<PAGE>   1
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                                  UNITED STATES
                       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 JUNE 30, 1998

                                       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 0-25740


                               ACT NETWORKS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

          DELAWARE                                              77-0152144
(STATE OR OTHER JURISDICTION                                 (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION)                            IDENTIFICATION NO.)


                  188 CAMINO RUIZ, CAMARILLO, CALIFORNIA 93012
               (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 388-2474


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

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

                                  COMMON STOCK
                                (Title of Class)

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

                                Yes  X        No
                                    ---         ---

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

        Based on the closing sale price on Nasdaq National Market on August 31,
1998, the aggregate market value of the voting stock held by non-affiliates of
the registrant was $42,570,345.

        As of August 31, 1998, there were 9,376,480 shares of Common Stock
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      NONE

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                               ACT NETWORKS, INC.

                          1998 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS

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                                                                                           PAGE
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<S>        <C>                                                                             <C>
ITEM 1.    BUSINESS........................................................................  1

ITEM 2.    PROPERTIES...................................................................... 14

ITEM 3.    LEGAL MATTERS................................................................... 14

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS............................. 14

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........... 15

ITEM 6.    SELECTED FINANCIAL DATA......................................................... 16

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
           OF OPERATIONS................................................................... 17

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................................... 23

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE............................................................ 23

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................. 24

ITEM 11.   EXECUTIVE COMPENSATION.......................................................... 26

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................. 30

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................. 31

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K................ 32
</TABLE>

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ITEM 1.    BUSINESS

ACT Networks, Inc., a Delaware corporation ("ACT" or the "Company"), develops,
manufactures and markets wide area network (WAN) access products which support a
broad range of integrated voice and data network applications. Service providers
and enterprise customers use the Company's products to build multimedia networks
that are bandwidth efficient, cost-effective and easy to manage. The Company's
products incorporate advanced voice and data compression algorithms, enhanced
switching and traffic management capabilities, and state-of-the-art hardware and
software integration technologies.

The Company was incorporated in California in May 1987 under the name Advanced
Compression Technology, Inc., changed its name to ACT Networks, Inc. in May
1994, and reincorporated in the state of Delaware on May 2, 1995. The Company's
executive offices are located at 188 Camino Ruiz, Camarillo, California 93012
and its telephone number at that location is (805) 388-2474.

INDUSTRY BACKGROUND

The communications traffic of many organizations has grown steadily during the
past two decades due to increased use of distributed computing, electronic mail,
facsimile, electronic transaction processing, corporate-wide voice
communications systems and, more recently, the Internet. This evolution has led
to the use of wide area networks to provide interoffice information access and
communications, which in turn has produced an increasing need for
cost-effective, reliable and flexible WAN access solutions.

The WAN solutions available to an organization vary substantially depending on
the organization's size and communications needs, and the state of the local
telecommunications infrastructure. Large organizations with large amounts of
data traffic have traditionally relied upon wideband digital transmission
circuits (such as T1 and E1 and above) leased from public carriers to provide
voice, facsimile and data communications between regional offices.

Organizations with less data traffic, including middle market companies and
branch offices of large organizations, have traditionally used a combination of
low speed leased digital circuits (such as DDS 56K) for data and analog lines or
public switched telephone networks for voice and facsimile communications.

In international markets where the public telecommunication infrastructure is
generally less developed organizations are increasingly relying on satellite
transmission (VSAT) and other wireless media to build private networks to
transmit voice, facsimile and data between remote locations.

Conventional WANs are typically comprised of leased dedicated circuits, circuit
switching mechanisms and network access equipment based on time division
multiplexing ("TDM"). This approach has inherent limitations which may reduce
its cost-effectiveness in certain applications. The deployment of a leased
circuit to connect two remote sites is often inefficient because the entire
bandwidth capacity is dedicated to the organization 24 hours a day even during
periods of little or no communications traffic. Leased circuits are also
expensive and in many cases can comprise a significant portion of an
organization's total networking budget. In addition, conventional WAN solutions
are inflexible as bandwidth within the network is static between two fixed
points and cannot be dynamically switched among multiple locations on demand. As
a result, conventional WAN solutions are not ideally suited to the multimedia
transmission of data, voice and facsimile traffic.

In response to the need for services that allow the flexible allocation and
efficient utilization of bandwidth among multiple network sites, public carriers
began providing packet-switched services such as X.25. Although these services
generally cost less than dedicated digital circuits and provide reliable
transmission of low-speed asynchronous data, they impose substantial
transmission delays and thus are not well suited for high-speed synchronous
data, voice, facsimile and other delay-sensitive applications.

In the early 1990s two highly performant networking technologies emerged to
address the need for integrated, cost-effective, flexible WAN solutions: Frame
Relay and Asynchronous Transfer Mode ("ATM"). These high-speed packet/cell-based
networks provide significantly reduced network delays while still permitting
bandwidth capacity to be allocated on demand between any two endpoints on a WAN,
thereby improving utilization efficiency and supporting a broader range of
communications applications. More recently, IP (Internet Protocol) is
establishing itself as the WAN transmission protocol of choice among Internet
Service Providers (ISPs) and next generation telephone companies.

The majority of public carriers and service providers in the United States and
around the world have deployed Frame Relay and/or ATM networks to provide
high-speed public services supporting voice and data traffic. They are now
implementing, or planning to implement, IP-based services, such as Virtual
Private Networking (VPN) to complement their Internet offerings. Enterprises are
using Frame Relay, ATM and IP to integrate voice, data and facsimile traffic
over public and private WANs and are realizing greater efficiencies at an
inherently lower operating cost. Service providers rely on the Company's WAN
access products to bring traffic onto their networks and to deliver it to its
destination, be it another Frame Relay, ATM, or IP-based network and the
traditional telephone voice network ("PSTN").

                                       1

<PAGE>   4

THE ACT SOLUTION

ACT's WAN access products are designed to integrate voice, data and video
applications over frame relay, ATM and IP-based WANs. Enterprise customers and
service providers use the Company's products to build multimedia networks that
are bandwidth efficient, cost-effective and easy to manage. The Company's
products incorporate advanced voice and data compression algorithms, enhanced
switching and traffic management capabilities, and state-of-the-art hardware and
software integration technologies.

ACT's products are based on current international standards and are designed to
work with either terrestrial media (such as copper, fiber and coaxial
transmission lines) or wireless media (such as satellite, radio and microwave).

MARKETS AND APPLICATIONS

The following describes the primary markets and applications for the Company's
products:

The Enterprise Market: this market consists of companies that consolidate their
voice, data and facsimile applications over a private, or dedicated, wide area
network. For example, a large bank in Korea has deployed the Company's
integrated Frame Relay access devices to build an integrated private frame relay
network connecting approximately 350 sites. This network provides switched voice
and facsimile connectivity among these locations and concurrently supports both
SNA and LAN data applications. The enterprise market also consists of
organizations whose telecommunications requirements do not justify leasing
dedicated circuits for the purposes of establishing a private network. These
end-users contract with service providers to interconnect their remote offices
via public Frame Relay or ATM services to eliminate many of the problems and
costs associated with managing and supporting a private network. These customers
install the Company's products on their premises to aggregate their voice and
data traffic for transmission via the service provider of their choice.

The Service Provider Market: traditionally, telephone companies have provided
voice services and value added network services providers have provided data
transmission services. As a result of worldwide deregulation and the
liberalization of telecommunications policies, many new service providers have
emerged to offer competitive voice and data services. These service providers
deploy Frame Relay, ATM and/or IP networks to transport and manage voice and
data traffic over a network infrastructure that is inherently better suited to
transport multimedia traffic than the PSTN. These efficiencies are passed on to
the end-user in the form of higher throughput, increased connectivity and lower
costs. The Company markets its WAN access products to alternate service
providers (such as wholesale long-distance carriers and call-back operators),
value added network services providers, competitive local exchange carriers
(CLECs), incumbent local exchange carriers (ILECs), competitive access providers
(CAPs), Internet Service Providers (ISPs) and Interexchange Carriers (IXCs).
These customers deploy the Company's products within their networks to achieve
greater levels of traffic aggregation over their transmission circuits, or at
the premises of their end-user customers to bring voice and data traffic onto
their service networks.

PRODUCTS

The Company is migrating toward two principal product families, NetPerformer and
ServiceXchange, which share a common technology foundation but are targeted at
different market segments. NetPerformer is a family of Frame Relay access
devices ("FRADs") targeted at enterprise customers who need to integrate and
transport voice, fax, LAN and SNA data over private or public Frame Relay
networks. ServiceXchange addresses the needs of service providers who are
especially focused on transporting large volumes of voice traffic cost
effectively over Frame Relay, ATM, or IP backbones. Within each family, both
chassis-based and stand-alone configurations will be offered to serve specific
customer requirements for price, performance, density, and feature set.

The common technology foundation that the two platforms share has been developed
or significantly enhanced over the past year, and includes:

o   New low-cost, high-density, DSP-based voice processors, which helps reduce
    the cost of the overall solution.

o   Flexible voice signaling system, which enhances compatibility and
    commonality with various public switch infrastructures.

o   Highly-efficient, cell-based protocol and prioritization scheme, which
    helps maintain toll-quality voice transmission, yet ensures the delivery of
    mission-critical data.

The Company intends to leverage this shared technology foundation in its future
products.

NetPerformer

Designed to integrate voice, fax, SNA and LAN traffic over frame relay and
emerging public network services, NetPerformer addresses the needs for branch,
regional and central site internetworking with a low cost of ownership. ACT
offers two products that complement the NetPerformer line: SkyFrame, and
MS-8000/9000.


                                       2


<PAGE>   5

NetPerformer enterprise WAN access products include:

o  SDM-9500: modular, chassis-based central-site solution

o  SDM-9400: expandable analog/digital voice/fax/data solution for regional
   offices

o  SDM-9300/9350: low-cost voice/fax/data solutions for branch office
   applications

o  SDM-8300: data-only access device for regional offices

o  SDM-8200: entry-level data-only solution for branch office applications

The Company intends to add additional variants in fiscal 1999 based on ACT's new
common technology foundation, which will offer a reduced cost basis, while
improving port density and overall system performance.

With NetPerformer enterprise WAN access products, organizations worldwide can
build private networks that are: o Cost Effective: Integrating LAN, SNA, legacy
data, voice and fax traffic substantially cuts recurring communications costs o
Bandwidth Efficient: Fast packet networking and advanced compression
capabilities (8:1 voice, 4:1 data) save bandwidth and money o Easy to Manage:
Integrated traffic is managed via ACT's standards-based GUI network management
system, ACTview 2000

SkyFrame

SkyFrame adds a satellite (VSAT) networking dimension to the NetPerformer
product line so that ACT can offer end-to-end voice, fax and data solutions,
under one network management system, regardless of the network topology used:
satellite or wireline. SkyFrame is deployed to interconnect remote branch
offices for small to medium size networks in markets where geography, or the
lack of wireline infrastructure, necessitate the use of space-based
communications facilities.

MS-8000/9000 Frame Relay Switches

ACT has a long-standing OEM partnership with Ascend Communications (formerly
Cascade) where ACT private-labels Ascend frame relay switches. ACT bundles its
NetPerformer products with Ascend's high-capacity Frame Relay switches to
provide performance, redundancy and scalability, allowing ACT's customers to
deploy large, cost-effective private networks.

ServiceXchange

ServiceXchange is a product line currently under development that will form the
foundation of ACT's future service provider offering, and shares the common
technology foundation with the NetPerformer family. ServiceXchange is a family
of highly-scalable, H.323-compliant, IP telephony gateways. The ServiceXchange
family is designed for high density, packet-telephony, fax, and data
applications over IP, frame relay, ATM, and the PSTN.

The SX-10, the entry-level system, will support four T1/E1 channels for 96/120
simultaneous calls. The Company intends to release the SX-10 for commercial
shipment in the third quarter of fiscal 1999 and other members of the SX family
will be introduced at future dates to satisfy various price and density
requirements. The timing of the introductions will be largely dependent on a
variety of factors including, without limitation, the success of product
development and the evolution of the packet telephony market.

ACTview 2000 NMS

ACT has developed ACTview 2000, a fully-featured SNMP network management tool
that is optimized for the two strategic product families, yet manages the legacy
product lines offered by ACT and installed by its customers in the past. ACT
customers have the ability to manage all aspects of their networks, including
monitoring voice and data traffic, configuring nodes and expansion cards,
downloading new versions of software, and monitoring the health of the network
via a rich, intuitive graphical user interface. Based on HP OpenView, operating
on a Windows NT or Windows 95/98 workstation, ACTView 2000 can be integrated
with other enterprise management applications to support a single,
centrally-located enterprise management system.

Legacy Products

ACT is enhancing the ACTnet product line, composed of the SDM-JFP, SDM-FP, and
SDM-DX, with features that improve compatibility with the NetPerformer family,
enabling long-standing ACTnet customers to migrate to newer platforms.


                                       3

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CUSTOMERS

End users of the Company's products include financial institutions, government
agencies, retail chains, distribution companies and manufacturing organizations.
The Company's products are also used by public network service providers of all
types. A representative list of end users and service providers is set forth
below:

      Domestic End-Users             Alternative Service Providers    
                                                                      
      Bonnecker & Leigh              IDT Telecommunications           
      First Chicago Bank             Delesat (Germany)                
      Idaho National Guard           Teleglobe                        
      Intelsat                       AT&T Alascom                     
      National Semiconductor         Comsat do Brazil                 
      Pyrodyne                       Department of Telecom, India     
      South East Frozen Food         Entel-Chile                      
      Worldex                        IMPSAT                           
                                     Infonet Services Corporation     
      International End-Users        Philippine Long Distance Company 
                                     Russtel, Russia                  
      American Express, Argentina    Telefonica de Espana             
      Bank of Brazil                 Telefonica de Peru               
      Cheietsee, Japan               Teleport Europe, Germany         
      Duty-Free, Australia           Victori                          
      Industrial Bank of Korea
      Memorex Telex, Australia
      RadioCel/Biper, Mexico
      Samsung, Korea
      Ssangyong, Korea
      TAM, Brazil

SALES AND MARKETING

      The Company markets and sells its enterprise-oriented products primarily
through a worldwide network of value-added resellers and systems integrators.
Because the WAN access needs of end users vary significantly from market to
market, the Company focuses on contracting with local resellers who have the
technical capability and the market presence to assist enterprises in developing
networking solutions to meet their particular needs. The Company devotes
resources to educating resellers as to the benefits of the Company's products
and to training them in the proper installation and support of the Company's
products. The Company's salespersons support the Company's resellers in their
marketing and sales efforts, as does the marketing organization through a
variety of reseller support programs.

      The Company also sells its products directly to service providers and
large, multi-national enterprises. The Company believes that these customers can
best be served via a direct sales force, and the Company intends to continue to
increase the number of sales personnel focused on these customers.

      The Company intends to increase its direct marketing efforts to major
telecommunications product manufacturers who offer a broader line of solutions.
These manufacturers may serve as resellers of the Company's products under
private label, OEM or other types of strategic relationships.

      The Company's marketing efforts include participating in major
telecommunication trade shows, advertising in major trade journals, conducting
direct mail marketing campaigns, publishing newsletters and technical articles,
and conducting conferences for resellers. The Company also relies heavily on its
web site for information distribution, lead generation and qualification, and
sales support (via sales and reseller Intranet sites). As of June 30, 1998, the
Company's marketing department consisted of 13 full-time employees.


                                       4


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CUSTOMER SUPPORT AND TRAINING

      The Company considers on-going technical support, training, service and
repair of its products an integral part of its business. The Company's standard
product warranty includes one-year factory hardware repair, one-year telephone
and facsimile technical support and a 90-day dead-on-arrival express replacement
service. In addition, the Company offers extended out-of-warranty hardware
repair and maintenance programs, software upgrades, a modem dial-in service and
a 24-hour priority technical support hot line. Other service programs include
network design and analysis, network optimizing and tuning, network staging and
on-site installation and troubleshooting. Resellers and certain third party
service organizations provide additional customer support.

      The Company offers its resellers a variety of one-week training modules
covering product sales, technical matters and new products. In certain
circumstances, the Company also offers similar training programs to end-users.
Classes are conducted regularly at the Company's facility in Camarillo,
California, as well as in the field.

PRODUCT DEVELOPMENT

      The Company has spent approximately $5 million, $8.3 million and $16.3
million during each of the fiscal years ended June 30, 1996, 1997 and 1998,
respectively, on research and development activities. The Company's current
product development efforts are directed toward producing a common technology
foundation which can be leveraged to rapidly deliver new products in order to
meet the changing needs of customers in the enterprise and service provider
market segments. In particular, the Company intends to focus on the completion
of the SX-10, the development of other products in the ServiceXchange family and
the development of new capabilities for the Netperformer family. The Company's
product development efforts focus on the following principles:

      Develop New Products and Technology. The Company continually assesses
worldwide market trends with the focus of developing new products designed to
meet emerging market demands. In developing new products, the Company attempts
to combine its existing technology base (largely its extensive integrated voice
and data technology) with new technologies (such as IP and ATM on the network
side) to provide a broader range of networking solutions to the end-user.

      Improve Existing Technology. The Company has, over time, amassed a unique
set of voice processing technologies and expertise. As voice processing
technology becomes generally available as licensable software or integrated chip
sets, The Company seeks to maintain differentiation by optimizing its voice
processing technology to maintain toll quality, while continuing to reduce the
bandwidth requirements and expand industry compatibility and data integration.
Additionally, the Company plans to improve voice processing density by making
use of newly-available high-power digital signal processing technology.

      Leverage Software-defined Products. With the Company's focus shifting
toward two strategic product platforms, NetPerformer and ServiceXchange, which
share common software-defined technology components, the Company is able to
rapidly enhance the products to meet emerging market needs. This strategy also
allows the Company to reduce hardware design changes and retooling costs, and to
accelerate the certification processes for new products.

      The Company believes its future success will depend, in part, upon its
ability to expand and enhance the features of its existing products and to
develop and introduce new products designed to meet changing customer needs on a
cost-effective and timely basis. Failure by the Company to respond on a timely
basis to technological developments, changes in industry standards or customer
requirements, or any significant delay in product development or introduction,
could have a material adverse effect on the Company's business and results of
operations. There can be no assurance that the Company will respond effectively
to technological changes or new product announcements by others or that the
Company will be able to successfully develop and market new products or product
enhancements.

COMPETITION

      The market for the Company's products is highly competitive. The Company
competes with a variety of companies offering Frame Relay access products, which
are split into two categories largely by their size. The larger competitors,
including such companies as Cisco Systems, Inc. ("Cisco"), Northern Telecom
("Nortel"), Motorola Information Systems Group ("Motorola"), Ascend
Communications ("Ascend") and Lucent Technologies ("Lucent"), offer total
solutions (including backbone products, access products, integration and
support) for large, multinational customers.

      Smaller, more specialized competitors, such as Memotec Communications,
Inc. ("Memotec"), Sync Research, Inc. ("Sync"), and Nuera Communications
("Nuera"), focus primarily on building private Frame Relay networks for
small-to-mid-size companies.

      The Company plans to compete with its larger competitors by establishing a
strategic partnership with one or more of them. The Company plans to compete
directly with the smaller competitors by highlighting product and technology
differentiators, and providing expert integration service and support.


                                       5


<PAGE>   8

      The Company expects substantial additional competition from existing
competitors and from a number of other companies which may enter the Company's
existing or future markets. Many of the Company's current and potential
competitors have substantially greater name recognition and financial,
marketing, technical and other resources than the Company. Many of these
companies sell directly to end-users, which the Company believes may provide a
competitive edge over the Company when marketing either similar products or
alternative networking solutions. Consolidations in the industry could enhance
the capabilities of the Company's competitors. There can be no assurance that
the Company will be able successfully to compete against either current or
potential competitors or that competition will not have a material adverse
effect on the Company's business, operation results and financial condition.

      The principal competitive factors in the markets for the Company's
products are price, quality, product features, performance, reliability, product
reputation and customer support. The Company believes it presently competes
favorably in all of these areas.

MANUFACTURING

        The Company's manufacturing operations consist primarily of quality
control, functional testing, final assembly, burn-in and shipping. The Company
uses third parties for circuit board assembly and in-circuit testing. This
approach minimizes both inventory and capital expenditures while providing
production scheduling and capacity flexibility. The Company performs extensive
testing and inspection of all of its products prior to shipment. The Company's
facility in Camarillo, California received ISO-9001 certification in July 1996.

        The Company currently procures all of its components from outside
suppliers. The Company has generally been able to obtain adequate supplies of
all components in a timely manner from existing sources. In order to minimize
the risk of supply interruption, the Company maintains quantities of selected
parts and has arrangements with various suppliers to maintain shelf stock to
support its near-term requirements. None of these arrangements with alternative
suppliers and subcontractors obligate the Company to purchase the suppliers
shelf stock.

        The Company resells Frame Relay switches purchased from Ascend. Although
the Company believes similar products can be purchased from other sources, the
process of qualifying replacement suppliers, generating the supporting
documentation, performing system level integration, obtaining
standards-compliant approval for its products, and retraining sales and
marketing channels would take a significant amount of time and expense. The
Company's ability to offer an integrated, cost-effective networking solution is
based, in part, on its ability to sell such products as part of its present
line. The Company's inability to source these products at satisfactory quality
and quantity levels and with the appropriate lead time would adversely affect
the Company's business and operations.

        Certain components used in the Company's products are available only
from single sources. These include digital signal processors, microprocessors,
programmable gate array devices, power supplies and passive components. Although
the Company generally buys components under purchase orders and does not have
long-term agreements with its suppliers, it expects its suppliers, most of whom
are large companies such as Texas Instruments and Motorola, to be able to
continue to satisfy its requirements. Although the Company believes that
alternative sources are available, if the Company's ability to obtain these
components were impaired or interrupted for any reason, there could be a
substantial disruption in the supply of the Company's products, which could
adversely affect the Company's business and financial condition and results of
operations.

GOVERNMENTAL REGULATION

        The Company's products are subject to regulations promulgated by the
Federal Communications Commission (FCC) regarding emission of electromagnetic
energy, which may interfere with other equipment. All of the Company's current
products have been tested and comply with the relevant FCC regulations and with
all required Underwriters Laboratories safety specifications.

        The Company's products are also subject to extensive governmental
regulation and product certification in certain foreign countries. These
regulations and product certification requirements are often significantly more
stringent and burdensome than the regulations to which the Company's products
are subject in the United States. In addition, the certification process to
which the Company must subject its products before they can be marketed in such
countries is time consuming and expensive.

