<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549
                              ___________________

                                   FORM 10-K
                 FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
          SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(MARK ONE)

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934 FOR THE FISCAL YEAR ENDED JULY 26, 1997
                                       OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO __________

                         COMMISSION FILE NUMBER 0-26114

                                 TELTREND INC.
             (Exact Name of Registrant as Specified in Its Charter)

             DELAWARE                           13-3476859
   (State or Other Jurisdiction              (I.R.S. Employer
of Incorporation or Organization)         Identification Number)

                          620 STETSON AVENUE
                     ST. CHARLES, ILLINOIS 60174
          (Address of Principal Executive Offices)(Zip Code)

 REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:  (630) 377-1700


     SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:  NONE


     SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:


                   COMMON STOCK, $.01 PAR VALUE PER SHARE

                       PREFERRED SHARE PURCHASE RIGHTS

                              (Title of Class)

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

                Yes  X                 No
                   -----                 -----

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


     As of October 17, 1997, 6,436,321 shares of the Company's Common Stock,
$.01 par value per share ("Common Stock"), were outstanding.  On that date, the
aggregate market value of voting and non-voting common equity (based upon the
last sale price of the registrant's Common Stock on October 17, 1997) held by
non-affiliates of the registrant was $113,440,158 (6,436,321 shares at $17.625
per share).


                      DOCUMENTS INCORPORATED BY REFERENCE


PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL YEAR
ENDED JULY 26, 1997 ARE INCORPORATED BY REFERENCE INTO PART II OF THIS FORM
10-K.


PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL
MEETING OF STOCKHOLDERS TO BE HELD DECEMBER 11, 1997 ARE TO BE INCORPORATED BY
REFERENCE INTO PART III OF THIS FORM 10-K.

<PAGE>   2



                                   PART I


CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995


         This Annual Report on Form 10-K, including the "Management's Discussion
and Analysis of Financial Condition and Results of Operations"  incorporated
herein by reference, contains "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 concerning, among other
things, the prospects, developments and business strategies for the Company (as
defined) and 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 "expected," "expects,"
"believe," "believes," "will," "anticipated," "emerging," "intends," "could,"
"may," "estimates," "should," and (ii) are subject to risks and uncertainties
and represent the Company's present expectations or beliefs concerning future
events.  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 (a) 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, certain suppliers and certain key customers, and
(b) risks inherent to the telecommunications industry, including rapidly
changing technology, evolving industry standards, increasing numbers of patent
infringement claims, changes in customer requirements, price-competitive
bidding, changing government regulations and potential competition from the
Regional Bell Operating Companies and Lucent Technologies, Inc., and others.    
Therefore, results actually achieved may differ materially from expected
results included in, or implied by, these statements. See Subparagraph d. of
Item 1 -- "Factors That May Affect Future Results."




ITEM 1 - DESCRIPTION OF BUSINESS


a.       GENERAL DEVELOPMENT OF BUSINESS


         (i) BACKGROUND


         Teltrend Inc. ("Teltrend" or the "Company") designs, manufactures and
markets a broad range of transmission products, such as channel units,
repeaters and termination units, used by telephone companies ("Telcos") to
provide voice and data services over the telephone network.  Substantially all
of the Company's products have historically been sold directly to the Regional
Bell Operating Companies and their local affiliates (collectively, the "RBOCs")
for use with the copper wireline in the local telephone subscriber loop (the
"Local Loop").

         The Company's principal executive offices are located at 620 Stetson
Avenue, St.  Charles, Illinois, 60174 and its telephone number at that location
is (630) 377-1700.  Unless the context otherwise requires, all references to
the "Company" or "Teltrend" in this Annual Report on Form 10-K (the "Report")
collectively refer to Teltrend Inc. and its subsidiaries.  The Company's fiscal
year ends on the last Saturday of July each year.  All references to fiscal
years in this Report refer to fiscal years ending in the calendar year
indicated (e.g., fiscal 1997 refers to the year ended July 26, 1997).


         (ii) 3NET ACQUISITION


         On September 18, 1997, the Company consummated the purchase of all the
outstanding shares (the "Shares") in the capital of Securicor 3 Net Limited of
Basingstoke, England and its U.S. affiliate Securicor 3Net Inc. (collectively,
"3net") from 3 Net Holdings Limited of Surrey, England ("3Net Holdings").  3Net
Holdings is a subsidiary of Securicor Communications Limited of Surrey, England
("Securicor Communications").  With operations in England, New Zealand, China
and the United States, 3net is a leading developer of Integrated Services
Digital Network ("ISDN") products for communications equipment and service
providers. 3net also supplies local area networking ("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.


                                     -2-


<PAGE>   3


         Pursuant to a Share Purchase Agreement, dated August 28, 1997,
negotiated and entered into among the Company, Securicor 3 Net Limited, 3Net
Holdings, Securicor Communications and Security Services plc (the parent
company of 3Net Holdings and Securicor Communications), the Company acquired
all of the Shares for a total acquisition cost of approximately U.S. $16.0
million in cash.  3net will adopt Teltrend's name and identity, but the Company
does not expect any redundancies or major organization changes due to the
acquisition.  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.


         (iii) TELTREND INC. RIGHTS AGREEMENT


         On January 16, 1997, the Board of Directors of the Company declared a
dividend of one preferred share purchase right (a "Right") for each outstanding
share of common stock, par value $.01 per share, of the Company (the "Common
Stock").  The dividend was payable on January 27, 1997 to the holders of record
of the Common Stock as of the close of business on that date.  Each Right
entitles the registered holder to purchase from the Company, under certain
circumstances involving the acquisition or the announcement of the intent to
acquire 15% or more of the Company's Common Stock, one one-hundredth of a share
of Series A Junior Participating Preferred Stock, par value $.01 per share, of
the Company (the "Preferred Stock") at a price of $160.00 per one one-hundredth
of a share of Preferred Stock, subject to adjustment.  The description and
terms of the Rights are set forth in a Rights Agreement dated as of January 16,
1997, as the same may be amended from time to time (the "Rights Agreement"),
between the Company and LaSalle National Bank, as Rights Agent (the "Rights
Agent"), a copy of which is filed herewith as an exhibit to this Annual Report
on Form 10-K.


b.       FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS


         During each of the last three fiscal years, the Company has operated in
only one industry segment.


c.       NARRATIVE DESCRIPTION OF BUSINESS


         (i) GENERAL


         The Company designs, manufactures and markets a broad range of
transmission products, such as channel units, repeaters and termination units,
that are used by Telcos to provide voice and data services over the existing
telephone network, primarily in the Local Loop.  In recent years, the demand
for high speed digital transmission over the telephone network has increased as
a result of the demand for high capacity voice lines and the growing
communications requirements of LAN interconnections, wide area networks
("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 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 traditional principal product lines include:  (i) Tl/Wireless
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) 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(R) 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 up to 12,000 feet.

----------

*/SLC is a registered trademark of Lucent Technologies Inc. ("Lucent")


                                      -3-


<PAGE>   4



         With the September 1997 acquisition of 3net, the Company has expanded
its principal product lines to include ISDN products for communications
equipment and service providers in the international market, as well as LAN
internetworking, ISDN remote access and secure virtual private networking
solutions for business customers worldwide.


         (ii) INDUSTRY BACKGROUND


         OVERVIEW.  Transmission through the telephone network has traditionally
been accomplished by analog transmission.  Analog transmission, however, has
been unable to provide the requisite data rates and reliability to support the
growing communications requirements of LAN interconnections, WANs, on-line data
networks and services and, to a lesser extent, video conferencing.  Digital
transmission emerged in the 1970s as a reliable high bandwidth alternative to
analog transmission.  As a result, demand for digital communications service by
end-users is growing, and will likely continue to grow.


         INCREASING DEPLOYMENT OF DIGITAL SERVICE IN THE LOCAL LOOP.  While
Telcos generally utilize fiber optic or other systems to permit high
speed digital transmission between their switching facilities ("Central
Offices") and from their Central Offices to DLC systems within the Local Loop,
transmission over copper wireline remains the principal method by which
telecommunication services are provided in the "last mile", the final link
between the Central Office or DLC and the end-user.  Increasing demand for
digital transmission by end-users has given the Telcos considerable incentive
to upgrade service in the Local Loop.  Although replacement of the "last mile"
copper wireline in the Local Loop with fiber optic, coaxial cable, hybrid
fiber-coax, wireless and other higher bandwidth and quality transmission media
has occurred to a certain extent, widespread replacement of the copper wireline
has not occurred because of the labor and capital intensive nature of the
replacement process. Consequently, technologies have emerged which enhance the
transmission capabilities of the copper wireline and allow the Telcos to
respond to customer demand for digital service in the Local Loop at affordable
rates and at a level of quality approaching that of fiber.


         TECHNOLOGICAL DEVELOPMENTS AND TRENDS.  DDS, when introduced in the
early 1970s, was one of the first digital transmission services offered
by Telcos in the Local Loop.  DDS provides dedicated service at rates up to 64
Kbit/sec and has typically been deployed for point-of-sale applications and
other on-line data networks.  The next digital service to be widely deployed in
the Local Loop was T1, which is a 1.544 Mbit/sec dedicated service that can be
provided over two twisted pair of copper telephone wires.  Applications for T1
service include connections between the Central Office and customer private
branch exchanges ("PBXs") and T1 multiplexers and, more recently, cellular
base-stations.  Traditional T1 service is provided by "conditioning" the
existing copper wireline to meet the standards for T1 service.  This
conditioning requires the removal of all bridge taps, the separation of the
wire pairs and the installation of mid-span repeaters to regenerate the signal
every 3,000 to 6,000 feet (which is necessary because the T1 signal degrades as
it passes along the copper wireline).  Consequently, installation and
maintenance of repeatered T1 lines is labor intensive and can be costly,
depending on the length of the loop and the amount of conditioning required
along the copper wireline.  HDSL technology is an accepted alternate method of
providing T1 service across the copper network which does not require
conditioning the lines or the installation of line repeaters for distances of
up to 12,000 feet.


