<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-Q

(MARK ONE)

/X/         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
            EXCHANGE ACT OF 1934
                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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                                                77-0396887
(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


    FORMER NAME, FORMER ADDRESS AND FORMER NINE MONTHS, IF CHANGED SINCE LAST
                             REPORT: Not Applicable


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

                APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
                  PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

INDICATED BY A CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTIONS 12, 13, OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT.
         YES ____________ NO _______________

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.

AS OF MAY 9, 1997, THERE WERE 9,262,818 SHARES OF COMMON STOCK OUTSTANDING.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      NONE
<PAGE>   2
                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                                                               PAGE
PART I.           FINANCIAL INFORMATION                                                                      NUMBER

<S>                                 <C>                                                                      <C>
                  Item 1.           Financial Statements

                                            Consolidated Balance Sheets as of
                                            March 31, 1997 and June 30, 1996......................................3

                                            Consolidated Statements of Operations
                                            for the Nine Month Periods Ended
                                            March 31, 1997 and 1996...............................................4

                                            Consolidated Statements
                                            of Cash Flows for the Nine Month Periods Ended
                                            March 31, 1997 and 1996...............................................5

                                            Notes to Condensed Consolidated
                                            Financial Statements..................................................6

                  Item 2.           Management's Discussion and Analysis of
                                    Financial Condition and Results of Operations.................................8

PART II.          OTHER INFORMATION

                  Item 1            Legal Proceedings............................................................13

                  Item 2            Changes in Securities........................................................13

                  Item 3            Defaults upon Senior Securities..............................................13

                  Item 4            Submission of Matters to a Vote of Securityholders...........................13

                  Item 5            Other Information.  Risk Factors.............................................13

                  Item 6.           Exhibits and Reports on Form 8-K.............................................20

SIGNATURE........................................................................................................23

EXHIBIT INDEX....................................................................................................24
</TABLE>


                                       2
<PAGE>   3
                                     PART I.
                              FINANCIAL INFORMATION

ITEM 1.           FINANCIAL STATEMENTS.

                               ACT NETWORKS, INC.
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                            MARCH 31,           JUNE 30,
                                                                             1997                  1996
                                                                        ----------------------------------
                                                                          (unaudited)
<S>                                                                     <C>                   <C>
ASSETS
Current assets:
   Cash and cash equivalents                                            $  64,027,023         $ 70,374,310
   Accounts receivable, less allowances of $287,000
            in March and June                                              15,644,360            9,861,953
   Inventory                                                               10,899,687            7,409,459
   Prepaid expenses                                                           574,082              599,765
   Deposits                                                                   100,517               65,659
                                                                        ----------------------------------
Total current assets                                                       91,245,669           88,311,146
Plant, equipment and other improvements:
   Machinery and equipment                                                  4,543,189            3,017,720
   Furniture and fixtures                                                     533,733              379,386
   Computer software                                                        1,843,372              801,643
   Leasehold improvements                                                     653,940              528,527
                                                                        ----------------------------------
                                                                            7,574,234            4,727,276
   Accumulated depreciation and amortization                                3,395,788            2,248,926
                                                                        ----------------------------------
                                                                            4,178,446            2,478,350
Goodwill and intangible assets                                              4,051,518            1,882,455
Other assets                                                                  898,882            1,178,565
                                                                        ----------------------------------
Total assets                                                            $ 100,374,515         $ 93,850,516
                                                                        ==================================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                     $   3,104,676         $  2,121,933
   Accrued expenses                                                         1,643,620              639,746
   Accrued vacation                                                           435,035              334,635
   Accrued commissions                                                        224,516              143,243
   Income taxes payable                                                     1,681,322              245,241
   Deferred income taxes                                                       77,624               78,803
                                                                        ----------------------------------
Total current liabilities                                                   7,166,793            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 9,255,869 in March
       and 9,117,329 in June                                               99,846,682           98,175,394
   Accumulated deficit                                                     (6,638,960)          (8,035,773)
                                                                        ----------------------------------
Total stockholders' equity                                                 93,207,722           90,139,621
                                                                        ==================================
Total liabilities and stockholders' equity                              $ 100,374,515         $ 93,850,516
                                                                        ==================================
</TABLE>


                             See accompanying notes.