        Resellers in many countries have title to the governmental
authorizations and certifications necessary to market the Company's products in
such country, and there is no assurance that, in the event a reseller ceased
marketing the Company's products, the reseller would transfer such authorization
or certification to the Company or that the expense and delay associated with
obtaining a new authorization or certification would not adversely affect the
Company's business and operations in such country. There can be no assurance
that resellers will continue to market the Company's products or devote the
resources necessary to provide effective sales and marketing support to the
Company.


                                       6


<PAGE>   9

PROPRIETARY RIGHTS

        The Company does not hold any patents and historically has relied on a
combination of contractual rights, trade secrets, copyright and trademark law
and technical measures to establish and protect its proprietary rights in its
products. However, the Company is currently seeking patent protection for
certain of its technologies. Although the Company relies to a great extent on
trade secret protection for much of its technology, and obtains confidentiality
agreements from its employees, consultants and other third parties to whom the
Company reveals confidential information pursuant to their business
relationships, there can be no assurance that third parties will not
independently develop the same or similar technology, obtain unauthorized access
to the Company's proprietary technology or misuse the technology to which the
Company has granted them access. The Company has substantial international
operations and the laws of foreign countries treat the protection of proprietary
rights differently from, and may not protect the Company's proprietary rights to
the same extent as do, laws in the United States.

        Certain technology licensed from third parties is incorporated in the
Company's products. For example, the Company licenses certain of its voice
compression algorithms, the right to commercialize its SkyFrame products,
components of its network management system software and other software and
technology embedded in the hardware incorporated into the Company's products
pursuant to nonexclusive license agreements. The failure of the Company to
retain such licenses or obtain new licenses as improvements in such technology
are developed and new technology is introduced could adversely affect the
Company's business and results of operations.

        Since patent applications in the United States are not publicly
disclosed until the patent issues, applications may have been filed which, if
issued as patents, would relate to the Company's products. In addition, the
Company has never conducted a comprehensive patent search relating to the
technology used in its products. Accordingly, there can be no assurance that
third parties will not assert infringement claims against the Company in the
future or that such claims will not be successful. The Company could incur
substantial costs in defending itself and its customers against any such claims,
regardless of the merits of such claims. Parties making such claims may be able
to obtain injunctive or other equitable relief which could effectively block the
Company's ability to sell its products in the United States and abroad, and
could result in an award of substantial damages. In the event of a successful
claim of infringement, the Company, its customers and end-users may be required
to obtain one or more licenses from third parties. In addition, the Company has
in the past, and may in the future, pay significant sums to obtain licenses from
third parties to avoid the costs and uncertainties associated with defending a
potential claim. There can be no assurance that the Company or its customers
could obtain necessary licenses from third parties at a reasonable cost or at
all. The defense of any lawsuit could result in time consuming and expensive
litigation, damages, license fees, royalty payments and restrictions on the
Company's ability to sell its products, any of which could have a material
adverse effect on the Company's business and results of operations.

EMPLOYEES

        As of August 31, 1998, the Company employed 242 full-time persons,
including 40 in operations, 34 in sales and marketing, 22 in customer service,
111 in engineering and 35 in finance and administration. The Company also
employs a small number of temporary and contract employees. None of the
Company's employees is represented by a labor union. The Company is not a party
to any collective bargaining agreement or other similar agreement. The Company
has experienced no work stoppages to date. The Company believes that its
relationship with its employees is good.

RISK FACTORS

        This Report may contain forward-looking statements which involve risks
and uncertainties. Actual results could differ materially from those discussed
in the forward-looking statements. Certain of the factors that could cause
actual results to differ materially are discussed below. The following risks
should be considered carefully, in addition to the other information contained
in this Report, before purchasing shares of the Company's Common Stock.

FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company has experienced and may
in the future experience significant fluctuations in net sales and operating
results from quarter to quarter as a result of a number of factors including,
without limitation, the volume and timing of orders from, and shipments to,
major customers; market acceptance of the Company's products; the ability of the
Company's customers, particularly international customers, to obtain financing
for the purchase of the Company's products; economic issues in international
markets; changes in the Company's strategies; changes in pricing policies or
price reductions by the Company or its competitors; variations in the Company's
sales channels or the mix of product sales; the timing of new product
announcements and product introductions by the Company or its competitors;
product obsolescence resulting from new product introductions or changes in
customer demand; the availability and cost of supplies; the financial stability
of major customers; expenses associated with the acquisition of technologies or
businesses; changes in regulatory requirements; the development of public
telecommunications infrastructures, particularly in international markets; and
currency fluctuations. While the Company regularly engages in price discounting,
significant discounts in a particular quarter could adversely affect the results
of operations for such quarter. In addition, significant and continuing
discounts due to competition or other factors could adversely affect the
Company's business, operating


                                       7

<PAGE>   10

results and financial condition. The Company has generally not experienced
seasonality in its net sales, although the Company has from time to time
experienced decreased net sales to customers in Europe in the third calendar
quarter of each year and has experienced some decreases in net sales in other
international markets during certain periods during the year. Due to all of the
foregoing factors, in certain quarters the Company's operating results have
been, and it is likely that in some future periods the Company's operating
results will be, below the expectations of public market analysts and investors.
In such event, the price of the Company's Common Stock has been and in the
future could be materially adversely affected. For example, on several occasions
over the last few years, the Company's net sales decreased when compared to the
preceding quarter and, as a result, the Company's results of operations and, in
certain instances, the price of the Company's Common Stock were adversely
affected. In addition, in July 1998 the Company commenced a restructuring
program which adversely impacted the Company's operating results and which will
continue to adversely impact the Company's operating results in the near term.
Quarterly results are not necessarily indicative of future performance for any
particular period, and there can be no assurance that the Company will attain
growth in net sales or profitability on a quarterly or annual basis. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

        The Company's sales are primarily through resellers and are typically
characterized by several large orders and a large number of small orders.
Resellers typically do not stock a supply of the Company's products and place
orders with the Company only after they have received orders from their
customers. In addition, the Company's backlog at the beginning of a quarter is
generally insufficient to achieve expected net sales for the quarter. While it
is difficult for the Company to accurately forecast the timing and quantity of
orders on a quarter to quarter basis, the Company may increase expenses with the
expectation of future sales. The failure of the Company to accurately forecast
the timing and volume of orders for a quarter would adversely affect the results
of operations for such quarter and, potentially, for future periods.
Fluctuations in quarterly results may result in significant volatility in the
market price of the Company's Common Stock. In addition, sales of networking
products fluctuate from time to time based on numerous factors, including
capital spending levels and general economic and market conditions. Future
declines in networking product sales, as a result of general economic conditions
or for any other reason, could have a material adverse effect on the Company's
business, operating results and financial condition.

LIMITED HISTORY OF OPERATIONS AND PROFITABILITY. The Company was organized in
May 1987 and commenced shipments of its first product in October 1988. While the
Company first achieved profitability in the fourth calendar quarter of 1990, it
incurred losses in periods subsequent to that time. There can be no assurance
that the Company will be profitable in future periods. In the past, the Company
has expanded its level of operations, resulting in increased fixed costs and
operating expenses, with the expectation of increased sales and gross profits.
The Company's operating results and net income were adversely impacted as net
sales and gross profits did not increase sufficiently to offset such increased
expenses. While the Company commenced a restructuring program in July 1998 to
decrease expenses, there can be no assurance that expenses have been, or will
be, decreased sufficiently to result in profitability, that the Company will not
increase expenses with the anticipation of increased sales in the future, or
that the Company will maintain or increase net sales or gross profits. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

DEPENDENCE ON KEY PERSONNEL; NEW MANAGEMENT. The Company's success is dependent
in large part on its executive officers, senior management and sales and
technical personnel. Since July 1998, the Company has undergone numerous changes
in all levels of the organization as a result of a restructuring and other
factors. In particular, the Company has a new Chief Executive Officer, Vice
President of Marketing, Vice President of Sales and Vice President of
Engineering. The failure of new management and other personnel to fully
integrate into the Company's operations and to execute the Company's strategy,
and the failure of the Company to retain such management and other personnel,
could have a material adverse effect on the Company's business. The Company's
success will be dependent on its continued ability to attract, retain and
motivate highly skilled employees, who are in great demand. There can be no
assurance that the Company will be able to do so.

RESTRUCTURING. In July 1998, the Company commenced a restructuring program to
streamline its operations and focus its efforts on the Netperformer and
ServiceXchange products. The Company discontinued or de-emphasized certain
nonstrategic operations or product lines and effected numerous personnel
changes. As a result of these and other factors, the Company incurred
significant losses in the quarter ended June 30, 1998. The Company expects to
incur an additional $2 million to $3 million in expenses related to the
restructuring in fiscal 1999, although there can

                                       8
<PAGE>   11

be no assurance that expenses related to the restructuring will not be in excess
of such amount. As such, the restructuring program will adversely impact the
Company's results of operations in the near term. There can be no assurance that
the restructuring will positively impact the Company in the long term.

TECHNOLOGICAL CHANGE, CHANGING MARKETS AND NEW PRODUCTS. The market for the
Company's products is characterized by rapid technological advances, evolving
industry standards, frequent new product introductions and enhancements, and
significant price competition. The introduction of products involving superior
or alternative technologies, the emergence of new industry standards,
governmental regulations, changes in a market's pricing structure and other
factors could render the Company's existing products, as well as products under
development, obsolete and unmarketable in one or more markets which could
adversely affect the Company's business, operating results and financial
condition. The Company has experienced instances where one or more of those
factors resulted in a significant decrease in sales of the Company's products in
particular markets or resulted in new products becoming obsolete or
unmarketable. The Company's success will depend, in part, on the viability of
the Company's products in its markets and the ability of the Company to develop
effective distribution channels to address these markets. There can be no
assurance that the Company's products will be widely accepted. Failure of the
Company's products to achieve market acceptance could have a material adverse
effect on the Company's business, operating results and financial condition.

        The Company believes its future success will depend, in part, upon its
ability to expand and enhance the features of its existing products and to
develop or acquire and introduce new products designed to meet changing customer
needs on a cost-effective and timely basis. In particular, the completion of the
development and successful commercial release of the ServiceXchange family of
products is critical to the Company's strategies. Failure by the Company to
respond on a timely basis to technological developments, changes in industry
standards or customer requirements, or any significant delay in product
development or introduction (particularly the ServiceXchange products), could
have a material adverse effect on the Company's business, operating results and
financial condition. There can be no assurance that the Company will respond
effectively to technological changes or new product announcements by others or
that the Company will be able to successfully develop and market new products or
product enhancements and that any new product or product enhancement will gain
market acceptance.

        Inherent in the product development process are a number of risks. The
development of new, technologically advanced products and product enhancements
is a complex and uncertain process requiring high levels of innovation, as well
as the accurate anticipation of technological and market trends. The Company
budgets research and development expenditures based on planned product
introductions and enhancements; however, actual expenditures may significantly
differ from budgeted expenditures. There can be no assurance that the Company
will successfully identify, develop or introduce new products or product
enhancements. Products such as those offered by the Company may contain
undetected or unresolved software errors when they are first introduced or as
new versions are released. There can be no assurance that, despite extensive
testing by the Company, software errors will not be found in new products or
upgrades after commencement of commercial shipments, resulting in delay in or
loss of market acceptance. Future delays in the introduction or shipment of new
or enhanced products, the inability of such products to gain market acceptance
or problems associated with new product transitions could adversely affect the
Company's operating results, particularly on a quarterly basis. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

SUBSTANTIAL COMPETITION. The market for the Company's products is highly
competitive. The Company competes directly domestically and internationally with
a variety of companies offering fast packet access and/or gateway products
including Cisco Systems, Inc., Lucent Technologies, Inc., Ascend Communications,
Northern Telecom, Inc., Memotec Communications, Inc., Motorola Information
Systems Group, Sync Research, Inc. and other companies. The Company expects
substantial additional competition from existing competitors and from a number
of other companies which may enter the Company's existing or future markets.
Many of the Company's current and potential competitors have substantially
greater name recognition and financial, marketing, technical and other resources
than the Company. Many of these companies sell directly to end-users, which the
Company believes may provide a competitive edge over the Company when marketing
either similar products or alternative networking solutions. In addition, many
of these companies offer a more comprehensive networking solution to their
customers than the Company. Consolidations in the industry could enhance the
capabilities of the Company's competitors. There can be no assurance that the
Company will be able successfully to compete against either current or potential
competitors or that competition will not have a material adverse effect on the
Company's business, operation results and financial condition.

                                       9
<PAGE>   12

INTEGRATION OF ACQUISITIONS. The Company has, and may in the future, acquire
complementary technologies and businesses. Acquisitions by the Company may
result in potentially dilutive issuances of equity securities, the incurrence of
additional debt, the creation and amortization of goodwill and the incurrence of
acquisition related expenses, all of which could adversely affect the Company's
results of operations. In addition, acquisitions involve numerous risks,
including difficulties in the assimilation of the operations, technologies and
products of the acquired businesses; the diversion of management's attention
from other business concerns; risks associated with the Company's entering
markets in which it has no or limited direct prior experience; and the potential
loss of key employees of the acquired company. The Company has engaged in
several acquisitions in the last two years which have resulted in increased
expenses without a commensurate increase in net sales. These acquisitions have
also adversely impacted the Company's results of operations due to in-process
research and development expenses, the write down of tangible and intangible
assets and other factors. In the event the Company engages in additional
acquisitions, no assurances can be given as to the effect thereof on the
Company's business, operating results and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

CUSTOMER CONCENTRATION. A small number of customers have historically accounted
for a substantial portion of the Company's net sales. During the fiscal years
ended June 30, 1996, 1997 and 1998, the Company's five largest customers
collectively accounted for 42%, 36% and 35%, respectively, of net sales. In many
instances, the Company's major customers in any given period have ordered
significantly less products in future periods. The Company believes that this
has been due, in part, to customers who make large, one-time purchases to set up
their communications infrastructure, after which such customers do not require
further significant purchases. In addition, the Company believes this may be due
to a variety of other factors, including, without limitation, the economic
conditions in various countries, particularly those in Asia and South America.
Therefore, the Company expects that its major customers will fluctuate from
period to period. There can be no assurance that a major customer will not
reduce or delay the amount of products ordered from the Company or significantly
change the terms upon which the Company and such customer do business. Any such
reduction, delay or change could have a material adverse effect on the Company's
business.

MANAGEMENT OF GROWTH. The Company has from time to time experienced growth in
its operations, both internally and as a result of acquisitions. The Company's
growth has placed, and will continue to place, strain on the Company's
managerial, operational and financial resources, systems and controls. This is
particularly true with respect to sales in international markets since each
specific international market has its own unique regulatory, financial,
technical, customer and other characteristics which often require the Company to
devote significant resources to sell products in that country. In addition, the
Company engages from time to time in customer development activities for
customers which require the allocation of significant resources. The Company's
future operating results will depend on its ability to attract, hire and retain
skilled employees, and to expand and improve the Company's operational, product
development, management information and financial systems and controls. The
Company continues to upgrade its management information and product development
systems. The Company's failure to manage growth effectively, successfully
upgrade its systems or to hire, retain and integrate necessary qualified
personnel could adversely affect the Company's business, operating results and
financial condition.

INTERNATIONAL SALES, TARIFF AND REGULATORY MATTERS. Sales of the Company's
products to customers outside of North America accounted for approximately 63%,
75% and 64% of the Company's net sales for the fiscal years ended June 30, 1996,
1997, and 1998, respectively. In addition, the Company believes that a majority
of its sales to customers inside North America represent sales of products which
are used or resold in markets outside of North America. The Company expects that
international sales will continue to account for a significant portion of the
Company's net sales in future periods. International sales are subject to
certain inherent risks, including unexpected changes in regulatory requirements
and tariffs, difficulties in staffing and managing foreign operations,
potentially adverse tax consequences and problems in collecting accounts
receivable. A significant number of the Company's products are sold or installed
in countries, including several in South America and Asia, where political or
economic issues have, and may in the future, adversely affect the purchasing
decision of customers. The Company believes that recent events in Asia and Latin
America have adversely impacted, and will continue to adversely impact, the
Company's net sales in these regions in the near term. Although the Company's
sales are currently denominated in U.S. dollars,


                                       10


<PAGE>   13

fluctuations in currency exchange rates have in the past caused, and could in
the future cause, the Company's products to become relatively more expensive to
customers in a particular country, leading to a reduction in sales or
profitability in that country and potentially leading to an extension of payment
terms. Furthermore, future international activity may result in foreign currency
denominated sales and, in such event, gains and losses on the conversion to U.S.
dollars of accounts receivable and accounts payable arising from international
operations may contribute to fluctuations in the Company's results of
operations. The financial stability of foreign markets could also affect the
Company's international sales. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations"

        Rates for telecommunications services are governed by tariffs of
licensed carriers that are subject to regulatory approval. Future changes in
these tariffs could have a material adverse effect on the Company's business.
For example, should tariffs for public switched digital services increase in the
future relative to tariffs for private leased services, the cost-effectiveness
of certain of the Company's products would be reduced, and its business and
results of operations could be adversely affected. In addition, the Company's
products must meet standards and receive certification for connection with the
public telecommunications networks of a country prior to their sale in such
country. In the United States, for example, the Company's products must comply
with certain regulations promulgated by the Federal Communications Commission.
The Company's products must also be certified by domestic telecommunications
carriers. In foreign countries, the Company's products are subject to a wide
variety of governmental review and certification requirements. From time to
time, foreign governments have altered certification or regulatory requirements
which has adversely impacted the Company's ability to sell products in such
markets. Any future inability to obtain on a timely basis or retain domestic
certificate or foreign regulatory approvals could have a material adverse effect
on the Company's business, operating results and financial condition.

RELIANCE ON THIRD PARTY SUPPLIERS. The Company relies on third party suppliers
who supply the components used in the Company's products. The unavailability of
certain components from current suppliers, especially components custom designed
for the Company, could result in delays in the shipment of the Company's
products as well as additional expenses associated with obtaining and qualifying
a new supplier. In addition, certain key components used in the Company's
products are available only from single sources and the Company does not have
long term contracts ensuring the supply of such components. As the Company
typically maintains less than 90 days supply of such components, there can be no
assurance that components will be available to meet the Company's future
requirements at favorable prices, if at all. The Company's inability to obtain
components in a timely manner would materially and adversely affect the
Company's business and financial condition. In addition, any significant
increase in component prices could also adversely affect the Company's results
of operations. The Company resells Frame Relay switches purchased from Ascend.
Although the Company believes similar products can be purchased from other
sources, the process of qualifying replacement suppliers, generating the
supporting documentation, performing system level integration, obtaining
standards-compliant approval for its products, and retraining sales and
marketing channels would require a significant amount of time and expense. The
Company's ability to offer an integrated, cost-effective networking solution is
based, in part, on its ability to sell such products as part of its present
line. The Company's inability to source these products at satisfactory quality
and quantity levels and with the appropriate lead time would adversely affect
the Company's business and operations.

RELIANCE ON INDIRECT DISTRIBUTION. The Company markets and sells products
domestically and internationally primarily through resellers, such as
distributors, value-added resellers and system integrators. The number of
qualified resellers in certain countries is limited. Resellers typically are not
effective at selling the Company's products until they have been trained and
have successfully completed several sales. The Company's performance depends in
part on attracting, retaining and motivating such resellers. Certain of the
Company's resellers also act as resellers for competitors of the Company and
could devote greater effort and resources to marketing competitive products. The
Company's resellers are generally provided discounts and, occasionally, are
entitled to special pricing or distribution arrangements, the effect of which is
to decrease the Company's gross margins. While the Company has contractual
relationships with many of its resellers, these agreements do not require the
resellers to purchase the Company's products and can generally be terminated on
short notice by the reseller. Resellers in many countries have title to the
governmental authorizations and certifications necessary to market the Company's
products in such country, and there is no assurance that, in the event a
reseller ceased marketing the Company's products, the reseller would transfer
such authorization or certification to the Company or that the expense and delay
associated with obtaining a new authorization or certification would not
adversely affect the Company's business and operations in such country. There
can be no assurance that resellers will continue to market the Company's
products or devote the


                                       11

<PAGE>   14

resources necessary to provide effective sales and marketing support to the
Company. In addition, the Company is dependent on the continued viability and
financial stability of its resellers, many of which are small organizations with
limited capital. The loss of any key reseller could adversely affect the
Company's business.

DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company's future success will depend
in part on its proprietary technology. In addition, certain technology licensed
from third parties is incorporated in the Company's products. In particular, the
Company licenses certain of its voice compression algorithms, the right to
commercialize its SkyFrame products, components of its network management system
software and other software and technology embedded in the hardware incorporated
into the Company's products pursuant to nonexclusive license agreements. The
failure of the Company to retain such licenses or obtain new licenses as
improvements in such technology are developed and new technology is introduced
could adversely affect the Company's business. The Company does not currently
hold any patents. The Company relies principally on copyright, trade secret and
contract law to protect its proprietary technology. There can be no assurance
that such measures are adequate to protect the Company's proprietary technology.
The Company has substantial international operations and the laws of foreign
countries treat the protection of proprietary rights differently from, and may
not protect the Company's proprietary rights to the same extent as do, laws in
the United States. Since patent applications in the United States are not
publicly disclosed until the patent is issued, applications may have been filed
which, if issued as patents, would relate to the Company's products. In
addition, the Company has never conducted a comprehensive patent search relating
to the technology used in its products. Accordingly, there can be no assurance
that third parties will not assert infringement claims against the Company in
the future or that such claims will not be successful. The Company could incur
substantial costs in defending itself and its customers against any such claims,
regardless of the merits of such claims. Parties making such claims may be able
to obtain injunctive or other equitable relief which could effectively block the
Company's ability to sell its products in the United States and abroad, and
could result in an award of substantial damages. In the event of a successful
claim of infringement, the Company, its customers and end-users may be required
to obtain one or more licenses from third parties. The Company has in the past,
and may in the future, pay significant sums to obtain licenses from third
parties to avoid the costs and uncertainties associated with defending a
potential claim. There can be no assurance that the Company or its customers
could obtain necessary licenses from third parties at a reasonable cost or at
all. The defense of any lawsuit could result in time consuming and expensive
litigation, damages, license fees, royalty payments and restrictions on the
Company's ability to sell its products, any of which could have a material
adverse effect on the Company's business, results of operations and financial
condition.

