<PAGE>   1




                       SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549

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

                                    FORM 10-K

              Annual Report Pursuant To Section 13 or 15(d) Of The
                         Securities Exchange Act Of 1934

                    For the fiscal year ended March 31, 1998
                                              --------------
                         Commission file number 0-22210
                                                -------

                                SUMMA FOUR, INC.
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                                                           <C>       
                        Delaware                                                           02-0329497
(State or other jurisdiction of incorporation or organization)                (IRS employer identification number)
</TABLE>

               25 Sundial Avenue, Manchester, New Hampshire 03103
                     (Address of principal executive office)

       Registrant's telephone number, including area code: (603) 625-4050
                                                           --------------

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

           Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, $.01 par value
                          ----------------------------
                                (Title of Class)

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

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

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

The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $64,536,000 as of May 31, 1998. There were
6,601,981 shares of Common Stock outstanding as of May 31, 1998.

                         DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement (the "Definitive Proxy Statement") to
be filed with the Securities and Exchange Commission relative to the Company's
1998 annual meeting of stockholders are incorporated by reference in Part III.


                       Index to Exhibits begins on Page 37
                            Total Number of Pages 50


<PAGE>   2


PART I

Item 1 - Business

THE COMPANY

    Summa Four, Inc. (the "Company") is a leading provider of open, programmable
switches that enable worldwide telecommunications service providers to build and
deploy advanced networks and applications. Examples of services offered by
companies using Summa Four's products include core transport switching for
personal communications, wireless local loop and wireless networks, enhanced
service delivery for voice and fax messaging, single number routing, intelligent
800 calling, voice activated dialing, calling card applications, and automated
operator services. The Company's products are based on an open architecture and
have a universal application interface which supports the economical and rapid
introduction of these and other public telephone network applications.

    Many of the world's largest telecommunications service providers are
end-users of the Company's products, including AT&T, MCI, Sprint, Worldcom,
Qwest, the Regional Bell Operating Companies ("RBOCs"), GTE, British Telecom,
Mercury Communications (a division of Cable and Wireless), Telcom Finland,
Telstra (in Australia), Telefonica (in Spain), Singapore Telecom, Hong Kong
Telecom, and Mesatel (in Mexico). The Company sells its products directly to
end-users and through relationships with systems integrators, including IBM,
Unisys, Tandem, Vicorp, Mosaix, Comverse Technology, Digital Equipment, and
Interactive Technology. Through March 31, 1998, the Company had sold more than
1,900 programmable switches in 38 countries worldwide. For the year ended March
31, 1998, Unisys, Telefonica, and IBM represented approximately 11%, 7%, and 7%,
respectively of the Company's net revenues.

    Examples of specific applications of the Company's switches include the
following: (i) a RBOC has built one of the world's largest integrated voice
messaging systems; (ii) a US long distance telephone company has deployed a
voice activated dialing system used in conjunction with their calling card
offering; (iii) a Pacific Asia Public Network Operator has introduced a
network-based conference calling application; (iv) an International Simple
Reseller in Europe has constructed an alternative long distance network
connecting eight European cities; (v) a major wireless vendor has deployed PCS
services.

    The Company was incorporated under the laws of Delaware on June 28, 1976.
Its principal executive offices are located at 25 Sundial Avenue, Manchester, NH
03103-7251 and its telephone number is (603) 625-4050.

RECENT DEVELOPMENTS

    In July 1997, Jeffrey A. Weber, was appointed Vice President, Finance and
Chief Financial Officer of the Company. Mr. Weber was previously Senior Vice
President Finance, Operations & Finance and Treasurer of Computer Identics, a
manufacturer of bar code data collection products.

    In February 1998, the Company entered into a strategic license agreement
with Dialogic, Inc., a leading manufacturer of high-performance computer
telephony components. In April 1998, Summation, LLC. was formed as a jointly
owned entity. The principles are the Company which holds a majority interest,
and Junction, Inc., a Cupertino, California-based development company whose
principles have significant experience in the design and development of
telephony solutions. The purpose of these business relationships is to aid in
the development and deployment of what the Company believes will be the
industry's first telco-capable, programmable switching platform (Sigma) founded
on standards-based hardware and software. This fully-integrated, intelligent
platform is intended to enable telecommunications service providers to reduce,
significantly, the cost and time-to-market for delivery of advanced services.

    Litigation related to suits initiated by Claircom Communications, Inc.
("Claircom") against the Company and by the Company against Claircom and AT&T
Wireless Communications Group, Inc. in the States of Washington, New Hampshire,
and Delaware was settled in principle on April 20, 1998, and a definitive
settlement agreement was entered into by the parties on June 1, 1998. The terms
of the settlement included a $7 million payment to the Company. Legal fees of
approximately $2.4 million were paid from the settlement proceeds.


                                       2
<PAGE>   3


VCO OPEN PROGRAMMABLE SWITCHES

    The Company offers three switching products. The Company's VCO (virtual
central office) 80 Open Programmable Switch accounted for the majority of fiscal
year 1998. VCO/80 sales were supplemented by sales of the Company's VCO/20
switch, which is a lower capacity platform that provides the full functionality
of the VCO/80. The most recent member of the VCO family is the VCO/4K, which was
first introduced in March 1998. The VCO/4K provides twice the capacity of the
VCO/80 with half the system footprint.

    The VCO Series of switches can be deployed in a variety of ways -- as a
fully network-compliant switching foundation for an enhanced services platform,
as a core transport switch in wireline networks, and/or as a mobile switching
center, base station controller or local loop controller for wireless networks.

    The Company's open, programmable switches are controlled by a host computer
wherein the intelligent network service software resides. The VCO's open
architecture allows the developer to select the computer and operating system
that best suits an application. Each of the Company's VCO switches are comprised
of a non-blocking switching matrix, standards-based interface hardware and
software (to communicate to the public switched telephone networks), service
circuit cards (which perform various functions such as speech prompting and
recording) and call control software (which allows discrete control over all
elements of the voice and data call path). This standards-based, open
architecture platform enables a wide variety of developers to focus their
attention on application development through the application programmatic
interface (API), rather than on complex switching functions.

    The VCO switches are modular and scaleable and incorporate advanced
technologies such as SS7, ISDN, hierarchical call control and SNMP network
management.

MARKETING AND SALES

    In order to meet the needs of customers with diverse and complex network
requirements, the Company sells its products through the coordinated efforts of
its direct sales force and selected systems integrators, which include value
added resellers and an increasing number of emerging application developers.
These resellers are generally selected for their capacity to offer the Company's
products in combination with related products and services, as well as for their
capability to serve particular markets.

    The Company's products have been installed in countries on six continents.
International sales, as a percentage of total sales, were approximately 43% and
40% in fiscal 1998 and fiscal 1997, respectively. The Company believes the
increase in international sales is primarily attributable to the adoption of the
Company's products by public network operations worldwide, spurred by the rapid
expansion of markets and the expansion of the Company's international sales
operations in Europe and Asia.

BACKLOG

       The Company's backlog was approximately $6,224,000 and $6,215,000 at
March 31, 1998 and 1997, respectively. The Company includes in its backlog only
written orders for products and related services scheduled to be shipped or
rendered within one year.

CUSTOMER SUPPORT, SERVICE AND CONSULTING

    The Company services, repairs and provides technical support for its
products. In addition, the Company provides consulting services. A high level of
continuing customer service and support is integral to the Company's objective
of developing long-term relationships with its customers who require
uninterrupted operations of the Company's products. The Company's products
generally have warranties of 12 months. Support services include 24-hour
technical support, remote access diagnostic and servicing capabilities, extended
maintenance and support programs, comprehensive technical customer training,
customer documentation, field installation and emergency replacement. Special
consulting services are provided on a contractual basis whenever required.


                                       3
<PAGE>   4



PRODUCT DEVELOPMENT

    The Company's focus upon three major areas of development resulted in the
design and/or release of several important new products during fiscal 1998:

    -   VCO, hardware and software, improvements were developed including
        release version 4.2 which provides the ability to perform "Live
        Upgrades" to a system while calls continue to be processed. In addition,
        VCO products have received supplemental country certifications,
        particularly as relates to SS7 and ISDN connections. Various components
        of the VCO product are now certified in over 33 countries.

    -   The VCO/4K product, which will support up to 4,088 ports within a single
        25" enclosure, was developed and released to the market. Design of the
        product incorporated a new type of hardware simulation tool(s) in
        combination with new, object-oriented software development processes
        intended to result in high quality designs with reduced market delivery
        time-frames. The VCO/4K introduced two major card types, (i) the ICC
        card which is intended to allow multiple protocols to run on a single
        board supporting up to 16 spans and, (ii) the SPC card which is intended
        to allow the delivery of up to 32 services on a single DSP-based service
        card and requires the use of only one slot. Previous technology required
        the use of up to 32 slots for delivery of similar services.

    -   Development of the next generation Open Programmable Switch platform
        (Sigma), a telco capable standards based switch, was initiated during
        the first quarter of fiscal 1998. Design of this product incorporated
        the same hardware simulation and object oriented tools used to design
        the VCO/4K product. The new platform is intended to be capable of
        switching in excess of 16,000 ports based on new .35 micron ASIC
        technology. It is also designed and intended to be compatible with
        existing VCO and SDS (a prior product family) applications while
        accommodating third-party standard Compact PCI hardware and industry
        standard Application Program Interfaces (API) such as S-100 and TAPI.

    In fiscal years 1998, 1997 and 1996, the Company's research and development
expenditures were approximately $11,171,000, $10,478,000 and $9,131,000,
respectively. All such costs have been expensed as incurred. In addition, during
fiscal years 1998, 1997 and 1996, the Company received $0, $0 and $188,000,
respectively, from customer sponsored development projects which have been
recorded as a reduction to related research and development expenses. At March
31, 1998, 77 employees and 2 persons, retained on a contract basis for specific
projects, were engaged in product development.

    The Company recently entered into a strategic licensing agreement with
Dialogic, Inc. In addition, the Company has continued its relationship with
Junction, Inc. which has been formalized by the formation of Summation, LLC.
These business relationships are associated with the development of the Sigma
product. The expenses associated with these developmental activities are being
funded from operations.

    Summa Four believes that the ongoing, timely development of new products and
applications, and enhancements to existing products are essential for the
Company to compete in the programmable switch market, and the Company expects to
continue to devote substantial resources to research and development in fiscal
year 1999.


                                       4
<PAGE>   5



MANUFACTURING

    The Company's manufacturing operations consist of the purchase and
management of materials and sub- assemblies, final assembly, testing and quality
control. The Company uses independent third party contract manufacturing
companies, with whom the Company has had working relationships ranging from less
than one year to four years, to perform most of the production processes related
to the manufacture of printed circuit board subassemblies. The Company installs
software into the electronically programmable read-only memory (EPROM) of its
systems which enhances maintenance of quality control and security. This
manufacturing process enables the Company to configure the hardware and software
in combinations to meet a wide variety of customer requirements in a timely
manner. The Company uses automated testing equipment, as well as comprehensive
inspection and statistical process control testing, to assure the quality and
reliability of its products. Test programs, fixtures and stations are developed
and maintained by the Company and are capital assets of the Company. To date,
the Company has not experienced significant customer returns.

    The Company generally uses industry standard components for its products.
Certain components, including microprocessors and power supplies, are presently
being purchased from a single source or from limited sources. The Company has
been able to obtain adequate supplies of components for its products in a timely
manner from a number of regular sources of supply, or, when necessary, from
alternative sources of supply. The Company believes that in most of these cases,
alternative sources of supply are either currently available or could be
developed over a moderately short period of time. In addition, in certain
instances, components required for certain sub-assemblies used in the Company's
products are no longer being manufactured. The Company has and continues, on an
ongoing basis, to redesign such sub-assemblies in order to eliminate production
interruption that could occur if such components cannot be procured. The
inability to develop alternative sources, if required, or an inability to meet
demand, or an interruption in supply, or a significant increase in the price of
one or more components, would adversely affect the Company's operating results
and could adversely impact customer relationships.

    The Company is ISO 9001 and BABT (British Approvals Board for
Telecommunications) certified. Compliance audits are conducted at least
annually.

COMPETITION

    The market for programmable switching products is highly competitive and is
subject to price and margin pressures and rapid technological change. At
present, the Company's principal competition comes from Excel Switching
Corporation, Inc., the DTS Division of Harris Corp. and Redcom Laboratories. The
Company expects competition to increase in the future from existing competitors
in the programmable switching market and from other companies which may enter
the Company's existing or future markets, including major central office switch
vendors and PC-based switching vendors. In addition, the Company believes that
as the programmable switch market evolves, competition and/or partnering
arrangements may develop among the companies which currently offer products and
services to particular segments of the programmable switch market, including
private networking companies, central office switch manufacturers, voice
processing companies, PBX manufacturers and others. Many of these current and
potential competitors may have substantially greater financial, marketing and
technical resources than the Company. The development of such competition or of
such partnering arrangements could have a material adverse effect on the
Company's business, results of operation and financial condition.

    The Company believes that the principal competitive factors in the market
for programmable switching systems are: knowledge of the requirements applicable
to service providers; broad applications experience; technical benefits of
product design, including an open architecture to permit customer programming;
market distribution strategies; product flexibility and scalability;
reliability; responsiveness to customer needs; service and price.


                                       5
<PAGE>   6



PATENTS, PROPRIETARY RIGHTS AND LICENSES

    The Company relies on a combination of patent, copyright and trade secret
laws to establish and maintain its proprietary rights in its products. The
Company's products are generally sold pursuant to purchase and license
agreements which contain terms and conditions restricting unauthorized
disclosure or reverse-compiling of the proprietary software embodied in its
products. The Company is the owner of four active United States patents with
expirations ranging from the year 2001 to 2014 and has an application pending
for one additional patent in the United States, covering certain aspects of the
Company's products. No assurance can be given that the Company's patent
application will be granted, or if granted, will be upheld if challenged.
Although the Company relies, to a great extent, on trade secret protection for
much of its technology and has obtained confidentiality agreements from its
employees, there can be no assurance that third parties will not either
independently develop the same or similar technology, obtain unauthorized access
to the Company's proprietary technology or misuse the technology to which the
Company has granted access.