         Switched digital services are increasingly being deployed in the Local
Loop in response to customer demand for flexible, high-bandwidth transmission
services.  Whereas dedicated lines are fixed connections between two points,
switched services permit the flexibility of connecting with any similarly
equipped location.  A newer DDS-based service provides switched 56 Kbit/sec
digital transmission.  In addition, basic rate ISDN technology allows a Telco
to deliver switched digital transmission over the copper network at rates up to
128 Kbit/sec (plus an additional 16 Kbit/sec for special services).  These
technologies can support telecommuting, video conferencing and remote-LAN
access.  Although basic rate ISDN technology has been available for over ten
years, it had not been widely deployed by Telcos until recently.  Its recent
increase in popularity is largely attributable to the emergence of widespread
Internet usage, and cost effective customer premises equipment ("CPE") which
utilizes ISDN capabilities and features.

                                      -4-



<PAGE>   5




         Other emerging technologies that provide high bandwidth digital
services include primary rate ISDN, a switched digital line which
operates at T1 speeds, and Asynchronous Digital Subscriber Line ("ADSL"), which
provides sufficient capacity for delivery of video-on-demand over the copper
wireline.


         OTHER INDUSTRY TRENDS.  Faced with increasing competition for
customers, Telcos are demanding enhanced functionality in the equipment
they deploy to deliver telecommunications services.  In response, equipment
manufacturers have developed, and will likely continue to develop, products
which can be tested, adjusted and reconfigured from a remote location (i.e.,
"intelligent" products) to assist Telcos in achieving labor cost savings and
efficiency gains.  For instance, Telcos are now deploying sophisticated T1
transmission gear that includes inherent performance monitoring ("PM")
capabilities.  These PM systems allow the Telcos to constantly monitor the
quality of service being delivered to their T1 customers.


         The technologies which have emerged to replace the existing copper
infrastructure (such as fiber optic, coaxial cable, hybrid fiber-coax and
wireless systems) remain relatively costly to install.  While the transition
from copper wireline to telecommunications networks based on newer technology
is generally expected to be gradual, it is anticipated that the markets for and
the pace of deployment of these technologies will grow as their costs decrease.
Accordingly, demand for products applicable to the copper wireline will
decrease and new products and services will need to be developed to address the
demands of these growing markets.  See Subparagraph d. (ii) of this Item 1 --
"Factors That May Affect Future Results -- Rapid Technological Changes and
Dependence on New Products" and Subparagraph d. (i) of this Item 1 -- "Factors
That May Affect Future Results--Dependence on T1/Wireless Product Line."


         (iii) PRODUCTS


         (a)   GENERAL

         Digital and analog signals from each subscriber are gathered at a
Telco's Central Office.  While most of these lines are connected
directly to the Central Office switch, special service lines are attached to an
assembly which provides the speed and functionality of the particular circuit. 
These circuit assemblies, known as channel units, connect the subscriber line
to a channel bank or similar equipment which converts voice and data
transmission signals as required (e.g., from analog to digital), combines or
separates them as necessary (e.g., into or from a single digital stream for T1
service) and directs the signals through the telephone network.  Channel banks
are typically located in the Central Offices.  A DLC within the Local Loop
performs the same function as a channel bank and typically interfaces fiber
optic or some other medium which has been deployed between the Central Office
and the copper wireline that runs to the end-user's premises.  Along the copper
wireline in the Local Loop, electronic equipment such as repeaters may be
required to restore and amplify the signal.  In the case of dedicated lines, a
Telco typically installs a termination unit at the end-user's premises which
allows testing and adjustment of the subscriber line.


        The Company manufactures a broad range of products necessary to
provision the Local Loop which are designed for installation either at
the end-user's premises, along the Local Loop or at the Central Offices.  The
Company's products include channel units, repeaters and termination units used
by the Telcos for the provisioning, testing and termination of analog and
digital transmission services in the Local Loop at speeds of up to 1.544
Mbit/sec.


         Most of the Company's products consist of a single printed circuit
board upon which a microprocessor and other electronic components are
mounted.  These units generally plug into a housing at either the customer's
location, the Central Office or an intermediate point along the telephone
network.  While the Company offers many of the housings into which these units
plug, some of the units are designed specifically to plug into housings or
systems manufactured by others, and virtually all of the units are plug
compatible with various industry-standard systems, such as the Lucent SLC(R)-5
DLC system.  To meet customer requirements, the Company regularly produces
customized versions of its standard products to incorporate customer-specific
"firmware" (embedded memory) or unique hardware (such as a customized
electronic assembly) or to mount unique parts on an otherwise standard printed
circuit board.  Many of the Company's products enhance traditional voice and
data transmission



                                      -5-



<PAGE>   6




products, incorporating onboard microprocessors which allow them to
perform many functions automatically and to be provisioned and tested from a
remote location, thereby reducing labor costs and achieving efficiency gains.


         (B) THE COMPANY'S PRODUCT LINES


         T1/WIRELESS PRODUCTS.  The Company is a supplier of intelligent
repeatered T1 products for the Local Loop.  These products allow Telcos
to quickly deploy high speed (1.544 Mbit/sec) digital service over the existing
infrastructure of copper wireline in the Local Loop at affordable rates and at
a level of quality which approaches that of fiber.  T1 service is frequently
deployed for PBX and dedicated lines.  The Company was the first to
successfully introduce cost-effective intelligent T1 repeaters, which spurred
the sales growth of the Company's T1 products.


         Within its T1 product line the Company currently offers intelligent
network interface units ("NIUs"), intelligent office repeaters, intelligent
line repeaters, T1 maintenance shelves and T1 mountings.  The Company's NIUs
are installed by Telcos to terminate a T1 line at the customer's premises and
to allow testing of the circuit.  The Company's T1 repeater products are
installed by Telcos to regenerate a T1 signal that has degraded due to
transmission over a long distance of copper wireline.  These repeaters contain
addressable loopback circuits that allow rapid fault isolation from a remote
location.  This remote testing capability allows Telcos to offer improved
service at a lower cost in the increasingly competitive telecommunications
environment.


         A new generation of NIUs is being introduced to Telcos throughout the
United States.  These new NIUs contain extensive performance monitoring
capabilities for both directions of T1 transmission (toward the customer and
toward the network).  The PM NIUs provide crucial information to the network
provider regarding the quality and availability of their delivered T1 services.
PM NIUs can be deployed ubiquitously at the network interface, terminating all
forms of T1 transmission facilities - repeatered T1, HDSL, or fiber-based.  The
Company has developed a PM NIU product that it began to sell in January 1997 to
help the Company successfully compete in the PM NIU market.  While there is no
assurance that the Company will be able to compete in the PM NIU market, the
Company believes that its PM NIU sales and the market for PM NIU products will
show moderate growth over the next several years.


         HDSL technology is an accepted alternate method of providing T1 service
over the copper wireline in the Local Loop.  HDSL is easier to provision than
traditional T1 service because it eliminates the need to condition the wireline
and to install line repeaters for distances of up to 12,000 feet.  Despite the
use of HDSL, Telcos continue to deploy traditional repeatered T1 service, since
it is presently more cost-effective than HDSL on short lines and on established
repeatered T1 routes.  However, the Company expects that demand for its
T1/Wireless products (which provide traditional repeatered T1 service) will
decline as the cost of HDSL systems declines.  The Company has recently
introduced a 4-wire HDSL product line in response to the anticipated decline in
demand for repeatered T1 products. See Subparagraph d. (i) of this Item 1 --
"Factors That May Affect Future Results--Dependence on T1/Wireless Product
Line."


         In fiscal 1996, the Company introduced a T1 product called the 
CellPak(TM). The CellPak(TM) provides T1 transport in a completely
self-contained, pre-tested, outdoor package for connecting a cellular or
personal communications services antenna cell site back to its local telephone
Central Office using metallic or fiber optic lines.  Coordination problems that
are often encountered between the wireless operator and the telephone company
are greatly reduced by the CellPak(TM), both in original installation and in
maintenance situations.  Teltrend's  CellPak(TM) systems are available with
HDSL, conventional T1 or fiber optic feeds.


         Sales of the Company's T1/Wireless products accounted for approximately
56.2%, 54.3% and 55.6% of the Company's total net sales for fiscal 1997, 1996
and 1995, respectively.


         VF/DLC PRODUCTS.  The Company is a supplier of intelligent VF products.
Within its VF product line the Company currently offers data station
termination ("DST") units, VF channel units and mountings which Telcos use
primarily to provide dedicated analog data lines.  The Company's DST and VF
channel units are installed by Telcos at the customer's premises and in a
channel bank or DLC system, respectively, to terminate both ends of

                                      -6-



<PAGE>   7



an analog data line.  In addition, these units contain onboard  microprocessors
which allow all testing and adjustment to be performed from a remote location.


         The Company's VF products are principally used by Telcos to provision
the 4-wire analog data lines typically leased by Telco customers to connect
geographically dispersed computer terminals (such as point-of-sale credit card
authorization terminals, automatic teller machines, lottery terminals and
reservation stations) to a central computer.  Although there are several other
ways to link these terminals to a central computer (most notably DDS), analog
data lines remain, for several reasons, a primary method for accomplishing
these links.  An analog data line is the only practical way to add a terminal
to an existing analog data network (of which there is a large installed base). 
In addition, analog data line transmission is often the more economical, more
easily installed or, in certain locations, the only service available.


         The Company believes that the domestic market for its VF products is
decreasing, and will likely continue to decrease, as digital data transmission
services within the Local Loop become less costly and more widely deployed.
However, the Company will endeavor to partially offset the effects of this
decline by expanding its marketing efforts for its VF products to independent
Telcos and to international markets.


         Voice services, referred to generally as plain old telephone service or
special plain old telephone service, still represent the dominant use of the
telephone network in the United States.  The Company manufactures POTS/SPOTS
channel units which plug into a channel bank or DLC system and provide the
interface necessary for Telcos to furnish these voice services.  The Company's
POTS/SPOTS channel units are microprocessor controlled and provide the exacting
gain, reflection and low noise performance required to accommodate advanced
POTS/SPOTS features, such as caller identification, which are increasingly
being offered by Telcos.  The flexibility of microprocessor design has allowed
the Company to solve a variety of special performance problems encountered in
the telephone network.