YEAR 2000. Many computer and networking systems experience problems handling
dates beyond the year 1999. Therefore, some computer and networking hardware,
software and firmware will need to be modified prior to the year 2000 in order
to remain functional. The Company is assessing both the internal readiness of
its computer and networking systems and the compliance of its products and
software sold to customers for handling the year 2000. The Company expects to
implement successfully any systems and programming changes required to address
year 2000 issues, if any, and does not believe that the cost of such actions, if
any, will have a material effect on the Company's results of operations or
financial condition. There can be no assurance, however, that there will not be
a delay in, or increased costs associated with, the implementation of such
changes, and the Company's inability to implement such changes could have a
material adverse effect on the Company's business, results of operations and
financial condition.

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. The Company anticipates
that available cash, together with amounts available under its credit facilities
and cash flow from operations, will be adequate to satisfy its capital
requirements through at least the next 12 months. The Company's future capital
requirements will depend on many factors including, but not limited to, the cost
of acquisitions of businesses, products and technologies, the levels at which
the Company maintains inventory, the market acceptance of the Company's
products, the levels of promotion and advertising required to launch such
products and attain a competitive position in the marketplace, and the extent to
which the Company invests in new technology and improvements to its existing
technology. To the extent that existing resources and future earnings are
insufficient to fund the Company's activities, the Company may need to raise
additional funds through public or private financings including equity
financings. If additional funds are raised through the issuance of equity
securities, the percentage ownership of then current stockholders of the Company
will be reduced and such equity securities may have rights, preferences or
privileges senior to those of the holders of the Company's Common Stock. No
assurance can be given that additional financing will be available or that, if
available, it can be obtained on terms favorable to the Company and its
stockholders. The Company's lack of


                                       12

<PAGE>   15

authorized Preferred Stock could hinder the Company's ability to obtain
financing. If adequate funds are not available, the Company may be required to
delay, scale back or eliminate some or all of its research and development, to
curtail its operations significantly or to obtain funds through arrangements
with strategic partners or others that may require the Company to relinquish
rights to certain of its technologies or potential markets. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

VOLATILITY OF STOCK PRICE. The trading price of the Company's Common Stock has
undergone significant fluctuations and is expected to continue to be subject to
significant fluctuations in response to variations in quarterly operating
results, the gain or loss of significant contracts, changes in management,
announcements of technological innovations or new products by the Company or its
competitors, legislative or regulatory changes, general trends in the industry
and other events or factors. 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 often been
unrelated to the operating performance of these companies. These broad market
fluctuations may adversely affect the market price of the Company's Common
Stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISIONS. The Company's Certificate of
Incorporation provides for a Board of Directors with staggered terms, which may
discourage or prevent certain types of transactions involving an actual or
potential change in control of the Company, including transactions in which the
stockholders might otherwise receive a premium for their shares over then
current market prices. Certain provisions of Delaware law applicable to the
Company, including Section 203 of the Delaware General Corporation Law, could
have the effect of delaying, deferring or preventing a change of control of the
Company. It is possible that the staggered board and Section 203 of the Delaware
General Corporation Law may have the effect of delaying, deferring or preventing
a change of control of the Company, may discourage bids for the Company's Common
Stock at a premium over the market price of the Common Stock and may adversely
affect the market price of the Common Stock.

LACK OF DIVIDENDS. The Company has never paid cash dividends on shares of its
capital stock. The Company currently intends to retain any future earnings in
its business and does not anticipate paying any cash dividends in the future.
Furthermore the Company's agreement with its lender currently limits the
Company's ability to pay cash dividends.



                                       13

<PAGE>   16

ITEM 2. PROPERTIES.

        The Company's principal administrative, engineering and manufacturing
facilities are located in one 52,000 square foot leased facility in Camarillo,
California, under a lease that expires on July 1, 1999. The base rent is
currently approximately $56,000 a month. In addition to the base rent, the
Company pays its share of the operating expenses, property tax, and insurance
premiums on the building. The Company also leases 15,000 square feet of space in
Montreal, Canada, 8,000 square feet in Phoenix, Arizona and 14,000 square feet
in Monassas, Virginia and 35,000 square feet in Westlake Village, California,
11,000 feet of which is subleased to a third party. ACT maintains small sales
support offices in the United Kingdom and in the States of Maryland and Texas.
The Company believes its facilities are adequate for its current needs and that
suitable additional or substitute space will be available as needed.

ITEM 3. LEGAL MATTERS.

        The Company has no material pending legal proceedings.

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

        No matters were submitted to a vote of security-holders during the
quarter ended June 30, 1998.



                                       14

<PAGE>   17

                                     PART II

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

PRICE RANGE OF COMMON STOCK

        The Company's Common Stock is traded in the over-the-counter market and
is quoted on the Nasdaq National Market under the symbol "ANET." The following
table sets forth, for the periods indicated, the high and low last reported sale
prices for the Common Stock on the Nasdaq National Market.


<TABLE>
<CAPTION>

FISCAL YEAR                                                High       Low
-----------                                              --------   ---------
<S>                                                        <C>      <C>
1999
  1st Quarter (through September 21, 1998)               $ 9 3/16   $ 4 15/16

1998
  4th Quarter                                            $15        $ 8 3/4
  3rd Quarter                                             13          7 7/8
  2nd Quarter                                             12 3/4      7
  1st Quarter                                             15 7/8     11 11/16

1997
  4th Quarter                                            $18 7/8    $10 3/8
  3rd Quarter                                             36 1/4     11 1/4
  2nd Quarter                                             36 1/2     24 1/4
  1st Quarter                                             37 1/4     21 1/2
</TABLE>

As of September 21, 1998, there were approximately 6,600 record holders of the
Company's Common Stock. On September 21, 1998, the last reported sale price of
the Common Stock on the Nasdaq National Market was $6.00 per share.

DIVIDEND POLICY

        The Company has never paid cash dividends on shares of its capital
stock. The Company currently intends to retain any future earnings for use in
its business and does not anticipate paying any cash dividends in the future.
Furthermore, the Company's agreement with its lender currently limits the
Company's ability to pay cash dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations Liquidity and Capital
Resources."


                                       15

<PAGE>   18

ITEM 6. SELECTED FINANCIAL DATA.

        The following selected financial data with respect to the Company's
statement of operations for each of the five fiscal years ended June 30, 1994,
1995, 1996, 1997 and 1998 and the balance sheet data at June 30, 1994, 1995,
1996, 1997 and 1998 are derived from the audited financial statements of the
Company. The financial statements and the related report of independent auditors
for the fiscal years ended June 30, 1994 and 1995 are not included in this
Report. The following information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with the Financial Statements of the Company and the related
notes thereto included elsewhere in this Report.

<TABLE>
<CAPTION>
                                                      FISCAL YEAR ENDED JUNE 30,
                                         ----------------------------------------------------
                                            1994       1995      1996       1997      1998
                                         ---------  ---------  --------  ---------  ---------
                                                (in thousands, except per share data)
<S>                                      <C>        <C>        <C>       <C>        <C>
Statement of Operations Data:
   Net sales...........................  $  12,654  $  20,566  $ 28,404  $  49,173  $  54,964
   Cost of goods sold..................      5,939      9,244    13,998     21,431     29,900
                                         ----------------------------------------------------  
     Gross profit......................      6,715     11,322    14,406     27,742     25,064
 Operating expenses:
     Research and development..........      1,955      3,586     5,027      8,344     16,349
     Sales and marketing...............      2,943      4,785     7,174     11,115     15,984
     General and administrative........      1,335      1,736     3,257      5,291      8,935
     In-process research and 
       development.....................                           5,600      3,416      6,750
     Impairment and restructuring......                                                 3,393
                                         ----------------------------------------------------  
                                             6,233     10,107    21,058     28,166     51,411
                                         ----------------------------------------------------  

   Income (loss) from operations.......        482      1,215    (6,652)      (424)   (26,347)
   Gain on sale of investment..........                                                 4,704
   Net interest income and other 
     income (expense)..................          8         69     1,220      3,327      2,419
   Loss due to earthquake..............      (281)
                                         ----------------------------------------------------  
   Income (loss) before income taxes...        209      1,284    (5,432)     2,903    (19,224)
   Provision for income taxes..........                    22       295      1,420        157
                                         ----------------------------------------------------  

   Net income (loss)...................  $     209  $   1,262  $ (5,727)  $  1,483   $(19,381)
                                         ----------------------------------------------------  

Earnings (loss) per share
   Basic...............................  $    0.18  $    0.72  $  (0.78)  $   0.16   $  (2.11)
   Diluted ............................  $    0.05  $    0.24  $  (0.78)  $   0.15   $  (2.11)

   Shares used in per share 
      calculations                           
   Basic...............................      1,149      1,753     7,308      9,184      9,170
   Diluted.............................      3,852      5,211     7,308      9,973      9,170
</TABLE>


<TABLE>
<CAPTION>
                                                      FISCAL YEAR ENDED JUNE 30,
                                         ----------------------------------------------------
                                            1994       1995      1996       1997      1998
                                         ---------  ---------  --------  ---------  ---------
                                                            (in thousands)
<S>                                      <C>        <C>        <C>       <C>        <C>
Balance Sheet Data:

   Working capital .....................  $ 3,923     $38,235     $84,747  $ 81,982    $66,145
   Total assets.........................    6,398      42,847      93,851   100,696     80,838
   Total long-term debt, excluding
     current maturities.................                              147
   Accumulated deficit..................   (3,571)     (2,304)     (8,036)   (6,652)   (25,933)
   Total stockholders' equity  (1)......    4,847      40,316      90,140    93,538     72,517
</TABLE>

-----------
(1) The Company has never paid cash dividends on shares of its capital stock.


                                       16

<PAGE>   19

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

        The following discussion and analysis should be read in conjunction with
the Financial Statements and related Notes thereto contained elsewhere in this
Report. This Report contains forward-looking statements that involve a number of
risks and uncertainties including, without limitation, those set forth in
"Business--Risk Factors." The Company's actual results may differ materially
from any future performance discussed in the forward-looking statements and in
this Management's Discussion and Analysis of Financial Condition and Results of
Operations.

GENERAL

        ACT develops, manufactures, and markets wide area network (WAN) access
products which support a broad range of integrated voice and data network
applications. Service providers and enterprise customers use the Company's
products to build multimedia networks that are bandwidth efficient,
cost-effective and easy-to-manage. The Company's products incorporate advanced
voice and data compression algorithms, enhanced switching and traffic management
capabilities, and state-of-the-art hardware and software integration
technologies.

        The Company is migrating toward two principal product families,
NetPerformer and ServiceXchange, which share a common technology foundation but
are targeted at different market segments. NetPerformer is a family of Frame
Relay access devices ("FRADs") targeted at enterprise customers who need to
integrate and transport voice, fax, LAN, and SNA data over private or public
Frame Relay networks. ServiceXchange addresses the needs of service providers
who are especially focused on transporting large volumes of voice traffic cost
effectively over Frame Relay, ATM, or IP backbones. Within each family, both
chassis-based and stand-alone configurations will be offered to serve specific
customer requirements for price, performance, density, and feature set.

        The Company's future results will be dependent upon a variety of factors
including, without limitation, the Company's ability to develop and release new
products in a timely manner and within anticipated budgets. While the Company
anticipates the release of new products in fiscal 1999, there can be no
assurance that such products will be released when anticipated or that such
products will achieve market acceptance.

        The Company anticipates that, in general, the average sales price for
its products will decrease over time due to competition and other factors. The
Company is currently focusing on developing OEM or similar relationships with
third parties, which may result in significant pricing discounts and lower gross
margins. In addition, the Company has from time to time introduced new products
which are less expensive alternatives to the Company's older products. In such
instances, the Company must sell more units to maintain the same level of
aggregate net sales. Price erosion of existing products, significant discounting
and the Company's introduction of less expensive networking alternatives could
adversely affect the Company's margins and results of operations.

        Sales to customers outside of North America accounted for approximately
65%, 75% and 64% of the Company's net sales for the fiscal years ended June 30,
1996, 1997 and 1998, respectively. The Company expects that international sales
will continue to account for a significant portion of the Company's net sales in
future periods. In addition, the Company believes that a significant portion of
its sales to customers inside North America represent sales of products which
are used or resold in markets outside of North America. International sales are
subject to certain inherent risks, including unexpected changes in regulatory
requirements and tariffs, problems and delays in collecting accounts receivable
and economic downturns in foreign markets. A significant number of the Company's
products are sold or installed in countries, including several in South America
and Asia, where political or economic issues have adversely affected, and may in
the future adversely affect, the purchasing decision of the customer. In
addition, fluctuations in currency exchange rates have caused, and may in the
future cause, the Company's products to become relatively more expensive to
customers in a particular country, leading to a reduction in sales or
profitability in that country. The Company believes that recent events in Asia
and South America will adversely impact the Company's net sales in these regions
in the near term.

        A small number of customers have historically accounted for a
substantial portion of the Company's net sales. In particular, Interexchange
accounted for approximately 12.2% of the Company's net sales for the fiscal
year ended June 30, 1998. During the fiscal years ended June 30, 1996, 1997 and
1998, the Company's five largest customers collectively accounted for 42%, 36%
and 35%, respectively, of net sales. Any reduction, delay or change in orders
from significant customers could have a material adverse effect on the Company's
business.

ACQUISITIONS

In November 1995, the Company acquired all the outstanding shares of Presticom,
a developer of multiprotrocol Frame Relay access devises. In December 1996, the
Company acquired all the outstanding shares of DeltaComm Corporation, a
developer of bandwidth-efficient modems with expertise in the satellite
communications industry. In March 1997, the Company acquired the DynaStar family
of products from Dynatech Communications, Inc. The DynaStar product line is a
family of compact, flexible,

                                       17
<PAGE>   20

integrated multi-service access switch connectivity products that support
extensive multiprotocol WAN connections including TCP/IP, PPP, Frame Relay, X.25
and ATM. In August 1997, the Company acquired out of bankruptcy certain assets
of Sourcecom, Inc., a developer of high performance broadband access devises. In
connection with these acquisitions, the Company expensed a portion of the
purchase prices as in-process research and development. The products and
technologies acquired in the Dynatech Communications, Inc. and DeltaComm
Corporation acquisitions are being either de-emphasized or discontinued.

RESTRUCTURING PROGRAM

        In July 1998, the Company announced a major restructuring program
designed to streamline operations and focus on key markets. As part of the
restructuring program, the Company is concentrating its resources on the
Netperformer and ServiceXchange product lines. In connection with the
restructuring, the Company is significantly reducing its workforce, eliminating
its business unit matrix structure in favor of a functional organization and
de-emphasizing engineering, sales and marketing efforts for non-strategic
products.

        Included in the Company's June 30, 1998 net loss were certain
restructuring and impairment charges of $3.4 million as a result of the
Company's evaluation and write-down of certain assets, principally the tangible
and intangible assets established in the DeltaComm, Dynastar, and SourceCom
acquisitions. In addition, the Company recorded charges to cost of goods sold of
$3.7 million to write-down the carrying value of inventory due to the
restructuring and related de-emphasis or discontinuation of certain product
lines and other factors.

        The impairment write-downs, excluding inventory write-downs, reflected
in the statement of operations consist of the following non-cash charges (in
thousands):

        Asset Impaired                                                Amount
        --------------------------------------------                 --------
        Property, plant and equipment                                $    682
        Developed technology and other acquisition                      2,444
        intangibles
        Other intangible assets                                           267
                                                                     --------
                                                                     $  3,393
                                                                     ========

The Company believes it will record additional charges of $2 to $3 million in
fiscal 1999 related to employee termination and other costs associated with the
restructuring, although there can be no assurance that such costs will not be
greater than anticipated.

RESULTS OF OPERATIONS

        The following table sets forth for the years indicated, the percentage
of net sales represented by each item in the Company's statement of operations.

<TABLE>
<CAPTION>
                                              Fiscal Years Ended June 30,
                                         ------------------------------------
                                          1996           1997           1998
                                         ------         ------         ------
<S>                                      <C>            <C>            <C>   
Net sales                                100.0%         100.0%         100.0%
Cost of goods sold                        49.3           43.6           54.4
                                         -----          -----          -----
Gross profit                              50.7           56.4           45.6

Operating expenses:
   Research and development               17.7           17.0           29.6
   Sales and marketing                    25.2           22.6           29.1
   General and administrative             11.5           10.8           16.3
   Impairment and restructuring                                          6.2
   Acquired in-process research
      and development                     19.7            6.9           12.3
                                         -----          -----          -----
                                          74.1           57.3           93.5
                                         -----          -----          -----
Loss from operations                     (47.9)         (23.4)          (0.9)
Net interest and other income              4.3            6.8           12.9
                                         -----          -----          -----
Income (loss) before taxes               (35.0)         (19.1)           5.9
Provision for income taxes                 1.0            2.9            0.3
                                         -----          -----          -----
Net income (loss)                        (20.1)%          3.0%         (35.3)%
                                         =====          =====          =====
</TABLE>


                                       18


<PAGE>   21

Net sales

        The Company classifies its sales as either international or domestic.
International sales are, in general, shipments to locations outside the United
States, regardless of the end-user's or the customer's location. Domestic sales
are, in general, shipments to locations within the United States, even if the
end-user or customer is located outside the United States. As the Company sells
primarily through resellers, the Company does not know with certainty the
location of the end-user. The Company believes that a majority of sales that it
classifies as domestic are shipped to end-users outside the United States.

        The Company also classifies its sales by customer. In general, the
end-users of the Company's products are either enterprise customers who acquire
the Company's products for use in their own network or service providers who use
the Company's products to provide telecommunications services to third parties.
Service providers include alternate service providers (such as wholesale
long-distance carriers and call-back operators), value added network services
providers, competitive local exchange carriers, incumbent local exchange
carriers, competitive access providers, Internet Service Providers and
Interexchange Carriers. The Company's NetPerformer products may be used by both
enterprise customers and service providers. The Company's ServiceXchange
products are designed primarily for the service provider market. As the Company
does not intend to actively promote many of its former products which have,
historically, accounted for a majority of the Company's net sales, the Company's
net sales may be adversely impacted in the near term. The Company has in the
past, and may in the future, encounter decreased sales as a result of product
transitions.

        Net sales increased 11.8% to $55.0 million for the fiscal year ended
June 30, 1998 from $49.2 million for the fiscal year ended June 30, 1997. This
increase was primarily as a result of increased domestic sales of the Company's
products as well as sales of products from businesses acquired in fiscal 1997
and 1998. Increases in sales to Europe and the Asia Pacific region were offset
by decreases in sales to South America. Net sales to the Asia Pacific region
decreased substantially from the first two quarters of the fiscal year ending
June 30, 1998 to quarters three and four of current fiscal year. For the fiscal
year ended June 30, 1998, sales to enterprise customers were approximately $36.2
million, or 65.2%, and sales to service providers were approximately $19.3
million, or 34.8%. The following table sets forth, for the fiscal periods
indicated, the percentages of total net sales represented by domestic and
international sales.

<TABLE>
<CAPTION>
                                                       Fiscal Year Ended
                                               --------------------------------
                                               June 30, 1998      June 30, 1997
                                               -------------      -------------
<S>                                            <C>                 <C>
            Domestic Sales                          36.2%             25.3%
            International Sales                     63.8              74.7
                                                   -----             -----
                                                   100.0%            100.0%
                                                   =====             =====
</TABLE>

        Net sales increased 73.1% to $49.2 million for the fiscal year ended
June 30, 1997 from $28.4 million for the fiscal year ended June 30, 1996 due to
increased unit sales of the Company's Frame Relay access products. Included in
net sales is $2.5 million attributable to sales of products from businesses
acquired in fiscal 1997. For the fiscal year ended June 30, 1997, sales to
enterprise customers were approximately $41.2 million, or 83.8%, and sales to
service providers were approximately $8.0 million, or 16.2%. For the fiscal year
ended June 30, 1996, sales to enterprise customers were approximately $23
million, or 5.4%, and sales to service providers were approximately $5.4
million, or 19.0%.

        The two categories of customers operate either terrestrial or wireless
networks. For the fiscal year ended June 30, 1997, sales of products into
terrestrial and wireless networks were approximately $36 million, or 73.2%, and
$13.2 million, or 26.8%, respectively. For the fiscal year ended June 30, 1996,
sales of products into terrestrial and wireless networks were approximately
$18.4 million, or 64.8%, and $10 million, or 35.2%, respectively.

Gross Profit

        Gross profit represents net sales less the cost of goods sold, which
includes cost of materials, manufacturing overhead costs and direct labor
expenses. The Company's gross profit was $25.1 million, or 45.6% of net sales,
for the fiscal year ended June 30, 1998. The Company's gross profit was $27.7
million, or 56.4% of net sales, for the fiscal year ended June 30, 1997. Cost of
goods sold for the year ended June 30, 1998 includes charges of $3.7 million to
write-down the carrying value of inventory due to the de-emphasis or
discontinuation of certain product lines. Without these charges, gross profit
for the fiscal year ended June 30, 1998 would have been $28.7 million, or 52.2 %
of net sales. The decrease in gross profit as a percentage of sales was
primarily attributable to decreases in average sales prices due to competitive
pressure. Management anticipates continued downward pressure on gross profit as
a percentage of sales, particularly as the Company pursues OEM opportunities
that typically produce lower gross margins.

        The Company's gross profit was $27.7 million, or 56.4% of net sales, for
the fiscal year ended June 30, 1997. The Company's gross profit was $14.4
million, or 50.7% of net sales, for the fiscal year ended June 30, 1996. Fiscal
1996 included a $700,000 charge for obsolete inventory that was taken to

                                       19
<PAGE>   22

recognize the decreased demand for certain point-to-point products. Gross
profit, not including this charge, was $15.1 million, or 53.2% of net sales, for
the fiscal year ended June 30, 1996. The increase in gross profit as a
percentage of sales was primarily attributable to changes in product mix,
particularly decreased OEM sales.

Operating Expenses

RESEARCH AND DEVELOPMENT. Research and development expense increased to $16.3
million, or 29.6% of net sales, for the fiscal year ended June 30, 1998 from
$8.3 million, or 17% of net sales, for the fiscal year ended June 30, 1997. This
increase was primarily attributable to the cost of personnel for the development
of new products and enhancement of existing products, which increased to
approximately $10.1 million from $4.7 million. The acquisitions of the Dynastar
product line in March 1997 and SourceCom in August 1997 represented an increase
of approximately 25 and 19 engineering personnel, respectively, without a
commensurate increase in sales. Other material components of the increase in
research and development expense were consultant fees, the cost of materials and
depreciation expense.

