<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, 1999
                                       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               (I.R.S. Employer Identification No.)
of incorporation or organization)

                    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,
8,899,323 shares, based on the $13.00 closing sale price on March 10, 2000, was
$115,691,199.

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 15,496,852 shares of Common
Stock were outstanding at March 10, 2000.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Annual Report to the Stockholders for the fiscal
year ended December 31, 1999, are incorporated by reference in Part II.

Part III - Proxy Statement for the Annual Meeting of Stockholders to be held
April 27, 2000, 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 26A 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'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 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 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.



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         The Company is seeking to expand distribution for its products outside
the United States. The Company has taken early steps to establish a presence,
through distributors, OEM agreements, or otherwise, in Australia, Canada, China,
Mexico, the Philippines, Taiwan and South Africa. The Company believes that
countries currently building telecommunications infrastructures will require
centralized network management and the supporting data communications capability
supplied by its products.


         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, MCIWorldcom, and over
1,000 smaller independent firms, competitive local exchange carriers (CLECs) and
long distance companies. Because of their relative size, demand for product, and
importance, the Company has concentrated its 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 into 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 depends on the
development and acceptance of new products and new releases of existing
products. Additional sales growth may be derived from additional sales to other
RBOCs, CLECs and long distance phone companies. See "Business - Business Risks -
Risks Associated with Customer Concentration; Dependence on Telecommunications
Industry."

PRODUCTS

AISWITCH(TM)
------------

         The AISwitch connects multiple generations of telecommunications
network equipment to computers that monitor, control and analyze field
conditions. The AISwitch incorporates the latest high speed microprocessor and
programmable gate array technology to bridge the hardware and software gaps
between old and new equipment, providing productivity gains and cost savings at
both the customer's Central Office and the Operations Centers. Substantially all
vintages of telecommunications network equipment can be integrated with support
systems through the use of the AISwitch.

         The AISwitch provides connectivity and visibility among the diverse
communication protocols and vendor equipment found in every telecommunications
network. Within a typical telecommunications service region, there may be as
many as 10,000 Network Elements to interface


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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.

         A unique capability of the AISwitch 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 includes a wide variety of
functions and options that are configured to fit client needs.

         The key to the AISwitch integration capability is its flexible
microprocessor controlled digital switching and protocol processing
capabilities. The AISwitch 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.


         The AISwitch features NEBS Level 3 compliance, Hot Swap capability,
software download and is Simple Network Management Protocol (SNMP) manageable.
It ensures 100% connectivity, 100% reliability and 100% availability from OS
systems to Network Elements across any data communication network.


         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. See "Business - Business Risks - Reliance on Suppliers."

AISCOUT(TM)
-----------

         The AIscout is a self-contained, economical, mediation and
concentration device providing versatile functionality and hardware connectivity
for data communications networks. While designed for smaller Central Offices,
Controlled Environmental Vaults and collocation sites, the AIscout offers many
features to meet a broad range of network needs. It is ideal for protocol
mediation and port concentration for transporting OAM&P data between Network
Elements and Operational Support Systems. The AIscout offers remote software
download capabilities, remote configuration, SNMP manageability, configuration
backup, download and restore and local craft access. These management features
contribute to more efficient allocation of customers' manpower. By integrating
the AIflex (Fiber LAN Extender - a WDM technology) within the AIscout, the OAM&P
traffic may use the same fiber as the payload traffic. This eliminates the need
for routers and CSU/DSUs, which in turn flatten out the network and eliminates
both the need for installing a dedicated circuit and recurring monthly dedicated
circuit costs.



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APPLIEDVIEW(TM)
---------------

         AppliedView is an element management system which allows the people and
operations systems in a Network Operations Center to monitor the status of
AISwitch units in remote locations such as Central Offices and Controlled
Environmental Vaults. The program includes software download and configuration
backup for remote AISwitch units. AppliedView gives Network Operations Center
technicians the same view as a technician standing in front of the switch. It
provides centralized, constant and continuous surveillance and provisioning of
the AISwitch network. Through a graphical user interface, this network manager
reduces the cost and time required for upgrades and remote site maintenance.

