Dialog (DLGO) 10QSB 2005 Q1 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB

(Mark One)

x Quarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2005.

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

Commission File No. 000-30294

	DIALOG GROUP, INC.
	(Name of Small Business Issuer in its Charter)
Delaware		87-0394290
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification Number)

Twelfth Floor, 257 Park Avenue South, New York, NY	10010
(Address of Principal Executive Offices)	(Zip Code)
212.254.1917
(Issuer's Telephone Number)

Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:Yesx  Noo

Check whether the registrant filed all documents and reports required to be filed by Section l2, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yesx  Noo

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

At May 20, 2004 there were 149,081,084 shares of common stock, par value $.001 per share outstanding.

Transitional Small Business Disclosure Format (check one):Yeso  Nox

DIALOG GROUP, INC. AND SUBSIDIARIES

INDEX

Page Number
Part I - Financial Information
	Item 1	Financial Statements
F-1	Condensed Consolidated Balance Sheets as of December 31, 2004 (audited) and March 31, 2005 (unaudited)
F-2	Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2005 (unaudited) and March 31, 2004 (unaudited)
F-3	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 (unaudited) and March 31, 2004 (unaudited)
F- 4 to F- 19	Notes to Condensed Consolidated Financial Statements (unaudited)
3 - 8	Item 2.	Management’s Discussion and Analysis or Plan of Operation
9	Item 3.	Controls and Procedures
Part II - Other Information
10	Item 1	Legal Proceedings
11	Item 2	Recent Unregistered Sales of Equity Securities and Use of Proceeds
13	Item 6.	Exhibits

DIALOG GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS	March 31,			December 31
	2005			2004
	(Unaudited)
CURRENT ASSETS:
Cash		-			131,690
Accounts receivable (Net)		834,324			608,985
Letter of Credit		90,000			-
Prepaid expenses and other current assets		208,133			68,114
Total current assets		1,132,457			808,789
PROPERTY AND EQUIPMENT, NET		39,922			42,087
OTHER ASSETS:
Data Assets (Net)		554,067			538,978
Website (Net)		74,583			89,364
Security Deposits		73,088			75,338
Total other assets		701,738			703,680
TOTAL ASSETS		1,874,117			1,554,556
LIABILITIES
CURRENT LIABILITIES:
Bank overdraft		34,558			-
Accounts payable		1,852,374			1,615,925
Accrued expenses		979,752			880,547
Deferred revenue		614,200			808,490
Notes and Loans Payable		491,867			226,915
Current Liabilities Due to related parties		141,000			113,011
Other current liabilities		59,837			18,139
Total current liabilities		4,173,588			3,663,027
LONG TERM DEBT:
Griffin Xover Fund 5% Convertible Note - Related Party		555,000			510,000
Convertible Notes - Related Parties		118,045			118,045
TOTAL LONG TERM DEBT:		673,045			628,045
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock		313			313
Common stock		149,082			116,673
Additional paid-in-capital		6,080,346			5,912,491
Accumulated deficit		(9,162,457	)		(8,765,993	)
Dividends- Preferred Stock		(39,800	)		-
Total stockholders' equity (deficiency)		(2,972,516	)		(2,736,516	)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)		1,874,117			1,554,556

F-1

DIALOG GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Unaudited)
	2005			2004
REVENUES	$	1,716,718		$	1,945,432
COST OF REVENUES		692,653			939,970
GROSS PROFIT		1,024,065			1,005,462
OPERATING EXPENSES:
Selling, General and Administrative Expenses		1,316,040			1,390,901
Total Operating Expenses		1,316,040			1,390,901
LOSS FROM OPERATIONS		(291,974	)		(385,440	)
OTHER INCOME (EXPENSES):
Interest expense		(43,336	)		(18,504	)
Other (Expenses)					1,400
Forgiveness of Debt		3,750
Other income		-			92,264
Net Other Income (Expenses)		(39,586	)		75,160
NET LOSS BEFORE DISCOUNTINUED OPERATIONS		(331,560	)		(310,280	)
INACTIVE & DISCONTINUED OPERATIONS
Income (Loss) from Inactive Operations		(290	)
TOTAL COMPREHENSIVE LOSS	$	(331,850	)	$	(310,280	)
NET LOSS PER SHARE, BASIC	$	(0.002	)	$	(0.004	)
NET LOSS PER SHARE, FULLY DILUTED	$	(0.002	)	$	(0.003	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING BASIC		149,081,084			87,796,266
FULLY DILUTED		193,200,806			114,780,491

F-2

DIALOG GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDING MARCH 31, 2005 & 2004
	2005			2004
Cash Flows from Operating Activities:
Net Loss form Continuing Operations	$	(331,560	)	$	(310,280	)
Gain/(Loss)from Inactive Operations		(290	)
Loss from Operations	$	(331,850	)	$	(310,280	)
Adjustments to reconcile net loss
to net cash used in operating activities of continuing operations:
Gain on debt settlement		3,750
Depreciation and amortization		99,223			82,994
Bad debt expense		4,008			11,447
Common stock, warrants and stock options issued for services		78,161
Changes in operating assets and liabilities: (Increase) Decrease
Accounts receivable		(229,348	)		(311,022	)
Prepaid and other current assets		(230,019	)		18,877
Other current receivables					(1,320	)
Security Deposits		2,250
Accounts payable and accrued expenses: Increase (Decrease)		429,151			196,676
Current liabilities - Due to related parties		27,989
Other current liabilities		41,698			(98,536	)
Deferred revenues		(194,290	)		226,900
Net Cash Used in Operating Activities		(299,277	)		(184,264	)
Cash Flows from Investing Activities of Continuing Operations:
Purchase of property and equipment		(1,662	)		(13,543	)
Purchase of database		(95,703	)
Net Cash Used in Investing Activities		(97,365	)		(13,543	)
Cash Flows from Financing Activities of Continuing Operations:
Note Receivable - Findstar					25,000
Short Term Borrowing, net		264,952			(9,439	)
Proceeds from sale of common stock		-			35,000
Net Cash Provided by Financing Activities		264,952			50,561
Increase (decrease) in cash		(131,690	)		(147,246	)
Cash at Beginning of Period	$	131,690		$	147,246
Cash at Period End	$	-		$	-
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest Paid During the Period	$	43,336		$	17,982
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Conversion of Accounts Payable to Common Stock	$	7,500
Conversion of Accrued Expenses to Common Stock	$	52,524		$	20,000

F-3

DIALOG GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2005

NOTE  1 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND CAPITALIZATION

Dialog Group, Inc. was incorporated under the laws of the State of Delaware on October 4, 2002. The Company’s authorized capital stock consisted of 1,000 shares with no par value.

IMX Pharmaceuticals, Inc., formerly IMX Corporation, was organized under the laws of the State of Utah on June 2, 1982. The Company changed its name to IMX Pharmaceuticals, Inc. on June 30, 1997.

On November 12, 2002, IMX Pharmaceutical, Inc. and Dialog Group, Inc. merged into a single Delaware corporation (the “Company”) for the sole purpose of reincorporating IMX Pharmaceutical, Inc. in Delaware. The name of the surviving corporation is Dialog Group, Inc.

In conjunction with the merger, the Company’s Certificate of Incorporation was restated to increase the total number of shares of capital stock that the Company has the authority to issue to 101,000,000. The total number of authorized shares of common stock, $0.001 par value, was 100,000,000 and the total number of authorized preferred stock, $0.001 par value, was 1,000,000. The Board of Directors is authorized to establish the preferred stock in one or more series and to fix the rights, preferences, privileges, and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences and the number of shares constituting each series or the designation of such series.

On May 23, 2003, the Company further increased the total number of shares of capital stock of authorized shares of $0.001 par value common stock available for issuance to 175,000,000 and the total number of authorized $0.001 par value preferred stock available for issuance to 1,500,000.