        Research and development expense increased to $8.3 million, or 17% of
net sales, for the fiscal year ended June 30, 1997 from $5.0 million, or 17.7%
of net sales, for the fiscal year ended June 30, 1996. This increase was
primarily attributable to the cost of personnel for the development of new
products and enhancement of existing products, which increased to approximately
$4.7 million from $2.5 million. The acquisitions of DeltaComm and the Dynastar
product line represented an increase of approximately 29 engineering personnel.
Other material components of the increase in research and development expense
were consultant fees, the cost of materials and depreciation expense.

        As discussed above in "Restructuring Program," management expects to
reduce its workforce as the Company de-emphasizes engineering efforts for
non-strategic products. While the actual amount expended will depend upon a
variety of factors, the Company anticipates decreasing research and development
expenses in the near term due to the restructuring program. In particular, the
Company plans to narrow its product focus to emphasize the Netperformer and
ServiceXchange product lines and anticipates decreasing research and development
expenses accordingly. However, the development of new products and features
involves a number of risks and uncertainties, and there can be no assurance that
the Company's research and development expenses will decrease either in actual
dollars or as a percentage of sales in future periods.

SALES AND MARKETING. Sales and marketing expense increased to $16 million, or
29.1% of net sales, for the fiscal year ended June 30, 1998 from $11.1 million,
or 22.6% of net sales, for the fiscal year ended June 30, 1997. Sales and
marketing expense increased to $11.1 million, or 22.6% of net sales, for the
fiscal year ended June 30, 1997 from $7.2 million, or 25.2% of net sales, for
the fiscal year ended June 30, 1996. These increases were primarily attributable
to the addition of personnel and increased marketing activities.

        As discussed above in "Restructuring Program," management expects to
reduce its workforce as the Company de-emphasizes sales and marketing efforts
for non-strategic products and adopts a function-based organization structure.
While the actual amount expended will depend upon a variety of factors, the
Company anticipates decreasing sales and marketing expenses in the near term due
to the restructuring program.

GENERAL AND ADMINISTRATIVE. General and administrative expense increased to $8.9
million, or 16.3% of net sales, for the fiscal year ended June 30, 1998 from
$5.3 million, or 10.8% of net sales, for the fiscal year ended June 30, 1997.
The Dynastar and SourceCom acquisitions contributed significantly to the
increase in general and administrative expense without a commensurate increase
in sales. Other material components of the increase in general and
administrative expense were the cost of personnel associated with the expansion
of the Company's management team, outside services and bad debt expense of
approximately $1.2 million.

        General and administrative expense increased to $5.3 million, or 10.8%
of net sales, for the fiscal year ended June 30, 1997 from $3.3 million, or
11.5% of net sales, for the fiscal year ended June 30, 1996. The Dynastar,
DeltaCom and SourceCom acquisitions contributed significantly to the increase
in general and administrative expense without a commensurate increase in sales.

        Amortization expense relating to acquisitions was approximately $880,000
and $427,000 in the fiscal years ended June 30, 1998 and June 30, 1997,
respectively.

        As part of the restructuring program, the Company wrote-off certain
intangible assets acquired in connection with the DeltaComm and Dynatech
acquisitions and wrote-down certain intangible assets in connection with the
SourceCom asset acquisition. Going forward from June 30, 1998, general and
administrative expenses will include approximately $370,000 per year for
approximately 4 1/2 years due to the amortization of goodwill and other
intangibles associated with the acquisitions of the SourceCom assets and
Presticom.

        As part of the restructuring program, the Company intends to combine,
eliminate or scale back certain facilities which management expects will reduce
general and administrative expense beginning in the second quarter of fiscal
1999. As noted above in "Restructuring Program," the Company will record
additional charges in fiscal 1999 related to employee termination and other
costs associated with de-emphasizing certain product lines and consolidating
facilities.

                                       20
<PAGE>   23

Net interest and other income (expense)

        Net interest income was $2.4 million for the fiscal year ended June 30,
1998 compared to net interest income of $3.3 million in fiscal 1997. This
decrease was primarily attributable to the decrease in invested funds due to
acquisitions in late March 1997 and August 1997 and working capital
requirements. Net interest income was $1.2 million for fiscal 1996. The increase
in fiscal 1997 was primarily attributable to interest received on the proceeds
from the Company's secondary offering in June 1996.

Gain on sale of investment

        In March 1998, the Company sold 228,000 shares of Common Stock of
Netspeak Corporation for a gain of $4.7 million. The Company purchased the
shares in June 1997 for $2 million.

Income Taxes

        The provision for income taxes for the fiscal year ended June 30, 1998
totaled approximately $157,000. In general, the provision for income taxes may
differ from the federal statutory rate due to the foreign income taxes related
to the Company's Canadian subsidiary, the effect of federal and state
alternative minimum taxes, and net operating losses incurred for the period that
are not benefited. For fiscal 1998, the difference between the federal statutory
rate and the effective tax rate primarily relates to operating losses not
benefited. At June 30, 1998, subject to certain limitations, the Company had
research and development credit carryforwards of approximately $1,042,000 and
$559,000 for federal and state tax purposes, respectively, and approximately
$8,159,000 and $1,752,000 in federal and state operating loss carryforwards,
respectively. See Note 4 to Notes to Financial Statements.

        There was a $1.4 million provision for income taxes for fiscal 1997 and
a provision of $295,000 for income taxes for the year ended June 30, 1996.

Inflation/Accounting Pronouncements

        Although management cannot accurately anticipate the effect of inflation
on its operations, to date inflation has not had a material effect on product
sales or results of operations. In February 1997, the Financial Accounting
Standards Board issued Statement No. 128, Earnings per Share (SFAS 128), which
the Company adopted in its quarter ended December 31, 1997. (See Note 1, "Net
(Loss) Income Per Share"). Statements of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130), and No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131), were issued in
June 1997. The disclosures required by these statements are under review by the
Company and must be reported in fiscal 1999. The adoption of these statements is
not expected to have a material impact on the Company's consolidated results of
operations, financial position or cash flows.

Year 2000

        The Year 2000 issue is the result of computer programs that were written
using two digits rather than four to define the applicable year; accordingly,
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the Year 2000. This could result in a system
failure or miscalculation causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal activities.

        The Company's internal information systems require a Unix operating
system version upgrade to become Year 2000 compliant. The upgrade will be
completed in fiscal 1999. The Company is performing internal testing of its
products and expects to complete such testing during the second quarter of
fiscal 1999. Based on its testing to date, the Company believes that its
products are Year 2000 compliant. The Company has not, and has no present
intention to, have its products tested by an independent lab. The Company does
not expect that the costs to complete the testing program related to the Year
2000 will have a material impact on operations or financial results. The Company
has not conducted a comprehensive survey of customers or suppliers to assess the
potential impact, if any, of Year 2000 noncompliance on the part of third
parties, however the Company believes that there are two predominant sources of
third party risk for the Company with respect to the Year 2000 issue. The
Company depends on turnkey manufacturers of components for its manufacturing
process and disruption of operations at such a supplier, whether due to Year
2000 noncompliance or not, could negatively impact the Company's shipment
schedule. The Company also has a number of large customers who are either
end-users or resellers. The Company's top five customers generated 35% of net
sales in fiscal 1998. Year 2000 noncompliance at such customers' sites could
negatively impact sales to such customers by disrupting the networks of such
customers or their customers, in the case of resellers. In the event that the
Company's internal system or systems of significant outside vendors are not
converted or modified in a timely manner to make them Year 2000 compliant, there
could be a material adverse effect upon the business and financial results of
the Company. The Company does not have a contingency plan in place to address
such an event and does not presently intend to create one.

                                       21
<PAGE>   24

LIQUIDITY AND CAPITAL RESOURCES

        The Company has funded its operations primarily from the sale of stock
and sales of the Company's products. Net proceeds from the sale of Common Stock
in the Company's secondary offering in June 1996 were $53.7 million. For fiscal
1998, the Company's operating activities used cash of approximately $8.9
million, primarily as a result of the Company's net loss for the period offset
by adjustments for non-cash items including depreciation, in-process technology
and impairment charges. At June 30, 1998, the Company had approximately $66
million in working capital, including $46.6 million in cash and cash equivalents
and short-term investments.

        Capital expenditures relating primarily to the purchase of computer
equipment, test equipment, computer software and leasehold improvements amounted
to approximately $2.4 million for the fiscal year ended June 30, 1998. The
Company currently has no material commitments for capital expenditures. However,
the Company anticipates spending between $2 million and $3 million during the
next 12 months to acquire test equipment, computer equipment, office furniture,
tooling and leasehold improvements. The Company also invested $8.4 million in
its acquisition of the assets of SourceCom and purchased $2.4 million of
treasury stock.

        The Company had a loan and security agreement (the "Loan Agreement")
with Silicon Valley Bank (the "Bank"), which provided for aggregate borrowings
up to a maximum of $3 million. Under the loan agreement, the Company could
borrow up to the lesser of $3 million or 75% of eligible accounts receivable
(the revolving line of credit). The revolving line of credit expired July 5,
1998 and the Company is presently renegotiating it. At June 30, 1998 and June
30, 1997, there were no outstanding balances under the line of credit.

        The Company believes that available cash, cash equivalents and
short-term investments together with internally generated cash flow, will be
adequate to satisfy its capital requirements for at least the next twelve
months.



                                       22

<PAGE>   25

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

        The financial statements and supplementary data required by Regulation
S-X are included in this Form 10-K commencing on page F-1.

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

        Not applicable.




                                       23

<PAGE>   26

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

EXECUTIVE OFFICERS AND DIRECTORS

        The following table sets forth certain information concerning the
executive officers and directors of the Company as of August 31, 1998.

<TABLE>
<CAPTION>
  NAME                               AGE     POSITION
  ----                               ---     --------
<S>                                  <C>     <C>
  Andre de Fusco                     40      Chairman of the Board of Directors,
                                             President and Chief Executive Officer
  Melvin L. Flowers                  45      Chief Financial Officer and Vice
                                             President, Finance and Administration
  Alain Gravel                       39      Vice President, Engineering
  Christopher F. Perna               34      Vice President, Sales
  Mike T. Zeile                      34      Vice President, Marketing
  H. Peter Staab                     51      Chief Technology Officer
  Brig. Gen. Harold R. Johnson(1)(2) 75      Director
  William Ambrose (1)(2)             40      Director
  Archibald J. McGill (1)(2)         67      Director
  Frederick W. Gluck                 63      Director
</TABLE>

-----------
(1)     Member of the Compensation Committee.
(2)     Member of the Audit Committee.

        Andre de Fusco was appointed President and Chief Executive Officer in
July 1998. Previously Mr. de Fusco held several positions with the Company,
including the position of Vice President and General Manager of the Company's
Broadband Network Services subsidiary from August 1997 to June 1998, Vice
President, Strategic Planning and Business Development from December 1995 to
June 1998 and Vice President of Marketing from December 1994 to December 1995.
Mr. de Fusco was employed as Director of International Accounts and Director of
Business Development for Northern Telecom from 1991 to 1994 and as Vice
President of Marketing and President of MaxCom, a developer of electronic mail
systems, from 1984 to 1991.

        Melvin L. Flowers has served as Chief Financial Officer and Vice
President of Finance since July 1993 and as Vice President, Finance and
Administration since December 1995. Prior to joining the Company, Mr. Flowers
served as President and Chief Financial Officer of Pacific Earth Resources, an
ornamental horticultural company, from 1991 to 1993 and from 1989 to 1991,
respectively, and as Vice President and Chief Financial Officer of Spectramed
Incorporated, a medical device manufacturing company, from 1986 to 1989.

        Alain Gravel was appointed Vice President, Engineering in July 1998.
From November 1995 to July 1998, Mr. Gravel served as Vice President of Research
& Development, Data Products, of the Company's Enterprise Network Systems
subsidiary. Mr. Gravel served as Vice President of Research & Development of
Presticom until the Company acquired Presticom in November 1995. Mr. Gravel was
a co-founder of Presticom and was responsible for the development of the
NetPerformer product line. He also served on the Board of Directors of
Presticom. Mr. Gravel was employed as the Software Development Manager for
Memotec from 1988 to 1989 and for Datagram, a developer of statistical
multiplexers, from 1984 to 1988.

        Christopher F. Perna was appointed Vice President, Sales in July 1998.
Previously, Mr. Perna was Vice President of Sales at ComCore Semiconductor based
in Calabasas, California, where he was responsible for worldwide sales and
application support from 1997 to 1998. Prior to ComCore, Mr. Perna was a
manufacturer sales representative at Jones & McGeoy Sales from 1994 to 1997, and
a district sales manager at Integrated Devices Technology from 1991 to 1994.

        Mike T. Zeile was appointed Vice President, Marketing in July 1998. Mr.
Zeile held the position of Vice President of Marketing at ComCore Semiconductor
from July 1997 to July 1998 where he managed all aspects of the Company's
marketing business as well as product management. Prior to joining ComCore, Mr.
Zeile worked at Sourcecom Corporation, where he led the definition of the
product platform that became the basis for ACT's new ServiceXchange product
family. Mr. Zeile has also held various senior management and marketing
positions at ADC Telecommunications from 1987 to 1997.

        H. Peter Staab was appointed Chief Technology Officer in July 1998. Mr.
Staab previously served as Vice President, Corporate Research and Development
from July 1997 to July 1998 and served as Vice President of Engineering from
June 1995 to July 1998. Before joining the Company, Mr. Staab was employed at
General DataComm as Director of Network Management and Systems from 1992 to 1995
and Director of Transmission Products from 1985 to 1992.


                                       24


<PAGE>   27

        Brig. Gen. (retired) Harold R. Johnson has served as a member of the
Board of Directors of the Company since 1988. Brig. Gen. Johnson is currently
the Senior Vice President of Business Development at The Fairchild Corporation,
an aerospace and communications company, and has been with Fairchild in various
capacities since 1988. From 1980 to 1988, Brig. Gen. Johnson was founder,
President and Chief Executive Officer of Telebit Corporation, a manufacturer of
telecommunications equipment.

        William W. Ambrose has served as a member of the Board of Directors
since 1993. Mr. Ambrose is currently an independent consultant for several
private companies. Prior to 1998, Mr. Ambrose was the President of Pyramid
Research, Inc. a telecommunications market research organization which he
founded in 1986. Mr. Ambrose was initially elected as a director of the Company
pursuant to a voting agreement entered into in connection with investment in the
Company by a subsidiary of a former stockholder.

        Archibald J. McGill has served as a member of the Board of Directors
since 1994. Mr. McGill is the President and Chief Executive Officer of
Chardonnay Inc., an investment management company, and has served in such
position since 1986. Mr. McGill served as President of Rothschild, Inc., a
venture capital investment firm, from 1983 to 1986. Mr. McGill was previously
President of the AIS/American Bell division of AT&T and a Vice President of
Marketing for International Business Machines. Mr. McGill is presently a member
of the Board of Directors of Disc, Inc., Ciber, Inc., Apertus Technologies, Inc.
and Employee Benefit Plans, Inc.

        Frederick W. Gluck has served as a member of the Board of Directors
since March 1997. Mr. Gluck is currently of counsel to McKinsey and Company. Mr.
Gluck was Vice-Chairman and a director of the Bechtel Group from 1995 through
July 1998. Previously, Mr. Gluck was at McKinsey and Company for 27 years and
led the firm from 1988 until his retirement in 1994. Mr. Gluck is presently a
member of the Board of Directors of Amgen, Columbia HCA, Thinking Tools, Inc.
and several other private companies.

        The Board of Directors of the Company is divided into three classes,
designated "Class I," "Class II" and "Class III," respectively. Each director
serves for a term ending on the date of the third annual meeting of stockholders
following the annual meeting at which such director was elected. However, each
initial director in Class I (Mr. Fusco and Mr. Gluck) serves for a term ending
on the date of the annual meeting of stockholders held in 1998; each initial
director in Class II (Mr. Ambrose and Mr. McGill) serves for a term ending on
the date of the annual meeting of stockholders held in 2000 and each initial
director in Class III (Brig. Gen. Johnson) serves for a term ending on the date
of the annual meeting of stockholders held in 1999.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

        Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers, directors and persons who beneficially own more
than 10% of the Company's Common Stock to file initial reports of ownership and
reports of changes in ownership with the Securities and Exchange Commission
("SEC"). Such persons are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms filed by such person.

        Based solely on the Company's review of such forms furnished to the
Company and written representations from certain reporting persons, the Company
believes that all filing requirements applicable to the Company's executive
officers, directors and more than 10% stockholders were complied with, except
that the Company was late in filing a Form 5 for Michael Gardner, an executive
officer in Fiscal 1996, who elected to reprice 150,000 options in June, 1997 at
$16.675. Mr. Gardner's employment with the Company terminated in October, 1997.


                                       25

<PAGE>   28

ITEM 11. EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

        The following table sets forth the aggregate compensation paid by any
person for all services rendered in all capacities to the Company to the Chief
Executive Officer and to each of the four additional most highly compensated
executive officers (the "Named Executive Officers") for the fiscal year ended
June 30, 1996, 1997 and 1998. Except as indicated below, during fiscal year
1996, 1997, and 1998, no Named Executive Officer received other compensation in
excess of the lesser of $50,000 or 10% of such officer's compensation, nor did
any such officer receive any restricted stock award, stock appreciation right or
payment under any long term incentive plan.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                  LONG-TERM
                                                   ANNUAL COMPENSATION           COMPENSATION
                                            -------------------------------      -------------
                                            FISCAL                 BONUS/         UNDERLYING
NAME AND PRINCIPAL POSITIONS                 YEAR   SALARY      COMMISSION($)     OPTIONS (#)
-----------------------------                ----   ------      -------------    -------------
<S>                                         <C>     <C>          <C>              <C>
Martin Shum (1)..........................   1998    $270,000                      100,000(6)
  Outgoing Chairman of the Board,           1997     225,000
President & CEO                             1996     190,000                      251,500(3)(4)

Linda Carlson (1)........................   1998     140,000        28,000         20,000(6)
  Outgoing Vice President,                  1997     100,000       101,092
  Worldwide Sales                           1996     117,553        87,200         38,429(3)(4)(5)

John W. Tucker (1).......................   1998     140,000        52,000         20,000(6)
   Outgoing Vice President and General      1997     100,000       121,576
   Manager, Wireless Network Systems        1996     102,510        65,714         67,286(3)(4)

Melvin L. Flowers .......................   1998     150,000                       20,000(6)
   Chief Financial Officer and Vice         1997     140,000
   President, Finance and Administration    1996     120,000                       68,429(3)(4)

Andre de Fusco (2).......................   1998     140,000                       20,000(6)
   Vice President, Strategic Planning       1997     140,000
   and and Business Development             1996     123,335         7,677         54,286(3)(4)
</TABLE>

-----------
(1) The above-named officer is no longer employed by the Company.

(2) Mr. de Fusco is the current Chief Executive Officer and President of the
    Company.

(3) Each of the Named Executive Officers were granted the following stock
    options on August 1, 1995 pursuant to the Company's 1995 Option Bonus
    Program at an exercise price of $16.50: Mr. Shum, 24,000; Ms. Carlson,
    1,429; Mr. Tucker, 2,286; Mr. Flowers, 3,429; and Mr. de Fusco, 2,286. The
    options are immediately exercisable with any unvested shares acquired under
    such option being subject to repurchase by the Company, at the exercise
    price, upon termination of the optionee's service with the Company, and vest
    according to the following schedule ("Standard Vesting"): twenty-four
    percent (24%) of the shares vest upon completion of one year following the
    vesting commencement and the balance will vest at a rate of two percent (2%)
    per full month of employment thereafter.

(4) Each of the Named Executive Officers were granted the following Stock
    Options on September 19, 1996 at an exercise price of $13.00: Mr. Shum,
    227,500; Ms. Carlson, 7,000; Mr. Tucker, 65,000; Mr. Flowers, 65,000, and
    Mr. de Fusco, 52,000. The options were immediately exercisable with any
    unvested shares acquired under such option being subject to repurchase by
    the Company, at the exercise price, upon termination of the optionee's
    service with the Company, and is subject to the Company's Standard Vesting.

(5) Ms. Carlson was elected to serve as the Company's Vice President, Worldwide
    Sales on December 11, 1995 and granted a stock option to purchase 30,000
    shares of the Company's Common Stock. The option is immediately exercisable
    with any unvested shares acquired under such option being subject to
    repurchase by the Company, at the exercise price, upon termination of the
    Optionee's service with the Company and is subject to the Company's Standard
    Vesting.

(6) Each of the Named Executive Officers were granted the Stock Options on
    December 3, 1997 at an exercise price of $7.69. Mr. Shum and Mr. Flowers
    were granted options pursuant to the Company's 1997 Stock Incentive Plan and
    Ms. Carlson, Mr. Tucker and Mr. de Fusco were granted options pursuant to
    the Company's 1995 Option Bonus Program. The options were immediately
    exercisable with any unvested shares acquired under such option being
    subject to repurchase by the Company, at the exercise price, upon
    termination of the optionee's service with the Company, and is subject to
    the Company's Standard Vesting.

                                       26
<PAGE>   29

OPTION GRANTS

        The following table sets forth, for the fiscal year ended June 30, 1998,
information concerning the grant of options to purchase shares of Common Stock
under the Company's 1995 Plan or 1997 Incentive Plan to the Named Executive
Officers. No stock appreciation rights were granted to any of the Named
Executive Officers during fiscal year 1998.


                    OPTION GRANTS IN YEAR ENDED JUNE 30, 1998



                                INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
                                                                           POTENTIAL REALIZATION
                        NUMBER OF                                             VALUE AT ASSUMED
                        SECURITIES   PERCENT OF                            ANNUAL RATES OF STOCK
                        UNDERLYING  TOTAL OPTIONS                          PRICE APPRECIATION FOR
                         OPTIONS     GRANTED TO     EXERCISE                   OPTION TERM(4)
                         GRANTED    EMPLOYEES IN    OF BASE    EXPIRATION  ----------------------
NAME                     (1)(2)     FISCAL 1998     PRICE(3)     DATE          5%          10%
----                    --------    ------------    --------   ----------  -----------  ---------
<S>                     <C>         <C>             <C>         <C>          <C>        <C>
Martin Shum (5)         100,000        7.96%         $7.69      12/2/07      483,463    1,225,190

Linda Carlson (5)        20,000        1.59%         $7.69      12/2/07       96,693      245,038

John W. Tucker (5)       20,000        1.59%         $7.69      12/2/07       96,693      245,038

Melvin Flowers           20,000        1.59%         $7.69      12/2/07       96,693      245,038

Andre de Fusco           20,000        1.59%         $7.69      12/2/07       96,693      245,038
</TABLE>

---------------
(1) The options granted to the Named Executive Officers were granted on December
    3, 1997 and have a maximum term of 10 years, subject to earlier termination
    in the event of the optionee's cessation of service with the Company.

