<PAGE>   1
                                    FORM 10-K
                     U.S. Securities and Exchange Commission
                             Washington, D.C. 20549
                                   (Mark One)
     [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
                                       OR
        [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
             For the transition period from __________ to__________

                         Commission file number: 0-21352

                             APPLIED INNOVATION INC.
                (Name of registrant as specified in its charter)

           DELAWARE                                              31-1177192
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)

                    5800 INNOVATION DRIVE, DUBLIN, OHIO 43016
               (Address of principal executive offices)(Zip Code)

                     Issuer's telephone number: 614-798-2000

        Securities registered pursuant to Section 12(b) of the Act: None

          Securities registered pursuant to Section 12(g) of the Act:
                    COMMON STOCK, $0.01 PAR VALUE PER SHARE
                                (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, and (2) has been subject to the filing requirements for
at least 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]

Aggregate market value of voting stock held by non-affiliates of the registrant,
9,172,575 shares, based on the $7.06 closing sale price on March 6, 1998, was
$64,758,380.

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 15,790,832 shares of Common
Stock were outstanding at March 6, 1998.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Annual Report to the Stockholders for the fiscal
year ended December 31, 1997, are incorporated by reference in Part II.

Part III - Proxy Statement for 1998 Annual Meeting of Stockholders, in part, as
indicated.
<PAGE>   2
         This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended. The words
"anticipate," "believe," "expect," "estimate," and "project" and similar words
and expressions identify forward-looking statements which speak only as of the
date hereof. Investors are cautioned that such statements involve risks and
uncertainties that could cause actual results to differ materially from
historical or anticipated results due to many factors, including, but not
limited to, the factors discussed in "Business - Business Risks." The Company
undertakes no obligation to publicly update or revise any forward-looking
statements.

                                     PART I

ITEM 1.  BUSINESS.
         ---------


GENERAL

         Applied Innovation Inc. (the "Company") develops, manufactures and
markets network mediation and network bridging products and associated services
to support the operation, maintenance, administration and provisioning of the
internal data network that is used by telecommunications service providers to
manage elements in their customer service network systems. The Company is also
developing products which will assist telecommunications service providers in
handling the rapidly increasing Internet traffic.

         The Company's predecessor was incorporated in 1983 and engaged
primarily in development and preliminary testing activities until September
1984. In June 1986, the Company was formed as a Delaware corporation and the
Company's predecessor, an Ohio corporation, was merged into the Company solely
for the purpose of effecting a change in domicile. In 1995, the Company formed
its wholly owned subsidiary, Applied Innovation International Inc., a U.S.
Virgin Islands corporation, to act as a foreign sales corporation to market the
Company's products outside of the United States.

         The Company's executive offices and manufacturing facilities are
located at 5800 Innovation Drive, Dublin, Ohio, 43016, telephone (614) 798-2000.

THE COMPANY'S MARKETS

         The Company's Data Communications Network (DCN) Products provide the
data network used to support Operations Support Systems needed to monitor and
maintain thousands of pieces of electronic equipment, or Network Elements, used
by telecommunications service providers. Network Elements provide the switching,
connections and support products required to transmit voice and data calls
through one or more Central Offices. Telecommunications service providers
continually upgrade and expand the equipment needed to provide service to their
customers. As each piece of new equipment is installed, it is connected to the
Company's data monitoring network that is used to report alarms, gather
performance information, and to provide test access and equipment reprogramming
for establishing and

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maintaining customer service. The Company's customers can use the Operations
Support Systems to perform a variety of tasks that include: fault management,
configuration management, performance management, security and inventory
management.

         The Company is seeking to expand distribution for its DCN Products
outside the United States. The Company has taken early steps to establish a
local presence in China, which is rapidly becoming the world's biggest market
for telecommunications equipment. The Company believes that countries currently
building a telecommunications infrastructure will require centralized network
management and the supporting data communications capability supplied by the DCN
Products.

         Over the past year and a half the Company has focused on designing,
developing and building its Access Products, which are Central Office compliant
Internet access solutions designed to redirect data traffic from telephone
company Central Office locations. Customers who utilize the Company's Access
Products will be able to off-load Internet data traffic from congested voice
traffic lines onto a data network, relieving communications lines originally
designed to carry voice, not data. The Company's Access Products Group is solely
focused on development of telecommunications solutions for Internet and
Enterprise systems needs. The market for the Company's Access Products is
comprised of the same telecommunications service providers the Company currently
serves.

         The Company estimates that the Regional Bell Operating Companies
(RBOCs) control approximately half of the estimated 20,000 telecommunications
Central Office locations in the United States. The remaining locations are
controlled by a few large firms like GTE, Sprint, AT&T, Worldcom, MCI and over
1,000 smaller independent firms. Because of their relative size, demand for
product, and importance, the Company has concentrated its DCN Products marketing
efforts on the larger telecommunications service providers. The Company has
historically received a large percentage of its annual net sales from RBOCs. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

         Each telecommunications service provider has a finite number of Central
Office facilities which limit their total capacity for the Company's products.
To the extent that the Company achieves significant penetration with the
Company's products of any single customer's Central Office facilities, it cannot
anticipate substantial additional sales of those existing products to the
customer. Future domestic sales growth to these customers will depend on the
development of new products and new releases of existing products. Sales growth
will be derived from additional sales to other RBOCs, long distance phone
companies and competitive access providers. See "Business - Business Risks -
Risks Associated with Customer Concentration; Dependence on Telecommunications
Industry."

PRODUCTS

DATA COMMUNICATIONS NETWORK (DCN) PRODUCTS
------------------------------------------

         The DCN Products, marketed as the AISwitch(TM) Series 180, connect
multiple generations of telecommunications network equipment to computers that
monitor, control and analyze field conditions. The AISwitch Series 180
incorporates the latest high speed microprocessor and programmable gate

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array technology to bridge the hardware and software gaps between old and new
equipment. All vintages of equipment can be integrated with support systems. The
AISwitch Series 180 provides productivity gains and cost savings at both the
customer's Central Office and Operations Centers.

