<PAGE>   1
Teltrend Inc. - 620 Stetson Avenue - St. Charles, Illinois  60174

[Teltrend Logo]

Teltrend Inc. 1997 Annual Report


                                       NO
                                     SPEED
                                     LIMITS

Market

Markets + Solutions + Products = Growth

Driven


[Teltrend Logo]




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At Teltrend, we believe the faster the traffic the more extraordinary the
opportunities.

[Inside Front and Back Cover Photos]

<PAGE>   3
Financial Highlights

    [Bar Graph]

       Sales
(dollars in millions)

    [Bar Graph]

 Net Income (Loss)
(dollars in millions)


<TABLE>
<CAPTION>
                                                            1993       1994     1995     1996     1997
                                                         ---------------------------------------------
<S>                                                      <C>        <C>      <C>      <C>      <C>      
Net sales                                                $39,365    $49,454  $62,052  $85,913  $81,243
Gross profit                                             $12,789    $18,324  $26,061  $39,269  $35,947
Income from operations                                    $2,519     $6,009  $11,391  $19,852  $14,433
Net income (loss)                                        ($3,307)        $8   $4,330  $12,164   $9,628
Working capital                                           $2,205     $3,292  $10,188  $35,901  $44,088
Stockholders' equity (deficit)                          ($43,077)  ($43,069) $15,417  $42,645  $52,435
</TABLE>
                            (dollars in thousands)



                                                                   Teltrend Inc.

                                                                               1

<PAGE>   4

President's Message
DEAR FELLOW SHAREHOLDER:

As you know, fiscal 1997 sales of $81.2 million, net income of $9.6 million,
and earnings per share of $1.45 were lower than expected. But as fiscal 1997
came to a close, a number of bright spots appeared that we believe point to a
better fiscal 1998. One bright spot  was that cash and short-term investments
increased almost $10 million, to $32.8 million. Other bright spots included:

1.   The expansion of our market focus to include Competitive Local Access
     Providers and Independent Telephone Companies;

2.   The expansion of our product offerings for various high-speed digital
     services; and

3.   The acquisition of the UK-based Securicor 3net (completed September 18,
     1997), which we believe puts Teltrend squarely into the high-growth 
     international ISDN market.

     But before talking about the future, let me first tell you a few things
about fiscal 1997. Overall, it was a very mixed bag. Of our 10 sales regions:
seven Regional Bell Operating Companies (RBOCs), GTE, Sprint, and
International, three showed large year-to-year gains, three were basically
level, three were moderately down, and one territory was sharply down. Of our
eight product lines, four showed large year-to-year percentage increases, two
were basically level, and two were sharply down. The product lines showing
large year-to-year percentage increases were Digital Loop Carrier (DLC), T1
Network Interface Units, CellPack, and High Density Subscriber Line Products
(HDSL). The two product lines that were down were Voice Frequency Products (VF)
and T1 repeaters.
     In a very real sense, fiscal 1997 was revolutionary in our core RBOC
markets. A big contributor to this revolution was the reaction of the RBOCs to 
the Telecommunications Act of 1996. Another factor was the announcement of the 
merger of Bell Atlantic with NYNEX and the merger of Southwestern Bell with 
Pacific Telesis. Additional key catalysts were the exploding use of the 
Internet and the accelerating growth in high-capacity digital services for 
voice and data. And underlying all this was the continuing push of 
technological advancement.
     All of these changes caused the RBOCs to focus on limiting their
expenditures and, consequently, on delaying some new programs. As Teltrend
worked to overcome the impact of these delays, we began to reformulate our
strategies and implement programs to compete better in what is turning out to
be an altered competitive landscape (see Markets section). By the fourth
quarter, Teltrend had in place a new non-RBOC sales force of eight seasoned
professionals and we had made key changes in our product development efforts.
Additionally, as fiscal 1997 drew to a close, we were finalizing our
acquisition of Securicor 3net. This exciting company, based in Basingstoke,
England, had fiscal 1996 sales of approximately $17 million and is a leading 
supplier of ISDN, secure virtual private networking, and interconnectivity 
solutions in the global marketplace.
     Those of you who have followed Teltrend know that we grew from sales of
$29 million in fiscal 1992 to $86 million in fiscal 1996 (a 31 percent compound
annual growth rate). We achieved this growth by entering new markets in the
local loop (see Teltrend Strategic Map at right). During this period, the
emphasis was on innovative Open-Architecture solutions for the installed 
telephone network infrastructure in the United States. This infrastructure of 
approximately 160 million access lines has recently come under siege. 
Originally designed for three-minute low-fidelity infrequent voice calls, a 
growing army of users are asking it to pass 56,000 bits per second (bps) for 
hours

2 Teltrend, Inc.


<PAGE>   5




on end. Teltrend has brought innovative solutions to this infrastructure
in the past, and we believe these sorts of solutions are needed even more
today.
     We also believe that Teltrend's position as a broad-based supplier of
provisioning products will allow us to benefit from programs now underway at
the RBOCs to reduce the number of vendors with which they do business (see
Products section). We intend to continue vigorously with our historic role of
supplying a wide range of innovative, Open-Architecture, provisioning products
to the RBOCs. But we also intend to focus on developing more proprietary
equipment solutions, as well as diversifying our customer base. In recent
years, Teltrend has been granted 14 patents, and we have another 13 patent
applications in process. These patents, along with our technology licenses and
proprietary development programs, should pave the way to a strong, defensible
position in the dynamic and growing world marketplace that is
Telecommunications today.
     Some of you may remember that six years ago we were a struggling,
one-product company. We shared the vision then of becoming a broad-based
supplier of local loop provisioning products for the RBOCs. Our goal was to
supply all the types of channel units, repeaters, network interface units, and
the like that the RBOCs need to provide voice and data services in the local
loop. We also envisioned bringing a new standard of innovation and utility to
these products by adding a "brain," or microprocessor to them. Along the way we
expanded that vision to include small digital loop carrier (DLC) systems and
proprietary ISDN customer premises equipment, and last year we expanded our
vision of the market to include the non-RBOC domestic market and the
international market. As a result of all this, Teltrend today addresses a
dynamic, growing market well in excess of $1 billion annually.
     Fiscal 1997 was not the year we wanted or expected, but we believe we
learned enough from it not to be compelled to repeat it. The vision some of us
shared six years ago is alive and well. We have never felt better about the
future. The trend, we believe, is to Teltrend.

/s/ Howard L. Kirby, Jr.
-----------------------------------
    Howard L. Kirby, Jr.
    President, Chief Executive Officer,
    and Chairman of the Board


HOWARD L. KIRBY, JR.
President and Chief Executive Officer
[Photo of Howard L. Kirby]

[Teltrend Strategic Map]


                                                                Teltrend, Inc. 3


<PAGE>   6



Experienced Management


Key Teltrend executives left to right are:



          1. Doug Hoffmeyer         Vice President, Finance
          2. Jan Lollini            Director of Human Resources
          3. Jack Parker            Vice President/General Manager,
                                    DLC, VF and T1/Wireless Products
          4. Mike Grzeskowiak       Vice President, Operations
          5. Ted Maxeiner           Assistant Vice President, Finance
                                    and Controller


                          [Photo of Key Executives]



<PAGE>   7



          6.  Norm Guenther  Assistant Vice President, Quality
          7.  Don Bozeman    Vice President, Non-RBOC Sales
          8.  Larry Sheets   Vice President/General Manager,
                               Broadband Products
          9.  Gil Hosie      Vice President, RBOC Sales
         10.  John Muntean   Vice President/General Manager,
                               ISDN and DDS Products


                          [Photo of Key Executives]


<PAGE>   8

          1                                             2
Digital Loop Carrier and                     T1 and Wireless Products
Voice Frequency Products


                                    Markets

FISCAL 1997:  WELCOME TO THE FRENCH REVOLUTION
Teltrend's fiscal 1997 passed into history on July 26. From Teltrend's
perspective, this period was one of the most dynamic 12-month periods since
AT&T's divestiture in 1984. In many respects, fiscal 1997 was like the French
Revolution: the worst of times, the best of times.
     Underlying the revolutionary market changes in fiscal 1997 was the
Telecommunications Act of 1996, which we believe dampened enthusiasm among the
RBOCs for investment in their loop facilities, and seemed to intensify the
perception at the RBOCs that they must continuously seek ways to reduce their
costs if they are to survive. The exact degree to which the Telecom Act of 1996
affected RBOC thinking during fiscal 1997 is open to debate. But one thing is 
for sure, during fiscal 1997 the RBOCs took a broad range of actions to reduce 
their costs, their investment levels, and the number of vendors with which they
do business.
     Perhaps the most dramatic examples of RBOC strategic actions during fiscal
1997 were the announced mergers of Bell Atlantic with NYNEX and of Southwestern
Bell with Pacific Telesis, which resulted in across-the-board equipment pricing
studies and resulting pressures on vendors to reduce equipment prices.
Additionally, in fiscal 1997 the RBOCs introduced programs to incentivize
strongly their employees to reduce inventory levels and other investments in
plant and equipment. Fiscal 1997 also saw the introduction of RBOC programs to
off-load procurement and logistics responsibilities to third parties. Last, but
certainly not least, fiscal 1997 was characterized by ongoing technology shifts
in RBOC networks. These technology shifts included increased demand for more
automated and intelligent equipment solutions, as well as shifts to more
advanced transmission solutions, such as ISDN, DDS, HDSL, and fiber optics.
     Teltrend believes that the impact of these changes on its business, while
negative on balance in fiscal 1997, should be positive in the future because:

1.   Teltrend's improving position in ISDN, DDS, and HDSL should allow it to
     benefit from the fundamental technology shifts to these technologies.

2.   The accelerating use of fiber optics to deliver t1 should increase the
     demand for metallic t1 terminating/extension equipment behind fiber
     optics -- an area where teltrend is currently an industry leader.

6 Teltrend Inc.


<PAGE>   9

                3                                        4
       ISDN and DDS Products                     Broadband Products
        [Photo of Products]                     [Photo of Products]

Full Line of ISDN Provisioning Units       NetZap PlusTM Full T1 HDSL System  
                                   
Teltrend provides a full line of ISDN      Teltrend's new NetZap Plus full T1 
provisioning units including channel       HDSL system provides the latest in 
units, repeaters, rapid-deployment         "repeaterless" T1 connectivity.    
channel banks, line powering units,
and housings.


                                                                Teltrend Inc. 7


<PAGE>   10

[Bar Graph]

Basic Rate Interface ISDN Lines in service in the U.S.*
*Estimated Projections
Source: The Yankee Group

3.   Teltrend's improving positions with the Competitive Local Access
     Providers and in the international market should help to reduce the impact
     of RBOC buying swings on Teltrend's sales levels.

4.   The RBOCs increasing emphasis on reducing the number of equipment vendors
     should tend to favor Teltrend, which has a relatively broad product
     offering.

1. THE DIGITAL LOOP CARRIER MARKET
In spite of the market vagaries previously discussed, the digital loop carrier
(DLC) market was healthy in fiscal 1997. Teltrend's fiscal 1997 DLC sales
increased 50 percent from $4.1 million to $6.1 million. Various studies
indicate that the United States presently has more than 125 million local loops
that have not been converted from the old twisted-wire to the new
fiber-optic/DLC combination. A recent report on "Telco Local Loop Technologies"
by Robertson Stephens and Company stated, "We believe the growth in DLC
installations has accelerated recently due to stronger new line growth as well
as the introduction of optical technology into the market in the early 1990s."
     In the past, Teltrend has competed in the DLC market largely by supplying
special service channel units for the existing infrastructure of Lucent DLC
systems (SLC(R)-96, SLC-5). Teltrend is now in the process of becoming an
Original Equipment Manufacturer (OEM) supplier of channel units to emerging DLC
systems companies, including Next Level Systems, Inc. The Company also recently
began supplying very small DLC systems that are SLC-5 plug-compatible. The
Company's first product of this type, called the Integrated Digital Bank, the
IDB5000, was introduced last year.
     The VF portion of Teltrend's DLC/VF business is highly profitable but
addresses a mature market in decline. VF products represent a very large
installed base at the RBOCs, and the Company's sales in this product market
were also negatively impacted during fiscal 1997 by the inventory consolidation
programs initiated by the RBOCs during the year.

2. THE T1 REPEATERED LINE AND FIBER-OPTIC METALLIC EXTENSION MARKET
Teltrend's overall T1 sales were slightly down in fiscal 1997, although T1
Customer Premise Equipment (CPE) sales were up 50 percent, and CellPak(TM) 
sales were up 120 percent. The overall slight decline was caused by the
repeatered line T1 category, which was down 27 percent. We expect this
repeatered line T1 market to continue declining. Offsetting this decline,
however, is growing demand for T1 metallic termination/extension equipment
behind fiber-optic spans, which should generate greater sales for the Company's
T1 metallic extension equipment. Overall, we believe this T1 segment should see
small to moderate growth in fiscal 1998.
        
3. THE ISDN MARKET
ISDN provides dial-up data at 128 Kbs along with a broad range of voice and
voice-plus-data capabilities. ISDN is low cost, here today, and generally
available everywhere in the United States. The chart (in the upper right corner
of this page) from the Yankee Group shows its estimate of projected ISDN line
growth. It projects that the installed base of ISDN access lines in the United
States will almost triple over the next three years.
     Teltrend produces ISDN products that the telephone companies use to
provide service over the local loop. The traditional Teltrend ISDN product line
consists of

(R) SLC is a registered trademark of Lucent Technologies, Inc.