                                       3
<PAGE>   4
                               ACT Networks, Inc.
                      Consolidated Statements of Operations
                                   (unaudited)


<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED                    NINE MONTHS ENDED
                                                         MARCH 31,                             MARCH 31,
                                              --------------------------------     ------------------------------- 
                                                  1997               1996              1997               1996
                                              --------------------------------------------------------------------

<S>                                           <C>                  <C>             <C>                 <C>
Net sales                                     $ 13,651,763         $8,030,487      $ 35,724,831        $19,299,372

Expenses:
   Cost of goods sold                            5,815,281          3,687,135        15,480,070         10,020,685
   Research and development                      2,223,629          1,271,054         5,536,821          3,550,015
   Sales and marketing                           2,900,728          1,910,100         7,443,401          5,068,552
   General and administrative                    1,248,647            904,226         3,410,307          2,311,262
   In-process research and development
                                                 2,715,108                            3,415,854          5,600,000
                                              --------------------------------------------------------------------
Total operating expenses                        14,903,393          7,772,515        35,286,453         26,550,514
                                              --------------------------------------------------------------------
Income (loss) from operations                   (1,251,630)           257,972           438,378         (7,251,142)

Other:
   Interest and other income, net                  773,216            230,187         2,452,803            911,905
                                              --------------------------------------------------------------------
Income (loss) before income taxes                 (478,414)           488,159         2,891,181         (6,339,237)
Provision for income taxes                         557,570             93,567         1,521,760            132,997
                                              --------------------------------------------------------------------
Net income (loss)                             $ (1,035,984)        $  394,592       $ 1,369,421        $(6,472,234)
                                              ====================================================================
Net income (loss) per share                   $      (0.11)        $     0.05       $      0.14        $     (0.89)
                                              ====================================================================
Shares used in computing net income
  (loss) per share                               9,194,308          7,990,561        10,035,540          7,233,789
                                              ====================================================================
</TABLE>

                             See accompanying notes


                                       4
<PAGE>   5
                               ACT Networks, Inc.
                      Consolidated Statements of Cash Flows
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                  NINE MONTHS ENDED
                                                                      MARCH 31,
                                                                      ---------
                                                              1997                 1996
                                                         ----------------------------------
<S>                                                      <C>                  <C>
OPERATING ACTIVITIES
Net income (loss)                                        $  1,369,421         $ (6,472,233)
Adjustments to reconcile net income (loss) to net
   cash used in operating activities:
     Depreciation and amortization                          1,375,678              792,797
     Write-off of in-process research and
       development                                          3,415,854            5,600,000
     Changes in operating assets and liabilities:
        Accounts receivable                                (5,468,533)          (2,201,182)
        Inventory                                          (1,922,192)          (2,230,326)
        Prepaid expenses and deposits                          66,349             (776,803)
        Accounts payable, accrued
           expenses and income taxes payable                3,320,877             (263,982)
                                                         ---------------------------------
Net cash (used in) provided by operations                   2,157,454           (5,551,729)

INVESTING ACTIVITIES
Increase in short-term investments                                              (6,596,398)
Purchase of fixed assets                                   (2,467,762)          (1,388,199)
Acquisition of DeltaComm Corporation                         (219,033)
Acquisition of DynaStar Assets                             (6,793,850)
Acquisition of Presticom, Inc.                                                  (6,880,470)
Other assets                                                  214,518               97,012
                                                         ---------------------------------
Net cash used in investing activities                      (9,266,127)         (14,768,055)

FINANCING ACTIVITIES
Stock warrants and options                                  1,031,288              115,801
Repayment of notes payable                                   (297,294)            (124,900)
Borrowings on line of credit                                                        75,675
Research & development deposit                                                      45,000
                                                         ---------------------------------
Net cash provided by financing activities                     733,994              111,576
Translation adjustment                                         27,392              (10,302)
                                                         ---------------------------------

Net (decrease) increase in cash                            (6,347,287)         (20,218,510)
Cash and equivalents at beginning of the period            70,374,310           30,546,278
                                                         ---------------------------------
Cash and equivalents at end of the period                $ 64,027,023         $ 10,327,768
                                                         =================================
</TABLE>


                             See accompanying notes


                                       5
<PAGE>   6
                               ACT NETWORKS, INC.
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                                   (Unaudited)

1.       BASIS OF PRESENTATION

The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the nine-month period ended March 31, 1997 are
not necessarily indicative of the results that may be expected for future
periods. For further information, refer to the financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended June 30, 1996.