         Within a typical telecommunications service region, there may be as
many as 10,000 Network Elements to interface with a variety of equipment using
various communications protocols. Communications protocols are standards which
describe the way in which data is transmitted between computer systems.
Replacing existing equipment and updating it to conform to newer standards takes
place on extended schedules of up to twenty years, with successive introductions
of new technologies. For this reason, many of the Central Office and local site
locations utilize multiple generations of equipment from different vendors, each
with unique operating conditions. The Company's products offer one of the most
comprehensive solutions available for connecting these dissimilar
telecommunications elements.

         An unique capability of the AISwitch Series 180 and the Company's
technical organization is the ability to engineer custom interfaces for
telecommunications equipment produced by a variety of different manufacturers
for telecommunications service providers. Each AISwitch Series 180 includes a
wide variety of functions and options that are configured to fit client needs.

         The key to the AISwitch Series 180 integration capability is its
flexible microprocessor controlled digital switching and protocol processing
capabilities. The AISwitch Series 180 permits the use of industry-standard, open
architecture network building blocks to more easily connect different computers,
Network Elements and other intelligent Central Office equipment with one or more
network destinations. The Company transforms a complex multi-vendor environment
into an easily managed seamless network to increase the total efficiency of
Operations, Administration, Maintenance and Provisioning (OAM&P) systems.

         Applied View(TM) is the Company's open standards management system.
Applied View provides industry standard Simple Network Management Protocol
(SNMP) management of the OAM&P network, which connects Network Elements with
Operations Support Systems. Because Applied View is based on Hewlett-Packard
Company's Open View (TM) ("HP Open View(TM)), the same system can also monitor
other data communications networks and systems. Applied View also provides a
platform for Telecommunications Management Network (TMN), and Element Management
Layer (EML). Applied View enables customers to make basic configuration changes
to every AISwitch in their network from a single location. Applied View also
provides centralized configuration backup and control, and automatically stores
status, alias, destination and alarm events in the HP Open View(TM) database.

         The Company has licensed technology from Cisco Systems, Inc. ("Cisco")
which allows the Company to integrate a Cisco router into the AISwitch. Cisco's
routing technology is the most widely used and allows the AISwitch to work
smoothly with the routing technology already in use by most of the Company's
customers.

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ACCESS PRODUCTS
---------------

         The Company's Access Products are designed to meet rigid Central Office
standards, redirecting network congestion away from the overcrowded Central
Office switches onto a data network connected directly to Internet Service
Providers (ISPs). The Access Products will provide RBOCs, ISPs and Enterprise
networks with cost-effective, scaleable data traffic management and enable them
to deliver greater remote access reliability and capability to their end users.
The Company's AI 4800 is currently available, while the AI5800 is currently
expected to be released during the fourth quarter of 1998.

         The AI 4800 is a Central Office-based product that diverts Internet
data traffic away from congested voice traffic lines. It provides a logical and
direct route to a data network by moving modems to the originating Central
Office. As a result, it provides low cost, dependable Internet access and moves
data traffic from traditional voice lines to either a Frame Relay or
Asynchronous Transfer Mode (ATM) Network. The AI 4800 also acts as an efficient
remote access concentrator, off-loading both analog and digital data from voice
networks. This same platform can be used to develop new offerings based on
advanced services such as integrated data, voice and video, along with higher
bandwidth technologies or high-speed wireless. It is anticipated that
significant gains can be realized by transporting Internet access traffic on
packet-switched versus circuit-switched networks.

         The AI 5800 is a larger follow-on Access Product than the AI 4800 and
the typical system handles up to 624 modems per shelf, with up to 10 shelves per
typical 6,240 modem system. Like the AI 4800, the AI 5800 is scaleable and
expandable to fit customer needs. Further, the AI 5800 is upgradeable to handle
voice over Internet Protocol (IP). Designed to fit into an existing
infrastructure, the AI 5800 is configured with high port density to reduce the
product's footprint, thus saving space costs. It is also designed to be in
compliance with Bellcore's Network Equipment - Building Systems (NEBS), and is a
fully scaleable and expandable system, providing a robust data traffic solution.

MANUFACTURING AND OPERATIONS

         The printed circuit boards of the Company's products are proprietary
designs of the Company. Printed circuit boards and power supplies used in each
of the Company's product families are manufactured by third parties on a
contract basis and standard electronic components are purchased from a variety
of vendors. The Company is not dependent upon any of these manufacturers for its
printed circuit boards or parts inventory as there are alternative sources
available. Schedules based on order backlog and favorable prices determine when
and from whom components are purchased. The Company utilizes an automated
inventory control system and a streamlined sales reporting and forecasting
system.

         The printed circuit boards and components are sent to job shop assembly
firms to provide assembly and wave soldering services. Final assembly and
testing of the products is conducted in the Company's Dublin, Ohio production
facility. Although some physical and electrical inspection of the printed
circuit boards is performed at the off-site assembly houses, final quality
control is accomplished at the Company's facility.

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         The Company has made significant investments to attain quality
assurance consistent with stringent industry standards. The Company utilizes
sophisticated testing facilities for its products that are designed to simulate
extreme temperature and natural disaster conditions in order to validate the
integrity of these products in unforeseen circumstances so that service
interruptions are avoided. The manufacturing and quality assurance programs that
the Company utilizes are designed to be in compliance with NEBS, Generic
Equipment Requirements and the International Standards Organization 9001 ("ISO
9001") guidelines.