(2) The options are immediately exercisable with any unvested shares acquired
    under such option being subject to repurchase by the Company, at the
    exercise price, upon termination of the optionee's service with the Company,
    and vest according to the following schedule: twenty-four percent (24%) of
    the shares vest upon completion of one year following the vesting
    commencement date or grant date, as applicable, and the balance will vest at
    a rate of two percent (2%) per full month of employment thereafter. However,
    the option shares will immediately vest in the event the Company is acquired
    by a merger or asset sale, unless the options are assumed by the acquiring
    entity.

(3) The exercise price may be paid in cash, in shares of Common Stock valued at
    fair market value on the exercise date or pursuant to a cashless exercise
    procedure. The Company may also finance the option exercise by loaning the
    optionee sufficient funds to pay the exercise price for the purchased
    shares.

(4) There is no assurance provided to any executive officer or any other holder
    of the Company's securities that the actual stock price appreciation over
    the 10-year option term will be at the assumed 5% and 10% levels or at any
    other defined level. Unless the market price of the Common Stock does in
    fact appreciate over the option term, no value will be realized from the
    option grants.

(5) The above named officer is no longer employed by the Company.

OPTION CANCELLATION/REGRANT PROGRAM

        The Company implemented an option cancellation/regrant program for
directors, executive officers and other employees holding stock options with an
exercise price per share in excess of the market price of the Company's Common
Stock at the time the cancellation/regrant occurred. The cancellation/regrant
was effected on August 3, 1998, and 1,724,798 outstanding options with an
exercise price in excess of $ 6.75 per share were canceled and new options for
the same aggregate number of shares were granted with an exercise price of $6.75
per share. Andre de Fusco, Frederick W. Gluck, Alain Gravel, Christopher F.
Perna and Mike T. Zeile repriced 374,000, 21,000, 42,000, 90,000 and 90,000
shares, respectively.

                                       27


<PAGE>   30
OPTION EXERCISES AND HOLDINGS

        The following table sets forth information concerning the number and
value of shares acquired on exercise of options held by each of the Named
Executive Officers during the fiscal year ended June 30, 1998 and the number and
value of unexercised options held by each of the Named Executive Officers as of
June 30, 1998. No stock appreciation rights were exercised during fiscal year
1997 and no such appreciation rights were outstanding as of June 30, 1998.


                 AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1998
              AND OPTION VALUES FOR FISCAL YEAR ENDED JUNE 30, 1998

<TABLE>
<CAPTION>
                                                      NUMBER OF SECURITIES
                                                          UNDERLYING              VALUE OF UNEXERCISED
                            NUMBER                     UNEXERCISED OPTIONS        IN-THE-MONEY OPTIONS
                          OF SHARES        VALUE       AT JUNE 30, 1998(1)        AT JUNE 30, 1998($)(2)
                          ACQUIRED ON     REALIZED  ------------------------------------------------------
NAME                      EXERCISE(#)     ($)(3)    EXERCISABLE  UNEXERCISABLE  EXERCISABLE  UNEXERCISABLE
----                      -----------     --------  -----------  -------------  -----------  -------------
<S>                       <C>             <C>        <C>          <C>           <C>          <C>
Martin Shum.............    12,500        116,000    $ 470,263                  $1,065,887
Linda Carlson...........                                59,643                      30,603
John W. Tucker..........                                99,500                     127,369
Melvin L. Flowers.......     5,686         60,769       81,029                      21,250
Andre de Fusco..........                               101,000                     124,099
</TABLE>

-----------
(1) All of the options of the Named Executive Officers are immediately
    exercisable, with any unvested shares acquired under such option being
    subject to repurchase by the Company, at the exercise price, upon
    termination of the optionee's service with the Company, and vest according
    to the following schedule: twenty-four percent (24%) of the shares vest upon
    completion of one year following the vesting commencement date or grant
    date, as applicable and the balance will vest at a rate of two percent (2%)
    per full month of employment thereafter. At June 30, 1998, each of the Named
    Executive Officers owned the following number of options for which vested
    shares were issuable upon exercise: Mr. Shum, 361,897; Ms. Carlson, 25,177;
    Mr. Tucker, 57,263; Mr.Flowers, 38,723, and Mr. de Fusco, 57,239.

(2) Calculated based on the closing sale price at June 30, 1998 of $ 8.75 per
    share, less the applicable exercise price. All of the options of these Named
    Executive Officers are immediately exercisable, with any unvested shares
    acquired under such option being subject to repurchase by the Company, at
    the exercise price, upon termination of the optionee's service with the
    Company. The value of vested shares issuable upon exercise of "in-the-money"
    options at June 30, 1998 for each of the Named Executive Officers was as
    follows: Mr. Shum, $959,637; Ms. Carlson, $9,353; Mr. Tucker, $106,119; Mr.
    Flowers, $0; and Mr. de Fusco, $80,846.

(3) Calculated based on the excess of the fair market value of the purchased
    shares on the exercise date over the exercise price paid for those shares.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

        The Board of Directors has a Compensation Committee (the "Compensation
Committee"), which administers the Company's stock option plans. The members of
the Compensation Committee are Mr. William Ambrose, Brig. Gen. (ret.) Harold R.
Johnson and Mr. Archibald J. McGill. None of these individuals were at any time
during the fiscal year ended June 30, 1998 an officer or employee of the
Company.

        The Board of Directors has an Audit Committee (the "Audit Committee")
which supervises and makes recommendations and decisions with respect to the
periodic audits of the Company's financial results. The members of the Audit
Committee are Mr. Archibald J. McGill, Mr. William Ambrose and Brig. Gen. (ret)
Harold R. Johnson.

DIRECTOR COMPENSATION

        Each non-employee director (which does not include any director who
serves as representative of a stockholder who owns more than 5% of the Company's
voting securities) receives $6,000 annually for services as a member of the
Board of Directors. Non-employee directors are reimbursed for their
out-of-pocket expenses in serving on the Board of Directors. There are no family
relationships among any of the current executive officers or directors of the
Company.


                                       28


<PAGE>   31

        During the 1998 fiscal year, certain non-employee directors were
eligible to receive option grants under the Automatic Option Grant Program in
effect under the Company's 1997 Stock Incentive Plan. Accordingly, at the 1997
Annual Shareholders Meeting held on November 13, 1997, each of the following
non-employee directors received an option grant under the Automatic Option Grant
Program for 7,000 shares of Common Stock with an exercise price of $9.28 per
share: Messrs. Ambrose, McGill and Gluck and Brig. Gen. (ret.) Johnson. In
addition, on December 3, 1997, the above named directors also received an option
grant under the Discretionary Option Grant Program under the Company's 1997
Stock Incentive Plan for 3,000 shares with an exercise price of $7.69 per share.
The exercise price in effect for each option is equal to the fair market value
per share of Common Stock on the grant date. Each option has a maximum term of
ten (10) years measured from the grant date, subject to earlier termination
following the optionee's cessation of Board service. Each option is immediately
exercisable for all of the option shares; however, any shares purchased under
the option will be subject to repurchase by the Company, at the option exercise
price paid per share, upon the optionee's cessation of Board service prior to
vesting in those shares. The shares subject to each 7,000 and 3,000 share grant
will vest on the day immediately preceding the date of the 1998 Annual Meeting,
provided the optionee continues in Board service through that date.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

        Under Section 145 of the Delaware General Corporation Law, the Company
can indemnify its directors and officers against liabilities they may incur in
such capacities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). The Company's Bylaws provide that the Company
will indemnify its directors and officers to the fullest extent permitted by law
and require the Company to advance litigation expenses upon receipt by the
Company of an undertaking by the director or officer to repay such advances if
it is ultimately determined that the director or officer is not entitled to
indemnification. The Bylaws further provide that rights conferred under such
Bylaws do not exclude any other right such persons may have or acquire under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise.

        The Company's Certificate of Incorporation provides that, pursuant to
Delaware Law, its directors shall not be liable for monetary damages for breach
of the directors fiduciary duty of care to the Company and its stockholders.
This provision in the Certificate of Incorporation does not eliminate the duty
of care, and in appropriate circumstances equitable remedies such as injunctive
or other forms of non-monetary relief will remain available under Delaware Law.
In addition, each director will continue to be subject to liability for breach
of the director's duty of loyalty to the Company or its stockholders, for acts
or omissions not in good faith or involving intentional misconduct or knowing
violations of law, for actions leading to improper personal benefit to the
director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws.

        The Company has entered into agreements to indemnify its directors and
certain of its officers in addition to the indemnification provided for in the
Certificate of Incorporation and Bylaws. These agreements, among other things,
indemnify the Company's directors and certain of its officers for certain
expenses (including attorneys' fees), judgments, fines and settlement amounts
incurred by such person in any action or proceeding, including any action by or
in the right of the Company, on account of services as a director or officer of
the Company, or as a director or officer of any other company or enterprise to
which the person provides services at the request of the Company.


                                       29

<PAGE>   32

12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

        The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of August 31, 1998 by (i)
each person known by the Company to beneficially own more than 5% of the
outstanding shares of Common Stock, (ii) each of the Company's directors, (iii)
each of the Named Executive Officers, and (iv) all directors and executive
officers of the Company as a group:

<TABLE>
<CAPTION>
                                                                  SHARES BENEFICIALLY
                                                                       OWNED(1)
DIRECTORS, FIVE PERCENT STOCKHOLDERS, NAMED EXECUTIVE             --------------------
OFFICERS AND DIRECTORS AND OFFICERS AS A GROUP                    NUMBER       PERCENT
--------------------------------------------------------          --------------------
<S>                                                               <C>          <C>
Heartland Advisors (2)..................................          810,000       8.6%
Kingdom Capital Management Corporation (2)..............          582,200       6.2
Andre de Fusco (3)......................................          405,135       4.1
Melvin L. Flowers (4)...................................           31,929        *
Alain Gravel (5)........................................           57,621        *
Christopher F. Perna (6)................................           90,000        *
Mike T. Zeile (7).......................................           90,000        *
H. Peter Staab (8)......................................
Brig. Gen. H. R. Johnson (9)............................           29,714        *
William W. Ambrose (10).................................           49,155        *
Archibald J. McGill (11)................................           56,857        *
Frederick W. Gluck (12).................................           52,000        *
All directors and executive officers as a
   group (10 persons) (13)..............................          862,411       8.5%
Martin Shum (14) (15)...................................          536,212       5.5%
John Tucker (14) (16)...................................           63,904        *
Linda Carlson (14) (17).................................           25,941        *
</TABLE>

-----------

  *  Less than 1%.

 (1) Unless otherwise indicated, the persons named in the table have sole voting
     and sole investment power with respect to all shares beneficially owned,
     subject to community property laws where applicable.

 (2) Based upon information contained in unofficial databases as of June 30,
     1998.

 (3) Includes 401,000 shares issuable upon exercise of immediately exercisable
     options, of which 73,440 shares will be vested within 60 days from August
     31, 1998.

 (4) Includes 10,000 shares issuable upon exercise of immediately exercisable
     options, of which 10,000 shares will be vested within 60 days from August
     31, 1998.

 (5) Includes 42,000 shares issuable upon exercise of immediately exercisable
     options, of which 17,400 shares will be vested within 60 days from August
     31, 1998.

 (6) Includes 90,000 shares issuable upon exercise of immediately exercisable
     options, of which no shares will be vested within 60 days from August 31,
     1998.

 (7) Includes 90,000 shares issuable upon exercise of immediately exercisable
     options, of which no shares will be vested within 60 days from August 31,
     1998.

 (8) Includes 94,000 shares issuable upon exercise of immediately exercisable
     options, of which 53,800 shares will be vested within 60 days from August
     31, 1998.

 (9) Includes 24,000 shares issuable upon exercise of immediately exercisable
     options, of which 14,000 shares will be vested within 60 days from August
     31, 1998.

(10) Includes 25,155 shares beneficially owned by Stone Silo Investments. Mr.
     Ambrose, as sole owner of Stone Silo Investments, may be deemed to have
     beneficial ownership of these shares. Also includes 24,000 shares issuable
     upon exercise of immediately exercisable options, of which 14,000 shares
     will be vested within 60 days from August 31, 1998.


                                       30


<PAGE>   33

(11) Includes 56,857 shares issuable upon exercise of immediately exercisable
     options, of which 46,857 shares will be vested within 60 days from August
     31, 1998.

(12) Includes 52,000 shares issuable upon exercise of immediately exercisable
     options of which 15,960 shares will be vested within 60 days from August
     31, 1998.

(13) Includes 25,155 shares owned by Stone Silo Investments. Also includes an
     aggregate of 862,411 shares issuable to the Company's directors and
     executive officers upon the exercise of immediately exercisable options
     held by such directors and executive officers of which 245,457 shares will
     be vested within 60 days from August 31, 1998.

(14) No longer employed by the Company.

(15) Includes 38,571 shares held by members of Mr. Shum's family and 147,249
     shares held by Helen Shum and Martin Shum as Trustees of the Shum Trust
     dated April 15, 1994. Also, includes 346,249 shares issuable upon exercise
     of immediately exercisable options of which all shares will be vested
     within 60 days from August 31, 1998.

(16) Includes 57,309 shares issuable upon exercise of immediately exercisable
     options of which 57,309 shares currently vested and exercisable until
     October 8, 1998.

(17) Includes 25,206 shares issuable upon exercise of immediately exercisable
     options of which 25,206 shares currently vested and exercisable until
     October 8, 1998.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         NONE


                                       31
<PAGE>   34

                                     PART IV

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


        (a)(1) FINANCIAL STATEMENTS:

        The Company's financial statements appear in a separate section of this
Annual Report on Form 10-K commencing on the pages referenced below:

<TABLE>
<CAPTION>
                                                                                          Page
                                                                                          ----
<S>                                                                                       <C>
        Report of Ernst & Young LLP, Independent Auditors................................  F-1
        Consolidated Balance Sheets as of June 30, 1998 and 1997.........................  F-2
        Consolidated Statements of Operations for the years ended
          June 30, 1998, 1997 and 1996...................................................  F-4
        Consolidated Statements of Stockholders' Equity for the years
          ended June 30, 1998, 1997 and 1996.............................................  F-5
        Consolidated Statements of Cash Flows for the years ended
          June 30, 1998, 1997 and 1996...................................................  F-6
        Notes to Consolidated Financial Statements.......................................  F-8
</TABLE>

        (2) FINANCIAL STATEMENT SCHEDULES:

        The financial statement schedules of the Company are included in a
separate section of this Annual Report on Form 10-K commencing on the pages
referenced below. All other schedules have been omitted because they are not
applicable, not required, or the information is included in the financial
statements or notes thereto.

<TABLE>
<CAPTION>
                                                                                          Page
                                                                                          ----
<S>                                                                                       <C>
        SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS.................................  S-1
</TABLE>



                                       32

<PAGE>   35

        (3) EXHIBITS:

<TABLE>
<CAPTION>

EXHIBIT
NUMBER                          DESCRIPTION
-------                         -----------
<S>     <C>
  3.1   Certificate of Incorporation of the Company. Incorporated by reference
        to Exhibit 3.1 to the Company's Registration Statement on Form S-1,
        Registration No. 33-90394

  3.2   Bylaws of the Company. Incorporated by reference to Exhibit 3.2 to the
        Company's Registration Statement on Form S-1, Registration No. 33-90394

  4.1   Specimen certificate representing shares of Common Stock of the Company.
        Incorporated by reference to Exhibit 4.1 to the Company's Registration
        Statement on Form S-1, Registration No. 33-90394.

  4.2   Form of Warrant of the Company. Incorporated by reference to Exhibit 4.2
        to the Company's Registration Statement on Form S-1, Registration No.
        33-90394.

 10.1   Standard Industrial/Commercial Multi-Tenant Lease-Modified Net dated May
        23, 1994 by and between Herman Bennett and the Company. Incorporated by
        reference to Exhibit 10.1 to the Company's Registration Statement on
        Form S-1, Registration No. 33-90394.

 10.2   Master Lease Agreement dated January 11, 1994 by and between the Company
        and Leasetec Corporation, as amended and supplemented. Incorporated by
        reference to Exhibit 10.2 to the Company's Registration Statement on
        Form S-1, Registration No. 33-90394.

 10.3   Loan and Security Agreement dated March 23, 1993, as amended, between
        Silicon Valley Bank and the Company and related agreements and
        documents. Incorporated by reference to Exhibit 10.3 to the Company's
        Registration Statement on Form S-1, Registration No. 33-90394.

 10.4   Loan and Security Agreement (Exim) dated May 11, 1994, as amended,
        between Silicon Valley Bank and the Company and related agreements and
        documents. Incorporated by reference to Exhibit 10.4 to the Company's
        Registration Statement on Form S-1, Registration No. 33-90394.

 10.5   Executive Employment Agreement dated December 23, 1992, by and between
        the Company and Martin Shum. Incorporated by reference to Exhibit 10.5
        to the Company's Registration Statement on Form S-1, Registration No.
        33-90394.

 10.6   Form of Indemnification Agreement. Incorporated by reference to Exhibit
        10.6 to the Company's Registration Statement on Form S-1, Registration
        No. 33-90394.

 10.7   1987 Stock Option Plan (the "1987 Plan"). Incorporated by reference to
        Exhibit 10.7 to the Company's Registration Statement on Form S-1,
        Registration No. 33-90394.

 10.8   Form of Amended Notice of Grant of Stock Option with respect to holders
        of installment incentive stock options granted under the 1987 Plan.
        Incorporated by reference to Exhibit 10.8 to the Company's Registration
        Statement on Form S-1, Registration No. 33-90394.

 10.9   Form of 1987 Installment Incentive Stock Option Agreement, Immediately
        Exercisable Stock Option Agreement and Immediately Exercisable
        Non-Qualified Stock Option Agreement generally used in connection with
        the 1987 Plan. Incorporated by reference to Exhibit 10.9 to the
        Company's Registration Statement on Form S-1, Registration No. 33-90394.

 10.10  Form of 1987 Stock Purchase Agreement generally used in connection with
        the 1987 Plan. Incorporated by reference to Exhibit 10.10 to the
        Company's Registration Statement on Form S-1, Registration No. 33-90394.

 10.11  1993 Stock Option Plan as amended (the "1993 Plan"). Incorporated by
        reference to Exhibit 10.11 to the Company's Registration Statement on
        Form S-1, Registration No. 33-90394.

 10.12  Form of Notice of Grant of Stock Option generally used in connection
        with the 1993 Plan. Incorporated by reference to Exhibit 10.12 to the
        Company's Registration Statement on Form S-1, Registration No. 33-90394.

 10.13  Form of 1993 Stock Option Agreement generally used in connection with
        the 1993 Plan. Incorporated by reference to Exhibit 10.13 to the
        Company's Registration Statement on Form S-1, Registration No. 33-90394.
</TABLE>


                                       33


<PAGE>   36

<TABLE>
<CAPTION>

EXHIBIT
NUMBER                          DESCRIPTION
-------                         -----------
<S>     <C>
 10.14  Form of 1993 Stock Purchase Agreement generally used in connection with
        the 1993 Plan. Incorporated by reference to Exhibit 10.14 to the
        Company's Registration Statement on Form S-1, Registration No. 33-90394.

 10.15* Cooperation and Supply Agreement dated as of November 19, 1993 by and
        between StrataCom, Inc. and the Company. Incorporated by reference to
        Exhibit 10.15 to the Company's Registration Statement on Form S-1,
        Registration No. 33-90394.

 10.16  Technical Information Escrow Agreement dated July 18, 1994 by and
        between StrataCom, Inc., the Indianapolis Vault Company and the Company.
        Incorporated by reference to Exhibit 10.16 to the Company's Registration
        Statement on Form S-1, Registration No. 33-90394.

 10.17  Memorandum of Agreement dated January 19, 1995 by and between the
        Company, Promon International, Inc. and Pacific Technology Fund.
        Incorporated by reference to Exhibit 10.17 to the Company's Registration
        Statement on Form S-1, Registration No. 33-90394.

 10.18  Shareholder Rights Agreement dated as of April 23, 1992, as amended by
        Amendment No. 1 to Shareholder Rights Agreement dated as of August 11,
        1992, Amendment No. 2 to Shareholder Rights Agreement dated as of
        October 19, 1992, Amendment No. 3 to Shareholder Rights Agreement dated
        as of December 18, 1992, Amendment No. 4 to Shareholder Rights Agreement
        dated as of March 15, 1993, Amendment No. 5 to Shareholder Rights
        Agreement dated as of November 16, 1993, and Amendment No. 6 to
        Shareholder Rights Agreement dated as of December 15, 1994. Incorporated
        by reference to Exhibit 10.18 to the Company's Registration Statement on
        Form S-1, Registration No. 33-90394.

 10.19  Virtual DAMA Agreement dated December 31, 1993, by and between the
        Company and Promon Technical Services, Inc., as amended. Incorporated by
        reference to Exhibit 10.19 to the Company's Registration Statement on
        Form S-1, Registration No. 33-90394.

 10.20  1995 Stock Option/Stock Issuance Plan (the "1995 Plan"). Incorporated by
        reference to Exhibit 99.1 to the Company's Registration Statement on
        Form S-8, Registration No. 33-80007.

 10.21  Form of Addendum to Stock Option Agreement (Limited Stock Appreciation
        Right). Incorporated by reference to Exhibit 99.4 to the Company's
        Registration Statement on Form S-8, Registration No. 33-80007.

 10.22  Form of Stock Option Agreement generally used in connection with the
        Discretionary Option Grant Program of the 1995 Plan. Incorporated by
        reference to Exhibit 99.3 to the Company's Registration Statement on
        Form S-8, Registration No. 33-80007.

 10.24  Form of Addendum to Stock Option Agreement (Involuntary Termination
        Following Change of Control). Incorporated by reference to Exhibit 99.5
        to the Company's Registration Statement on Form S-8, Registration No.
        33-80007.

 10.25  Form of Addendum to Stock Option Agreement (Special Tax Elections).
        Incorporated by reference to Exhibit 99.6 to the Company's Registration
        Statement on Form S-8, Registration No. 33-80007.

 10.26  Form of Automatic Stock Option Agreement. Incorporated by reference to
        Exhibit 99.9 to the Company's Registration Statement on Form S-8,
        Registration No. 33-80007.

