<PAGE>   1
================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                    FORM 10-K

(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, 1997

                                       OR

[ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
       EXCHANGE ACT OF 1934

       FOR THE TRANSITION PERIOD FROM                    TO
                                      ------------------    --------------------

                         COMMISSION FILE NUMBER 0-25740

                               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. [X]

         Based on the closing sale price on Nasdaq National Market on August 29,
1997, the aggregate market value of the voting stock held by non-affiliates of
the registrant was $119,143,822.

         As of August 29, 1997, there were 9,299,030 shares of Common Stock
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      NONE

================================================================================

<PAGE>   2

                               ACT NETWORKS, INC.

                          1996 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
              
                                                                                   Page
                                                                                   ----
<S>       <C>                                                                      <C>   
ITEM 1.   BUSINESS.................................................................  1    
                                                                                            
ITEM 2.   PROPERTIES............................................................... 12    
                                                                                            
ITEM 3.   LEGAL MATTERS............................................................ 12    
                                                                                            
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS...................... 12    
                                                                                            
ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.... 13    
                                                                                            
ITEM 6.   SELECTED FINANCIAL DATA.................................................. 14    
                                                                                            
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS           
           OF OPERATIONS........................................................... 15    
                                                                                            
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................. 20    
                                                                                            
ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND                   
          FINANCIAL DISCLOSURE..................................................... 20    
                                                                                            
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................... 21    
                                                                                            
ITEM 11.  EXECUTIVE COMPENSATION................................................... 23    
                                                                                            
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........... 26    
                                                                                            
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................... 28    
                                                                                            
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K......... 29    
</TABLE>



<PAGE>   3
ITEM 1.  BUSINESS

         ACT Networks, Inc., a Delaware corporation ("ACT" or the "Company"),
develops, manufactures, and markets fast packet wide-area network access
products which support a broad range of voice, data and integrated network
applications. End-users and service providers worldwide use the Company's
products to build cost-effective, bandwidth efficient, easy-to-manage wide area
networks ("WANs"). The Company's products incorporate advanced voice and data
compression algorithms, switching capabilities, and proprietary 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 office automation,
distributed computing, electronic mail, facsimile transmission, electronic
transaction processing and corporate-wide voice communications systems. 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 solutions.

         The WAN solutions available to an organization vary substantially
depending on the organization's size and communications needs, and the state of
development of the local telecommunications infrastructure. Large organizations
in the United States and certain countries in Europe with large amounts of data
traffic have traditionally relied upon wideband digital transmission circuits
(such as T1 and E1) leased from public carriers to provide voice, facsimile and
data communications between regional offices. Organizations in these countries
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 certain other
international markets, such as Korea, Spain and Italy, carriers are implementing
digital circuits which organizations are using to build private networks which
connect geographically disparate offices. The cost of these circuits generally
limits their use to large organizations with substantial communications traffic.
In other international markets where the public telecommunication infrastructure
is less developed, such as Argentina, China, India and Russia, organizations are
increasingly relying on satellite transmission and other wireless media to build
or lease private digital networks to transmit voice, facsimile and data between
multiple locations.

         Conventional WANs are typically comprised of leased dedicated circuits,
circuit switching mechanisms and network access equipment based on time division
multiplexing ("TDM"). This WAN solution 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 voice and
facsimile transmissions.

         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-based 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. Two "fast packet"
networking technologies, Frame Relay and Asynchronous Transfer Mode ("ATM"),
have emerged to address the need for integrated, cost-effective, flexible WAN
solutions. Fast packet 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. A number of public carriers and
alternative service providers in the United States and around the world are
increasingly providing public fast packet services for high-speed communications
traffic. In countries where carriers do not provide public fast packet
transmission services, organizations can build private fast packet networks that
offer many of the same benefits. While ATM is not generally available through
public carriers, Frame Relay services are now widely offered in the United
States and certain countries in Europe as a cost-effective, variable bandwidth
networking solution.

         The Company believes the increased availability and acceptance of Frame
Relay services is creating new applications for Frame Relay access products.
Enterprises are using Frame Relay to integrate voice, data and facsimile traffic
over public and private Frame Relay networks. Data service providers may use
Frame Relay to offer voice over their existing networks. Carriers and
alternative service providers may use Frame Relay to improve the cost-efficiency
of their voice services. Large data communications users may migrate from
private leased lines to public Frame Relay services for the transmission of SNA
and other legacy protocol 

                                       1.

<PAGE>   4

data. Finally, enterprises in countries lacking a developed terrestrial
infrastructure may use Frame Relay over satellite to fulfill their integrated
networking needs.

THE ACT SOLUTION

         ACT's technologies and products are designed to support a wide variety
of applications in the emerging fast packet marketplace. ACT provides
cost-effective, bandwidth efficient WAN solutions to customers worldwide for the
transmission of voice, data and facsimile communications traffic using Frame
Relay. The Company's products incorporate advanced voice and data compression
algorithms, voice and data access switching capabilities, and proprietary voice,
data and facsimile 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 and microwave).

MARKETS AND APPLICATIONS

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

         Integrated Frame Relay Networks. The integrated Frame Relay networks
market is currently the primary market for the Company's products. This market
consists of companies that consolidate their voice, data and facsimile
applications over a public or private network. ACT's customers in this market
include domestic and international end-users who choose to build private
networks or to access public Frame Relay networks, as well as alternative
service providers primarily in international markets who offer their customers a
cost-effective networking alternative to local public carriers. Representative
applications in this market include:

         o Private Frame Relay Network. In markets with developing public
telecommunications infrastructures, large companies use the Company's products
to access terrestrial or wireless media to establish cost-effective and
bandwidth efficient private networks using leased transmission circuits. The
application of advanced compression technologies in the Company's networking
products to voice, data and facsimile traffic allows multinational users to
connect their remote sites while reducing bandwidth requirements. For example, a
large bank in Korea has deployed the Company's integrated Frame Relay access
devices ("IFRADs") 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.

         o Public Frame Relay Network Access. Service providers in the United
States and certain European countries offer public Frame Relay services. The
Company's IFRADs allow end-users, whose telecommunications bandwidth
requirements do not justify leasing wideband dedicated digital circuits, to
connect directly to a public Frame Relay network and to eliminate many of the
problems and costs associated with managing and supporting a private network.
Middle market companies in the domestic market use ACT's IFRADs to access public
Frame Relay services. For example, a large food broker and distribution company
in the southeast United States uses public Frame Relay services in conjunction
with the Company's IFRADs to provide corporate-wide voice, voice mail, facsimile
and full data and LAN connectivity.

         o Frame Relay Over Satellite. Organizations in countries without a
developed terrestrial public network have limited alternatives to meet their
networking needs. By deploying the Company's products, alternative service
providers in developing countries can provide businesses with toll-quality
voice, facsimile and data transmission services. Alternatively, businesses can
use the Company's products to implement a private satellite-based network.
Historically, the Company has served this market through the deployment of
point-to-point products. The Company believes that its recently introduced
SkyFrame product line is well-suited for this market. For example, a major Latin
American satellite-based alternative service provider uses the Company's
integrated point-to-point products and IFRADs to provide turn-key integrated
private networks to major corporate clients in Argentina, Columbia, Venezuela
and Mexico.

         Voice Over Frame Relay Market. Frame Relay service providers have
primarily focused on data-only applications. The Company believes that carriers
currently offering data-only services can, by using the Company's products to
add a Frame Relay voice component to their service, offer voice services at a
lower cost than the customer is currently paying for their separate voice
network. The Company believes that a voice offering enhances the competitive
position of this type of carrier. The domestic acceptance of voice-specific
applications has been limited to date by a variety of factors. However, ACT
believes that the development of many functional telephony capabilities
necessary to support this application, combined with the growing acceptance of
voice over Frame Relay as a technology, will result in increased utilization of
this application. For example, Infonet Services Corporation, a global provider
of data services, is now offering integrated services over its Frame Relay
network and has entered into a supply agreement with the Company.


                                       2.

<PAGE>   5

PRODUCTS

         The Company's product families consist of Net Performer, ACTnet,
SkyFrame and Dynastar. The chassis of each of the Company's products has a
modular architecture which enables the Company to upgrade its products to meet
changing market needs by adding enhancement cards or plug-in modules. The
Company also offers ACTview, a Microsoft Windows-based network management
system. This software product allows users to perform network configuration,
diagnostics, software downloading and network alarm reporting. ACTview can
manage a network of up to 255 SDM-FPs or SDM-JFPs.

         NetPerformer is a family of integrated Frame Relay access devices
("FRADs") targeted at voice, fax, LAN and SNA data integration over private or
public Frame Relay networks. NetPerformer products are described below.


                   ------------------- -----------------------------------------
                   PRODUCT NAME        PRODUCT DESCRIPTION
                   ------------------- -----------------------------------------
                   SDM-9500            Central Site integrated HUB
                   ------------------- -----------------------------------------
                   SDM-9400            Regional Office integrated access
                   ------------------- -----------------------------------------
                   SDM-9300            Branch Office integrated access
                   ------------------- -----------------------------------------
                   SDM-8300            Branch Office data access
                   ------------------- -----------------------------------------
                   SDM-8200            Remote Office data access
                   ------------------- -----------------------------------------

         ACTnet is a family of voice-centric FRAD's targeted at voice and data
integration over private or public Frame Relay networks. ACTnet Frame Relay
products are described below.

<TABLE>
<CAPTION>
                    ------------------ -----------------------------------------------------------
                    PRODUCT NAME       PRODUCT DESCRIPTION
                    ------------------ -----------------------------------------------------------
                    <S>                <C>                                                             
                    SDM-FP             IFRAD  with 5 low speed data channels, 1 high speed data
                                       channel and 8 expansion slots
                    ------------------ -----------------------------------------------------------
                    SDM-JFP            IFRAD  with 1 low speed data channels, 1 high speed data
                                       channel and 4 expansion slots
                    ------------------ -----------------------------------------------------------
                    SDMDX              IFRAD  with 5 low speed data channels, 1 high speed data
                                       channel and 8 expansion slots
                    ------------------ -----------------------------------------------------------
</TABLE>

         SkyFrame is a family of satellite access equipment with integral modems
for building single-carrier, hubless, switchless, multiple-location Frame Relay
satellite networks. SkyFrame products are described below.

<TABLE>
<CAPTION>

                   ------------------- ------------------------------------------------------------
                   PRODUCT NAME        PRODUCT DESCRIPTION
                   ------------------- ------------------------------------------------------------
                   <S>                 <C>
                   SF-800              SDM-FP with Skyframe operating system
                   ------------------- ------------------------------------------------------------
                   SF-400              SDM-JFP with Skyframe operating system
                   ------------------- ------------------------------------------------------------
                   SkyLane 512         L-Band satellite modem
                   ------------------- ------------------------------------------------------------
</TABLE>

         Dynastar is a family of data protocol mediation devices targeted at
service providers' OSS/NE applications. The Dynastar products are described
below.