SALES AND MARKETING

         The Company's products and services are sold primarily through its own
sales force, except for an independent sales agent in Canada. The Company is
exploring alternative distribution channels to allow sales of the Company's
products to markets that are not easily accessible nor cost effective for its
own sales force. In addition to the Dublin, Ohio headquarters, the Company
maintains sales offices in Atlanta, Chicago, Dallas, Denver, New York, Raleigh
and San Francisco.

         The Company's sales and marketing staff consists of a Senior Vice
President of Sales and Marketing, Regional Sales Managers, District Sales
Managers, Sales Engineers, Product Line Managers and an administrative staff.
Sales leads are currently generated primarily through target marketing to
telecommunications service providers, direct mail and trade shows. Sales leads
are followed up by personal contact from the Company's marketing staff. If
sufficient interest exists, an on-site visit may be scheduled for the purpose of
making a sales presentation or actual demonstration of the product.

         The technical complexity of the Company's products and the relative
large size of customers creates a long sales cycle for the Company's products.
The technical nature of the products and Central Office environment also
mandates a very technical sales force. The Company's sales force receives an
incentive based compensation package where they are rewarded for increased
levels of sales.

         The Company is seeking a strategic partner to leverage the expanded
development of its Access Products, which includes the AI 4800 and AI 5800. The
Company plans to initiate discussions with companies that have significant
telecommunications industry expertise with demonstrated sales and marketing
strengths.

RESEARCH AND DEVELOPMENT

         The Company's research and development activity is coordinated with
product management to create product development teams which focus on customer
requirements. The DCN team focuses on enhancing the AISwitch for its operations
support role. The Access Products team focuses on creating products to help
telecommunications service providers handle the burgeoning data traffic caused
by the explosion of the Internet.

         Enhancements to the AISwitch(TM) are focused on increasing its capacity
and adapting to the emerging Open Systems Interconnection (OSI) applications
being driven into Network Elements by worldwide standardization efforts. At the
same time, the AISwitch(TM) is being enhanced to accommodate

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<PAGE>   7
older data communication standards in order to broaden its range of application.
The DCN Products team consists of 50 engineers.

         The Access Products, represented by the AI 4800 and AI 5800, are
strategic new developments which will expand the Company's technology into Frame
Relay and ATM, emerging worldwide standards for carrying all types of
communications. The AI 5800 required an increased development capability which
was met by the establishment of the Research and Development Center in the
Raleigh, North Carolina area, where several world-class telecommunications and
data communication centers have attracted a pool of talented hardware and
software engineers. The Access Products team consists of 48 engineers.

         The Company spent $12,897,072, $7,646,796, and $5,979,252 on
Company-sponsored research and development during the fiscal years ended
December 31, 1997, 1996, and 1995, respectively. Research and development
expenditures represented approximately 27.6%, 18.6%, and 16.6% of annual net
sales in fiscal 1997, 1996, and 1995, respectively. The Company continues to
expect to commit a substantial amount of resources and cash to its research and
development efforts during 1998. See "Business - Business Risks - New Products
and Rapid Technological Change; Need to Manage Product Transitions."

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CUSTOMER SERVICE AND WARRANTY

         The Company offers its customers a variety of support services such as
program management, training, detail engineering, installation and test and
turn-up. Program managers interface between the Company and customers for
installation of new products and service and upgrades of existing products. The
program manager is also responsible for assuring that all possible circumstances
are anticipated prior to certifying the system for full operation. Following
installation, the program manager continues to monitor the customer's system to
ensure proper satisfaction.

         The Company designs training programs to educate the customer's system
administration, operations and maintenance personnel to operate the system.
Classes are available, either on-site or at the Company's headquarters.
Additional training is also offered to the customer during system upgrades and
for new operations personnel.

         The Company's field service department provides custom design and
installation services for telecommunications network equipment. The Company
believes that its field service department complements and enhances the sale of
its DCN Products.

         The AI Switch(TM) carries a one year warranty with guaranteed overnight
factory replacement service for circuit boards or system modules in the event of
equipment failure. In addition, for an additional charge, on-site spares are
available for those customers who require immediate replacement. The Company
also provides a 24-hour Service Hotline for instant access to the Company's
field service and support departments. It also offers a toll-free 800 number.

         Warranty expense represented approximately 3.6%, 10.2%, and 1.7% of
annual net sales in 1997, 1996, and 1995. Warranty expense increased in 1996
because of repair costs of units which the Company agreed to repair to avoid
future product difficulties and to demonstrate the Company's quality assurance
commitment to customers. See "Business - Business Risks - Risk of Product
Defects."

COMPETITION

         There are numerous manufacturers of data communications equipment.
Manufacturers of these products frequently specialize their products for
specific applications and could enter the Company's target markets. Significant
competition exists from several well-established companies having resources
greatly superior to those of the Company as well as from relatively new but
aggressive companies.

         Competition for the Company's DCN Products has traditionally come
primarily from suppliers of telecommunications switching and transmission
equipment. Lucent Technologies has a product line, Datakit, which competes
directly with the Company's products when selling into the telecommunications
industry. Competition also comes from other data communications suppliers, such
as Cisco Systems, Inc., Dantel, Bay Networks, and Harris Corporation's
Westronics division. In some cases, newer products or redesigned older products
from these suppliers compete with the Company's products.

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<PAGE>   9
         Competition for the Company's Access Products also comes from suppliers
of telecommunications equipment and data communications suppliers. Competitors
include, but are not limited to, companies such as Lucent Technologies, Cisco
Systems, Inc., and Northern Telecom. The Company is actively seeking a strategic
partner to help market the Access Products. See "Business Business Risks -
Competition."

PERSONNEL

         As of February 27, 1998, the Company had 258 full-time and part-time
employees. The Company's employees are distributed among the following
departments: Sales and Marketing (26); Research and Development (104); Customer
Service (54); Manufacturing (46) and Operations (28). The Company anticipates
that it will continue to increase the number of its employees as it grows.