    Certain technology used in the Company's products is licensed from various
parties on a non-exclusive basis. Royalties due under these license agreements
have either been fully paid or are payable based upon units shipped. The
non-renewal of these licenses could have a material adverse effect on the
Company's operations.

    The telecommunications industry is characterized by the existence of a large
number of companies holding patents and frequent litigation based on allegations
of patent infringement. On May 27, 1998, Excel Switching Corporation filed a
patent infringement suit against the Company. See Item 3 - Legal Proceedings.
The Company is not aware of any other allegations of infringement by its
products or technology of the proprietary rights of others. The Excel
litigation, or any other allegation of infringement, regardless of its outcome,
could result in substantial cost to and diversion of effort by the Company. Any
infringement claims or litigation against the Company could materially and
adversely affect the Company's business, results of operations and financial
condition.

EMPLOYEES

    At March 31, 1998 the Company employed 207 persons. In addition, the Company
retained, on a contract basis, 4 persons for specific temporary projects. The
Company believes that its future growth and success will depend in large part
upon its ability to continue to attract and retain highly qualified personnel
who are in great demand. The Company has no collective bargaining agreement with
its employees.

Item 2 - Properties

    The Company's principal administrative, sales and marketing, development,
manufacturing and support facility is located in Manchester, New Hampshire and
consists of approximately 71,000 square feet under a lease that will expire in
August 1998. The Company is currently in negotiations to extend the lease. In
addition, the Company leases and/or occupies eight additional sales offices in
major metropolitan areas in the United States, and has international offices in
England, Singapore and Japan.


                                       6
<PAGE>   7


Item 3 - Legal Proceedings

    The previously reported litigation related to suits initiated by Claircom
Communications, Inc. ("Claircom") against the Company and by the Company against
Claircom and AT&T Wireless Communications Group, Inc. in the States of
Washington, New Hampshire, and Delaware was settled in principle on April 20,
1998, and a definitive settlement agreement was entered into by the parties on
June 1, 1998. Under the terms of this agreement, Claircom received a fully paid
up, unlimited, perpetual, irrevocable, and exclusive world-wide license to use
the disputed technology in all avionics applications, and the Company received a
fully paid up, unlimited, perpetual, irrevocable, and exclusive world-wide
license to use the disputed technology in all non-avionics applications. The
Company also received a cash payment of $7 million and incurred related legal
fees of approximately $2.4 million, which was paid from the settlement proceeds.

    On May 22, 1998, Excel Switching Corporation ("Excel") filed suit in U. S.
District Court for the district of Massachusetts alleging that certain
unspecified telecommunications products of the Company have infringed U.S.
Patent Nos. 5,546,453, 5,426,694, and 5,349,579 allegedly owned by Excel. The
Company has answered Excel's complaint, alleging that the Company has not
infringed the Excel patents, and that those patents are invalid. The Company has
also asserted appropriate counterclaims and intends to vigorously defend the
litigation. The litigation is, however, in its early stages, discovery has not
begun and its outcome is, therefore, uncertain at this time.

Item 4 - Submission of Matters To a Vote of Security Holders

    None.


                                       7
<PAGE>   8


PART II

Item 5 - Market For  Registrant's  Common  Equity and  Related  Stockholder
Matters

    The Company completed its Initial Public Offering on September 23, 1993. The
common stock of the Company is listed on the NASDAQ National Market ("NASDAQ")
and is traded in the over-the-counter market under the symbol "SUMA". The
following table sets forth the high and low bid prices for the Common Stock as
reported by Nasdaq for each of the periods indicated:

                                                High               Low
                                                ----               ---

         Fiscal Year 1998
         ----------------

         First Quarter                       $ 9 1/8           $ 7
         Second Quarter                      $11               $ 6 5/8
         Third Quarter                       $13 3/8           $ 8 7/8
         Fourth Quarter                      $12 3/8           $ 8 3/4

         Fiscal Year 1997
         ----------------

         First Quarter                       $20               $12 1/4
         Second Quarter                      $15 7/8           $11 3/8
         Third Quarter                       $14 1/8           $ 7 1/2
         Fourth Quarter                      $11 3/4           $ 7 3/8

       At March 31, 1998, there were approximately 80 stockholders of record.
This number does not reflect persons or entities who hold their stock in nominee
or "street name" through various brokerage firms. The Company estimates that
there are approximately 5,000 additional beneficial holders when such "street
name holders" are included.

Dividend Policy

    It is not, generally, the Company's policy to declare or pay cash dividends
on its common stock. The Company currently intends to retain substantially all
of its earnings to finance future growth, and therefore does not anticipate
paying any cash dividends in the foreseeable future.


                                       8
<PAGE>   9



Item 6 - Selected Financial Data

    The following table summarizes certain selected historical consolidated
financial data which should be read in conjunction with the Company's
consolidated financial statements and accompanying notes included elsewhere
herein.

<TABLE>
<CAPTION>
                                                                             Years ended March 31,
                                                                    (In thousands, except per share data)
                                                      1998            1997           1996           1995           1994
                                                    -------         -------        -------        -------        -------
<S>                                                 <C>             <C>            <C>            <C>            <C>    
Statements of Income Data:
Net revenues                                        $41,942         $44,316        $41,193        $37,136        $27,257
Cost of revenues (1)                                 19,491          18,144         14,467         12,367          9,114
                                                    -------         -------        -------        -------        -------
   Gross profit                                      22,451          26,172         26,726         24,769         18,143
Operating expenses (1):
Selling, general and administrative                  16,667          14,196         13,023         11,968          8,434
Research and development                             11,171          10,478          9,131          5,863          3,999
                                                    -------         -------        -------        -------        -------
   Total operating expenses                          27,838          24,674         22,154         17,831         12,433
Operating income (loss)                              (5,387)          1,498          4,572          6,938          5,710
Other income:

   Interest and other income, net                     1,371           1,219          1,502          1,540            605
                                                    -------         -------        -------        -------        -------
Income (loss) before income taxes                    (4,016)          2,717          6,074          8,478          6,315
Provision for (benefit from) income
 taxes (2)                                           (1,285)            869          2,309          3,055          1,028
                                                    -------         -------        -------        -------        -------
Net income (loss)                                   $(2,731)        $ 1,848        $ 3,765        $ 5,423        $ 5,287
                                                    =======         =======        =======        =======        =======

Net income (loss) per share - basic                 $ (0.48)        $  0.31        $  0.61        $  0.82        $  0.92

Weighted average common
   shares outstanding - basic                         5,704           5,951          6,175          6,605          5,738

Net income (loss) per share - diluted               $ (0.48)        $  0.30        $  0.59        $  0.77        $  0.82

Adjusted weighted average common
   shares outstanding - diluted                       5,704           6,095          6,417          7,013          6,418

Balance Sheet Data:
Cash and cash equivalents                           $ 2,083         $ 6,169        $ 4,681        $ 7,070        $ 2,761
Working capital                                      27,715          22,960         24,861         28,953         15,686
Total assets                                         56,596          56,453         57,699         55,175         46,635
Long term liabilities                                   938             676            863          1,250            205
Stockholders' equity                                 43,567          45,649         49,137         48,033         40,684
</TABLE>

(1) For the fiscal years ended March 31, 1996, 1995, and 1994, a portion of
    customer service ($650, $577 and $21, respectively) and research and
    development ($230, $0 and $0, respectively) expenses were reclassified to
    cost of revenues. In addition, corporate quality expenses of $214, $181 and
    $84, respectively, were reclassified from cost of revenues to selling,
    general and administrative expenses. These reclassifications had no effect
    on operating or net income. All fiscal 1998 and 1997 amounts are stated in a
    manner which is consistent with these reclassifications.

(2) In fiscal 1998 and 1997, the Company reduced its tax rate to 32% from
    various other rates in previous years.

(3) There were no cash dividends paid.


                                       9
<PAGE>   10


Item 7 - Management's Discussion and Analysis of Financial Condition and
         Results of Operations

    This Annual Report on Form 10-K contains forward-looking statements that
involve a number of risks and uncertainties. There are a number of factors that
could cause the Company's actual results to differ materially from those
forecasted or projected in such forward-looking statements, including those
discussed below. Investors are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date hereof.

    The following table sets forth, for the periods indicated, certain
consolidated financial data as a percentage of net revenues:

                                                   Years ended March 31,
                                             --------------------------------
                                              1998          1997         1996
                                             -----         -----        ----- 

Net revenues                                 100.0%        100.0%       100.0%
Cost of revenues                              46.5          40.9         35.1
                                             -----         -----        ----- 
Gross profit                                  53.5          59.1         64.9
Operating expenses:
   Selling, general and administrative        39.7          32.0         31.6
   Research and development                   26.7          23.7         22.2
                                             -----         -----        ----- 
       Total operating expenses               66.4          55.7         53.8
                                             -----         -----        ----- 
Operating income (loss)                      (12.9)          3.4         11.1
Other income:
   Interest and other income, net              3.3           2.7          3.6
                                             -----         -----        ----- 
Income (loss) before income taxes             (9.6)          6.1         14.7
Provision for income taxes                    (3.1)          1.9          5.6
                                             -----         -----        ----- 
Net income (loss)                             (6.5)%         4.2%         9.1%
                                             =====         =====        ===== 

RESULTS OF OPERATIONS

FISCAL 1998 COMPARED WITH FISCAL 1997

    Net revenues for fiscal 1998 decreased by $2.4 million (5%) to $41.9
million, from $44.3 million in fiscal 1997. Specifically, the decrease resulted
from comparatively lower domestic sales, particularly over the first half of the
year. Shipments to the Company's Inter-exchange Carrier (IXC) customers
continued at minimal levels. Overall revenue, however, increased significantly
over the last half of the year in comparison to the first half, buoyed by
significant fourth quarter sales of the newly released VCO/4K port switch.

    Cost of revenues consists of production, shipping, service, and warranty
costs. Gross profit decreased $3.7 million (14%) to $22.5 million for fiscal
1998, compared to $26.2 million in fiscal 1997. Gross margin decreased to 54% in
fiscal 1998 from 59% in fiscal 1997. The decrease in gross margin in fiscal 1998
resulted primarily from the sale of systems with lower margins, an increase in
service revenues, which typically generate lower gross margins, expediting and
reconfiguration costs related to delivery of production materials, and a
one-time write off of obsolete inventories at the end of the second quarter. The
Company does not believe the current gross margins are necessarily indicative of
future gross margins, which may be affected by the level of net revenues,
customer mix, cost of components, competitive pricing pressure, introduction of
new products, and discounts granted to high volume purchasers. Although the
Company's newly released VCO/4K switch may generate higher margins than
traditional products, the Company's gross margin(s) may experience some downward
pressure as a result of competitive pricing and increased use of indirect
channels of distribution.


                                       10
<PAGE>   11


    Selling, general and administrative expenses increased by $2.5 million (17%)
to $16.7 million in fiscal 1998 compared with $14.2 million in fiscal 1997. This
increase resulted primarily from special charges for Claircom legal expenses,
other costs related to personnel and severance activities, and the
reorganization and expansion of the Company's sales and support functions.

    Research and development expenses in fiscal 1998 increased by $0.7 million
(7%) to $11.2 million compared with $10.5 million in fiscal 1997. As a
percentage of net revenues, research and development expenses increased to 27%
in fiscal 1998 as compared with 24% in fiscal 1997. The increase in fiscal 1998
was primarily the result of the expansion of the Company's software engineering
staff, expanded development efforts for international markets, spending for
research and development directed towards the enhanced VCO/4K switch and,
through Summation, LLC, the development of a new line of standards-based
programmable switches. The Company believes that an increased level of
expenditures for research and development will continue through at least its
next fiscal year.

    Operating income decreased by $6.9 million to a loss of $5.4 million, or
(13)% of net revenues, in fiscal 1998, compared to $1.5 million, or 3% of net
revenues, in fiscal 1997. The decrease in operating income as a percentage of
net revenues was primarily the result of lower overall gross margins, a series
of one-time special charges incurred in the second quarter and increased
spending for research and development and other operational purposes.

    Net interest income of $1.4 million in fiscal 1998, which includes the
effect of foreign exchange gains and losses, increased by $0.2 million as
compared to fiscal 1997. The increase resulted principally from greater interest
earnings in combination with foreign exchange transactional gains.

    The Company's effective tax rate in fiscal 1998 and 1997 was 32%.

FISCAL 1997 COMPARED WITH FISCAL 1996

    Net revenues for fiscal 1997 increased by $3.1 million (8%) to $44.3
million, from $41.2 million in fiscal 1996. This increase resulted primarily
from increased shipments of VCO 80 systems resulting in part from the broadening
of the Company's indirect sales channels, the introduction of the VCO 20 systems
beginning in the second quarter of fiscal 1997, increased revenues from customer
support and training and growth in international shipments. These revenue
increases were partially offset by a decline in the sale of sub-assemblies for
existing system expansion, lower average selling prices realized as the result
of a price reduction initiated during the year and fewer shipments to the
Company's Inter-exchange Carrier (IXC) customers, which represented 25% of net
revenues in fiscal 1996 and 12% of net revenues in fiscal 1997. International
revenues in fiscal 1997 were $19.3 million, or 44% of net revenues, compared to
$13.2 million, or 32% of net revenues in fiscal 1996. During the fiscal year,
twenty-eight new customers were added.

    Cost of revenues consists of production, shipping, service and warranty
costs. Gross profit decreased $0.5 million (2%) to $26.2 million for fiscal
1997, compared to $26.7 million in fiscal 1996. Gross margin decreased to 59% in
fiscal 1997 from 65% in fiscal 1996. The decrease in gross margin in fiscal 1997
resulted primarily from increased discounts associated with growing indirect
distribution channels, a change in the product mix whereby more thinly
configured systems were shipped to customers, a price reduction implemented in
the second quarter of fiscal 1997 to stimulate sales to resellers and the
increase of service revenue as a percent of total revenues at lower gross
margins. A reclassification of a portion of customer service and research and
development operating expenses to cost of revenues are reflected in these
results for the fiscal year ended March 31, 1996. (See note 1 of the Notes to
Consolidated Financial Statements.)


                                       11
<PAGE>   12



    Selling, general and administrative expenses increased by $1.2 million (9%)
to $14.2 million in fiscal 1997 compared with $13.0 million in fiscal 1996. This
increase was primarily attributable to expansion of the Company's direct sales
and support organization and increased professional services costs. As a
percentage of net revenues, selling, general and administrative expenses
remained constant at 32%.