         Late in fiscal 1996, Teltrend introduced a product called the
CyberBlock(R), which improves voice and data transmission over ordinary
telephone loops.  In addition to solving various common voice and modem
problems, the CyberBlock(R) also furnishes a lower cost way for telephone
companies to provision 2-wire special service lines.  The CyberBlock(R) employs
a modern microprocessor design which allows it to automatically adjust gain and
equalization of the loop in both directions.  The CyberBlock(R) has been used
in small quantities at each of the RBOCs and is officially approved by three
RBOCs.


         Sales of the Company's VF products accounted for approximately 15.4%,
21.0% and 32.0% of the Company's total net sales for fiscal 1997, 1996 and
1995, respectively.


         Within its DLC product line, the Company manufactures an advanced
2-wire foreign exchange unit ("2FXO") for the Lucent SLC(R)96 and D4 systems. 
The 2FXO uses microprocessor control to compensate for network anomalies caused
by variations in PBX's and Central Office switches.  It thereby eliminates
various operational and billing problems commonly experienced with foreign
exchange lines.


         In late fiscal 1996, the Company introduced a new advanced 2-wire dial
pulse terminate unit with gain transfer ("DPT/GT") for D4 channel bank systems.
The DPT/GT uses microprocessor control to provide an automated precision
balance.  This saves time and manpower in provisioning service and eliminates
operational performance problems (such as "howling") due  to maladjustment from
manual trial-and-error balancing.


         In the past, the Company 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(R)5).  The Company is now in the process of
becoming an original equipment manufacturer of channel units by selling channel
units to Next Level System, Inc., which is an emerging DLC systems company. The
Company also recently began supplying very small DLC systems that are SLC(R)5
plug-compatible.


         DDS/ISDN PRODUCTS.  The Company's DDS products are used by Telcos to
deliver digital service across two twisted pair of copper wires in the Local
Loop at speeds from 2.4-64 Kbit/sec.  The majority of DDS service

                                      -7-



<PAGE>   8



is provided by means of a dedicated line, but switched 56 Kbit/sec service
is also available.  As with the Company's analog VF data transmission products,
DDS service is typically used by customers who need to connect geographically
dispersed computer terminals to a central computer.  In recent years, DDS has
benefited from the trend toward digital service described above, including
frame relay service for Internet access.


        The Company manufactures DDS channel units (known as "dataports"),
which the Telcos plug into a channel bank or DLC system to connect a DDS line
to the rest of the telephone network.  The Company also manufactures
intelligent DDS termination units, which are installed by Telcos at the
end-user's premises to configure and maintain a DDS line. These products are
sold to all of the RBOCs and to Southern New England Telephone.


        The Company is currently manufacturing, developing and marketing
products based on basic rate ISDN technology.  This technology allows Telcos to
provide to their customers two 64 Kbit/sec digital channels, plus an additional
16 Kbit/sec for special purposes, over a single twisted pair of copper wires.
Whereas most digital transmission services require a dedicated line, ISDN is a
switched service.  This offers the end-user the flexibility of conventional
dial-up service with the speed and quality of digital transmission.  In
addition, multiple ISDN lines can be aggregated to provide the bandwidth
required for applications such as video conferencing.


        The Company currently manufactures and markets an ISDN channel unit
which plugs into Lucent's SLC(R)5 DLC system, an ISDN line repeater unit (which
is required every 12,000 to 18,000 feet along a line furnishing ISDN service)
and an ISDN channel unit for use with channel banks at Telco Central Offices
(which is necessary to interface the ISDN signal for interoffice transport when
the local Central Office switch cannot support ISDN service). See Subparagraph
d. (ix) of this Item 1 -- "Factors That May Affect Future Results --
Proprietary Rights and Risks of Third Party Claims of Infringement."


        The Company's acquisition of 3net in September 1997 has increased its
ISDN product offerings. 3net supplies ISDN access networking solutions such as
protocol conversion, port concentration, routing and remote management units
for telecommunications service and equipment providers which facilitate basic
rate and primary rate delivery by European and other international Telcos. 3net
also supplies network routers, a line of terminal equipment that makes ISDN
more attractive to the end-user.


        BROADBAND PRODUCTS.  The Company is currently selling both 2 and 4-wire
HDSL products.  HDSL technology allows 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. The HDSL market in the United States is highly
competitive and currently dominated by three companies:  PairGain Technologies,
Inc. ("PairGain"); ADC Telecommunications; Inc. ("ADC"); and ADTRAN, Inc.
("ADTRAN").  See Subparagraph c. (ix) of this Item 1 -- "Narrative Description
of Business -- Competition".


        (iv) CUSTOMERS


        The Company has historically sold substantially all of its products to
the RBOCs and a small portion of its products to independent Telcos, such as
GTE and Sprint and international Telcos.  Sales to the RBOCs accounted for
approximately 95.8%, 95.2% and 96.3% of the Company's total net sales in fiscal
1997, 1996 and 1995, respectively.  In fiscal 1997, sales to BellSouth
Telecommunications Inc., SBC Communications Inc., Ameritech Corp., Pacific Bell
and US West Inc. accounted for 25.9%, 19.3%, 13.4%, 11.2% and 10.8%,
respectively, of the Company's total net sales and one of these customers
purchased T1 products which accounted for approximately 13.3% of the Company's
total net sales.  No other customer accounted for more than 10% of the
Company's total net sales during fiscal 1997.  The Company believes that its
acquisition of 3net will give the Company an opportunity to expand its customer
base to include international Telcos and international small businesses,
distributors and other end-users of networking routers, thereby somewhat
reducing the Company's overall dependence on sales to the RBOCs.  See
Subparagraph d. (iii) of this Item 1 -- "Factors That May Affect Future
Results--Reliance on Certain Customers."


        Prior to selling a product to a Telco customer, the Company generally
must first submit that product for qualification by the customer.  Accordingly,
the Company is continually submitting successive generations of its current
products as well as new products to its customers for qualification.  Although
the qualification process varies


                                      -8-



<PAGE>   9


somewhat among customers, the Company's experience is that the process
can take anywhere from a few weeks to a year or more and generally consists of
the following three phases:

         -    Laboratory Evaluation.  The product's function and
              performance are tested against all relevant industry standards,
              such as those set by Bell Communications Research, Inc.
              ("Bellcore").


         -    Field Trial.  A number of telephone lines are equipped with the
              product for simulated operation in a field trial.  The field
              trial is used to evaluate performance, assess ease of
              installation and establish troubleshooting procedures.


         -    Product Selection and Deployment.  Prior to product selection
              and deployment, the customer develops and implements a variety of
              methods and procedures relating to ordering, stocking,
              installation, maintenance, returns and all other activities
              associated with the use of the product.


        (v)   MARKETING, SALES AND DISTRIBUTION


        As of July 26, 1997, the Company's marketing, sales and distribution
programs were conducted by 39 employees.  The majority of the Company's sales
in the United States are made by its field sales organization, which consists
of 23 salespersons deployed throughout the United States.  The marketing, sales
and customer service employees based at the Company's headquarters support
these field salespersons and often become involved in the sales process.  With
the acquisition of 3net, the Company increased its sales organization with 9
salespersons based in the U.K., 3 salespersons based in New Zealand and 3
salespersons based in China.  The Company also sells its products through
distributors.  Although the Company has agreements with many of these
distributors, these agreements do not establish minimum purchase commitments
and are generally terminable by either party on 60 days notice.  For each of
the Company's last five fiscal years, no distributor has accounted for more
than 1.5% of the Company's total net sales.  The Company believes that its
success has, to a significant degree, been due to the performance of its sales
and distribution teams and that its future success will depend, in part, on its
ability to attract and retain qualified sales and marketing personnel who can
successfully increase the Company's sales revenue in the highly competitive
telecommunications equipment marketplace.


        The Company has multi-year supply agreements with virtually all of its
major customers, which cover products representing a majority of the Company's
sales.  These agreements only govern the terms and conditions applicable to
purchases of the Company's products, including prices, and generally do not
establish any minimum purchase commitments.  Sales of the Company's products
under these agreements are made on a purchase order basis.  Because these
contracts generally prohibit the Company from increasing the price of its
products sold thereunder for stated periods of time, any significant increase
in the Company's costs during such periods which the Company is unable to
offset with a corresponding increase in prices due to such prohibitions could
have a material adverse effect on the Company.  See Subparagraph d. (iii) of
this Item 1 -- "Factors That May Affect Future Results--Reliance on Certain
Customers."  In addition, the Company has arrangements with four of its
customers which require the Company to maintain a portion of its finished goods
inventory at the various locations of such customers.  As of July 26, 1997,
approximately 33% of the Company's finished goods inventory was maintained at
these locations.  The Company may enter into additional similar arrangements as
the RBOCs increasingly seek ways to reduce their inventory costs.  These
arrangements generally require the Company to maintain higher inventory levels
than would otherwise be required.  See Subparagraph d. (v) of this Item 1 --
"Factors That May Affect Future Results--Increased Inventory Levels and Need to
Make Advance Purchase Commitments" and Subparagraph d. (x) of this Item 1 --
"Factors That May Affect Future Results--Potential Product Recalls and Warranty
Expenses."


        (vi) RESEARCH AND PRODUCT DEVELOPMENT


        The Company is market driven and works closely with its current and
potential customers  in connection with product development.  Using feedback
received from such customers, the Company identifies and develops new products
and enhancements to its existing products.


                                      -9-



<PAGE>   10




        As of July 26, 1997, the Company's research and product development was
carried out by a total of 76 engineers and engineering support personnel. These
individuals are organized into teams corresponding to the Company's product
lines, with each team being responsible for providing technical support for the
Company's existing products and conceiving new products in cooperation with
others within the Company.  Utilizing computer-aided design tools, each product
team also implements the Company's ongoing "value engineering" programs which
are designed to periodically replace all of the Company's major products with
successive generations having additional product features, such as
"intelligence," or new mechanics and/or lower costs.  The September 1997
acquisition of 3net increased the Company's research and product development
team with 29 people based in the United Kingdom and 14 people based in New
Zealand.