BUSINESS RISKS

         The Company desires to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995. In addition to the
other information in this report, readers should carefully consider that the
following important factors, among others, in some cases have affected, and in
the future could affect, the Company's actual results and could cause the
Company's actual consolidated results of operations for the year ended December
31, 1998, and beyond, to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.

         Risks Associated with Customer Concentration; Dependence on
Telecommunications Industry. A significant portion of the Company's revenues in
each fiscal quarter since inception has been derived from substantial orders
placed by large organizations, such as the RBOCs. As a result, the Company's net
sales often have been concentrated among a relatively small number of customers.
In fiscal 1997, 1996, and 1995, net sales from the Company's five, three and
four largest customers represented approximately 76%, 53%, and 67%,
respectively, of the Company's total net sales. The Company expects that it will
continue to be dependent upon a limited number of customers for a significant
portion of its revenues in future periods. None of the Company's customers are
contractually obligated to license or purchase additional products or services
from the Company. As a result of this customer concentration, the Company's
business, operating results and financial condition could be materially
adversely affected by the failure of anticipated orders to materialize and by
deferrals or cancellations of orders. In addition, there can be no assurance
that revenue from customers that have accounted for significant net sales in
past periods, individually or as a group, will continue, or if continued will
reach or exceed historical levels in any future period. Furthermore, such
customers are concentrated in the telecommunications industry. Accordingly, the
Company's future success depends upon the capital spending patterns of such
customers and the continued demand by such customers for the Company's products
and services. The Company's operating results may in the future be subject to
substantial period-to-period fluctuations as a consequence of such customer
concentration and factors affecting capital spending in the telecommunications
industry.

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         Product Concentration. Revenue from the sale, service and support of
the Company's AISwitch family of products has accounted for substantially all of
the Company's net sales since inception. The Company believes that revenue from
the sale, service and support of DCN Products will continue to account for
substantially all of the Company's net sales in fiscal 1998. Therefore, the
Company's future operating results, particularly in the near term, are
significantly dependent upon the continued market acceptance of the AISwitch,
improvements to the AISwitch framework and new and enhanced development tools
and network operations support. There can be no assurance that the AISwitch will
continue to achieve market acceptance or that the Company will be successful in
developing, introducing or marketing improvements to the AISwitch framework or
new or enhanced development tools and applications. The life cycles of the DCN
Products, including development tools and applications, are difficult to
estimate due in large part to the recent emergence of many of the Company's
markets, the effect of future product enhancements and competition. A decline in
the demand for the DCN Products as a result of competition, technological change
or other factors would have a material adverse effect on the Company's business,
operating results and financial condition.

         New Products, Research and Development, and Rapid Technological Change;
Need to Manage Product Transitions. The market for the Company's products is
characterized by rapidly changing technologies, evolving industry standards,
frequent new product introductions and rapid changes in customer requirements.
The introduction of products embodying new technologies and the emergence of new
industry standards and practices can render existing products obsolete and
unmarketable. As a result, the life cycles of the Company's products are
difficult to estimate. The Company's future success will depend on its ability
to enhance its existing products and to develop and introduce, on a timely and
cost-effective basis, new products and product features that keep pace with
technological developments and emerging industry standards and address the
increasingly sophisticated needs of its customers. The Company is attempting to
ensure future success by investing heavily in its research and development
effort. However, there can be no assurance that the Company will be successful
in developing and marketing new products or product features that respond to
technological change or evolving industry standards, that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of these new products and features, or that its new
products or product features will adequately meet the requirements of the
marketplace and achieve market acceptance. If the Company is unable, for
technological or other reasons, to develop and introduce enhancements of
existing products or new products in a timely manner, the Company's business,
operating results and financial condition will be materially adversely affected.

         The introduction or announcement of products by the Company or one or
more of its competitors embodying new technologies, or changes in industry
standards or customer requirements, could render the Company's existing products
obsolete or unmarketable. The introduction of new or enhanced versions of its
products requires the Company to manage the transition from older products in
order to minimize disruption in customer ordering. There can be no assurance
that the introduction or announcement of new product offerings by the Company or
one or more of its competitors will not cause customers to defer purchasing
existing Company products. Such deferment of purchases could have a material
adverse effect on the Company's business, operating results and financial
condition.

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         Competition. Most of the Company's current and potential competitors
have longer operating histories and significantly greater financial, technical,
sales, customer support, marketing and other resources, as well as greater name
recognition and a larger installed base of their products and technologies than
the Company. There can be no assurance that the Company's current or potential
competitors will not develop products comparable or superior to those developed
by the Company or adapt more quickly than the Company to new technologies,
evolving industry trends or changing customer requirements. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors or that competitive pressures faced by the Company will
not have a material adverse effect on its business, operating results and
financial condition.

         Dependence Upon Proprietary Technology; Risk of Third Party Claims of
Infringement. The Company's success and ability to compete is dependent in part
upon its proprietary software technology. The Company relies on a combination of
trade secret, copyright and trademark laws, nondisclosure and other contractual
agreements and technical measures to protect its proprietary rights. The Company
currently has no patents or patent applications pending. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. There can be no assurance that the steps taken
by the Company to protect its proprietary technology will prevent
misappropriation of such technology, and such protections may not preclude
competitors from developing products with functionality or features similar to
the Company's products. In addition, effective copyright and trade secret
protection may be unavailable or limited in certain foreign countries. While the
Company believes that its products and trademarks do not infringe upon the
proprietary rights of third parties, there can be no assurance that the Company
will not receive future communications from third parties asserting that the
Company's products infringe, or may infringe, the proprietary rights of third
parties. The Company expects that software product developers will be
increasingly subject to infringement claims as a number of products and
competitors in the Company's industry segment grows and the functionality of
products in different industry segments overlap. Any such claims, with or
without merit, could be time-consuming, result in costly litigation and
diversion of technical and management personnel, cause product shipment delays
or require the Company to develop non-infringing technology or enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company or at all. In
the event of a successful claim of product infringement against the Company and
failure or inability of the Company to develop non-infringing technology or
license the infringed or similar technology, the Company's business, operating
results and financial condition could be materially adversely affected. The
Company relies on certain software that it licenses from third parties,
including software that is integrated with internally developed software and
used in the Company's products to perform key functions. There can be no
assurance that these third party software licenses will continue to be available
to the Company on commercially reasonable terms or at all. Although the Company
believes that alternative software is available from other third-party
suppliers, the loss of or inability to maintain any of these software licenses
or the inability of the third parties to timely and cost-effectively enhance
their products in response to changing customer needs, industry standards or
technological developments could result in delays or reductions in product
shipments by the Company until equivalent software could be developed internally
or identified, licensed and integrated, which would have a material adverse
effect on the Company's business, operating results and financial condition.