    Research and development expenses in fiscal 1997 increased by $1.4 million
(15%) to $10.5 million compared with $9.1 million in fiscal 1996. As a
percentage of net revenues, research and development expenses increased to 24%
in fiscal 1997 as compared with 22% in fiscal 1996. The increase in fiscal 1997
was primarily the result of the expansion of the Company's software engineering
staff, increased utilization of contract engineering resources and expanded
development efforts for international markets. This increased spending was
focused towards enhancing the functionality of the Company's VCO product lines,
supporting a higher number of useable ports with the introduction of Release 4.0
Generic Operating Software (1776 ports), increased international certifications,
and ISDN interfaces for Europe, U.S. and Japan. During fiscal 1997, no payment
was received and during fiscal 1996, $188,000 was received from customer
sponsored development projects and recorded as a reduction to the related
research and development expenses.

    Operating income decreased by $3.1 million to $1.5 million, or 3% of net
revenues, in fiscal 1997, compared to $4.6 million, or 11% of net revenues, in
fiscal 1996. The decrease in operating income as a percentage of net revenues
was primarily the result of lower gross margins and higher spending for research
and development.

    Net interest and other income of $1.2 million in fiscal 1997 decreased by
$0.3 million as compared to fiscal 1996. The reduction primarily resulted from
lower interest earned on a smaller investment base and foreign exchange
transaction losses.

    The Company's effective tax rate in fiscal 1997 was 32% compared with 38% in
fiscal 1996. This reduction was primarily due to credits attributable to
tax-exempt interest and increases in international sales made through its
foreign sales corporation.

LIQUIDITY AND CAPITAL RESOURCES

    At March 31, 1998, the Company had $27.2 million in cash and cash
equivalents and current and non-current investments as compared to $32.3 million
at March 31, 1997. The decrease of $5.1 million (16%) was consistent with
increased spending levels related to the enhancement of the Company's world-wide
sales force and the continuing development of new products. The ratio of current
assets to current liabilities was 3.3:1 at March 31, 1998 and 1997.

    Accounts receivable were $11.4 million and $10.3 million at March 31, 1998
and 1997, respectively. The increase of $1.1 million (11%) was primarily due to
increasing sales levels throughout Asia, Europe and Latin America which
typically require and/or result in longer payment cycles compared to domestic
sales.

    Inventory decreased by $1.1 million (20%) to $4.0 million at March 31, 1998
from $5.1 million at March 31, 1997. The reduction primarily the result of
reclassification to depreciable fixed assets, of field technical support and
consignment equipment formerly reported as inventories.


                                       12
<PAGE>   13



    Other current assets increased to $3.9 million at March 31, 1998 from $1.8
million at March 31, 1997. The increase of $2.1 million was primarily the result
of a reclassification of accrued income taxes totaling $1.3 million related to
the year's net operating loss, previously reported as a current liability, and
an increase in prepaid insurance costs of $0.3 million related to the purchase
of a multi-year policy.

    Gross fixed assets increased by $5.3 million (45%) to $17.1 million at March
31, 1998 from $11.8 million at March 31, 1997. The increase is primarily due to
the purchase of various engineering design and test equipment totaling $1.9
million, computer equipment totaling $1.9 million, and capitalization of spares
totaling $0.5 million. The Company expects that its capital expenditures,
including leasehold improvements, will continue to increase. At March 31, 1998,
there were no material commitments for future capital expenditures.

    Accounts payable increased by $1.8 million (76%) to $4.1 million at March
31, 1998 from $2.3 million at March 31, 1997. The increase was primarily due to
accelerated inventory purchases related to the release and production of new
product(s) and enhanced spending levels related to the continuing development of
new products.

    The Company maintains an unsecured line of credit in the amount of $6.0
million with a bank. At March 31, 1998, no borrowings were outstanding under
this line. Unless renewed, the line will expire in September 1998. This line
bears interest at the bank's prime interest rate per annum (8.50% at March 31,
1998). The Company anticipates that the line of credit will be renewed.

    The Company does not consider the impact of inflation on its business
activities to have been significant to date.

    Purchase commitments to suppliers of the Company were approximately $8.2
million and $9.7 million at March 31, 1998 and 1997, respectively. The Company
anticipates funding purchase commitments from operations.

    Since 1994, the Board of Directors has authorized the Company to make open
market purchases of up to 1,000,000 shares of the Company's common stock. During
the twelve month periods ended March 31, 1998 and 1997, the Company repurchased
11,565 shares at an average cost of $7.00 and 572,500 shares at an average cost
of $11.10, respectively. Since the original repurchase authorization in July
1994, a total of 905,065 shares have been purchased by the Company at an average
cost of $13.14 per share. During fiscal 1998 and 1997, the Company reissued
28,706 and 20,575 shares, respectively, at an average price of $6.42 and $10.71,
respectively, related to purchases under the Company's Employee Stock Purchase
Plan. The Company may repurchase additional shares of its stock depending on
market conditions, price per share and other factors.

    The Company believes that its cash equivalents, together with funds expected
to be generated from operations, will be sufficient to finance the Company's
operations through at least the fiscal year ending March 31, 1999.


                                       13
<PAGE>   14



YEAR 2000 COMPLIANCE

    The Company has initiated a program to assess the impact of the year 2000
issue on the Company's computer systems and applications as well as the
Company's product offerings. The Company believes that all of its product
offerings are currently Year 2000 compliant and that its primary internal
information systems used to support its operations are also year 2000 compliant.
However, the Company utilizes third party equipment, telecommunication products,
and other third party software applications which may or may not be year 2000
compliant. Although the Company is currently taking steps to address the impact,
if any, of the year 2000 issue surrounding such third party products, failure of
any critical third party products to operate properly in the year 2000 may have
a material adverse effect on the Company's results of operations or require the
Company to incur unanticipated expenses to remedy any such problem. In addition,
as the Company purchases many critical components from single or sole source
suppliers, failure of any such vendor to adequately address the consequences
relating to the year 2000 issue may have a material adverse effect on the
Company's business, financial condition, and results of operations.

CERTAIN FACTORS THAT MAY AFFECT RESULTS

The statements contained in this Report which are not purely historical and are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
statements regarding the Company's expectations, hopes, intentions or strategies
regarding the future. Forward-looking statements include, but are not limited
to: statements regarding future product revenue levels; statements regarding
future international sales; statements regarding future gross profit levels;
statements regarding the level of future selling, general and administrative,
research and development expenses; statements regarding product development,
introduction and marketing; and statements regarding the sufficiency of the
Company's existing cash and available-for-sale securities to meet future
operating cash requirements. All forward-looking statements included in this
document are based on information available to the Company on the date hereof,
and the Company assumes no obligation to update any such forward-looking
statements. It is important to note that the Company's actual results could
differ materially from those in such forward-looking statements.

The market for telecommunication switches is based upon sophisticated
technologies and is subject to rapid technological change, new product
introductions and a number of current and evolving standards. Products marketed
by certain competitors of the Company may have design and functionality
capabilities similar to and/or in certain respects, more advanced than the
Company's products. There can be no assurance that the Company will be able to
compete successfully in the future against existing or new competitors or that
the Company's operating results will not be adversely affected by increased
price competition and technological factors. The Company believes that remaining
competitive depends on a variety of factors, including product selection,
successful and timely completion of product development, and its ability to
offer products at competitive prices.

    Some additional factors that could cause actual results to differ materially
from expectations are set forth below.

    -   The Company has recently entered into a strategic license agreement with
        Dialogic, Inc. The Company has also recently formed Summation, LLC, a
        jointly owned entity whose principles are the Company which holds a
        majority interest, and Junction, Inc., a California based development
        company. The Company anticipates that these relationships will result in
        the development of a new line of standards based programmable switches
        targeted for fiscal 1999. The Company further anticipates that the
        expenses associated with these developmental activities will be funded
        from operations. There can be no assurance that these or other similar
        relationships will result in the development of salable product(s) which
        will be beneficial to the future of the Company or that products
        produced by these or other similar relationships will be developed in a
        cost-effective manner and be available for sale within the time frame
        required.


                                       14
<PAGE>   15



    -   The Company is dependent upon sole source suppliers for certain key
        components used in its products. The Company purchases these sole source
        components pursuant to purchase orders placed from time-to-time. No
        assurance can be given that sole source suppliers will devote the
        resources necessary to support the enhancement or continued availability
        of such components or that any such supplier will not encounter
        financial or operational difficulties. In addition, in certain
        instances, components required for certain sub-assemblies used in the
        Company's products are no longer being manufactured. The Company has
        historically been able to secure such components by utilizing its
        network of suppliers. However, the Company is redesigning such
        sub-assemblies in order to eliminate production interruptions that could
        occur if such components cannot be acquired. The Company is actively
        seeking alternative solutions to address potentially serious delays or
        shortages from its major component supplier. If delays or shortages
        occur and the Company is unable to effect alternative supply
        arrangements, its business and results of operations could be materially
        adversely affected.

    -   A variety of factors could influence the level of the Company's net
        revenues in a particular quarter, including general economic conditions
        in the telecommunications switching industry, the timing of significant
        orders, shipment delays, the introduction of new products by the
        Company, the introduction of new products by the Company's competitors,
        acquisitions by the Company, patterns of capital spending by customers
        and other factors, many of which are beyond the Company's control. Since
        a substantial portion of the expenses of the Company do not vary
        relative to sales levels, if net revenues in a particular quarter do not
        meet expectations, it could have a material adverse effect on the
        Company's results of operations.

    -   The Company's gross margin has declined in recent periods and may
        continue to decline as a result of potential sales price reductions,
        product mix, changing market conditions and increasing use of indirect
        distribution channels. Gross margins are also affected by other factors
        such as changes in the cost of materials, production and quality
        considerations, and the timing of new product introductions. The Company
        from time-to-time adds functionality and features that add cost to its
        products, and the Company's gross margins will be adversely affected to
        the extent the Company is not able to increase the price of such systems
        to offset such increased costs.

    -   The Company's future results of operation and financial condition will
        depend, in part, on its ability to obtain and maintain patent protection
        for its products, to preserve its trade secrets and to operate without
        infringing on proprietary rights of third parties, including the cost of
        defending against such claims (see Item 3 - Legal Proceedings). There
        can be no assurance that the Company will be able to obtain and/or
        adequately protect the intellectual property required for it to compete
        effectively.

    -   The Company's ability to develop marketable products and maintain a
        competitive position in light of continuing technological developments
        will depend, in large part, on its ability to attract and retain highly
        qualified management, technical and sales and marketing personnel.
        Competition for the services of these key employees is intense.

    -   The Company's international business is subject to a number of inherent
        risks, including the challenges of building and managing foreign
        operations, unique product requirements, fluctuations in the value of
        foreign currencies, import/export duties, and unexpected regulatory,
        economic or political changes in foreign markets.

    Because of these and other factors, past financial performance should not be
considered an indicator of future performance.


                                       15
<PAGE>   16


Item 8 - Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                    PAGE(S)

Report of Independent Accountants                                       17

Consolidated Balance Sheets as of March 31, 1998 and 1997               18

Consolidated Statements of Income for the Years Ended March 31, 
  1998, 1997 and 1996                                                   19

Consolidated Statements of Changes in Stockholders' Equity for 
  the Years Ended March 31, 1998, 1997 and 1996                         20

Consolidated Statements of Cash Flows for the Years Ended 
  March 31, 1998, 1997 and 1996                                         21

Notes to Consolidated Financial Statements                         22 - 35




                                       16
<PAGE>   17


                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Stockholders and Board of Directors of Summa Four, Inc.:

    We have audited the accompanying consolidated balance sheets of Summa Four,
Inc., as of March 31, 1998 and 1997, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended March 31, 1998. These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits.

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

    In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Summa Four,
Inc. as of March 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1998, in conformity with generally accepted accounting principles. In
addition, in our opinion, the 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
May 1, 1998



                                       17
<PAGE>   18



                                SUMMA FOUR, INC.
                           CONSOLIDATED BALANCE SHEETS
                             MARCH 31, 1998 AND 1997
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                              1998             1997
                                                                          --------         --------
<S>                                                                       <C>              <C>     
ASSETS

Current assets:
   Cash and cash equivalents                                              $  2,083         $  6,169
   Investments - short-term                                                 16,148            7,472
   Accounts receivable, net of allowance
       for doubtful accounts of  $452 at March 31, 1998 and
       $237 at March 31, 1997                                               11,398           10,278
   Inventories, net                                                          4,036            5,069
   Deferred income taxes - current                                           2,208            2,288
   Prepaid and other current assets                                          3,933            1,812
                                                                          --------         --------
       Total current assets                                                 39,806           33,088
Investments  - long-term                                                     8,987           18,686
Property and equipment, net                                                  6,842            4,265
Deferred income taxes - non-current                                            306              226
Other assets                                                                   655              188
                                                                          --------         --------
       Total assets                                                       $ 56,596         $ 56,453
                                                                          ========         ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable                                                       $  4,103         $  2,333
   Accrued payroll and related expenses                                      1,217            1,016
   Other accrued expenses                                                    3,393            3,704
   Deferred revenues                                                         3,378            3,075
                                                                          --------         --------
       Total current liabilities                                            12,091           10,128
Other long-term liabilities                                                    938              676

Commitments and contingencies (Note 8)

Stockholders' equity:
   Preferred stock, $.01 par value;  authorized 1,000,000 shares
       - no shares issued
   Common stock, $.01 par value; authorized 20,000,000 shares;
   issued 6,601,697 shares at March 31, 1998 and
       6,411,762 at March 31, 1997                                              66               64
   Additional paid-in capital                                               44,285           43,657
   Retained earnings                                                        10,423           13,154
   Cumulative translation adjustment                                           (28)
   Unrealized gains (losses) on investments                                    (15)              43
   Common stock in treasury, 835,290 shares at March 31, 1998
       and 852,431 shares at March 31, 1997, at cost                       (11,164)         (11,269)
                                                                          --------         --------

       Total stockholders' equity                                           43,567           45,649
                                                                          --------         --------
       Total liabilities and stockholders' equity                         $ 56,596         $ 56,453
                                                                          ========         ========
</TABLE>



   The accompanying notes are an integral part of these consolidated financial
                                  statements.