        All product development expenses are charged to operations as incurred.
The Company's expenditures on research and product development were
approximately $9.7 million, $7.9 million and $5.3 million for fiscal 1997, 1996
and 1995, respectively.  The Company believes its future success will depend in
part on its ability to, on a cost effective and timely basis, continue to
enhance its products, develop and introduce new products for the telephone
network transmission market and other markets, address new industry standards
and changing customer needs and achieve market acceptance for its products.
Accordingly, the Company intends to continue to make significant investments in
research and product development, with a goal of maintaining its annual
research and development expenses at between 11% and 12% of its annual net
sales.  See Subparagraph d. (ii) of this Item 1 -- "Factors That May Affect
Future Results--Rapid Technological Changes and Dependence on New Products."
See also Item 7 -- "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Fiscal 1997 Compared with Fiscal 1996."


        (vii) CUSTOMER SERVICE AND SUPPORT


        The majority of service, repair and technical support of the Company's
products is performed at the Company's headquarters.  Under certain
circumstances, the Company also provides comprehensive on-site field support to
its customers.  The Company also offers telephone technical support to its
domestic customers 24 hours a day, seven days a week and also provides training
to its principal customers with respect to its products.


        Most of the Company's products carry a seven year limited warranty,
which generally covers defects in materials or workmanship and failure to meet
published specifications, but excludes damages caused by improper use, and all
other express or implied warranties.  Products returned which have
malfunctioned or failed to operate during the warranty period through no fault
of the customer are either repaired or replaced promptly.  The Company's
warranty covers only Company products and is not extended to related equipment
or components used in conjunction with these products.  For each of the past
five fiscal years, the Company's warranty expense has been relatively
insignificant, representing less than 1.0% of the Company's annual net sales.
The Company believes its low return rate is the result of its rigorous product
quality program.  Although the Company maintains a comprehensive quality
control program and has a high level of confidence in the quality and
reliability of its products, there can be no assurance that in the future
certain of the Company's products will not suffer from defects or other
deficiencies.  In addition, the Company is a party to supply contracts with
certain of its major customers pursuant to which the Company may, under certain
circumstances, be required to accept certain returns of products or to
indemnify such customers against certain liabilities arising out of use of the
Company's products.  See Subparagraph d. (x) of this Item 1 -- "Factors That
May Affect Future Results--Potential Product Recalls and Warranty Expenses."


        (viii) MANUFACTURING AND SUPPLIERS


        To successfully compete for Telco business, telecommunications
equipment manufacturers must offer products which assist Telcos in meeting
customer demand for high quality, reliable transmission services.  The Company
is committed to customer satisfaction in the design and manufacture of its
products and maintains comprehensive quality control systems to monitor product
and service quality throughout all of its processes.  This commitment has
resulted in the Company's domestic operations achieving CSQP(SM) (Customer
Supplier Quality Process) and ISO 9001 Registration recognition from Bellcore.



                                      -10-



<PAGE>   11



        
        At July 26, 1997, the majority of the Company's manufacturing and
quality processes were conducted by 236 employees.  The Company's manufacturing
process consists of several distinct phases: material planning and procurement,
assembly, burn-in, testing and quality audit.  The Company procures electronic
and mechanical components from outside manufacturers and assembles them using a
substantially automated production process.  Incoming components are subject to
quality inspection and testing.  In addition, all products manufactured by the
Company are 100% tested prior to shipment to customers.  The Company's quality
control systems are designed to assure product conformance with Bellcore
standards, high reliability in the field and complete customer satisfaction. 
To date, the Company has experienced no significant field failure conditions.


        All of the products offered and sold by the 3net operations are
manufactured by independent contractors, generally pursuant to manufacturing
agreements entered into with 3net.  These products have all achieved ISO9002
recognition, and 3net's software products have achieved "Ticket" recognition
for quality performance.  In addition, the contract manufacturers generally
give 3net a 12-month warranty against product defects.


        Historically, the Company has used industry standard components for its
products.  Some components, however, including application specific integrated
circuits ("ASICs"), are custom made to the Company's specifications.  In
addition, the Company uses proprietary design integrated circuits ("PDICs") in
the manufacture of its products which are the design and property of the
manufacturer from which they are purchased.  Certain key components required to
manufacture the Company's products, principally its ASICs and PDICs, are
currently available from only one source.  The Company continually evaluates
its sources of supply and will establish additional supply relationships where
available and advisable to increase the reliability of receipt of components.
The Company generally obtains its components on a purchase order basis.
Components that currently are readily available may become difficult to obtain
in the future.  In response to long order lead times and delays in the supply
of key components, the Company keeps an inventory of certain components at its
production facility on a consignment basis.  See Subparagraph d. (v) of this
Item 1 -- "Factors That May Affect Future Results--Dependence on Certain
Suppliers."


        The Company's customers typically require delivery of products shortly
after an order is placed which requires the Company to maintain relatively high
inventory levels and increases the risk of inventory obsolescence. In addition,
certain of the components used by the Company require an order lead time of up
to six months and the Company must regularly make advance noncancelable
commitments to purchase relatively large quantities of such components.  The
Company continually monitors and reviews its inventories and purchasing
practices in an effort to minimize inventory related costs and the risk of
obsolescence.  Members of the Company's management team meet each month to
review current inventories for potential obsolescence and, based on a rolling
six-month sales forecast, inventory aging data and purchasing trends, to
establish appropriate inventory reserves and inventory purchasing levels for
the succeeding month.  See Subparagraph d. (vi) of this Item 1 -- "Factors That
May Affect Future Results -- Increased Inventory Levels and Need to Make
Advance Purchase Commitments." See also Item 7 -- "Management's Discussion and
Analysis of Financial Condition and Results of Operations."


        (ix) COMPETITION


        The markets for the Company's products are highly competitive and
characterized by rapid technological change, evolving industry standards,
changes in customer requirements, price-competitive bidding and frequent
product introductions and enhancements.  With the development of the worldwide
telecommunications market and increasing demand for high speed digital
transmission over the existing telephone network, many companies have emerged
to offer products for these markets.  Moreover, the Company expects competition
to increase both from existing competitors and from other companies which may
enter the Company's existing or future markets, including the RBOCs and Lucent.
Lucent currently manufactures certain products also manufactured and sold by
the Company.  See Subparagraph d. (iii) of this Item 1 -- "Factors That May
Affect Future Results--Reliance on Certain Customers" and Subparagraph d. (vii)
of this Item 1 -- "Factors That May Affect Future Results--Potential
Competition from RBOCs and Lucent."  See also Subparagraph c. (x) of this Item
1 -- "Narrative Description of Business -- Regulation." The Company competes
for customers on the basis of price, product features, conformance with
industry standards and specifications, performance and reliability, technical
support and the maintenance of close customer relationships.



                                      -11-



<PAGE>   12





        The Company's competitors in the United States and elsewhere are
numerous and, in most cases, have significantly greater financial,
technological, manufacturing, marketing and personnel resources than the
Company.  In addition, certain of the Company's competitors have long-standing
relationships with certain Telcos which may adversely affect the Company's
ability to successfully compete for business at these Telcos.  The Company's
principal competitors with respect to T1 products are ADC, Troncom and Westell,
Inc. In addition, because HDSL is easier to provision than traditional T1
service, the Company is facing increasing competition with respect to its
repeatered T1 products from suppliers of HDSL systems, which is an accepted
alternate method of delivering T1 services in the Local Loop. The HDSL market
is dominated by PairGain, ADC and ADTRAN.  The Company's principal competitor
with respect to VF products is Tellabs, Inc. and the domestic market for VF
products generally is experiencing decreasing demand as higher speed digital
data transmission services become less costly and more widely deployed. The
Company's principal competitor with respect to DDS products is ADTRAN.  Lucent
and Pulse Communications, Inc. ("Pulsecom"), a subsidiary of Hubbell
Incorporated, are the Company's principal competitors with respect to the
Company's DLC products.  With respect to the Company's ISDN products, the
Company's principal competitor is ADTRAN.  See Subparagraph d. (i) of this Item
1 -- "Factors That May Affect Future Results--Dependence on T1/Wireless Product
Line" and Subparagraph d. (iv) of this Item 1 -- "Factors That May Affect
Future Results -- Highly Competitive Industry."


        (x) REGULATION


        The telecommunications industry is subject to regulation in the United
States, the United Kingdom and other countries.  Federal and state regulatory
agencies regulate most of the Company's domestic customers.  While such
regulation does not typically affect the Company directly, the effects of such
regulation on the Company's customers may adversely impact the Company's sales
and operating results.  For example, the sale of the Company's products may be
affected by the imposition upon certain of the Company's customers of common
carrier tariffs, the taxation of telecommunications services and regulatory
policies affecting terms on which common carriers conduct their business. These
policies are under continuous review and are subject to change.  See
Subparagraph d. (viii) of this Item 1 -- "Factors That May Affect Future
Results--Government Regulation."


        The Telecommunications Act of 1996 (the "Telecommunications Act"),
enacted on February 8, 1996, has generally eliminated the restrictions which
had previously prohibited the RBOCs from manufacturing telecommunications
equipment (subject to first satisfying certain conditions designed to
facilitate local exchange competition and receipt of prior approval by the
Federal Communications Commission).  These restrictions had been imposed under
the Modification of Final Judgment, which governed the structure of the 1984
divestiture by AT&T of its local operating telephone company subsidiaries.  The
passage of the Telecommunications Act may have an adverse effect on the Company
because the RBOCs, which are presently the Company's principal customers, may
now become manufacturers of some or all of the products currently manufactured
and sold by the Company and, consequently, may no longer purchase
telecommunications equipment produced by the Company at the levels historically
experienced.  See Subparagraph d. (vii) of this Item 1 -- "Factors That May
Affect Future Results -- Potential Competition from RBOCs and Lucent."


        (xi) PROPRIETARY RIGHTS


        The name "Teltrend" is a registered trademark of the Company in the
U.S. The Company has also registered six of its product names and has applied
for trademark registration for ten additional product identifiers or names in
the U.S.  The Company has pursued and intends to continue to pursue patent
protection of inventions that it considers important to the Company's business
and for which such protection is available.  The Company presently holds
patents on thirteen inventions relating to its products and has fourteen patent
applications pending in the U.S.  The Company also has a registered copyright
in the U.S. with respect to a certain software program used in a number of its
products.  In addition, as part of its confidentiality procedures, the Company
generally enters into nondisclosure agreements with its key employees and
certain suppliers, and limits access to and distribution of its proprietary
information.  Despite these precautions, it may be possible for a third party
to copy or otherwise obtain and use the Company's technology without
authorization.  Accordingly, there can be no assurance that the Company will be
successful in protecting its proprietary rights or that the Company's
proprietary rights will preclude competitors from developing products or
technology equivalent or superior to that of the Company.  Moreover, the laws
of some foreign countries do not protect the Company's proprietary rights in
its products to the same extent as do the laws of the United States.