<TABLE>
<CAPTION>

                   ------------------- ------------------------------------------------------------
                   PRODUCT NAME        PRODUCT DESCRIPTION
                   ------------------- ------------------------------------------------------------
                   <S>                 <C>
                   DS-100              Flexible access switch expandable to 13 ports
                   ------------------- ------------------------------------------------------------
                   DS-100i             Rack-mount DS-100
                   ------------------- ------------------------------------------------------------
                   DS-500              Integrated Lan/Wan access switch expandable to 82 ports
                   ------------------- ------------------------------------------------------------
</TABLE>


                                       3.

<PAGE>   6

CUSTOMERS

         End-users of the Company's products include government agencies,
financial institutions, retail chains, distribution companies and manufacturing
organizations. The Company's products are also used by public carriers and
alternative telecommunications service providers. A small number of customers
have historically accounted for a substantial portion of the Company's net
sales. In particular, Comsat do Brazil and IMPSAT accounted for 11.5% and 8.3%
of the Company's net sales for the fiscal year ended June 30, 1997,
respectively. A representative list of end-users and alternative service
providers is set forth below:

          Domestic End-Users                    Alternative Service Providers
          ------------------                    -----------------------------

          Bonnecker & Leigh                     AT&T Wireless
          First Chicago Bank                    Comsat do Brazil
          Idaho National Guard                  Department of Telecom, India
          Intelsat                              Entel-Chile
          National Semiconductor                IMPSAT
          Pyrodyne                              Infonet Services Corporation
          South East Frozen Food                Philippine Long Distance Company
          Worldex                               Russtel, Russia
                                                Telefonica de Espana
          International End-Users               Telefonica de Peru
          -----------------------               Teleport Europe, Germany
                                                Victori
          American Express, Argentina
          Bank of Brazil
          Cheietsee, Japan
          Duty-Free, Australia
          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 products primarily through a
worldwide network of over 100 resellers, including distributors, value-added
resellers and systems integrators. Because the WAN 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 end-users 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.

         The Company also sells its products directly to carriers, alternate
service providers and large end-users. The Company believes that these customers
can best be addressed by a direct sales force and the Company intends to
continue to increase the number of sales personnel focused on these customers.

         The Company's marketing efforts include participating in major
telecommunication trade shows held annually in the United States, Europe, Asia
Pacific and Latin America; advertising in major trade journals; conducting
direct mail marketing campaigns; publishing newsletters and technical articles;
and conducting conferences for resellers. As of June 30, 1997, the Company's
marketing department consisted of 13 full-time employees.

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.


                                       4.

<PAGE>   7

         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's product development efforts are directed toward enhancing
existing products and developing new products in order to meet changing end-user
needs and to support an increasing number of applications. The Company's product
development efforts focus on the following principles:

         Develop New Products and Technology. The Company continually assesses
market trends, both domestic and international, 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 with new
technologies to provide a broader range of networking solutions to the end-user.

         Improve Existing Technology. The Company seeks to expand the features
and functionality of its existing product lines through technology modifications
and enhancements to meet the changing needs of its customers. The Company
continuously reviews the design and manufacturing process of its products to
determine areas of product cost savings or enhanced product quality.

         Leverage Software-defined Products. The Company has designed and
continues to develop a small number of programmable hardware designs, each of
which can be used for multiple products through the installation of application
software that define features and functionality. This strategy allows the
Company to reduce hardware design changes and retooling costs and to accelerate
the certification processes for new products.

         As of June 30, 1997, the Company employed 101 persons in engineering,
62 of which were engaged primarily in software development.

         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 directly domestically and internationally with a variety of
companies offering Frame Relay access products including Cisco Systems, Inc.
("Cisco"), Memotec Communications, Inc. ("Memotec"), MICOM Communications Corp.
("MICOM"), Motorola Information Systems Group ("Motorola"), Sync Research, Inc.
("Sync") 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. 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 


                                       5.


<PAGE>   8
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 Cascade.
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.

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 may seek patent protection for certain of its
technologies, when appropriate, in the future. 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 

                                       6.
<PAGE>   9

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 June 30, 1997, the Company employed 265 full-time persons,
including 53 in operations, 55 in sales and marketing, 21 in customer service,
101 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
rate of end-user adoption of voice over Frame Relay; the ability of the
Company's customers, particularly international customers, to obtain financing
for the purchase of the Company's products; 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 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, in quarters
in both fiscal 1996 and 1997, the Company's net sales decreased when compared to
the preceding quarter and, as a result, the Company's results of operations and
the price of the Company's Common Stock were adversely affected. 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 intends to 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. Due to
the Company's limited history of profitable operations, there can be no
assurance 


                                       7.


<PAGE>   10

that it will be profitable in future periods. The Company plans to continue to
expand its level of operations, resulting in increased fixed costs and operating
expenses. The Company's operating results and net income will be adversely
affected to the extent that net sales and gross profits do not increase
sufficiently to offset such increased expenses. There can be no assurance that
the Company will be able to maintain or increase net sales or gross profits. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

         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.. For example, a rapid decline in the market for certain
point-to-point products resulted in reduced sales and an inventory write-down in
the quarter ended December 31, 1995.

         The market for Frame Relay products, especially access devices such as
those produced by the Company, is currently emerging and may not continue to
develop, whether as a result of competition, technological change, market forces
or otherwise. In addition, the transmission of voice over a Frame Relay network
is a new application that has not received widespread acceptance. The Company's
future operating results and ability to implement its strategy successfully will
be dependent in part upon the development and growth of the public Frame Relay
services market for voice, data and integrated applications. Public carriers
such as AT&T and MCI offer services which may adversely affect the adoption of
services and products based on Frame Relay technologies. For example, the
availability of inexpensive voice communications services in the United States
may reduce or eliminate the cost advantages of voice over Frame Relay services
in the United States. If the costs of telecommunications services in the United
States and other markets decline, the market for the Company's products may
either not materialize or could be adversely affected. There can be no assurance
that such markets will develop. Even if such markets develop, the Company's
success will depend, in part, on the viability of the Company's products in such
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 in this market. In addition, the widespread
acceptance of Asynchronous Transfer Mode ("ATM"), an alternative fast packet
technology, could have a material adverse effect on the Company's ability to
obtain market acceptance of its Frame Relay products. 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. 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,
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. The Company expects that the
average sales prices of its products will decline in the future primarily due to
increased competition and the introduction of new technologies. Accordingly, the
Company's ability to maintain or increase net sales and gross margins will
depend in part upon its ability to reduce its cost of sales, to increase unit
sales volumes of existing products and to introduce and sell new products. There
can be no assurance that the Company will be able to reduce its cost of sales in
the future to respond effectively to declining sales prices.

         The Company budgets research and development expenditures based on
planned product introductions and enhancements; however, actual expenditures may
significantly differ from budgeted expenditures. 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. 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 Frame Relay access products
including Cisco, FastComm, Memotec, MICOM, Motorola, Sync 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


                                       8.

<PAGE>   11

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.

         Integration of Acquisitions. A component of the Company's strategy is
to acquire complementary technologies and businesses. Such acquisitions involve
significant risks. The Company acquired Presticom Inc. in November 1995,
DeltaComm Corporation in December 1996, the DynaStar product family in March
1997 and the assets of SourceCom, Inc. in August 1997. To obtain benefits from
these acquisitions, the Company must successfully integrate the acquired
companies with the Company. Due in part to consolidation in the Company's
industry, the Company may in the future pursue acquisitions of related
businesses, products or technologies. 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 companies; 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. In the event that an acquisition does
occur, 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. Comsat Brazil
accounted for 11.5% of the Company's net sales for fiscal 1997. The Company's
five largest customers accounted for 42% and 36% of the Company's net sales for
the fiscal years ended June 30, 1996 and 1997, respectively. Scientific Atlanta
accounted for approximately 17% and 0% of the Company's net sales in fiscal
years ended June 30, 1996 and 1997, respectively. 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. In general, the Company's major
customers either sell or deploy the Company's products outside the United
States, which subjects the Company to a variety of other risks. See
"International Sales, Tariffs and Regulatory Matters."

         Management of Growth. The Company has recently experienced growth in
its operations, both internally and as a result of acquisitions. During the last
12 months, the Company has significantly increased the number of sales,
marketing, engineering and other personnel and expects to continue to increase
the number of its personnel. The Company's growth has placed, and will continue
to place, strain on the Company's managerial, operational and financial
resources and 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% and 75% of the Company's net sales for the fiscal years ended
June 30, 1996 and 1997, 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, where
political or economic issues could adversely affect the purchasing decision of
customers. Although the Company's sales are currently denominated in U.S.
dollars, fluctuations in currency exchange rates could 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.
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 


                                       9.


<PAGE>   12

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 Cascade.
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 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


                                      10.


<PAGE>   13

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, operating results and financial
condition.

         Dependence on Key Personnel. The success of the Company is dependent in
large part on its ability to retain its executive officers, the loss of one or
more of whom could adversely affect the Company's business. The Company is also
dependent on other members of management and its sales and technical personnel.
The Company believes that its future success will depend in large part upon 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.

         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 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.


                                      11.

<PAGE>   14

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 lease was amended
November 17, 1995 to add approximately 16,000 square feet. The base rent is
currently approximately $49,000 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, 1,800 square feet in Chandler, Arizona and 28,000 square feet
in Woodbridge, Virginia. 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, 1997.


                                      12.

<PAGE>   15

                                     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>
1998
  1st Quarter (through September 10, 1997)            $15 7/8         $11 11/16

FISCAL YEAR                                            HIGH             LOW
-----------                                            ----             ---

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

FISCAL YEAR                                            HIGH             LOW
-----------                                            ----             ---

1996
  4th Quarter                                          47 1/2          22 1/8
  3rd Quarter                                          26              11 3/4
  2nd Quarter                                          16 1/2           6 1/8
  1st Quarter                                          17 7/8           9 3/4
</TABLE>

         As of September 10, 1997, there were 119 record holders of the
Company's Common Stock. On September 10, 1997, the last reported sale price of
the Common Stock on the Nasdaq National Market was $12.69 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."


                                      13.