                                       18
<PAGE>   19



                                SUMMA FOUR, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                    YEARS ENDED MARCH 31, 1998, 1997 AND 1996
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                     1998            1997            1996
                                                   -------         -------         -------

<S>                                                <C>             <C>             <C>    
Net revenues                                       $41,942         $44,316         $41,193
Cost of revenues(*)                                 19,491          18,144          14,467
                                                   -------         -------         -------
   Gross profit                                     22,451          26,172          26,726
Operating expenses(*):
   Selling, general and administrative              16,667          14,196          13,023
   Research and development                         11,171          10,478           9,131
                                                   -------         -------         -------
   Total operating expenses                         27,838          24,674          22,154
                                                   -------         -------         -------
Operating income (loss)                             (5,387)          1,498           4,572
Other income:
   Interest and other income, net                    1,371           1,219           1,502
                                                   -------         -------         -------
Income (loss) before income taxes                   (4,016)          2,717           6,074
Provision for (benefit from) income taxes           (1,285)            869           2,309
                                                   -------         -------         -------

Net income (loss)                                  $(2,731)        $ 1,848         $ 3,765
                                                   =======         =======         =======

Net income (loss) per share - basic                $ (0.48)        $  0.31         $  0.61

Weighted average common
   shares outstanding - basic                        5,704           5,951           6,175


Net income (loss) per share - diluted              $ (0.48)        $  0.30         $  0.59

Adjusted weighted average common
   shares outstanding - diluted                      5,704           6,095           6,417
</TABLE>

(*) Reflects the reclassification of certain expenses. See note 1
    (Reclassification).

   The accompanying notes are an integral part of these consolidated financial
                                  statements.


                                       19
<PAGE>   20


<TABLE>
<CAPTION>
                                                                    SUMMA FOUR, INC.
                                               CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                                        YEARS ENDED MARCH 31, 1998, 1997 AND 1996
                                                            (In thousands, except share data)

                                   Common Stock       Additional               Cumulative     Unrealized
                               -------------------      Paid-In    Retained   Translation   Gains (Losses)   Treasury  Stockholders'
                                 Shares     Amount      Capital    Earnings    Adjustment   on Investments    Stock       Equity
                               ---------   -------    ----------   --------   -----------   --------------   --------  -------------

<S>                            <C>         <C>          <C>         <C>           <C>           <C>          <C>           <C>    
Balance, March 31, 1995        6,334,437   $    63      $42,718     $ 7,541       $(140)        $(966)       $ (1,183)     $48,033
                                                                                            
Issuance of common stock                                                                    
   under stock option and                                                                   
   purchase plans                 47,000         1          410                                                   176          587
Income tax benefit from                                                                     
   stock option plans                                       459                                                                459
Foreign currency translation                                                         15                                         15
Purchase of treasury stock                                                                                     (4,149)      (4,149)
Net income                                                            3,765                                                  3,765
Unrealized gains on                                                                         
   investments                                                                                    427                          427
                               ---------   -------      -------     -------       -----         -----        --------      -------
Balance, March 31, 1996        6,381,437   $    64      $43,587     $11,306       $(125)        $(539)       $ (5,156)     $49,137
                               =========   =======      =======     =======       =====         =====        ========      =======
                                                                                            
Issuance of common stock                                                                    
   under stock option and                                                                   
   purchase plans                 30,325                     88                                                   246          334
Income tax benefit from                                                                     
   stock option plans                                       (18)                                                               (18)
Foreign currency translation                                                        125                                        125
Purchase of treasury stock                                                                                     (6,359)      (6,359)
Net income                                                            1,848                                                  1,848
Unrealized gains on                                                                         
   investments                                                                                    582                          582
                               ---------   -------      -------     -------       -----         -----        --------      -------
Balance, March 31, 1997        6,411,762   $    64      $43,657     $13,154       $   -         $  43        $(11,269)     $45,649
                               =========   =======      =======     =======       =====         =====        ========      =======
                                                                                            
Issuance of common stock                                                                    
   under stock option and                                                                   
   purchase plans                189,935         2          628                                                   105          735
Foreign currency translation                                                        (28)                                       (28)
Net (loss)                                                           (2,731)                                                (2,731)
Unrealized (losses) on                                                                      
   investments                                                                                    (58)                         (58)
                               ---------   -------      -------     -------       -----         -----        --------      -------
Balance, March 31, 1998        6,601,697   $    66      $44,285     $10,423       $ (28)        $ (15)        (11,164)     $43,567
                               =========   =======      =======     =======       =====         =====        ========      =======
</TABLE>

   The accompanying notes are an integral part of these consolidated financial
                                  statements.


                                       20
<PAGE>   21
                                SUMMA FOUR, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                    YEARS ENDED MARCH 31, 1998, 1997 AND 1996
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                    1998             1997             1996
                                                                  -------          -------          -------
<S>                                                               <C>              <C>              <C>    
Cash flows from operating activities:
   Net income (loss)                                              $(2,731)         $ 1,848          $ 3,765
                                                                  -------          -------          -------
Adjustments to reconcile net income to net
   cash provided by operating activities:
   Depreciation and amortization                                    2,751            2,429            1,951
   Deferred income taxes                                               --             (526)            (223)
   Tax benefit from stock option plans                                 --              (18)             459
   Provision for doubtful accounts                                    215              150              274
   Provision for excess and obsolete inventory                       (161)             112              257
Changes in operating assets and liabilities:
   Accounts receivable                                             (1,335)            (837)          (1,174)
   Inventory                                                        1,194           (1,829)          (1,243)
   Prepaid and other current assets                                (2,121)            (737)            (293)
   Other assets                                                      (468)             152             (269)
   Accounts payable                                                 1,770              558             (432)
   Accrued payroll and related expenses                               201               59                9
   Deferred revenues                                                  602            1,202              613
   Other accrued expenses and other liabilities                      (311)             454            1,075
                                                                  -------          -------          -------
   Total adjustments                                                2,337            1,169            1,004
                                                                  -------          -------          -------
       Net cash provided by (used in) operating activities           (394)           3,017            4,769
                                                                  -------          -------          -------
Cash flows from investing activities:
   Purchases of property and equipment                             (5,327)          (2,939)          (2,469)
   Sales (purchases) of investments, net                              965            7,466           (1,108)
                                                                  -------          -------          -------
       Net cash provided by (used in)
           investing activities                                    (4,362)           4,527           (3,577)
                                                                  -------          -------          -------

Cash flows from financing activities:
   Proceeds from the sale of stock under stock
       option plans                                                   735              334              587
   Purchase of treasury stock                                          --           (6,359)          (4,149)
   Principal payments under capital lease obligations                 (37)             (31)             (19)
                                                                  -------          -------          -------
       Net cash provided by (used in) financing activities            698           (6,056)          (3,581)
Effect of exchange rate on cash                                       (28)              --               --
Net increase (decrease) in cash and cash equivalents               (4,086)           1,488           (2,389)
Cash and cash equivalents, beginning of period                      6,169            4,681            7,070
                                                                  -------          -------          -------
Cash and cash equivalents, end of period                          $ 2,083          $ 6,169          $ 4,681
                                                                  =======          =======          =======
Supplemental disclosure of cash flow information
   Cash paid for interest                                         $    10          $    19          $     7
   Cash paid for income taxes                                     $   752          $   791          $   984
Supplemental disclosure of non-cash investing 
   and financing activities:
   Equipment acquired under capital lease obligations             $    --          $    --          $   174
</TABLE>


  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       21


<PAGE>   22


                                SUMMA FOUR, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  Summary of Significant Accounting Policies:

    Basis of Presentation

    The Company is active in only one business segment: developing, marketing,
manufacturing and supporting its open, programmable switches that enable
telecommunications service providers to build and deploy advanced wireline and
wireless services. The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All intercompany transactions
have been eliminated.

    Cash Equivalents

    Cash equivalents consist of certificates of deposit and money market funds
which have maturities of 90 days or less when acquired, and are carried at cost
which approximates fair value. At March 31, 1998 and 1997, the Company had
approximately $1,296,000 and $5,487,000, respectively, maintained at three
institutions.

    Inventory

    Inventory is stated at the lower of cost (first-in, first-out) or market
using a standard costing system, which approximates cost. Provision is made for
excess or potentially obsolete inventory and other inventory valuation concerns
in the period such matters are identified.

    Property and Equipment

    Property and equipment are stated at cost. Depreciation is provided for on
the straight-line method for financial reporting purposes and on accelerated
methods for income tax purposes over the estimated useful lives of the assets.
The estimated useful lives of property and equipment for financial reporting
purposes are as follows: office furniture and equipment, 3-5 years; computers, 
3 years; and machinery and equipment, 2-10 years. Leasehold improvements are
amortized over the shorter of their estimated useful life or the lease term.

    Expenditures for additions, renewals and betterments of property and
equipment are capitalized. Expenditures for maintenance and repairs are expensed
as incurred. Upon retirement or sale, the cost of the disposed asset and the
related accumulated depreciation are removed from the account and any resulting
gain or loss is credited or charged to operations.

    Research and Development

    Research and development costs are expensed as incurred. The Company follows
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed", in accounting for
product development expenditures. To date, costs eligible for capitalization
have been immaterial and have not been capitalized.

    Revenue Recognition

    Revenue from product sales is recognized upon shipment. Revenue under
maintenance agreements is recognized ratably over the life of the related
agreements. Deferred revenue consists of customer deposits and amounts received
for extended maintenance agreements. For the year ended March 31, 1996, payment
of $188,000 was received for customer sponsored development projects and
recorded as a reduction to related research and development expenses. There were
no such receipts for the years ended March 31, 1998 and 1997.


                                       22
<PAGE>   23




    Income Taxes

    The Company utilizes the liability method of accounting for income taxes as
set forth in Statement of Financial Accounting Standards No. 109 ("SFAS No.
109"), "Accounting for Income Taxes". SFAS No. 109 is an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns. The measurement of deferred
tax assets is reduced by a valuation allowance if, based upon weighted available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized.

    Product Warranty

    The Company generally provides a twelve month warranty on its hardware and
software products. Anticipated warranty costs are accrued upon shipment and are
charged to cost of sales.

    Net (Loss) Income per Share

    The Company has adopted Statement of Financial Accounting Standards No. 128
(SFAS No, 128), "Earnings per Share," which requires the presentation of basic
and diluted earnings per share. Basic earnings per share excludes the dilutive
effect of common equivalent securities and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if stock options were exercised that resulted in the
issuance of common stock that then shared in the earnings of the entity. In
accordance with SFAS 128, as of March 31, 1998, the Company has restated all
prior period earnings per share data presented.

    Translation of Foreign Currencies

    Assets and liabilities of foreign subsidiaries, which are denominated in
currencies other than the U.S. dollar, are remeasured into U.S. dollars at rates
of exchange in effect at the end of the fiscal year except non-monetary assets
and liabilities which are remeasured using historical exchange rates. Revenue
and expense amounts are remeasured using an average of exchange rates in effect
during the year, except those amounts related to non-monetary assets and
liabilities, which are remeasured at historical exchange rates. Net realized and
unrealized gains and losses resulting from currency remeasurement are included
in operations.

    Reclassification

    A portion of customer service ($650,000) and research and development
($230,000) expenses were reclassified to cost of revenues for the fiscal year
ended March 31, 1996. In addition, in 1996, corporate quality expenses of
$214,000 were reclassified from cost of revenues to selling, general and
administrative expenses. These reclassifications had no effect on operating
income or net income.

    Certain items in the consolidated financial statements for the years ended
March 31, 1997 and 1996 have been reclassified to conform with the March 31,
1998 presentation.

    Concentration of Credit Risk

    Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
investments and accounts receivable. The Company places its cash in what it
believes are credit-worthy financial institutions. The Company's investments
consist primarily of obligations of the U.S. Government, States and political 
sub-divisions.


                                       23
<PAGE>   24



    Credit risk with respect to trade receivables is concentrated because the
Company sells to a limited number of large customers. The Company's customer
base includes telephone companies in North and South America, Asia, and Europe
and a number of smaller applications developers and systems integrators.
Although the Company is directly affected by the condition of the
telecommunication industry, management does not believe that significant credit
risk currently exists and monitors this risk on a regular basis. The carrying
amount of the trade receivables approximates fair value and any credit losses
have been within management's expectations.

    Risks and Uncertainties

    Certain components used in the Company's products are purchased from a
single or limited source, and certain technology used in the Company's products
is licensed from third parties. In addition, in certain instances, components
required for certain sub-assemblies used in the Company's products are no longer
being manufactured. The Company has historically been able to secure such
components by utilizing its network of suppliers; however, the Company is
redesigning such sub-assemblies in order to eliminate production interruption
that could occur if such components cannot be procured. The Company often
obtains parts from only one or limited sources, even where multiple sources are
available, to maintain quality control and strengthen the working relationship
with these parties. These purchases and licensing agreements are made under
existing contracts or purchase orders. However, the inability to develop
alternative sources, if required, due to the vendor's inability to deliver on
schedule, or the licenser's termination of certain licenses, could have a
material adverse effect on the Company's financial condition, results of
operations, and/or cash flows.

    The Company's increasing international business is subject to a number of
inherent risks, including the challenges of building and managing foreign
operations, unique product requirements, fluctuations in the value of foreign
currencies, import/export duties, and unexpected regulatory, economic or
political changes in foreign markets.

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

    Recent Pronouncements

    In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting
Comprehensive Income." SFAS No. 130 requires that changes in comprehensive
income be shown in a financial statement that is displayed with the same
prominence as other financial statements. SFAS No. 130 will be effective for
annual periods beginning after December 15, 1997 and the Company will adopt its
provisions in fiscal 1999. Reclassification for earlier periods is required for
comparative purposes. The Company is currently evaluating the impact SFAS No.
130 will have on its financial statements; however, because SFAS No. 130
requires only additional disclosure, the Company does not expect a material
impact on its financial position or results of operations.

    In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS No. 131"), "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 supersedes SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise." SFAS No.
131 includes requirements to report selected segment information quarterly and
entity-wide disclosures about products and services, major customers, and the
material countries in which the entity holds assets and reports revenues. SFAS
No. 131 will be effective for annual periods beginning after December 15, 1997
and the Company will adopt its provisions in fiscal 1999. Reclassification for
earlier periods is required, unless impracticable, for comparative purposes. The
Company is currently evaluating the impact SFAS No. 131 will have on its
financial statements; however, because SFAS No. 131 requires only additional
disclosure, the Company does not expect a material impact on its financial
position or results of operations.