 10.27  Form of Stock Issuance Agreement generally used in connection with the
        Discretionary Option Grant Program of the 1995 Plan. Incorporated by
        reference to Exhibit 99.10 to the Company's Registration Statement on
        Form S-8, Registration No. 33-80007.

 10.28  Form of Addendum to Stock Issuance Agreement (Involuntary Termination
        Following Change of Control). Incorporated by reference to Exhibit 99.11
        to the Company's Registration Statement on Form S-8, Registration No.
        33-80007.

 10.29  Form of Addendum to Stock Issuance Agreement (Special Tax Elections).
        Incorporated by reference to Exhibit 99.12 to the Company's Registration
        Statement on Form S-8, Registration No. 33-80007.

 10.30  Employee Stock Purchase Plan. Incorporated by reference to Exhibit 99.13
        to the Company's Registration Statement on Form S-8, Registration No.
        33-80007.
</TABLE>

                                       34

<PAGE>   37

<TABLE>
<CAPTION>

EXHIBIT
NUMBER                          DESCRIPTION
-------                         -----------
<S>     <C>
 10.31  The Share Purchase Agreement By and Among the Company, Canada Inc. and
        Certain Presticom Stockholders, dated as of November 24, 1995.
        Incorporated by reference to Exhibit 2.1 to the Company's Current Report
        on Form 8-K, dated November 30, 1995.

 10.32  License Agreement dated May 8, 1996, by and between the Company and
        SkyData, Inc. Incorporated by reference to Exhibit 10.32 to the
        Company's Registration Statement on Form S-3, Registration No.
        333-04183.

 10.33  1997 Non-Executive Officer Stock Option/Stock Issuance Plan as amended
        July 15, 1997. Incorporated by reference to Exhibit 99.1 to the
        Company's Registration Statement on Form S-8, Registration No.
        333-56525.

 10.34  Form of Notice of Grant of Stock Option generally used in connection
        with 1997 Plan. Incorporated by reference to Exhibit 10.29 to the
        Company's Quarterly Report for the period ended March 31, 1997.

 10.35  Form of Stock Option Agreement generally used in connection with 1997
        Plan Incorporated by reference to Exhibit 10.30 to the Company's
        Quarterly Report for the period ended March 31, 1997.

 10.36  Form of Addendum to Stock Option Agreement. Incorporated by reference to
        Exhibit 10.31 to the Company's Quarterly Report for the period ended
        March 31, 1997.

 10.37  The Asset Purchase Agreement by and between the Company and Sourcecom,
        Inc. dated as of July 16, 1997. Incorporated by reference to Exhibit 2.2
        to the Company's Current Report on Form 8-K dated August 11, 1997.

 10.38  1997 Stock Incentive Plan. Incorporated by reference to Exhibit 99.1 to
        the Company's Registration Statement on Form S-8, Registration No.
        333-44087.

 10.39  Form of Notice of Grant of Stock Option - Installment Option.
        Incorporated by reference to Exhibit 99.2 to the Company's Registration
        Statement on Form S-8, Registration No. 333-44087.

 10.40  Form of Stock Option Agreement - Installment Option. Incorporated by
        reference to Exhibit 99.3 to the Company's Registration Statement on
        Form S-8, Registration No. 333-44087.

 10.41  Notice of Grant of Stock Option - Immediately Exercisable Option.
        Incorporated by reference to Exhibit 99.4 to the Company's Registration
        Statement on Form S-8, Registration No. 333-44087.

 10.42  Stock Option Agreement - Immediately Exercisable Option. Incorporated by
        reference to Exhibit 99.5 to the Company's Registration Statement on
        Form S-8, Registration No. 333-44087.

 10.43  Form of Addendum to Stock Option Agreement (Limited Stock Appreciation
        Rights). Incorporated by reference to Exhibit 99.6 to the Company's
        Registration Statement on Form S-8, Registration No. 333-44087.

 10.44  Form of Addendum to Stock Option Agreement (Involuntary Termination
        following Change in Control). Incorporated by reference to Exhibit 99.7
        to the Company's Registration Statement on Form S-8, Registration No.
        333-44087.

 10.45  Stock Purchase Agreement. Incorporated by reference to Exhibit 99.8 to
        the Company's Registration Statement on Form S-8, Registration No.
        333-44087.

 10.46  Addendum to Stock Purchase Agreement (Involuntary Termination following
        Change in Control). Incorporated by reference to Exhibit 99.9 to the
        Company's Registration Statement on Form S-8, Registration No.
        333-44087.

 10.47  Automatic Notice of Initial Grant. Incorporated by reference to Exhibit
        99.10 to the Company's Registration Statement on Form S-8, Registration
        No. 333-44087.

 10.48  Automatic Notice of Annual Grant. Incorporated by reference to Exhibit
        99.11 to the Company's Registration Statement on Form S-8, Registration
        No. 333-44087.

 10.49  Automatic Stock Option Agreement. Incorporated by reference to Exhibit
        99.12 to the Company's Registration Statement on Form S-8, Registration
        No. 333-44087.
</TABLE>

                                       35
<PAGE>   38

<TABLE>
<CAPTION>

EXHIBIT
NUMBER                          DESCRIPTION
-------                         -----------
<S>     <C>
 21.1   List of Subsidiaries of the Company.

 23.2   Consent of Ernst & Young LLP.

 24.1   Power of Attorney (included on page 37).

 27.1   Financial Data Schedule.
</TABLE>

----------

 *      The Company has received confidential treatment for portions of this
        document previously filed with the Commission.

        (b   REPORTS ON FORM 8-K:

        No reports on Form 8-K were filed during the quarter ended June 30,
1998.


                                       36

<PAGE>   39

                                   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, in the City of Camarillo,
State of California, on September 28, 1998.

                                       ACT NETWORKS, INC.


                                       By: /s/ ANDRE DEFUSCO
                                           ----------------------------------
                                           Andre De Fusco
                                           President and Chief Executive Officer


                                POWER OF ATTORNEY

        We, the undersigned officers and directors of ACT Networks, Inc., do
hereby constitute and appoint Andre de Fusco and Melvin L. Flowers, and each of
them, our true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Report, and to
file the same, with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby, ratifying and confirming all that each of said
attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.

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

<TABLE>
<CAPTION>

Signature                                 Title                               Date
---------                                 -----                               ----
<S>                              <C>                                    <C>
/s/ Andre de Fusco               Chairman, President and Chief          September 28, 1998
-----------------------------    Executive Officer
    Andre de Fusco


/s/ MELVIN L. FLOWERS            Vice President, Finance and             September 28, 1998
-----------------------------    Chief Financial Officer (principal
    Melvin L. Flowers            financial and accounting officer)


/s/ WILLIAM W. AMBROSE           Director                                September 28, 1998
-----------------------------
    William W. Ambrose


/s/ HAROLD R. JOHNSON            Director                                September 28, 1998
-----------------------------
    Harold R. Johnson


s/ ARCHIBALD J. MCGILL           Director                                September 28, 1998
-----------------------------
   Archibald J. McGill


/s/ Frederick W. Gluck           Director                                September 28, 1998
-----------------------------
    Frederick W. Gluck
</TABLE>


                                       37


<PAGE>   40

                         Report of Independent Auditors


Board of Directors
ACT Networks, Inc.

We have audited the accompanying consolidated balance sheets of ACT Networks,
Inc. as of June 30, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended June 30, 1998. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ACT Networks, Inc.
at June 30, 1998 and 1997, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended June 30, 1998 in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects, the information set forth therein.


                                             ERNST & YOUNG LLP



Woodland Hills, California
July 29, 1998


                                      F-1

<PAGE>   41

                               ACT Networks, Inc.

                           Consolidated Balance Sheets
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                       JUNE 30
                                                               -------------------------
                                                                 1998          1997
                                                               -------------------------
<S>                                                            <C>           <C>
ASSETS
Current assets:
  Cash and cash equivalents                                    $ 35,018      $ 50,948
  Marketable securities                                          11,607        10,592
  Accounts receivable, less allowances of $2,030 in
    1998 and $411 in 1997                                        17,226        14,792
  Inventory                                                       8,829        12,263
  Prepaids and other current assets                               1,786           545
                                                               -------------------------
Total current assets                                             74,466        89,140

Plant, equipment and other improvements:
  Machinery and equipment                                         6,288         5,618
  Furniture and fixtures                                            992           482
  Computer software                                               1,822         1,416
  Leasehold improvements                                            672           675
                                                               -------------------------
                                                                  9,774         8,191
Accumulated depreciation and amortization                         6,031         3,847
                                                               -------------------------
                                                                  3,743         4,344

Goodwill and other intangibles                                    2,574         5,091
Other assets                                                         55         2,121
                                                               -------------------------
Total assets                                                   $ 80,838      $100,696
                                                               =========================
</TABLE>


                                      F-2

<PAGE>   42

                               ACT Networks, Inc.

                     Consolidated Balance Sheets (continued)
                    (in thousands, except per share amounts)


<TABLE>
<CAPTION>
                                                                      JUNE 30
                                                               ----------------------
                                                                 1998          1997
                                                               ----------------------
<S>                                                            <C>           <C>
LIABILITIES AND STOCKHOLDERS' EQUITY 
Current liabilities:
  Accounts payable                                             $  4,538      $  3,114
  Accrued payroll and related benefits                            1,743           997
  Restructuring cost                                                750             -
  Other accrued liabilities                                       1,225         1,381
  Income taxes payable                                                -         1,579
  Deferred income taxes                                              65            87
                                                               ----------------------
Total current liabilities                                         8,321         7,158


Commitments and contingencies                                         -             -


Stockholders' equity:
  Common stock and additional paid-in capital; 
    $.001 par value:
      Authorized - 40,000
      Issued and outstanding - 9,402 and 9,188
       at June 30, 1998, respectively,  and 9,271               101,067       100,088
       at June 30, 1997
  Treasury stock, at cost 214 shares at June 30, 1998            (2,402)            -
  Unrealized gain on marketable securities                           95             -
  Foreign currency translation                                     (310)            2
  Accumulated deficit                                           (25,933)       (6,552)
                                                               ----------------------
Total stockholders' equity                                       72,517        93,538
                                                               ----------------------
Total liabilities and stockholders' equity                     $ 80,838      $100,696
                                                               ======================
</TABLE>

See accompanying notes.


                                      F-3

<PAGE>   43

                               ACT Networks, Inc.

                      Consolidated Statements of Operations
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                         YEARS ENDED JUNE 30
                                               ------------------------------------------
                                                  1998          1997            1996
                                               ------------------------------------------
<S>                                            <C>            <C>            <C>
Net sales                                      $  54,964      $  49,173      $  28,404

Expenses:
  Cost of goods sold                              29,900         21,431         13,998
  Research and development                        16,349          8,344          5,027
  Sales and marketing                             15,984         11,115          7,174
  General and administrative                       8,935          5,291          3,257
  In process research and development              6,750          3,416          5,600
  Impairment and restructuring                     3,393             -              -
                                               ------------------------------------------
Total operating expenses                          81,311         49,597         35,056
                                               ------------------------------------------
Loss from operations                             (26,347)          (424)        (6,652)

Other:
  Gain on sale of investment                       4,704             -              -
  Interest and other income                        2,426          3,346          1,265
  Interest expense                                    (7)           (19)           (45)
                                               ------------------------------------------
                                                   7,123          3,327          1,220
                                               ------------------------------------------

Income (loss) before income taxes                (19,224)         2,903         (5,432)
Provision for income taxes                           157          1,420            295
                                               ------------------------------------------
Net income (loss)                              $ (19,381)     $   1,483      $  (5,727)
                                               ==========================================
Earnings (loss) per share:
  Basic                                        $   (2.11)     $    0.16      $   (0.78)
  Diluted                                      $   (2.11)     $    0.15      $   (0.78)
                                               ==========================================
Shares used in computation of 
  earnings (loss) per share:
  Basic                                            9,170          9,184          7,308
  Diluted                                          9,170          9,973          7,308
                                               ==========================================
</TABLE>

See accompanying notes.


                                      F-4
<PAGE>   44

                               ACT Networks, Inc.

                 Consolidated Statements of Stockholders' Equity
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                               UNREALIZED   FOREIGN
                                                          PAID-IN                               GAIN ON     CURRENCY
                                     COMMON STOCK        CAPITAL IN                            AVAILABLE-  TRANSLATION
                                ------------------------  EXCESS OF    TREASURY   ACCUMULATED   FOR-SALE    AND OTHER
                                  SHARES      AMOUNT      PAR VALUE      STOCK      DEFICIT    SECURITIES    DEPOSIT       TOTAL
                                ----------------------------------------------------------------------------------------------------
<S>                             <C>        <C>         <C>              <C>      <C>             <C>         <C>          <C>
Balance at July 1, 1995            7,150   $       7      $ 42,662          -       $ (2,308)         -      $  (45)      $40,316
  Amortization of deposit 
    secured by Series E                -           -             -          -              -          -          45            45
    preferred stock
  Exercise of options and 
    warrants to purchase 
    common stock                     281           -           539          -              -          -           -           539
  Secondary public offering        1,510           2        53,684          -              -          -           -        53,686
  Shares issued in connection
    with acquisition                 176           -         1,281          -              -          -           -         1,281
  Net loss                             -           -             -          -         (5,727)         -           -        (5,727)
                                ----------------------------------------------------------------------------------------------------
Balance at June 30, 1996           9,117           9        98,166          -         (8,035)         -           -        90,140
  Exercise of options to 
    purchase common stock 
    and employee stock
    purchases                        131           -         1,273          -              -          -           -         1,273
  Shares issued in 
   connection with 
   acquisition                        23           -           640          -              -          -           -           640
  Translation Adjustment               -           -             -          -              -          -           2             2
  Net income                           -           -             -          -          1,483          -           -         1,483
                                ----------------------------------------------------------------------------------------------------
Balance at June 30, 1997           9,271           9       100,079          -         (6,552)                     2        93,538
  EXERCISE OF OPTIONS TO 
    PURCHASE COMMON STOCK 
    AND EMPLOYEE STOCK
    PURCHASES                        108           -           613          -              -          -           -           613
  FAIR VALUE OF WARRANTS 
    ISSUED                            25           -           235          -              -          -           -           235
  STOCK OPTION COMPENSATION           -            -           131          -              -          -           -           131
  TREASURY STOCK PURCHASED          (214)          -             -     (2,402)             -          -           -        (2,402)
  UNREALIZED GAINS ON 
    MARKETABLE SECURITIES              -           -             -          -              -         95           -            95
  FOREIGN CURRENCY 
    TRANSLATION ADJUSTMENT             -           -             -          -              -          -        (312)         (312)
  NET LOSS                             -           -             -          -        (19,381)         -           -       (19,381)
                                ----------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1998           9,188   $       9      $101,058    $(2,402)      $(25,933)       $95      $ (310)     $ 72,517
                                ====================================================================================================
</TABLE>

See accompanying notes.

                                      F-5

<PAGE>   45

                               ACT Networks, Inc.

                      Consolidated Statements of Cash Flows
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                 YEARS ENDED JUNE 30
                                                        ----------------------------------------
                                                            1998          1997          1996
                                                        ----------------------------------------
<S>                                                     <C>             <C>           <C>
OPERATING ACTIVITIES
Net income (loss)                                        $ (19,381)     $  1,483      $ (5,727)
Adjustments to reconcile net income (loss) to
  net cash provided by (used in) operating
  activities:
    Depreciation                                             2,436         1,571         1,045
    Amortization of intangible assets                        1,210           756           171
    Non-cash charges for warrants and stock 
      options                                                  366             -             -
    Gain on sale of investment                              (4,704)            -             -
    Provision for allowances on accounts 
      receivable                                             1,712             6             3
    Provision for deferred taxes                               (22)            9            68
    Impairment and restructuring charges                     3,393             -             -
    Write-off of in-process research and
      development                                            6,750         3,416         5,600
    Changes in operating assets and liabilities:
      Accounts receivable                                   (4,146)       (4,723)       (3,634)
      Inventory                                              3,734        (3,285)       (2,371)
      Prepaids and other current assets                     (1,241)          196          (342)
      Accounts payable, accrued expenses,
        other current liabilites and income 
        taxes payable                                          989         3,303           274
                                                         ----------------------------------------
Net cash provided by (used in) operations                   (8,904)        2,732        (4,913)

INVESTING ACTIVITIES
Purchase of marketable securities                          (18,727)      (13,744)            -
Sale of  marketable securities                              17,807         3,153             -
Sale (purchase) of long-term investment                      6,699        (1,995)            -
Purchase of plant, equipment and other 
  fixed assets                                              (2,434)       (3,163)       (1,794)
Acquisition of Presticom Inc., net of cash
  acquired                                                       -             -        (7,000)
Acquisition of DeltaComm Corp., net of cash
  acquired                                                       -          (262)            -
Acquisition of Dynastar product line                             -        (6,794)            -
Acquisition of certain assets of SourceCom                  (8,390)            -             -
Decrease in other assets                                      (142)         (329)         (617)
                                                         ----------------------------------------
Net cash used in investing activities                       (5,187)      (23,134)       (9,411)

FINANCING ACTIVITIES
Stock warrants and options                                     613         1,273           539
Repurchase of treasury shares                               (2,402)            -             -
Net proceeds from stock offering                                 -             -        53,686
Repayment of notes payable                                       -          (297)          (73)
                                                         ----------------------------------------
Net cash (used in) provided by financing 
  activities                                                (1,789)          976        54,152
Net impact of foreign exchange rate changes 
  on cash                                                      (50)            -             -
                                                         ----------------------------------------
Net (decrease) increase in cash                            (15,930)      (19,426)       39,828
Cash and cash equivalents at beginning of year              50,948        70,374        30,546
                                                         ========================================
Cash and cash equivalents at end of year                 $  35,018      $ 50,948      $ 70,374
                                                         ========================================
</TABLE>

                                      F-6

<PAGE>   46

                               ACT Networks, Inc.

                Consolidated Statements of Cash Flows (continued)
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                 YEARS ENDED JUNE 30
                                                          ------------------------------------
                                                            1998          1997          1996
                                                          ------------------------------------
<S>                                                       <C>           <C>           <C>
Supplemental cash flow information:
  Interest and income taxes paid during
    the year:
    Interest                                              $      7      $     19      $      6
    Income taxes                                             2,103           173            10

Non-cash investing and financing activities:
  Acquisition of certain assets of SourceCom:
    Fair market value of assets (including
      goodwill) acquired                                     1,640             -             -
    Estimated value of in-process research and
      development                                            6,750             -             -
                                                          -------------------------------------
                                                             8,390             -             -
  Acquisition of DeltaComm Corporation:
    Fair market value of assets (including
    goodwill) acquired                                           -           374             -
    Estimated value of in-process research and
      development                                                -           701             -
    Fair market value of liabilities assumed                     -          (158)            -
    Issuance of stock                                            -          (640)            -
    Cash acquired                                                -           (15)            -
                                                          -------------------------------------
                                                                 -           262             -
  Acquisition of Dynastar product line:                                                      -
    Fair market value of assets (including
      intangibles) acquired                                      -         4,353             -
    Estimated value of in-process research and
      development                                                -         2,715             -
    Liabilities assumed                                          -          (274)            -
                                                          -------------------------------------
                                                                 -         6,794             -
  Acquisition of Presticom Inc.:
    Fair market value of assets (including
      goodwill) acquired                                         -             -         4,456
    Estimated value of in-process research and
      development                                                -             -         5,600
    Fair market value of liabilities assumed                     -             -          (888)
    Issuance of stock                                            -             -        (1,281)
    Cash acquired                                                -             -          (887)
                                                          -------------------------------------
                                                                 -             -         7,000
                                                          -------------------------------------
                                                          $  8,390      $  7,056       $ 7,000
                                                          =====================================
</TABLE>

See accompanying notes.

                                      F-7
<PAGE>   47

                               ACT Networks, Inc.

                   Notes to Consolidated Financial Statements


1. SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND OPERATIONS

ACT Networks, Inc. (the Company) was incorporated in California on May 15, 1987
and reincorporated in Delaware in March 1995. The Company develops, manufactures
and markets integrated wide-area network (WAN) access products which use fast
packet technologies. The Company's products utilize advanced compression
algorithms, access switching capabilities and proprietary integration
technologies to build cost-effective, bandwidth efficient WANs.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation. Results of operations include
operations of subsidiaries from the date of acquisition.

CASH EQUIVALENTS

The Company considers cash equivalents to be only those investments which are
highly liquid, readily convertible to cash and which mature within three months
from date of purchase. Cash equivalents are carried at cost which approximates
fair market value and are considered available-for-sale as defined in Statement
of Financial Accounting Standard ("SFAS") No. 115.

MARKETABLE SECURITIES

The Company considers its investment portfolio available-for-sale and
accordingly, these investments are recorded at fair value. These investments,
which primarily consist of corporate investment grade bonds and commercial
paper, had a cost basis of $11,512,000 and $10,592,000,unrealized gain of
$95,000 and $0 and a fair value of $11,607,000 and $10,592,000 as of June 30,
1998 and 1997, respectively. The contractual maturities of all the Company's
marketable securities are less than one year at June 30, 1998. The cost of
securities sold is based on the specific identification method.


                                      F-8

<PAGE>   48

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

MARKETABLE SECURITIES (CONTINUED)

In March 1998, the Company sold its investment in Netspeak's stock, with a cost
basis of $1,995,000 for gross proceeds of $6,699,000, realizing a gain of
$4,704,000. There were no other material realized gains or losses relating to
marketable securities during the years ended June 30, 1998 and 1997.

CONCENTRATION OF CREDIT RISKS AND SIGNIFICANT CUSTOMERS

Accounts receivable consists primarily of amounts due from various original
equipment manufacturers, end users and distributors. Although, the Company does
not require collateral, it performs periodic credit evaluations and analysis of
amounts due from its customers. In addition, the Company carries credit
insurance on certain foreign receivables, subject to certain limits. Included in
accounts receivable at June 30, 1998 and 1997 are $11,019,000 and $10,517,000,
respectively, of amounts due from foreign customers. Significant reserves have
been established during the current fiscal year to provide for potential
uncollectible accounts.

The three largest accounts receivable from individual customers represented
19.6%, 4.7% and 4.2% at June 30, 1998 and 11.1%, 9.1% and 5.7% at June 30, 1997
of total accounts receivable, respectively.

Sales to one customer represented 12.3% of total sales for 1998, sales to one
customer represented 11.5% of total sales for 1997, and sales to one customer
represented 17% of total sales for 1996.

