupies sales offices in Atlanta, Dallas, Houston,
Los Angeles and San Jose, Schaumburg, Vienna, VA, Buenos Aires, Frankfurt, and
Hong Kong.  The North American leases are short term. Frankfurt's lease expires
in 1999, Hong Kong in 1998, and Buenos Aires in 1999.  The Company believes that
its facilities are adequate for its current needs and that suitable space will
be available as needed in the foreseeable future.

ITEM 3.  LEGAL PROCEEDINGS.
         ------------------

The Company is not party to any material legal proceeding.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
         ------------------------------------------------------

None

                                       15
<PAGE>
 
                                    PART II


ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
         ----------------------------------------------------------------------

Information in response to this item appears under the Caption "Selected
Financial Information" of the Company's Annual Report for the year ended
December 31, 1997, which is incorporated herein by reference.

As of March 6, 1998 the Company had 206 shareholders of record.

The Company has never declared or paid cash dividends on its Common Stock. Prior
to its acquisition by the Company, VOX paid dividends on its common stock.  See
the "Consolidated Financial Statements" presented in the Company's Annual Report
for the year ended December 31, 1997, which is incorporated herein by reference.
The Company currently intends to retain all earnings for the operation and
expansion of its business and therefore does not anticipate paying any cash
dividends in the foreseeable future.  The Company's existing bank line of credit
agreement contains restrictions limiting the ability of the Company to pay
dividends.  See Note 9 of Notes to the Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" of the Company's Annual Report dated
December 31, 1997 which is incorporated herein by reference.

ITEM 6.  SELECTED FINANCIAL DATA.
         ------------------------ 

Information in response to this item appears under the Caption "Selected
Financial Information" of the Company's Annual Report for the year ended
December 31, 1997, which is incorporated herein by reference.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         -----------------------------------------------------------------------
OF OPERATIONS.
--------------

Information in response to this item appears under the Caption "Management's
Discussion and Analysis of Financial Condition and the Results of Operations" of
the Company's Annual Report for the year ended December 31, 1997, which is
incorporated herein by reference.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
         --------------------------------------------

Information in response to this item is contained in the Company's Annual Report
for the year ended December 31, 1997, which is incorporated herein by reference,
except for the audited opinion on the prior year's financial statements, which
were audited by other auditors and whose opinion on those statements is included
below:

The Board of Directors
Natural MicroSystems Corporation:

We have audited the accompanying consolidated balance sheets of Natural
MicroSystems Corporation as of December 31, 1995 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flow  for
each of the years in the two year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsiblity is to express an opinion on these consolidated
financial statements based on our audits.

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

                                       16
<PAGE>
 
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Natural
MicroSystems Corporation as of December 31, 1995 and 1996, and the consolidated
results of its operations and its cash flows for each year in the two year
period ending December 31, 1996 in conformity with generally accepted accounting
principles.


KPMG Peat Marwick L.L.P.
Boston, Massachusetts
January 14, 1997




ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         ---------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------

On April 17, 1997, the Board of Directors of the Company, upon recommendation of
its Audit Committee, approved a change in the Company's independent accountants
from KPMG Peat Marwick L.L.P. to Coopers & Lybrand L.L.P. effective for the
fiscal year ended December 31, 1997. KPMG Peat Marwick L.L.P. served as the
Company's independent accountants for fiscal years 1992 through 1996. During
these periods, the Company did not have any disagreements with KPMG Peat Marwick
L.L.P. on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, nor did any reports issued by KPMG
Peat Marwick L.L.P. contain an adverse opinion or a disclaimer of opinion, nor
were such reports qualified or modified as to uncertainty, audit scope or
accounting principles.

                                       17
<PAGE>
 
                                    PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
          ---------------------------------------------------

Directors.  The information in response to this item appearing under the caption
"Election of Directors" of the Company's Proxy Statement for its Annual Meeting
of Stockholders to be held April 16, 1998; is incorporated herein by reference.