                                       24
<PAGE>   25



    In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued the Statement of Position ("SOP") 97-2, "Software Revenue
Recognition," which superseded SOP 91-1. SOP 97-2 has not changed the basic
rules of revenue recognition but does provide more guidance, particularly with
respect to multiple deliverables and "when and if available" products. SOP 97-2
is effective for transactions entered into for annual periods beginning after
December 15, 1997. The Company will adopt SOP 97-2 in fiscal 1999 and has not
yet determined its impact.

    In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132 (SFAS No. 132"), "Employers'
Disclosures about Pensions and Other Post-retirement Benefits." SFAS No. 132 is
effective for fiscal years beginning after December 15, 1997. The Company has
not assessed the impact of SFAS 132 on its financial statement disclosures.

    In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued the Statement of Position ("SOP") 98-1, "Internal Use
Software," which provides guidance on the accounting for the costs of software
developed or obtained for internal use. SOP 98-1 is effective for fiscal years
beginning after December 15, 1998. Management does not expect the statement to
have a material impact on its financial position or results of operations.

2. Investments

    The Company determines the appropriate classification of its debt and equity
securities at the time of purchase, and re-evaluates such designations as of
each balance sheet date. The Company has classified its debt and equity
securities as available-for-sale. These securities are carried at fair value
with the unrealized gains and losses reported in a separate component of
stockholders' equity. The amortized cost of debt securities is adjusted for the
amortization of premiums and the accretion of discounts to maturity. Such
amortization is included in interest income.

       A summary of available-for-sale securities at March 31, 1998 is as
follows (in thousands):

                                             Unrealized  Unrealized   Estimated
                                    Cost        Gains      Losses     Fair Value
                                   -------   ----------  ----------   ----------
Obligations of U.S. Government
   and Agencies                    $ 1,956                  $(21)       $ 1,935
Obligations of States and
   political sub-divisions          23,194       $14          (8)        23,200
                                   -------       ---        ----        -------

         Total                     $25,150       $14        $(29)       $25,135
                                   =======       ===        ====        =======

       A summary of available-for-sale securities at March 31, 1997 is as
follows (in thousands):

                                             Unrealized  Unrealized   Estimated
                                    Cost        Gains      Losses     Fair Value
                                   -------   ----------  ----------   ----------
Obligations of U.S. Government
   and Agencies                    $ 4,130                 $ (90)       $ 4,040
Obligations of States and                                
   political sub-divisions          21,776      $ 17         (34)        21,759
Other                                  209       150          --            359
                                   -------      ----       -----        -------
         Total                     $26,115      $167       $(124)       $26,158
                                   =======      ====       =====        =======

    The realized gains and losses on sales of securities calculated on the
specific identification method were $238,137 and ($235) and $20,251 and
($252,228) for the years ended March 31, 1998 and 1997, respectively. The net
adjustment to unrealized gains (losses) on available-for-sale securities
included as a separate component of stockholders' equity totaled $(14,823) and
$43,356 at March 31, 1998 and 1997, respectively.


                                       25



<PAGE>   26

    The amortized cost and estimated fair value of debt securities at March 31,
1998, by contractual maturity, are shown below (in thousands). Actual maturities
may differ from contractual maturities because the issuers of these securities
may have the right to prepay obligations without penalty.

                                                                    Estimated
         Maturity                                      Cost         Fair Value
         --------                                     -------       ----------
                                                    
Due within one year                                   $16,163        $16,148
Due between one through five years                      8,987          8,987
                                                      -------        -------
                                                      $25,150        $25,135
                                                      =======        =======
                                                   
3.  Inventories:

    Inventories at March 31, 1998 and 1997 consisted of the following (in
thousands):

                                                         1998           1997
                                                         ----           ----
    Raw materials                                      $1,898         $1,652
    Work-in-process                                     1,309          1,795
    Finished goods                                        829          1,622
                                                       ------         ------
                                                       $4,036         $5,069
                                                       ======         ======

4.  Property and Equipment:                          

    Property and equipment at March 31, 1998 and 1997 consisted of the following
(in thousands):

                                                       1998           1997
                                                     --------        -------
    Machinery and equipment                          $ 10,237        $ 7,573
    Office furniture and equipment                      6,421          4,531
    Leasehold improvements                                471            427
                                                     --------        -------
       Total                                           17,129         12,531
    Less: accumulated depreciation and amortization   (10,287)        (8,266)
                                                     --------        -------
                                                     $  6,842        $ 4,265
                                                     ========        =======

    Property and equipment includes $174,000 of office equipment acquired under
capital leases in fiscal 1996 on which accumulated depreciation totaled $90,000
and $52,000 at March 31, 1998 and 1997 respectively. Depreciation and
amortization expense associated with property and equipment totaled
approximately $2,751,000, $2,429,000 and $1,951,000 for the years ended March
31, 1998, 1997 and 1996, respectively.

5.  Income Taxes:

    The provision for income taxes includes federal, state and foreign income
taxes currently payable and those deferred because of temporary differences
between the financial statement and tax bases of assets and liabilities. The
provision for the years ended March 31, 1998, 1997 and 1996 was as follows (in
thousands):

                                       1998            1997            1996
                                     -------          ------          ------
    Current
       U.S. Federal                  $(1,697)         $  825          $1,972
       Non-U.S                           444             369             147
       State                             (32)            200             413
                                     -------          ------          ------
                                     $(1,285)         $1,394          $2,532
    Deferred
       U.S. Federal                       --          $ (458)         $ (194)
       Non-U.S                            --              --              --
       State                              --             (67)            (29)
                                     -------          ------          ------
                                          --            (525)           (223)
                                     -------          ------          ------
                                     $(1,285)         $  869          $2,309
                                     =======          ======          ======


                                       26
<PAGE>   27



    The following is a reconciliation between the federal statutory rate and the
effective tax rate:

                                                 1998        1997        1996
                                                -----        ----        ----
Statutory income tax rate                       (34.0)%      34.0%       34.0%
State income taxes, net of federal benefit       (0.3)        7.4         7.4
Tax effect of foreign activities                  1.0         2.1        (0.7)
Disallowed meals and entertainment deductions     1.6         0.7         0.4
Tax-exempt interest income                       (5.2)       (9.7)       (3.6)
Change in valuation allowance                      --        (6.7)       (2.4)

Other                                             4.9         4.2         2.9
                                                -----        ----        ----
     Effective tax rate                         (32.0)%      32.0%       38.0%
                                                =====        ====        ==== 

    The Company's deferred tax assets and liabilities and related valuation
allowance were as follows at March 31, 1998 and 1997, respectively (in
thousands):

                                                  1998           1997
                                                 ------         ------
Current deferred tax assets (liabilities)
    Deferred revenues                            $1,019         $  978
    Other allowances and reserves                   531            780
    Allowance for doubtful accounts                 187             93
    Warranty reserve                                362            334
    Depreciation                                    175            125
    Unrealized gains (losses) on securities         (66)           (22)
                                                 ------         ------
       Total current deferred tax assets          2,208          2,288
    Valuation allowance                              --             --
                                                 ------         ------
       Net current deferred tax assets           $2,208         $2,288
                                                 ======         ======
                                                
Non-current deferred tax assets                 
    Deferred revenues                            $  306         $  226
                                                 ------         ------
    Non-current deferred tax assets              $  306         $  226
                                                 ======         ======


    The Company had unrealized losses resulting from SFAS No. 115 of
approximately $539,000 at March 31, 1996. The valuation allowance at March 31,
1996 related to the unrealized capital losses for that year. No such allowance
was recorded at March 31, 1997 and 1998.

6.  Line of Credit

    As of March 31, 1998, the Company had a $6,000,000 unsecured line of credit
with a bank. Unless renewed, the line expires in September 1998. This line bears
interest at the bank's prime interest rate per annum (8.50% at March 31, 1998)
and the bank charges a 1/8% per annum commitment fee. There were no borrowings
under this line at March 31, 1998 and 1997. The bank agreement contains
covenants, including requirements as to the maintenance of certain levels of
working capital and net worth, and prohibitions on the payment of cash
dividends.


                                       27
<PAGE>   28

7.  Stockholders' Equity

    Incentive Stock Option Plans

    The Company has incentive stock option plans (1995 Employee Stock Incentive
Plan, 1993 Employee Stock Incentive Plan, and the 1992 Employee Stock Incentive
Plan) which provide for the granting of options to purchase an aggregate of
1,200,000 shares of the Company's common stock. While the majority of the
options granted are incentive stock options, the plans allow for the granting of
non-qualified stock options. Under these plans, shares of the Company's Common
Stock have been reserved for the issuance of a variety of awards, including
stock options, appreciation rights, and restricted and unrestricted stock grants
to employees, officers, directors, consultants, and advisors. Under each of the
Company's stock option plans, options expire ten years from date of grant.

    Under these plans, options are granted at the fair market value of the stock
on the date of grant (110% of fair market value in certain cases) and are
conditional upon continued employment with the Company. The options generally
become exercisable in increments of 33.3% per year over three years.

    As of March 31, 1998, incentive and non-qualified stock options to purchase
725,112 shares and 100,293 shares, respectively, were outstanding under these
plans. Of these outstanding options, incentive stock options to purchase 120,759
shares and non-qualified stock options to purchase 35,948 shares were
exercisable.

    In addition to these incentive stock option plans, previous plans provide
for the granting of options to purchase an aggregate of 508,375 shares of the
Company's Common Stock. As of March 31, 1998, options to purchase 3,500 shares
were outstanding, of which 3,500 were exercisable.

    Non-Qualified Stock Option Plans

    The Company has a non-qualified stock option plan which provides for the
granting of options to purchase 31,500 shares of the Company's common stock. As
of March 31, 1998, no options to purchase shares were outstanding.

   The 1993 Director Stock Option Plan authorized a maximum of 63,000 shares of
the Company's Common Stock to be issued. Under this plan, each director who was
not an employee of the Company receives upon his initial election an option to
purchase 7,000 shares of stock at an exercise price equal to the fair market
value of the stock on the date of grant. Such options vest immediately with
respect to twenty percent of such shares, with the remainder vesting in four
equal annual installments commencing one year after the date of grant.

   In addition, on the date of each Annual Meeting, each director receives an
option, which vests immediately, to purchase 2,500 shares of the Company's stock
at an exercise price equal to the fair market value at the date of the Annual
Meeting. As of March 31, 1998, options to purchase 48,650 shares were
outstanding, of which 44,450 were exercisable.


                                       28

<PAGE>   29


   Stock Purchase Plan

   Under the Employee Stock Purchase Plan, employees of the Company are eligible
to participate in semi-annual plan offerings for which payroll deductions may be
used to purchase shares of Common Stock. The purchase price of the shares is the
lower of 85% of the fair market value of the stock on the day the offering
commences or 85% of the fair market value of the stock on the day the offering
terminates. The Company has reserved 175,000 shares of stock under this Plan.
For the years ended March 31, 1998, 1997, and 1996 employees purchased 28,706,
20,575, and 15,339 shares at an average price of $7.69, $10.71 and $12.61,
respectively.

   Stock-Based Compensation

   In October 1995, Statement of Financial Accounting Standards No. 123 ("SFAS
No. 123"), "Accounting for Stock-Based Compensation", was issued. SFAS No. 123
is effective for periods beginning after December 15, 1995. The Company has
adopted the disclosure only alternative available under the provisions of SFAS
No. 123 in fiscal 1997. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates as
calculated in accordance with SFAS No. 123, the Company's net income and diluted
earnings per share for the years ended March 31, 1998, 1997 and 1996 would have
been reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                 1998                                1997
                    -------------------------------     -------------------------------
                    Net Income   Earnings Per Share     Net Income   Earnings Per Share
                    ----------   ------------------     ----------   ------------------
                  (In thousands)                      (In thousands)

    <S>              <C>              <C>                  <C>             <C>  
    As reported      $(2,731)         $(0.48)              $1,848          $0.30
    Pro forma        $(3,481)         $(0.61)              $1,108          $0.18


<CAPTION>
                                 1996
                    -------------------------------
                    Net Income   Earnings Per Share
                    ----------   ------------------
                  (In thousands)

    <S>                <C>             <C>  
    As reported        $3,765          $0.59
    Pro forma          $3,005          $0.47
</TABLE>

   The fair value of each stock option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions: an expected option life of six years, expected volatility of 65%
and a weighted-average risk-free interest rate of 6.10%, 6.26%, and 6.26% in the
years ended March 31, 1998, 1997, and 1996. The Company has not paid dividends
nor does it expect to pay dividends in the near future. The weighted average
fair value of stock options granted for the years ended March 31, 1998, 1997,
and 1996 was $5.66, $6.93, and $12.22 respectively.