<PAGE>   16

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, 1993,
1994, 1995, 1996 and 1997 and the balance sheet data at June 30, 1993, 1994,
1995, 1996 and 1997 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, 1993 and 1994 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,
                                                      ---------------------------------------------------------------
                                                        1993          1994          1995         1996          1997
                                                      --------      --------      --------     --------      --------
                                                               (in thousands, except per share data)
<S>                                                   <C>           <C>           <C>          <C>           <C>
Statement of Operations Data:
   Net sales ....................................     $  6,207      $ 12,654      $ 20,566     $ 28,404      $ 49,173
   Cost of goods sold ...........................        3,185         5,939         9,244       13,998        21,431
                                                      --------      --------      --------     --------      --------
      Gross profit ..............................        3,022         6,715        11,322       14,406        27,742
 Operating expenses:
      Research and development ..................        1,504         1,955         3,586        5,026         8,344
      In-process research and development .......                                                 5,600         3,416
      Sales and marketing .......................        1,777         2,943         4,785        7,174        11,115
      General and administrative ................        1,158         1,335         1,736        3,257         5,291
                                                      --------      --------      --------     --------      --------
   Total operating expenses .....................        4,439         6,233        10,107       21,057        28,166
                                                      --------      --------      --------     --------      --------
   Income (loss) from operations ................       (1,417)          482         1,215       (6,651)         (424)
   Net interest income and other income (expense)          (18)            8            69        1,219         3,327
   Loss due to earthquake .......................                       (281)                                        
                                                      --------      --------      --------     --------      --------
   Income (loss) before income taxes ............       (1,435)          209         1,284       (5,432)        2,903
   Provision for income taxes ...................                                       22          295         1,420
                                                      --------      --------      --------     --------      --------
   Net income (loss) ............................     $ (1,435)     $    209      $  1,262     $ (5,727)     $  1,483
                                                      --------      --------      --------     --------      --------
   Net income (loss) per share ..................     $  (0.52)     $   0.05      $   0.24     $  (0.78)     $   0.15
                                                      --------      --------      --------     --------      --------
 Shares used in per share calculations ..........        2,739         3,852         5,211        7,308         9,973
                                                      ========      ========      ========     ========      ========
</TABLE>

<TABLE>
<CAPTION>

                                                                            AS OF JUNE 30,
                                               ---------------------------------------------------------------------
                                                  1993           1994           1995          1996           1997
                                               ---------      ----------     ---------     ----------     ----------
                                                                (in thousands except per share data)
<S>                                            <C>           <C>            <C>             <C>            <C>
Balance Sheet Data:

   Working capital .......................      $ 2,284        $ 3,923       $ 38,235       $ 84,747       $ 81,982
   Total assets ..........................        3,837          6,398         42,847         93,851        100,696
   Total long-term debt, excluding current
     maturities ..........................           10                                          147               
   Accumulated deficit ...................       (3,780)        (3,571)        (2,304)        (8,036)        (6,651)
   Total stockholders' equity (1) ........        2,739          4,847         40,316         90,140         93,538
</TABLE>

-----------

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


                                      14.

<PAGE>   17

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 was founded in May 1987 to design, manufacture and market wide area
network communication products incorporating advanced compression and
integration technologies. In the third quarter of fiscal 1989, the Company
shipped its first integrated product, a point-to-point multiplexer designed for
use on a voice-band analog circuit. In the third quarter of fiscal 1991, the
Company began shipping a point-to-point integrated multiplexer designed for use
over digital leased lines. In the third quarter of fiscal 1993, the Company
introduced its first integrated Frame Relay access product line (ACTNet). The
Company introduced its wireless Frame Relay access product line (SkyFrame) in
the first quarter of fiscal 1996. The Company's multiprotocol data line of
products was acquired in the second quarter of fiscal 1996 with the acquisition
of Presticom. In the third quarter of fiscal 1997, the Company acquired a
multi-service access switch connectivity line of products with the acquisition
of the DynaStar product family from Dynatech. In the first quarter of fiscal
1998 the Company acquired certain assets of Sourcecom, Inc., a developer of
high performance broadband access devices.

         The Company's future operating results will be dependent upon the
development and growth of the public and private wide area network
communications market for its existing and proposed products. This market and
product applications within this market are currently emerging and may not
continue to develop, whether as a result of competition, technological change,
market forces or otherwise.

         The Company anticipates that, in general, the average sales price for
its products will decrease over time due to competition and other factors. 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 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
66%, 63% and 75% of the Company's net sales for the fiscal years ended June 30,
1995, 1996 and 1997, 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 majority 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 could adversely affect the purchasing
decision of the customer. In addition, fluctuations in currency exchange rates
could 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. See Note 1 to Notes to Financial Statements.

         A small number of customers have historically accounted for a
substantial portion of the Company's net sales. In particular, Comsat Brazil
accounted for approximately 11.5% of the Company's net sales for the fiscal year
ended June 30, 1997. In addition, IMPSAT accounted for approximately 10% and
8.3% of net sales for the fiscal years ended June 30, 1996 and June 30, 1997,
respectively. During those periods the Company's five largest customers
accounted for 43% and 36%, respectively, of net sales. Any reduction, delay or
change in orders from such 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 multiprotocol Frame Relay access devices. The Company
recorded an acquisition cost of approximately $9.1 million, of which
approximately $7.3 million in cash and 176,365 shares of Common Stock
represented the consideration paid to Presticom's shareholders and of which
approximately $0.6 million represented transaction expenses. As a result of the
acquisition, the Company expensed approximately $5.6 million in the quarter
ended December 31, 1995 as acquired in-process research and development and is
amortizing approximately $2.1 million of goodwill over seven years.

         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. The aggregate purchase price paid by
the Company was approximately $797,000 consisting of $158,000 paid in cash and
the issuance of 22,858 shares of Common Stock of the Company with an estimated
fair market value of $640,000. The Company recorded transaction expenses of
approximately 


                                      15.

<PAGE>   18
$104,000. As a result of the acquisition, the Company expensed approximately
$701,000 in the quarter ended December 31, 1996 as acquired in-process research
and development and is amortizing approximately $236,000 of goodwill over seven
years.

         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, 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 $6.4
million. The Company assumed approximately $274,000 of debt and recorded
transaction expenses of approximately $350,000. As a result of the acquisition,
the Company expensed approximately $2.7 million in the quarter ended March 31,
1997 as acquired in-process research and development and will amortize other
acquired intangibles of approximately $2.2 million over five to seven years.

         In August 1997, the Company acquired certain assets of Sourcecom, Inc.
a developer of high performance broadband access devices. The cash purchase
price paid by the Company was $8.6 million. The acquisition will be accounted
for under the purchase price method of accounting. In connection with this
acquisition, the Company hired approximately 30 employees, principally in
engineering. The Company intends to spend resources converting certain Sourcecom
products to create a family of gateway service devices. There can be no
assurance as to the results of this product development.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                              Fiscal Years Ended June 30,
                                                         -------------------------------------
                                                          1995           1996            1997
                                                         ------         ------          ------
<S>                                                      <C>            <C>             <C>
Net sales .....................................           100.0%         100.0%          100.0%
Cost of goods sold ............................            44.9           49.3            43.6
                                                          -----          -----           -----
Gross profit ..................................            55.1           50.7            56.4

Operating expenses:
   Research and development ...................            17.4           17.7            17.0
   Sales and marketing ........................            23.3           25.2            22.6
   General and administrative .................             8.4           11.5            10.8
   Acquired in-process research and development                           19.7             6.9
                                                          -----          -----           -----
Total operating expenses ......................            49.1           74.1            57.3
                                                          -----          -----           -----
Income (loss) from operations .................             5.9          (23.4)           (0.9)
Net interest and other income .................             0.3            4.3             6.8
                                                          -----          -----           -----
Income (loss) before taxes ....................             6.2          (19.1)            5.9
Provision for income taxes ....................             0.1            1.0             2.9
                                                          -----          -----           -----
Net income (loss) .............................             6.1%         (20.1)%           3.0%
                                                          =====          =====           =====
</TABLE>

Net sales

         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. The Company's customers may be divided into two
categories: enterprise and carrier. Carrier customers would include
inter-exchange carriers, competitive access providers, international record
carriers, satellite service providers, Frame Relay service providers and
regional Bell operating companies. For the fiscal year ended June 30, 1997,
sales to enterprise customers were approximately $41.2 million, or 83.8%, and
sales to carrier customers 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 81.0%, and sales to carrier customers 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. Sales to
enterprise customers operating terrestrial Frame Relay access systems continue
to be the cornerstone of the Company's sales with carrier customer and wireless
system sales expanding marginally.


                                       16.
<PAGE>   19
         Net sales increased 38.1% to $28.4 million for the fiscal year ended
June 30, 1996 from $20.6 million for the fiscal year ended June 30, 1995. The
increase was primarily due to increased sales of the Company's Frame Relay and
OEM products and to shipments of products acquired in the Presticom acquisition
which accounted for $3.5 million, or 44.4% of the increase in net sales. Net
sales of Frame Relay products were $18.8 million and $9.2 million for fiscal
1996 and 1995, respectively. Net sales of point-to-point products decreased to
$4.6 million in the fiscal year ended June 30, 1996 from $9.6 million in the
fiscal year ended June 30, 1995. While the Company anticipated the continued
decline of sales of point-to-point products due primarily to the conversion of
customers to Frame Relay products, the decrease in such sales during the period
was greater than anticipated by the Company. Net sales of OEM products increased
to $5.0 million for the fiscal year ended June 30, 1996 from $1.8 million for
the fiscal year ended June 30, 1995. The increase in OEM shipments was primarily
due to unusually large orders received from Scientific Atlanta.

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 $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 $0.7 million charge for obsolete inventory that was taken to
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. The gross margins generated by OEM product
sales are typically lower than those from certain of the Company's other
products.

         The Company's gross profit was $15.1 million, or 53.2% of net sales
(without charge for obsolete inventory) for the fiscal year ended June 30, 1996
as compared to 55.1% of net sales for fiscal 1995. This decrease in gross profit
as a percentage of net sales was primarily attributable to changes in product
mix, including increased OEM sales and decreased sales of voice cards. In the
future, gross profit may be affected by price competition and discounts, product
mix, product configuration, changes in unit volume, cost of components and
manufacturing and other factors.

Operating Expenses

         Research and development. 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.

         Research and development expense increased to $5.0 million, or 17.7% of
net sales, for the fiscal year ended June 30, 1996 from $3.6 million, or 17.4%
of net sales, for the fiscal year ended June 30, 1995. The increase was
primarily attributable to the cost of personnel for the development of new
products and enhancement of existing products, which increased to approximately
$2.5 million from approximately $1.7 million during the preceding comparable
period.

         While the actual amount expended will depend upon a variety of factors,
the Company anticipates increasing research and development expenses in the near
term. In particular, the Company anticipates increasing research and development
expenses related to the acquisiton of the assets of Sourcecom and its
development of gateway service products.

         Sales and marketing. 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.
Sales and marketing expense increased to $7.2 million, or 25.2% of net sales,
for the fiscal year ended June 30, 1996 from $4.8 million, or 23.3% of net
sales, for the fiscal year ended June 30, 1995. These dollar increases were
primarily attributable to the addition of personnel and increased marketing
activities. The Company anticipates adding sales personnel and increasing sales
and marketing expenses in the near term.