Further, on June 18, 2004, the Company increased the total number of shares of capital stock of authorized shares of $0.001 par value common stock available for issuance to 200,000,000 and the total number of authorized $0.001 par value preferred stock available for issuance to 1,500,000. And, on June 18, 2004, the Company eliminated its Class C preferred stock. Also, on June 18, 2004 the terms of the Company’s Class E preferred stock were restated. The number of shares of authorized Class E preferred stock is 200 shares. In the event of liquidation, dissolution or winding-up or sale of more than 50% of the voting securities of the Company, holders of the Class E preferred stock shall be entitled to Liquidation Rights equivalent to $10,000.00 per share plus any accumulated but unpaid dividends.

BUSINESS ACTIVITY

The Company, which is headquartered in New York, NY, has offices in Valencia, California; Sunrise, Florida; and Houston, Texas. The Company’s two divisions, Data Dialog and Healthcare Dialog, provide a combination of traditional advertising (print, broadcast) and marketing services (broadcast, new media, and internet-based promotional venues); as well as a broad spectrum of proprietary and exclusive databases for healthcare, pharmaceutical, consumer and business-to-business market clients.

F-4

DIALOG GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2005

Additionally, the Company maintains exclusive contracts with leading multi-national pharmaceutical companies to operate, maintain and provide content for their consumer-directed Web sites.

Both Dialog Group’s divisions currently market its product and service offerings through three branded, business organizations. The Healthcare Dialog division: nFusion, +Media, and iData. The Data Dialog division: Data Dialog Marketing, Data Dialog Digital and Mail Mogul.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash.

The Company maintains cash balances at several banks. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $100,000. From time to time, the Company had cash in financial institutions in excess of federally insured limits.

ACCOUNTS RECEIVABLE

The Company conducts business and extends credit based on the evaluation of its customers’ financial condition, generally without requiring collateral. Exposure to losses on receivables is expected to vary by customer due to the financial condition of each customer. The Company monitors credit losses and maintains allowances for anticipated losses considered necessary under the circumstances. Recoveries of accounts previously written off are recognized as income in the periods in which the recoveries are made. The Company has a $350,000 line of credit with a commercial asset-backed lender with a term of two years beginning August 2004.It is secured by the Company’s accounts receivables, equipment, and inventory. At March 31, 2005, the allowance for doubtful accounts is $142, 085. Of this amount, $132,500 is related to an agreement and issuance of non-qualified stock options (see Note 6- Non-Trade Accounts Receivable) and the Company’s collection efforts.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful life of the assets, which range from three years to five years. Expenditures for major betterments and additions are capitalized, while replacement, maintenance and repairs, which do not extend the lives of the respective assets, are charged to expense currently. Any gain or loss on disposition of assets is recognized currently. The Company has a $350,000 line of credit with a commercial asset-backed lender with a term of two years beginning August 2004.It is secured by the Company’s accounts receivables, equipment, and inventory.

GOODWILL AND OTHER ASSETS

Goodwill

The Company tests goodwill and other assets for impairment annually. The provisions of SFAS No. 142 require the completion of an annual impairment test, with the impairments recognized in current earnings.

F-5

DIALOG GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2005

Databases

The databases consist of the one acquired from Healthcare Horizons and other acquired from Azimuth Target Marketing along with the costs of expanding the databases through the use of telephone surveys. As the databases, along with current telephone surveys, are generating revenue streams and are expected to do so in the future, no impairment is required. The databases are amortized over a three year period, while the telephone surveys are amortized over a five year period.

Website

The Company accounts for website development and maintenance costs in accordance with the guidance of EITF 00-2 “Accounting for Website Development Costs” and Statement of Position 98-1 “Software Developed or Obtained for Internal Use”. Costs incurred in the planning stage are expensed as incurred. Costs incurred in connection with the development stage are capitalized during the application development stage and amortized over a three year period. Costs incurred during the post-implementation operation stage, and fees incurred for web hosting, are expensed as incurred

IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company’s financial instruments consist primarily of cash, accounts receivable, other receivable, accounts payable, accrued expenses, current liabilities and debt. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these instruments. The estimated fair value is not necessarily indicative of the amounts the Company would realize in a current market exchange or from future earnings or cash flows.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reported period. Actual results could differ from those estimates.

F-6

DIALOG GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2005

COMPENSATED ABSENCES

The Company only accrues for compensated absences of employees with employment agreements with the Company that require the Company to provide for this benefit. Accordingly, the liability, if any, for such absences has been recorded in the accompanying consolidated financial statements.

REVENUE RECOGNITION

The Company recognizes revenues in accordance with SAB 101, which reflects the basic principles of revenue recognition in existing generally accepted accounting principles. Accordingly, revenues are recognized in the Healthcare Division upon a monthly review by management of each agreement to determine the percentage of the goods, or services actually delivered, or provided to customers. In the Data Division revenues derived from the sale of twelve-month subscriptions to the Company’s mailing lists are deferred and included in income on a monthly basis as revenues are earned. Revenues are earned on other goods or services when actually delivered or provided to the customer.

NET LOSS PER COMMON SHARE AND DILUTIVE SECURITIES

Earnings (loss) per share are computed in accordance with SFAS No. 128, “Earnings per Share”. Basic earnings per share is computed by dividing net income, after deducting preferred stock dividends accumulated during the period, by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities outstanding during the period.

The following is a summary of the securities that could potentially dilute basic earning (loss) per share in the future. These were not included in the computation of the diluted earnings (loss) per share because their exercise or conversion would be anti-dilutive.

	Period		Period
	Ended		Ended
	March 31,		March 31,
	2005		2004
Preferred stock		20,786,274		20,296,904
Warrants		6,921,865		2,991,640
Stock options		3,477,500		1,877,500
Convertible notes		12,934,083		1,818,182
Total		44,119,722		26,984,225

F-7

DIALOG GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2005

INCOME TAXES

The Company accounts for income taxes using SFAS No. 109, “Accounting for Income Taxes,” which requires recognition of deferred tax liabilities and assets for expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is recorded for deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be realized.

ADVERTISING COSTS

Advertising costs are expensed as incurred. The Company incurred $8,061 and $7,091in advertising costs for the period ended March 31, 2005 and March 31, 2004, respectively.

STOCK-BASED COMPENSATION

On December 2004, the FASB issued SFAS No. 123R, "Accounting for Stock-Based Compensation". This statement is a revision to SFAS No. 123, "Accounting for Stock-Based Compensation" and supersedes APB Opinion No.25, "Accounting for Stock Issued to Employees". This statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service, the requisite service period (usually the vesting period). The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models.

In addition, a public entity is required to measure the cost of employee services received in exchange for an award of liability instruments based on its current value. The fair value of that award will be re-measured subsequently at each reporting date through the settlement date. Changes in fair value during the requisite service period will be recognized as compensation cost over the period.

For public entities that file as small business issuers, this statement is effective as of the beginning of the first interim or annual reporting period that begins after December 15, 2005.

At the required effective date, all public entities that used the fair value method for either recognition or disclosure under Statement 123 are required to apply this statement using a modified version of prospective application. Under that transition method, compensation cost is recognized on or after the required effective date for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under Statement 123 for either recognition or pro-forma disclosures. For periods before the required effective date, those entities may elect to apply the modified version of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods by Statement 123. The Company does not expect SFAS No. 123R to have a material effect on itsfinancial statements.

F-8

DIALOG GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2005

PRINCIPLES OF CONSOLIDATION

In the opinion of the Company, the accompanying unaudited consolidated financial statements prepared in accordance with instructions for Form 10-QSB, include all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of the results for the periods presented. It is suggested that these consolidated financial statements be read in conjunction with the Company's Annual Report for the year ended December 31, 2004.The balance sheet as of December 31, 2004 was derived from audited financial statements as of that date. The results of operations for the three months ended March 31, 2005 are not necessarily indicative of the results to be expected for the full year.

The consolidated financial statements include the accounts of the Company, Dialog Group, Inc., and its wholly-owned subsidiaries; Data Dialog, Inc. Healthcare Dialog, Inc., IP2M, and Mail Mogul, Inc. All material intercompany transactions and balances have been eliminated in consolidation.

REPORTING PERIOD

The accompanying condensed consolidated financial statements for the three months ended March 31, 2005 depict the results of operations and cash flows of DDI, DGI, HCD, IP2M, and MMI.