                                       29
<PAGE>   30



   A summary of the Company's stock option plan activity since April 1, 1995 is
presented below:

                                                 Number        Weighted Average
                                               of Shares        Exercise Price
                                               ---------       ----------------

Options outstanding at March 31, 1995           493,100              $11.27
                                               --------

Granted                                         313,585              $19.47
Canceled                                        (55,605)             $21.72
Exercised                                       (47,000)             $ 7.04
                                               --------

Options outstanding at March 31, 1996           704,080              $14.38
                                               --------

Granted                                         344,400              $10.73
Canceled                                       (178,012)             $21.59
Exercised                                       (30,325)             $ 3.76
                                               --------

Options outstanding March 31, 1997              840,143              $11.74
                                               ========

Granted                                         524,905              $ 8.75
Canceled                                       (297,558)             $15.27
Exercised                                      (189,935)             $ 3.32
                                               --------

Options outstanding March 31, 1998              877,555              $10.57
                                               ========


    The following table summarizes information about stock options outstanding
at March 31, 1998:

<TABLE>
<CAPTION>
                      Options Outstanding                                Options Exercisable
                 -----------------------------                      ------------------------------
                              Weighted-Average
    Range of        Number       Remaining       Weighted-Average      Number     Weighted-Average
Exercise Prices  Outstanding  Contractual Life    Exercise-price    Exercisable    Exercise Price
---------------  -----------  ----------------   ----------------   -----------   ----------------

 <S>               <C>           <C>                  <C>               <C>             <C>   
 $ 2.00-$ 4.00       3,500       4.06 years           $ 2.57            3,500           $ 2.57
 $ 4.01-$ 8.00     223,231       9.24 years           $ 7.53           12,500           $ 7.88
 $ 8.01-$12.00     514,936       8.93 years           $ 9.66          106,212           $ 9.61
 $12.01-$18.00      81,450       7.48 years           $14.20           44,957           $14.12
 $18.01-$27.00      40,650       6.79 years           $24.29           29,130           $24.32
 $27.01-$41.00      13,788       6.00 years           $34.13            8,358           $34.13
                   -------                                            -------

                   877,555                                            204,657
                   =======                                            =======
</TABLE>

    Shareholders Rights Plan

    On February 9, 1995, the Board of Directors voted to adopt a Shareholders
Rights Plan, applicable to shareholders of record on March 10, 1995. In
connection with the adoption of this Plan, the Company declared a dividend
distribution of one Right for each outstanding share of the Company's
outstanding stock. Each Right entitles the registered holder to purchase from
the Company a unit consisting of one one-thousandth of a share of Series A
Junior Participating Stock, $.01 par value (the "Preferred Stock"). The Rights
are not exercisable until the Distribution Date and will expire at the close of
business on February 8, 2005, unless earlier redeemed or exchanged by the
Company. The primary purpose of the plan is to ensure that all shareholders of
the Company receive fair treatment in the event of an unsolicited offer to
acquire control of the Company.





                                       30


<PAGE>   31

8. Earnings Per Share:

    Basic earnings per share excludes the dilutive effect of common equivalent
securities and is computed by dividing income available to common shareholders
by the weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur if
stock options were exercised that resulted in the issuance of common stock that
then shared in the earnings of the entity. In accordance with SFAS 128, as of
March 31, 1998, the Company has restated all prior period earnings per share
data presented. A reconciliation between basic earnings per share and diluted
earnings per share is as follows (in thousands except per share amounts):


<TABLE>
<CAPTION>

                                                  1998            1997          1996
                                                 -------        -------       --------
<S>                                          <C>                 <C>                 <C>

Basic

Weighted average common shares outstanding         5,704          5,951         6,175
                                                 =======        =======       =======

Net income (loss)                                $(2,731)       $ 1,848       $ 3,765

Per share amount                                 $ (0.48)       $  0.31       $  0.61
                                                 =======        =======       =======


Diluted

Weighted average common shares outstanding         5,704          5,951         6,175

 Net effect of dilutive stock options -

based on the treasury stock method                     0            144           242
                                                 -------        -------       -------
      Total                                        5,704          6,095         6,417
                                                 =======        =======       =======

Net income (loss)                                $(2,731)       $ 1,848       $ 3,765

Per share amount                                 $ (0.48)       $  0.30       $  0.59
                                                 =======        =======       =======

</TABLE>

At March 31, 1998 approximately 95,000 options were not included in the diluted
earnings per share calculation as a result of their antidilutive effect.

                                       31
<PAGE>   32

9. Commitments and Contingencies:

    The Company leases its facilities and certain equipment under operating
lease agreements which expire at various dates through fiscal year 2003. The
agreement for the New Hampshire headquarters will terminate on August 31, 1998.
The Company is negotiating a renewal of the current lease. Rental expense
amounted to approximately $912,000, $814,000 and $675,000 in fiscal 1998, 1997
and 1996, respectively.

    Future minimum annual commitments under such leases are as follows (in
thousands):

<TABLE>
<CAPTION>


    Years ending March 31,                             Amount
    ----------------------                             ------
    <S>                                               <C>    

         1999                                           $408
         2000                                            121
         2001                                             91
         2002                                             52
         2003                                             52
                                                       -----
                                                        $724
                                                       =====
</TABLE>

    Purchase commitments to suppliers of the Company were approximately $8.2
million and $9.7 million at March 31, 1998 and 1997, respectively.

    The previously reported litigation related to suits initiated by Claircom
Communications, Inc. ("Claircom") against the Company and by the Company against
Claircom and AT&T Wireless Communications Group, Inc. in the States of
Washington, New Hampshire, and Delaware was settled in principle on April 20,
1998, and a definitive settlement agreement was entered into by the parties on
June 1, 1998. Under the terms of this agreement, Claircom received a fully paid
up, unlimited, perpetual, irrevocable, and exclusive world-wide license to use
the disputed technology in all avionics applications, and the Company received a
fully paid up, unlimited, perpetual, irrevocable, and exclusive world-wide
license to use the disputed technology in all non-avionics applications. The
Company also received a cash payment of $7 million and incurred related legal
fees of approximately $2.4 million, which was paid from the settlement proceeds.

    On May 22, 1998, Excel Switching Corporation ("Excel") filed suit in U.S.
District Court for the district of Massachusetts alleging that certain
unspecified telecommunications products of the Company have infringed U.S.
Patent Nos. 5,546,453, 5,426,694, and 5,349,579 allegedly owned by Excel. The
Company has answered Excel's complaint, alleging that the Company has not
infringed the Excel patents, and that those patents are invalid. The Company has
also asserted appropriate counterclaims and intends to vigorously defend the
litigation The litigation is, however, in its early stages, discovery has not
begun and its outcome is, therefore, uncertain at this time.

10.401(k) Profit Sharing Plan:

    The Company maintains a qualified 401(k) profit sharing plan. The plan
covers substantially all employees who have satisfied a one month service
requirement and have attained the age of 21. The Company has a number of fund
options, including: fixed income, balanced, equity income, growth and income,
growth, and international funds available under the Plan. Vesting in the Company
contributions to the Plan is based on a three-year schedule (33.3% per year).

    Employee contributions may range from 1-15% of compensation with a
discretionary matching Company contribution not to exceed 6% of compensation.
The Company contributed approximately $179,000, $167,000 and $142,000 relating
to this plan during fiscal 1998, 1997 and 1996, respectively. The Company, at
its discretion, may also make an optional contribution for any plan year,
although no such contribution has been made to date.

                                       32
<PAGE>   33

11.Geographic Data and Major Customers:

    A significant portion of the Company's revenues are derived from a limited
number of customers. Approximately 25% of the Company's revenues for the fiscal
year ended March 31, 1998, were from three customers accounting for 11%, 7% and
7% of total revenues. Approximately 29% of the Company's revenues for the fiscal
year ended March 31, 1997 were from three customers accounting for 12%, 9% and
8% of total revenues. Approximately 32% of the Company's revenues for the fiscal
year ended March 31, 1996 were from three customers accounting for 14%, 9% and
9% of total revenues. From time-to-time a significant portion of the Company's
accounts receivable balance may be with these or other major customers. At March
31, 1998, approximately $2,932,000 was outstanding from two customers and at
March 31, 1997, approximately $2,064,000 was outstanding from two customers.
Consideration is given to the financial position of these customers when
determining the appropriate allowance for doubtful accounts. The Company's
standard payment terms are net 30 days. Generally, all customers are subject to
these terms. At the Company's discretion, in order to accommodate a customer's
request, the Company has selectively extended payment terms. At March 31, 1998,
the Company had approximately $5.6 million of accounts receivable with other
than standard payment terms.

    The Company has three foreign subsidiaries which sell the Company's products
in their respective geographic areas. Revenues are reflected in the geographic
areas from which the sales are made. Financial information, summarized by
geographic areas, greater than 10%, is as follows (in thousands):


<TABLE>
<CAPTION>

                                    United
                                    States        Europe         Asia Pacific     Elimination    Consolidated
                                    ------        ------         ------------     -----------    ------------              
<S>                                <C>              <C>             <C>              <C>             <C>
Year ended March 31, 1998
-------------------------
Total revenues
-   Unaffiliated                   $24,796         $7,435          $9,711                            $41,942
-   Inter-Company transfers          6,267             --              --           $(6,267)              --
                                   -------         ------          ------           -------          -------
       Total                       $31,063         $7,435          $9,711           $(6,267)         $41,942   
                                                                           
Income from operations             $(9,965)        $1,412          $3,167           $    (1)         $(5,387)
Identifiable assets                $53,308         $4,299          $  997           $(2,008)         $56,596


                                   United
                                   States          Europe          Asia Pacific   Elimination    Consolidated
                                   ------          ------          ------------   -----------    ------------
Year ended March 31, 1997
-------------------------
Total revenues

-   Unaffiliated                   $29,717         $5,539          $ 9,060                           $44,316
-   Inter-Company transfers          3,040             --          $ 1,677          $(4,717)              --
                                 ---------         ------          -------          -------          -------
       Total                       $32,757         $5,539          $10,737          $(4,717)         $44,316
                                                                         

Income from operations             $ 1,966         $  699          $   121          $   (69)         $ 2,717
Identifiable assets                $54,616         $3,225          $   255          $(1,643)         $56,453

</TABLE>


                                       33
<PAGE>   34


<TABLE>
<CAPTION>

                                    United
                                    States         Europe       Asia Pacific     Elimination     Consolidated
                                    ------         ------       ------------     -----------     ------------
<S>                                   <C>              <C>             <C>              <C>             <C>
Year ended March 31, 1996
-------------------------
Total revenues

-   Unaffiliated                   $ 33,609        $5,792          $ 1,792                           $41,193
-   Inter-Company transfers           3,667            --          $    --          $(3,667)              --
                                   --------        ------          -------          -------          -------
       Total                       $ 37,276        $5,792          $ 1,792          $(3,667)         $41,193


Income from operations             $  5,669        $  289          $    90               26          $ 6,074
Identifiable assets                $ 56,977        $2,577          $   233          $(2,088)         $57,699

</TABLE>

    The Company's operations are structured to achieve consolidated objectives.
As a result, significant interdependencies and overlaps exist among the
Company's operating entities. Accordingly, the revenues, operating income and
identifiable assets shown for each geographic area may not be indicative of the
amounts which would have been reported if the operating entities were
independent of one another.

    The United States intercompany transfers represent shipments of systems to
international subsidiaries. The intercompany transfers are made at prices which
approximate cost plus an appropriate markup, and are eliminated from
consolidated revenues.

    Corporate assets, consisting of investments, totaled approximately $25.1
million and $26.2 million at March 31, 1998 and 1997 respectively, and are
included in the identifiable assets in the United States where the Company's
headquarters are located.

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


<TABLE>
<CAPTION>


            Years ended March 31,               1998       1997        1996
            ---------------------             ------     ------      ------
<S>                                           <C>        <C>         <C> 
                Asia/Pacific                  $7,332    $ 9,060      $3,453
                Canada                           872      2,931       2,082
                Other                          1,356         77         119
                                              ------    -------      ------
                   Total                      $9,560    $12,068      $5,654
                                              ======    =======      ======

</TABLE>

                                       34
<PAGE>   35

12.Other Items

    Other accrued expenses at March 31, 1998 and 1997 included accrued sales
taxes of approximately $226,000, and $250,000, respectively. In addition, other
accrued expenses at March 31, 1998 and 1997 included a warranty accrual of
$928,000 and $856,000, respectively.

    Other assets at March 31, 1998 and 1997 included approximately $566,000 and
$120,000, respectively, of employee notes receivable relating to the purchase of
the Company's Common Stock.

    During the fourth quarter of fiscal 1997, the Company reduced its effective
tax rate for fiscal 1997 to 32%. The 32% effective tax rate remained the same
for fiscal 1998.

13.Supplemental Selected Quarterly Financial Data (unaudited)

<TABLE>
<CAPTION>

                                                   (In thousands, except per share data)
                                                            Quarters ended
                                    
                                          June 30      Sept. 30       Dec. 31      March 31
                                          -------      ---------      -------      --------
<S>                                      <C>             <C>          <C>          <C>                   
1998:     

    Net revenues                         $ 9,276         $10,116      $11,023      $11,527
    Gross profit                           4,942           4,760        6,078        6,671
    Net income (loss)                    $  (566)        $(1,909)     $  (310)     $    54
    Net income (loss)               
                                    
       per share - basic                 $ (0.10)        $ (0.34)     $ (0.05)     $  0.01
                                    
    Weighted average common         
       shares outstanding - basic          5,571           5,648        5,683        5,766
                                    
    Net income (loss)               
       per share - diluted               $ (0.10)        $ (0.34)     $ (0.05)     $  0.01
                                    
    Weighted average common         
       shares outstanding - diluted        5,571           5,648        5,683        5,861
                                  

1997:
    Net revenues                         $11,189         $ 9,982      $11,624      $11,521
    Gross profit                           7,063           6,010        6,718        6,381
    Net income (loss)                    $   744         $   195      $   457      $   452
    Net income (loss)
       per share - basic                 $  0.12         $  0.03      $  0.08      $  0.08

    Weighted average common
       shares outstanding - basic          6,082           6,007        5,913        5,800

    Net income (loss)
       per share - diluted               $  0.12         $  0.03       $ 0.08      $  0.08

    Weighted average common
       shares outstanding - diluted        6,314           6,203        6,062        5,944
</TABLE>


Item 9 - Changes in and  Disagreements  With  Accountants on Accounting and
         Financial Disclosure

   None.

                                       35
<PAGE>   36

PART III

Item 10 - Directors and Executive Officers of the Registrant

    Incorporated by reference from portions of the Definitive Proxy Statement
for its 1998 Annual Meeting of Stockholders.

Item 11 - Executive Compensation

    Incorporated by reference from portions of the Definitive Proxy Statement
for its 1998 Annual Meeting of Stockholders.

Item 12 - Security Ownership of Certain Beneficial Owners And Management

    Incorporated by reference from the portion of the Definitive Proxy Statement
entitled "Security Ownership of Certain Beneficial Owners and Management".

Item 13 - Certain Relationships and Related Transactions

    None.

PART IV

Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K

       (a)    (1)  Financial Statements

                   See index in Part II,  Item 8

              (2)  Financial Statement Schedule

                   Schedule II         Valuation and Qualifying Accounts

                        All other schedules for which provision is made in the
                   applicable accounting regulations of the Securities and
                   Exchange Commission are not required under the related
                   instructions or are inapplicable, and therefore have been
                   omitted.