         General and administrative. 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. General and administrative expense increased to $3.3 million, or
11.5% of net sales, for the fiscal year ended June 30, 1996 from $1.7 million,
or 8.4% of net sales, for the fiscal year ended June 30, 1995. General and
administrative expenses will be impacted by approximately $424,000 per year for
five years commencing March 11, 1997 and by approximately $300,000 per year for
seven years commencing November 30, 1995 due to amortization of goodwill
associated with the acquisitions of the DynaStar product family and Presticom.
Amortization expense relating to acquisitions was approximately $427,000 and
$175,000 in the fiscal years ended June 30, 1997 and June 30, 1996,
respectively. 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 and outside services.

                                      17.

<PAGE>   20

         The Company expects to continue to expand its operations, resulting in
potentially substantial dollar increases in each category of operating expenses.
The Company's operating results and net income will be adversely affected to the
extent that net sales and gross profits do not increase sufficiently to offset
such increased expenses.

Net interest and other income (expense)

         Net interest income was $3.3 million for the fiscal year ended June 30,
1997 compared to net interest income of $1.2 million in fiscal 1996. Net
interest income was $68,400 for fiscal 1995. These changes were primarily
attributable to interest received on the proceeds from the Company's public
offering in May 1995 and the Company's secondary offering in June 1996.

Income Taxes

         The provision for income taxes for the fiscal year ended June 30, 1997
totaled approximately $1.4 million. 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 1997, the difference between the federal statutory
rate and the effective tax rate primarily relates to certain charges for
acquired in-process research and development which are not deductible for tax
purposes. At June 30, 1997, subject to certain limitations, the Company had
research and development credit carryforwards of approximately $811,000 and
$268,000 for federal and state tax purposes, respectively, and approximately
$3.9 million in federal operating loss carryforwards. See Note 4 to Notes to
Financial Statements.

         There was a $295,000 provision for income taxes for fiscal 1996 and
only a nominal provision of $21,800 for income taxes for the year ended June 30,
1995 due to reductions in the deferred tax valuation allowance attributable to
utilization of net operating loss carryforwards by the Company.

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 is required to be adopted on June 30, 1998. At that time, the
Company will be required to change the method currently used to compute earnings
per share and to restate all prior periods. Under the new requirements, primary
and fully diluted earnings per share will be replaced with basic and diluted
earnings per share. Basic earnings per share excludes the dilutive effect of
stock options and will therefore be higher than primary earnings per share.
Diluted earnings per share under the new standard is expected to be essentially
the same as primary earnings per share amounts calculated under principles
currently used. The impact of the adoption of SFAS 128 on earnings per share
calculations for the fiscal years ended June 30, 1997 and 1996 is not expected
to be material.

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
1997, the Company's operating activities provided cash of approximately $2.7
million. At June 30, 1997, the Company had approximately $82 million in working
capital, including $50.9 million in cash and cash equivalents.

         Capital expenditures relating primarily to the purchase of computer
equipment, test equipment, computer software and leasehold improvements amounted
to approximately $3.5 million for the fiscal year ended June 30, 1997. The
Company currently has no material commitments for capital expenditures. However,
the Company anticipates spending between $3.5 million and $5.0 million during
the next 12 months to acquire test equipment, computer equipment, office
furniture, tooling and leasehold improvements.

         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,
1997 and the Company is presently renegotiating it. At June 30, 1997 and June
30, 1996, there were no outstanding balances under the line of credit. Interest
on the revolving line of credit is payable monthly at a rate equal to the bank's
prime rate, which was 8.5% at June 30, 1997, 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 revolving line of credit. At June 30, 1997 and June 30,
1996, no letters of credit were outstanding.


                                      18.


<PAGE>   21

         The loan and security agreement contained certain covenants that, among
other things, required the Company to maintain certain financial ratios and
limited the Company's ability to obtain certain forms of additional debt, to
repurchase the Company's stock and pay dividends. The Company believes that
available cash, together with internally generated cash flow, will be adequate
to satisfy its capital requirements for at least the next twelve months.


                                      19.

<PAGE>   22

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.


                                      20.

<PAGE>   23

                                    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, 1997.

<TABLE>
<CAPTION>

      NAME                                 AGE      POSITION
      ----                                 ---      --------
      <S>                                  <C>      <C>
      Martin Shum                          49       Chairman of the Board of Directors, President and
                                                        Chief Executive Officer
      Michael S. Gardner                   51       Chief Operating Officer
      Melvin L. Flowers                    44       Chief Financial Officer and Vice President,
                                                        Finance and Administration
      Andre de Fusco                       39       Vice President, Strategic Planning and Business
                                                        Development
      H. Peter Staab                       50       Vice President, Corporate Research and Development
      Linda Carlson                        52       Vice President, Worldwide Sales
      John W. Tucker                       52       Vice President and General Manager,
                                                        Wireless Systems Group
      Jean-Guy Lacombe                     40       Vice President and General Manager,
                                                        Enterprise Network Systems
      Brig. Gen. Harold R. Johnson (1)     74       Director
      William Ambrose (1)                  39       Director
      Archie J. McGill (1)(2)              66       Director
      Frederick Gluck                      62       Director
</TABLE>

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

         Martin Shum founded the Company in May 1987 and has served as Chairman
of the Board of Directors, President and Chief Executive Officer since that
time. Prior to founding ACT, Mr. Shum was employed in various capacities by
several telecommunications companies, including Vice President of Marketing and
Development at MICOM, Director of Business Planning and Director of Engineering
at General DataComm, and senior member of the technical staff at Plessey
Telecommunications Research. Mr. Shum became a director of Netspeak Corporation
in June 1997.

         Michael S. Gardner has served as Chief Operating Officer since joining
the Company in November 1996. Mr. Gardner served as President of
Whittaker/Xyplex, an internetworking and remote access division of Whittaker
Corporation prior to joining the Company. From 1992 to 1994, Mr. Gardner was
Chief Operating Officer of Advanced Computer Communications. Mr. Gardner also
held numerous positions at Ungermann-Bass and Hewlett-Packard.

         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.

         Andre de Fusco has served as Vice President, Strategic Planning and
Business Development since December 1995. Mr. de Fusco joined the Company in
December 1994 and served as its Vice President of Marketing until 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.

         H. Peter Staab was appointed Vice President, Corporate Research and
Development in July 1997 and served as Vice President of Engineering since
joining the Company in June 1995. 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.

         Linda Carlson has served as Vice President, Worldwide Sales since
December 1995. Ms. Carlson served as the Company's Assistant Vice President of
Sales--Americas from January 1991 to December 1995. Prior to January 1991, Ms.
Carlson was employed at various telecommunication companies, including RED-SAC
and MICOM.


                                      21.


<PAGE>   24

         John W. Tucker has served as Vice President and General Manager,
Wireless Network Systems since March 1997, as Vice President, Sales and
Marketing since December 1995, and served as the Company's Vice President of
Sales from June 1990 until December 1995. Mr. Tucker was employed as a marketing
consultant from 1988 to 1990, as Assistant Vice President of North American
Sales at MICOM from 1985 to 1988 and as Director of Sales at Interlan, a local
area network component manufacturer, from 1984 to 1985.

         Jean-Guy Lacombe has served as Vice President and General Manager,
Enterprise Network Systems since July 1997, Vice President, Operations of the
Company and the General Manager of Presticom since December 1995. Mr. Lacombe
was the Chairman of the Board and Chief Executive Officer of Presticom from
February 1988 until November 1995.

         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
modems.

         William W. Ambrose has served as a member of the Board of Directors
since 1993. Mr. Ambrose is 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.

         Archie 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.

         Frederick Gluck has served as a member of the Board of Directors since
March 1997. Mr. Gluck recently retired as Vice Chairman of Bechtel Group, Inc.,
and continues as a Director and senior counselor and a member of the Board of
Directors of Bechtel Enterprises, Inc. Prior to joining Bechtel, Mr. Gluck spent
27 years with McKinsey & Company, a global management consulting firm, serving
as a Partner, Director and Managing Director. Mr. Gluck also spent ten years
with Bell Telephone, working in program management, systems analysis and
engineering and guidance systems designs.

         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. 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 1997 and each initial director in Class
III (Mr. Shum and 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.


                                      22.

<PAGE>   25

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, 1995, 1996 and 1997. Except as indicated below, during fiscal year
1995, 1996, and 1997, 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
                                                    --------------------------------------  ------------
                                                                                             SECURITIES
                                                    FISCAL                      BONUS/       UNDERLYING
NAME AND PRINCIPAL POSITIONS (1)                     YEAR         SALARY     COMMISSION($)   OPTIONS (#)
--------------------------------                    ------        -------    -------------   -----------
<S>                                                  <C>          <C>          <C>           <C>
Martin Shum.......................................   1997         225,000
                                                     1996         190,000                    251,500(3)(4)
                                                     1995         175,000                     57,143(2)

Linda Carlson.....................................   1997         100,000      101,092
                                                     1996         117,553       87,200        38,429(3)(4)(5)
                                                     1995          92,000       55,000         4,571(2)

John W. Tucker....................................   1997         100,000      121,576
                                                     1996         102,510       65,714        67,286(3)(4)
                                                     1995         115,000                      4,571(2)

Melvin L. Flowers.................................   1997         140,000
                                                     1996         120,000                     68,429(3)(4)
                                                     1995         115,000                     10,857(2)

Andre de Fusco....................................   1997         140,000
                                                     1996         123,335        7,677        54,286(3)(4)
                                                     1995         100,000                      6,857(2)
</TABLE>

------------------
(1) See "Directors and Executive Officers of Registrant" for the complete title
    of the position held by each Named Executive Officer. 

(2) These options were granted on July 18, 1994 pursuant to the Company's 1994
    Stock Option Bonus Program at an exercise price of $1.75 per share: 58,570
    options to Martin Shum (including 1,427 options to Mr. Shum's spouse, who is
    an employee of the Company), 2,857 options to Linda Carlson, 4,571 options
    to John Tucker, 10,857 options to Melvin Flowers, and 6,857 options to Andre
    de Fusco.

(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.


                                      23.

<PAGE>   26

OPTION GRANTS

         There were no grants of options to purchase shares of Common Stock
under the Company's 1995 Plan (or the Predecessor Plans) to the Named Executive
Officers. No stock appreciation rights were granted to any of the Named
Executive Officers during fiscal year 1997.

OPTION REPRICING

         The Company implemented an option cancellation/regrant program for
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 June 10, 1997, and a number of outstanding options with an exercise
price in excess of $ 16 5/8 per share were canceled and new options for the same
aggregate number of shares were granted with an exercise price of $ 16 5/8 per
share. No Named Executive Officer participated in the option
cancellation/regrant program; however, Michael Gardner elected to have all
150,000 of his stock options repriced.

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, 1997 and the number and
value of unexercised options held by each of the Named Executive Officers as of
June 30, 1997. No stock appreciation rights were exercised during fiscal year
1997 and no such appreciation rights were outstanding as of June 30, 1997.