Teltrend Inc.   8


<PAGE>   11


[Bar Graph]

U.S. HDSL Revenues*
*Estimated Projections
Source: The Yankee Group




line repeaters, basic rate channel units, and specialized channel banks.
Teltrend sales of ISDN products grew 7 percent in fiscal 1997. Late in
fiscal 1997, Teltrend started negotiating to buy 3net, a subsidiary of
Securicor, Ltd., based in Basingstoke, England. In September, the Company
acquired 3net and its subsidiaries. 3net is a leading company in the
international ISDN business. This acquisition increases significantly
Teltrend's ISDN business, especially in international ISDN markets. 3net has
two exciting ISDN related product lines. One, called "Telco" products,
facilitates basic rate and primary rate delivery by European and other
international telephone companies. The other, called "Network" products,
constitutes a line of terminal equipment  that makes ISDN more attractive to
the end-user.

4. THE XDSL MARKET
The market for very high-speed (384 Kbs to 52 Mbs) telephone service over the
existing twisted-pair phone lines is referred to as xDSL, or broadband. This
market is currently divided into four principle segments:

-    HDSL: 1.5 Mbs both directions, over two twisted pairs

-    ADSL/RADSL: 1.5 Mbs to 25.0 Mbs toward the customer and 64 Kbs to
     1.0 Mbs from the customer, over one twisted pair

-    SDSL: 384 Kbs to 1.5  Mbs both  directions over  one twisted pair

-    VDSL: 52 Mbs toward the customer and between 1.6 Mbs and 2.3 Mbs
     from the customer, over one twisted pair

     Teltrend presently competes in the HDSL and SDSL markets. Overall growth
of the HDSL market, has been rapid, and is expected by most experts to
continue. HDSL currently represents the bulk of the xDSL market. The projected
growth of the HDSL market, according to the Yankee Group, is shown in the chart
(in the lower left corner of this page). HDSL utilizes 4 wires just like
repeatered T1, and is arguably the best way to provision T1 service in about 60
percent of the cases. Teltrend entered this market late in fiscal 1997 and is
just beginning to receive orders.
     Teltrend has been selling a fractional T1 SDSL product for two years. This
product reduces the cost to telephone companies of providing fractional T1
service to their customers. The market for fractional T1 services has not yet
fully developed, and Teltrend's emphasis is now on the 4-wire HDSL market.
     A key factor in the overall T1 delivery market today is the movement
toward intelligent platforms or mechanics. These platforms replace traditional
non-intelligent mechanics, such as the AT&T 220, the AT&T DDM+ and the
Charles/Wescom STS. Intelligent platforms offer the extension of T1 by
repeatered T1, HDSL, and low-speed fiber optics. These intelligent systems also
provide remote monitoring and provisioning, comprehensive performance
monitoring, and other advanced capabilities. The Company is currently working
on such an intelligent platform and believes that such systems should enlarge
the utility of T1 service and could lead to new applications and increased
demand for Teltrend's T1 products.

                                                           Teltrend Inc.  9



<PAGE>   12
                                   SOLUTIONS

FUTURE SHOCK
Teltrend's historic role has been to provide telephone companies (telcos) with
new, innovative versions of the basic electronic building blocks they need to
provision voice and data services over the local telephone line, or loop. These
new Teltrend upgrades have typically involved the adding of a "brain," or
microprocessor, to time-honored electronic units like repeaters, channel units,
and network interface units. This "brain" does the work previously done by
technicians (setting switches and making measurements). Also, the telcos can
communicate with the "brain" from a distance, thereby avoiding the cost of
dispatching personnel. The "brain" saves technician time and reduces the
technician skill level required. These factors have become very important as
the telcos find themselves "downsized" to fewer and fewer people.
     Additionally, as the capacity of local network facilities has increased
and as data, versus voice, requirements have begun to drive the network, the
reliability of telephone service has become extremely critical. The presence of
a "brain" in a provisioning unit allows not only automated or remote
provisioning and maintenance, but also allows the accumulation of data on the
circuit (so-called performance monitoring data). This performance monitoring
feature, virtually unknown in the local loop a decade ago, when Teltrend first
put a "brain" in these types of telco units, is increasingly demanded today.
     In addition to a shrinking work force and more demanding customers, telcos
today face problems not even dreamed of a few short years ago. The Internet
explosion continues to overload their networks. A network designed for three
minute voice calls must now accommodate millions of Internet surfers who stay
connected for hours on end. A network designed for low-fidelity voice (below
3000 hertz) now has patrons demanding their telephone circuit pass dial-up data
at 56,000 bits per second. Legacy digital loop carrier systems designed to
eliminate the hand-crank party line years ago are now expected to accommodate
ISDN data at 128,000 bits per second. T1 lines, at 1,544,000 bits per second,
once considered only of interest to the Fortune 500, are now routinely ordered
into residential garages and basements. Social changes are resulting in the
need to provide, in many cases, five or more telephones to residences where
only one was needed a few short years ago. And in a world in which twisted-pair


10 Teltrend Inc.

<PAGE>   13

[Photo of CyberBlock]

CyberBlock(R) LCR4002

The Teltrend CyberBlock is designed to
provide improved voice and data performance
on long loops. It also provides a
more economical way for Telcos to provision
special voice circuits like foreign
exchange lines.



wire is supposed to be passe, the telcos are finding themselves running out of
it at an alarming rate. And all this is complicated by the Telecommunications
Act of 1996.
     What a world! The RBOCs can't change it. The independent telcos can't 
change it. And Teltrend can't change it. But Teltrend can provide solutions 
that allow its customers, the telcos, to meet these challenges and, hopefully, 
prosper.

HELPING POTS
Although wireless voice and advanced data services like ISDN, DDS, and
T1 are growing rapidly, plain old telephone service (POTS) consisting of
dial-up voice or modem-data remains the bulk of U.S. telephone usage. Of the
approximately 160 million U.S. access lines, approximately 130 million, or more
than 80 percent, are still for POTS service. Of these 130 million lines,
approximately 75 percent are twisted-pair copper running all the way back to
the central office. Many of these loops are long or noisy or both, and many are
foreign exchange lines that must be "back hauled" to some very distant central
office.
     Also, 25 percent of these local access lines are deployed via DLC. While
solving some problems, deploying access lines via DLC can create other
problems. DLC, and other channel banks, work by converting the analog
voice/modem information to digital form and reversing the process at the other
end. This analog-to-digital (A/D) then digital-to-analog (D/A) process can play
havoc with modem data, particularly the new 56,000-bit-per-second dial-up
modem.
     All the conditions described above can significantly degrade voice and
modem performance. But Teltrend has developed a range of solutions to deal with
them. Here are three examples:

CYBERBLOCK An economical little device that installs in the plastic telephone
box outside a residence or business (see above left). The CyberBlock
automatically compensates for gain and frequency-response problems on the
twisted-pair, improving voice and modem performance.




                                                           Teltrend Inc.  11

<PAGE>   14






Teltrend's Products Connect
Subscribers to their Local Central Office                     Teltrend Products


<TABLE>
<S>                           <C>                                  <C>
Telephone                     CB   CyberBlock                      POTS - PLAIN OLD TELEPHONE SERVICE
   
Computer                      RO   Router     MB    Minibank       ISDN - DIAL-UP DATA & VOICE  Repeater          

Pay Telephone                 CB   CyberBlock                      SPECIAL SERVICES VOICE - COIN, PRIVATE LINE, ETC.               
                                                                                                                                   
ATM Machine                  DDI   DDS Network Interface Unit      DDS - PRIVATE LINE DATA   Repeater           
                                                                                                                                   
                             NIU   T1 Network Interface Unit        T1 - VIA REPEATERED LINE  Repeater   Repeater
Private Branch Exchange                                                                                                            
                              HD   HDSL                             T1 - VIA HDSL                                                  
                                                                                                                                
Cellular or PCS Telephone                      CP   CellPak         CELLULAR & PCS                                                 
</TABLE>

ISP409 A channel unit that allows Internet service providers (ISPs) to connect
into a special part of the local central office switch. Connecting in this way
keeps the heavy-use ISP lines from blocking out ordinary telco customers trying
to make calls.

DCAC4570 A channel unit that takes the analog-to-digital-to-analog process out
of back-to-back telephone line interconnection, thus eliminating the modem
degradation that would otherwise occur.

HELPING HIGH-CAPACITY VOICE AND DATA
Beyond the world of POTS lies the exploding worlds of wireless communications
and high-speed data services. Here also, rapidly evolving requirements are
putting the telcos under the gun to provide clear high speed service. And here
also Teltrend is coming up with innovative solutions to help them. Here are
four examples:

PERFORMANCE MONITORING T1 NETWORK INTERFACE UNIT
This unit allows a telephone company to know if a problem has occurred
on a T1 access line and, if so, to pinpoint where the problem occurred.

CELLPAK(TM)  This unit allows a telephone company to provide high-capacity
central office access to a cellular or Personal Communications System (PCS)
wireless base station by either repeatered T1, HDSL T1, or low-speed fiber
optics, and to provide this service in a pretested weatherproof package. With
the Teltrend CellPak, initial installation and subsequent maintenance do not
require access to the wireless operator's building.

IDB5000 VERY SMALL DIGITAL LOOP CARRIER SYSTEM The IDB5000 allows a telco to
provide ISDN and other special services from a DLC location, irrespective of
the capability of the installed DLC system. The IDB5000 is plug-compatible with
the existing infrastructure of SLC(R)-5 channel units. This provides significant
savings in logistics and training costs to the telephone company. The IDB5000
is variously described as a "rapid deployment bank," or a "bypass bank," or a
"mini-bank."  All are very apt terms.

NETZAP PLUS(TM) HDSL The new Teltrend NetZap Plus HDSL system provides
repeaterless T1 service out to 12,000 feet. It can also be used out to 36,000
feet using two Teltrend HDSL doublers. This new Teltrend HDSL system has a
range of features, including provisioning from both ends, which the Company
believes will make it a favorite with discerning telco users.

(R)SLC is a registered trademark of Lucent Technologies, Inc.

12  Teltrend Inc.





<PAGE>   15
             [Telephone Company Local Central Office Flow Chart]



[Photo of Product]
Performance Monitoring T1 Network
Interface Unit (NIU)

The Teltrend T1 Performance
Monitoring (PM) Network
Interface Unit, Model 5760,
continuously monitors the
performance of the T1 line
and stores a broad range of
performance data for later retrieval.


SOLUTIONS SUMMARY

These then are some of the solutions that Teltrend is providing to its
customers. These solutions are mostly geared to Open-Architecture and to the
imbedded mechanics used in the U.S. network. As the Company moves forward,
however, it is becoming evident that proprietary systems-oriented solutions
will also be required for the Company to prosper in the long run. A start
toward developing proprietary system oriented solutions at Teltrend was the 200
Mechanics(R), which we invented. The IDB5000 bypass DLC system was also a step
in this direction. And Teltrend is currently working on T1 delivery/extension
systems. Whether Open-Architecture or proprietary solutions eventually will
prevail in world telephone networks is, at this point, far from clear. But,
Teltrend intends to continue to develop innovative solutions to our customers' 
problems using both approaches, standard plug-ins for industry infrastructure, 
as well as proprietary systems.



CellPak(TM) 504
[Photo of Product]

The Teltrend CellPak 504 provides
a convenient weatherproof outdoor
Telco termination package at
Cellular and PCS antenna sites.


                                    Products

Open here to discover the broad range of Teltrend telephone products.