RECLASSIFICATIONS

Certain reclassifications have been made to the prior year financial statements in order for them to be in conformity with the current year presentation.

RESTATEMENT

In 2004 and during the first quarter of 2005, no restatements were required to be made.

NOTE 2- ACTUAL RESULTS OF OPERATIONS

The following set forth the Company’s actual results of operations for the three months ended March 31, 2005, with comparative actual results for the three months ended March 31, 2004

F-9

DIALOG GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2005

	Unaudited
	Three months			Three months
	Ending			Ending
	March 31, 2005			March 31, 2004
REVENUE	$	1,716,718		$	1,945,432
COST OF SALES		692,652			939,970
GROSS PROFIT		1,024,065			1,005,462
OPERATING EXPENSES:
Other Selling, General, and Administrative Expenses		1,316,040			1,390,901
TOTAL OPERATING EXPENSE		1,316,040			1,390,901
INCOME (LOSS) FROM OPERATIONS		(291,974	)		(385,440	)
Other Income (Expenses):
Interest expenses		(43,336	)		(18,504	)
Other expenses					1,400
Other income					92,264
Forgiveness of Debt		3,750
Total other income (expenses)		(39,586	)		75,160
Net Profit/(Loss) Before Inactive and Discontinued Operations		(331,560	)		(310,280	)
Discontinued Operations		(290	)		0
Net Loss		(331,850	)		(310,280	)

NOTE - -4INACTIVE AND DISCONTINUED SUBSIDARIES

During the fourth quarter of 2004, the Company treated IP2M as an inactive business unit. IP2M did not have operational activity for more than fifteen months. The activities formally conducted by IP2M have been absorbed into the operating activities and results of Healthcare Dialog. This required the elimination of inter-company balances and related transactions of Dialog Group, Healthcare Dialog, and of IP2M. During 2004, in addition to transactions related to IP2M, discontinued operations included transactions related primarily to ThinkDirectMarketing employees’ labor arbitration awards and related expenses for legal services.

NOTE 5 -GOING CONCERN CONSIDERATIONS

The accompanying condensed consolidated financial statements have been presented assuming the continuity of the Company as a going concern. However, the Company has incurred substantial losses resulting in an accumulated deficit of $8,982,457 as of March 31, 2005. These conditions raise substantial doubt as to the ability of the Company to continue as a going concern.

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

LIQUIDITY

The Company continues review means of raising funds including issuing debentures and equity instruments. The Company is also reviewing the sale of non-core assets.

The Company reduced its current obligations of approximately $133,000 which consisted of accounts payable, accrued payroll, and accrued vacation. The President and C.E.O. along with the C.O.O. and C.F.O. amended their employment contacts for 2005 with the Company that reduced the Company’s payroll requirements. Additionally, the President and C.E.O., C.O.O. and C.F.O, and a related party converted approximately $52,000 of accrued compensation to common stock, while a supplier converted approximately $8,000 of open invoices to common stock. See Note 18- Subsequent events, item along with two for additional transactions.

F-10

DIALOG GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2005

PROFITABILITY

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

·Restructure its sales organization to allow for more effective sales processes. These steps include, among others, consolidating sales operations, and the expansion of sales organization.

·Reduce expenses through improved labor utilization.

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

·Reduce operating costs through improved procurement procedures.

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

NOTE 6-NON-TRADE RECEIVABLE

On November 19, 2004, the Company amended a prior agreement pursuant to which a non-qualified stock option had been issued. On November 19, 2004, the optionee executed its rights to purchase $200,000 of Dialog Group, Inc. common stock at the price of $0.06 per share for a total of 3,333,333 immediately upon the registration and delivery of shares. The Company complied with the requirements of Notice of Option Purchase. The optionee, to date, has provided only approximately $67,000 of the $200,000 that it is committed to pay to the Company. The Company has reserved for the entire unpaid balance of $132,500 due to the uncertainty of collection. The Company has hired an attorney In March to pursue collection of the unpaid balance. Prior to hiring the attorney, the Company was pursuing collection of the unpaid balance directly with optionee.

NOTE 7-LETTER OF CREDIT

In connection with supplier agreement of Healthcare Dialog, the Company arranged for a standby Letter of Credit in the amount of $90,000 in February of 2005. The Letter of Credit is in effect for one year from February 2005. The collateral for the Letter of credit is secured by personal assets of the Company’s President and C.E.O. (See Note 15-Related Party Transactions).The agreement with the supplier requires Healthcare Dialog to replenish any draws by the supplier against the standby Letter of Credit. During the first quarter of 2005, the supplier did not draw against the Letter of Credit.

NOTE 8-STOCK-BASED COMPENSATION

During the period ending March 31, 2005, the Company entered into the following stock-based compensation transactions.

As consideration for personally guaranteeing certain obligations of the Company, the Board of Directors authorized the Company to issue 4,750,000 shares of common stock for $23,750 the President and C.E.O. for 4,750,000 shares and 350,000 shares of common stock for $1,750 to the C.O.O. and C.F.O.

F-11

DIALOG GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2005

In connection with amending their employment contracts with the Company for the balance of 2005, the President and C.E.O agreed to a salary reduction of $100,000, while the C.O.O. and C.F.O agreed to a salary reduction of $65,000, the Board of Directors authorized 10,000,000 and 6,500,000 shares of common stock to be issued to the President and C.E.O and to the C.O.O. and C.F.O, respectively.

For performing additional services that are not included in his employment contract, the Company agreed to issue 2,000,000 shares of common stock for $10,000, to the Secretary of the Corporation.

The Company amended one existing consulting services agreement to limit its obligation to 1,456,398 shares and entered into new consulting services agreement for 1,000,000 shares, for $13,835 and $7,000, respectively. The companies will, or have provided general investor relations and marketing services.

The Company offered two employees with potential stock awards. The Company will provide 350,000 shares valued at $3,500. To receive the award, the employees must be employed at the Company at December 31, 2005.

The Company will issue the shares in the near future. The Company accounted for the transactions in accordance with FASB 123R as issued in December 2004.

NOTE 9- ACCRUED LIABILITES

As of March 31, 2005, accrued liabilities consisted of the following:

Accrued professional fees and other expenses	$	183,211
Accrued payroll and payroll taxes		292,055
Accrued interest		20,438
Accrued settlements and contingencies		484,046
	$	979,752

See Note 16-Litigation for the specific items that comprise the $484,046 in Accrued settlements and contingencies.

NOTE 10 -EQUITY

COMMON STOCK

During the period ending March 31, 2005, the Company issued 2,839,076 shares in connection with the payment of the series E Preferred Stock dividends. As a result of non completion of an agreement in the 1st quarter, the Company cancelled 799,999 shares.

PREFERRED STOCK

During the first quarter of 2005, no preferred stock was issued.

During the first quarter of 2005, no debt was converted into preferred stock.

F-12

DIALOG GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2005

STOCK OPTIONS

Stock options for 100,000 were granted to an unrelated party, while no options were exercised during the period ending March 31, 2005

STOCK WARRANTS

In connection with issuance of a $45,000 convertible note, convertible into common stock at price of $0.025 per share, warrants provide holders to purchase the common stock at the price of $0.025. Warrants to purchase 540,000 shares have been issued to the holder of this convertible note. The warrants are exercisable until September 30, 2009. Warrants to purchase a total of 6,381,865 shares have been issued to all convertible note holders.

CLASS E PREFERRED STOCK DIVIDENDS

The dividends accrue at the rate of $400 per share per quarter. Pursuant to the provisions of the Class E Preferred Stock Declaration, shares of common stock, based on the average closing price for the shares during the last 20 trading days before the dividends were due, may be paid in lieu of cash.

During the first quarter of 2005, quarterly dividends accrued on its Class E Preferred Stock at the rate of $400 per share, per quarter, for a total of $39,800 accrued and unpaid for at March 31, 2005.

CONVERSION OF PREFERRED STOCK INTO COMMON STOCK

During the first quarter of 2005, 247,120 shares of series B Preferred stock was converted into 3,086,196 shares of common stock.