The executive officers of the Company are as follows:


<TABLE>
<CAPTION>
        Name                        Age                        Position
        ----                        ---                        -------- 
<S>                                 <C>         <C>
Robert P. Schechter                  49         President, Chief Executive Officer and
                                                Chairman of the Board of Directors
Ronald J. Bleakney                   52         Senior Vice President of Sales
Charles T. Foskett                   54         Senior Vice President International Market
                                                Development and Director
Dorothy A. Terrell                   52         Senior Vice President of Corporate Operations
                                                and President of the Services Group
R. Brough Turner                     51         Senior Vice President of Technology
Dianne L. Callan                     52         Vice President and General Counsel
Allen P. Carney                      47         Vice President of Marketing
John F. Kennedy                      49         Vice President of Finance, Chief Financial
                                                Officer, and Treasurer
George D. Kontopidis, Ph. D.         44         Vice President of Engineering
Deborah K. Louis                     45         Vice President of Operations
</TABLE>


ROBERT P. SCHECHTER has been President and Chief Executive Officer and a
Director of the Company since April 1995. He has been Chairman of the Board of
Directors since March 1996. From 1987 to 1994, Mr. Schechter held various senior
executive positions with Lotus Development Corporation, most recently Senior
Vice President International Business Group, and from 1980 to 1987 he was a
partner with Coopers & Lybrand L.L.P. Mr. Schechter is also a director of MRS
Technology, Inc., a developer and manufacturer of steppers for flat panel
displays and Infinium Software Inc., L.L.P. a developer of enterprise-level
business software.

RONALD J. BLEAKNEY has been Senior Vice President of Sales of the Company since
December 1997 and was Senior Vice President of North American Sales of the
Company since December 1995.  From 1990 to December 1995 he was Vice President
of Sales and Marketing.  From 1989 to 1990, he was national sales manager of
Raytheon Company's Equipment Division.  From 1988 to 1989, Mr. Bleakney held
various positions with Pixelogix, Inc., a developer of video digitizers,
including that of president.

CHARLES T. FOSKETT, a co-founder of the Company, has been its Senior Vice
President of International Market Development since December 1997 and a Director
since 1983.  He was Senior Vice President of International Operations since May
1995.  From July 1991 to May 1995 he was Chairman of the Board of Directors and
Vice President of International Operations. From 1984 to 1991, he was President
and Chief Executive Officer of the Company.  From 1970 to 1983, he held various
positions at DigiLab, a division of Bio-Rad Laboratories, Inc. which
manufactures analytical and biomedical instruments (DigiLab), serving as its
president from 1977 to 1983.

DOROTHY A. TERRELL has been Senior Vice President of Corporate Operations and
President of the Services Group since February 1998.  From 1991 she was
President of Sun Express, Inc. the aftermarketing and online services company of
Sun Microsystems, Inc.  Ms. Terrell is also a director of  Sears Roebuck and
Company, General Mills, Inc. and Herman Miller, Inc. maker of office furniture.

                                       18
<PAGE>
 
R. BROUGH TURNER, a co-founder of the Company, has been Senior Vice President of
Technology since 1994. He was Senior Vice President of Operations from 1983 to
1994 and was Treasurer from 1983 to 1995.  From 1977 to 1983, Mr. Turner was
manager of data systems development at DigiLab.

DIANNE L. CALLAN has been Vice President and General Counsel since April 1997.
She was Deputy General Counsel of Lotus Development Corporation from 1986 to
1996. From 1980 to 1985, Ms. Callan was Corporate Counsel for Interactive Data
Corporation, then a provider of software and services for the financial and
banking industries.

ALLEN P. CARNEY has been Vice President of Marketing since April 1996. From 1992
to 1996 Mr. Carney held various marketing positions including Vice President,
Applications Marketing and Vice President of International Marketing at Lotus
Development Corporation.  From 1982 to 1992, Mr. Carney held various marketing
positions including Vice President, European Operations with Atex, Inc., a
turnkey supplier of prepress automation systems.

JOHN F. KENNEDY has been Chief Financial Officer and Vice President of Finance
of the Company since August 1993 and Treasurer since May 1995.  From March 1991
to July 1993, he was chief financial officer of Ultimap Corporation, a developer
of geographic information software.  From June 1990 to February 1991, he was
chief financial officer of a division of International Business Interiors, Inc.,
a distributor of office furniture.  From June 1989 to June 1990, he was chief
financial officer of Kurzweil Music Systems, Inc., a developer and manufacturer
of electronic musical instruments.  From June 1988 through May 1989, Mr. Kennedy
was chief financial officer of New England Digital Distribution, Inc., a
provider of telecommunications equipment and services.

GEORGE D. KONTOPIDIS, Ph. D., has been Vice President of Engineering of the
Company since January, 1989.  From 1984 until 1989, he was director of
engineering of the Sea Data Division of Pacer Systems, Inc., a maker of
oceanographic instruments.

DEBORAH K. LOUIS has been Vice President of Operations since April 1997.  From
1986 to 1997, she held a variety of positions at Lotus Development Corporation,
most recently Vice President of Worldwide Customer Operations. From 1983 to
1986, she worked in the materials organization for Wang Laboratories 
Corporation.