Teltrend Inc. 13

Teltrend Inc. 14




<PAGE>   16




             1                   DIGITAL LOOP CARRIER AND
                                 VOICE FREQUENCY PRODUCTS
<TABLE>
<CAPTION>


                                  FEATURED PRODUCTS                     TECHNICAL SPECIFICATIONS
-------------------------------------------------------------------------------------------------------------------
<S>                               <C>                                <C>
Teltrend offers a full            Full Line Of Channel               -  The DCAC4570 is designed to eliminate           
line of special services          Units for interconnection,            modem degradation in back-to-back circuits      
channel units for the             Internet Access, and                  while preserving testability                    
AT&T D4 channel bank              Other Special Services                                                    
and the Lucent SLC(R)-96                                             - The ISP409 is designed to alleviate local       
and SLC-5 Digital                 [Photo of Product]                   central office switch congestion caused by      
Loop Carrier Systems.                                                  Internet Service Providers                      
                                                   
                                                                     -  The DPT/GT4530 is designed to eliminate     
                                                                        howling and other problems on long          
                                                                        direct-inward-dial (DID) lines              
                                                                                                                    
                                                                     -  The FXO4520 is designed to eliminate many   
                                                                        problems commonly encountered with certain  
                                                                        PBX's and certain central office switches   
                                                                                                                    
                                                                     -  The Combo 4555 is designed to provide FXS,  
                                                                        DPO, TO, PLAR, all with gain transfer and   
                                                                        automatic balance                           
                                                                                                                    
                                                                        Not shown are Teltrend ETO and SPOTS        
                                                                        units for SLC-5 and D4                      
---------------------------------------------------------------------------------------------------------------------------
The Teltrend IDB5000 Series       IDB5000 Series Special             -  Available in one or two T1 configurations 
DLC Minibank is designed to       Services DLC Minibank              -  Uses standard SLC-5 type channel units    
provide an economical way to                      
implement small numbers of        [Photo of Product]    
special services circuits
in the local loop.
-----------------------------------------------------------------------------------------------------------------------------
The Teltrend CyberBlock(R)        CyberBlock LCR4002                 -  Designed to solve chronic problems with              
is designed to provide                                                  residential and business lines                       
improved voice and data           [Photo of Product]
performance on long loops.                                           -  Easy to install and align                            
                                                        
                                                                     -  Lower cost and quicker way to
                                                                        provision 2-wire special circuits
                                                                        compared to using metallic facility
                                                                        terminal (MFT) equipment     
--------------------------------------------------------------------------------------------------------------------------
Teltrend Ultraport is the          Analog Data Line Provisioning      -  Teltrend's Ultraport(R) is line or local powered     
universal way to                   Units                                                      
terminate analog data lines.                                          -  The Ultraport is designed to equalize the line     
                                   [Photo of Product]                    in both directions, improving modem performance    
Teltrend ISQ installed in                                                      
the central office                                                    -  The Ultraport and ISQ are designed to provide      
channel bank, automates                                                  complete circuit testability                       
circuit alignment.                                                      
                                                                      -  The Ultraport is available in 200 Mechanics(R) or  
Analog data lines are                                                    400 Mechanics                                      
typically used to tie
Automatic Teller Machines
and the like back to a
central computer.
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>




             2                   T1 AND WIRELESS PRODUCTS


<TABLE>
<CAPTION>
                                  FEATURED PRODUCTS                            TECHNICAL SPECIFICATIONS
----------------------------------------------------------------------------------------------------------------------------------
<S>                               <C>                                  <C>
The Teltrend T1 Performance       Performance Monitoring T1 Network   - Compatible with all leading test/monitoring systems  
Monitoring (PM) Network           Interface Unit (NIU)                                                                     
Interface Unit, Model 5760,                                           - PM data is available through front panel jack or can 
continuously monitors the         [Photo of Product]                    be retrieved remotely                                
performance of the T1 line                                                       
and stores a broad range                                              - 200 Mechanics(R) for space savings                   
of performance data for                                                       
later retrieval.                                                      - Line powered                                         
                                                       
                                                                      - Stores PM data for up to 7 days                      
-----------------------------------------------------------------------------------------------------------------------------------
Teltrend supplies a broad         Full Line of Intelligent T1           Left to right                             
line of intelligent units         Provisioning Units                  - Teltrend T1 Line Repeater                 
for provisioning T1                                            
repeatered lines.                 [Photo of Product]                  - Teltrend Intelligent T1 Office Repeaters: 
                                                                        DDM+ Mechanics                            
All units are remotely                                                  STS Mechanics                             
addressable and provisionable.                                          220 Mechanics                             
-----------------------------------------------------------------------------------------------------------------------------------
The Teltrend CellPak(TM) 504      CellPak 504                         - Available for repeatered T1, HDSL T1,  
provides a convenient                                                   and low-speed fiber configurations     
weatherproof outdoor Telco        [Photo of Product]                                         
termination package at                                                - Features separate secure access doors  
Cellular and PCS antenna sites.                                         for wireless operator and for the Telco
                                         
                                                                      - Full line protection features          
                                                            
                                                                      - UL certified                           
-----------------------------------------------------------------------------------------------------------------------------------
Teltrend provides a broad range   Mountings                           - Single and multiple mounts             
of mountings for both digital                                       
and analog services.              [Photo of Product]                  - 400 Mechanics and 200 Mechanics        

                                                                      - Wall and equipment rack configurations 
                  
</TABLE>                  
                  
(R) SLC is a registered trademark of Lucent Technologies, Inc.                  

<PAGE>   17




            3                             ISDN and DDS Products

<TABLE>
<CAPTION>
                                           FEATURED PRODUCTS            TECHNICAL SPECIFICATIONS
-------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>                          <C>
                                           
Teltrend's IDB5008I and IDB5016            IDB5008/IDB5016              - IDB5008I provides up to eight (8) ISDN circuits   
Channel Banks are designed to                                             over a single DS1 and is ideal for customer       
provide a quick economical way             [Photo of Product]             premise application                               
to provision basic rate ISDN                                                    
service in the local loop. Call                                         - IDB5016 provides up to sixteen (16) ISDN circuits 
these banks "bypass banks,"                                               over two (2) DS1s for central office and remote   
"rapid deployment banks,"                                                 or terminal applications                             
"mini-banks;" all these names                                                    
are apt.                                                                - Use standard SLC(R)- 5 type channel units            
                                                    
                                                                        - Banks can also be used to supply POTS, SPOTS,     
                                                                          COIN, DDS and other special services              
-------------------------------------------------------------------------------------------------------------------------------

Teltrend provides a full line of ISDN      Full Line of ISDN            -  D4, SLC-96, SLC-5, and SLC-2000 channel units         
provisioning units including channel       Provisioning Units           -  Repeaters available in single and dual configurations 
units, repeaters, rapid-deployment
channel banks, line powering units,        [Photo of Product]
and housings.
--------------------------------------------------------------------------------------------------------------------------------
Teltrend provides a full line of DDS       Full Line of DDS              -  D4, SLC-96, SLC-5 and SLC-2000 channel units 
provisioning units including channel       Provisioning Units            -  Full support of swtched 56 Kbs service      
units, repeaters, network interface
units (NIU's) and housings.                [Photo of Product]
--------------------------------------------------------------------------------------------------------------------------------

               
               
</TABLE>

            4                             Broadband Products

<TABLE>
<CAPTION>
                                           FEATURED PRODUCTS            TECHNICAL SPECIFICATIONS
-------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>                          <C>
                                           
Teltrend's new NetZap Plus(TM) full        NetZap Plus Full T1          - Central office unit available in 220, STS and  DDM+    
T1 HDSL system provides the latest in      HDSL System                    mechanics  
"repeaterless" T1 connectivity.                                         - Central office units power up to two doublers
                                           [Photo of Product]             plus remote unit
                                                                        - Provisionable from either end
                                                                        - Doublers available in "dual wide," "H," and           
                                                                          "400 Mechanics"
                                                                        - Graphical interface for ease of maintenance
                                                                        - Central office 220 units works from -40V to -150V
-----------------------------------------------------------------------------------------------------------------------------
Teltrend's NetZapTM fractional T1 HDSL    NetZap Fractional T1 HDSL     - Central office unit available in   
system provides 2 to 12 DSO's over an     System                          D4/SLC(R)-96 mechanics             
ordinary 2-wire loop. NetZap allows two                                 - Can be configured from either end  
or more fractional T1 customers to be     [Photo of Product]                                      
aggregated on a single T1, saving
transmission and switching facilities.
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(R) SLC is a registered trademark of
Lucent Technologies, Inc.




<PAGE>   18
Basic Drivers Behind Teltrend's U.S. Market,
and Associated Teltrend Products

<TABLE>
<CAPTION>

Telephone Service         Approximate                Approximate                   Associated Teltrend Products
                          Installed Base             Annual Growth   
                          of Access Lines            of Access Lines 
                          (end of fiscal '97)        (fiscal '98)    
------------------------------------------------------------------------------------------------------------------------------

<S>                     <C>                            <C>                        <C>                                       
POTS                    133,000,000                    4,000,000                  -    CyberBlock(R)                               
                                                                                  -    POTS/SPOTS DLC Channel Units              

Private Line Voice       16,000,000                      500,000                  -    Special Services Voice Channel Units      

Private Line Data         3,000,000                      200,000                  -    Data Station Termination Units            
                                                                                  -    ETO Channel Units                         

T1 via Repeatered Line    1,000,000                      100,000                  -    Full Line of Intelligent Office &         
                                                                                       Line Repeaters and NIU's                  

T1 via HDSL                 500,000                      400,000                  -    Full Line of Full T1 HDSL and             
                                                                                       Fractional T1 HDSL Products               

T1 via Fiber Optics         500,000                      200,000                  -    CellPak(TM)              

ISDN                      1,000,000                      600,000                  -    Full Line of ISDN Channel Units,          
                                                                                       Repeaters, and Housings                   
                                                                                  -    Protocol Converters                       
                                                                                  -    ISDN Routers                              

DDS                       5,000,000                      500,000                  -    Full Line of DDS Channel                  
                                                                                  -    Units, Repeaters, and NIU's               
--------------------------------------------------------------------------------------------------------------------------------
TOTAL                   160,000,000                    6,500,000                                                                 
</TABLE>                                               



           5                      Teltrend Limited
                                  Formerly Securicor 3net

                                  Headquartered in Basingstoke, UK, with
                                  locations in Christchurch, New Zealand and
                                  Beijing, China, Teltrend Limited develops,
                                  manufactures, and distributes products for the
                                  International ISDN market.


<TABLE>
<CAPTION>

                                                      FEATURED PRODUCTS                  TECHNICAL SPECIFICATIONS
--------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>                                <C>
Teltrend supplies a variety of                        Interchange IQ Series              The Interchange IQ Series provide:
ISDN access network solutions for Telecom                                              - ISDN Protocol Conversion        
service providers and telecom equipment               [Photo of Product]               - Port Concentration              
vendors operating within European and                                                  - Service Grooming                
other international markets.                                                           - Intelligent Routing             
                                                                                       - Remote Management               
---------------------------------------------------------------------------------------------------------------------------
Teltrend supplies high-performance                    Network IQ Series                Shown at left are the following   
multi-protocol ethernet routers which meet                                             Network IQ products:              
the needs of a wide range of users from               [Photo of Product]               - NiQ800 ISDN Small Office Router 
small office through to telephone                                                      - NiQ1000 Remote Office Router    
central office site. The Network IQ range                                              - NiQ3100 Central Site Router     
of routers meet the needs of a wide
range of general and special applications.
               
</TABLE>







<PAGE>   19

Locations of Teltrend's U.S. Sales Representatives

                                    [MAP]

Locations of Teltrend's International Sales Representatives

                                   [MAPS]

                                                               Teltrend Inc. 17



<PAGE>   20

              19   Selected Historical Financial Data
              20   Management Discussion and Analysis of Financial
                    Condition and Results of Operations
              25   Report of Independent Auditors
              26   Balance Sheets
              27   Statements of Income
              28   Statements of Changes in Stockholders' Equity
              29   Statements of Cash Flows
              30   Notes to Financial Statements



                                   Financials

The statement of operations data set forth below with respect to fiscal 1997,
1996 and 1995 and the balance sheet data at July 26, 1997 and July 27, 1996 are
derived from, and are qualified by reference to, the financial statements as
audited by Ernst & Young LLP, and should be read in conjunction with those
financial statements and notes thereto and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The statement of
operations data set forth below with respect to Fiscal 1994 and 1993 and the
balance sheet data at July 29, 1995, July 30, 1994 and July 31, 1993 are
derived from the Company's audited financial statements not included in this
Report.

     References to the "Company" herein refer to Teltrend Inc. The Company's
fiscal year ends each year on the last Saturday of July. All references to
fiscal years herein refer to fiscal years ending in the calendar year indicated
(e.g., fiscal 1997 refers to the year ended July 26, 1997).


18 Teltrend Inc.


<PAGE>   21
Selected Historical Financial Data (1)


<TABLE>
<CAPTION>
                                                                            Fiscal Year Ended July(1)
                                                                    (Dollars in thousands, except per share data)

STATEMENT OF OPERATIONS DATA
------------------------------------------------------------------------------------------------------------------------
                                                         1997         1996          1995          1994          1993(6)
                                                     -------------------------------------------------------------------
<S>                                                     <C>          <C>           <C>           <C>           <C>
STATEMENT OF OPERATIONS DATA                    
Net sales                                               $81,243       $85,913       $62,052       $49,454       $39,365
Cost of sales                                            45,296        46,644        35,991        31,130        26,576
                                                     ------------------------------------------------------------------
Gross profit                                             35,947        39,269        26,061        18,324        12,789
                                                     ------------------------------------------------------------------
Operating expenses:                             
  Sales and marketing                                     7,333         7,309         5,908         4,914         4,016
  Research and development                                9,686         7,944         5,337         4,862         4,018
  General and administrative                              4,495         4,164         3,425         2,539         2,236
                                                     -------------------------------------------------------------------
Total operating expenses                                 21,514        19,417        14,670        12,315        10,270
                                                     -------------------------------------------------------------------
Income from operations                                   14,433        19,852        11,391         6,009         2,519
Other income (expense):                         
  Interest                                                1,467           809        (8,484)(2)    (5,978)       (5,622)
  Other                                                     (30)          (44)         (204)            27         (204)
                                                     -------------------------------------------------------------------
Income (loss) before income tax provision       
  (benefit) and extraordinary items                      15,870        20,617         2,703             58       (3,307)
Income tax provision (benefit)                            6,242         8,453        (2,038)(3)         50            -
                                                     -------------------------------------------------------------------
Income (loss) before extraordinary items                  9,628        12,164         4,741              8       (3,307)
Extraordinary items(4)                                        -             -           411              -            -
                                                     -------------------------------------------------------------------
Net income (loss)                                        $9,628       $12,164        $4,330             $8      $(3,307)
                                                     -------------------------------------------------------------------
Net income per common share                               $1.45         $1.86
Average common shares outstanding                     6,654,488     6,552,339
Pro forma earnings per share (unaudited)(5)                                           $1.19          $0.63
Pro forma average common                        
  shares (unaudited)(5)                                                           5,951,485      5,943,395
                                                
BALANCE SHEET DATA                              
----------------------------------------------------------------------------------------------------------------------
Working capital                                         $44,088       $35,901       $10,188        $3,292        $2,205
Total assets                                             62,832        57,284        28,699        19,109        15,415
Long-term debt, net of current portion                        -             -             -        50,105        49,694
Stockholders' equity (deficit)                           52,435        42,645        15,417       (43,069)      (43,077)
                                                     ------------------------------------------------------------------
</TABLE>                                        

                                                
(1)  The Company's fiscal year consists of four 13 week quarters, with each
     of the first three quarters ending on the last Saturday of such quarter and
     the fourth quarter ending on the last Saturday in July.