CONVERSION OF DEBT

During the first quarter of 2005, approximately $60,000 of debt and accrued expenses were converted into common stock

NOTE 11 -STOCK OPTIONS

Effective January 1, 2003, the Company adopted the recognition provisions of SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure. Prior to 2002, the Company accounted for employee stock options using the provisions of APB No. 25 “Accounting for Stock Issued to Employees” and related interpretations. During the quarter ended March 31, 2005, 100,000 stock options were granted to employees, non-employee directors, officers, or consultants. 180,900 options vested in the three months ending March 31, 2005, while 9,504 options are forfeited by former employees during the first quarter of 2005.

F-13

DIALOG GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2005

Stock options activity for 2005 at March 31,2005 is as follows:

	Number			Weighted Average
	Of Shares			Exercise Price
Options Outstanding, December 31, 2004		3,366,898		$	0.121
Options Granted		100,000			0.012
Options Forfeited		(9,504	)		3.000
Options Expired		0			0
Options Exercised		0			0
Options outstanding, March 31, 2005		3,457,394			0.112

NOTE 12-COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company has entered into five lease obligations for office space along with a corporate apartment in New York City. The offices are located in California, Florida, New York, and Texas.

California Lease

The California lease was executed on June 19, 2003. The term of the lease is from August 1, 2003 through October 31, 2006. The lease contains an option for the Company to extend the lease for an additional three-year period.

Florida Lease

The Florida lease was executed on April 15, 2003. The term of the lease is from May 1, 2003 through April 30, 2008. The lease includes in addition to the office space, various office furniture remaining from a prior lessee.

New York

The New York lease was executed on June 8, 2004. The term of the lease is from June 1, 2004 through May 31, 2007.

The corporate apartment in New York City lease was renewed on January 1, 2005. The term of the lease is from January 1, 2005 through December 31, 2007.

Texas Lease

The lease was amended on September 1, 2003 to extend the lease agreement period to September 30, 2006.

F-14

DIALOG GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2005

EMPLOYMENT CONTRACTS

The Company has employment contracts with four employees. Employment contracts at March 31, 2005 are as follows.

	Annual
Position	Compensation
President and C.E.O	$	250,000
C.O.O. and C.F.O.	$	150,000
Administrative Head of Healthcare Dialog	$	150,000
Corporate Secretary	$	66,000

The employment contracts for the President and C.E.O, C.O.O. and C.F.O., and the Administrative Head of Healthcare Dialog are for one year, with initial term ending March 31, 2005, extendable for successive one year terms, unless terminated at the end of the term by

either party upon ninety days written notice to the other party. Annual increases at the first of every year shall be at least the percentage of the prior year’s C.P.I. If for any reason, the employee is not paid the employee’s base salary for the year, the difference between the base salary and the amount paid shall be paid to the employee prior to payment of any year-end bonus to any other employee. Employee shall be entitled to not less than five (5) weeks paid vacation for each full calendar year prorated for any partial year. Employee shall accrue earned and unused vacation. Employee shall receive all benefits and fringes made available to other employees and officers of the Company including pension, medical, dental, life, and disability insurance and other similar plans. Employee and spouse shall receive these benefits fully paid by the Company. Health insurance for the employee and family will be provided by the Company. Health club memberships for the employee will be paid for by the company. Life insurance at a cost of at least $1,000 per month will be paid by the Company. Long and short term disability insurance for the employee will be paid by the Company. The employee is entitled to a monthly automobile allowance of $1,500 per month.

The employment agreement with the Corporate Secretary is effective June 1, 2004 to May 31, 2005. It does not contain a renewal clause. If for any reason, the employee is not paid the employee’s base salary for the year, the difference between the base salary and the amount paid shall be paid to the employee prior to payment of any year-end bonus to any other employee. Health insurance for the employee is paid by the Company. Employee shall accrue earned and unused vacation. Employee shall receive all benefits and fringes made available to him from time to time by the Company.

NOTE 13 -SEGMENT DISCLOSURES

The Company's reportable operating segments are categorized in three components: (1) Healthcare; which includes Healthcare Dialog, Inc., (2) Data; which includes Mail Mogul, Inc., and Data Dialog, Inc., (3) Corporate which is Dialog Group, Inc.

F-15

DIALOG GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2005

HEALTHCARE

Healthcare Dialog designs, develops and distributes direct marketing and customer relationship management products and services for the healthcare industry.

Revenues are generated by Strategic and Creative Services:

·   direct mail campaigns

·   creation of sales representative training materials

·   creation and dissemination of patient and professional education materials

·   consumer advertising

·   creation and management of websites

·   to place internet advertising

·   for the use of our healthcare database

+ Media provides, maintains and delivers healthcare information over the internet and television.

DATA

Mail Mogul is an online market place for sellers of direct mail, providing leads, website applications, mailing lists, mailing supplies as well as other products and services.

Revenues are generated from

·   data from data dialog master database

·   mail room supplies

·   membership in “RFQ” an online marketplace for quoting direct mail jobs

·   sale of licensed databases and database products and services

·   data updating services

Data Dialog provides online marketing list, direct mail programs and creates target lists for specific direct marketing categories for small to medium sized businesses. The company allocates the costs of revenues and direct operating expenses to these segments.

Revenues are generated from

·   data from the Dialog Group databases

·   Data Dialog Digital, a product that automatically appends names and addresses to telephone numbers on inbound calls to telephone service centers.

·   direct mail campaigns

CORPORATE

This is comprised of general and administrative functions and related expenses. These costs are retained at corporate and are not allocated to the business segments. Costs that are specifically attributable to a business unit are charged to that unit. Management’s philosophy is charging the units for specific attributable costs, such as I.T services, rent, and depreciation or amortization of assets owned by Corporate that have a benefit to the business unit more accurately reflects the operating costs of Corporate and the matching of revenues and costs of the respective business unit.

F-16

DIALOG GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2005

Three months ended March 31, 2005 Actual Unaudited Results

										Consolidated
	Corporate			Healthcare			Data			Total
REVENUE	$	0		$	803,199		$	913,519			1,716,718
COST OF SALES		0			353,643			339,009			692,653
GROSS PROFIT		0			449,556			574,509			1,024,065
OPERATING EXPENSES:
Selling, General and Administration Expenses		465,536			316,372			534,131			1,316,040
TOTAL OPERATING EXPENSE		465,536			316,372			534,131			1,316,040
INCOME (LOSS) FROM OPERATIONS		(453,536	)		133,184			40,378			(291,974	)
Other Income(Expenses)
Interest income
Interest expense		(24,556	)		(15,863	)		(2,916	)		(43,336	)
Other (expense)
Other income
Forgiveness of debt		3,750									3,750
Total other income(expenses)		(20,806	)		(15,863	)		(2,916	)		(39,586	)
Income/(Loss) Before Inactive and Discontinued Operations		(486,343	)		117,321			37,462			(331,850	)
Inactive Operations					(290	)
Discontinued operations
Net Income/(Loss)		(486,343	)		117,031			37,462			(331,850	)
Total Net Assets		813,051			795,787			266,279			1,874,117
Gross Fixed and Other Assets		1,054,807			0			255,034			1,309,841
Accumulated Depreciation and Amortization		518,384			0			122,886			641,270

F-17

DIALOG GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2005

Three months ended March 31, 2004 Actual Results

										Consolidated
	Corporate			Healthcare			Data			Total
REVENUE	$	0		$	933,817		$	1,011,615		$	1,945,432
COST OF SALES					449,318			490,652			939,970
GROSS PROFIT					484,499			520,963			1,005,462
OPERATING EXPENSES:
Selling, General and Administration Expenses		605,243			199,147			586,511			1,390,901
TOTAL OPERATING EXPENSE		605,243			199,147			586,511			1,390,901
INCOME (LOSS) FROM OPERATIONS		(605,243	)		285,352			(65,549	)		(385,440	)
Other Income(Expenses)
Interest income
Interest expense		(10,336	)		(8,168	)					(18,504	)
Other (expense)
Other income
Forgiveness of debt		92,264						1,400			93,663
Total other income(expenses)		81,927			(8168	)		1,400			75,160
Income/(Loss) Before Inactive and Discontinued Operations		(523,316	)		277,184			(64,150	)		(310,280	)
Inactive Operations
Discontinued operations
Net Income/(Loss)		(523,316	)		277,184			(64,150	)		(310,280	)
Total Net Assets		678,763			821,794			459,732			1,960,289
Gross Fixed and Other Assets		816,313			0			197,973			1,014,286
Accumulated Depreciation and Amortization		227,343			0			47,399			274,742

NOTE 14- LOANS AND NOTES PAYABLE

Loans and notes payable due to non-related parties consisted of the following as of March 31, 2005.