                                      -12-



<PAGE>   13




        The telecommunications industry is characterized by an increasing
number of patents and frequent litigation based on allegations of patent
infringement.  From time to time, third parties may assert exclusive patent,
copyright and other intellectual property rights to technologies which are
important to the Company.  Moreover, a substantial number of the Company's
products are intended to plug into telephone network equipment manufactured by
third parties, some of which are also competitors of the Company.  Such
equipment may be originally designed or subsequently modified so that it is
incompatible with the Company's existing or future products.  Further,
intellectual property rights may be associated with certain of such equipment
and the Company may not be able to design products so they do not infringe
these rights or license such rights on commercially favorable terms.


        The Company is a party to agreements with two of the RBOCs whereby the
Company licenses certain telecommunications technology, including digital
channel banks and signal decoding systems, in connection with the manufacture
of its products.


        Prior to the Company's initial public offering in June 1995 (the
"IPO"), the subsidiary through which the Company then conducted its operations
(the "Operating Subsidiary") also licensed certain technology from AT&T, which
technology has since been transferred to Lucent.  The term of this license
continued through July 1995, subject to a right of continuation under certain
circumstances at substantially higher royalty rates.  In connection with the
merger of the Operating Subsidiary into Teltrend Inc., the Company sought
AT&T's consent to assignment of this license from the Operating Subsidiary to
the Company.  At that time, AT&T indicated it would give such consent after
resolving certain issues with the Company with respect to the license. However,
the term of the license agreement expired before the parties had the
opportunity to resolve these issues and the parties have since discussed a
replacement license agreement.  There can be no assurance that the Company will
be able to obtain a replacement license agreement at royalty rates which do not
exceed those in effect during Fiscal 1995, and any substantial increase in
royalty rates could have a material adverse effect on the Company.  The Company
is also evaluating its continuing obligations to AT&T (now Lucent) with respect
to the Operating Subsidiary's pre-IPO license agreement with Lucent including
the extent to which its current products employ technology covered by the
unexpired patents licensed thereunder.  Any resolution of these issues which
applies the maximum royalty increase provided for in the license to a
substantial number of the Company's products could have a material adverse
effect on the Company's results of operations.  See Subparagraph d. (ix) of
this Item 1 -- "Factors That May Affect Future Results -- Proprietary Rights
and Risks of Third Party Claims of Infringement."


        Further, in the context of its discussions with Lucent, Lucent
indicated that the Company's initial ISDN product may make use of certain of
Lucent's patented technology and Lucent has expressed a willingness to license
such technology.  The Company is currently evaluating Lucent's claim and the
advisability of entering into such licensing agreement.  However, there can be
no assurance as to the resolution of this matter.  See Subparagraph d. (ix) of
this Item 1 -- "Factors That May Affect Future Results -- Proprietary Rights
and Risks of Third Party Claims of Infringement."


        (xii) EMPLOYEES


        As of July 26, 1997, the Company had 371 full-time employees, including
76 in engineering, 39 in sales and marketing, 236 in manufacturing and quality
assurance and 20 in finance and administration. The acquisition of 3net
increased the Company's total number of full-time employees by 113 to a total
of 484.  The Company's future success will depend largely upon its ability to
attract and retain highly qualified personnel.  The Company's employees are not
represented by any collective bargaining agreements, and the Company has never
experienced a work stoppage.  The Company believes that its employee relations
are good.


        (xiii) BACKLOG


        At July 26, 1997, the Company's backlog of orders believed to be firm
was approximately $2.1 million, compared to approximately $4.0 million at July
27, 1996. The Company believes that backlog is not a meaningful indicator of
net sales that can be expected for any future period.




                                      -13-



<PAGE>   14


d.      FACTORS THAT MAY AFFECT FUTURE RESULTS


        (i)   DEPENDENCE ON T1/WIRELESS PRODUCT LINE


        The Company's T1/Wireless products accounted for approximately 56.2%,
54.3% and 55.6% of the Company's total net sales in fiscal 1997, 1996 and 1995,
respectively.  The Company expects to derive a large percentage of its net
sales for the foreseeable future from the sale of its T1/Wireless products.
Consequently, the Company's inability to maintain or increase net sales of its
T1/Wireless products in the future, or to offset any shortfall in sales of such
products with sales within its other existing or future product lines, could
have a material adverse effect on the Company.


        The Company is facing increasing competition with respect to its
repeatered T1 products from suppliers of systems based on HDSL technology as an
alternate method of delivering T1 services in the Local Loop.  Because HDSL is
easier to provision than traditional T1 service, the Company expects that HDSL
products will adversely affect the demand for its T1 products as the cost of
HDSL systems decline.  If increasing competition causes the Company to reduce
selling prices for its repeatered T1 products, there can be no assurance that
the Company will be able to increase unit sales volumes of such products,
reduce its costs of sales of such products or maintain or increase revenues or
gross margins attributable to such products to offset in full or in part the
reduced revenue effects of such selling price reductions.


        (ii)  RAPID TECHNOLOGICAL CHANGES AND DEPENDENCE ON NEW PRODUCTS


        The market for the Company's products is characterized by rapidly
changing technology, evolving industry standards, changes in customer
requirements, price-competitive bidding and frequent product introductions and
enhancements. The introduction of telephone network voice and data transmission
products involving new technologies, the emergence of new industry standards or
changes in customer requirements or service offerings could adversely affect
the Company's ability to sell its existing products and products currently
under development.  All of the Company's existing products are designed
primarily to facilitate and enhance the delivery of communications over the
existing copper wireline in the Local Loop and the Company expects that Telcos
will increasingly replace this copper wireline with fiber optic, coaxial cable,
wireless and other technologies (each of which uses a significantly different
method of delivery).  Furthermore, the Company faces increasing competition
with respect to its repeatered T1 products from suppliers of HDSL systems as an
alternate method of delivering conventional T1 services.  The Company believes
that the continued installation of new technologies in the Local Loop will
adversely affect demand for certain of its existing products and that its
future success will largely depend upon its ability, on a cost-effective and
timely basis, to continue to enhance its existing products and develop and
achieve commercial acceptance of new products.  There can be no assurance that
developments by others will not render the Company's products or technologies
obsolete or unmarketable or that the Company will be able to successfully
anticipate or adapt to changing technology, industry standards or customer
requirements on a timely basis.  Any failure by the Company to anticipate and
respond to technological developments or changes in industry standards or
customer requirements could have a material adverse effect on the Company.


        (iii)  RELIANCE ON CERTAIN CUSTOMERS


        The Company has historically depended, and is likely to continue to
depend, on the RBOCs for substantially all of its net sales.  Sales to the
RBOCs accounted for approximately 95.8%, 95.2% and 96.3% of the Company's total
net sales in fiscal 1997, 1996 and 1995, respectively.  Among the RBOCs, sales
to BellSouth Telecommunications Inc., SBC Communications Inc., Ameritech Corp.,
Pacific Bell and US WEST Inc. accounted for approximately 25.9%, 19.3%, 13.4%,
11.2% and 10.8%,  respectively, of the Company's net sales in fiscal 1997.
During this same period, one of these customers purchased T1 products which
accounted for approximately 13.3% of the Company's total net sales.  The
Company has no supply agreements with any of the RBOCs which establish minimum
purchase commitments and there can be no assurance that sales of the Company's
products to the RBOCs or other customers will continue or that the Company's
customer base will become materially less concentrated.  See -- "Factors That
May Affect Future Results -- Potential Competition from RBOCs and Lucent." The
loss of one or more of the RBOCs as a customer, the reduction of orders for the
Company's products, or a failure or delay in the deployment of the Company's
products by the RBOCs could materially and adversely affect


                                      -14-



<PAGE>   15




the Company.  In addition, recent contract negotiations with certain
RBOCs have resulted in lower prices for selected products.  Also, the RBOCs and
most of the Company's other customers are significantly larger than, and are
able to exert a high degree of influence over, the Company.


        (iv)  HIGHLY COMPETITIVE INDUSTRY


        The markets for the Company's products are highly competitive,
especially with respect to price, product features, quality and conformance to
industry standards.  The Company's competitors in the United States and
elsewhere are numerous and the Company expects its competition to increase in
the future both from existing and new competitors, including possibly the RBOCs
and Lucent. See "--Factors that May Affect Future Results -- Potential
Competition From RBOCs and Lucent."  Increased competition could reduce gross
profit margins and may require increased spending by the Company on product
development and sales and marketing, or may otherwise adversely affect the
Company.  The Company has generally been required to reduce the selling prices
of its products over time to meet increasing competition and will likely be
required to do so in the future.  The Company's ability to maintain or increase
net sales will depend largely upon its ability to increase unit sales volumes
of its products to counter declines in the average sales prices of its
products.  Declining average sales prices would also adversely affect gross
margins on the Company's products if not offset by reductions in the Company's
cost of sales.  There can be no assurance that the Company will be able to
increase unit sales volumes of its products, reduce its costs of sales of such
products or maintain or increase revenues or gross margins attributable to such
products.  Most of the Company's competitors and potential competitors have
significantly greater financial, technological, manufacturing, marketing and
personnel resources than the Company.  In addition, certain of the Company's
competitors have long-standing relationships with certain Telcos which may
adversely affect the Company's ability to successfully compete for business at
these Telcos.


        (v)  DEPENDENCE ON CERTAIN SUPPLIERS


        Certain key components which are required to manufacture the Company's
products are available from only one source.  Such components include the
Company's application specific integrated circuits, which are built to Company
specifications, and its proprietary design integrated circuits, which are the
design and property of the manufacturer from which they are purchased.  The
Company generally obtains its components on a purchase order basis.
Accordingly, there can be no assurance that the Company will be able to
continue to obtain sufficient quantities of key components as required or that
such components, if obtained, will be available to the Company on commercially
favorable terms.  Further, certain components require an order lead time of up
to six months.  Failure by the Company to order sufficient quantities of
components in advance could prevent the Company from meeting customer demand
for its products.