(2)  Fiscal 1995 includes approximately $2.9 million of additional interest
     expense resulting from the accretion in the aggregate outstanding principal
     amount of a portion of the Company's outstanding long-term indebtedness.
     Substantially all of the Company's long-term indebtedness was repaid in
     full upon consummation of the IPO (as defined in Note 1 of Notes to
     Financial Statements) and the other components of the Recapitalization (as
     defined in Note 1 of Notes to Financial Statements).

(3)  In fiscal 1995, the Company eliminated its valuation allowance for net
     deferred tax assets of approximately $3.4 million.

(4)  Extraordinary items include a Prepayment Penalty ("Prepayment Penalty")
     of $500,000 associated with prepayment of the Company's former credit
     Agreement in connection with the Recapitalization (as defined in Note 1 of
     Notes to Financial Statements) and the write-off of the unamortized loan
     financing costs of $162,500 related to a portion of the Company's long-term
     indebtedness which was repaid upon consummation of the IPO (as defined in
     Note 1 of Notes to Financial Statements) and the other components of the
     Recapitalization, net of an income tax benefit of $251,750 related to the
     Prepayment Penalty and write-off.

(5)  Pro forma earnings per share and average number of shares for fiscal
     1994 and fiscal 1995 give effect to the IPO (as defined in Note 1 of Notes
     to Financial Statements) and the other components of the Recapitalization
     (as defined in Note 1 of Notes to Financial Statements), as if they
     occurred as of August 1, 1993.

(6)  Fiscal 1993 consisted of 53 weeks. The extra week had no material impact
     on the results.


                                                             Teltrend Inc.  19

<PAGE>   22
Management's Discussion and Analysis of
Financial Condition and Results of Operations 

         Cautionary Statement for Purposes of the "Safe Harbor"
         Provisions of the Private Securities Litigation Reform Act of 1995

         This Annual Report, including the following "Management's
         Discussion and Analysis of Financial Condition and Results of
         Operations," contains "forward-looking statements" within the meaning
         of the Private Securities Litigation Reform Act of 1995 concerning,
         among other things, the Company's prospects, developments and business
         strategies for its operations, including the development and marketing
         of certain new products and the anticipated future growth in certain
         markets in which the Company currently markets and sells its products
         or anticipates selling and marketing its products in the future. These
         forward-looking statements (i) are identified by their use of such
         terms and phrases as "we believe," "are needed," "we intend," "we also
         intend," "should pave the way," "never felt better about the future,"
         "should be," "should allow," "should increase," "should help," "should
         tend," "is now in the process of becoming," "we expect," "should
         generate," "should see," "projected," "projects," "will almost
         triple," "is expected," "should enlarge," "could lead," "can provide,"
         "is coming up with," "will make," "will also be required," "intends,"
         "will allow," "will help," "will continue," "will be," (ii) are
         subject to risks and uncertainties and represent the Company's present
         expectations or beliefs concerning future events, and (iii) in certain
         cases (as indicated herein), are based on industry and market data and
         estimates developed by others. The Company cautions that the
         forward-looking statements are qualified by important factors that
         could cause actual results to differ materially from those in the
         forward-looking statements, including (i) risks of general market
         conditions, including demand for the Company's products and services,
         competition and price levels and the Company's historical dependence
         on relatively few product lines and on certain key customers, and (ii)
         risks inherent to the telecommunications industry, including rapidly
         changing technology, evolving industry standards, changes in customer
         requirements, price-competitive bidding, frequent product
         introduction, changing government regulations and potential
         competition from AT&T, the RBOCs, Lucent Technologies, Inc. and
         others. Results actually achieved thus may differ materially from
         expected results included in these statements. See "Factors That May
         Affect Future Results" in the Company's fiscal 1997 Annual Report on
         Form 10-K as filed with the Securities and Exchange Commission.

GENERAL
------------------------------------------------------------------------------

         Teltrend Inc. ("Teltrend" or the "Company") designs,
         manufactures and markets a broad range of transmission products, such
         as channel units, repeaters and termination units, that are used by
         telephone companies ("Telcos") to provide voice and data services over
         the existing telephone network. Substantially all of the Company's
         products are sold directly to the Regional Bell Operating Companies
         and their local affiliates (collectively, the "RBOCs") for use with
         copper wireline in the local subscriber loop (the "Local Loop").  The
         demand for high speed digital transmission over the telephone network
         continues to increase as a result of the demand for high capacity
         voice lines and the growing communications requirements of LAN
         interconnections, WANs, on-line data networks (which typically connect
         point-of-sale credit card authorization terminals, automatic teller
         machines, lottery terminals and reservation stations to a central
         computer), the Internet, other on-line data services and, to a lesser
         extent, video conferencing. The Company's current products enhance the
         transmission of voice and data over the copper network and permit the
         Telcos to maximize use of the existing infrastructure of copper
         wireline.

                The Company's principal customers are the RBOCs, but the
         Company also sells its products to certain independent Telcos and
         other companies. The Company's principal product lines include:  (i)
         Tl products which allow Telcos to deploy 1.544 Mbit/sec digital
         services; (ii) Voice Frequency ("VF") products which are primarily
         used to provide analog data transmission services via dedicated lines;
         (iii) Dataphone Digital Services ("DDS") products which are used to
         provide switched and dedicated line digital transmissions at rates
         from 2.4 to 64 Kbit/sec; (iv) Integrated Services Digital Network
         ("ISDN") products which provide switched digital transmission of voice
         or data at rates of up to 128 Kbit/sec over copper wireline; and (v)
         digital loop carrier ("DLC") products which are cabinets and plug-in
         channel units that are compatible with D4, SLC(R) Series 5 and SLC 96
         systems.  DLC products include plain old telephone service ("POTS")
         and special plain old telephone service ("SPOTS") products, which are
         used to provide traditional analog voice and modem services. In
         addition, the Company recently began selling both 2 and 4-wire High
         bit-rate Digital Subscriber Line ("HDSL") products which allow Telcos
         to provide T1 service without the need to condition the copper
         wireline or install mid-span repeaters for distances of up to 12,000
         feet.

20 Teltrend Inc.



<PAGE>   23
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued) 

                On September 18, 1997, the Company acquired all the outstanding
         shares of Securicor 3net Limited of Basingstoke, England and its U.S.
         affiliate Securicor 3net Inc. (collectively, "3net") from 3net
         Holdings Limited of Surrey, England ("3net Holdings") for a total
         acquisition cost of approximately $16 million. The Company funded its
         acquisition of 3net with its cash and cash equivalents on hand and the
         proceeds from the sale of certain of its investments in debt
         securities. 3net Holdings is a subsidiary of Securicor Communications
         Limited of Surrey, England ("Securicor Communications"). Based in the
         United Kingdom, and with operations in New Zealand, China and the
         United States, 3net is a leading developer of ISDN products for
         communications equipment and service providers. 3net also supplies LAN
         Internetworking, ISDN Remote Access and secure Virtual Private
         Networking solutions for business customers worldwide. The Company
         believes 3net will help it to expand into foreign markets and will
         allow the Company to deliver ISDN products for the infrastructure and
         terminal equipment markets.


RESULTS OF OPERATIONS
------------------------------------------------------------------------------
         The following table sets forth certain statements of operations
         data as a percentage of net sales for fiscal 1997, 1996 and 1995. The
         Company's fiscal year typically consists of 52 weeks (four 13 week
         quarters), with every fifth year consisting of 53 weeks.

<TABLE>
<CAPTION>
                                                        Fiscal Year Ended July
                                                       1997      1996      1995
                                                      --------------------------
<S>                                                   <C>       <C>       <C>

Net sales                                              100.0%    100.0%     100.0%
Cost of sales                                           55.7      54.3       58.0
                                                      ---------------------------
Gross profits                                           44.3      45.7       42.0
                                                      ---------------------------
Operating expenses:
  Sales and marketing                                    9.0       8.5        9.5
  Research and development                              11.9       9.3        8.6
  General and administrative                             5.5       4.8        5.5
                                                      ---------------------------
  Total operating expenses                              26.4      22.6       23.6
                                                      ---------------------------
Income from operations                                  17.9      23.1       18.4
Interest expense                                           -         -      (13.7)(1)
Other income (expense)                                   1.7       0.9       (0.3)
                                                      ---------------------------
Income before income taxes and extraordinary items      19.6      24.0        4.4
Income tax provision (benefit)                           7.7       9.8       (3.3)(2)
                                                      ---------------------------
Income before extraordinary items                       11.9      14.2        7.7
Extraordinary items                                        -         -       (0.7)(3)
                                                      ---------------------------
Net income                                              11.9%     14.2%       7.0%
                                                      ---------------------------
</TABLE>


(1)  Includes approximately $2.9 million of additional expense (4.7% of net
     sales) resulting from the accretion of the outstanding principal amount of
     a portion of the Company's long-term indebtedness on August 1, 1994.
     Substantially all of the Company's long-term indebtedness was repaid upon
     consummation of the IPO and the other components of the Recapitalization.
     See Note 1 of Notes to Financial Statements.

(2)  Includes elimination of a valuation allowance for net deferred tax
     assets of approximately $3.4 million (5.4% of net sales).

(3)  Includes a Prepayment Penalty of $500,000 (0.8% of net sales) and the
     write-off of the unamortized loan financing costs of $162,500 (0.3% of net
     sales) related to a portion of the Company's long-term indebtedness which
     was repaid upon consummation of the IPO and the other components of the
     Recapitalization, net of an income tax benefit of $251,750 (0.4% of net
     sales) related to the Prepayment Penalty and write-off. See Note 14 of
     Notes to Financial Statements.

                                                                Teltrend Inc. 21


<PAGE>   24
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)

FISCAL 1997 COMPARED TO FISCAL 1996
----------------------------------------------------------------------------    
         NET SALES. Net sales for fiscal 1997 decreased 5.4%, or approximately
         $4.7 million, to approximately $81.2 million, from approximately $85.9
         million in fiscal 1996. The decrease in net sales was primarily due to
         a decrease in unit volume sales of the Company's VF/DLC, T1/Wireless
         and ISDN/DDS products of approximately $3.7 million, $1.0 million and
         $0.2 million, respectively. The decrease was partially offset by an
         increase of approximately $0.1 million in unit volume sales of HDSL
         products.

                The decrease in the unit volume sales of VF/DLC products was
         the result of generally declining sales of VF products throughout the
         market, offset somewhat by an increase in the sale of DLC products.
         The decline in sales of VF products was a continuation of a downward
         trend in VF sales resulting from a decline in the demand for analog
         services as demand for digital transmission services grows. The
         Company believes demand for digital transmission services will
         continue to grow as the cost of providing these services becomes less
         expensive.

                The decrease in the sales of the Company's T1/Wireless products
         was caused largely by a decrease in the intelligent T1 repeater unit
         volume sales. However, the losses were offset by an increase in T1 CPE
         and CellPakTM unit volume sales. Sales of the Company's T1 intelligent
         line repeaters ("ILRs") were negatively affected by the increased
         installation of HDSL equipment at certain RBOCs. However, another
         intelligent T1 repeater product, the intelligent high density
         repeaters ("IHRs") increased in unit volume sales primarily due to
         their deployment in conjunction with fiber optic installations. Sales
         of the Company's T1 CPE products, consisting of Network Interface
         Units ("NIUs") and associated mountings, increased due primarily to a
         sales agreement signed in late fiscal 1996 and the approval by certain
         RBOCs of new product iterations.

                The small decrease in ISDN/DDS sales resulted primarily from a
         decrease in the price paid by certain RBOCs for ISDN/DDS products
         offset by an increase in the number of RBOCs that have qualified these
         products since fiscal 1996.

         GROSS PROFIT. Gross profit in fiscal 1997 decreased 8.5%, or
         approximately $3.3 million, to approximately $35.9 million from
         approximately $39.3 million for fiscal 1996. Gross profit margin in
         fiscal 1997 decreased to 44.3% from 45.7% for fiscal 1996. The
         decrease in gross profit and gross profit margin was primarily
         attributable to decreased sales volume and the resulting smaller
         revenue base over which the Company could spread its fixed
         manufacturing costs. Other causes included increased pressure to
         reduce the Company's prices, especially for ISDN products, and the
         Company's sale of several relatively new products with lower gross
         profit margins.