                 AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997
              AND OPTION VALUES FOR FISCAL YEAR ENDED JUNE 30, 1997

<TABLE>
<CAPTION>
                                                                  Number of securities
                                                                        Underlying             Value of Unexercised
                                 Number                            Unexercised Options         In-the-Money Options
                               of Shares                           at June 30, 1997(1)         at June 30, 1997($)(2)
                              Acquired on          Value        --------------------------  --------------------------
Name                          Exercise(#)      Realized($)(3)   Exercisable  Unexercisable  Exercisable  Unexercisable
----                          -----------      --------------   -----------  -------------  -----------  -------------
<S>                            <C>             <C>              <C>          <C>            <C>          <C>
Martin Shum..................   15,900            $207,987        385,763                   $1,632,633
Linda Carlson................    3,000              54,945         39,643                       14,209
John W. Tucker...............    7,000             116,533         79,500                      159,183
Melvin L. Flowers............    6,000              93,454         66,715                       62,546
Andre de Fusco...............                                      81,000                      209,705
</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, 1997, each of the Named
    Executive Officers owned the following number of options for which vested
    shares were issuable upon exercise: Mr. Shum, 242,327; Ms. Carlson, 15,783;
    Mr. Tucker, 40,840; Mr.Flowers, 27,335, and Mr. de Fusco, 35,641.

(2) Calculated based on the closing sale price at June 30, 1997 of $ 12.75 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, 1997 for each of the Named Executive Officers was as
    follows: Mr. Shum, $1,593,968; Ms. Carlson, $12,328; Mr. Tucker, $156,169;
    Mr. Flowers, $55,385; and Mr. de Fusco, $97,568.

(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.


                                      24.


<PAGE>   27

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. Archie J. McGill. None of these individuals were at any time
during the fiscal year ended June 30, 1997 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. Archie J. McGill and Frederick Gluck.

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 executive officers or directors of the Company
except for John Tucker and Linda Carlson who are married.

         During the 1997 fiscal year, certain non-employee directors were
eligible to receive option grants under the Automatic Option Grant Program in
effect under the Company's 1995 Stock Option/Stock Issuance Plan. Accordingly,
at the 1996 Annual Shareholders Meeting held on November 4, 1996, 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
$27.50 per share: Messrs. Ambrose and McGill and Brig. Gen. (ret.) Johnson. In
addition, Frederick Gluck was granted options for 42,000 shares of Common Stock
with an exercise price of $19.69 per share upon joining the Board of Directors
in March 1997. 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-share
grant will vest on the day immediately preceding the date of the 1996 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.


                                      25.

<PAGE>   28

ITEM 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, 1997 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>
Lutheran Brotherhood (2)............................................      886,000        9.5%
Martin Shum (3).....................................................      434,417        4.5
William W. Ambrose (4)..............................................       39,155         *
Brig. Gen. H. R. Johnson (5)........................................       19,714         *
Archie J. McGill (6)................................................       46,857         *
Frederick W. Gluck (7)..............................................       42,000         *
Melvin L. Flowers (8)...............................................       80,656         *
John Tucker (9).....................................................       85,695         *
Andre de Fusco (10).................................................       82,816         *
H. Peter Staab (11).................................................       75,175         *
Linda Carlson (12)..................................................       40,070         *
Jean-Guy Lacombe (13)...............................................      125,272        1.3
Michael S. Gardner (14).............................................      150,000        1.6
All directors and executive officers as a
  group (12 persons) (15)..........................................     1,221,827       11.8
</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,
    1997.

(3) Includes 38,571 shares held by members of Mr. Shum's family and 14,083
    shares held by Helen Shum and Martin Shum as Trustees of the Shum Trust,
    dated April 15, 1994. Also includes 381,763 shares issuable upon exercise of
    immediately exercisable options (including 3,000 shares issuable upon
    exercise of options held by Mr. Shum's spouse) of which 261,608 shares will
    be vested within 60 days from August 31, 1997.

(4) Includes 25,155 shares beneficially owned by Pyramid Research, Inc. Mr.
    Ambrose, as President of Pyramid Research, Inc., may be deemed to have
    beneficial ownership of these shares. Also includes 14,000 shares issuable
    upon exercise of immediately exercisable options, of which 12,833 shares
    will be vested within 60 days from August 31, 1997.

(5) Includes 14,000 shares issuable upon exercise of immediately exercisable
    options, of which 12,833 shares will be vested within 60 days from August
    31, 1997.

(6) Includes 46,857 shares issuable upon exercise of immediately exercisable
    options, of which 36,262 shares will be vested within 60 days from August
    31, 1997.

(7) Includes 42,000 shares issuable upon exercise of immediately exercisable
    options, of which 5,880 shares will be vested within 60 days from August 31,
    1997.


                                      26.

<PAGE>   29

 (8) Includes 61,029 shares issuable upon exercise of immediately exercisable
     options, of which 27,775 shares will be vested within 60 days from August
     31, 1997.

 (9) Includes 79,500 shares issuable upon exercise of immediately exercisable
     options of which 46,497 shares will be vested within 60 days from August
     31, 1997. Excludes shares beneficially owned by Mr. Tucker's spouse, Ms.
     Linda Carlson, an executive officer of the Company.

(10) Includes 81,000 shares issuable upon exercise of immediately exercisable
     options, of which 42,841 shares will be vested within 60 days from August
     31, 1997.

(11) Includes 74,000 shares issuable upon exercise of immediately exercisable
     options of which 34,600 shares will be vested within 60 days from August
     31, 1997.

(12) Includes 39,643 shares issuable upon exercise of immediately exercisable
     options of which 19,029 shares will be vested within 60 days from August
     31, 1997. Excludes shares beneficially owned by Ms. Carlson's spouse, Mr.
     John Tucker, an executive officer of the Company.

(13) Includes 46,900 shares issuable upon exercise of immediately exercisable
     options of which 13,300 shares will be vested within 60 days from August
     31, 1997.

(14) Includes 150,000 shares issuable upon exercise of immediately exercisable
     options of which no shares will be vested within 60 days from August 31,
     1997.

(15) Includes 25,155 shares owned by Pyramid Research, Inc. Also includes an
     aggregate of 1,030,692 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 500,158 shares will
     be vested within 60 days from August 31, 1997.


                                      27.

<PAGE>   30

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

NONE


                                      28.

<PAGE>   31

                                     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, 1997 and 1996.......................F-2
         Consolidated Statements of Operations for the years ended
           June 30, 1997, 1996 and 1995.................................................F-4
         Consolidated Statements of Stockholders' Equity for the years
           ended June 30, 1997, 1996 and 1995...........................................F-5
         Consolidated Statements of Cash Flows for the years ended
           June 30, 1997, 1996 and 1995.................................................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>


                                      29.

<PAGE>   32

         (3) EXHIBITS:
<TABLE>
<CAPTION>

EXHIBIT NO.
-----------
<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>


                                      30.

<PAGE>   33

<TABLE>
<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.

    10.22      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.

    10.21      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.

    10.24      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>


                                      31.

<PAGE>   34

<TABLE>
<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.
               Incorporated by reference to Exhibit 10.28 to the Company's
               Quarterly Report for the period ended March 31, 1997.

    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.

    11.1       Statement Regarding Computation of Earnings Per Share.

    21.1       List of Subsidiaries of the Company.

    23.1       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, 1997.


                                      32.

<PAGE>   35

                                   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 29, 1997.

                                       ACT NETWORKS, INC.


                                       By: /s/ MARTIN SHUM
                                           -------------------------------------
                                           Martin Shum
                                           President and Chief Executive Officer

                                POWER OF ATTORNEY

         We, the undersigned officers and directors of ACT Networks, Inc., do
hereby constitute and appoint Martin Shum 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/ MARTIN SHUM                          Chairman, President and Chief              September 29, 1997
------------------------------------     Executive Officer
Martin Shum                             

/s/ MELVIN L. FLOWERS                    Vice President, Finance and                September 29, 1997
------------------------------------     Chief Financial Officer (principal
Melvin L. Flowers                        financial and accounting officer)

/s/ WILLIAM W. AMBROSE                   Director                                   September 29, 1997
------------------------------------
William W. Ambrose

/s/ HAROLD R. JOHNSON                    Director                                   September 29, 1997
------------------------------------
Harold R. Johnson

/s/ ARCHIE J. MCGILL                     Director                                   September 29, 1997
------------------------------------
Archie J. McGill

/s/ FREDERICK W. GLUCK                   Director                                   September 29, 1997
------------------------------------
Frederick W. Gluck
</TABLE>


                                      33.
<PAGE>   36
                         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, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended June 30, 1997. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ACT Networks, Inc.
at June 30, 1997 and 1996, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended June 30, 1997 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, 1997


                                      F-1

<PAGE>   37

                               ACT Networks, Inc.

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                         June 30
                                                            ---------------------------------
                                                                 1997                 1996
                                                            ------------         ------------
<S>                                                         <C>                  <C>
ASSETS
Current assets:
   Cash and cash equivalents                                $ 50,948,294         $ 70,374,310
   Short-term investments                                     10,591,665                   --
   Accounts receivable, less allowances of $411,000
     in 1997 and $287,000 in 1996                             14,792,162            9,861,953
   Inventory                                                  12,262,663            7,409,459
   Prepaid expenses                                              501,717              599,765
   Deposits                                                       43,595               65,659
                                                            ------------         ------------
Total current assets                                          89,140,096           88,311,146

Plant, equipment and other improvements:
   Machinery and equipment                                     6,032,790            2,949,764
   Furniture and fixtures                                        481,725              379,386
   Computer software                                           1,416,511              801,643
   Leasehold improvements                                        675,097              528,527
                                                            ------------         ------------
                                                               8,606,123            4,659,320
Accumulated depreciation and amortization                      3,846,797            2,180,970
                                                            ------------         ------------
                                                               4,759,326            2,478,350

Goodwill and other intangibles                                 4,675,847            2,932,450
Other assets                                                   2,120,588              128,570
                                                            ------------         ------------
Total assets                                                $100,695,857         $ 93,850,516
                                                            ============         ============
</TABLE>

See accompanying notes.


                                      F-2

<PAGE>   38

                               ACT Networks, Inc.

                     Consolidated Balance Sheets (continued)

<TABLE>
<CAPTION>
                                                                          June 30
                                                          ------------------------------------
                                                               1997                    1996
                                                          -------------          -------------
<S>                                                       <C>                    <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                       $   3,113,503          $   1,791,634
   Accrued expenses                                           1,530,315                920,045
   Accrued vacation                                             514,116                384,635
   Accrued commissions                                          333,514                143,243
   Income taxes payable                                       1,579,353                245,241
   Deferred income taxes                                         87,260                 78,803
                                                          -------------          -------------
Total current liabilities                                     7,158,061              3,563,601

Long-term debt                                                       --                147,294

Stockholders' equity:
   Common stock and additional paid-in capital;
     $.001 par value:
       Authorized - 40,000,000
       Issued and outstanding - 9,270,949 in 1997
         and 9,117,329 in 1996                              100,088,339             98,175,394
   Accumulated deficit                                       (6,550,543)            (8,035,773)
                                                          -------------          -------------
Total stockholders' equity                                   93,537,796             90,139,621
                                                          -------------          -------------
Total liabilities and stockholders' equity                $ 100,695,857          $  93,850,516
                                                          =============          =============
</TABLE>

See accompanying notes.