AIFLEX(TM)
----------

         The AIflex enables telecom companies to use existing fiber connections
from the Central Office to monitor and manage Controlled Environmental Vaults,
huts and shelters. The AIflex uses Wave Division Multiplexer (WDM) technology to
enable telecommunication providers to manage remote locations as nodes on a
Central Office-based LAN. Connecting directly to existing fiber without
interfering with existing payload, AIflex transmits management data between
remote sites and the central office without additional cost and delays
associated with extra lines or routers. Utilizing existing fiber saves money,
saves recurring circuit costs, frees a resource generating circuit and speeds
deployment time.


AIM(TM)
-------

         The Applied Innovation Mediator (AIM) is a lower-cost alternative to
the AISwitch that provides operations center management of small office network
elements in small central offices, Controlled Environmental Vaults, cell sites
and huts. It provides connectivity to virtually any network element, OS system,
or data communications network in a compact, cost-effective package. The AIM
also integrates diverse protocols and physical interfaces of network elements
for OAM&P applications.


NEWEB(TM)
---------

         NEWEB combines the AISwitch and Web technology for simple, secure
access to Network Elements from anywhere, anytime. Using a client/server
architecture, NEWEB provides users with a simple intuitive means to locate and
connect to specific network elements through a point and click, pull-down menu
interface. NEWEB gives technicians direct access, with PCs or workstations, to
remote Network Elements. Users increase their productivity by eliminating
unnecessary field service calls. NEWEB also enables users to diagnose and repair
faults in less time while shortening their learning curve for Network Element
provisioning and troubleshooting. With a multi-level


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security system that requires a password and username, properly authorized users
can easily add new Network Elements and customize the menu commands to meet
specific user needs. As a result, one user may be granted limited access to a
single equipment type in a city, while another user may have full access to
everything in a network, nationwide.


AISPY(TM)
---------

         AIspy is a comprehensive system for managing small telecom sites such
as Controlled Environmental Vaults, cell sites, huts, collocation sites, small
central offices and remote and unmanned facilities. AIspy provides monitoring
capabilities for the entire facility through a multitude of alarms and sensors.
AIspy is built to telephone company standards and provides the customer with
multiple management and communication path options. It has the capability to
control and record access into the monitored site through either keypad or
cellular phone (DTMF) input.

MANUFACTURING AND OPERATIONS

         All of the printed circuit boards used within the Company's products
are proprietary designs of the Company. Printed circuit boards and power
supplies used in each of the Company's products are contracted out to third
party manufacturing firms for assembly. These subassemblies are then shipped to
the Company for testing and final assembly. Procurement of materials is driven
through an enterprise resource planning ("ERP") system with production forecasts
supplied to contract firms for component ordering from sources supplied and
approved by the Company. The Company maintains and controls all documentation
and process requirements for products manufactured by the contract assembly
firms. The Company utilizes multiple assembly firms and is, therefore, not
dependent on any single third party manufacturer.


         The Company performs multiple inspections on its products as well as
various test procedures prior to shipment to customers. These processes are
designed to assure product performance and reliability in the environments in
which the products will be used. The Company has made and continues to make
significant investments to attain quality assurance consistent with stringent
industry standards. The Company develops and manufactures its products in
accordance with NEBS and Generic Equipment Requirements guidelines. The Company
is International Standards Organization 9001 ("ISO 9001") certified.


SALES AND MARKETING


         The Company's products and services are sold primarily through its own
sales force, except for independent sales agents in Canada, South Africa,
Australia and Taiwan. 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 and New York.



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         The Company's sales and marketing staff consists of a Senior Vice
President of Sales, a Director of Marketing, a Director of International
Marketing, a Director of Product Line Management, a Director of Customer
Service, Regional Sales Managers, Senior Account Managers, Account Managers,
Associate Account 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 sales
and marketing staff. If sufficient interest exists, an on-site visit may be
scheduled for the purpose of making a sales presentation, which may include a
product demonstration.


         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
incentive compensation based on increased levels of sales.

RESEARCH AND DEVELOPMENT

         The Company's research and development ("R&D") activity is coordinated
with product management to create product development teams that focus on
customer requirements. Enhancements to the AISwitch 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 is being enhanced to accommodate older
data communication standards in order to broaden its range of application


         The Company spent $7,479,496, $11,979,875 and $12,897,072, on
Company-sponsored R&D during the fiscal years ended December 31, 1999, 1998 and
1997, respectively. R&D expenditures represented approximately 15.1%, 22.3%, and
27.6% of annual net sales in fiscal 1999, 1998 and 1997, respectively. During
1998 and 1997, the Company incurred $6,263,000 and $6,536,000, respectively, in
R&D related to the terminated Access Products Group development activity. The
Company expects to commit a substantial amount of resources and cash to its
research and development efforts during 2000. See "Business - Business Risks -
New Products and Rapid Technological Change; Need to Manage Product
Transitions."