The balance sheet at June 30, 1996 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. Certain June 30, 1996 balance sheet items have been
reclassified to conform with the March 31, 1997 presentation.


2.       BUSINESS ACQUISITION

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 $6,443,800. The Company assumed approximately $274,000 of
debt and recorded transaction expenses of approximately $350,000.

The acquisition was accounted for under the purchase method of accounting and,
accordingly, the acquired assets and liabilities were recorded at their
estimated fair market values at the date of acquisition. 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. Other intangibles and assets acquired were developed technology of
$1,527,248, which will be amortized over 7 years, and work force of $296,965,
trade mark of $42,424 and customer base of $254,541, which will be amortized
over 5 years. The fair market value of the in-process research and development
and other intangibles was determined by an independent appraiser. Developed
technology represents technology which has reached technological feasibility and
relates to products which have been generating revenues. 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.

3.       INVENTORIES

The components of inventory consist of the following:

<TABLE>
<CAPTION>
                                                                     March 31, 1997            June 30, 1996
                                                                     --------------            -------------
<S>                                                                  <C>                       <C>
Purchased parts   ...................................                $   5,339,118             $   3,629,460
Sub-assemblies; finished goods.......................                    5,560,569                 3,779,999
                                                                     -------------             -------------
                                                                     $  10,899,687             $   7,409,459
                                                                     -------------             -------------
</TABLE>


                                       6
<PAGE>   7
                               ACT NETWORKS, INC.
               NOTES TO CONDENSED FINANCIAL STATEMENTS(CONTINUED)
                                   (Unaudited)


4.       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 modified treasury stock method) have been included in
the computation when dilutive.


5.       INCOME TAXES

The provision for income taxes for the nine months ended March 31, 1997 was
$1,521,760. The provision for income taxes for the nine months ended March 31,
1996 was $132,997. The provision for income taxes differs from the federal
statutory rate due primarily to the foreign income taxes related to the
Company's Canadian subsidiary and to federal and state net operating losses
carried forward from previous periods.


                                       7
<PAGE>   8
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATIONS

         This Report may contain forward-looking statements that involve a
number of risks and uncertainties including, without limitation, those set forth
in the "Risk Factors" section under "Other Information". The Company's actual
results may differ materially from any future performance discussed in
forward-looking statements and 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 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.

         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 Frame Relay access 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% and 63% of the Company's net sales for the fiscal years ended June 30, 1995
and 1996, respectively, and approximately 76% for the nine months ended March
31, 1997. 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, 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.

         A small number of customers have historically accounted for a
substantial portion of the Company's net sales. The Company's five largest
customers accounted for 43% and 46% of net sales for the fiscal years ended June
30, 1995 and 1996, respectively, and 41 % for the nine months ended March 31,
1997. Any reduction, delay or change in orders from such customers could have a
material adverse effect on the Company's business.


                                       8
<PAGE>   9
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 $61,000. 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
$6,443,800. 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 $2,715,000 in the quarter ended March 31,
1997 as acquired in-process research and development and will amortize other
acquired intangibles of approximately $2,121,000 over five to seven years.

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>
                                          Three Months Ended March 31,   Nine months Ended March 31,
                                          ----------------------------   ---------------------------
                                                1997           1996         1997        1996
                                                ----           ----         ----        ----
<S>                                           <C>           <C>           <C>       <C>

Net sales ............................         100.0%        100.0%       100.0%       100.0%
Cost of goods sold ...................          42.6%         45.9%        43.3%        51.9%
                                            ------------------------------------------------

Gross profit .........................          57.4%         54.1%        56.7%        48.1%
Operating expenses:
   Research and development ..........          16.3%         15.8%        15.5%        18.4%
   Sales and marketing ...............          21.3%         23.8%        20.8%        26.2%
   General and administrative ........           9.1%         11.3%         9.6%        12.0%
   In-process research and development          19.9%          0.0%         9.6%        29.0%
                                            ------------------------------------------------

Total operating expenses .............          66.6%         50.9%        55.5%        85.6%

(Loss) income from operations ........          (9.2)%         3.2%         1.2%       (37.5)%
Net interest and other income ........           5.7%          2.9%         6.9%         4.7%
                                            ------------------------------------------------

(Loss) income before taxes ...........          (3.5)%         6.1%         8.1%       (32.8)%
Provision for income taxes ...........           4.1%          1.2%         4.3%         0.7%
                                            ------------------------------------------------

Net (loss) income ....................          (7.6)%         4.9%         3.8%       (33.5)%
                                            ================================================
</TABLE>




                                       9
<PAGE>   10
Net sales

         Net sales increased 70% to $13.7 million for the three months ended
March 31, 1997 from $8 million for the three months ended March 31, 1996. Net
sales increased 85.1% to $35.7 million for the nine months ended March 31, 1997
from $19.3 million for the nine months ended March 31, 1996.