                                      F-3

<PAGE>   39

                               ACT Networks, Inc.

                      Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                                     Years ended June 30
                                                   --------------------------------------------------------
                                                        1997                 1996                  1995
                                                   ------------          ------------          ------------
<S>                                                <C>                   <C>                   <C>
Net sales                                          $ 49,173,298          $ 28,404,454          $ 20,566,247

Expenses:
   Cost of goods sold                                21,431,244            13,997,928             9,244,460
   Research and development                           8,344,215             5,026,601             3,586,230
   In process research and development                3,415,854             5,600,000                    --
   Sales and marketing                               11,114,962             7,174,339             4,784,467
   General and administrative                         5,291,220             3,257,349             1,735,759
                                                   ------------          ------------          ------------
Total operating expenses                             49,597,495            35,056,217            19,350,916
                                                   ------------          ------------          ------------
Income (loss) from operations                          (424,197)           (6,651,763)            1,215,331

Other:
   Interest and other income                          3,346,043             1,264,944               252,172
   Interest expense                                     (19,298)              (45,552)             (183,725)
                                                   ------------          ------------          ------------
                                                      3,326,745             1,219,392                68,447
                                                   ------------          ------------          ------------

Income (loss) before income taxes                     2,902,548            (5,432,371)            1,283,778
Provision for income taxes                            1,419,670               294,760                21,782
                                                   ------------          ------------          ------------
Net income (loss)                                  $  1,482,878          $ (5,727,131)         $  1,261,996
                                                   ============          ============          ============
Net income (loss) per share                        $       0.15          $      (0.78)         $       0.24
                                                   ============          ============          ============
Shares used in computing net income (loss)
  per share                                           9,973,404             7,307,664             5,210,910
                                                   ============          ============          ============
</TABLE>

See accompanying notes.


                                       F-4

<PAGE>   40

                               ACT Networks, Inc.

                 Consolidated Statements of Stockholders' Equity

<TABLE>
<CAPTION>
                                                                                  Common Stock
                                                                                    Paid-In
                                        Preferred Stock            Common Stock     Capital      Promon
                                     -------------------------------------------- In Excess of   Secured    Accumulated
                                       Shares       Amount       Shares    Amount  Par Value     Deposit      Deficit        Total
                                     ----------------------------------------------------------------------------------------------
<S>                                  <C>          <C>           <C>        <C>      <C>        <C>         <C>           <C>
Balance at July 1, 1994              17,351,666   $ 7,931,000   1,210,767  $1,211  $   785,259  $(300,000)  $(3,570,638) $4,846,832

  Amortization of deposit secured 
    by Series E preferred stock              --            --          --      --           --    255,000            --     255,000
  Exercise of options and warrants 
    to purchase common stock                 --            --     312,647     313      150,767         --            --     151,080
  Conversion of convertible
    preferred stock to common stock (17,351,666)   (7,931,000)  2,721,416   2,721    7,928,279         --            --          --
  Initial public offering                    --            --   2,905,000   2,905   33,797,816         --            --  33,800,721
  Net income                                 --            --          --      --           --         --     1,261,996   1,261,996
                                    -----------   -----------   ---------   -----  -----------  ---------  ------------ -----------
Balance at June 30, 1995                     --            --   7,149,830   7,150   42,662,121    (45,000)   (2,308,642) 40,315,629

  Amortization of deposit secured 
    by Series E preferred stock              --            --          --      --           --     45,000           --       45,000
  Exercise of options and warrants to
    purchase common stock                    --            --     281,134     281      539,111        --           --       539,392

  Secondary public offering                  --            --   1,510,000   1,510   53,684,370        --           --    53,685,880

  Shares issued in connection with
    acquisition                              --            --     176,365     176    1,280,675        --           --     1,280,851
Net loss                                     --            --          --      --           --        --   (5,727,131)   (5,727,131)
                                     ----------   -----------  ----------  ------ ------------  --------  -----------   -----------
Balance at June 30, 1996                     --            --   9,117,329   9,117 $ 98,166,277        --   (8,035,773)   90,139,621
  Exercise of options to purchase 
    common stock and employee stock
    purchases                                --            --     130,762     131    1,272,814        --           --     1,272,945
  Shares issued in connection with 
    acquisition                              --            --      22,858      23      639,977        --           --       640,000
  Translation adjustment                     --            --          --      --           --        --        2,352         2,352
  Net income                                 --            --          --      --           --        --    1,482,878     1,482,878
                                     ----------   -----------  ----------  ------ ------------   -------  -----------   -----------
Balance at June 30, 1997                     --   $        --   9,270,949  $9,271 $100,079,068   $    --  $(6,550,543)  $93,537,796
                                     ==========   ===========  ==========  ====== ============   =======  ===========   ===========
</TABLE>

See accompanying notes.


                                      F-5

<PAGE>   41



                               ACT Networks, Inc.

                      Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
                                                                         Years ended June 30
                                                          --------------------------------------------------
                                                              1997               1996               1995
                                                          ------------       ------------       ------------
<S>                                                       <C>                <C>                <C>
OPERATING ACTIVITIES
Net income (loss)                                         $  1,482,878       $ (5,727,131)      $  1,261,996

Adjustments to reconcile net income (loss) to
  net cash provided by (used in) operating activities:
    Depreciation and amortization                            2,327,509          1,216,277            583,730
    Provision for allowances on accounts receivable              6,572              2,769              6,492
    Provision (benefit) for deferred taxes                          --             68,039            (82,176)
    Amortization of secured research and development
      deposit                                                       --             45,000            255,000
    Write-off of in-process research and development         3,415,854          5,600,000                 --
    Changes in operating assets and liabilities:
      Accounts receivable                                   (4,722,907)        (3,633,474)        (2,549,094)
      Inventory                                             (3,285,168)        (2,371,001)        (2,876,827)
      Prepaid expenses and deposits                            195,636           (342,278)           (90,893)
      Accounts payable, accrued expenses and income
        taxes payable                                        3,312,145            229,285          1,029,776
                                                          ------------       ------------       ------------
Net cash provided by (used in) operations                    2,732,519         (4,912,514)        (2,461,996)

INVESTING ACTIVITIES
Purchase of short-term investments                         (10,591,665)                --                 --
Purchase of long-term investments                           (1,995,000)                --                 --
Purchase of plant, equipment and other fixed assets         (3,499,697)        (1,794,089)        (1,367,801)
Acquisition of Presticom Inc., net of cash acquired                 --         (7,000,399)                --
Acquisition of DeltaComm Corp., net of cash acquired          (262,013)                --                 --
Acquisition of Dynastar product line                        (6,793,850)                --                 --
Other assets                                                     8,039           (617,067)          (372,202)
                                                          ------------       ------------       ------------
Net cash used in investing activities                      (23,134,186)        (9,411,555)        (1,740,003)

FINANCING ACTIVITIES
Stock warrants and options                                   1,272,945            539,392            151,080
Borrowings on line of credit                                        --                 --          2,850,000
Repayments of line of credit                                        --                 --         (2,850,000)
Net proceeds from stock offering                                    --         53,685,880         33,800,721
Repayment of notes payable                                    (297,294)           (73,171)                --
                                                          ------------       ------------       ------------
Net cash provided by financing activities                      975,651         54,152,101         33,951,801
                                                          ------------       ------------       ------------
Net (decrease) increase in cash                            (19,426,016)        39,828,032         29,749,802
Cash and cash equivalents at beginning of year              70,374,310         30,546,278            796,476
                                                          ------------       ------------       ------------
Cash and cash equivalents at end of year                  $ 50,948,294       $ 70,374,310       $ 30,546,278
                                                          ============       ============       ============
</TABLE>


                                      F-6

<PAGE>   42

                               ACT Networks, Inc.

                Consolidated Statements of Cash Flows (continued)

<TABLE>
<CAPTION>
                                                                           Years ended June 30
                                                              -----------------------------------------------
                                                                  1997              1996              1995
                                                              -----------       ------------      -----------
<S>                                                           <C>               <C>               <C>
Supplemental cash flow information:
  Interest and income taxes paid during the year:
    Interest                                                  $    19,298       $     6,387       $   183,725
    Income taxes                                                  173,163             9,787            17,000

Non-cash investing and financing activities:
  Acquisition of Presticom Inc.:
  Fair market value of assets (including goodwill)
    acquired                                                           --         4,456,115                --
  Fair market value of in-process research and
    development                                                        --         5,600,000                --
  Fair market value of liabilities assumed                             --          (887,769)               --
  Issuance of stock                                                    --        (1,280,851)               --
  Cash acquired                                                        --          (887,096)               --

Acquisition of DeltaComm Corporation:
  Fair market value of assets (including goodwill)
    acquired                                                      374,424                --                --
  Fair market value of in-process research and development        700,746                --                --
  Fair market value of liabilities assumed                       (158,115)               --                --
  Issuance of stock                                              (640,000)               --                --
  Cash acquired                                                   (15,042)               --                --
                                                              -----------
                                                                  262,013                --                --
Acquisition of Dynastar product line:                                                    --
  Fair market value of tangible assets acquired                 2,131,764                --                --
  Fair market valuation of intangibles                          4,936,286                --                --
  Liabilities assumed                                            (274,200)               --                --
                                                              -----------
                                                                6,793,850                --                --
                                                              -----------       -----------       -----------
                                                              $ 7,055,863       $ 7,000,399       $        --
                                                              ===========       ===========       ===========
</TABLE>

See accompanying notes.


                                      F-7

<PAGE>   43

                               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 date of acquisition.

Cash Equivalents

Short-term investments that are part of the Company's cash management portfolio
are classified as cash equivalents and are carried at cost which approximates
market value and are considered available for sale. These investments are highly
liquid, are of limited credit risk and have original maturities of three months
or less.

Short-term Investments

Short-term investments represent marketable securities available for current
operations, all of which have been classified as available for sales. These
investments, which primarily consist of corporate investment grade bonds and
mature within one year, are carried at market value. The unrealized gain or loss
on these holdings is not significant. There were no realized gains or losses
relating to short-term investments during the year ended June 30, 1997.