         SALES AND MARKETING. Sales and marketing expenses in fiscal
         1997 and fiscal 1996 were approximately $7.3 million. As a percentage
         of net sales, sales and marketing expenses increased to 9.0% in 
         fiscal 1997 from 8.5% in fiscal 1996 due to the lower sales in fiscal
         1997.

         RESEARCH AND DEVELOPMENT. Research and development expenses in
         fiscal 1997 increased 21.9%, or approximately $1.7 million, to
         approximately $9.7 million from approximately $7.9 million in fiscal
         1996. As a percentage of total net sales, research and development
         expenses increased to 11.9% in fiscal 1997 from 9.2% in fiscal 1996.
         The increase in dollar amount was due primarily to increases in
         personnel associated expenses, such as recruiting and salaries for
         newly hired personnel, related support equipment and the outsourcing
         of certain development costs. The Company's goal is to maintain
         expenditures for research and development at a level between 11% and
         12% of net annual sales.

         GENERAL AND ADMINISTRATIVE. General and administrative expenses
         in fiscal 1997 increased 7.9%, or approximately $0.3 million, to
         approximately $4.5 million from approximately $4.2 million in fiscal
         1996. As a percentage of total net sales, general and administrative
         expenses increased to 5.5% in  fiscal 1997 from 4.8% in fiscal 1996.
         The dollar increase was largely the net result of an increase in
         salaries and professional services and a reduction in bad debt expense
         and accrued bonuses.

         OTHER INCOME. Other income in fiscal 1997 was approximately
         $1.4 million compared to approximately $0.8 million in fiscal 1996.
         The increase was due to interest earned on cash equivalents and
         marketable securities purchased with the proceeds from the Company's
         sale in the second quarter of fiscal 1996 in a registered public
         offering of 575,000 shares of its Common Stock, the "Second Public
         Offering," and cash flow from operations. See Note 1 of Notes to
         Financial Statements.

         INCOME TAXES. A provision for income taxes of approximately
         $6.2 million was recorded in fiscal 1997 compared to approximately
         $8.5 million in fiscal 1996. This decrease in income tax provision is
         principally a function of the change in the level of the Company's net
         income before taxes in fiscal 1997 compared to fiscal 1996.

22  Teltrend Inc.



<PAGE>   25
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)

FISCAL 1996 COMPARED TO FISCAL 1995
-----------------------------------------------------------------------------
         NET SALES. Net sales for fiscal 1996 increased 38.5%, or
         approximately $23.9 million, to approximately $85.9 million, from
         approximately $62.1 million in fiscal 1995. The increase in net sales
         was due to an increase in unit volume sales of all product lines
         except VF. Increases in unit volume sales were recorded by T1, DDS,
         ISDN and POTS/SPOTS products of approximately $11.8 million, $7.4
         million, $3.5 million and $2.6 million, respectively, which was
         partially offset by a $1.9 million decrease in unit volume sales of VF
         products. Unit volume sales of the Company's T1 products increased
         primarily as a result of qualifying certain new products for sale
         during fiscal 1995 and the first quarter of fiscal 1996. In addition,
         the Company experienced higher sales of existing T1 products to
         certain customers who had previously purchased lesser amounts of such
         products. The increase in unit volume DDS sales resulted primarily
         from an increase in the number of RBOCs that had qualified DDS
         products from two in the first quarter of fiscal 1995 to all seven
         RBOCs by the third quarter of fiscal 1996. Sales of the Company's ISDN
         products commenced in the third quarter of fiscal 1995. By the fourth
         quarter of fiscal 1996 five RBOCs and GTE had qualified one or more
         ISDN products for use. POTS/SPOTS unit volume sales increased due to
         significant sales of 2FX0, a new product, at two RBOCs in fiscal 1996.
         Unit volume sales of VF products declined as a result of the gradual
         decline, in overall demand for analog VF products as telecommunication
         applications increasingly require the improved speed and reliability
         offered by digital transmission.

         GROSS PROFIT. Gross profit in fiscal 1996 increased 50.7%, or
         approximately $13.2 million, to approximately $39.3 million from
         approximately $26.1 million in fiscal 1995. Gross profit margin for
         fiscal 1996 increased to 45.7% from 42.0% for fiscal 1995. While the
         increase in gross profit was primarily attributable to the increase in
         net sales, the increase in gross profit margin was due primarily to
         the ability of the Company to spread fixed manufacturing overhead
         costs over a larger revenue base. Other factors contributing to the
         increase in gross profit margin were the initial sales to several
         customers of products with relatively high gross profit margins, and
         reduced labor and material costs for many of the Company's established
         products.

         SALES AND MARKETING. Sales and marketing expenses in fiscal
         1996 increased 23.7%, or approximately $1.4 million, to approximately
         $7.3 million from approximately $5.9 million in fiscal 1995. As a
         percentage of net sales, sales and marketing expenses decreased to
         8.5% for fiscal 1996 from 9.5% for fiscal 1995. The increase in the
         dollar amount of sales and marketing expenses was primarily due to
         increased sales commissions resulting from higher sales, greater
         expenditures on new product and other marketing promotions and an
         increase in expenses resulting from the hiring of additional sales and
         marketing personnel.

         RESEARCH AND DEVELOPMENT. Research and development expenses in
         fiscal 1996 increased 48.8%, or approximately $2.6 million, to
         approximately $7.9 million from approximately $5.3 million in fiscal
         1995. As a percentage of total net sales, research and development
         expenses increased to 9.3% in fiscal 1996 from 8.6% in fiscal 1995.
         The increase in dollar amount of this expense was due primarily to
         increases in personnel associated expenses, such as recruiting and
         salaries for newly hired personnel, and related support equipment.

         GENERAL AND ADMINISTRATIVE. General and administrative expenses
         in fiscal 1996 increased 21.6%, or approximately $700,000, to
         approximately $4.2 million from approximately $3.4 million in fiscal
         1995. As a percentage of total net sales, general and administrative
         expenses decreased to 4.8% in fiscal 1996 from 5.5% in fiscal 1995.
         The dollar increase in this expense was largely attributable to
         accruals for employee bonuses that are based, to a significant degree,
         on Company performance; higher accruals for license fees; and to
         additional professional fees and insurance expenses incurred as a
         result of being a publicly-owned company during fiscal 1996 as opposed
         to only two months of fiscal 1995.

         INTEREST. The Company incurred $18,000 interest expense for
         fiscal 1996, compared to approximately $8.5 million for fiscal 1995.
         The decrease in interest expense was due to the repayment of
         substantially all of the Company's long-term indebtedness upon
         consummation of the IPO and the other components of the
         Recapitalization in June 1995. During the first quarter of fiscal
         1996, the remaining long-term indebtedness, a note payable to a former
         shareholder, was also repaid in full.

         INCOME TAXES. A provision for income taxes of approximately
         $8.5 million was recorded for fiscal 1996. This provision is a
         function of the level of the Company's net income before income taxes
         in fiscal 1996. In fiscal 1995, a benefit from income taxes of
         approximately $2.0 million was recorded. This benefit resulted from
         the elimination of the Company's valuation allowance for net deferred
         tax assets in fiscal 1995 as a consequence of the Recapitalization
         which reduced the Company's debt burden and thus provided the Company
         the ability to generate taxable income.

                                                                Teltrend Inc. 23


<PAGE>   26
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------------------------------------------------------

         At July 26, 1997, the Company had no long-term indebtedness and
         had working capital of approximately $44.1 million, which included
         cash and cash equivalents of approximately $11.8 million and
         marketable securities of approximately $20.9 million. The increase in
         working capital from approximately $35.9 million at the end of fiscal
         1996 was due primarily to cash flow from operations.

                Cash used for capital expenditures was approximately
         $4.2 million in fiscal 1997 compared to approximately $3.2 million for
         fiscal 1996. Most of the expenditures were for the purchase of land
         for the construction of a new facility, manufacturing test equipment
         and engineering equipment.

                As of July 26, 1997, the Company had net trade accounts
         receivable of approximately $7.8 million, compared to approximately
         $11.9 million as of the end of  fiscal 1996. This decrease was due
         primarily to (i) a decrease in net sales for the fourth quarter
         compared to the Company's net sales for the fourth quarter of fiscal
         1996, and (ii) the collection of certain past-due receivables,
         resulting in a decrease in the average number of days receivables were
         outstanding. For fiscal 1997, inventories decreased by approximately
         $1.3 million, from approximately $12.3 million at the end of fiscal
         1996 to approximately $11.0 million as of July 26, 1997. The decrease
         in inventory was primarily a result of decreased sales volume and
         lower standard material costs.

                On September 18, 1997, the Company purchased all of the shares
         of 3net for a total acquisition cost of approximately $16 million. The
         Company funded the purchase price for 3net with its cash and cash
         equivalents on hand and the proceeds from the sale of certain of its
         investments in debt securities.

                The Company maintains a credit facility (the "Bank Facility"),
         which provides, subject to certain restrictions and based on the
         Company's accounts receivable and inventory levels, up to $15.0
         million on an unsecured basis for working capital financing. There are
         no amounts presently outstanding under the Bank Facility. Based on the
         Company's accounts receivable and inventory levels as of July 26,
         1997, the Company estimates that approximately $11.3 million is
         available to it under the Bank Facility as of the date hereof.
         Borrowings under the Bank Facility will mature on June 30, 1998 and
         bear interest at a floating rate based on (i) LIBOR or the prime rate
         offered by the lender from time to time, and (ii) the Company's
         debt-to-equity ratio, determined quarterly by the Company. The terms
         of the Bank Facility prohibit the Company from declaring and paying
         dividends in any fiscal year which exceed, in the aggregate, 50% of
         the Company's net income for the immediately preceding fiscal year.

                The Company expects that existing cash and cash equivalents,
         marketable securities, cash from operations, plus available borrowings
         under the Bank Facility will be adequate to fund the Company's working
         capital needs for the foreseeable future.



24 Teltrend Inc.




<PAGE>   27
Report of Management


         The management of Teltrend Inc. has prepared and is responsible
         for the integrity of the information presented in this Annual Report,
         including the Company's financial statements. These statements have
         been prepared in conformity with generally accepted accounting
         principles and include, where necessary, informed estimates and
         judgments by management, with due consideration given to materiality.

                The Company maintains systems of accounting and internal
         controls designed to provide assurance that assets are properly
         accounted for, and that the financial records are reliable for
         preparing financial statements. The systems are augmented by qualified
         personnel and reviewed on a periodic basis.

                Our independent auditors, Ernst &Young LLP, conduct annual
         audits of our financial statements in accordance with generally
         accepted auditing standards, which include the review of internal
         controls for the purpose of establishing audit scope, and issue an
         opinion on the fairness of such financial statements.

                The Company has an audit committee, composed solely of outside
         directors that meets periodically with management and the independent
         auditors to review the manner in which they are discharging their
         responsibilities and to discuss auditing, internal accounting
         controls, and financial reporting matters. The independent auditors
         periodically meet alone with the Audit Committee and have free access
         to the Audit Committee at any time.


     /s/ Howard L. Kirby, Jr.                    /s/ Douglas P. Hoffmeyer
     -----------------------------------------   -----------------------------
         Howard L. Kirby, Jr.                        Douglas P. Hoffmeyer
         President and Chief Executive Officer       Vice President, Finance



Report of Independent Auditors

         To the Stockholders and Board of Directors Teltrend Inc.,

         We have audited the accompanying balance sheets of Teltrend
         Inc. as of July 26, 1997 and July 27, 1996, and the related statements
         of income, changes in stockholders' equity and cash flows for the
         years ended July 26, 1997, July 27, 1996 and July 29, 1995. These
         financial statements are the responsibility of the Company's
         management. Our responsibility is to express an opinion on
         these financial statements based on our audits.

                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 financial position of
         Teltrend Inc. as of July 26, 1997 and July 27, 1996, and the results
         of its operations and its cash flows for the years ended July 26,
         1997, July 27, 1996 and July 29, 1995 in conformity with generally
         accepted accounting principles.
 