        The Company has been able to adjust its order lead times and/or
promised delivery dates to avoid material delivery delays of its products. 
However, there can be no assurance that the Company will be able to continue to
adjust its order lead times and/or promised delivery dates to avoid material
delivery delays of its products in the future.  Under certain of the Company's
supply contracts, a delay in the delivery of products would permit the customer
to cancel the purchase order or, in limited circumstances, assess a late
delivery charge.  In addition, late deliveries could adversely affect the
Company's ability to obtain additional sales from a particular customer.  The
Company's inability to obtain sufficient quantities of key components or
products, or to develop alternative sources of such components or alternative
contract manufacturing relationships (in the case of the 3net operations) on
commercially favorable terms if and as required in the future, could result in
delays or reductions in product shipments or could otherwise have a material
adverse effect on the Company's customer relationships and, consequently, on
its business, results of operations and financial condition.  See  "-- Factors
That May Affect Future Results -- Reliance on Certain Customers."


        (vi)  INCREASED INVENTORY LEVELS AND NEED TO MAKE ADVANCE PURCHASE
              COMMITMENTS


        To respond to anticipated customer demand, the Company maintains high
inventory levels.  In addition, at the request of several of its customers, the
Company has entered into arrangements to maintain certain of its finished goods
inventory at the various locations of such customers.  Although the Company
believes these arrangements facilitate sales to its customers, they result in
higher levels of inventory than are necessary in the



                                      -15-



<PAGE>   16



absence of such arrangements.  Maintaining high inventory levels
substantially increases the risk that the Company's profitability and results
of operations may from time to time be materially and adversely affected by
inventory obsolescence.  To procure adequate supplies of certain components,
the Company must regularly make advance commitments to purchase relatively
large quantities of such components.  At July 26, 1997, the Company had open
noncancellable purchase commitments of approximately $2.6 million, covering
several different components.  The inability of the Company to incorporate such
components in its products could have a material adverse effect on the Company. 
See Subparagraph c. (viii) of this Item 1 -- "Narrative Description of Business
-- Manufacturing and Suppliers" and Subparagraph c. (v) of this Item 1 --
"Narrative Description of Business -- Marketing, Sales and Distribution."


        (vii)  POTENTIAL COMPETITION FROM RBOCS AND LUCENT


        The Telecommunications Act of 1996 has generally eliminated the
restrictions which had previously prohibited the RBOCs from manufacturing
telecommunications equipment (subject to first satisfying certain conditions
designed to facilitate local exchange competition and receipt of prior approval
by the Federal Communications Commission).  These restrictions had been imposed
under the Modification of Final Judgment, which governed the structure of the
1984 divestiture by AT&T of its local operating telephone company subsidiaries.
The passage of the Telecommunications Act may have an adverse effect on the
Company because the RBOCs, which are presently the Company's principal
customers, may now become manufacturers of some or all of the products
currently manufactured and sold by the Company and, consequently, may no longer
purchase telecommunications equipment produced by the Company at the levels
historically experienced. In addition, the operations of Lucent, as a supplier
to the Telcos, may have an adverse effect on the Company's business because
Lucent sells certain products that directly compete with the Company's
products.


        (viii)  GOVERNMENT REGULATION


        The telecommunications industry is subject to regulation in the United
States, the United Kingdom and other countries.  Federal and state regulatory
agencies regulate most of the Company's domestic customers.  While such
regulation does not typically affect the Company directly, the effects of such
regulation on the Company's customers may adversely impact the Company's sales
and operating results.  For example, the sale of the Company's products may be
affected by the imposition upon certain of the Company's customers of common
carrier tariffs, the taxation of telecommunications services and regulatory
policies affecting terms on which common carriers conduct their business.  In
addition, certain countries may have or may develop rules and regulations that
will adversely affect the Company's ability to effectively compete in some
markets.  Thus, there is no assurance that markets that are now open to the
Company's products will not be limited by government regulation in the future.


        (ix)  PROPRIETARY RIGHTS AND RISKS OF THIRD PARTY CLAIMS OF INFRINGEMENT


        The telecommunications industry is characterized by an increasing
number of patents and frequent litigation based on allegations of patent
infringement. From time to time, third parties may assert exclusive patent,
copyright and other intellectual property rights to technologies which are
important to the Company.  While the Company does not believe that its present
products and technology infringe the intellectual property rights of others,
there can be no assurance that third parties will not assert infringement
claims against the Company or that any such assertions will not result in
costly litigation. There can be no assurance that the Company would prevail
against any such claims or that licenses of any third-party intellectual
property would be available to the Company on commercially reasonable terms. 
In addition, a substantial number of the Company's products are intended to
plug into telephone network equipment designed and manufactured by third
parties, some of which are competitors of the Company.  The design or
modification of such equipment so that it is incompatible with the Company's
products could adversely affect the Company's ability to maintain its current
level of, or achieve additional, net sales.  The inability of the Company to
develop products for such equipment which do not infringe the intellectual
property rights associated with such equipment, or to obtain the right to use
such intellectual property on commercially reasonable terms, could have a
material adverse effect on the Company.  In addition, any infringement claims
or litigation against the Company could have a material adverse effect on the
Company.



                                      -16-



<PAGE>   17



        The Company was a party to agreements with certain of the RBOCs
pursuant to which it licensed certain telecommunications technology, including
digital channel banks and signal decoding systems, in connection with the
manufacture of its products.  The terms of virtually all of these licensing
agreements expired at varying times during fiscal 1995, subject to a right of
continuation at an increased royalty rate with respect to specified Company
products.  The Company is currently evaluating its continuing obligations under
each of the remaining agreements and the extent to which its current products
employ technology covered by the unexpired patents licensed thereunder.  There
can be no assurance that the results of the Company's evaluation of these
agreements and/or subsequent negotiations with the RBOCs will not result in the
Company's payment of royalties at increased rates with respect to all or a
substantial number of the Company's products.  Any substantial increase in
royalty rates could have a material adverse effect on the Company.


        Prior to the IPO, the Operating Subsidiary also licensed certain
technology from AT&T.  This technology has since been transferred to Lucent.
The term of this license continued through July 1995, subject to a right of
continuation under certain circumstances at substantially higher royalty rates.
In connection with the IPO and the Company's recapitalization in connection
therewith, the Company sought AT&T's consent to assignment of this license from
the Operating Subsidiary to the Company.  At that time, AT&T indicated it would
give such consent after resolving certain issues with the Company with respect
to the license.


        After AT&T's spin-off of Lucent and the simultaneous transfer of
certain technology and patent rights to Lucent, the Company continued its
discussions with Lucent instead of AT&T.  In the context of these discussions,
Lucent indicated that the Company's initial ISDN product may make use of
certain of Lucent's patented technology and has expressed a willingness to
include this technology in the context of a replacement license agreement.  The
Company is currently evaluating Lucent's claim.  The resolution of this matter
is uncertain at this time, and there can be no assurance that the Company will
be able to obtain a replacement license agreement with Lucent at royalty rates
which would not have a material adverse effect on the Company.  See "--Factors
That May Affect Future Results -- Potential Competition from RBOCs and Lucent."
See also Item 3 -- "Legal Proceedings."


        (x)  POTENTIAL PRODUCT RECALLS AND WARRANTY EXPENSES


        The Company's products are required to meet rigorous standards imposed
by its customers, including written technical requirements and various
mechanical, electrical performance, environmental operating and storage
conditions, and to interface in a complex and changing environment with
telecommunication network equipment produced by numerous other suppliers.  In
the event there are material deficiencies or defects in the design or
manufacture of the Company's products or if such products become incompatible
with existing third-party network equipment, the affected products could be
subject to a recall. Although the Company has not experienced any complete
recall of a product from the field in the past, the Company has from time to
time agreed to upgrade certain of its products in response to product design
issues raised by certain of its customers.  There can be no assurance that the
Company will not experience a material product recall in the future.  Any
product recall and associated negative publicity could have a material adverse
effect on the Company.


        (xi)  POSSIBLE VOLATILITY OF STOCK PRICE


        The Company believes factors such as announcements of new products or
technological innovations by the Company or third parties, as well as
variations in the Company's results of operations, the gain or loss of
significant customers, legislative or regulatory changes, general trends in the
industry, market conditions, analysts' estimates, the stock market and other
events or factors may cause the market price of the Common Stock to fluctuate
significantly. In addition, the stock market has experienced extreme price and
volume fluctuations which have particularly affected the market price for many
high technology companies and which have little apparent correlation with the
operating performance of these companies.  Such broad market fluctuations may
adversely affect the market price of the Common Stock.  


        (xii) RISKS RELATED TO 3NET ACQUISITION


        The Company completed its acquisition of 3net on September 18, 1997. 
The Company expects the acquisition of 3net to increase its sales and the
markets for its existing and future product offerings.  However, there



                                      -17-



<PAGE>   18



can be no assurance that 3net will provide the sales and market
opportunities that the Company expects.  Furthermore, even if the acquisition
of 3net does provide such expected sales and market opportunities, there can be
no assurance that the Company will be able to successfully integrate 3net into
its business or take advantage of the synergies which the Company presently
believes will result from the integration of 3net's business.  Any failure by
the Company to quickly and successfully integrate the 3net business such that
it is able to derive the benefit from contemplated synergies could have a
material adverse effect on the Company's results of operations.


ITEM 2 - PROPERTIES


        The Company's headquarters and principal administrative, engineering
and manufacturing facilities are located in a facility containing approximately
105,000 square feet located on approximately seven acres of land in St.
Charles, Illinois.  The Company leases this building under an operating lease
arrangement which expires in September 1999.  The Company is also leasing an
additional 3,712 square feet in an office building also located in St. Charles,
Illinois.  This building is used to provide office and lab space for marketing
and engineering personnel.  The lease on this space expires in December 1998.
In October 1997, the Company offered to purchase another building in St.
Charles, Illinois to provide 19,890 square feet of office and lab space for
$915,000.  The offer was preliminarily accepted but all of the terms of the
purchase have not been agreed upon.


        3net's principal administrative and engineering offices are located in
a 16,000 square foot facility in an office complex in Basingstoke, England
under two leases which expire in December 2005. 3net also leases sales and
engineering offices in Christchurch, New Zealand (approximately 8,000 square
feet under a lease that expires in March 2000, subject to a four-year renewal
right) and Beijing, China (approximately 2,000 square feet under a lease that
expires in 2007).