ITEM 11.  EXECUTIVE COMPENSATION.
          -----------------------

The information appearing under the caption "Executive Compensation" (other than
the information appearing under the captions "Compensation Committee Report on
Executive Compensation" and "Comparison of Cumulative Total Stockholder Return")
of the Company's Proxy Statement for its Annual Meeting of Stockholders to be
held April 16, 1998 is incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
          ---------------------------------------------------------------

The information appearing under the caption "Stock Ownership of Directors,
Executive Officers and Principal Stockholders" of the Company's Proxy Statement
for its Annual Meeting of Stockholders to be held April 16, 1998 is incorporated
herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
          -----------------------------------------------

None

                                       19
<PAGE>
 
                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K.
          ---------------------------------------------------------------

(a) (1)  Financial Statements
-----------------------------

The following are included in Part II of this report, incorporated by reference
from the Company's Annual Report for the year ended December 31, 1997, which is
attached here in its entirety as Exhibit 13.1, but not deemed filed except to
the extent that portions thereof are expressly incorporated by reference herein.

Report of Independent Accountants

Consolidated Balance Sheets as of December 31, 1996 and 1997.

Consolidated Statements of Operations for the Years Ended December 31, 1995,
1996 and 1997.

Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1995, 1996 and 1997.

Consolidated Statements of Cash Flow for the Years Ended December 31, 1995, 1996
and 1997.

Notes to the Consolidated Financial Statements.

(a) (2)  Financial Statement Schedules

The following are included on the indicated pages of this report:
 
                                                     Page No.
                                                     --------
Report of Independent Accountants on Schedule           22
Schedule VIII Valuation and Qualifying Accounts         23


Schedules not listed above are omitted because they are not required or because
the required information is given in the Consolidated Financial Statements or
Notes thereto.

(a) (3)  Exhibits

The Exhibit Index, appearing after the signature page on sequentially numbered
page 24, is incorporated herein by reference.

(a) (4)  Reports of FORM 8K

None.

                                       20
<PAGE>
 
SIGNATURES

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

                                            NATURAL MICROSYSTEMS CORPORATION
                                                                            
                                                                            
                                          By: /s/ Robert P. Schechter  
                                              ----------------------------
                                              Robert P. Schechter
                                              President, Chief Executive Officer
                                              and Chairman of the Board


                                  SIGNATURES

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 in
the capacities and on the dates indicated.


<TABLE>
<CAPTION>
             Signature                                       Title                                 Date 
                                                                                                
<S>                                          <C> 
/s/ Robert P. Schechter                      President, Chief Executive Officer and              March 23,1998
------------------------------------         Chairman of the Board of Directors
Robert P. Schechter                          (Principal Executive Officer)       
                                               
/s/ John F. Kennedy                          Vice President of Finance,                          March 23,1998
------------------------------------         Chief Financial Officer,
John F. Kennedy                              (Principal Financial Officer), and Treasurer

/s/ David C. Flynn                           Corporate Controller                                March 23,1998
------------------------------------         (Chief Accounting Officer)
David C. Flynn                                     

/s/ Charles T. Foskett                       Senior  Vice President of International             March 23,1998
------------------------------------         Operations and Director
Charles T. Foskett                                  

/s/ Zenas W. Hutcheson III                   Director                                            March 24,1998
------------------------------------
Zenas W. Hutcheson III

/s/ W. Frank King                            Director                                            March 24,1998
------------------------------------
W. Frank King

/s/ David F. Millet                          Director                                            March 24,1998
------------------------------------
David F. Millet

/s/ Pamels D. Reeve                          Director                                            March 24,1998
------------------------------------
Pamela D. Reeve

/s/ Ronald W. White                          Director                                            March 24,1998
------------------------------------
Ronald W. White

</TABLE>

                                       21
<PAGE>
 
                       Report of Independent Accountant



The Board of Directors
Natural MicroSystems Corporation:

Our report on the consolidated financial statements of Natural MicroSystems
Corporation has been incorporated by reference in this Form 10-K from page 20 of
the 1997 Annual Report to Shareholders of Natural MicroSystems Corporation. In
connection with our audit of such financial statements, we have also audited the
related financial statement schedule listed in the index on page 24 of this Form
10-K.

In our opinion, such consolidated financial statement schedule referred to
above, when considered in relation to the basic financial statements  taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.

                                                        Coopers & Lybrand L.L.P.