/s/Ernst & Young LLP
----------------------
Ernst & Young LLP

Chicago, Illinois
August 25, 1997
except for Note 15, as to which the date is September 18, 1997

                                                        Teltrend Inc.  25


<PAGE>   28


Teltrend Inc.
Balance Sheets



<TABLE>
<CAPTION>
ASSETS                                                                                       July 26, 1997   July 27, 1996
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                              <C>            <C>
                Current assets:                                                          
                   Cash and cash equivalents                                                 $11,837,265    $22,889,192    
                   Marketable securities                                                      20,930,326              -    
                   Trade accounts receivable, net of allowance for                                                         
                    doubtful accounts of $100,000 and $260,192                                 7,833,708     11,940,566    
                   Inventories                                                                11,048,285     12,349,169    
                   Deferred income taxes                                                       1,870,560      2,227,232    
                   Prepaid expenses and other current assets                                     964,092      1,133,831    
                                                                                             --------------------------
                                                                                              54,484,236     50,539,990    
                Land                                                                           1,949,234              -    
                Machinery and equipment                                                       14,527,782     12,554,728    
                Leasehold improvements                                                           934,897        895,506    
                Accumulated depreciation                                                     (9,372,063)    (7,579,651)    
                                                                                             --------------------------
                                                                                               8,039,850      5,870,583    
                Deferred income taxes                                                            134,428        766,694    
                Other assets, less accumulated amortization of $123,828 and $100,091             173,020        106,819    
                                                                                             --------------------------
                                                                                             $62,831,534    $57,284,086    
                                                                                             --------------------------
</TABLE>

<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------------
                <S>                                                                           <C>            <C>
                Current liabilities:                                                                                       
                   Accounts payable                                                           $3,443,249     $6,017,340    
                   Accrued expenses                                                            6,903,763      8,621,970    
                   Income taxes payable                                                           49,032              -    
                                                                                             --------------------------
                                                                                              10,396,044     14,639,310    
                Commitments and Contingencies                                                                              
                                                                                                                           
                Stockholders' equity:                                                                                      
                   Common Stock:                                                                                           
                      Common stock, $0.01 par value, 15,000,000 shares                                                     
                         authorized and 6,436,321 and 6,422,596 issued and                                                 
                         outstanding respectively                                                 64,363         64,226    
                Additional paid-in capital                                                    99,327,697     99,165,221    
                Accumulated deficit                                                          (46,956,570)   (56,584,671)    
                                                                                             --------------------------
                                                                                              52,435,490     42,644,776    
                                                                                             --------------------------
                                                                                             $62,831,534    $57,284,086    

</TABLE>

The accompanying notes are an integral part of these financial statements


26 Teltrend Inc.


<PAGE>   29





Teltrend Inc.
Statements of Income

<TABLE>
<CAPTION>

                                                                                    Year Ended
                                                                  ---------------------------------------------
                                                                  July 26, 1997  July 27, 1996   July 29, 1995
                                                                  ---------------------------------------------
<S>                                                                <C>             <C>            <C>
Net sales                                                           $81,242,707    $85,912,819    $62,052,041
Cost of sales                                                        45,296,096     46,643,923     35,991,032
                                                                   --------------------------------------------
Gross profit                                                         35,946,611     39,268,896     26,061,009
                                                                   --------------------------------------------
Operating expenses:                                       
  Sales and marketing                                                 7,333,068      7,308,716      5,907,864
  Research and development                                            9,685,832      7,943,964      5,337,455
  General and administrative                                          4,494,643      4,163,984      3,424,860
                                                                   --------------------------------------------
                                                                     21,513,543     19,416,664     14,670,179
                                                                   --------------------------------------------
Income from operations                                               14,433,068     19,852,232     11,390,830
                                                                   --------------------------------------------
Other income (expense):                                   
  Interest expense to related parties                                         -              -     (8,422,937)
  Interest expense - others                                                (776)       (17,931)       (78,419)
  Interest income                                                     1,467,750        826,672         17,350
  Other - net                                                           (29,954)       (44,112)      (204,306)
                                                                   --------------------------------------------
                                                                      1,437,020        764,629     (8,688,312)
                                                                   --------------------------------------------
Income before income taxes and                            
  extraordinary items                                                15,870,088     20,616,861      2,702,518
Provision (benefit) for income taxes                                  6,241,987      8,452,913     (2,038,250)
                                                                   --------------------------------------------
Income before extraordinary items                                     9,628,101     12,163,948      4,740,768
Extraordinary items                                                           -              -       (410,750)
                                                                   --------------------------------------------
Net income                                                           $9,628,101    $12,163,948     $4,330,018

                                                                   --------------------------------------------
Net income per common share                                               $1.45          $1.86
                                                                   -----------------------------
Average common shares outstanding                                     6,654,488      6,552,339
                                                                   -----------------------------
Pro forma net income (unaudited)                                                                   $7,105,524
Pro forma net income per common                                                                    ----------
  share (unaudited)                                                                                     $1.19
                                                                                                   ----------
Pro forma average common shares                           
  outstanding (unaudited)                                                                           5,951,485
                                                                                                    ---------
</TABLE>                                                  




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


                                                        Teltrend Inc. 27



<PAGE>   30
Teltrend Inc.
Statements of Changes in Stockholder's Equity

<TABLE>
<CAPTION>
                                                                  Common       Additional     Accumulated
                                                                   Stock     Paid-in Capital     Deficit
                                                                  -----------------------------------------
<S>                                                               <C>        <C>             <C>              
Balance, July 30, 1994                                              $ 3,902      $30,006,143  $(73,078,637)
  Conversion of shares as described in Recapitalization              16,558          (16,558)             -
  Initial public offering                                            37,375       54,079,817              -
  Options exercised                                                     403           37,902              -
  Net income                                                              -                -      4,330,018
                                                                   ----------------------------------------
Balance, July 29, 1995                                               58,238       84,107,304    (68,748,619)
  Second public offering                                              5,750       14,750,001              -
  Options exercised                                                     238            3,581              -
  Tax benefit from exercise of stock options                              -          304,335              -
  Net income                                                              -                -     12,163,948
                                                                   ----------------------------------------
Balance, July 27, 1996                                               64,226       99,165,221    (56,584,671)
  Options exercised                                                     137           17,899              -
  Tax benefit from exercise of stock options                              -          144,577              -
  Net income                                                              -                -      9,628,101
                                                                   ----------------------------------------
Balance, July 26, 1997                                              $64,363      $99,327,697   $(46,956,570)
                                                                   ----------------------------------------
</TABLE>

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


28 Teltrend Inc.
<PAGE>   31
Teltrend Inc.
Statement of Cash Flows


<TABLE>
<CAPTION>
                                                                                       Year Ended                       
                                                                       -------------------------------------------      
OPERATING ACTIVITIES                                                   July 26, 1997  July 27, 1996  July 29, 1995      
------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>            <C>            <C>                
                 Net income                                               $9,628,101    $12,163,948     $4,330,018      
                 Adjustments to reconcile net income to net cash
                   provided by operating activities:
                   Depreciation and amortization                           2,028,221      1,741,465      1,336,941      
                   Write-off of deferred financing costs                           -              -        162,500      
                   (Gain) loss on sale of equipment                          (13,795)         6,739        191,706      
                 Tax benefit from exercise of common stock options           144,577        304,335              -      
                 Issuance of additional Series A and B debentures                                                       
                   in lieu of interest payments                                    -              -      3,099,204      
                 Changes in certain assets and liabilities:                                                             
                   Accounts receivable                                     4,106,858     (3,840,996)    (2,101,261)     
                   Inventories                                             1,300,884     (4,420,147)       851,478      
                   Deferred income taxes                                     988,938          6,074     (3,000,000)     
                   Prepaid expenses and other current assets                 169,739       (436,907)      (254,472)     
                   Accounts payable                                       (2,574,091)       603,470      1,977,061      
                   Income taxes payable                                       49,032       (720,773)       720,772      
                   Accrued expenses                                       (1,718,208)     1,712,028        261,337      
                                                                          ----------------------------------------
                 Net cash provided by operating activities                14,110,256      7,119,236      7,575,284      


FINANCING ACTIVITIES
------------------------------------------------------------------------------------------------------------------

                 Exercise of common stock options                             18,036          3,819         38,308      
                 Proceeds from public stock offerings                              -     14,755,751     54,117,191      
                 Payment of long-term debt                                         -       (237,464)   (69,954,098)     
                 Proceeds from issuance of long-term debt                          -              -     15,000,000      
                                                                          ----------------------------------------
                 Net cash provided by (used for) 
                   financing activities                                       18,036     14,522,106       (798,599)     
                                                                                                                        


INVESTING ACTIVITIES
------------------------------------------------------------------------------------------------------------------

                 Capital expenditures                                     (4,192,152)    (3,203,557)    (2,419,686)     
                 Purchase of marketable securities                       (40,744,863)             -              -      
                 Proceeds from sale of marketable securities              19,814,537              -              -      
                 Proceeds from sale of equipment                              32,197         18,464         49,670      
                 Other investing activities                                  (89,938)        16,522       (133,980)     
                                                                          ----------------------------------------
                 Net cash used for investing activities                  (25,180,219)    (3,168,571)    (2,503,996)     
                                                                          ----------------------------------------
                 Net increase (decrease) in cash and
                   cash equivalents                                      (11,051,927)    18,472,771      4,272,689      
                 Cash and cash equivalents, beginning of year             22,889,192      4,416,421        143,732      
                                                                          ----------------------------------------
                 Cash and cash equivalents, end of year                  $11,837,265    $22,889,192     $4,416,421      
                                                                          ----------------------------------------
</TABLE>


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

                                                             Teltrend Inc.  29






<PAGE>   32
Teltrend Inc.
Notes to Financial Statements

1  BASIS OF PRESENTATION
-------------------------------------------------------------------------------
         THE RECAPITALIZATION 
         During the fourth quarter of fiscal 1995, Teltrend Inc. (the
         "Company") completed a recapitalization (the "Recapitalization"). The
         principal components of the Recapitalization included (i) the
         conversion of all of the Company's existing capital stock whereby each
         issued and outstanding share of Class A common stock, $.01 par value
         per share, of the Company (the "Old Class A Stock") was converted into
         6.086133 shares of a new class of common stock, $.01 par value per
         share (the "Common Stock"), of the Company and each issued and
         outstanding share of Class B common stock, $.01 par value per share
         (the "Old Class B Stock"), and Class C common stock, $.01 par value
         per share (the "Old Class C Stock"), of the Company was canceled (the
         "Common Stock Conversion"), (ii) the sale by the Company of 3,737,500
         shares of Common Stock in an initial public offering (the "IPO") at a
         price per share of $16.00 (less underwriting discounts and commissions
         of $1.12 per share), (iii) the issuance by the Company of shares of a
         new Class A common stock, $.01 par value per share (the "Class A
         Stock"), to certain stockholders in exchange for an equal number of
         shares of Common Stock (the "Common Stock Exchange"), (iv) the merger
         of all of the Company's subsidiaries with and into the Company, and
         (v) the payment, using the net proceeds of the IPO, of all of the
         Company's outstanding indebtedness under its Series B Debentures and
         its credit agreement with The Prudential Insurance Company of America
         and Pruco Life Insurance Company (the "Former Credit Agreement," which
         consisted of term loans, a revolving loan facility and Series A
         Debentures), as well as certain related obligations (the "Debt
         Payment").

         SECOND PUBLIC OFFERING
         During the second quarter of fiscal 1996, the Company sold an
         additional 575,000 shares of its Common Stock pursuant to a registered
         public offering (the "Second Public Offering") of shares of Common
         Stock. The net proceeds of the Second Public Offering received by the
         Company totalled approximately $14.7 million (after deducting
         underwriting discounts, commissions and expenses). In connection with
         the Second Public Offering all of the outstanding shares of Class A
         Stock were sold, and upon such sale automatically converted into an
         equal number of shares of Common Stock. Accordingly, no shares of the
         Company's Class A Stock were outstanding as of July 26, 1997.


         PRO-FORMA NET INCOME PER SHARE
         Pro forma net income and pro forma net income per share data is
         based on historical net income adjusted to reflect the
         Recapitalization as if it had occurred as of August 1, 1993.


2  DESCRIPTION OF BUSINESS
-------------------------------------------------------------------------------
         The Company is an independent equipment supplier to the special
         service segment of the telecommunication industry. The Company
         manufactures and markets telecommunication equipment and related
         products that monitor, clarify, convert, switch, transmit, or
         otherwise process signals in telecommunication lines of voice and data
         communication networks. The Company's year-end is the last Saturday in
         July for financial reporting and tax purposes.


3  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-------------------------------------------------------------------------------

         CASH AND CASH EQUIVALENTS
         The Company considers all highly liquid investments with a
         maturity of three months or less when purchased to be cash
         equivalents.

         MARKETABLE SECURITIES
         The Company invests in debt instruments with a maturity of
         greater than three months and less than or equal to one year. Such
         securities are classified as held-to-maturity, as the Company has the
         intent and the ability to hold these securities until maturity. These
         securities are carried at amortized cost, which approximates fair
         value.

         INVENTORIES
         Inventories are stated at the lower of cost as determined by
         the first in, first out method or market value.


30  Teltrend Inc.



<PAGE>   33
Teltrend Inc.
Notes to Financial Statements (continued)

3  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT)
--------------------------------------------------------------------------------

         REVENUE RECOGNITION
         The Company recognizes revenue upon shipment of goods and
         transfer of title to customers.

         INCOME TAXES
         The Company accounts for income taxes using the
         liability method as required by Financial Accounting Standards Board
         Statement No. 109, "Accounting for Income Taxes".

         EQUIPMENT AND LEASEHOLD IMPROVEMENTS
         Equipment and leasehold improvements are recorded at cost. The
         Company uses the straight-line method of computing provisions for
         depreciation and amortization of equipment and leasehold improvements
         over estimated useful lives ranging from three to ten years.
 
         GOODWILL
         At each balance sheet date, the Company evaluates for
         recognition of potential impairment its recorded goodwill against its
         projected discounted cash flows.

         USE OF ESTIMATES
         The preparation of financial statements of conformity with
         generally accepted accounting principles requires management to make
         estimates and assumptions that affect the amounts reported in the
         financial statements and accompanying notes. Actual results could
         differ from these estimates.