Convertible notes in the aggregate amount of $100,000 due to three former IP2M note holders assumed by the Company. The notes are due August 31, 2004. The notes bear interest at the rate of 10% per annum. The notes are convertible into shares of the Company’s common stock. The number of shares to be issued upon conversion will be determined by the closing bid price of the Company’s common stock on the date of conversion. Each holder is entitled to convert up to 25% of the initial balance of the note (including accrued interest) each month. During the Second Quarter of 2004 $75,000.00 of Notes were converted to Common Stock $ 25,000

$115,000 revolving credit agreement with a commercial bank matured on October 13, 2004. The Company is currently in discussions with the bank. The line of credit bears interest at prime plus 2% per annum and is personally guaranteed by the Company’s President and C.E.O. $ 114,689

F-18

DIALOG GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2005

Small business loan assumed upon the purchase of Azimuth Target Marketing. The loan bears interest at prime plus 2 ¼ % per annum, due in equal installments over 36 months, maturing during 2006.	$	2,911
$350,000 line of credit with commercial asset-backed lender with a term of two years beginning August 2004. The line of credit bears interest at prime plus 4% per annum plus on-going fees. It is secured by the Company’s accounts receivables, equipment, inventory, and up to $150,000 of the debt is personally guaranteed by the President and C.E.O. of the Company and his spouse.	$	349,267
Total loans and notes payable	$	491,867
Less: Current maturities	$	(491,867	)
Long Term Debt	$	0

Please see Note 15- Related Party Transactions Due to Related Parties for information about additional Company debt.

NOTE15 - -RELATED PARTY TRANSACTIONS

CONVERTIBLE NOTES DUE TO RELATED PARTIES

During 2004, the Company began issuing a Convertible Note. The notes all bear interest at the rate of five (5%) percent per annum. They mature on May 31, 2006. The holders of the notes can convert them into Company common stock at a price of $0.06 per share. After the Company’s shares close over $0.12 per share for twenty trading days, the Company can compel the holders to convert their notes and all accrued interest into shares of common stock at the conversion price.

By the end of the 1^st quarter, 2005, the Company had issued notes with an aggregate of $628,045 in initial principal amount. At the time the notes were issued, the Company issued warrants granting the holders the right to purchase an aggregate of 3,140,225 shares at a price of $0.075.

Convertible Notes in the aggregate amount of $118,045 were issued to the President and C.E.O, the C.O.O. and C.F.O., along with two employees for unpaid payroll at December 31, 2004. $ 118,045

Three notes, in the initial principal amounts of $250,000, $135,000, $125,000, and $45,000 were issued to a fund through the efforts of an affiliated broker-dealer. The Company paid an aggregate of approximately $55,000 to a company whose president is a member of the board of directors of the Company for arranging the sale of these notes. See Note-18 Subsequent events, item one for additional information. $ 555,000

F-19

DIALOG GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2005

DUE TO RELATED PARTIES

In December 2004, a group of individuals, including a member of board of directors provided approximately $113,000 directly to a supplier for unpaid invoices. The advance is non-interest bearing and due on demand. In January of 2005, a significant portion was repaid.	$	26,000
In conjunction with the Company obtaining a Letter of Credit for the benefit of a supplier of Healthcare Dialog (see Note-7 Letter of Credit), the President and C.E.O. of the Company personally secured the Letter of Credit by pledging personal assets in the amount of the Letter. Unless, the Letter of Credit is drawn down on, no amount is due.	$	90,000
The President and C.E.O. of Company provided the Company with $25,000 of short-term, interest-free, unsecured debt.	$	25,000
Total loans and notes payable due to related parties	$	814,045
Less: Current maturities	$	(141,000	)
Long Term Debt due to related parties	$	673,045

CONVERSION OF DEBT DUE TO RELATED PARTIES

During the period ending March, 31, 2005, related parties converted approximately $53,000 of debt, or accrued expenses into equity of the Company.

RENT TO RELATED PARTIES

The Company leases an apartment from January 1, 2005 through December 31, 2007 from a company controlled by the C.O.O. and C.F.O. of the Company. Rent expense paid to the company controlled by the related parties amounted to $6,000 for three months ended March 31, 2005.

NOTE 16 -LITIGATION

SUPPLIERS

During July of 2003, Axiom Corporation commenced an action against ThinkDirectMarketing, Inc., a discontinued subsidiary. The complaint seeks $400,000 on a note payable, and $295,415 for unpaid data usage, and $1,250,000 for unused minimum usage requirements for 2003 and 2004. The debts, if any, are those of the discontinued entity. This litigation is still in the preliminary stages and no amounts have been accrued.

Wells Fargo Financial Leasing, Inc. filed an action against the Company for non-payment of equipment lease commitments made by Healthcare Dialog, Inc. Subsequent to year-end, a settlement was reached and both parties executed the agreement. The amount is fully recorded

F-20

DIALOG GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2005

in the accounts payables of the Company. The balance at March 31, 2005 is $5,000. In April, 2005 balance was paid.

Collins Ink, in June 2004, obtained a judgment of $92,347 for unpaid invoices. The full amount is recorded in the accounts payable of the Company. The balance at March 31, 2005 is $33,109.

Label Source, in June 2004, obtained a judgment of $121,037 for unpaid invoices. The full amount is recorded in the accounts payable of the Company. The balance at March 31, 2005 is $87,314. As payments are behind the payment plan schedule, the Company was informed that plaintiff obtained a lawyer in New York.

USA Direct, in April 2004 obtained a $39,025 judgment related to a discontinued operation of the Company. This amount is recorded in the accounts payable of the Company. In December 2004, the Company and USA Direct reached an agreement of $20,000 and a payment plan. The balance at March 31, 2005 is $10,000.

The New York State Department of Taxation in December 2004 provided a letter to QD Corporation, a discontinued unit that the Department claims that QD Corporation owes $7,936 in taxes and interest for corporate income taxes for the period ending December 31, 2002. After reviewing the consolidated tax return, QD Corporation is not required to file a separate return. This information has been provided to New York State Department of Taxation in response to its December 2004 letter. As the Company believes it has properly reported the taxes to the State of New York, no accrual for additional taxes and charges are recorded.

EMPLOYEES

In April 2003, Dialog Group received a summons from a Colorado State District Court seeking to enforce a former employee’s termination agreement. A settlement agreement was reached for $47,330. TDMI, a discontinued subsidiary, made payments of approximately $45,000 during 2003 and 2004. The balance at March 31, 2005, is $2000 and recorded as an accrual on the books of the Company. This amount is included in accrued settlements and contingencies in Note 9.The balance was paid in April, 2005.

In April 2003, two former TDMI employees commenced arbitration proceeding against the Company relating to their termination of employment. The employees seek damages totaling $375,789. TDMI, a discontinued subsidiary, accrued $147,000 against this potential liability. The Company has accrued for additional legal fees to contest the claims. In January 2005, the

Company received notice from the American Arbitration Association Employment Arbitration Tribunal that reviewed the claims. Its decision was to award the claimants a total of approximately $478,000 including fees. The amount is fully accrued for in the financial statements of the Company. The balance at March 31, 2005 is $473,898. This amount is accrued on the books of the Company. It is included in accrued settlements and contingencies in note 9. In April, the Company and the two former employees of TDMI executed a settlement agreement for $501,872 that includes a schedule of payments over two and half years that includes approximately $25,000 of interest.