                                      F-8

<PAGE>   44
                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

Significant Accounting Policies (continued)

Concentration of Credit Risks and Significant Customers

Accounts receivable consist primarily of amounts due from various original
equipment manufacturers, end users and distributors primarily located in foreign
countries. The Company does not require collateral. However, the Company does
perform periodic credit evaluations and analysis of the amounts due from its
customers. In addition, the Company carries credit insurance on certain foreign
accounts receivable, which is subject to certain limits. Included in accounts
receivable at June 30, 1997 and 1996 are $10,517,484 and $6,234,438,
respectively, of amounts due from foreign customers. Credit losses have been
within management's expectations and management believes that potential
uncollectible accounts have been provided for in the financial statements.

The three largest accounts receivable from individual customers represented
11.1%, 9.1% and 5.7% at June 30, 1997 and 18.1%, 11.8% and 7.3% at June 30, 1996
of total accounts receivable, respectively.

Sales included amounts to certain individual customers that exceed 10% of total
sales. Sales to one customer represented 11.5% of total sales for 1997, sales to
one customer represented 17% of total sales for 1996, and sales to one customer
represented 14% of total sales for 1995.

The Company's sales by geographic area are as follows:

<TABLE>
<CAPTION>
                                                 Years ended June 30
                                   ---------------------------------------------
                                      1997               1996           1995
                                   -----------      -----------     ------------
<S>                                <C>              <C>             <C>
North America                      $12,422,456      $10,568,213     $ 6,907,360
Latin America                       18,935,607        8,025,676       5,317,735
Europe                               5,375,160        3,752,173       2,404,614
Asia Pacific                        12,440,075        6,058,392       5,936,538
                                   -----------      -----------     -----------
                                   $49,173,298      $28,404,454     $20,566,247
                                   ===========      ===========     ===========
</TABLE>


                                      F-9

<PAGE>   45

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)


1. Significant Accounting Policies (continued)

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.

Inventory

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

<TABLE>
<CAPTION>
                                                  1997             1996
                                               ----------       ----------
<S>                                             <C>             <C>
Purchased parts                               $ 5,673,972       $3,629,460
Sub-assemblies and finished goods               6,588,691        3,779,999
                                              -----------       ----------
                                              $12,262,663       $7,409,459
                                              ===========       ==========
</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 $4,675,847 and $2,932,450 at June 30, 1997 and
1996 are net of accumulated amortization of $1,028,479 and $271,137,
respectively. 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. The other material intangible assets are software
licensing agreements being amortized over 3 to 5 years.


                                      F-10

<PAGE>   46

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

1. Significant Accounting Policies (continued)

Long-Lived Assets

Effective July 1, 1996, 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. Current and prior period financial statements have not been
affected by the adoption of SFAS 121.

Other Assets

At June 30, 1997, other assets includes a $1,995,000 investment in the initial
public offering of Netspeak Corporation. The market value of the investment at
June 30, 1997 is approximately $2,137,000 and is carried at cost due to certain
trading restrictions.

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.

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, 1997 and 1996 of such credits and grants amounted to $180,746 and
$454,685, respectively. For the years ended June 30, 1997 and 1996, $76,861 and
$143,500 of these credits and grants, respectively, were reflected as a
reduction of research and development expense in the accompanying statement of
operations.


                                      F-11

<PAGE>   47

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

1. Significant Accounting Policies (continued)

Net Income (Loss) Per Share

Net income (loss) per share is computed using the weighted average number of
shares of common stock outstanding. Common equivalent shares from stock options
and warrants (using the treasury stock method) have been included in the
computation when dilutive. For the year ended June 30, 1995, pursuant to the
Securities and Exchange Commission (SEC) Staff Accounting Bulletins, all common
and common equivalent shares issued by the Company at an exercise price below
the public offering price during the twelve-month period prior to the offering
(cheap stock) have been included in the calculation as if they were outstanding
for all periods presented (using the treasury stock method at the initial public
offering price per share and the if-converted method for convertible preferred
stock) through the date of the Company's initial public offering, May 2, 1995.

Supplemental earnings per share for the year ended June 30, 1995 was $0.27.
Supplemental earnings per share reflects what earnings per share would have been
under APB No. 15 if the debt retired with the proceeds from the initial public
offering (see note 9) had been retired at the beginning of the period. The
weighted average number of shares of common stock whose presumed proceeds are to
be used to retire debt are included in this calculation.

In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share (SFAS 128), which is required to be adopted on June 30,
1998. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements, primary and fully diluted earnings per share will be replaced
with basic and diluted earnings per share. Basic earnings per share excludes the
dilutive effect of stock options and will therefore be higher than primary
earnings per share. Diluted earnings per share under the new standard is
expected to be essentially the same as primary earnings per share amounts
calculated under principles currently used. The impact of the adoption of SFAS
128 on earnings per share calculations for the fiscal years ended June 30, 1997
and 1996 is not expected to be material.

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.


                                      F-12

<PAGE>   48

                               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.

Reclassification

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

2. Business Acquisitions

On March 11, 1997, the Company acquired the DynaStar family of products from
Dynatech Communications, Inc. ("DCI"), a wholly-owned subsidiary of Dynatech
Corporation, a Massachusetts corporation ("Dynatech"). 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 approximately $6,444,000. The Company assumed approximately
$274,000 of liabilities and recorded transaction costs 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. 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,
$2,715,108 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 $2,221,178 represented other intangibles being amortized over 5
to 7 years. 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-13

<PAGE>   49

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

2. Business Acquisitions (continued)

On December 16, 1996, 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 22,858
shares of common stock of the Company with an estimated fair market value of
$640,000. The Company assumed $158,115 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. 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 $9,168,346 consisting of
$7,887,495 paid in cash and the issuance of 176,365 shares of common stock of
the Company with an estimated fair market value of $1,280,851, representing a
30% discount from the quoted market price at the date of acquisition due to
certain trading restrictions placed on the stock pursuant to the agreement.

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. 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-14

<PAGE>   50

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

3. Line of Credit and Notes Payable

At June 30, 1997, 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, 1997 there were no outstanding balances under the Line of Credit.
Interest on the Line of Credit was payable monthly at a rate equal to the Bank's
prime rate, which was 8.5% at June 30, 1997, 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, 1997 and June 30, 1996, 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.

Subsequent to June 30, 1997, the line of credit expired on July 5, 1997 and a
new line is being negotiated.

4. Income Taxes

The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                                                       Years ended June 30,
                                          ------------------------------------------
                                              1997            1996            1995
                                          ------------------------------------------
<S>                                       <C>               <C>             <C>
    Current:
      Federal                             $   60,000        $     --        $ 91,307
      State                                   20,000              --          18,659
      Foreign                              1,331,213         274,311              --
                                          ----------        --------        --------
                                           1,411,213         274,311        $109,966
    Deferred:
      Federal                                     --              --         (88,184)
      State                                       --              --              --
      Foreign                                  8,457          20,449              --
                                          ----------        --------        --------
                                               8,457          20,449         (88,184)
                                          ----------        --------        --------
                                          $1,419,670        $294,760        $ 21,782
                                          ==========        ========        ========
</TABLE>


                                      F-15

<PAGE>   51

                               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 $3,987,331 and $(1,133,642) for the year ended June
30, 1997 and $871,772 and $(5,994,285) 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,
                                                  ---------------------------------
                                                  1997           1996          1995
                                                  ----           ----          ----
<S>                                               <C>            <C>           <C>
Statutory federal income tax (benefit) rate        34%            (34)%         34%
Amortization of goodwill                            4               1           --
Non-deductible in process research and
  development                                       8              35           --
Change in valuation allowance                      --              --          (39)
State income taxes                                 --              --            5
Foreign income taxes                               --               5           --
Other                                               3              (2)           2
                                                  ---             ---          ---
                                                   49%              5%           2%
                                                  ===             ===          ===
</TABLE>

The tax provision for the years ended June 30, 1997 and 1995 included the
application of net operating loss carryforwards which generated tax benefits of
approximately $848,000 and $519,000, respectively.


                                      F-16

<PAGE>   52

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

4. Income Taxes (continued)

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:

<TABLE>
<CAPTION>
                                                                    June 30,
                                                       ---------------------------------
                                                           1997                  1996
                                                       -----------           -----------
<S>                                                    <C>                   <C>
Deferred tax assets:
  Technology deposit                                   $    70,858           $   108,390
  Allowance for losses on receivables                      126,517               109,786
  Vacation accruals                                        139,193               108,888
  Depreciation                                             306,025               188,571
  Inventory valuation allowance                            425,150               322,674
  Amortization of intangibles                            1,026,071                    --
  Net operating loss carryforwards                       1,310,938             2,394,364
  Research and development credit carryforwards          1,078,856               630,923
  AMT credits                                               52,162                19,844
  Unicap adjustment                                        106,963                61,510
  Other                                                     63,444                43,598
                                                       -----------           -----------
Total deferred tax assets                                4,706,177             3,988,548

Deferred tax liabilities:
  Software development costs                               (27,188)              (28,138)
  License fee                                             (117,235)             (420,000)
  Prepaid insurance                                        (29,198)             (148,794)
  Federal benefit from State                              (165,094)                   --
                                                       -----------           -----------
Total deferred tax liabilities                            (338,715)             (596,932)
                                                       -----------           -----------
Net deferred tax assets                                  4,367,462             3,391,616
Valuation allowance                                     (4,367,462)           (3,391,616)
Foreign deferred tax liabilities                           (87,260)              (78,803)
                                                       -----------           -----------
                                                       $   (87,260)          $   (78,803)
                                                       ===========           ===========
</TABLE>

The net change in the valuation allowance for net deferred tax assets during the
year ended June 30, 1997 was approximately $975,000.


                                      F-17

<PAGE>   53

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

4. Income Taxes (continued)

At June 30, 1997, the Company has net operating loss carryforwards for federal
tax purposes of approximately $3,856,000, which expire in 2012. The Company has
research and development credit carryforwards of $811,000 and $268,000 for
federal and state tax purposes, respectively, that expire through 2010 for
federal and 2012 for state.

Included in the valuation allowance balance is $2,728,000 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. Stock Option and Purchase Plans

At June 30, 1995 the Company had a 1987 stock option plan and a 1993 stock
option plan which provided for granting stock options to key employees,
directors, outside consultants and independent contractors. In September 1995,
the Company adopted the 1995 stock option/stock issuance plan (the 1995 Plan)
and an employee stock purchase plan. The 1995 Plan serves as the successor to
the 1987 and 1993 stock option plans and all options outstanding and options
available for grant under the 1987 and 1993 stock option plans were incorporated
into the 1995 Plan. In September 1996, the Board of directors approved an
amendment to the 1995 plan which increased the number of shares authorized
thereunder from 1,780,844 to 2,280,844. This increase was approved by the
Company's shareholders at the Annual Meeting held in November 1996. In April
1997, the Company's board of directors adopted the 1997 Non-Executive Officer
Stock Option/Stock Issuance Plan (the 1997 Plan) which authorized 250,000 shares
of common stock for issuance under the plan. The 1997 Plan was amended in July
1997 with an additional 250,000 shares authorized.