         EARNINGS PER SHARE
         The Company computes earnings per share by dividing net income
         by the weighted average number of shares of common stock and common
         stock equivalents outstanding. In February 1997, the Financial
         Accounting Standards Board issued Statement No. 128, Earnings per
         Share, which is required to be adopted on December 31, 1997. At that
         time, the Company will be required to change the method currently used
         to compute earnings per share and to restate all prior periods. Under
         the new requirements for calculating basic earnings per share, the
         dilutive effect of stock options will be excluded. The impact is
         expected to result in an increase in basic earnings per share for each
         of the fiscal years ending July 26, 1997 and July 27, 1996 and the pro
         forma earnings per share for the fiscal year ending July 29, 1995 of
         $.05, $.08 and $.03 per share respectively. The impact of Statement
         No. 128 on the calculation of diluted earnings per share for these 12
         month periods is not expected to be material.

         STOCK OPTIONS
         Stock options are accounted for in accordance with Accounting
         Principles Board Opinion No. 25, "Accounting for Stock Issued to
         Employees" ("APB #25").  Under APB #25, no compensation expense is
         recognized when the exercise price of the option equals the fair value
         of the underlying stock on the grant date.

         RECLASSIFICATION
         Certain amounts in the fiscal 1996 Financial Statements have
         been reclassified to conform to fiscal 1997 presentation.


4  RETIREMENT INVESTMENT PLAN
-------------------------------------------------------------------------------

         The Company has a defined-contribution plan covering all full
         and part-time personnel who have a minimum of one-half year of service
         and have attained the age of 21. The plan became effective January 1,
         1990. Participants may contribute between 1% and 15% of their annual
         compensation. Since January 1, 1994, the Company contributes $.40 for
         each $1.00 contributed to the plan by the participant up to a maximum
         of 5% of the participant's annual compensation. Beginning on August 1,
         1996, the Company contributes a discretionary amount on the employee's
         behalf out of the Company profits earned during the plan year. Since
         the amount of the contribution depends upon profits, the amount of
         contribution may vary from year to year. Company contributions were
         $348,646, $183,900, and $142,369 for the years ended July 26, 1997,
         July 27, 1996, and July 29, 1995, respectively.




Teltrend Inc.  31


<PAGE>   34
Teltrend Inc.
Notes to Financial Statements (continued)

5  INVENTORIES

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

         Inventories at July 26, 1997 and July 27, 1996 were as follows:

<TABLE>
<CAPTION>
                                                           1997         1996    
                                                       ------------------------
         <S>                                           <C>          <C>
         Raw materials                                 $ 6,238,143  $ 7,904,341 
         Work-in-process                                 1,650,867    1,795,233
         Finished goods                                  3,159,275    2,649,595 
                                                       ------------------------
                                                       $11,048,285  $12,349,169 
                                                
</TABLE>                                                                        
          


6  ACCRUED EXPENSES
-------------------------------------------------------------------------------

Accrued expenses at July 26, 1997 and July 27, 1996 consisted of:
<TABLE>
<CAPTION>
                                                            1997        1996   
                                                        ----------------------- 
         <S>                                            <C>         <C>         
         Salaries, wages, and bonuses                   $2,432,269   $3,756,607
         Warranty                                        1,425,297    1,453,340
         Other                                           3,046,197    3,412,023
                                                        -----------------------
                                                        $6,903,763   $8,621,970
                                                      
</TABLE>                                                      


7  LONG-TERM DEBT
-------------------------------------------------------------------------------

         In connection with the Recapitalization, the term notes, Series
         A and B Debentures and revolving note payable were retired with the
         proceeds of the IPO. Also, in connection with the Recapitalization, the
         Company entered into a new credit facility (the "Bank Facility") which
         provides, subject to certain restrictions, up to $15 million on an
         unsecured basis for working capital financing. As of July 26, 1997, no
         amounts were outstanding under the Bank Facility. At July 26, 1997,
         Teltrend was eligible to borrow up to $11,285,039. The Bank Facility
         will expire on June 30, 1998.

                Under the Bank Facility agreement, the Company is restricted 
         to declare and pay dividends on its Common Stock not to exceed 50% of 
         net income for the immediately preceding fiscal year.

                Interest paid in fiscal years 1997, 1996 and 1995 was $776,
         $17,931 and $6,526,593 respectively.

8  COMMON STOCK OPTIONS
-------------------------------------------------------------------------------

         Prior to the Recapitalization, the Company had a stock option plan 
         (the "Plan") which provided for the grant of both incentive stock
         options and nonqualified stock options to purchase shares of the Old
         Class A Stock. Unless the applicable agreement expressly provided
         otherwise, each option granted under the Plan was exercisable as to
         20% of the shares covered thereby immediately upon grant and as to an
         additional 20% of such shares on each of the next four anniversaries
         of the date of grant.

                In fiscal year 1994, the Board of Directors approved a
         resolution to decrease the exercise price of all options outstanding
         under the Plan to the then-estimated value of $.1643 per share from
         $4.1077 per share. In connection with the Recapitalization, all options
         outstanding under the Plan were converted into options to purchase
         shares of Common Stock and the Company's Board of Directors amended the
         Plan to provide that no additional options could be granted thereunder
         in the future. As of July 26, 1997, 79,921 options were outstanding
         under the Plan.

                During June 1995, the Company adopted the Teltrend Inc. 1995
         Stock Option Plan (the "1995 Stock Option Plan") which provides for the
         grant of both incentive stock options in accordance with Section 422A
         of the Internal Revenue Code and nonqualified stock options. A maximum
         of 440,000 shares of Common Stock may be issued in the aggregate to key
         employees of the Company. The Compensation Committee of the Company's
         Board of Directors which administers the 1995 Stock Option Plan will
         determine when and to whom options will be granted. Unless the
         applicable agreement expressly provides otherwise, options shall


32 Teltrend Inc.

<PAGE>   35
Teltrend Inc.
Notes to Financial Statements (continued)

8  COMMON STOCK OPTIONS (CONT)
-----------------------------------------------------------------------------   
         become exercisable as to 25% of the shares covered thereby on the
         first anniversary of the date of grant and as to an additional 25% of
         such shares on each of the next three anniversaries of the date of
         grant. As of July 26, 1997, 329,000 options were outstanding under the
         1995 Stock Option Plan, all with an exercise price of $16.
     
                During January 1996, the Company adopted the Teltrend Inc. 1996
         Non-Employee Director Stock Option Plan (the "Director Option Plan")
         which provides for the grant of nonqualified stock options. A maximum
         of 240,000 shares of Common Stock may be issued to non-employee
         directors of the Company. Each individual elected as a director of the
         Company at the January 11, 1996 Annual Meeting who qualified as a
         non-employee director received an option to purchase up to 12,000
         shares of Common Stock as of the date of the Annual Meeting.
         Thereafter, each non-employee director, who has not previously served
         on the Company's Board of Directors, will receive an option to
         purchase up to 12,000 shares of Common Stock on the date of his or her
         initial election to the Board. A non-employee director may receive
         only one option grant under the Director Option Plan. Options granted
         under the Director Option Plan will vest and become exercisable as to
         25% of the shares covered thereby on the first anniversary of the date
         of grant and as to an additional 25% of such shares on each of the
         next three anniversaries of the date of grant. As of July 26, 1997,
         84,000 options were outstanding under the Director Option Plan with a
         range of exercise prices of $20 to $41.

                During September 1996, the Company adopted the Teltrend
         Inc. 1996 Stock Option Plan (the "1996 Stock Option Plan") which
         provides for the grant of both incentive stock options in accordance
         with Section 422A of the Internal Revenue Code and nonqualified stock
         options. A maximum of 700,000 shares of Common Stock may be issued in
         the aggregate to key employees of the Company. The Compensation
         Committee of the Company's Board of Directors which administers the
         1996 Stock Option Plan will determine when and to whom options will be
         granted. Unless the applicable agreement expressly provides otherwise,
         options shall become exercisable as to 25% of the shares covered
         thereby on the first anniversary of the date of grant and as to an
         additional 25% of such shares on each of the next three anniversaries
         of the date of grant. As of July 26, 1997, 160,600 options were
         outstanding under the 1996 Stock Option Plan with a range of exercise
         prices of $17.50 to $20.

                Transactions involving stock options granted under the Plan
         (after giving effect to the Recapitalization), the Key Employee
         Option, the 1995 Stock Option Plan, the Director Option Plan and the
         1996 Stock Option Plan are summarized as follows:



<TABLE>
<CAPTION>

                                         Number of Options    Exercise Price
                                         -----------------------------------
         <S>                              <C>                  <C>

         Outstanding, July 30, 1994            313,613                  $.16           
         Granted                                54,808                   .16           
         Granted                               330,000                 16.00           
         Exercised                            (233,139)                  .16           
         Canceled                              (14,734)                  .16           
                                              -------------------------------                                        
         Outstanding, July 29, 1995            450,548                 11.76           
         Granted                               129,000        28.75 to 47.00           
         Exercised                             (23,794)                  .16           
                                              -------------------------------
         Outstanding, July 27, 1996            555,754                 19.10           
         Granted                               273,600        17.50 to 46.25           
         Exercised                             (13,725)         .16 to 16.00           
         Canceled                             (162,108)         .16 to 47.00           
                                              ------------------------------
         Outstanding, July 26, 1997            653,521                $17.59           
</TABLE>

         The weighted average remaining contractual life of the options
         outstanding is 8.0 years. Of the 653,521 stock options outstanding at
         July 26, 1997, 235,923 are currently exercisable with a weighted
         average exercise  price of $13.25.


                                                            Teltrend Inc. 33



<PAGE>   36
Teltrend Inc.
Notes to Financial Statements (continued)

                Pro forma information regarding net income and earnings per
         share is required by FASB Statement No. 123. "Accounting for
         Stock-Based Compensation" and has been determined as if the Company
         had accounted for its employee stock options under the fair value
         method of that Statement. The fair value of these options was
         estimated at the date of grant using a Black-Scholes option pricing
         model with the following weighted-average assumptions for fiscal 1997
         and fiscal 1996; risk-free interest rate of 6.0 percent; dividend
         yields of 0.0 percent; volatility factors of the expected market price
         of the Company's Common Stock of 0.25; and a weighted-average expected
         life of the option of 6 years.

                The Black-Scholes option valuation model was developed for use
         in estimating the fair value of traded options which have no vesting
         restrictions and are fully transferable. In addition, option valuation
         models require the input of highly subjective assumptions including
         the expected stock price volatility. Because the Company's employee
         stock options have characteristics significantly different from those
         of traded options, and because changes in the subjective input
         assumptions can materially affect the fair value estimate, in
         management's opinion, the existing models do not necessarily provide a
         reliable single measure of the fair value of its employee stock
         options.

                The weighted-average fair value of options was $7.04 for
         options granted in fiscal 1997 and $12.47 for options granted in
         fiscal 1996.

                For purposes of pro forma disclosures, the estimated fair value
         of the options is amortized to expense over the options' vesting
         period. The Company's pro forma information follows (in thousands
         except for earnings per share information):




<TABLE>
<CAPTION>
                                              Fiscal Year Ended July
                                              ----------------------
                                                1997         1996
                                              ----------------------
           <S>                               <C>          <C>
           Net earnings - as reported         $9,628,101  $12,163,948
           Net earnings - pro forma           $8,723,200  $11,768,925
           Earnings per share - as reported        $1.45        $1.86
           Earnings per share - pro forma          $1.31        $1.80
</TABLE>


                The pro forma effect on net income for fiscal 1997 and fiscal
         1996 is not representative of the pro forma effect on net income in
         future years because it does not take into consideration pro forma
         compensation expense related to grants made prior to fiscal 1996 and an
         increased vesting period for grants made in fiscal 1997.

9  LEASE COMMITMENTS
------------------------------------------------------------------------------

         The Company leases its office and manufacturing facilities and
         pays real estate taxes, insurance, and general repairs and maintenance
         on the leased facilities. Rent expense for the fiscal years ended July
         26, 1997, July 27, 1996 and July 29, 1995 totaled $539,611, $697,280
         and $690,373, respectively.

         Future minimum annual rental payments required under the lease
         are as follows:

<TABLE>
<S>                                                      <C> 
                                                   
          Fiscal Year 1998                                $545,848
          Fiscal Year 1999                                 514,915
          Fiscal Year 2000                                  83,241
                                                        ----------
                                                        $1,144,004  
                                                        ----------

</TABLE>
34  Teltrend Inc.


<PAGE>   37
Teltrend Inc.
Notes to Financial Statements (continued)

10  INCOME TAXES
-------------------------------------------------------------------------------
         Deferred income taxes reflect the net tax effect of temporary
         differences between the amount of assets and liabilities for financial
         reporting purposes and the amounts used for income tax purposes.
         Significant components of the Company's deferred taxes are as follows:
<TABLE>
<CAPTION>
                                                 July 26, 1997    July 27, 1996 
                                                 ------------------------------ 
         <S>                                        <C>            <C>        
         Deferred tax assets (liabilities):                 
            Net operating loss carryforwards        $  293,083     $  964,334  
            Product warranty accruals                  570,119        581,336  
            Inventory reserves                         522,376        826,118  
            Vacation accrual                           400,622        362,152  
            Medical reserve                            219,583        242,487  
            Unicap adjustment                          102,560         86,528  
            Other                                       99,724        173,035  
                                                 ------------------------------
               Total deferred tax assets             2,208,067      3,235,990  
         Tax over book depreciation                   (203,079)      (242,064) 
                                                 ------------------------------
         Net recorded deferred tax assets           $2,004,988     $2,993,926  
                                                 ------------------------------
         Recognized in balance sheet:                                   
            Net deferred tax assets - current       $1,870,560     $2,227,232  
            Net deferred tax assets - noncurrent       134,428        766,694  
                                                 ------------------------------
                Net deferred tax assets             $2,004,988     $2,993,926  
</TABLE>

         At July 26,1997, the Company has available for tax purposes
         approximately $.8 million of net operating loss carryforwards which
         expire in fiscal year 2010.