F-21

DIALOG GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2005

The Company reached a settlement with a former employee for claims against an employment contract. It was settled by conversion to series E preferred stock in 2004.The Company accrued for a liability sufficient to cover the settlement. The balance at March 31, 2005 is $8,149 and is included in accrued settlements and contingencies in Note 9.

NOTE 17-FORGIVENESS OF DEBT

During the period ending March 31, 2005, Management arranged the settlement of accounts payable and other obligations resulting in approximately $3,800 of debt.

NOTE 18-SUBSEQUENT EVENTS

In April, 2005, the Company and the holder of $555,000 in convertible notes had these notes cancelled and purchased by another related party. As part of canceling the notes, the accrued interest was forgiven and the attached warrants were cancelled. A new note, for $555,000 was issued to replace the four notes that were cancelled.

In April, 2005, the Company issued a 5% convertible note in the amount of $550,000 in a related party transaction. The Company obtained $500,000 in April. In connection with arranging the sale of this note, the Company paid $50,000 to a company whose president is a member of the board of directors of the Company.

In May, 2005, the Company signed a letter of intent to acquire an online advertising and affiliate marketing company. The company has developed several new highly customizable online technologies that enhance advertising and marketing performance. The proposed acquisition would allow Dialog Group, Inc. to expand our means of distributing our data services and increase our online presence. The exact terms of the transaction are subject to board of directors’ approval along with agreement on a definitive contract.

In April, 2005, the Company entered into a settlement agreement and payment arrangement with two former employees of TDMI, a discontinued operation. See Note16-Litagation, Employees. The settlement agreement’s payment plan stated the former employees be paid an initial amount of $100,000 and the balance over the next thirty months. The $100,000 payment was made in April 2005.

F-22

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

General

Dialog Group, Inc. (DLGG) is a publicly traded corporation, headquartered at 257 Park Avenue South, Suite 1201, New York, New York 10010, with offices in Valencia, California; Sunrise, Florida; and Houston, Texas. The company’s two divisions, Data Dialog and Healthcare Dialog, provide a broad spectrum of proprietary and exclusive databases for healthcare, pharmaceutical, consumer and business-to-business market clients. The company also provides a combination of traditional customer relationship management support applications such as advertising (print, broadcast) and marketing services (broadcast, new media, and Internet-based promotional venues). Dialog Group maintains exclusive contracts with leading multinational pharmaceutical companies to operate, maintain, and provide content for their consumer-directed Web sites.

Description of the Divisions

Both of Dialog Group’s divisions each currently market its product and service offerings through three branded business organizations. The Data Dialog Division’s are Data Dialog Marketing, Data Dialog Digital and Mail Mogul. The Healthcare Dialog Division’s are nFusion, +Media, and iData.

Data Dialog Division

Data Dialog Marketing serves the direct marketing needs of small- and medium-sized businesses with systems and tools that generate business and consumer prospect leads, provide data services, and streamline business processes by integrating the collection and distribution of data. Data Dialog Marketing offers a host of data-related services, such as targeted marketing lists, turnkey direct mail programs, and data cleansing to multiple market segments including insurance, financial planning, real estate, auto dealerships and other segments that are users of direct mail and prospect marketing. Data Dialog Marketing also offers a unique subscription-based product featuring limited selections of data specifically designed for the small business segment. The unit markets a proprietary online list creation tool, Data Dialog Select.

Data Dialog Digital is a customer data integration product that automatically appends name and address information, as well as demographic & sociographic information, to telephone numbers on calls made by consumer and business customers to CTI Platforms. Data Dialog Digital primarily markets its products to call centers and Interactive Voice Response system users operating in-bound and blended call centers with 5 to 500 seats. Data Dialog Digital currently has contracts and sub-contracts with 27businesses in this market segment and an additional 20 agreements with resellers which service this market. The real time format of this unit’s products gives customers instant access to data, and speeds up their promotional efforts and improves customer service.

Mail Mogulbrings one-stop shopping to the small- to medium-sized mail shop industry. Mail Mogul helps mail shops improve their business opportunities through a total-business-solutions approach. Proprietary and external lists are sold at competitive prices both on and off line to mail shops for their customers. In addition, list hygiene services are offered to mail shops that have customer lists which need to be updated and or standardized. Its “Hot Leads” product is this market’s first online commerce center to link customers who need direct mail job quotes with mail shops and direct marketing service organizations with letter-shop capabilities. Finally, Mail Mogul offers consumable supplies to its customers for their equipment and to round out its offerings.

3

Healthcare Dialog Division

iDatauses proprietary technologies to support healthcare and pharmaceutical clients in their direct marketing efforts, clinical trial recruitment, and consumer/patient market research efforts. It offers unique healthcare data on almost 2 million households, and serves as the foundation for the highly targeted and efficient communication plans of pharmaceutical companies, retailers, and other healthcare companies. Its exclusive data is compiled from respondents who agree to telephone interviews. The primary function of this business unit is to identify patient/consumer targets and enhance patient/consumer databases.

nFusion delivers advertising, relationship marketing and communications services to the healthcare industry. Clients use its strategic and creative services to build comprehensive programs for healthcare professionals, consumers, and sales representatives. These include training materials development, patient and professional education materials distribution, and targeted direct mail and advertising campaigns. Clients rely onnFusion’s interactive services to produce sophisticated promotional Web sites, educational Web sites, interactive training and educational CD-ROMs, Internet advertising, e-mail campaigns, and proprietary marketing programs.

+Media’splatform provides, maintains, and delivers healthcare, beauty and pet content across a national network of 87 local affiliate TV and radio station Web sites. The content, which includes over 15,000 text articles, attracts over a million unique health information seekers per day to the broadcast stations’ Web sites for a combined US household penetration of 75%. Here, client public relations, promotional material, and educational material are blended into a seamless presentation for maximum viewer impact. To maintain repeat traffic, all features are refreshed daily.    

Results of Operations

Dialog Group

Management continued to evaluate the margins of some of the products offered and focused more on profit improvement and not Revenue alone. Revenues for the quarter ended March 31, 2005 were $1,716,700 compared with $1,945,400 for the quarter ended March 31, 2004. This represents a decline of $228,700 or 11% from the same period a year ago. Sales from the high margin data companies were $913,500 or 47% of total. With the addition of iData sales, which are reported in the Healthcare Dialog total, data sales were $1,038,400 or 53% of total Revenue. Data Sales in total for the first quarter of 2005 are ahead of the first quarter of 2004. Revenue for each of the companies and some of the products will be addressed in more detail below.

4

Costs of Revenues for the quarter ended March 31, 2005 were $692,700, some 40% of sales, compared with $940,000 or approximately 48% of sales in the quarter ended March 31, 2004. The decline in Revenue of $228,700 was offset by the $247,300 decline in Cost of Revenue from a year ago for the same period. Improved terms from data suppliers and the greater utilization of company data assets rather than relying on external sources and a change in the mix of Revenue drove down Cost of Revenue in the first quarter of 2005 from the same quarter of the prior year. The sources of the Revenue and costs for each division are discussed in more detail by company in the sections which follow.

Operating Expenses for the quarter ended March 31, 2005 were $1,316,000 compared with $1,390,900 for the quarter ended March 31, 2004. This represents a reduction of $74,900 from the first quarter of 2004. Management plans to continue to reduce overhead in the quarters ahead. Dialog Group in 2005 is allocating some administrative and IT expenses to the divisions which it did not do in 2004, the details of which are explained in more detail in the individual company comments.

Losses from Operations were $292,000 for the quarter ended March 31, 2005, compared with $385,400 for the quarter ended March 31, 2004, an improvement of approximately $93,400 from the same period a year ago. The positive results can be attributed to lower Cost of Revenue resulting from higher margin businesses making up a greater percentage of Total Sales in the first quarter of 2004 than for the comparable period in 2004. A reduction of Operating Expenses also contributed to the improved results. “Reduce Overhead” has and will continue to be the Dialog Group credo.