CUSTOMER SERVICE AND WARRANTY

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


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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 products.

         The Company warrants its products for a minimum of one year and up to
five years, as negotiated under contract. Customers may also purchase extended
warranty contracts with guaranteed overnight factory replacement service for
circuit boards or system modules in the event of equipment failure. Software
revisions to the Company's products are also available as part of the warranty
package. 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 its field service and support
departments. A toll-free 800 number is also offered.


         Warranty expense represented approximately 2.4%, 4.5% and 3.6% of
annual net sales in 1999, 1998 and 1997, respectively. 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
superior to those of the Company and from relatively new but aggressive
companies.

         Competition for the Company's 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 and Harris Corporation's Westronics division. In some
cases, newer products or redesigned older products from these suppliers compete
with the Company's products. See "Business - Business Risks - Competition."

PERSONNEL


         As of March 1, 2000, the Company had 233 full-time and part-time
employees. The Company's employees are distributed among the following
departments: Sales and Marketing (39); Research and Development (69); Customer
Service (56); Manufacturing (39); and Operations (30). The Company anticipates
that it will continue to increase the number of its employees as it grows.



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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, 2000, 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 1999, 1998 and 1997, net sales from the Company's two, five and five
largest customers represented approximately 42%, 75% and 76%, 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 or 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.


         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 the AISwitch will continue to account for a
significant portion of the Company's net sales in fiscal 2000. 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 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
AISwitch as a result of competition, technological


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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.

         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.



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         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.


         Reliance on Suppliers. The Company purchases raw material and licenses
technology from a number of domestic and foreign sources. The Company believes
that certain of 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


                                      -11-
<PAGE>   12

on December 31, 2000 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, investments,
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.

         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 expense. 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


                                      -12-
<PAGE>   13

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.


         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 Chairman 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 other 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. Furthermore, competitors have


                                      -13-
<PAGE>   14

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 Company's common stock will continue. The market
price of the shares of the Company's 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 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 and
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 beneficially own
approximately 44.9% of the outstanding shares of 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 44.9% of the outstanding shares of the Company's
Common Stock. In particular, Gerard B. Moersdorf, Jr. and his spouse own
approximately 42.2% 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.


                                      -14-
<PAGE>   15


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 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.

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

      Not applicable.

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

      Not applicable.




                                      -15-
<PAGE>   16


                                     PART II

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

         The Company's 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 the Company's common
stock. The prices shown represent quotations between dealers, without adjustment
for retail markups, markdowns or commissions and may not represent actual
transactions.

<TABLE>
<CAPTION>
                         1999                       1998
                         ----                       ----
                   High         Low           High        Low
<S>                <C>          <C>           <C>         <C>
Q1                 $5.19        $3.13         $8.00       $5.38

Q2                 $5.75        $2.81        $11.75       $7.00

Q3                 $4.94        $3.50        $11.25       $2.38

Q4                 $9.00        $3.40         $4.50       $2.19
                   --------------------------------------------
</TABLE>



          At March 10, 2000, the Company had 625 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
"Selected Consolidated Financial Data " in the Company's Annual Report to
Stockholders and is incorporated herein by reference.



                                      -16-
<PAGE>   17


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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
         ----------------------------------------------------------

          The Company does not have any material exposure to interest rate
changes, commodity price changes, foreign currency fluctuations, or similar
market risks. Furthermore, the Company has not entered into any derivative
contracts and the Company has no debt outstanding as of December 31, 1999.


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.




                                      -17-
<PAGE>   18


                                    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 27, 2000 (the "Proxy
Statement"), and the information appearing under the caption "SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" on page 13 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 through 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 pages 9 and 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, 1999 and 1998.

          Consolidated Statements of Operations for the years ended December 31,
          1999, 1998 and 1997.

          Consolidated Statements of Stockholders' Equity for the years ended
          December 31, 1999, 1998 and 1997.

          Consolidated Statements of Cash Flows for the years ended December 31,
          1999, 1998 and 1997.

          Notes to Consolidated Financial Statements.