                                     - 11 -
<PAGE>   12
         Reliance on Suppliers. The Company purchases raw material and licenses
technology from a number of domestic and foreign sources. The Company believes
that currently there are acceptable alternatives to the suppliers of raw
material and technology used in its products, with the exception of network
routing products supplied by Cisco Systems, Inc. The Company currently purchases
network routing products and licenses technology regarding the same from Cisco
Systems, Inc. pursuant to a Technology Agreement. The term of the Technology
Agreement expires on December 31, 1999 and automatically renews for one year
periods, unless either party elects not to renew. Additionally, the Technology
Agreement may be terminated by either party for any reason upon six months
notice. The Company believes that its customers place a high value on the
incorporation of network routing products and technology from Cisco Systems,
Inc. into the Company's products. While the Company believes that it could
obtain similar quality network routing products and technology from other
vendors, the termination of the Technology Agreement could materially adversely
affect the acceptance of the Company's products, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.

         Future Capital Needs; Uncertainty of Additional Financing. The Company
currently anticipates that its existing cash, cash equivalents, cash to be
generated from future operations, and funds which may be obtained from future
financing activities will provide sufficient capital to meet the business needs
of the Company. See "Management's Discussion and Analysis of Financial Condition
and the Results of Operations - Liquidity and Capital Resources." The Company
may need to raise additional funds through public or private debt or equity
financings in order to take advantage of unanticipated opportunities, including
more rapid expansion or acquisitions of complementary businesses or
technologies, or to develop new or enhanced services and related products or
otherwise respond to unanticipated competitive pressures. If additional funds
are raised through the issuance of equity securities, the percentage ownership
of the then current stockholders of the Company may be reduced and such equity
securities may have rights, preferences or privileges senior to those of the
holders of the Company's Common Stock. There can be no assurance that additional
financing will be available on terms favorable to the Company, or at all. If
adequate funds are not available or are not available on acceptable terms, the
Company may not be able to take advantage of unanticipated opportunities,
develop new or enhanced services and related products or otherwise respond to
unanticipated competitive pressures and the Company's business, operating
results and financial condition could be materially adversely affected.

         Future Operating Results Uncertain. Although the Company has previously
experienced growth in revenues and net income, the Company expects that
historical growth rates are not sustainable and such growth rates should not be
considered indicative of future growth, if any. There can be no assurance that
the Company's revenues will grow or be sustained in future periods or that the
Company will be profitable in any future period.

         Need for Strategic Partner for the Company's Access Products. Over the
past year and a half the Company has been designing, developing and building its
Access Products Group. Through December 31, 1997, the Company had spent
approximately $7.4 million developing this line of products primarily funded
through operating cash flow and cash reserves. The Company is currently seeking
a strategic partner to fully

                                     - 12 -
<PAGE>   13
develop this product opportunity, primarily for the sales and marketing of its
Access Products. The Company's failure to locate a strategic partner for the
Access Products Group could materially adversely affect the Company's ability to
market and sell these products, which could have a material adverse effect on
the Company's business, financial condition and results of operations.

         Risk of Product Defects. Products as complex as those offered by the
Company may contain defects or failures when introduced or when new versions or
enhancements are released. The Company has in the past discovered defects in
certain of its products. Although the Company has remedied all known material
defects in its products, there can be no assurance that, despite testing by the
Company and its customers, errors will not be found in existing or new products
or releases, resulting in delay or loss of revenue, loss of market share or
failure to achieve market acceptance or substantial warranty expenses. Any such
occurrence could have a material adverse effect upon the Company's business,
operating results and financial condition.

         Potential Fluctuations in Quarterly Results; Seasonality. The Company's
quarterly operating results have in the past and will in the future vary
significantly depending on factors such as the timing of significant orders and
shipments, capital spending patterns of the Company's customers, changes in
pricing policies by the Company or its competitors, the lengthy sales cycle of
the Company's products, increased competition, changes in operating expenses,
personnel changes, demand for the Company's products, the number, timing and
significance of new product and product enhancement announcements by the Company
and its competitors, the ability of the Company to develop, introduce and market
new and enhanced versions of its products on a timely basis, the mix of direct
and indirect sales and general economic factors, among others. A significant
portion of the Company's revenues have been, and will continue to be, derived
from substantial orders placed by large organizations, such as the RBOCs, and
the timing of such orders and their fulfillment has caused and will continue to
cause material fluctuations in the Company's operating results, particularly on
a quarterly basis. Due to the foregoing factors, quarterly net sales and
operating results have been and will continue to be difficult to forecast.
Revenues are also difficult to forecast because the Company's sales cycle, from
initial evaluation to product shipment, varies substantially from customer to
customer. For these and other reasons, the sales cycle associated with the
purchase of the Company's products is typically lengthy and subject to a number
of significant risks, including customers' budgetary constraints and internal
acceptance reviews, over which the Company has little or no control. The
Company's expense levels are based, in part, on its expectations as to future
revenue levels. If revenue levels are below expectations, operating results are
likely to be materially adversely affected. In particular, because only a small
portion of the Company's expenses varies with net sales, net income (loss) may
be disproportionately affected by a reduction in net sales. The Company's
business has experienced and is expected to continue to experience significant
seasonality, in part due to an increase in capital expenditures by customers in
certain quarters. Based upon all of the foregoing, the Company believes that
quarterly net sales and operating results are likely to vary significantly in
the future and that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as indications of
future performance. Further, it is likely that in some future quarter, the
Company's net sales or 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.