        The Company believes that anticipated growth through September 1999 can
be accommodated by these facilities and by leasing additional space.


        On March 5, 1997, the Company purchased 22.65 acres of land located in
Geneva, Illinois for approximately $1.8 million.  The Company plans to commence
the construction of a new office, researching and  manufacturing facility in
late fiscal 1998.  The Company estimates the cost of this facility to be
approximately $20.0 million and expects to fund its construction from existing
cash, cash flows and possibly debt.


ITEM 3 - LEGAL PROCEEDINGS


        On February 25, 1997, Wilcom, Inc. ("Wilcom") instituted a patent
infringement action against the Company in the United States District Court for
the Eastern District of New York (Wilcom, Inc. v. Teltrend Inc., Civil Action
No. 97-0918) seeking injunctive relief, damages, interest, costs and attorney's
fees.  Wilcom alleges that certain of the Company's products infringe U.S.
Patent Nos. 4,961,218 and 5,504,811, which relate to enhanced line powered
amplifiers.  The only Company product specifically identified as allegedly
infringing the patents is the CyberBlock(R) model LCR4002.  The Company
believes that the CyberBlock(R) model LCR4002 does not infringe either of the
patents identified in the suit and, accordingly, that it has the meritorious
and complete defense of non-infringement.  Nonetheless, in the event that
Wilcom prevails in the action, the Company does not believe that the suit is
likely to have a material adverse effect on the financial condition or results
of operations of the Company.  Although sales of the CyberBlock(R) model
LCR4002 could increase in the future, sales of this product to date have not
been significant.


        The Company is from time to time involved in various other legal
proceedings arising in the ordinary course of its business.  In addition, the
Company has from time to time been notified by others who assert exclusive
rights to certain technology.  The Company evaluates these claims on a case by
case basis and enters into licensing arrangements when it appears necessary or
desirable to do so. The Company believes the resolution of any other pending
matters will not materially affect the Company's financial position or results
of operations. See Subparagraph d. (ix) of Item 1 -- "Factors That May Affect
Future Results -- Proprietary Rights and Risks of Third Party Claims of
Infringement."




                                      -18-



<PAGE>   19



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


     No matter was submitted during the fourth quarter of the Company's 1997
fiscal year to a vote of security holders, through solicitation of proxies or
otherwise.


Pursuant to General Instruction G(3) of Form 10-K and Instruction 3 to Item
401(b) of Regulation S-K, the following information is included as an
unnumbered item in Part I of this Report in lieu of being included in the Proxy
Statement for the Company's annual meeting of stockholders to be held on
December 11, 1997.


                      EXECUTIVE OFFICERS OF THE REGISTRANT


     HOWARD L. KIRBY, JR., PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF
THE BOARD OF DIRECTORS--Mr. Kirby has served as the President, the Chief
Executive Officer and a director of the Company since January 1990.   Mr. Kirby
was named Chairman of the Board of Directors in February 1997.  Mr. Kirby began
his career in the telecommunications industry in 1962 with Collins Radio
Company (which subsequently became a part of Rockwell International
Corporation), where he spent 20 years in various management positions in
engineering, marketing and sales.  From 1982 to 1984, Mr. Kirby was the
Director of Planning and Business Development for U.S. Telephone, now part of
Sprint Corporation.  In 1984, Mr. Kirby became the Vice President and General
Manager at Pulse Communications, Inc. ("Pulsecom"), a subsidiary of Hubbell
Incorporated, and held that position until he joined the Company in 1990.  Mr.
Kirby is 61 years old.


     GILBERT H. HOSIE, VICE PRESIDENT, RBOC SALES--Mr. Hosie has served as Vice
President, RBOC Sales since March 1997.  Mr. Hosie began his career as a
technician for New York Telephone Company in 1964.  In 1969, he became District
Sales Manager for General Electric Company and held that position for six
years.  In 1975, Mr. Hosie joined the Wescom Telephone Products Division
("Wescom") of Rockwell International Corporation ("Rockwell") as its Midwest
Regional Manager and remained at Wescom until 1985.   Mr. Hosie joined the
Company in 1985 and served in various sales and marketing positions until he
was elected to serve as the Company's Vice President, Sales in August 1994.
Mr. Hosie is 56 years old.


     DOUGLAS P. HOFFMEYER, VICE PRESIDENT, FINANCE, SECRETARY AND
TREASURER--Mr. Hoffmeyer joined the Company in 1986 and has served as the
Company's Vice President, Finance, Secretary and Treasurer since 1988.  Mr.
Hoffmeyer began his career in 1969 with the public accounting firm of Arthur
Andersen & Co., where he remained for five years before joining a Chicago-area
accounting firm as a partner.  Mr. Hoffmeyer is 50 years old.


     LAURENCE L. SHEETS, VICE PRESIDENT/GENERAL MANAGER, BROADBAND PRODUCTS AND
CHIEF TECHNICAL OFFICER--Mr. Sheets has served as the Company's Vice
President/General Manager, Broadband Products since July 1996 and also as its
Chief Technical Officer since March 1997.  Mr. Sheets joined Bell Telephone
Laboratories ("Bell Labs") as a member of its technical staff in 1966 and left
in 1984 as a Distinguished Member of Technical Staff.  At that time, Mr. Sheets
joined Rockwell (Wescom) where he held various progressive positions, including
Manager and later Director of Advanced Technology as well as Director of
Engineering.  From January 1991 to July 1996, Mr. Sheets was the Vice
President, Engineering for the Company.  Mr. Sheets is 54 years old.


     MICHAEL S. GRZESKOWIAK, VICE PRESIDENT, OPERATIONS--Mr. Grzeskowiak has
served as the Company's Vice President, Operations since February 1990.  He
began his career as an engineer at Western Electric Company (now Lucent) in
1967, supporting the factory and field installations for switching systems.  In
1975, he joined Wescom where he held various positions, including Director of
Manufacturing, Director of Production Operations and Director of Manufacturing
Planning, until he joined the Company in 1990.  Mr. Grzeskowiak is 52 years old.


     DONALD G. BOZEMAN, VICE PRESIDENT, NON-RBOC SALES--Mr. Bozeman has served
as the Company's Vice President, Non-RBOC Sales since May 1997.  Mr. Bozeman
began his career in 1962 as a design engineer at Western Electric Company and
subsequently held various engineering, sales and product development positions
with a number of firms.  From 1983 to 1986, Mr. Bozeman was employed by Telco
Systems, Inc. as its Vice President of Corporate Development and later as the
President of its VF Division.  Mr. Bozeman served as Vice President


                                      -19-



<PAGE>   20

of Marketing for Pulsecom from 1986 until 1991.  Mr. Bozeman joined the
Company in February 1992, and from August 1994 to July 1996, Mr. Bozeman was
the Vice President, Marketing for the Company.  From July 1996 to May 1997, Mr.
Bozeman was Vice President/General Manager, T1/Wireless Products.  Mr. Bozeman
is 62 years old.

     JOHN A. MUNTEAN, VICE PRESIDENT/GENERAL MANAGER, ISDN AND DDS
PRODUCTS--Mr. Muntean joined the Company in this position in April 1997.  He
began his career with Reliance Electric Company (which was acquired by Exxon
and later acquired by Rockwell) in 1974.  His experience in telecommunications
began with Reliance Comm/Tec (now RELTEC Corporation) in 1981 where he served
in several marketing, sales and management positions.  In 1990, he joined
Motorola where he held sales and marketing positions in the New Enterprises and
Computer Group.  Most recently, from 1991 until joining the Company, he held
Vice President positions in sales and marketing, product management and
engineering with Charles Industries, Ltd., a privately held manufacturer of
telecommunications equipment (and acquirer of Wescom from Rockwell in 1991).
Mr. Muntean is 44 years old.


     JACK C. PARKER, VICE PRESIDENT/GENERAL MANAGER, DLC, VF AND T1/WIRELESS
PRODUCTS--Mr. Parker joined the Company in September 1996 as the Company's Vice
President/General Manager, VF, DLC Products.  In May 1997, Mr. Parker was also
made Vice President/General Manager, T1/Wireless Products, in addition to the
VF and DLC Products.  Mr. Parker began his career with Harris Corporation's
Aerospace Group in 1969.  From 1972 to 1980, Mr. Parker was employed by General
Electric's Telecommunications Division (which was later acquired by Wescom,
which was, in turn, later acquired by Rockwell) where he served as an
electronic design engineer and supervisor.  In 1980, Mr. Parker joined Tellabs
Inc. as the Manager of Digital Processing.  In 1985, Mr. Parker joined Pulsecom
as a Vice President of Engineering, before returning to Harris Corporation as
the Vice President of the Loop Systems Business Unit of the Dracon Division and
later as the Vice President of Engineering.  Most recently, Mr. Parker was the
Vice President of Engineering and Marketing at Canoga Perkins, a Division of
Inductotherm Inc.  Mr. Parker is 51 years old.


     THEODOR A. MAXEINER, CHIEF ACCOUNTING OFFICER; ASSISTANT VICE PRESIDENT,
FINANCE; CONTROLLER; ASSISTANT SECRETARY; AND ASSISTANT TREASURER--Mr. Maxeiner
joined the Company as its Accounting Manager in 1985 and has served as the
Company's Controller, Assistant Secretary and Assistant Treasurer since 1988.
In May 1997, Mr. Maxeiner became the Chief Accounting Officer.  Mr. Maxeiner is
52 years old.


     NORMAN C. GUENTHER, ASSISTANT VICE PRESIDENT, QUALITY--Mr. Guenther joined
the Company in 1987 as Director of Quality Assurance and has served as the
Company's Assistant Vice President, Quality since June 1990.  Prior to joining
the Company, Mr. Guenther spent six years in the United States Air Force as a
telecommunications system controller and held various quality management
positions with private firms.  Mr. Guenther is 48 years old.



                                      -20-



<PAGE>   21


                                    PART II


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


     The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "TLTN."  The following table sets forth for the periods 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
FISCAL 1996                                                        High      Low
<S>                                                                <C>      <C>
      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
</TABLE>

On October 17, 1997, 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 Company's credit 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.