              (3)   Exhibits

                                       36
<PAGE>   37

                                        EXHIBITS
<TABLE>
<CAPTION>

  Exhibit No.              Description
  -----------              -----------                                       
  <S>        <C> <C>                                                         
  3.1          - Amended and Restated Certificate of Incorporation of the
                 Registrant. (1)
  
  3.2          - Amended and Restated By-laws of the Registrant. (2)

  4.1          - Specimen Certificate representing the Registrant's Common
                 Stock. (1)

  4.2          - Rights Agreement, dated February 22, 1995, by and among the
                 Registrant and state Street Bank and Trust Company. (4)
 
 10.1          - Lease Agreement, dated July 18, 1990, by and between the
                 Registrant and Northern Manchester Trust. (1)

 10.2          - Lease Agreement, as amended, dated December 21, 1992, by and
                 between the Registrant and 1100 Corporation. (1)

 10.3          - Lease Agreement, dated February 15,1993 by and between the
                 Registrant and Atrium Executive Center, Inc. (1)

 10.4          - Registration Agreement, dated July 25, 1984, as amended, by and
                 among the Registrant and certain investors.(originally filed as
                 exhibit 10.5) (1)

 10.5          - Purchase Agreement, dated July 25, 1984, by and among the
                 Registrant and certain investors. (originally filed as exhibit
                 10.6) (1)

 10.6          - 1993 Stock Incentive Plan, as amended. (originally filed as
                 exhibit 10.8) (1)

 10.7          - 1993 Employee Stock Purchase Plan, as amended. (originally
                 filed as exhibit 10.9) (1)

 10.8          - 1993 Director Stock Option Plan, as amended. (originally filed
                 as exhibit 10.9) (7)

 10.9          - Stock Option Plan of August 1, 1992. (originally filed as
                 exhibit 10.11) (1)

 10.10         - Incentive Stock Option Plan of January 1, 1985. (originally
                 filed as exhibit 10.12) (1)

 10.11         - Stock Option Agreement, dated July 23, 1987, by and between the
                 Registrant and Mr. William M. Scranton. (originally filed as
                 exhibit 10.13) (1)

 10.12         - Non-Qualified Employee Option Agreement, dated July 23, 1987,
                 by and between the Registrant and Mr. Barry R. Gorsun.
                 (originally filed as exhibit 10.14) (1)

 10.13         - Promissory Note, dated April 1, 1991, by Summa Four, Ltd.
                 (originally filed as exhibit 10.19) (1)

 10.14         - Letter Agreement, dated October 15, 1992, by and between the
                 Registrant and Fleet Bank of Massachusetts, N.A., as modified.
                 (originally filed as exhibit 10.21) (1)

 10.15         - Customer Purchase Agreement, dated November 20, 1992, by and
                 between the Registrant and Sprint/United Management Company.
                 (originally filed as exhibit 10.22) (1)

 10.16         - Customer Purchase Agreement, dated September 11, 1991, by and
                 between the Registrant and United States Advanced Networks.
                 (originally filed as exhibit 10.24) (1)
</TABLE>

                                       37
<PAGE>   38

                                    EXHIBITS (CONT'd)

<TABLE>
<CAPTION>

Exhibit No.                           Description
-----------                           -----------                               
<S>          <C> <C>                                                            
 10.17         - Customer Purchase Agreement, dated October 10, 1990, by and
                 between the Registrant and Unisys Corporation. (originally
                 filed as exhibit 10.25) (1)
 10.18         - Resale Agreement, dated November 5, 1992, by and between the
                 Registrant and IBM Canada Ltd. (originally filed as exhibit
                 10.26) (1)
 10.19         - Agreement, dated October 14, 1992, by and between the
                 Registrant and Claircom Communications Group, L.P. (originally
                 filed as exhibit 10.27) (1)
 10.20         - Release, Settlement and License Agreement, dated November 2,
                 1992, by and among the Registrant, Omnitel Corporation, Aspect
                 Telecommunications Corporation and Richard L. Scully.
                 (originally filed as exhibit 10.28) (1)
 10.21         - Product Development and Licensing Agreement, dated January 19,
                 1990, by and between the Registrant and The Telephone
                 Connection, Inc. (originally filed as exhibit 10.30) (1)
 10.22         - Amendment dated August 31, 1994 to Lease Agreement dated July
                 18, 1990 with Northern Manchester Trust. (originally filed as
                 exhibit 10.35) (3)
 10.23         - Amendment dated August 23, 1995 to Lease Agreement dated July
                 18, 1990 with Northern Manchester Trust. (originally filed as
                 exhibit 10.38) (6)
 10.24         - 1997 Executive Incentive Bonus Plan. (originally filed as
                 exhibit 10.26) (8)
 10.25         - +Employment Agreement, dated July 23, 1996, by and between the
                 Registrant and Thomas A. St. Germain. (originally filed as
                 exhibit 10.27) (8)
 10.26         - +Employment Agreement, dated July 22, 1996, by and between the
                 Registrant and Theresa Pratt Wang. (originally filed as exhibit
                 10.28) (8)
 10.27         - +Employment Agreement, dated July 23, 1996, by and between the
                 Registrant and John H. Shaw. (originally filed as exhibit
                 10.29) (8)
 10.28         - +Employment Agreement, dated July 23, 1996, by and between the
                 Registrant and Michael G. Hluchyj. (originally filed as exhibit
                 10.30) (8)
 10.29         - +Employment Agreement, dated July 22,1996, by and between the
                 Registrant and Kendrick A. Estey. (originally filed as exhibit
                 10.31) (8)
 10.30         - +Employment Agreement, dated October 18, 1996, by and between
                 the Registrant and Todd P. Hasselbeck. (originally filed as
                 exhibit 10.32) (8)
 10.31         - +Agreement, dated November 16, 1996, by and between the
                 Registrant and Barry R. Gorsun. (originally filed as exhibit
                 10.33) (8)
 10.32         - +Employment Agreement, dated November 21, 1996, by and between
                 the Registrant and Robert A. Degan. (originally filed as
                 exhibit 10.34) (8)
</TABLE>

                                       38
<PAGE>   39

                                    EXHIBITS (CONT'd)

<TABLE>
<CAPTION>

Exhibit No.                        Description
-----------                        -----------                                 
  <S>        <C> <C>                                                           
 10.33         - Amendment dated June 12, 1997, to Agreement dated November 16,
                 1996 by and between the Registrant and Barry R. Gorsun.
                 (originally filed as exhibit 10.6) (11)

 10.34         - Loan Modification Agreement, dated July 28, 1993, by and
                 between Registrant and Fleet Bank of Massachusetts, N.A.
                 (originally filed as exhibit 10.32) (2)

 10.35         - Promissory Note, dated July 28, 1993, by and between the
                 Registrant and Fleet Bank of Massachusetts, N.A. (originally
                 filed as exhibit 10.33) (1)

 10.36         - Amendment, dated August 2, 1994, to Letter Agreement dated
                 October 15, 1992, by and the Registrant and Fleet Bank of
                 Massachusetts, N.A.(5)

 10.37         - Contract for Services Agreement, dated November 27, 1996, by
                 and between the Registrant and D2 Technologies, Inc. (9)

 10.38         - Supply Agreement with Addendum, dated February 17, 1997, by and
                 between the Registrant and ADC Newnet. (9)

 10.39         - Amendment dated August 30, 1996, to Letter Agreement dated
                 October 15, 1992, by and between the Registrant and Fleet Bank
                 of Massachusetts, N.A. (9)

 10.40         - +1995 Stock Option Plan. (7)

 10.41         - +Amendment, Dated August 24, 1995, to Letter Agreement dated
                 August 24, 1995, by and between the Registrant and Fleet Bank
                 of Massachusetts, N.A. (originally filed as exhibit 10.43) (7)

 10.42         - +Employment Agreement, dated February 14, 1998, by and between
                 the Registrant and Philip T. Coates.

 10.43         - Employment Agreement, dated June 26, 1997, by and between the
                 Registrant and Jeffrey A. Weber. (originally filed as exhibit
                 10.5) (11)

 10.44         - +Employment Agreement, dated April 15, 1997, by and between the
                 Registrant and Richard Swee. (originally filed as exhibit
                 10.36) (10)

 10.45         - Customer Agreement, dated June 30, 1997, by and between the
                 Registrant and Mentor Graphics Corporation. (originally filed
                 as exhibit 10.3) (11)

 10.46         - Lease Agreement dated June 2, 1997, by and between the
                 Registrant and Atrium Executive Center, Inc. (originally filed
                 as exhibit 10.4) (11)

 10.47         - Lease Agreement, dated July 3, 1997, by and between the
                 Registrant and Bay Business Centers, Inc. (originally filed as
                 exhibit 10.1) (12)

 10.48         - Products and Services Agreement, dated August 4, 1997, by and
                 between the Registrant and D2 Technologies, Inc. (originally
                 filed as exhibit 10.2) (12)

 10.49         - Software License and Maintenance Agreement, dated August 4,
                 1997, by and between the Registrant and D2 Technologies, Inc.
                 (originally filed as exhibit 10.3) (12)
</TABLE>


                                       39
<PAGE>   40

                                    EXHIBITS (CONT'd)


<TABLE>
<CAPTION>

Exhibit No.                         Description
-----------                         -----------                                  
  <S>        <C> <C>                                                            
 10.50         - Loan Modification Agreement, dated December 19, 1997, by and
                 between the Registrant and Fleet National Bank. (originally
                 filed as exhibit 10.1) (13)

 10.51         - Promissory Note, dated December 19, 1997, by and between the
                 Registrant and Fleet National Bank.(originally filed as exhibit
                 10.2) (13)

 10.52         - Joint Development Agreement, dated June 11, 1997, by and
                 between the Registrant and Junction, Inc. (originally filed as
                 exhibit 10.37) (10)

 21            - Subsidiaries of the Registrant.

 23            - Consent of Coopers & Lybrand, L.L.P.

 27.1          - Financial Data Schedule

 27.2          - Restated Financial Data Schedule for Fiscal Year Ended March
                  31, 1997.

 27.3          - Restated Financial Data Schedule for Fiscal Year Ended March
                 31, 1996.
</TABLE>

(1) Incorporation herein by reference to the Registrant's Registration Statement
    on Form S-1 (File No. 33-66602), as declared effective by the Securities and
    Exchange Commission (the "Commission") on September 23, 1993.

 +  Management contract or compensatory plan or arrangement filed as an exhibit
    pursuant to Item 14(c) of this report.

              The exhibits filed as part of this Annual Report on Form 10-K are
       listed on the exhibit index immediately preceding such exhibits, which
       exhibit index is incorporated herein by reference. The Company's current
       management contracts and executive compensation plans and arrangements
       are listed in the exhibit index incorporated herein by reference at
       exhibit numbers 10.6-10.12, 10.25-10.33, 10.40, 10.42-10.44.

    The Company will provide copies of the exhibit index, exhibits and Schedule
    II to shareholders upon request.

(2) Incorporation herein by reference to the Registrant's Amendment No. 2 to its
    Annual Report on Form 10-K for fiscal year ended March 31, 1994 filed with
    the Commission on June 19, 1998.

(3) Incorporation herein by reference to the Registrant's Annual Report on Form
    10-K for the fiscal year endedMarch 31, 1995, filed with the Commission on
    June 27, 1995.

(4) Incorporation herein by reference to the Registrant's Report on Form 8-K
    filed with the Commission on March 6, 1995.

(5) Incorporation herein by reference to the Registrant's Amendment No. 2 to its
    Annual Report on Form 10-K for the fiscal year ended March 31, 1995 filed
    with the Commission on June 19, 1998.

(6) Incorporation herein by reference to the Registrant's Annual Report for the
    fiscal year ended March 31, 1996 on Form 10-K filed with the Commission on
    June 17, 1996.

(7) Incorporation herein by reference to the Registrant's Amendment No. 1 to its
    Annual Report for the fiscalended March 31, 1996 on Form 10-K filed with the
    Commission on June 19, 1998.

(8) Incorporation herein by reference to the Registrant's Annual Report for the
    fiscal year ended March 31, 1997 on form 10-K filed with the Commission on
    June 23, 1997.

                                       40
<PAGE>   41

                                    EXHIBITS (CONT'D)

(9) Incorporation herein by reference to the Registrant's Amendment No. 1 to its
    Annual Report for the fiscal year ended March 31, 1997 on form 10-K filed
    with the Commission on June 19, 1998.

(10)Incorporation herein by reference to the Registrant's Quarterly Report for
    the quarter ended June 30, 1997 on form 10-Q filed with the Commission on
    August 2, 1997.

(11)Incorporation herein by reference to the Registrant's Amendment No. 1 to its
    Quarterly Report for the quarter ended June 30, 1997 on form 10-Q filed with
    the Commission on June 19, 1998.

(12) Incorporation herein by reference to the Registrant's Amendment No. 1 to
    its Quarterly Report for the quarter ended September 30, 1997 on form 10-Q
    filed with the Commission on June 19, 1998.

(13) Incorporation herein by reference to the Registrant's Amendment No. 1 to
    its Quarterly Report for the quarter ended December 31, 1997 on form 10-Q
    filed with the Commission on June 19, 2998.

   (b)     No reports on Form 8-K have been filed during the last quarter of the
           period covered by this report.

                                       41
<PAGE>   42

 SIGNATURES

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

Dated:  June 23, 1998                  Summa Four, Inc.

                                  By:  /s/ Jeffrey A. Weber
                                       -----------------------------------------
                                       Jeffrey A. Weber
                                       Vice President Finance,
                                       Chief Financial Officer
                                       (Principal Financial & Accounting 
                                       Officer)

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


<TABLE>
<CAPTION>

      Signature                                       Title                                   Date

<S>                                              <C>                                      <C> 
/s/ Barry R. Gorsun                             Chairman of the Board                    June 23, 1998
--------------------------------
Barry R. Gorsun

/s/ Robert A. Degan                             President & Chief Executive Officer      June 23, 1998
-------------------------------
Robert A. Degan

/s/ Jeffrey A. Weber                            Vice President Finance,                  June 23, 1998
-------------------------------                 Chief Financial Officer
Jeffrey A. Weber                                (Principal Financial & Accounting Officer)

                   
/s/ Russell I. Pillar                           Director                                 June 23, 1998
-------------------------------- 
Russell I. Pillar

/s/ Gordon T. Ray                               Director                                 June 23, 1998
-------------------------------
Gordon T. Ray

/s/ Edgar L. Brown, Jr.                         Director                                 June 23, 1998
-------------------------------
Edgar L. Brown, Jr.