                                     - 13 -
<PAGE>   14
         Management of Growth. The Company has experienced a period of rapid
sales and customer growth and an expansion in the number of its employees, the
scope of its operating and financial systems and the geographic area of its
operations. This growth has resulted in new and increased responsibilities for
management personnel and has placed and continues to place a significant strain
upon the Company's management, operating and financial systems and resources.
Although the Company believes that there are currently no existing material
weaknesses, to accommodate recent growth and to compete effectively and manage
future growth, if any, the Company will be required to continue to implement and
improve operational, financial and management information systems, procedures
and controls on a timely basis and in such a manner as is necessary to
accommodate the increased number of transactions and customers and the increased
size of the Company's operations. Management of future growth, if any, will also
require that the Company continuously expand, train, motivate and manage its
work force. These demands will require the addition of new management personnel.
The Company's future success will depend to a significant extent on the ability
of its current and future executive officers to operate effectively, both
independently and as a group. There can be no assurance that the Company's
personnel, systems, procedures and controls will be adequate to support the
Company's existing and future operations. Any failure to implement and improve
the Company's operational, financial and management systems or to expand, train,
motivate or manage employees could have a material adverse effect on the
Company's business, operating results and financial condition.

         Dependence on Key Personnel. The Company's success depends to a
significant degree upon the continuing contributions of its key management,
sales, professional services, customer support and product development
personnel. In particular, the Company would be materially adversely affected if
it were to lose the services of Gerard B. Moersdorf, Jr., Chief Executive
Officer, President, Treasurer and a director of the Company, who has provided
significant leadership and direction to the Company since its inception. The
Company has obtained key man life insurance on the life of Mr. Moersdorf in the
amount of $1,000,000 payable to the Company. The loss of key management or
technical personnel could adversely affect the Company. The Company believes
that its future success will depend in large part upon its ability to attract
and retain highly-skilled managerial, sales, professional services, customer
support and product development personnel. The Company has at times experienced
and continues to experience difficulty in recruiting qualified personnel.
Competition for qualified personnel is intense, and there can be no assurance
that the Company will be successful in attracting and retaining such personnel.
In addition, there are only a limited number of qualified professional services
and customer support engineers, and competition for such individuals is
especially intense. In addition, competitors have in the past and may in the
future attempt to recruit the Company's employees. Failure to attract and retain
key personnel could have a material adverse effect on the Company's business,
operating results and financial condition.

         Limited Market; Volatility of Stock Price. Although the Company is
listed on the Nasdaq National Market, there can be no assurance that an active
or liquid trading market in the Common Stock will continue. The market price of
the shares of Common Stock is likely to be highly volatile and may be
significantly affected by factors such as actual or anticipated fluctuations in
the Company's operating results, announcements of technological innovations, new
products or new contracts by the Company or its competitors, developments with
respect to copyrights or proprietary rights, general market conditions and other
factors. In addition, the stock market has from time to time experienced
significant

                                     - 14 -
<PAGE>   15
price and volume fluctuations that have particularly affected the market prices
for the common stocks of technology companies. These types of broad market
fluctuations may adversely affect the market price of the Company's Common
Stock. In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
initiated against such company. Such litigation could result in substantial
costs and a diversion of management's attention and resources, which could have
a material adverse effect upon the Company's business, operating results and
financial condition.

         Anti-Takeover Provisions; Certain Provisions of Delaware Law;
Certificate of Incorporation and By-Laws. Certain provisions of Delaware law,
the Company's Certificate of Incorporation and By-Laws could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, control of the Company. The Company's
By-Laws provide for the Board of Directors to be divided into three classes of
directors serving staggered three-year terms. Such classification of the Board
of Directors expands the time required to change the composition of a majority
of directors and may tend to discourage a proxy contest or other takeover bid
for the Company. Additionally, the directors, executive officers and existing
principal stockholders of the Company and their affiliates collectively own
approximately 43.1% of the outstanding the Company's Common Stock. Such
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company.

         Concentration of Stock Ownership. The present directors, executive
officers and principal stockholders of the Company and their affiliates
beneficially own approximately 43.1% of the outstanding shares of the Company's
Common Stock. In particular, Gerard B. Moersdorf, Jr. and his spouse own
approximately 41.5% of the outstanding shares of Common Stock. As a result,
these stockholders are able to exercise significant influence over matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. Such concentration of ownership may have
the effect of delaying or preventing a change in control of the Company.

ITEM 2.  PROPERTIES.
         -----------

         The Company headquarters is a 115,000 square foot modern corporate
office and manufacturing facility in Dublin, Ohio. All of the Company's
manufacturing, administrative and research and development activities for the
DCN Products and a substantial portion of its marketing activities are conducted
at this location. The Company owns the building and the approximately 33 acres
of land on which it is situated.

         The Company leases approximately 24,000 square feet of office space in
Morrisville, North Carolina, used primarily for research and development
activities for the Access Products. The lease for the Morrisville facility
commenced in February 1997 and has a five year term.

ITEM 3.  LEGAL PROCEEDINGS.
         ------------------

         Not applicable.

                                     - 15 -
<PAGE>   16
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
         ----------------------------------------------------

         Not applicable.