Net Other Income/Expense was an expense of $39,600 for the quarter ended March 31, 2005, compared with Net Other Income/Expense was income of $75,200 for the quarter ended March 31, 2004, an increase of $114,800. The company’s other income/expense for this year included interest expenses of approximately $43,300 and income of $3,800, arising from gain on forgiveness of debt. Last year included interest expense of $18,500 and other income of $93,700 that arose primarily from the review of accrued expenses and adjustment to current estimates.

The Net Loss for the quarter ended March 31, 2005 was $331,800, compared with a Net Loss $310,300 in the quarter ended March 31, 2004, representing an increase of $21,500.

Data Dialog Division:

Data Dialog had Sales of $392,000 for the period ending March 31, 2005, compared to approximately $198,000 for the first quarter of 2004. Data Dialog Marketing, which sells data and marketing services to small- and mid sized-end users, accounted for approximately $261,000 of total Data Dialog Sales for the period ending March 31, 2005. The company’s Data Dialog Digital call center reverse append product was the second largest revenue producer for the first quarter, contributing $102,100 in Revenue. Data Dialog Management, which sells data to large end users and brokers, produced the balance. Specialty List sales sold by two of the divisions provided the greatest proportion of the Revenue for Data Dialog. The Data Dialog Marketing subscription list products were the second strongest Revenue producer.

5

Mail Mogul’s Revenues were $521,500 for the quarter ended March 31, 2005, compared with$813,700 for the same period ended March 31, 2004. The year began with weak sales resulting from fewer experienced sales people on staff and increased competition. During the first quarter of 2005, Sales from Mail Mogul’s highest margin “Hot Lead” category was up from the same period a year ago. While highly profitable list Sales were off for the period ending March 31, 2005 from the same periods a year ago, the Sales of low margin consumable supplies were off more significantly from the first quarter of 2004 to first quarter 2005.

Data Dialog’s Costs of Revenue for the first three months of 2005 were $114,800 or 29% of Sales, compared with $52,500, or 27% of sales in the first quarter of 2004. The savings from the Company sales from company-owned data assets was negatively offset by the increase in sales of the lower margin wholesale products along with sales of printing and fulfillment. Cost of Revenue by product varied from 17% of sales to 43% of sales. As sales continue to improve in the quarters ahead, Cost of Revenue percentage should continue to improve as a result of fixed expenses relating to data acquisition and Internet marketing.

Mail Mogul’s Costs of Revenue were $224,200 for the quarter ended March 31, 2005, representing 43% of revenue, compared with $438,100 and 54% of revenue for the quarter ended March 31, 2004. The mix of the business was the major reason for the reduction in the Cost of Revenues percent for Mail Mogul in the first quarter. Sales from the company’s lowest Cost of Revenue product “Hot Leads” in the first quarter of 2005 was up for the period ending March 31, 2005, compared to the period ending March 31, 2004. “Hot Leads” is an online community where member mail shops bid on mailing jobs. Sales of low margin mail shop consumable supplies were down significantly from a year ago while sales of higher margin data made up a greater percentage of the total Revenue for the period. Mail Mogul’s Cost of Revenue reduction of approximately $214,000 helped to offset the reduction in Revenue during the first quarter of 2005 compared to the first quarter of 2004.

Data Dialog’s Operating Expenses for the three month period ended March 31, 2005 were $330,000, an improvement of approximately $65,000 from the same period a year ago when the figure was $394,900. Operating Expenses decreased from the first quarter of 2004 to the first quarter of 2005, while sales doubled during the same period, contributing to the overall profit improvement of this company. Certain data expenses paid exclusively by Data Dialog in 2004 are being shared in the amount of $17,500 with Mail Mogul in 2005, along with $28,000 of inter-company cost allocations to other divisions, and approximately $ 25,000 related to the transfer of employees from Data Dialog.

Mail Mogul’s Operating Expenses $235,600 for the quarter ended March 31, 2005 compared with$228,000 for the quarter ended March 31, 2004. In 2005, allocation of $35,000 for marketing, administrative and IT expenses were charged to Mail Mogul during the period ending March 31, 2005 that were not charged for the same period in 2004. Management believes the 2005 approach yields a more accurate presentation of operating results.

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Data Dialog’s Net Loss from Operations was $52,800 for the first quarter of 2005, compared to a loss of approximately $250,000 for the first quarter of 2004. Investments made in sales staff and an online platform for Data Dialog Marketing are having a positive impact on Data Dialog. Data Dialog Digital was the one product line of the three which showed a profit for the first quarter.

Mail Mogul’s Net Income from Operations for the quarter ended March 31, 2005 was $61,700, compared with approximately $158,000 for the same quarter in 2004. Mail Mogul sales ending March 31, 2005 were down almost $300,000 from the same period a year ago, while Net Income is down by less than $100,000. Management believes the results of the first quarter were attributed to the turnover of experienced sales people and a conscious effort to divert resources away from lower margin categories. Even with a decrease in Revenue, this company was still profitable in the first quarter of 2005, and Management believes the strategy in place will return the bottom line to past year levels.

Healthcare Dialog Division

Total Revenue for Healthcare Dialog was $803,200 for the first quarter of 2005 compared to $933,800 for the same period a year ago. A metamorphosis of Dialog Group into a company with products that are broader-based and include clients other than pharmaceutical companies is taking place. The company is less dependent on a few large pharmaceutical clients than in the past. Resources and assets formally allocated to Healthcare Dialog are being deployed in other divisions.

Sales innFusion for the three months ended March 31, 2005 were $518,000, or about 64% of the total Healthcare Dialog business in the first quarter of 2005. This healthcare-focused marketing business is the single largest segment of Healthcare Dialog. Sales ofnFusion for the first quarter of 2004 were $470,000.

+Mediaproduced sales of $160,300 for the period ending March 31, 2005, which was also below the 2004 level of $461,700 for the same period. While orders placed were below last year by about $100,000, sales the first quarter of 2004 were further depressed because inventory was not made available from the supplier which owns the TV Web Sites.Sales that were booked but not placed as a result of a shortage of online inventory in the first quarter will be filled and revenue realized later in 2005.

The remaining healthcare segment,iData,which conducts telephone surveys primarily for healthcare companies, had Revenue for the first quarter of 2005 of $125,000. This compares favorably to the same period a year ago when Sales were about $40,000. Contracted Sales for 2005 are ahead of 2004 actual revenues.

Healthcare Dialog’s Costs of Revenue was $335,000 for the quarter ended March 31, 2005, or 42% of revenue compared with $424,000, and 45% of revenue for the quarter ended March 31, 2004 The reduction is related to using fewer consultants and freelancers for savings of approximately $125,000.. One factor affecting the Cost of Revenue rate was a change in the technology used for theiDatasurveys. This more cost-effective approach was not introduced until after the end of the first quarter of 2004.

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The Healthcare Dialog’s consolidated Total Operating Expenses were approximately $316,400 for the three months ended March 31, 2005, compared to $199,100 for the same period a year ago. In the first quarter of 2005, expenses included allocation of approximately $80,000 for IT and administration that were not included in 2004 along with approximately $43,000 related to transfers of employees to Healthcare Dialog from other divisions. Management believes the new approach more accurately presents operating results for each business unit.

For the three months ended March 31, 2005, Healthcare Dialog’s consolidated Net Income from Operations was approximately $153,000 compared to $311,000 in the first quarter of 2004. Healthcare Dialog experienced a decline in volume in the first quarter of 2005, compared to the same period a year ago. It still produced the highest Income from Operations of any of the Dialog Group companies and was still able to produce a 19% Net Income from Operations.

Liquidity & Capital Resources

DGI had a consolidated working capital deficit of approximately ($3,041,000) on March 31, 2005 as compared to a deficit of approximately ($2,854,000) at December 31, 2004. The increase of approximately $187,000 is the result increase in accounts payable, accrued expenses and short-term borrowing due a reduced level of sales in the first quarter that did not provide the level of accounts receivable required to fund operations.

On March 31, 2005 the Healthcare Dialog Division’s financial condition included a working capital deficit, of about ($952,000) as compared to a deficit of approximately ($909,000) at December 31, 2004.