Options granted under all stock option plans 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


                                      F-18

<PAGE>   54

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

5. Stock Option and Purchase Plans (continued)

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.

The following is a summary of all stock option activity for the three years
ended June 30, 1997:

<TABLE>
<CAPTION>
                                             Exercise
                                               Price            Number
                                             Per Share         of Shares
                                            ----------        -----------
          <S>                               <C>               <C>
          Outstanding at June 30, 1994       .07- 1.05            579,928
            Granted                         1.75- 4.90            263,000
            Canceled                         .70- 4.90            (25,303)
            Exercised                        .70- 1.75           (167,740)
                                                               ----------
          Outstanding at June 30, 1995       .07- 4.90            649,885
            Granted                         8.25-23.88          1,073,458
            Canceled                         .70-23.88            (31,612)
            Exercised                        .70-17.25           (269,407)
                                                               ----------
          Outstanding at June 30, 1996       .07-23.88          1,422,324
            Granted                        11.00-35.00          1,744,738
            Canceled                         .70-35.00           (936,494)
            Exercised                        .70-17.25           (109,852)
                                                               ----------
          Outstanding at June 30, 1997       .07-23.88          2,120,716
                                                               ==========
</TABLE>

At June 30, 1997, the Company has authorized a total of 2,280,844 shares of
common stock for issuance under the 1995 Plan and 500,000 shares under the 1997
Plan. At June 30, 1997, 228,728 shares remain available for grant and 2,052,116
are reserved for issuance upon the exercise of outstanding options and options
available for grant under the 1995 Plan and 431,400 shares remain available for
grant and 68,600 shares are reserved for issuance upon the exercise of
outstanding options under the 1997 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 at the closing stock price of ACT stock on June 10, 1997,
or 16 5/8 per share. All options previously granted to each


                                      F-19


<PAGE>   55

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

5. Stock Option and Purchase Plans (continued)

employee at the higher price which were repriced were canceled. The new options
granted were subject to the same vesting schedule as the previous options (i.e.,
the employee did not lose any vesting by getting the new options) except that
any vesting which may have already occurred under the previous options would be
forfeited unless the optionee remains in the Company's employ through June 9,
1998.

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. 20,910 shares were issued
under this plan for the year ended June 30, 1997. There are 129,089 shares
authorized and available for future issuance under this plan.

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 1995. 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 1997 and 1996, respectively: risk-free interest rates of 6.61%
and 6.22%; dividend yields of 0% and 0%; volatility factors of the expected
market price of the Company's common stock of 65%, and expected life of the
options of 4 years. These assumptions resulted in weighted-average fair values
of $9.62 and $7.99 per share for stock options granted in 1997 and 1996,
respectively.


                                      F-20

<PAGE>   56

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

5. Stock Options (continued)

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 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:

<TABLE>
<CAPTION>

         Years ended June 30,                      1997                1996
         --------------------                  -----------         -----------
         <S>                                   <C>                 <C>
         Pro forma net loss                    $(2,412,175)        $(7,107,878)
         Pro forma loss per share:
           Primary                                  $(0.26)             $(0.97)
</TABLE>

6. Product Development Agreement

In 1994, the Company executed a product development agreement with Promon
Technical Services, Inc. (PST) a company under the control of Promon
International, Inc. The deemed fair value of the contracted development effort
was estimated to be approximately $350,000. Of the $350,000 development
contract, $50,000 was recorded as research and development expense in the year
ended June 30, 1994, and the remaining $300,000 was recorded as a contra-equity
account to be charged to research and development expense over the development
period. For the year ended June 30, 1995, the Company charged $255,000 of the
$300,000 to research and development expense based on the efforts expended
during the year. The remaining $45,000 was charged to research and development
in the year ended June 30, 1996.


                                      F-21

<PAGE>   57

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

7. Commitments

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:

<TABLE>
<CAPTION>

Fiscal Years ended June 30,
---------------------------
<S>                                                <C>
          1998                                     $  845,598
          1999                                        758,058
          2000                                         84,576
          2001                                         28,192
                                                   ----------
                                                   $1,716,424
                                                   ==========
</TABLE>

Rental expense under operating leases was $668,285, $491,832, and $537,000 for
the years ended June 30, 1997, 1996 and 1995, respectively.

8. 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 $30,110 to the Plan during the year ended 1997 and made no
contributions to the Plan during the years ended 1996 and 1995.

9. Stockholders' Equity

In March 1995, the Board approved "reincorporation" in Delaware and a
one-for-seven reverse stock split of the Company's common stock. All share and
per share data has been adjusted retroactively to reflect the reverse stock
split.

In May 1995, the Company completed an initial public offering of 2,905,000
shares of the Company's unissued common stock and 200,000 shares of its
outstanding common stock being offered by certain selling shareholders at $13.00
per share. In connection with the offering all previously outstanding preferred
stock was automatically converted into common stock based on the appropriate
conversion ratios.


                                      F-22

<PAGE>   58

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)


9. Stockholders' Equity (continued)

In June 1996, the Company completed a secondary public offering of 1,510,000
shares of the Company's unissued common stock and 1,490,000 shares of its
outstanding common stock being offered by certain selling stockholders at $38.00
per share.

10. Geographic Information

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

<TABLE>
<CAPTION>
                                                         Years ended June 30,
                                         --------------------------------------------------
                                             1997               1996              1995
                                         ------------       ------------       ------------
<S>                                      <C>                <C>                <C>
Sales to unaffiliated customers:
  United States                          $ 42,495,580       $ 25,647,700       $ 20,566,247
  Canada                                    6,677,718          2,757,044                 --
Transfers between geographic areas:
  United States                               401,920            254,134                 --
  Canada                                    7,570,901            975,910                 --
Adjustments and eliminations               (7,972,821)        (1,230,334)                --
                                         ------------       ------------       ------------
Total revenues                           $ 49,173,298       $ 28,404,454       $ 20,566,247
                                         ============       ============       ============

Operating profit (loss):
  United States                          $ (4,436,940)      $ (7,219,838)      $  1,215,331
  Canada                                    3,963,884            877,933                 --
Adjustments and eliminations                   48,859           (309,858)                --
                                         ------------       ------------       ------------
Total operating profit (loss)            $   (424,197)      $ (6,651,763)      $  1,215,331
                                         ============       ============       ============
</TABLE>

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 $3,415,854 and
$5,600,000 for the years ended June 30, 1997 and June 30, 1996, respectively.
Intercompany sales and transfers are recorded at cost plus a normal mark up.


                                      F-23

<PAGE>   59

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

10. Geographic Information (continued)

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

<TABLE>
<CAPTION>
                                              Years ended June 30,
                                      -----------------------------------
                                          1997                   1996
                                      ------------           ------------
<S>                                   <C>                    <C>
Identifiable assets:
  United States                       $ 92,614,633           $ 88,334,549
  Canada                                 7,479,875              3,598,966
Adjustments and eliminations            (4,074,498)            (1,144,019)
                                      ------------           ------------
Total identifiable assets             $ 96,020,010           $ 90,789,496
                                      ============           ============
</TABLE>

Identifiable assets are those assets of the Company that are identified with the
operations in each geographic area. Canada's identifiable assets include
accounts receivable of approximately $2,473,170 and $1,232,505 denominated in
foreign currencies at June 30, 1997 and June 30, 1996, respectively.


                                      F-24

<PAGE>   60

                               ACT Networks, Inc.

             Notes to Consolidated Financial Statements (continued)

11. Quarterly Operating Data (Unaudited)

The following is a summary of unaudited quarterly results of operations:

<TABLE>
<CAPTION>
                                                                 Quarter
                                     ----------------------------------------------------------------
                                       First            Second*           Third*             Fourth
                                     --------          --------          --------           ---------
                                                 (In Thousands Except Per Share Data)
<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
                                     --------          --------          --------           --------
Net income (loss) per share          $   0.13          $   0.11          $  (0.11)          $    .01
                                     ========          ========          ========           ========
</TABLE>

<TABLE>
<CAPTION>
                                                                Quarter
                                     ------------------------------------------------------------
                                      First            Second*            Third           Fourth
                                     -------           -------           -------          -------
                                               (In Thousands Except Per Share Data)
<S>                                  <C>               <C>               <C>              <C>
Year ended June 30, 1996:
  Net sales                          $ 5,102           $ 6,167           $ 8,030          $ 9,105
  Gross profit                         2,642             2,476             4,143            5,128
  Net income (loss)                     (211)           (6,656)              395              745
                                     -------           -------           -------          -------
Net income (loss) per share          $ (0.03)          $ (0.92)          $  0.05          $  0.09
                                     =======           =======           =======          =======
</TABLE>

-----------------
* Included in the Company's net income (loss) for the third and second quarters
  of 1997 and the second quarter of 1996 are charges of $2,715,108, $700,746 and
  $5,600,000, respectively, due to the write-off of in-process research and
  development purchased in connection with acquisitions (see Note 2).

12. Subsequent Events (unaudited)

In August 1997, the Company acquired certain assets of Sourcecom, Inc, a
developer of high performance broadband access devices. The cash purchase price
paid by the Company was $8,600,000. The acquisition will be accounted for under
the purchase method of accounting.


                                      F-25

<PAGE>   61
                               ACT NETWORKS, INC.

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

                        Three years ended June 30, 1997

<TABLE>
<CAPTION> 
                                                                     Additions              Deductions
                                                              -------------------------    -------------
                                                                             Charged to      Amounts
                                                                                Other       Charged to
                                              Balance at      Charged to       Accounts       Reserve      Balance at
                                              Beginning       Costs and       (Primarily       Net of       End of 
                                              of Period        Expense       Gross Sales)  Reinstatement    Period
                                              ---------       ----------    -------------  -------------   ----------
<S>                                           <C>             <C>           <C>            <C>             <C>
Year ended June 30, 1995
  Reserves and allowance deducted from
    asset accounts
      Allowance for doubtful items            $ 56,566          $ 4,132         $     --      $ (2,312)      $ 63,000
                                              ========          =======         ========      ========       ========

Year ended June 30, 1996
  Reserves and allowance deducted from
    asset accounts
      Allowance for doubtful items            $ 63,000          $20,000         $     --      $ 20,000       $ 63,000
      Other (sales return reserve)                  --               --          425,000       201,000        224,000
                                              --------          -------         --------      --------       --------
                                              $ 63,000          $20,000         $425,000      $221,000       $287,000
                                              ========          =======         ========      ========       ========
Year ended June 30, 1997
  Reserves and allowance deducted from
    asset accounts
      Allowance for doubtful items            $ 63,000          $59,000         $128,000      $ 31,000       $219,000
      Other (sales return reserve)             224,000               --           63,000        95,000        192,000
                                              --------          -------         --------      --------       --------
                                              $287,000          $59,000         $191,000      $126,000       $411,000
                                              ========          =======         ========      ========       ========
</TABLE>


                                      S-2