                                     - 16 -
<PAGE>   17
                                     PART II

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

         Applied Innovation Inc. common stock has been traded in the
over-the-counter market since 1986. The common stock was traded on the NASDAQ
OTC Bulletin Board until May 18, 1993. From May 18, 1993 to November 26, 1993
the common stock was traded on the NASDAQ Small Cap Market. On November 29, 1993
the common stock began trading on the NASDAQ National Market. The following
table sets forth, for the periods indicated, the high and low bid prices for
Applied Innovation Inc. common stock. The prices shown represent quotations
between dealers, without adjustment for retail markups, markdowns or commissions
and may not represent actual transactions.


                         1997                             1996
                         ----                             ----
                  High           Low               High          Low
----------------------------------------------------------------------
Q1                $6.50         $4.38             $13           $8
----------------------------------------------------------------------
Q2                $6.38         $3.25             $14           $8.25
----------------------------------------------------------------------
Q3                $4.75         $3.75             $10.875       $7.875
----------------------------------------------------------------------
Q4                $8.13         $4.13             $10.125       $5.75
----------------------------------------------------------------------

          At March 6, 1998, the Company had 801 stockholders of record.

          The Company has not paid any cash dividends and presently anticipates
that all of its future earnings will be retained for development of its
business. The Company does not anticipate paying cash dividends on its Common
Stock in the foreseeable future. The payment of any future dividends would be at
the discretion of the Company's Board of Directors and would depend upon, among
other things, future earnings, operations, capital requirements, the general
financial condition of the Company and general business conditions. Although the
Company's ability to pay dividends is not currently restricted by any of its
financing agreements, the Company may be subject to such restrictions in the
future.

ITEM 6.  SELECTED FINANCIAL DATA.
         ------------------------

          The information required by this item is included under the caption
"Financial Highlights" in the Company's Annual Report to Stockholders and is
incorporated herein by reference.

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

          The information required by this item is included under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's Annual Report to Stockholders and is incorporated
herein by reference.

                                     - 17 -
<PAGE>   18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
         -----------------------------------------------------------

          None.

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

          The information required by this item is included under the caption
"Consolidated Financial Statements" in the Company's Annual Report to
Stockholders and is incorporated herein by reference.

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

          None.

                                     - 18 -
<PAGE>   19
                                    PART III

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

          The information appearing under the caption "ELECTION OF DIRECTORS" on
pages 4 through 11 of the Company's Proxy Statement relating to the Company's
Annual Meeting of Stockholders to be held on April 23, 1998 (the "Proxy
Statement"), and the information appearing under the caption "SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" on page 18 of the Proxy Statement is
incorporated herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION.
          -----------------------

          The information appearing in the Proxy Statement under the caption
"ELECTION OF DIRECTORS - Executive Compensation" on pages 7 and 11 of the Proxy
Statement is incorporated herein by reference.

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

          The information appearing in the Proxy Statement under the caption
"OWNERSHIP OF COMMON STOCK BY PRINCIPAL STOCKHOLDERS" on page 2, and under the
caption "SECURITY OWNERSHIP OF MANAGEMENT" on page 3 of the Proxy Statement, is
incorporated herein by reference.

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

          The information appearing in the Proxy Statement under the caption
"ELECTION OF DIRECTORS - Related Party Transactions" on page 10 is incorporated
herein by reference.

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

(a)(1)    The following documents are filed as part of this report:

          Consolidated Balance Sheets as of December 31, 1997 and 1996

          Consolidated Statements of Operations for the years ended December 31,
          1997, 1996, and 1995

          Consolidated Statements of Stockholders' Equity for the years ended
          December 31, 1997, 1996, and 1995

          Consolidated Statements of Cash Flows for the years ended December 31,
          1997, 1996, and 1995

          Notes to Consolidated Financial Statements

                                     - 19 -
<PAGE>   20
(a)(2)    No schedules are included because of the absence of the conditions
          under which they are required or because the required information is
          included in the financial statements or the notes thereto.

(a)(3) Exhibits:  The following exhibits are filed as part of this report:

<TABLE>
<CAPTION>
   EXHIBIT NO.                                        DESCRIPTION
          PAGE
<S>                                                                                                            <C>
         3.1       Certificate of Incorporation of the Company..................................................(1)

         3.2      By-laws of the Company, as amended............................................................(1)

         10.1     Company's Amended and Restated 1986 Incentive Stock
                  Option Plan, including form of Stock Option Agreement........................................(1)*

         10.2     Company's 1986 Amended and Restated Non-Statutory
                  Stock Option Plan, including form of Stock Option Agreement..................................(1)*

         10.3     Form of Confidentiality, Assignment and Non-Competition
                  Agreement between the Company and employee officers..........................................(1)*

         10.4     Technology Agreement, dated November 12, 1996, between
                  the Company and Cisco Systems, Inc............................................................(5)

         10.5A    Letter Agreement between the Company and William H. Largent
                  regarding employment.........................................................................(5)*

         10.5B    Employment Agreement between the Company and William H. Largent..............................(5)*

         10.6     Letter Agreement between the Company and
                  John M. Spiegel re: employment...............................................................(1)*

         10.7     Employment Agreement between the Company and
                  William J. Mrukowski.........................................................................(5)*

         10.8     Form of Indemnification Agreement between the Company
                  and officers and directors...................................................................(2)*

         10.9     Schedule of Indemnification Agreements.......................................................(2)*

         10.10    Omitted

         10.11    Omitted
</TABLE>

                                     - 20 -
<PAGE>   21
<TABLE>
<S>                                                                                                            <C>
         10.12    Omitted