                Significant components of the provision (benefit) for income
         taxes are as follows:
<TABLE>
<CAPTION>
                                                Fiscal Year Ended July 
                                     ------------------------------------------
                                         1997           1996            1995
                                     ------------------------------------------
         <S>                         <C>            <C>              <C>
         Current provision                                                 
           Federal                   $4,458,751     $7,407,115    $   731,750
           State                        794,298      1,039,724        230,000
                                     ------------------------------------------
                                      5,253,049      8,446,839        961,750
         Deferred tax provision 
           (benefit)                    988,938          6,074     (3,000,000)
                                     ------------------------------------------
         Provision (benefit) for 
           income taxes              $6,241,987     $8,452,913    $(2,038,250)
</TABLE>                                                            
                        
         Income taxes paid in fiscal years 1997, 1996 and 1995 totaled
         $4,826,000, $9,080,000 and $35,000, respectively.      
      
               Total income tax provision (benefit) for each year varied from
         the amount computed by applying the statutory U.S. federal income tax
         rates to income before taxes and extraordinary items for the reasons
         set forth in the following reconciliation.

<TABLE>
<CAPTION>
                                                Fiscal Year Ended July
                                     ------------------------------------------
                                         1997          1996            1995
                                     ------------------------------------------
         <S>                         <C>            <C>              <C>

         Income tax provision at 
           the statutory rate        $5,554,531     $7,215,901       $918,860
         Increase (reduction) 
           resulting from:
            Decrease in valuation 
              reserve for 
              non-realizable 
               tax benefits                   -              -     (3,375,548)
           State income taxes, 
            net of federal 
            tax benefit                 794,298      1,039,724        230,000
           Other, net                  (106,842)       197,288        188,438
                                     ------------------------------------------
         Actual income tax 
          provision (benefit)        $6,241,987     $8,452,913    $(2,038,250)
                                     ------------------------------------------
</TABLE>

                                                             Teltrend Inc.  35


<PAGE>   38
Teltrend Inc.
Notes to Financial Statements (continued)

11  COMMITMENTS AND CONTINGENT LIABILITIES
------------------------------------------------------------------------------
         The Company has commitments to purchase raw materials under
         purchase contracts with various vendors totaling approximately
         $6,320,865 at July 26, 1997 and $9,719,931 at July 27, 1996.

12  RELATED PARTY TRANSACTIONS
------------------------------------------------------------------------------
         For the year ended July 29, 1995, pursuant to an agreement
         between the Company and one of its principal stockholders, the
         stockholder provided management and consulting services to the Company
         for fees and related expenses of approximately $717,000, which
         includes an additional fee of $500,000 paid in consideration of the
         early termination of the management and consulting contract upon
         consummation of the Recapitalization.

13  SIGNIFICANT CUSTOMERS
------------------------------------------------------------------------------
         For the year ended July 26, 1997, four customers comprised
         approximately 25.9%, 19.3%, 13.4% and  11.2% of net sales, 20.6%,
         18.4%, 18.2% and 15.2% for the year ended July 27, 1996 and 22.3%,
         20.7%, 17.1% and 12.6% for the year ended July 29, 1995.

                At July 26, 1997, four customers comprised approximately 
         20.2%, 19.9%, 16.1% and 13.5% of accounts receivable, and 24.9%,
         17.5%, 17.4% and 10.4% at July 27, 1996.


14  EXTRAORDINARY ITEMS
------------------------------------------------------------------------------
         Extraordinary items for the year ended July 29, 1995 include a
         $500,000 penalty paid upon prepayment of the Former Credit Agreement
         in connection with the Recapitalization, the write-off of the
         unamortized loan financing costs of $162,500 related to the Former
         Credit Agreement and a tax benefit of $251,750 relating
         to the prepayment penalty and write-off.

15  SUBSEQUENT EVENTS
------------------------------------------------------------------------------
         On September 18, 1997, the Company purchased the outstanding
         shares of Securicor 3net Limited (3net) for a total acquisition cost
         of approximately $16.0 million. 3net is a telecommunication equipment
         and software company based in the United Kingdom with operations in
         New Zealand, China and the United States. In 3net's last fiscal year
         they recorded revenues of approximately $17 million.

16  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                         Fiscal 1997
                             -----------------------------------------------------------------
                             October 26, 1996  January 25, 1997  April 26, 1997  July 26, 1997
                             -----------------------------------------------------------------
<S>                              <C>               <C>               <C>           <C>
Net sales                         $22,590,930       $18,824,794     $21,302,597    $18,524,386
Gross profit                       10,364,151         8,186,215       9,383,705      8,012,540
  Net income                       $3,231,561        $1,994,744      $2,438,024     $1,963,772
                             -----------------------------------------------------------------
Net income per common share             $0.48             $0.30           $0.37          $0.30
                             -----------------------------------------------------------------

</TABLE>

<TABLE>
<CAPTION>


                                                         Fiscal 1996
                             -----------------------------------------------------------------
                             October 28, 1995  January 27, 1996  April 27, 1996  July 27, 1996
                             -----------------------------------------------------------------
<S>                              <C>               <C>               <C>           <C>
Net sales                         $20,851,281       $20,531,673     $20,763,736    $23,766,129
Gross profit                        9,457,120         9,081,897       9,734,209     10,995,670
  Net income                       $2,828,641        $2,716,180      $3,126,274     $3,492,853
                             -----------------------------------------------------------------
Net income per common share             $0.47             $0.41           $0.46          $0.52
                             -----------------------------------------------------------------
</TABLE>

36 Teltrend Inc.


<PAGE>   39
Teltrend Inc.
Market for Company's Securities and Related Matters


         The authorized capital stock of the Company consists of
         15,000,000 shares of Common Stock, $.01 par value per share (the
         "Common Stock"), and 750,000 shares of Preferred Stock, par value $.01
         per share (the "Preferred Stock"). As of September 29, 1997, 6,436,321
         shares of Common Stock were outstanding and no shares of Preferred
         Stock were outstanding.

                The Common Stock began trading on the Nasdaq National Market on
         June 9, 1995 under the symbol "TLTN." Prior to that date, there was no
         market for the Company's Common Stock. The following table sets forth
         for the period indicated the high and low closing sale prices for the
         Common Stock as reported on the Nasdaq National Market:


<TABLE>
<CAPTION>
                                                                Price Range of Common Stock
                                                              --------------------------------
                                                                     High           Low 
                                                              --------------------------------
<S>                                                                <C>         <C>             
FISCAL 1996                                                                                       
----------------------------------------------------------------------------------------------
         First Quarter                                                                 
            (from July 30, 1995 through October 28, 1995)             $33          $20         
         Second Quarter                                                                        
            (from October 29, 1995 through January 27, 1996)          $46 3/4      $28         
         Third Quarter                                                                         
            (from January 28, 1996 through April 27, 1996)            $51          $39 3/4         
         Fourth Quarter                                                                        
            (from April 28, 1996 through July 27, 1996)               $57 1/4      $20         
                                                                                               
FISCAL 1997                                                                                       
----------------------------------------------------------------------------------------------
         First Quarter                                                                         
            (from July 28, 1996 through October 26, 1996)             $52 3/4      $32         
         Second Quarter                                                                    
            (from October 27, 1996 through January 25, 1997)          $33 3/4      $16 7/8         
         Third Quarter                                                                     
            (from January 26, 1997 through April 26, 1997)            $21 1/2      $16 5/8         
         Fourth Quarter                                                                    
            (from April 27, 1997 through July 26, 1997)               $19 1/8      $14 3/8         
                                                                                           
FISCAL 1998                                                                                   
------------------------------------------------------------------------------------------
         First Quarter                                                                     
            (from July 27, 1997 through September 29, 1997)           $17 5/8      $14 7/8         

</TABLE>                                                              
        
        
        
         On September 29, 1997, the last reported sale price of the
         Common Stock as reported on the Nasdaq National Market was $17 1/8 per
         share. On that same date, there were 127 registered holders of record
         of the Common Stock.

                The Company has not paid any dividends on its capital stock
         since 1988. Restrictions or limitations on the payment of dividends may
         be imposed under the terms of credit agreements or other contractual
         obligations. The terms of the Bank Facility prohibit the Company from
         declaring and paying in any fiscal year dividends which exceed, in the
         aggregate, 50% of the Company's net income for the immediately
         preceding fiscal year. In the absence of such restrictions or
         limitations, the declaration and payment of dividends will be at the
         sole discretion of the Board of Directors of the Company and subject to
         certain limitations under the General Corporation Law of the State of
         Delaware. The timing, amount and form of dividends, if any, will
         depend, among other things, on the Company's results of operations,
         financial condition, cash requirements, plans for expansion and other
         factors deemed relevant by the Board of Directors. The Company intends
         to retain any future earnings for use in its business and therefore
         does not anticipate paying any cash dividends in the foreseeable
         future.


                                                                Teltrend Inc. 37


<PAGE>   40
Officers

HOWARD L. KIRBY, JR.
Chairman of the Board,
President and Chief Executive Officer
of the Company

DONALD G. BOZEMAN
Vice President,  Non-RBOC Sales

MICHAEL S. GRZESKOWIAK
Vice President, Operations

NORMAN C. GUENTHER
Assistant Vice President, Quality

DOUGLAS P. HOFFMEYER
Vice President, Finance;
Secretary and Treasurer

GILBERT H. HOSIE
Vice President, RBOC Sales

THEODOR A. MAXEINER
Chief Accounting Officer;
Assistant Vice President, Finance;
Controller; Assistant Secretary
and Assistant Treasurer

JOHN MUNTEAN
Vice President/General Manager,
ISDN and DDS Products

JACK C. PARKER
Vice President/General Manager,
DLC, VF and T1/Wireless Products

LAURENCE L. SHEETS
Vice President/General Manager,
Broadband Products




Board of Directors

HOWARD L. KIRBY, JR. (3), (4)
Chairman of the Board,
President and Chief Executive Officer
of the Company

CARL M. MUELLER*
Former Vice Chairman of Bankers
Trust Company and a Director of
BT Capital Partners Corporation,
and AEA Investors, Inc.

FRANK T. CARY (1), (2)
Former Chairman and Chief
Executive Officer of International
Business Machines Corporation
and Director of Celgene Corporation, 
Cygnus Therapeutic Systems, ICOS
Corporation, Lincare, Inc., SPS
Transaction Services, and Seer
Technologies

WILLIAM R. DELK (1), (2)
Retired Vice President
BellSouth Corporation, Inc.

BERNARD F. SERGESKETTER (4)
Former Vice President of AT&T,
President of Sergesketter &Associates, Inc.,
a private consulting firm

HARRY CRUTCHER, III (3), (4)
President, Resorts Financial
Services Co. (financial consulting
firm), Managing Partner, Grouse
Mountain Associates, Ltd. (hotel
owner and operator) and President,
Crutcher Enterprises, Inc. (financial
strategic planning firm)

DONALD R. HOLLIS (4)
President, DRH Strategic Consulting Inc.;
former Executive Vice President,
First Chicago Corporation; also a
Director of Deluxe Corporation,
Information Advantage Open Port 
Technology and Cambridge Assessment 
Centre

SUSAN B. MAJOR (1), (2)
Vice President, A.T. Kearney, Inc.,
former Director of Paging and
Wireless Data for Ameritech
Cellular Services, Inc.



Corporate Information

CORPORATE OFFICE
Teltrend Inc.
620 Stetson Avenue
St. Charles, Illinois 60174

ANNUAL MEETING
The Annual Meeting of Teltrend Inc.
will be held at 9:00 a.m. on Thursday,
December 11, 1997 at the Company's
facility in St. Charles, Illinois.

ANNUAL REPORT ON FORM 10-K
Single copies of the Company's Annual
Report on Securities and Exchange
Commission Form 10-K (without
exhibits) will be provided without
charge to stockholders upon written
request directed to Douglas P.
Hoffmeyer, Secretary, at the
Corporate Office.

COMMON STOCK
The Common Stock of Teltrend Inc.
is traded on the Nasdaq National
Market under the  symbol "TLTN."

COUNSEL
Jenner & Block
Chicago, Illinois

AUDITORS
Ernst & Young LLP
Chicago, Illinois

TRANSFER AGENT AND REGISTRAR
LaSalle National Bank
Chicago, Illinois



* Mr. Mueller has informed the Company that he will
  not seek re-election to the Board of Directors at the
  Annual Meeting

(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Member of Nominating Committee
(4) Member of Executive Committee 

38 Teltrend Inc.