ITEM 6 - SELECTED FINANCIAL DATA


     The five-year Selected Historical Consolidated Financial Data and
accompanying notes contained on page 19 of the Company's Annual Report to
Stockholders for the fiscal year ended July 26, 1997 are incorporated herein by
reference.


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

                                      -21-



<PAGE>   22





     Management's Discussion and Analysis of Financial Condition and Results of
Operations contained on pages 20 through 24, inclusive, of the Company's Annual
Report to Stockholders for the fiscal year ended July 26, 1997 is incorporated
herein by reference.


ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


     a.  The table presenting unaudited quarterly financial data for the
Company for the fiscal years ended July 26, 1997 and July 27, 1996 on page 36
of the Company's Annual Report to Stockholders for the fiscal year ended July
26, 1997 is incorporated herein by reference.


     b.  The report of independent auditors, financial statements and notes to
financial statements of the Company contained on pages 25 through 36,
inclusive, of the Company's Annual Report to Stockholders for the fiscal year
ended July 26, 1997 are herein incorporated by reference.



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


     There were no disagreements on any matters of accounting principles or
financial statement disclosure with the Company's independent accountants
during fiscal 1997 or 1996.


                                    PART III


ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.


     The sections entitled "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" contained in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on December 11,
1997 are incorporated herein by reference.  The section entitled "Executive
Officers of the Registrant" appearing immediately after Part I of this Report
is incorporated herein by reference.


ITEM 11 - EXECUTIVE COMPENSATION


     The section entitled "Executive Compensation" contained in the Company's
Proxy Statement for the Annual Meeting of Stockholders to be held on December
11, 1997 is incorporated herein by reference.


ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


     The Section entitled "Security Ownership of Certain Beneficial Owners and
Management" contained in the Company's Proxy Statement for the Annual Meeting
of Stockholders to be held on December 11, 1997 is incorporated herein by
reference.


ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


     None.




                                      -22-



<PAGE>   23


                                    PART IV


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


a.   (1)  Financial Statements


     The following financial statements of the Company, included in the
Company's Annual Report to Stockholders for the fiscal year ended July 26,
1997, are incorporated by reference in Part II, Item 8 of this Report.


Balance Sheets as of July 26, 1997 and July 27, 1996


Statements of Income for the years ended July 26, 1997, July 27, 1996 and July
29, 1995


Statements of Changes in Stockholders' Equity for the years ended July 26,
1997, July 27, 1996 and July 29, 1995


Statements of Cash Flows for the years ended July 26, 1997, July 27, 1996 and
July 29, 1995


Notes to Financial Statements


     (2)  Financial Statement Schedules


     Schedules are omitted because of the absence of the conditions under which
they are required or because the information called for is included in the
consolidated financial statements or notes thereto.


     (3)  Exhibits


                                 EXHIBIT INDEX
<TABLE>
<CAPTION>


   Exhibit
   Number   Description
   -------  -----------
   <S>      <C>
   2        None.

   3.1      Restated Certificate of Incorporation of Registrant, as amended. (1)

   3.2      Amended and Restated Bylaws of the Registrant.(2)

   3.3      Certificate of Designation of Series A Junior Participating
            Preferred Stock, filed January 23, 1997.

   4.1      Specimen form of Common Stock certificate.(2)

   4.2      Articles Fourth, Seventh, Eighth, Tenth and Twelfth of the Restated
            Certificate of Incorporation of the Registrant, as amended (incorporated
            by reference to the Restated Certificate of Incorporation included in
            Exhibit 3.1 herewith).


   4.3      Articles I, II (Sections 1 and 3), IV (Sections 1 through 6), V (Section
            3) and VI of the Amended and Restated Bylaws of the Registrant
            (incorporated by reference to the Amended and Restated Bylaws included in
            Exhibit 3.2 herewith).

   4.4      Credit Agreement between the Registrant and LaSalle National Bank, dated
            June 14, 1995.(1)

</TABLE>
                                      -23-



<PAGE>   24



<TABLE>
<S>         <C>
   4.5      Rights Agreement between the Registrant and LaSalle National Bank, as Rights Agent, dated January 16, 1997.(6)


   4.6      Form of Rights Certificate (incorporated by reference to Exhibit B to the Rights Agreement included in Exhibit 4.5
            herewith).

   9        None.

  *10.1     Indemnification Agreement, dated June 8, 1995, between the Registrant and Howard L. Kirby, Jr.(1)

  *10.2     Schedule of each of the directors and executive officers of the Registrant with whom the Registrant has entered into an
            Indemnification Agreement. (7)

  *10.3     Teltrend Inc. 1995 Stock Option Plan.(2)

  *10.4     Form of Nonqualified Stock Option Agreement under the Teltrend Inc. 1995 Stock Option Plan.(1)

  *10.5     Schedule of Nonqualified Stock Option Agreements which have been entered into by directors or executive officers of the
            Registrant. (7)

  *10.6     TI Investors Inc. Stock Option Plan.(2)

  *10.7     Forms of Nonqualified Stock Option Agreement under the TI Investors Inc. Stock Option Plan, dated August 1, 1994,
            between Donald G. Bozeman, together with Amended and Restated Nonqualified Stock Option Agreement under the TI Investors
            Inc. Stock Option Plan, dated May 13, 1994, between the Registrant and Donald G. Bozeman.(1)

  *10.8     Teltrend Inc. 1996 Non-Employee Director Stock Option Plan.(5)

  *10.9     Schedule of Nonqualified Stock Option Agreements which have been entered into by directors of the Registrant. (7)

 *10.10     Amended and Restated Stock Option Agreements, dated May 13, 1994, between the Registrant and Gilbert H. Hosie.(1)

  10.11     Registration Rights and Lock-Up Agreement between the Registrant, The Prudential Insurance Company of America, Pruco
            Life Insurance Company, AEA Investors Inc. and Stockholders of the Registrant prior to consummation of the Registrant's
            initial public offering.(1)


  10.12     Lease, dated April 22, 1983, between CMD Corporation and the Registrant, together with First Amendment to Lease,
            dated August 9, 1985, between Morgan Guaranty Trust Company of New York and the Registrant and Memorandum of Lease,
            First Amendment to Lease and Ratification of First Amendment to Lease, dated August 29, 1988.(2)


  10.13     Second Amendment to Lease, dated September, 1995, between Morgan Guaranty Trust Company of New York and the
            Registrant.(4)


  10.14     Real Estate Sale Agreement, dated August 20, 1996, between the Registrant and Itasca Bank & Trust Co., as Trustee,
            under Trust Agreement dated June 29, 1992 and known as Trust No. 11038 and The Kautz Road Business Park Joint Venture.
            (7)

</TABLE>  


                                      -24-



<PAGE>   25


<TABLE>

<S>         <C>
  10.15     Teltrend 1996 Stock Option Plan.


  10.16     Share Purchase Agreement among Security Services PLC, Securicor
            Communications Limited, 3 Net Holdings Limited, Securicor 3 Net Limited
            and Teltrend Inc. (3)
 
  13        1997 Annual Report to Stockholders

  21        Subsidiaries of Teltrend Inc.

  23.1      Consent of Ernst & Young LLP.

  24        None.

  27        Financial Data Schedule.

  99        None.
</TABLE>
------------------------------


     (1) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended April 29, 1995 (Commission File No.
0-26114).


     (2) Incorporated by reference to the Registrant's Registration Statement
on Form S-1, as amended (Registration No. 33-91104), originally filed with the
Securities and Exchange Commission April 11, 1995.


     (3) Incorporated by reference to the Registrant's Current Report on Form
8-K dated September 18, 1997 (Commission File No. 0-26114).


     (4) Incorporated by reference to Registrant's Report on Form 10-K for the
fiscal year ended July 29, 1995 (Commission File No. 0-26114).


     (5) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended January 27,1996 (Commission File No.
0-26114).


     (6) Incorporated by reference to the Registrant's Current Report on Form
8-K dated January 16, 1997 (Commission File No. 0-26114).


     (7) Incorporated by reference to the Registrant's Annual Report on Form
10-K for the Fiscal Year ended July 27, 1996 (Commission File No. 0-26114).


     (8) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended January 27, 1996 (Commission File No.
0-26114).


     * Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Report pursuant to Item 14(c).


     TELTREND INC. WILL FURNISH ANY OF THE ABOVE EXHIBITS TO ITS STOCKHOLDERS
UPON WRITTEN REQUEST ADDRESSED TO THE SECRETARY AT THE ADDRESS GIVEN ON THE
COVER PAGE OF THIS FORM 10-K.  THE CHARGE FOR FURNISHING COPIES OF THE EXHIBITS
IS $.25 PER PAGE, PLUS POSTAGE.




                                      -25-



<PAGE>   26



b. Report on Form 8-K


     The Company filed a current report on Form 8-K dated September 18, 1997
reporting under item 2 thereof the acquisition of 3net.


     This report contains the following trademarks of the Company, some of
which are registered: Teltrend, CellPak and CyberBlock.  Any other product or
brand names are trademarks, registered trademarks or service marks of their
respective companies.



                                     -26-


<PAGE>   27


                                  SIGNATURES


     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, on October 24,
1997.



                                             TELTREND INC.


                                    By  /s/ Howard L. Kirby, Jr.
                                       -------------------------------------
                                       Howard L. Kirby, Jr.
                                       President and Chief Executive Officer



     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant in
the capacities indicated on October 24, 1997.



<TABLE>
<CAPTION>
         SIGNATURE                               CAPACITY
---------------------------  ------------------------------------------------
<S>                          <C>

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


/s/ Douglas P. Hoffmeyer         
---------------------------  Vice President, Finance, Secretary and Treasurer
Douglas P. Hoffmeyer         (Principal Financial Officer)


/s/ Frank T. Cary                
---------------------------
Frank T. Cary                Director


/s/ Harry Crutcher, III           
---------------------------
Harry Crutcher, III          Director


/s/ William R. Delk              
---------------------------
William R. Delk              Director


/s/ Donald R. Hollis             
---------------------------
Donald R. Hollis             Director


/s/ Susan B. Major               
---------------------------
Susan B. Major               Director


/s/ Carl M. Mueller              
---------------------------
Carl M. Mueller              Director


/s/ Bernard F. Sergesketter      
---------------------------
Bernard F. Sergesketter      Director
</TABLE>