         The Company's customers may be divided into two categories, enterprise
and carrier. Carrier customers would include inter-exchange carriers, regional
Bell operating companies, competitive access providers, international record
carriers, satellite service providers, and Frame Relay service providers. For
the nine months ended March 31, 1997, sales to enterprise customers were
approximately $30.9 million, or 86.5%, and sales to carrier customers were
approximately $4.8 million, or 13.5%. For the nine months ended March 31, 1996,
sales to enterprise customers were approximately $15.2 million, or 78.8%, and
sales to carrier customers were approximately $4.1 million, or 21.2%.

The two categories of customers operate either terrestrial or wireless networks.
For the nine months ended March 31,1997, sales of products into terrestrial and
wireless networks were approximately $25.1 million, or 70.2%, and $10.6 million,
or 29.8%, respectively. For the nine months ended March 31,1996, sales of
products into terrestrial and wireless networks were approximately $11.7
million, or 60.6%, and $7.6 million, or 39.4%, respectively.

Gross Profit

         Gross profit represents net sales less the cost of goods sold, which
includes cost of materials, manufacturing overhead costs and direct labor
expenses. The Company's gross profit was $7.8 million, or 57.4% of net sales,
for the three months ended March 31, 1997 compared to $4.3 million, or 54.1% of
net sales, for the three months ended March 31, 1996.

         The Company's gross profit was $20.2 million, or 56.7% of net sales,
for the nine months ended March 31, 1997 compared to $9.3 million, or 48.1% of
net sales, for the nine months ended March 31, 1996. For the three month and
nine month periods ended March 31, 1997, the increase in gross profit as a
percentage of sales was primarily attributable to an increase in Frame Relay
product sales and a decrease in sales of OEM products which typically sell at a
lower gross margin, and to lower material cost and the efficiencies of increased
unit volume. In addition, the prior nine month period ended March 31, 1996
included a $0.7 million charge for obsolete inventory. The gross profit , not
including this charge, was $10 million, or 51.7 % of sales. 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 $2.2
million, or 16.3% of net sales, for the three months ended March 31, 1997 from
$1.3 million, or 15.8% of net sales, for the three months ended March 31, 1996.
Research and development expense increased to $5.5 million, or 15.5% of net
sales, for the nine months ended March 31, 1997 from $3.5 million, or 18.4% of
net sales, for the nine months ended March 31, 1996. These dollar increases were
primarily attributable to the cost of personnel for the development of new
products and enhancement of existing products including personnel added with the
DeltaComm and DynaStar product acquisitions. Other material components of these
increases were consultant fees, the cost of materials and depreciation expense.
While the actual amount expended will depend upon a variety of factors, the
Company anticipates increasing research and development expenses in the near
term.

Sales and marketing. Sales and marketing expense increased to $2.9 million, or
21.3% of net sales, for the three months ended March 31, 1997 from $1.9 million,
or 23.8% of net sales, for the three months ended March 31, 1996. Sales and
marketing expense increased to $7.4 million, or 20.8% of net sales, for the nine


                                       10
<PAGE>   11
months ended March 31, 1997 from $5.1 million, or 26.2% of net sales, for the
nine months ended March 31, 1996. These dollar increases were primarily
attributable to the addition of personnel and increased marketing activities.
The Company anticipates continuing to add sales and marketing personnel and
increasing sales and marketing expenses in the near term.

General and administrative. General and administrative expense increased to $1.2
million, or 9.1% of net sales, for the three months ended March 31, 1997 from
$0.9 million, or 11.3% of net sales, for the three months ended March 31, 1996.
General and administrative expense increased to $3.4 million, or 9.6% of net
sales, for the nine months ended March 31, 1997 from $2.3 million, or 12% of net
sales, for the nine months ended March 31, 1996. General and administrative
expense 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, 1997 due to amortization of goodwill associated with the
acquisitions of the DynaStar product family and Presticom.