         10.13    Company's 1996 Stock Option Plan.............................................................(4)*

         11       Statement re: computation of earnings per share...............................................(5)

         13       Portions of the Annual Report to Stockholders.................................................(5)

         23.1     Consent of KPMG Peat Marwick LLP..............................................................(5)

         24       Powers of Attorney............................................................................(5)

         27       Financial Data Schedule.......................................................................(5)
</TABLE>
         --------------------
         (1)      Previously filed with the same exhibit number with the
                  Company's Form 10-SB filed March 10, 1993 and incorporated
                  herein by reference.
         (2)      Previously filed with the same exhibit number with the
                  Company's Form 10-KSB filed March 31, 1994 and incorporated
                  herein by reference.
         (3)      Previously filed with the same exhibit number with the
                  Company's Form 10-K filed March 31, 1995 and incorporated
                  herein by reference.
         (4)      Previously filed with the same exhibit number with the
                  Company's Form 10-K filed March 31, 1996 and incorporated
                  herein by reference.
         (5)      Filed herewith.
         *        Management contract or compensatory plan or arrangement
                  required to be filed as an exhibit to this form.

(b)      No reports on Form 8-K were filed in the fourth quarter of 1997.

(c)      Exhibits - The exhibits to this report follow the signature page.

(d)      Financial Statement Schedules - None.

                                     - 21 -
<PAGE>   22
                                   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.

                                         APPLIED INNOVATION INC.


Date: March 27, 1998                     By: /s/ Gerard B. Moersdorf, Jr.
                                            -------------------------------
                                            Gerard B. Moersdorf, Jr., Chairman,
                                             President and Treasurer

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

<TABLE>
<CAPTION>
         SIGNATURE                                   TITLE                                   DATE
         ---------                                   -----                                   ----
<S>                                         <C>                                         <C>
/s/ Gerard B. Moersdorf, Jr.                Chairman, President                         March 27, 1998
------------------------------              and Treasurer (Principal Executive
Gerard B. Moersdorf, Jr.                    Officer)

/s/ William H. Largent                      Senior Vice President of                    March 27, 1998
------------------------------              Operations and Chief Financial
William H. Largent                          Officer (Principal Financial
                                            Officer)

/s/ John M. Spiegel                         Controller                                  March 27, 1998
------------------------------              (Principal Accounting Officer)
John M. Spiegel

*James H. Blough
------------------------------
James H. Blough                             Director                                    March 27, 1998

*Curtis A. Loveland
------------------------------
Curtis A. Loveland                          Director                                    March 27, 1998

*Gerard B. Moersdorf, Sr.
------------------------------
Gerard B. Moersdorf, Sr.                    Director                                    March 27, 1998

*Richard W. Oliver
------------------------------
Richard W. Oliver                           Director                                    March 27, 1998

*Thomas W. Huseby
------------------------------
Thomas W. Huseby                            Director                                    March 27, 1998
</TABLE>

                                     - 22 -

<PAGE>   23
<TABLE>
<S>                                         <C>                                         <C>
*Alexander B. Trevor
------------------------------
Alexander B. Trevor                         Director                                    March 27, 1998
</TABLE>



*By: /s/ Gerard B. Moersdorf, Jr.
    -----------------------------
    Gerard B. Moersdorf, Jr.
    (Attorney-in-Fact)

                                     - 23 -
<PAGE>   24
<TABLE>
<CAPTION>
                                                  Applied Innovation Inc.
                                                  Form 10-K Exhibit Index

   EXHIBIT NO.                                        DESCRIPTION
          PAGE
<S>                                                                                                            <C>
         3.1      Certificate of Incorporation of the Company...................................................(1)

         3.2      By-laws of the Company, as amended............................................................(1)

         10.1     Company's Amended and Restated 1986 Incentive Stock
                  Option Plan, including form of Stock Option Agreement........................................(1)*

         10.2     Company's 1986 Amended and Restated Non-Statutory
                  Stock Option Plan, including form of Stock Option Agreement..................................(1)*

         10.3     Form of Confidentiality, Assignment and Non-Competition
                  Agreement between the Company and employee officers..........................................(1)*

         10.4     Technology Agreement, dated November 12, 1996, between
                  the Company and Cisco Systems, Inc............................................................(5)

         10.5A    Letter Agreement between the Company and William H. Largent
                  regarding employment.........................................................................(5)*

         10.5B    Employment Agreement between the Company and William H. Largent..............................(5)*

         10.6     Letter Agreement between the Company and
                  John M. Spiegel re: employment...............................................................(1)*

         10.7     Employment Agreement between the Company and
                  William J. Mrukowski.........................................................................(5)*

         10.8     Form of Indemnification Agreement between the Company
                  and officers and directors...................................................................(2)*

         10.9     Schedule of Indemnification Agreements.......................................................(2)*

         10.10    Omitted

         10.11    Omitted

         10.12    Omitted

         10.13    Company's 1996 Stock Option Plan.............................................................(4)*

         11       Statement re: computation of earnings per share...............................................(5)

         13       Portions of the Annual Report to Stockholders.................................................(5)

         23.1     Consent of KPMG Peat Marwick LLP..............................................................(5)

         24       Powers of Attorney............................................................................(5)

         27       Financial Data Schedule.......................................................................(5)
</TABLE>
         --------------------
         (1)      Previously filed with the same exhibit number with the
                  Company's Form 10-SB filed March 10, 1993 and incorporated
                  herein by reference.
         (2)      Previously filed with the same exhibit number with the
                  Company's Form 10-KSB filed March 31, 1994 and incorporated
                  herein by reference.
         (3)      Previously filed with the same exhibit number with the
                  Company's Form 10-K filed March 31, 1995 and incorporated
                  herein by reference.
         (4)      Previously filed with the same exhibit number with the
                  Company's Form 10-K filed March 31, 1996 and incorporated
                  herein by reference.
         (5)      Filed herewith.
         *        Management contract or compensatory plan or arrangement
                  required to be filed as an exhibit to this form.