The Company's sales by geographic area of the customer are as follows (in
thousands):

<TABLE>
<CAPTION>
                                               YEARS ENDED JUNE 30
                                   ---------------------------------------
                                       1998            1997          1996
                                   ---------------------------------------
<S>                                <C>             <C>           <C>
  North America                    $  19,913       $  12,422     $  10,568
  Latin America                       14,194          18,936         8,026
  Europe                               6,203           5,375         3,752
  Asia Pacific                        14,654          12,440         6,058
                                   ---------------------------------------
                                   $  54,964       $  49,173     $  28,404
                                   =======================================
</TABLE>


                                      F-9

<PAGE>   49

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INVENTORY

Inventory is stated at the lower of cost (first-in, first-out method) or market
and consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                       1997          1997
                                                    ------------------------
<S>                                                 <C>           <C>
Purchased parts                                     $  3,643      $  5,674
Sub-assemblies and finished goods                      5,186         6,589
                                                    ------------------------
                                                    $  8,829      $ 12,263
                                                    ========================
</TABLE>

PLANT, EQUIPMENT AND OTHER IMPROVEMENTS

Plant, equipment and other improvements are stated on the basis of cost.
Depreciation and amortization is computed using the straight-line method over
the estimated useful lives of the assets or the lease terms, which vary from
three to seven years.

GOODWILL AND OTHER INTANGIBLES

Goodwill and other intangibles of $2,574,000 and $5,091,000 at June 30, 1998 and
1997 are net of accumulated amortization of $1,646,000 and $1,391,000,
respectively, and consist primarily of developed technology acquired in the
Company's acquisitions. Goodwill represents the excess of the purchase price
over the estimated fair market value of net assets acquired in business
combinations and is being amortized over 7 years. Acquisition intangibles
represent the fair market valuation of intangibles acquired in business
combinations and are being amortized over 5 to 7 years. Other intangible assets
include software licensing agreements which are being amortized over 3 to 5
years. Intangible assets were significantly written down in the current fiscal
year as a part of the Company's restructuring (see Note 10).


                                      F-10

<PAGE>   50

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)


1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

LONG-LIVED ASSETS

Effective July 1, 1997, the Company has adopted the Statement of Financial
Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of" (SFAS 121). Long-lived assets, such
as plant, equipment and intangibles, are reviewed for impairment whenever events
or changes in circumstances indicate that the net book value of these assets may
not be recoverable (See Note 10).

ACCOUNTING FOR INCOME TAXES

Deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.

REVENUE RECOGNITION

The Company recognizes revenues from product sales upon shipment. The Company's
products are generally under warranty against defects and are sold with
provisions for certain levels of continuing customer support. The amount of any
potential warranty costs or other customer support costs are estimated and
provided for in the period of sale.

CREDITS AND GRANTS

The Company receives foreign credits and grants from Canada and the Province of
Quebec related to research and development expenditures made by its Canadian
subsidiary. These amounts are reflected as a reduction of research and
development expense in the Company's statement of operations. Amounts receivable
as of June 30, 1998 and 1997 of such credits and grants amounted to $63,000 and
$181,000, respectively. For the years ended June 30, 1998 and 1997, $159,000 and
$77,000, respectively, of these credits and grants were reflected as a reduction
of research and development expense in the accompanying statement of operations.


                                      F-11
<PAGE>   51

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

EFFECT OF FOREIGN CURRENCY

The Company translates the assets and liabilities of its foreign subsidiaries at
the rate of exchange in effect at the period end. Revenues and expenses are
translated using an average of exchange rates in effect during the period.
Translation adjustments are recorded as a component of stockholders' equity in
the consolidated balance sheet.

EARNINGS (LOSS) PER SHARE

During the year ended June 30, 1998, the Company adopted SFAS No. 128, "Earnings
Per Share" which required a change in the method used to compute earnings per
share. Under this new standard, primary and fully diluted earnings per share
were replaced with basic and diluted earnings per share. Basic earnings per
share amounts exclude the dilutive effect of potential common shares. For ACT
Networks, Inc., diluted earnings per share amounts under the new standard are
the same as primary earnings per share amounts previously presented. As required
by SFAS No. 128, all prior period amounts have been restated to conform to the
new presentation.

"Basic earnings per share" is based upon the weighted average number of common
shares outstanding. "Diluted earnings per share" is based upon the weighted
average number of common shares and dilutive potential common shares
outstanding. Potential common shares are outstanding stock options under the
Company's stock option plans which are included under the treasury stock method.


                                      F-12
<PAGE>   52

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

EARNINGS  (LOSS) PER SHARE (CONTINUED)

The following table sets forth the computation for basic and diluted earnings
per share (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                Years ended June 30,
                                                       ----------------------------------------
                                                         1998              1997          1996
                                                       ----------------------------------------
<S>                                                    <C>                <C>          <C>
  Numerator for basic and diluted earnings per
     share - net income (loss)....................     $(19,381)          $1,483       $(5,727)
                                                       =======================================
  Denominator:
     Denominator for basic  earnings (loss) per
        share - weighted-average shares...........        9,170            9,184         7,308
     Effect of dilutive securities - employee
        stock options.............................            -              789             -
                                                       ---------------------------------------
  Denominator for diluted earnings (loss) per
     share - adjusted weighted-average shares.....        9,170            9,973         7,308
                                                       =======================================
  Basic earnings (loss) per share.................     $  (2.11)          $ 0.16       $ (0.78)
                                                       =======================================
  Diluted earnings (loss) per share...............     $  (2.11)          $ 0.15       $ (0.78)
                                                       =======================================
</TABLE>

Options to purchase 2,661,000 and 1,422,000 shares outstanding during the
years-ended June 30, 1998 and 1996 respectively, were excluded from the
respective computations of diluted loss per share because their effect would be
anti-dilutive. Options to purchase 360,000 shares with exercise prices greater
than the average market prices of common stock outstanding during the year ended
June 30, 1997 were also excluded from the computations of diluted earnings per
share because of their anti-dilutive effect.


                                      F-13

<PAGE>   53

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STOCK OPTION AND PURCHASE PLANS

The Company's stock option and purchase plans are accounted for under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" (see Note 6).

FUTURE ACCOUNTING REQUIREMENTS

Statements of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130), and No. 131, "Disclosures about Segments of an Enterprise
and Related Information" (SFAS 131), were issued in June 1997. The disclosures
required by these statements are under review by the Company and must be
reported in fiscal 1999. The adoption of these statements is not expected to
have a material impact on the Company's consolidated results of operations,
financial position or cash flows.

USE OF ESTIMATES

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

RECLASSIFICATION

Certain prior year balances have been reclassified to conform to the current
year presentation.

2. BUSINESS AND ASSET ACQUISITIONS

On August 10, 1997, the Company acquired, out of bankruptcy court, certain
assets of SourceCom,, a Massachusetts corporation ("SourceCom"). SourceCom is a
developer of high performance broadband access devices. The cash purchase price
paid by the Company was approximately $8,000,000. The Company also recorded 
transaction costs of approximately $390,000.


                                      F-14

<PAGE>   54

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

2. BUSINESS AND ASSET ACQUISITIONS (CONTINUED)

The acquired assets were recorded at their estimated fair market values at the
date of acquisition. Of the total purchase price for the assets acquired,
$6,750,000 represented the value of in-process research and development that had
not yet reached technological feasibility and was charged to the Company's
operations and $1,090,000 represented other intangibles being amortized over 5
years (see Note 10). The fair market value of the in-process research and
development and other intangibles was determined by an independent appraiser.
Pro forma financial information is not presented because the transaction was
only an acquisition of certain assets, primarily technology, with no relative
historical operating results and, therefore, pro forma financial information
would not be meaningful.

On March 11, 1997, the Company acquired the DynaStar family of products from
Dynatech Communications, Inc. The DynaStar product line is a family of compact,
flexible, integrated multi-service access switch connectivity products that
support extensive multi protocol WAN connections including TCP/IP, PPP, Frame
Relay, X.25 and ATM. The cash purchase price paid by the Company was $6,444,000.
The Company assumed approximately $274,000 of debt and recorded transaction
expenses of approximately $350,000.

The acquisition was accounted for under the purchase method of accounting and,
accordingly, the acquired assets and liabilities were recorded at their
estimated fair market values at the date of acquisition. DynaStar's operating
results have been included in the Company's consolidated financial statements
since the acquisition date of March 11, 1997. The purchase price plus costs
directly attributable to the completion of the acquisition have been allocated
to the assets and liabilities acquired. Of the total purchase price, $2,715,000
represented the value of in-process research and development that had not yet
reached technological feasibility and was charged to the Company's operations
and $2,221,000 represented other intangibles being amortized over 5 years (see
Note 10). The fair market value of the in-process research and development and
other intangibles was determined by an independent appraiser. Pro forma
financial information is not presented because the pro forma effect of the
transaction is not considered material to the Consolidated Statements of
Operations.


                                      F-15
<PAGE>   55

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

2. BUSINESS ACQUISITIONS (CONTINUED)

On December 16, 1997, the Company acquired all the issued and outstanding shares
of DeltaComm Corporation, an Arizona corporation ("DeltaComm"). DeltaComm is a
developer of bandwidth-efficient modems with expertise in the satellite
communication industry. The Company paid $158,000 in cash and issued 23,000
shares of common stock of the Company with an estimated fair market value of
$640,000. The Company assumed $158,000 of liabilities. Transaction costs were
approximately $104,000.

The acquisition was accounted for as a purchase and, accordingly, the acquired
assets and liabilities were recorded at their estimated fair market values at
the date of acquisition. DeltaComm's operating results have been included in the
Company's consolidated financial statements since the acquisition date of
December 16, 1996. The purchase price plus costs directly attributable to the
completion of the acquisition have been allocated to the assets and liabilities
acquired. Approximately $701,000 of the total purchase price represented the
value of in-process research and development that had not yet reached
technological feasibility and was charged to the Company's operations. Pro forma
financial information is not presented because the pro forma effect of the
transaction is not considered material to the Consolidated Statements of
Operations.

On November 30, 1995, ACT Networks, Inc. and Canada Inc., a wholly owned
subsidiary of the Company, acquired all the issued and outstanding shares of
Presticom Inc., a Canadian corporation ("Presticom"). Presticom is a developer
of multiple protocol Frame Relay access devices with expertise in the SNA
environment. The aggregate purchase price paid by the Company, including
approximately $600,000 in transaction costs, was $9,168,000 consisting of
$7,887,000 paid in cash and the issuance of 176,000 shares of common stock of
the Company with an estimated fair market value of $1,281,000.

The acquisition was accounted for as a purchase and, accordingly, the acquired
assets and liabilities were recorded at their estimated fair market values at
the date of acquisition. Presticom's operating results have been included in the
Company's consolidated financial statements since the acquisition date of
November 30, 1995. The purchase price, plus costs directly attributable to the
completion of the acquisition, have been allocated to the assets and liabilities
acquired. Approximately $5,600,000 of the total purchase price represented the
value of the in-process research and development that had not yet reached
technological feasibility and was charged to the Company's operations.


                                      F-16

<PAGE>   56

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

3. LINE OF CREDIT AND NOTES PAYABLE

At June 30, 1998, the Company had a loan and security agreement (the "Loan
Agreement") with Silicon Valley Bank (the "Bank"), which provided for aggregate
borrowings up to a maximum of $3,000,000. Under the Loan Agreement, the Company
could borrow up to the lesser of $3,000,000 or 75% of eligible accounts
receivable (the "Line of Credit").

At June 30, 1998 there were no outstanding balances under the Line of Credit.
The interest rate on the Line of Credit was 10% (prime rate plus 1.5%). The Loan
Agreement provided for the issuance of letters of credit in an aggregate amount
outstanding up to $500,000. Letters of credit outstanding reduced the amount
available under the Line of Credit. At June 30, 1998 and June 30, 1997, no
letters of credit were outstanding.

The Loan Agreement contained certain covenants that, among other things,
required the Company to maintain certain financial ratios and limit the
Company's ability to obtain certain forms of additional debt to repurchase the
Company's stock and pay dividends.

The line of credit expired on July 5, 1998 and a new line is being negotiated.

4. INCOME TAXES

The provision for income taxes consists of the following (in thousands):

<TABLE>
<CAPTION>
                                            YEARS ENDED JUNE 30,
                                     ----------------------------------
                                       1998          1997        1996
                                     ----------------------------------
<S>                                  <C>          <C>         <C>
Current:
  Federal                            $      -      $    60       $   -
  State                                    10           20           -
  Foreign                                 169        1,331         274
                                     ----------------------------------
                                          179        1,411         274
Deferred:
  Federal                                                -           -
  State                                                  -           -
  Foreign                                 (22)           9          21
                                     -----------------------------------
                                          (22)           9          21
                                     ===================================
                                     $    157      $ 1,420       $ 295
                                     ===================================
</TABLE>


                                      F-17

<PAGE>   57

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

4. INCOME TAXES (CONTINUED)

The Company's foreign and domestic operations had income (loss) before income
taxes and eliminations of $491,000 and $(19,623,000) for the year ended June 30,
1998, $3,987,000 and $(1,134,000) for the year ended June 30, 1997 and $872,000
and $(5,994,000) for the year ended June 30, 1996.

A reconciliation of the statutory federal income tax rate to the effective tax
rate, as a percentage of income before tax, is as follows:

<TABLE>
<CAPTION>
                                            YEARS ENDED JUNE 30,
                                        ------------------------------
                                         1998       1997        1996
                                        ------------------------------
<S>                                      <C>        <C>         <C>
Statutory federal income tax
  (benefit) rate                         (34)%       34%        (34)%
 Amortization of goodwill                  1          4           1
 Non-deductible in process
  research and development                 -          -          35
 Change in valuation allowance            33          8           -
 State income taxes                        -          -           -
 Foreign income taxes                      1          -           5
 Other                                     -          3          (2)
                                        ------------------------------
                                           1%        49%          5%
                                        ------------------------------
</TABLE>

The tax provision for the year ended June 30, 1997 included the application of
net operating loss carryforwards which generated tax benefits of approximately
$848,000.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows (in thousands):


                                      F-18

<PAGE>   58

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

4. INCOME TAXES (CONTINUED)

<TABLE>
<CAPTION>
                                                                 JUNE 30
                                                       --------------------------
                                                           1998            1997
                                                       --------------------------
<S>                                                    <C>              <C>
Deferred tax assets:
  Allowance for losses on receivables                  $     778        $    127
  Vacation accruals                                          245             139
  Depreciation                                               320             306
  Inventory valuation allowance                            1,905             425
  Amortization of intangibles                              4,448           1,026
  Net operating loss carryforwards                         2,852           1,311
  Research and development credit carryforwards            1,601           1,079
  Other accruals                                             503             296
                                                       -------------------------
Total deferred tax assets                                 12,652           4,709

Deferred tax liabilities:
  Unicap adjustment                                          (57)             -
  Software development costs                                 (27)            (27)
  License fee                                                (70)           (118)
  Prepaid insurance                                          (81)            (29)
   Federal benefit from State                               (525)           (165)
                                                       -------------------------
Total deferred tax liabilities                              (760)           (339)
                                                       -------------------------
Net deferred tax assets                                   11,892           4,367
Valuation allowance                                      (11,892)         (4,367)
Foreign deferred tax liabilities                             (65)            (87)
                                                       -------------------------
                                                       $     (65)       $    (87)
                                                       =========================
</TABLE>

The net change in the valuation allowance for net deferred tax assets during the
year ended June 30, 1998 was approximately $7,525,000.

At June 30, 1998, the Company has net operating loss carryforwards for federal
and state tax purposes of approximately $8,159,000 and $1,752,000, respectively,
which expire in 2013 for federal and 2003 for state. The Company has research
and development credit


                                      F-19
<PAGE>   59

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

4.   INCOME TAXES (CONTINUED)

carryforwards of $1,042,000 and $559,000 for federal and
state tax purposes, respectively, that expire through 2013 for federal and
state.

Included in the valuation allowance balance is $2,794,000 related to the
exercise of stock options which are not reflected as an expense for financial
reporting purposes. Accordingly, any future reduction in the valuation allowance
relating to this amount will be credited directly to equity and not reflected as
an income tax benefit in the statement of operations.

The Company intends to reinvest the foreign subsidiary's net earnings in the
subsidiary's local operations. Accordingly, U.S. taxes have not been provided
for such earnings.

5. COMMITMENTS & CONTINGENCIES

The Company leases its office, manufacturing facility and certain equipment
under noncancelable lease agreements. The office and manufacturing facility
lease is subject to annual increases based on the Consumer Price Index. Future
minimum lease payments are as follows (in thousands):

FISCAL YEARS ENDED JUNE 30,
---------------------------
      1999                                                 $ 1,408
      2000                                                     368
      2001                                                     235
      2002                                                     219
      2003                                                     132
                                                           -------
                                                           $ 2,362
                                                           =======

Rental expense under operating leases was $1,429,000, $668,000 and, $492,000 for
the years ended June 30, 1998, 1997 and 1996, respectively.

The Company is involved in certain claims and legal proceedings which arise in
the normal course of business. Management does not believe that the outcome of
any of these matters will have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.


                                      F-20

<PAGE>   60

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

6. STOCK OPTION AND PURCHASE PLANS

The Company's stock option plans provide for option grants designated as either
nonqualified or incentive stock options. Options granted under all stock option
plans generally carry an exercise price of not less than the fair market value
of the underlying shares as of the date of the option grant and expire after ten
years. The Company executes individual option agreements under the stock option
plans and the shares underlying the options generally become vested at 24% of
the total grant after the completion of the first 12 full months of employment
and 2% per month thereafter. Certain terms of options held by the Company's then
Chairman of the Board and Chief Executive Officer were modified giving rise to a
non-cash compensation charge of $131,000 for the year ended June 30, 1998.

At June 30, 1998, the Company has authorized a total of 2,781,000 shares of
common stock for issuance under the 1995 stock option/stock issuance plan (the
1995 Plan), 500,000 shares under the 1997 Non-Executive Officer Stock
Option/Stock Issuance Plan (the 1997 Plan) and 460,000 shares under the 1997
Stock Incentive Plan (the "1997 Incentive Plan"). At June 30, 1998 298,000
shares remain available for grant and 1,781,000 are reserved for issuance upon
the exercise of outstanding options and options available for grant under the
1995 Plan, 30,000 shares remain available for grant and 470,000 shares are
reserved for issuance upon the exercise of outstanding options under the 1997
Plan and 48,000 shares remain available for grant and 410,000 shares are
reserved for issuance upon the exercise of outstanding options under the 1997
Incentive Plan.

On June 10, 1997, the Company's Board of Directors implemented a
cancellation/regrant program for options issued under the 1995 plan, whereby
holders of certain stock options were offered the opportunity to cancel certain
existing options and receive a grant of a new option to purchase the same number
of unexercised shares with an exercise price equal to the then market price of
ACT common stock.


                                      F-21

<PAGE>   61

6. STOCK OPTION AND PURCHASE PLANS (CONTINUED)

The following is a summary of all stock option activity for the three years
ended June 30, 1998:

<TABLE>
<CAPTION>
                                                    EXERCISE      WEIGHTED
                                       NUMBER        PRICE        AVERAGE
                                     OF SHARES     PER SHARE   EXERCISE PRICE
                                   ------------------------------------------
<S>                                 <C>           <C>               <C>
Outstanding at June 30, 1995           650,000   $  .70-$4.90    $  2.57
  Granted                            1,073,000     8.25-23.88      13.80
  Canceled                             (32,000)     .70-23.88       6.88
  Exercised                           (269,000)     .70-17.25       2.14
Outstanding at June 30, 1996         1,422,000      .70-23.88      10.67
  Granted                            1,745,000    11.00-35.00      21.97
  Canceled                            (936,000)     .70-35.00      26.00
  Exercised                           (110,000)     .70-17.25       8.10
                                   ---------------------------------------
Outstanding at June 30, 1997         2,121,000      .70-35.00      13.33
  Granted                            1,256,000     7.06-14.56      10.31
  Canceled                            (665,000)    1.75-35.00      15.91
  Exercised                            (51,000)     .70-12.13       2.43
                                    --------------------------------------
Outstanding at June 30, 1998         2,661,000    $.70-$27.50    $ 11.47
                                   =======================================
</TABLE>

At June 30, 1998, stock options to purchase 1,510,000 shares were exercisable at
a weighted average price of $10.94. Information regarding stock options
outstanding as of June 30, 1998 is as follows:

<TABLE>
<CAPTION>
                                  Options Outstanding                     Options Exercisable
                      ------------------------------------------       ------------------------
                                                     Weighted-
                                    Weighted-         Average                        Weighted-
                                     Average         Remaining                        Average
                                     Exercise       Contractual                      Exercise
     Price Range        Shares        Price             Life           Shares          Price
-----------------------------------------------------------------------------------------------
<S>                   <C>           <C>              <C>              <C>            <C>
     Under $10.00       939,000        6.09             8.0            531,000           4.66
     Over $10.00      1,722,000       14.39             8.1            979,000          14.34
</TABLE>


                                      F-22
<PAGE>   62

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

6. STOCK OPTION AND PURCHASE PLANS (CONTINUED)

Fair Value Disclosures

Stock option grants are set at the closing price of the Company's common stock
on the date of grant and the related number of shares granted are fixed at that
point in time. Therefore under the principles of APB Opinion No. 25, the Company
does not recognize compensation expense associated with the grant of stock
options. SFAS No. 123, "Accounting for Stock-Based Compensation", requires the
use of option valuation models to provide supplemental information regarding
options granted after fiscal 1996. Pro forma information regarding net income
and earnings per share shown below was determined as if the Company had
accounted for its employee stock options and shares sold under its stock
purchase plan under the fair value method of that statement.

The fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1998, 1997 and 1996, respectively: risk-free interest rates of
6.22%, 6.61% and 6.22%; dividend yields of 0%; volatility factors of the
expected market price of the Company's common stock of 65%, and expected life of
the options of 4.16, 4 and 4 years. These assumptions resulted in
weighted-average fair values of $5.73, $9.62 and $7.99 per share for stock
options granted in 1998, 1997 and 1996, respectively.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized over the options' vesting periods. The pro forma effect on net
income for 1998, 1997 and 1996 is not representative of the pro forma effect on
net income in future years because it does not take into consideration pro forma
compensation expense related to grants made prior to 1996. Pro forma information
in future years will reflect the amortization of a larger number of stock
options granted in several succeeding years. The Company's pro forma information
is as follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>

   Years ended June 30,               1998               1997          1996
--------------------------------------------------------------------------------
<S>                                 <C>                <C>           <C>
   Pro forma net loss               $(24,184)          $(2,412)      $(7,108)
   Pro forma loss per share:
      Basic                           $(2.64)           $(0.26)       $(0.97)
      Diluted                         $(2.64)           $(0.26)       $(0.97)
</TABLE>


                                      F-23
<PAGE>   63

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

6. STOCK OPTION AND PURCHASE PLANS (CONTINUED)

The Company has an employee stock purchase plan whereby, in accordance with
Section 423 of the Internal Revenue Code, eligible employees may authorize
payroll deductions of up to 10% of their salary to purchase shares of the
Company's common stock at the lower of 85% of the fair market value of common
stock on the first or last day of the offering period. 57,000 shares were issued
under this plan for the year ended June 30, 1998. There are 73,000 shares
authorized and available for future issuance under this plan.