         While the dollar amounts of operating expenses increased, the Company
was able to reduce expenses as a percentage of sales due primarily to an
increase in sales without a commensurate increase in expense levels. 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 $773,216 for the three months ended March
31,1997 compared to net interest income of $230,187 for the three months ended
March 31, 1996 Net interest income was $2,452,803 for the nine months ended
March 31,1997 compared to net interest income of $911,905 for the nine months
ended March 31, 1996. This change was primarily attributable to interest
received on the proceeds from the Company's secondary public offering in June
1996.

Income Taxes

         The provision for income taxes for the nine months ended March 31, 1997
was $1,521,760. The provision for income taxes for the nine months ended March
31, 1996 was $132,997. The provision for income taxes differs from the federal
statutory rate due primarily to the foreign income taxes related to the
Company's Canadian subsidiary and to federal and state net operating losses
carried forward from previous periods. A portion of future reductions in the
valuation allowance attributed to tax deductions related to the exercise of
stock options will be recorded in equity and will not be reflected as a
reduction in the tax provision. Subject to certain limitations, the Company has
a research and development tax credit carryforward and federal and state
operating loss carryforwards, a portion of which it expects to apply against its
tax liability for fiscal 1997. If the Company generates profits, the net
operating loss carryforwards and research and development tax credit
carryforward will be utilized and the Company's effective tax rates will
increase.


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, Earning per Share, which is
required to be adopted on December 31, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods. Under the new requirements for calculating primary
earnings per share, the dilutive effect of stock options will be excluded. The
impact on primary and fully diluted earnings per share for the quarters ended
March 31, 1997 and 1996 is not expected to be material.



                                       11
<PAGE>   12
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 approximately $53.7
million. For the nine months ended March 31, 1997, the Company's operating
activities provided cash of approximately $2.2 million. At March 31, 1997, the
Company had approximately $84 million in working capital, including $64 million
in cash and cash equivalents.

         Capital expenditures relating primarily to the purchase of computer
equipment, test equipment, and computer software amounted to approximately $2.5
million for the nine months ended March 31, 1997. The Company currently has no
material commitments for capital expenditures. However, the Company anticipates
spending between $3.0 million and $4.0 million during the next 12 months to
acquire test equipment, computer equipment, and tooling.

         The acquisition of the DynaStar product family used cash of
approximately $6,443,800 for the purchase. $350,050 of transaction expenses were
also recorded by the Company.

         The Company has a loan and security agreement (the "Loan Agreement")
with Silicon Valley Bank (the "Bank"), which provides for aggregate borrowings
up to a maximum of $3,000,000. Under the Loan Agreement, the Company may borrow
up to the lesser of $3,000,000 or 75% of eligible accounts receivable (the "Line
of Credit"). The Line of Credit expires July 5, 1997. At March 31, 1997 there
was no outstanding balances under the Line of Credit. Interest on the Line of
Credit is payable monthly at a rate equal to the Bank's prime rate, which was
8.50% at March 31, 1997, plus 1.5%. The Loan Agreement provides for the issuance
of letters of credit in an aggregate amount outstanding up to $500,000. Letters
of credit outstanding reduce the amount available under the Line of Credit. At
March 31, 1997 and March 31, 1996, no letters of credit were outstanding.

         The Loan Agreement contains certain covenants that, among other things,
require the Company to maintain certain financial ratios and limit the Company's
ability to obtain certain forms of additional debt to repurchase the Company's
stock and pay dividends. The Company believes that available cash, together with
amounts available under its credit facilities and internally generated cash
flow, will be adequate to satisfy its capital requirements for at least the next
twelve months.


                                       12
<PAGE>   13
                                     PART II

                                OTHER INFORMATION

ITEM 1.       LEGAL PROCEEDINGS.  NONE.

ITEM 2.       CHANGES IN SECURITIES.  NONE.

ITEM 3.       DEFAULTS UPON SENIOR SECURITIES.  NONE.

ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.  NONE

ITEM 5.       OTHER INFORMATION.


         This Report may contain forward-looking statements that involve a
number of risks and uncertainties including, without limitation, those set forth
in the "Risk Factors" section below. The Company's actual results may differ
materially from any future performance discussed in forward-looking statements.