At the end of March, the Data Dialog Division had a working capital deficit of approximately ($867,000) as compared to a deficit of about ($665,000) on December 31, 2004. This is the result of current assets essentially remaining unchanged while accounts payable and other current liabilities increased.

Inflation

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

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Item 2Controls and Procedures.

Management continues its focus on the issue of internal control. To that end, it is continuing the process of centralizing the accounting function and developing policies and procedures that enhance the Company’s internal controls Management continues to evaluate and test present measures while at the same time reviewing areas that require improvement. Additionally, it continues the process of hiring persons with the skill sets appropriate to fill the Company’s needs.

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Part II. Other Information

Items 3 and 4 are omitted as they are either not applicable or have been included in Part I.

Item 1.Legal Proceedings

Suppliers

During July of 2003, Axiom Corporation commenced an action against ThinkDirectMarketing, Inc., a discontinued subsidiary. The complaint seeks $400,000 on a note payable, and $295,415 for unpaid data usage, and $1,250,000 for unused minimum usage requirements for 2003 and 2004. The debts, if any, are those of the discontinued entity. This litigation is still in the preliminary stages and no amounts have been accrued.

Wells Fargo Financial Leasing, Inc. filed an action against the Company for non-payment of equipment lease commitments made by Healthcare Dialog, Inc. Subsequent to year-end, a settlement was reached and both parties executed the agreement. The amount is fully recorded in the financial statements of the Company. The balance at March 31, 2005 is $5,000. In April, balance was paid.

Collins Ink, in June 2004, obtained a judgment of $92,347 for unpaid invoices. The full amount is recorded in the financial statements of the Company. The balance at March 31, 2005 is $33,109.

Label Source, in June 2004, obtained a judgment of $121,037 for unpaid invoices. The full amount is recorded in the financial statements of the Company. The balance at March 31, 2005 is $87,314. As payments are behind the payment plan schedule, the Company was informed that plaintiff obtained a lawyer in New York.

USA Direct, in April 2004 obtained a $39,025 judgment related to a discontinued operation of the Company. This amount is fully accrued in the financial statements of the Company. In December 2004, the Company and USA Direct reached an agreement of $20,000 and a payment plan. The balance at March 31, 2005 is $10,000.

The New York State Department of Taxation in December 2004 provided a letter to QD Corporation, a discontinued unit that the Department claims that QD Corporation owes $7,936 in taxes and interest for corporate income taxes for the period ending December 31, 2002. After reviewing the consolidated tax return, QD Corporation is not required to file a separate

return. This information has been provided to New York State Department of Taxation in response to its December 2004 letter. As the Company believes it has properly reported the taxes to the State of New York, no additional taxes and charges are recorded.

Employees

In April 2003, Dialog Group received a summons from a Colorado State District Court seeking to enforce a former employee’s termination agreement. A settlement agreement was reached for $47,330. TDMI, a discontinued subsidiary, made payments of approximately $45,000 during 2003 and 2004. The balance at March 31, 2005, is $2000. The balance was paid in April.

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In April 2003, two former TDMI employees commenced arbitration proceeding against the Company relating to their termination of employment. The employees seek damages totaling $375,789. TDMI, a discontinued subsidiary, accrued $147,000 against this potential liability. The Company has accrued for additional legal fees to contest the claims. In January 2005, theCompany received notice from the American Arbitration Association Employment Arbitration Tribunal that reviewed the claims. Its decision was to award the claimants a total of approximately $478,000 including fees. The amount is fully accrued for in the financial statements of the Company. The balance at March 31, 2005 is $473,898. In April, the Company and the two former employees of TDMI executed a settlement agreement for $501,872 that includes a schedule of payments over two and half years that includes approximately $25,000 of interest.

Item 2Unregistered Sales of Equity Securities and Use of Proceeds

Class E Preferred Stock Dividends

During the second quarter, the Board decided to pay the quarterly dividends on the Company’s Class E Preferred Stock in shares of common stock. The dividends, at a rate of $400 per share per quarter, for the last three quarters of 2004 had not been paid. Pursuant to the provisions of the Class E Preferred Stock Declaration, shares of common stock, based on the average closing price for the shares during the last 20 trading days before the dividends were due, maybe paid in lieu of cash. During January a total of2,839,076 shares were issued to settle $109,000 of dividends due at that time. The holders of the Class E Preferred Stock had represented themselves in writing to be accredited investors who were purchasing those shares and any shares issued as dividends for their own investment and agreed to restrictions on resale placed with the Company’s transfer agent and the printing of a legend on his certificate. Because of these factors, this issuance is exempt from registration under the Securities Act as not involving a public distribution under section 4(2).

Consultants

In January the Company issued 1,456,298 shares of common stock to Knightsbridge Holdings, Inc. in connection with consulting services related to regaining Bulletin Board trading status. These shares were valued at $13,835.78.

Also in January, the Company issued 1,000,000 shares to Peter Nasca Associates, Inc. for public relations services. These shares were valued at $7,000.

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

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Employees

In January, the Company issued a total of 350,000 shares to two employees on the condition that they remain Company employees through the end of 2005. The shares are held in escrow to assure their compliance with their obligations. These shares are valued at $3,500. Both employees are accredited investors who accepted these shares for their own investment and agreed to restrictions on resale placed with the Company’s transfer agent and the printing of a legend on his certificate. Because of these factors, this issuance is exempt from registration under the Securities Act as not involving a public distribution under section 4(2).

Guarantees

Peter DeCrescenzo and Vincent DeCrescenzo, Sr. have guaranteed Company obligations and provided Company access to their personal credit cards, on which the Company carries substantial balances. Pursuant to Board of Directors resolutions, they have been issued 4,750,000 and 350,000 shares respectively as compensation for providing these guarantees and access to credit. These shares were values at $19,000 and $1,400 respectively. Both guarantors are accredited investors who accepted these shares for their own investment and agreed to restrictions on resale placed with the Company’s transfer agent and the printing of a legend on his certificate. Because of these factors, this issuance is exempt from registration under the Securities Act as not involving a public distribution under section 4(2).

Convertible Note

In January 2005, Dialog Group issued its convertible note to one purchaser. The note is due May 31, 2006, bears interest at a rate of 5% per annum, and is convertible with respect to both principal and interest at $0.025 commencing April 1, 2005. At the same time, Dialog Group granted to the purchaser a warrant to purchase 540,000 shares of common stock at $0.025 per share commencing April 1, 2005 and continuing until September 30, 2009. The purchaser represented itself in writing to be an accredited investor who was purchasing these notes for its own investment. The note and the warrant will bear a Securities Act legend and the purchaser has agreed, with respect to any common shares to be issued upon conversion or exercise, to restrictions on resale placed with the Company’s transfer agent and the printing of a legend on any certificates. Because of these factors, this sale is exempt from registration under the Securities Act as not involving a public distribution under section 4(2).

Other issues

See Current Report on Form 8-K, filed April 27, 2005, for details of other recent sales of securities.

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

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Item 6. Exhibits

Exhibits

Exhibit No.	Description
31(i)	302 Certification of Chief Executive Officer
31(ii)	302 Certification of Chief Financial Officer
32(i)	906 Certification of Chief Executive Officer
32(ii)	906 Certification of Chief Financial Officer

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SIGNATURES

In accordance with 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.

DIALOG GROUP, INC.

Date: May 20, 2005

By:/s/ Peter V. DeCrescenzo

Peter V. DeCrescenzo, President and Chief Executive Officer

Signature	Title	Date
/s/ Peter V. DeCrescenzo Peter V. DeCrescenzo	Chief Executive Officer	May 20, 2005
/s/Vincent DeCrescenzo Vincent DeCrescenzo	Chief Financial and Accounting Officer	May 20, 2005

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INDEX TO EXHIBITS

Exhibit Number	Page Number	Description
31(i)	--	302 Certification of Chief Executive Officer
31(ii)	--	302 Certification of Chief Financial Officer
32(i)	--	906 Certification of Chief Executive Officer
32(ii)	--	906 Certification of Chief Financial Officer

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