Boston, Massachusetts
January 19, 1998

                                       22
<PAGE>
 
<TABLE>  
<CAPTION> 
                                      NATURAL MICROSYSTEMS CORPORATION

                 Valuation and Qualifying Accounts                             Schedule VIII

            Col. A               Col. B               Col. C             Col. D               Col. E
            ------               ------               ------             ------               ------
Allowance for                  Balance at                                                   Balance at
doubtful accounts           beginning of year        Additions       Deductions (1)         end of year
-----------------           -----------------        ---------       --------------         -----------
<S>                             <C>                   <C>               <C>                   <C>
12/31/95                        $332,844              $548,892          $233,766              $647,970
12/31/96                        $647,970              $285,093          $248,438              $684,625
12/31/97                        $684,625              $510,793          $553,500              $641,918

(1) Amounts include write-offs of accounts receivable deemed to be uncollectable

</TABLE> 

                                       23
<PAGE>
 
                        NATURAL MICROSYSTEMS CORPORATION
                                 Exhibit Index


The Company will furnish to any stockholder who so request, a copy of this
Annual Report on FORM 10K, as amended, including a copy of any exhibit listed
below, provided that the Company may require payment of a reasonable fee not to
exceed its cost of furnishing such exhibit.

<TABLE>
<CAPTION> 

    Exhibit
      No.                                                  Title                                                 Page No.
-----------------------------------------------------------------------------------------------------------------------------------
<S>               <C>                                                                                            <C> 
   *2.1           Share Exchange Agreement dated as of September 2, 1995 by and among the Registrant and
                  Shareholders of VOX S.A. and MABB Participation S.A. (filed with Registrant's Form
                  10-Q for the quarter ended September 30, 1995).
   *2.2           Share Exchange Agreement dated June 14, 1996 by and among the Registrant and
                  Shareholders of Tek-Nique, Inc. (filed with Registrant's Form 10-Q for the quarter
                  ended June 30, 1996)
   *2.3           Stock Purchase Agreement dated June 15, 1996 between the Registrant and PSR, Systems,
                  Inc. (filed with Registrant's Form 10-Q for the quarter ended June 30, 1996)
  * 3.1           Fourth Restated Certificate of Incorporation of the Registrant (filed with the
                  Registrant's Form 10K for the year ended December 31, 1995).
  * 3.2           By-Laws of Registrant, as amended (filed with the Registrant's registration statement
                  on Form S-1 (#33-72596)).
  * 4.1           Specimen Certificate for the Common Stock (filed with the Registrant's registration
                  statement on Form S-1 (#33-72596)).
 * 10.3           Agreement dated as of February 28, 1992 between Registrant and Eltron Associates
                  (filed with the Registrant's registration statement on Form   S-1 (#33-72596)).
#* 10.11          1989 Stock Option and Stock Purchase Plan, as amended (filed with the Registrant's
                  registration statement on Form S-1 (#33-72596)).
#* 10.12          1993 Stock Option Plan, as amended (filed with the Registrant's Form 10-Q for the
                  quarter ended March 31, 1995).
#* 10.13          1993 Employee Stock Purchase Plan (filed with the Registrant's registration statement
                  on Form S-1 (#33-72596)).
#* 10.14          1993 Non-Employee Directors Stock Option Plan (filed with the Registrant's
                  registration statement on Form S-1 (#33-72596)).
  *10.18          Lease Amendment between Registrant and Lillian Greene dated April 4, 1995 (filed with
                  the Registrant's Form 10-Q for the quarter ended June 31, 1995).
 #*10.19          1995 Non-Statutory Stock Option Plan
   10.20          Lease Amendment between Registrant and National Development of New England, LLC dated
                  October 1996
  *10.21          Loan modification Agreement dated May 17, 1996 between Registrant and Silicon Valley
                  Bank (filed with the Registrant's Form 10-Q for the quarter ended June 30, 1996).
  *10.22          Turnkey Manufacturing Agreement dated June 1, 1996 between the Registrant and Sanmina
                  Corporation
   13.1           1997 Annual Report to Stockholders (which is not deemed to be filed except to the
                  extent that portions thereof are expressly incorporated by reference herein)
  *16.1           Letter Re: Change in Certifying Accountant (filed with the Registrant's Form  8-K,
                  dated April 17, 1997)
   21.1           Subsidiaries of the Company
   27.1           Financial Data Schedule

* Previously filed with the registration statement or report indicated.
# Management contract or compensatory plan or arrangement.

</TABLE>

                                       24