                                  RISK FACTORS

The following Risk Factors should be considered carefully in addition to the
other information contained in this Report:

         Fluctuations in Quarterly Operating Results. The Company has
experienced and may in the future experience significant fluctuations in
revenues 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, 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
could be materially adversely affected. In the quarter ended March 31, 1996, the
Company's revenues decreased when compared to the preceding quarter, primarily
due to a reduced demand for certain point-to-point products. As a result, the
price of the Company's Common Stock was 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 or sustain 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


                                       13
<PAGE>   14
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 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 regulation or changes in a market's pricing structure
could render the Company's existing products, as well as products currently
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. 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


                                       14
<PAGE>   15
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 FastComm, Memotec, MICOM, Motorola, Sync and other companies. The
Company anticipates competition from manufacturers of Frame Relay switches, such
as Cisco Systems Inc., which is also a supplier to and customer of the Company.

          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, such as the
acquisition of StrataCom by Cisco Systems Inc. and MICOM by Northern Telecom
Limited, 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, and the DynaStar product family in March
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. The Company's
five largest customers accounted for 46% and 41% of the Company's net sales for
the fiscal year ended June 30, 1996 and the nine months ended March 31, 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


                                       15
<PAGE>   16
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 66% and 63% of the Company's net sales for the fiscal years ended
June 30, 1995 and June 30, 1996, respectively, and 76% for the nine months ended
March 31, 1997. 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 the customer. 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 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,
and to date all of the Company's products have so complied. 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


                                       16
<PAGE>   17
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.

          The Company's sales through OEMs who purchase custom products
decreased from 17.7% for the fiscal year ended June 30, 1996 to 4.3% for the
nine months ended March 31, 1997. The Company does not classify private label
sales of standard products as OEM sales. In fiscal 1996, virtually all of the
Company's OEM sales were generated by sales of custom voice cards to Scientific
Atlanta for use in its satellite based communication system. The Company does
not believe it will sell additional OEM voice cards to Scientific Atlanta. OEM
and private label business is subject to risks such as contract termination,
products developed by a third party or by the third party's internal development
team, change in corporate ownership, business direction or product mix by the
third party, and assumption of manufacturing rights by the third party. There
can be no assurance that these factors will not adversely affect the Company's
business, operating results and financial condition.

          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


                                       17
<PAGE>   18
the protection of proprietary rights differently from, and may not protect the
Company's proprietary rights to the same extent as do, laws in the United
States.

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


                                       18
<PAGE>   19
          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.


                                       19
<PAGE>   20
ITEM 6.       EXHIBITS AND REPORTS ON FORM 8-K.

                    (a)  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.

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           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.

10.6           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.

10.7           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.

10.8           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.

10.9           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.

10.10          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.
</TABLE>


                                       20
<PAGE>   21
<TABLE>
<S>            <C>
10.11*         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.

10.12          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.

10.13          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.

10.14          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.

10.15          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.

10.16          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.

10.17          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.

10.18          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.

10.19          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.

10.20          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.

10.21          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.

10.22          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.

10.23          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.
</TABLE>


                                       21
<PAGE>   22
<TABLE>
<S>            <C>
10.24          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.

10.25          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.

10.26          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.

10.27          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.

10.28          1997 Non-Executive Officer Stock Option/Stock Issuance Plan.

10.29          Form of Notice of Grant of Stock Option generally used in connection with 1997 Plan.

10.30          Form of Stock Option Agreement generally used in connection with 1997 Plan.

10.31          Form of Addendum to Stock Option Agreement.

11.1           Statement Regarding Computation of Earnings Per Share.

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 March
31, 1997


                                       22
<PAGE>   23
                                    SIGNATURE



                  Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Report on Form 10-Q to be signed on
its behalf by the undersigned, thereunto duly authorized





Date: May 15, 1997                 ACT NETWORKS, INC.



                                   /s/ Melvin L Flowers
                                   --------------------
                                   Melvin L. Flowers
                                   Vice President, Finance and Administration,
                                   and Chief Financial Officer

                                   (Duly Authorized Officer and Principal
                                   Financial and Accounting Officer)


                                       23
<PAGE>   24
                                  EXHIBIT INDEX


EXHIBIT NO.

<TABLE>
<S>            <C>
10.28          1997 Non-Executive Officer Stock Option/Stock Issuance Plan.

10.29          Form of Notice of Grant of Stock Option generally used in connection with 1997 Plan.

10.30          Form of Stock Option Agreement generally used in connection with 1997 Plan.

10.31          Form of Addendum to Stock Option Agreement.

11.1           Statement Regarding Computation of Earnings Per Share.

27.1           Financial Data Schedule.
</TABLE>



                                       24