/s/ John A. Shane                               Director                                 June 23, 1998
-------------------------------
John A. Shane
</TABLE>


                                       42
<PAGE>   43
<TABLE>
<CAPTION>

                                       SUMMA FOUR, INC.

                                         SCHEDULE II
                               VALUATION AND QUALIFYING ACCOUNTS
                           YEARS ENDED MARCH 31, 1998, 1997 AND 1996
                                        (IN THOUSANDS)

                                       BEGINNING     ADDITIONS CHARGED      DEDUCTIONS/     ENDING
                                        BALANCE     TO COST AND EXPENSES     WRITE-OFFS     BALANCE
             
<S>                                       <C>               <C>               <C>            <C>
Allowance for doubtful accounts,

    1998                                  $237              $293              $ 78           $452
    1997                                   480               150               393            237
    1996                                   400               274               194            480
                                                                                           
Inventory reserve,                                                                         
                                                                                           
    1998                                  $554              $145              $306           $393
    1997                                   442               112                 0            554
    1996                                   200               257                15            442
                                                                                           
Warranty reserve,                                                                          
                                                                                           
    1998                                  $856              $ 72              $  0           $928
    1997                                   856                 0                 0            856
    1996                                   750               137                31            856
                                                                                           
                                                                                        
</TABLE>

                                       43

<PAGE>   44

                              EXHIBITS

Exhibit No.      Description
-----------      -----------

 3.1           - Amended and Restated Certificate of Incorporation of the
                 Registrant. (1)

 3.2           - Amended and Restated By-laws of the Registrant. (2)

 4.1           - Specimen Certificate representing the Registrant's Common
                 Stock. (1)

 4.2           - Rights Agreement, dated February 22, 1995, by and among the
                 Registrant and state Street Bank and Trust Company. (4)

10.1           - Lease Agreement, dated July 18, 1990, by and between the
                 Registrant and Northern Manchester Trust. (1)

10.2           - Lease Agreement, as amended, dated December 21, 1992, by and
                 between the Registrant and 1100 Corporation. (1)

10.3           - Lease Agreement, dated February 15,1993 by and between the
                 Registrant and Atrium Executive Center, Inc. (1)

10.4           - Registration Agreement, dated July 25, 1984, as amended, by and
                 among the Registrant and certain investors. (originally filed 
                 as exhibit 10.5)(1)

10.5           - Purchase Agreement, dated July 25, 1984, by and among the
                 Registrant and certain investors. (originally filed as exhibit
                 10.6) (1)

10.6           - + 1993 Stock Incentive Plan, as amended. (originally filed as
                 exhibit 10.8) (1)

10.7           - + 1993 Employee Stock Purchase Plan, as amended. (originally
                 filed as exhibit 10.9) (1)

10.8           - + 1993 Director Stock Option Plan, as amended. (originally
                 filed as exhibit 10.9) (7)

10.9           - + Stock Option Plan of August 1, 1992. (originally filed as
                 exhibit 10.11) (1)

10.10          - + Incentive Stock Option Plan of January 1, 1985. (originally
                 filed as exhibit 10.12) (1)

10.11          - + Stock Option Agreement, dated July 23, 1987, by and between
                 the Registrant and Mr. William M. Scranton. (originally filed
                 as exhibit 10.13) (1)

10.12          - + Non-Qualified Employee Option Agreement, dated July 23, 1987,
                 by and between the Registrant and Mr. Barry R. Gorsun.
                 (originally filed as exhibit 10.14) (1)

10.13          - Promissory Note, dated April 1, 1991, by Summa Four, Ltd.
                 (originally filed as exhibit 10.19) (1)

10.14          - Letter Agreement, dated October 15, 1992, by and between the
                 Registrant and Fleet Bank of Massachusetts, N.A., as modified.
                 (originally filed as exhibit 10.21) (1)

10.15          - Customer Purchase Agreement, dated November 20, 1992, by and
                 between the Registrant and Sprint/United Management Company.
                 (originally filed as exhibit 10.22) (1)

10.16          - Customer Purchase Agreement, dated September 11, 1991, by and
                 between the Registrant and United States Advanced Networks.
                 (originally filed as exhibit 10.24) (1)

                                       44

<PAGE>   45

                                    EXHIBITS (CONT'd)

<TABLE>
<CAPTION>

 Exhibit No.                      Description
 ----------                       -----------
 <S>          <C> <C>
 10.17         - Customer Purchase Agreement, dated October 10, 1990, by and
                 between the Registrant and Unisys Corporation. (originally
                 filed as exhibit 10.25) (1)

 10.18         - Resale Agreement, dated November 5, 1992, by and between the
                 Registrant and IBM Canada Ltd. (originally filed as exhibit
                 10.26) (1)

 10.19         - Agreement, dated October 14, 1992, by and between the
                 Registrant and Claircom Communications Group, L.P. (originally
                 filed as exhibit 10.27) (1)

 10.20         - Release, Settlement and License Agreement, dated November 2,
                 1992, by and among the Registrant, Omnitel Corporation, Aspect
                 Telecommunications Corporation and Richard L. Scully.
                 (originally filed as exhibit 10.28) (1)

 10.21         - Product Development and Licensing Agreement, dated January 19,
                 1990, by and between the Registrant and The Telephone
                 Connection, Inc. (originally filed as exhibit 10.30) (1)

 10.22         - Amendment dated August 31, 1994 to Lease Agreement dated July
                 18, 1990 with Northern Manchester Trust. (originally filed as
                 exhibit 10.35) (3)

 10.23         - Amendment dated August 23, 1995 to Lease Agreement dated July
                 18, 1990 with Northern Manchester Trust. (originally filed as
                 exhibit 10.38) (6)

 10.24         - 1997 Executive Incentive Bonus Plan. (originally filed as
                 exhibit 10.26) (8)

 10.25         - + Employment Agreement, dated July 23, 1996, by and between the
                 Registrant and Thomas A. St. Germain. (originally filed as
                 exhibit 10.27) (8)

 10.26         - + Employment Agreement, dated July 22, 1996, by and between the
                 Registrant and Theresa Pratt Wang. (originally filed as exhibit
                 10.28) (8)

 10.27         - + Employment Agreement, dated July 23, 1996, by and between the
                 Registrant and John H. Shaw. (originally filed as exhibit
                 10.29) (8)

 10.28         - + Employment Agreement, dated July 23, 1996, by and between the
                 Registrant and Michael G. Hluchyj. (originally filed as exhibit
                 10.30) (8)

 10.29         - + Employment Agreement, dated July 22,1996, by and between the
                 Registrant and Kendrick A. Estey. (originally filed as exhibit
                 10.31) (8)

 10.30        -  + Employment Agreement, dated October 18, 1996, by and between
                 the Registrant and Todd P. Hasselbeck. (originally filed as
                 exhibit 10.32) (8)

 10.31         - + Agreement, dated November 16, 1996, by and between the
                 Registrant and Barry R. Gorsun. (originally filed as exhibit
                 10.33) (8)

 10.32         - + Employment Agreement, dated November 21, 1996, by and between
                 the Registrant and Robert A. Degan. (originally filed as
                 exhibit 10.34) (8)
</TABLE>
                                       45
<PAGE>   46

                                    EXHIBITS (CONT'd)

 Exhibit No.      Description
 -----------      -----------           

 10.33         - + Amendment dated June 12, 1997, to Agreement dated November
                 16, 1996 by and between the Registrant and Barry R. Gorsun.
                 (originally filed as exhibit 10.6) (11)

 10.34         - Loan Modification Agreement, dated July 28, 1993, by and
                 between Registrant and Fleet Bank of Massachusetts, N.A.
                 (originally filed as exhibit 10.32) (2)

 10.35         - Promissory Note, dated July 28, 1993, by and between the
                 Registrant and Fleet Bank of Massachusetts, N.A. (originally
                 filed as exhibit 10.33) (1)

 10.36         - Amendment, dated August 2, 1994, to Letter Agreement dated
                 October 15, 1992, by and the Registrant and Fleet Bank of
                 Massachusetts, N.A.(5)

 10.37         - Contract for Services Agreement, dated November 27, 1996, by
                 and between the Registrant and D2 Technologies, Inc. (9)

 10.38         - Supply Agreement with Addendum, dated February 17, 1997, by and
                 between the Registrant and ADC Newnet. (9)

 10.39         - Amendment dated August 30, 1996, to Letter Agreement dated
                 October 15, 1992, by and between the Registrant and Fleet Bank
                 of Massachusetts, N.A. (9)
 
 10.40         - +1995 Stock Option Plan. (7)

 10.41         - Amendment, Dated August 24, 1995, to Letter Agreement dated
                 August 24, 1995, by and between the Registrant and Fleet Bank
                 of Massachusetts, N.A. (originally filed as exhibit 10.43) (7)

 10.42         - + Employment Agreement, dated February 14, 1998, by and between
                 the Registrant and Philip T. Coates.

 10.43         - + Employment Agreement, dated June 26, 1997, by and between the
                 Registrant and Jeffrey A. Weber. (originally filed as exhibit
                 10.5) (11)

 10.44         - + Employment Agreement, dated April 15, 1997, by and between
                 the Registrant and Richard Swee. (originally filed as exhibit
                 10.36) (10)

 10.45         - Customer Agreement, dated June 30, 1997, by and between the
                 Registrant and Mentor Graphics Corporation. (originally filed
                 as exhibit 10.3) (11)

 10.46         - Lease Agreement dated June 2, 1997, by and between the
                 Registrant and Atrium Executive Center, Inc. (originally filed
                 as exhibit 10.4) (11)

 10.47         - Lease Agreement, dated July 3, 1997, by and between the
                 Registrant and Bay Business Centers, Inc. (originally filed as
                 exhibit 10.1) (12)

 10.48         - Products and Services Agreement, dated August 4, 1997, by and
                 between the Registrant and D2 Technologies, Inc. (originally
                 filed as exhibit 10.2) (12)

 10.49         - Software License and Maintenance Agreement, dated August 4,
                 1997, by and between the Registrant and D2 Technologies, Inc.
                 (originally filed as exhibit 10.3) (12)

                                       46
<PAGE>   47

                                    EXHIBITS (CONT'd)

Exhibit No.      Description
-----------      -----------

 10.50         - Loan Modification Agreement, dated December 19, 1997, by and
                 between the Registrant and Fleet National Bank. (originally
                 filed as exhibit 10.1) (13)

 10.51         - Promissory Note, dated December 19, 1997, by and between the
                 Registrant and Fleet National Bank. (originally filed as
                 exhibit 10.2) (13)

 10.52         - Joint Development Agreement, dated June 11, 1997, by and
                 between the Registrant and Junction, Inc. (originally filed as
                 exhibit 10.37) (10)
 
 21            - Subsidiaries of the Registrant.

 23            - Consent of Coopers & Lybrand, L.L.P.

 27.1          - Financial Data Schedule

 27.2          - Restated Financial Data Schedule for Fiscal Year Ended March
                 31, 1997.

 27.3          - Restated Financial Data Schedule for Fiscal Year Ended March
                 31, 1996.

(1) Incorporation herein by reference to the Registrant's Registration Statement
    on Form S-1 (File No. 33-66602), as declared effective by the Securities and
    Exchange Commission (the "Commission") on September 23, 1993.

 +  Management contract or compensatory plan or arrangement filed as an
    exhibit pursuant to Item 14(c) of this report.

              The exhibits filed as part of this Annual Report on Form 10-K are
       listed on the exhibit index immediately preceding such exhibits, which
       exhibit index is incorporated herein by reference. The Company's current
       management contracts and executive compensation plans and arrangements
       are listed in the exhibit index incorporated herein by reference at
       exhibit numbers 10.6-10.12, 10.25-10.33, 10.40, 10.42-10.44.

    The Company will provide copies of the exhibit index, exhibits and Schedule
    II to shareholders upon request.

(2) Incorporation herein by reference to the Registrant's Amendment No. 2 to its
    Annual Report on Form 10-K for fiscal year ended March 31, 1994 filed with
    the Commission on June 19, 1998.

(3) Incorporation herein by reference to the Registrant's Annual Report on Form
    10-K for the fiscal year ended March 31, 1995, filed with the Commission on
    June 27, 1995.

(4) Incorporation herein by reference to the Registrant's Report on Form 8-K
    filed with the Commission on March 6, 1995.

(5) Incorporation herein by reference to the Registrant's Amendment No. 2 to its
    Annual Report on Form 10-K for the fiscal year ended March 31, 1995 filed
    with the Commission on June 19, 1998.

(6) Incorporation herein by reference to the Registrant's Annual Report for the
    fiscal year ended March 31, 1996on Form 10-K filed with the Commission on
    June 17, 1996.

(7) Incorporation herein by reference to the Registrant's Amendment No. 1 to its
    Annual Report for the fiscal yeaended March 31, 1996 on Form 10-K filed with
    the Commission on June 19, 1998.

(8) Incorporation herein by reference to the Registrant's Annual Report for the
    fiscal year ended March 31, 1997 on form 10-K filed with the Commission on
    June 23, 1997.

                                       47

<PAGE>   48

                                EXHIBITS (CONT'd)

 (9) Incorporation herein by reference to the Registrant's Amendment No. 1 to
     its Annual Report for the fiscal year ended March 31, 1997 on form 10-K
     filed with the Commission on June 19, 1998.

(10) Incorporation herein by reference to the Registrant's Quarterly Report for
     the quarter ended June 30, 1997 on form 10-Q filed with the Commission on
     August 2, 1997.

(11) Incorporation herein by reference to the Registrant's Amendment No. 1 to
     its Quarterly Report for the quarter ended June 30, 1997 on form 10-Q filed
     with the Commission on June 19, 1998.

(12) Incorporation herein by reference to the Registrant's Amendment No. 1 to
     its Quarterly Report for the quarter ended September 30, 1997 on form 10-Q
     filed with the Commission on June 19, 1998.

(13) Incorporation herein by reference to the Registrant's Amendment No. 1 to
     its Quarterly Report for the quarter ended December 31, 1997 on form 10-Q
     filed with the Commission on June 19, 2998.

   (b)     No reports on Form 8-K have been filed during the last quarter of the
           period covered by this report.


                                       48