7. EMPLOYEES' RETIREMENT PLAN

In 1994, the Company established a 401(k) Plan (the Plan) covering substantially
all of its full-time employees. Employees may make voluntary contributions to
the Plan. The Company may voluntarily contribute a percentage of the employee's
contribution, at its discretion, subject to certain limitations. The Company
contributed $66,000 and $30,000 to the Plan during the years ended 1998 and
1997, respectively, and made no contributions to the Plan during the year ended
1996.


                                      F-24
<PAGE>   64

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

8. GEOGRAPHIC INFORMATION

Information about the Company's operations in the United States and Canada is as
follows (in thousands):

<TABLE>
<CAPTION>
                                                        YEARS ENDED JUNE 30,
                                             ------------------------------------------
                                                 1998           1997           1996
                                             ------------------------------------------
<S>                                            <C>           <C>             <C>
Sales to unaffiliated customers:
  United States                              $  53,825      $  42,495       $  25,647
  Canada                                         1,139          6,678           2,757
Transfers between geographic areas:
  United States                                    249            402             254
  Canada                                         7,527          7,571             976
Adjustments and eliminations                    (7,776)        (7,973)         (1,230)
                                             ------------------------------------------
Total revenues                               $  54,964      $  49,173       $  28,404
                                             ==========================================

Operating profit (loss):
  United States                              $ (26,725)     $  (4,437)      $  (7,220)
  Canada                                           469          3,964             878
Adjustments and eliminations                       (91)            49            (310)
                                             ------------------------------------------
Total operating profit (loss)                $ (26,347)     $   (424)       $  (6,652)
                                             ==========================================
</TABLE>


                                      F-25

<PAGE>   65

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

8. GEOGRAPHIC INFORMATION (CONTINUED)

Operating profit (loss) represents total revenue less operating expenses
directly attributable to each geographic area and does not include interest and
other income or interest expense. Included in the operating loss for the United
States are write-offs of in-process research and development of $6,750,000,
$3,416,000 and $5,600,000 for the years ended June 30, 1998, June 30, 1997 and
June 30, 1996, respectively and impairment expense of $3,393,000 in the year
ended June 30, 1998. Intercompany sales and transfers are recorded at cost plus
a normal mark up.

Information about the Company's identifiable assets in each geographic area is
as follows (in thousands):

<TABLE>
<CAPTION>
                                           YEARS ENDED JUNE 30,
                                          -----------------------
                                            1998          1997
                                          -----------------------
<S>                                       <C>           <C>
Identifiable assets:
  United States                           $75,554       $ 94,132
  Canada                                    7,409          9,069
Adjustments and eliminations               (2,125)        (2,505)
                                          -----------------------
Total  assets                             $80,838       $100,696
                                          =======================
</TABLE>

Identifiable assets are those assets of the Company that are identified with the
operations in each geographic area.


                                      F-26
<PAGE>   66

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

9. QUARTERLY OPERATING DATA (UNAUDITED)

The following is a summary of unaudited quarterly results of operations (in
thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                              QUARTER
                                            ------------------------------------------
                                             FIRST(1)    SECOND    THIRD(2)  FOURTH(3)
                                            ------------------------------------------
<S>                                         <C>         <C>        <C>        <C>
Year ended June 30, 1998:
  Net sales                                 $  13,021   $15,310    $13,007   $ 13,626
  Gross profit                                  7,322     8,572      7,287      1,884
  Net (loss) income                            (8,946)     (483)     3,148    (13,099)
                                            -----------------------------------------
  (Loss) earnings per share (4)
    Basic                                   $   (0.97)  $ (0.05)   $  0.34   $  (1.43)
                                            =========================================
    Diluted                                 $   (0.97)  $ (0.05)   $  0.33   $  (1.43)
                                            =========================================
</TABLE>


<TABLE>
<CAPTION>
                                                              Quarter
                                            -----------------------------------------
                                             First       Second(1) Third(1)   Fourth
                                            -----------------------------------------
<S>                                         <C>          <C>       <C>         <C>
Year ended June 30, 1997:
  Net sales                                 $  10,169   $11,904    $13,652   $ 13,448
  Gross profit                                  5,718     6,690      7,836      7,497
  Net income (loss)                             1,291     1,115     (1,036)       113
                                            -----------------------------------------
  Earnings (loss) per share (4)
  Basic                                     $    0.14      0.12    $ (0.11)  $    .01
                                            =========================================
  Diluted                                   $    0.13   $  0.11    $ (0.11)  $    .01
                                            =========================================
</TABLE>

(1) Included in the Company's net income (loss) for the first quarter of 1998,
    third quarter of 1997 and second quarter of 1997 are charges of $6,750,000,
    $2,715,000, and $701,000, respectively, due to the write-off of in-process
    research and development purchased in connection with acquisitions (see Note
    2).

(2) Included in the Company's net income for the third quarter of 1998 is a gain
    of $4,704,000 from the sale of Netspeak Corporation Common Stock.

(3) The fourth quarter of 1998 includes impairment and restructuring charges of
    $3,393,000 and related inventory write-downs of $3,651,000, additional
    inventory write-downs of $522,000 and $1,200,000 of charges for reserves
    against receivables due to unexpectedly slow collections (see Note 10).

(4) Earnings (loss) per share for the first quarter 1998 and all of 1997 were
    restated to Basic and Diluted earnings (loss) per share reflecting the
    adoption of SFAS 128.


                                      F-27
<PAGE>   67

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

10. IMPAIRMENT AND RESTRUCTURING CHARGES

In July 1998 the Company announced a major restructuring program designed to
streamline operations and focus on key markets. As part of the restructuring
program, the Company is concentrating its resources on two product lines with
the most attractive growth potential: the Netperformer products for the
enterprise WAN access market, and the IP-based ServiceXchange platform for the
next generation service providers. In connection with the restructuring, the
Company plans to reduce its workforce by approximately 25% by eliminating its
current business unit matrix structure in favor of a functional organization,
consolidating facilities and de-emphasizing engineering, sales and marketing
efforts for non-strategic products.

As a result of the restructuring plan, the Company has accrued approximately
$750,000 at June 30, 1998 for certain non-cancelable purchase orders for certain
non-strategic inventory that have become impaired and the Company will record
additional charges in fiscal 1999 related to employee termination and other
costs associated with de-emphasizing certain product lines and consolidating
facilities.

In connection with the restructuring, the Company evaluated its long-lived
assets, principally the tangible and intangible assets established in the
DeltaComm, Dynastar, and SourceCom acquisitions, for impairment under SFAS No.
121. The carrying amount of these assets exceeded the projected undiscounted
future cash flows and, accordingly, the carrying amount was written-down to fair
value. Fair value was determined based on an analysis of the projected future
discounted cash flows of the underlying operation, including cash generated from
the disposal of underlying assets. In addition, the Company recorded charges to
cost of goods sold of $3,651,000 to write-down the carrying value of inventory
due to the restructuring and related de-emphasis or discontinuation of certain
product lines and other factors.


                                      F-28
<PAGE>   68

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

10. IMPAIRMENT AND RESTRUCTURING CHARGES (CONTINUED)

The impairment write-downs, excluding inventory write-downs, reflected in the
statement of operations consisted of the following non-cash charges (in
thousands):

<TABLE>
<CAPTION>

          Asset Impaired                                           Amount
          -------------------------------------------------------- -------
<S>                                                                <C>
          Property, plant and equipment                            $   682
          Developed technology and other acquisition intangibles     2,444
          Other intangible assets                                      267
                                                                   -------
                                                                   $ 3,393
                                                                   =======
</TABLE>

11. SUBSEQUENT EVENTS (UNAUDITED)

On August 3, 1998, the Company implemented an option cancellation/regrant
program for directors, executive officers and other employees holding stock
options with an exercise price per share in excess of the market price of the
Company's Common Stock at the time the cancellation/regrant occurred. 1,724,798
outstanding options with an exercise price in excess of $ 6.75 per share were
canceled and new options for the same aggregate number of shares were granted
with an exercise price of $ 6.75 per share.


                                      F-29
<PAGE>   69

                               ACT NETWORKS, INC.

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)
                         Three years ended June 30, 1998

<TABLE>
<CAPTION>
                                                   Additions                   Deductions
                                           --------------------------  --------------------------
                                                         Charged to       Amounts
                                                            Other       Charged to
                             Balance at    Charged to     Accounts        Reserve      Balance at
                            Beginning of   Costs and     (Primarily       Net of         End of
                               Period       Expense      Gross Sales)  Reinstatement     Period
                            ------------   ----------    ------------  -------------   ----------
<S>                         <C>            <C>           <C>           <C>             <C>
Year ended June 30, 1996
   Reserves and allowance 
     deducted from asset
     accounts     
     Allowance for 
       doubtful items           $ 63         $   20          $  425         $  20         $   63

Year ended June 30, 1997
   Reserves and allowance
     deducted from asset
     accounts 
     Allowance for 
       doubtful items          $ 287         $   59          $  191         $ 126         $  411

Year ended June 30, 1998
   Reserves and allowance
      deducted from asset
      accounts        
      Allowance for 
        doubtful items         $ 411         $1,150          $1,182         $ 713         $2,030
                               =====         ======          ======         =====         ======
</TABLE>



                                      S-2
<PAGE>   70


                                  EXHIBIT INDEX

<TABLE>
<CAPTION>

EXHIBIT
NUMBER                          DESCRIPTION
-------                         -----------
<S>     <C>
  3.1   Certificate of Incorporation of the Company. Incorporated by reference
        to Exhibit 3.1 to the Company's Registration Statement on Form S-1,
        Registration No. 33-90394

  3.2   Bylaws of the Company. Incorporated by reference to Exhibit 3.2 to the
        Company's Registration Statement on Form S-1, Registration No. 33-90394

  4.1   Specimen certificate representing shares of Common Stock of the Company.
        Incorporated by reference to Exhibit 4.1 to the Company's Registration
        Statement on Form S-1, Registration No. 33-90394.

  4.2   Form of Warrant of the Company. Incorporated by reference to Exhibit 4.2
        to the Company's Registration Statement on Form S-1, Registration No.
        33-90394.

 10.1   Standard Industrial/Commercial Multi-Tenant Lease-Modified Net dated May
        23, 1994 by and between Herman Bennett and the Company. Incorporated by
        reference to Exhibit 10.1 to the Company's Registration Statement on
        Form S-1, Registration No. 33-90394.

 10.2   Master Lease Agreement dated January 11, 1994 by and between the Company
        and Leasetec Corporation, as amended and supplemented. Incorporated by
        reference to Exhibit 10.2 to the Company's Registration Statement on
        Form S-1, Registration No. 33-90394.

 10.3   Loan and Security Agreement dated March 23, 1993, as amended, between
        Silicon Valley Bank and the Company and related agreements and
        documents. Incorporated by reference to Exhibit 10.3 to the Company's
        Registration Statement on Form S-1, Registration No. 33-90394.

 10.4   Loan and Security Agreement (Exim) dated May 11, 1994, as amended,
        between Silicon Valley Bank and the Company and related agreements and
        documents. Incorporated by reference to Exhibit 10.4 to the Company's
        Registration Statement on Form S-1, Registration No. 33-90394.

 10.5   Executive Employment Agreement dated December 23, 1992, by and between
        the Company and Martin Shum. Incorporated by reference to Exhibit 10.5
        to the Company's Registration Statement on Form S-1, Registration No.
        33-90394.

 10.6   Form of Indemnification Agreement. Incorporated by reference to Exhibit
        10.6 to the Company's Registration Statement on Form S-1, Registration
        No. 33-90394.

 10.7   1987 Stock Option Plan (the "1987 Plan"). Incorporated by reference to
        Exhibit 10.7 to the Company's Registration Statement on Form S-1,
        Registration No. 33-90394.

 10.8   Form of Amended Notice of Grant of Stock Option with respect to holders
        of installment incentive stock options granted under the 1987 Plan.
        Incorporated by reference to Exhibit 10.8 to the Company's Registration
        Statement on Form S-1, Registration No. 33-90394.

 10.9   Form of 1987 Installment Incentive Stock Option Agreement, Immediately
        Exercisable Stock Option Agreement and Immediately Exercisable
        Non-Qualified Stock Option Agreement generally used in connection with
        the 1987 Plan. Incorporated by reference to Exhibit 10.9 to the
        Company's Registration Statement on Form S-1, Registration No. 33-90394.

 10.10  Form of 1987 Stock Purchase Agreement generally used in connection with
        the 1987 Plan. Incorporated by reference to Exhibit 10.10 to the
        Company's Registration Statement on Form S-1, Registration No. 33-90394.

 10.11  1993 Stock Option Plan as amended (the "1993 Plan"). Incorporated by
        reference to Exhibit 10.11 to the Company's Registration Statement on
        Form S-1, Registration No. 33-90394.

 10.12  Form of Notice of Grant of Stock Option generally used in connection
        with the 1993 Plan. Incorporated by reference to Exhibit 10.12 to the
        Company's Registration Statement on Form S-1, Registration No. 33-90394.

 10.13  Form of 1993 Stock Option Agreement generally used in connection with
        the 1993 Plan. Incorporated by reference to Exhibit 10.13 to the
        Company's Registration Statement on Form S-1, Registration No. 33-90394.
</TABLE>


<PAGE>   71

<TABLE>
<CAPTION>

EXHIBIT
NUMBER                          DESCRIPTION
-------                         -----------
<S>     <C>
 10.14  Form of 1993 Stock Purchase Agreement generally used in connection with
        the 1993 Plan. Incorporated by reference to Exhibit 10.14 to the
        Company's Registration Statement on Form S-1, Registration No. 33-90394.

 10.15* Cooperation and Supply Agreement dated as of November 19, 1993 by and
        between StrataCom, Inc. and the Company. Incorporated by reference to
        Exhibit 10.15 to the Company's Registration Statement on Form S-1,
        Registration No. 33-90394.

 10.16  Technical Information Escrow Agreement dated July 18, 1994 by and
        between StrataCom, Inc., the Indianapolis Vault Company and the Company.
        Incorporated by reference to Exhibit 10.16 to the Company's Registration
        Statement on Form S-1, Registration No. 33-90394.

 10.17  Memorandum of Agreement dated January 19, 1995 by and between the
        Company, Promon International, Inc. and Pacific Technology Fund.
        Incorporated by reference to Exhibit 10.17 to the Company's Registration
        Statement on Form S-1, Registration No. 33-90394.

 10.18  Shareholder Rights Agreement dated as of April 23, 1992, as amended by
        Amendment No. 1 to Shareholder Rights Agreement dated as of August 11,
        1992, Amendment No. 2 to Shareholder Rights Agreement dated as of
        October 19, 1992, Amendment No. 3 to Shareholder Rights Agreement dated
        as of December 18, 1992, Amendment No. 4 to Shareholder Rights Agreement
        dated as of March 15, 1993, Amendment No. 5 to Shareholder Rights
        Agreement dated as of November 16, 1993, and Amendment No. 6 to
        Shareholder Rights Agreement dated as of December 15, 1994. Incorporated
        by reference to Exhibit 10.18 to the Company's Registration Statement on
        Form S-1, Registration No. 33-90394.

 10.19  Virtual DAMA Agreement dated December 31, 1993, by and between the
        Company and Promon Technical Services, Inc., as amended. Incorporated by
        reference to Exhibit 10.19 to the Company's Registration Statement on
        Form S-1, Registration No. 33-90394.

 10.20  1995 Stock Option/Stock Issuance Plan (the "1995 Plan"). Incorporated by
        reference to Exhibit 99.1 to the Company's Registration Statement on
        Form S-8, Registration No. 33-80007.

 10.21  Form of Addendum to Stock Option Agreement (Limited Stock Appreciation
        Right). Incorporated by reference to Exhibit 99.4 to the Company's
        Registration Statement on Form S-8, Registration No. 33-80007.

 10.22  Form of Stock Option Agreement generally used in connection with the
        Discretionary Option Grant Program of the 1995 Plan. Incorporated by
        reference to Exhibit 99.3 to the Company's Registration Statement on
        Form S-8, Registration No. 33-80007.

 10.24  Form of Addendum to Stock Option Agreement (Involuntary Termination
        Following Change of Control). Incorporated by reference to Exhibit 99.5
        to the Company's Registration Statement on Form S-8, Registration No.
        33-80007.

 10.25  Form of Addendum to Stock Option Agreement (Special Tax Elections).
        Incorporated by reference to Exhibit 99.6 to the Company's Registration
        Statement on Form S-8, Registration No. 33-80007.

 10.26  Form of Automatic Stock Option Agreement. Incorporated by reference to
        Exhibit 99.9 to the Company's Registration Statement on Form S-8,
        Registration No. 33-80007.

 10.27  Form of Stock Issuance Agreement generally used in connection with the
        Discretionary Option Grant Program of the 1995 Plan. Incorporated by
        reference to Exhibit 99.10 to the Company's Registration Statement on
        Form S-8, Registration No. 33-80007.

 10.28  Form of Addendum to Stock Issuance Agreement (Involuntary Termination
        Following Change of Control). Incorporated by reference to Exhibit 99.11
        to the Company's Registration Statement on Form S-8, Registration No.
        33-80007.

 10.29  Form of Addendum to Stock Issuance Agreement (Special Tax Elections).
        Incorporated by reference to Exhibit 99.12 to the Company's Registration
        Statement on Form S-8, Registration No. 33-80007.

 10.30  Employee Stock Purchase Plan. Incorporated by reference to Exhibit 99.13
        to the Company's Registration Statement on Form S-8, Registration No.
        33-80007.
</TABLE>


<PAGE>   72

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                          DESCRIPTION
-------                         -----------
<S>     <C>
 10.31  The Share Purchase Agreement By and Among the Company, Canada Inc. and
        Certain Presticom Stockholders, dated as of November 24, 1995.
        Incorporated by reference to Exhibit 2.1 to the Company's Current Report
        on Form 8-K, dated November 30, 1995.

 10.32  License Agreement dated May 8, 1996, by and between the Company and
        SkyData, Inc. Incorporated by reference to Exhibit 10.32 to the
        Company's Registration Statement on Form S-3, Registration No.
        333-04183.

 10.33  1997 Non-Executive Officer Stock Option/Stock Issuance Plan as amended
        July 15, 1997. Incorporated by reference to Exhibit 99.1 to the
        Company's Registration Statement on Form S-8, Registration No.
        333-56525.

 10.34  Form of Notice of Grant of Stock Option generally used in connection
        with 1997 Plan. Incorporated by reference to Exhibit 10.29 to the
        Company's Quarterly Report for the period ended March 31, 1997.

 10.35  Form of Stock Option Agreement generally used in connection with 1997
        Plan Incorporated by reference to Exhibit 10.30 to the Company's
        Quarterly Report for the period ended March 31, 1997.

 10.36  Form of Addendum to Stock Option Agreement. Incorporated by reference to
        Exhibit 10.31 to the Company's Quarterly Report for the period ended
        March 31, 1997.

 10.37  The Asset Purchase Agreement by and between the Company and Sourcecom,
        Inc. dated as of July 16, 1997. Incorporated by reference to Exhibit 2.2
        to the Company's Current Report on Form 8-K dated August 11, 1997.

 10.38  1997 Stock Incentive Plan. Incorporated by reference to Exhibit 99.1 to
        the Company's Registration Statement on Form S-8, Registration No.
        333-44087.

 10.39  Form of Notice of Grant of Stock Option - Installment Option.
        Incorporated by reference to Exhibit 99.2 to the Company's Registration
        Statement on Form S-8, Registration No. 333-44087.

 10.40  Form of Stock Option Agreement - Installment Option. Incorporated by
        reference to Exhibit 99.3 to the Company's Registration Statement on
        Form S-8, Registration No. 333-44087.

 10.41  Notice of Grant of Stock Option - Immediately Exercisable Option.
        Incorporated by reference to Exhibit 99.4 to the Company's Registration
        Statement on Form S-8, Registration No. 333-44087.

 10.42  Stock Option Agreement - Immediately Exercisable Option. Incorporated by
        reference to Exhibit 99.5 to the Company's Registration Statement on
        Form S-8, Registration No. 333-44087.

 10.43  Form of Addendum to Stock Option Agreement (Limited Stock Appreciation
        Rights). Incorporated by reference to Exhibit 99.6 to the Company's
        Registration Statement on Form S-8, Registration No. 333-44087.

 10.44  Form of Addendum to Stock Option Agreement (Involuntary Termination
        following Change in Control). Incorporated by reference to Exhibit 99.7
        to the Company's Registration Statement on Form S-8, Registration No.
        333-44087.

 10.45  Stock Purchase Agreement. Incorporated by reference to Exhibit 99.8 to
        the Company's Registration Statement on Form S-8, Registration No.
        333-44087.

 10.46  Addendum to Stock Purchase Agreement (Involuntary Termination following
        Change in Control). Incorporated by reference to Exhibit 99.9 to the
        Company's Registration Statement on Form S-8, Registration No.
        333-44087.

 10.47  Automatic Notice of Initial Grant. Incorporated by reference to Exhibit
        99.10 to the Company's Registration Statement on Form S-8, Registration
        No. 333-44087.

 10.48  Automatic Notice of Annual Grant. Incorporated by reference to Exhibit
        99.11 to the Company's Registration Statement on Form S-8, Registration
        No. 333-44087.

 10.49  Automatic Stock Option Agreement. Incorporated by reference to Exhibit
        99.12 to the Company's Registration Statement on Form S-8, Registration
        No. 333-44087.
</TABLE>

<PAGE>   73

<TABLE>
<CAPTION>

EXHIBIT
NUMBER                          DESCRIPTION
-------                         -----------
<S>     <C>
 21.1   List of Subsidiaries of the Company.

 23.2   Consent of Ernst & Young LLP.

 24.1   Power of Attorney (included on page 37).

 27.1   Financial Data Schedule.
</TABLE>