                                      -18-
<PAGE>   19

(a)(2)    Schedule II (Valuation and Qualifying Accounts)


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

<TABLE>
<CAPTION>

    EXHIBIT NO.                              DESCRIPTION


<S>      <C>                                                                                                    <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...........................................................(2)

         10.5A    Letter Agreement between the Company and William H. Largent
                  regarding employment.........................................................................(2)*

         10.5B    Employment Agreement between the Company and William H. Largent..............................(2)*

         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.........................................................................(2)*

         10.8     Form of Indemnification Agreement between the Company
                  and officers and directors...................................................................(3)*

         10.9     Schedule of Indemnification Agreements.......................................................(3)*


         10.10    Letter Agreement between the Company and Michael P. Keegan regarding
                  employment...................................................................................(4)*

         10.11    Amended and Restated 1996 Stock Option Plan..................................................(4)*
</TABLE>


                                      -19-
<PAGE>   20

<TABLE>
<CAPTION>
<S>      <C>                                                                                                    <C>
         10.12    Reserved

         10.13    Reserved

         11       Statement re: computation of earnings per share...............................................(4)

         13       Portions of the Annual Report to Stockholders.................................................(4)

         23.1     Consent of KPMG LLP ..........................................................................(4)

         24       Powers of Attorney ...........................................................................(4)

         27       Financial Data Schedule ......................................................................(4)

         99       Independent Auditors' Report .................................................................(4)
</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-K filed March 31, 1998 and incorporated
                  herein by reference.

         (3)      Previously filed with the same exhibit number with the
                  Company's Form 10-KSB filed March 31, 1994 and incorporated
                  herein by reference.

         (4)      Filed herewith.

         *        Management contract or compensatory plan or arrangement
                  required to be filed as an exhibit to this form.


(b)      Form 8-K filed October 27, 1999, reporting that on October 22, 1999,
         the Company's Board of Directors authorized the Company to repurchase
         up to 1,000,000 shares of its outstanding common stock through October
         31, 2000 (Item 5 and Item 7).

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

(d)      Financial Statement Schedules - The financial statement schedule to
         this report follows the signature page and the independent auditor's
         report thereon is included in Exhibit 99 to this Report on Form 10-K.

                                      -20-
<PAGE>   21
                                   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 30, 2000               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 30, 2000
------------------------------              and Treasurer (Principal Executive
Gerard B. Moersdorf, Jr.                    Officer)


  /s/ Michael P. Keegan
------------------------------
Michael P. Keegan                           Vice President,                             March 30, 2000
                                            Chief Financial Officer
                                            (Principal Financial and Accounting
                                            Officer)


*James H. Blough
------------------------------
James H. Blough                             Director                                    March 30, 2000


*Curtis A. Loveland
------------------------------
Curtis A. Loveland                          Director                                    March 30, 2000


*Gerard B. Moersdorf, Sr.
------------------------------
Gerard B. Moersdorf, Sr.                    Director                                    March 30, 2000


*Richard W. Oliver
------------------------------
Richard W. Oliver                           Director                                    March 30, 2000


*Thomas W. Huseby
------------------------------
Thomas W. Huseby                            Director                                    March 30, 2000
</TABLE>

                                      -21-
<PAGE>   22
<TABLE>
<CAPTION>
<S>                                      <C>                                         <C>
*Alexander B. Trevor
------------------------------
Alexander B. Trevor                         Director                                    March 30, 2000


*William H. Largent
------------------------------
William H. Largent                          Director                                    March 30, 2000



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

                                      -22-
<PAGE>   23



                             Applied Innovation Inc.
                 Schedule II - Valuation and Qualifying Accounts
              For the Years Ended December 31, 1997, 1998 and 1999

<TABLE>
<CAPTION>


Column A                                           Column B            Column C              Column D       Column E
--------                                           --------            --------              --------       --------
                                                             /---------Additions--------/
                                                             ----------------------------
                                               Balance at      Charged to     Charged to
                                              beginning of     costs and        other                     Balance at
Description                                      period         expense        accounts     Deductions   end of period
-----------                                      ------         -------        --------     ----------   -------------
<S>                                              <C>              <C>           <C>          <C>        <C>
YEAR ENDED DECEMBER 31, 1997:
     Allowance for doubtful accounts             $   112,528   $  756,633           --       $  640,877    $    228,284
     Allowance for obsolete inventory                 75,000       37,116           --               --         112,116
     Warranty provision                            2,761,589    1,537,591           --        2,143,855       2,155,325

YEAR ENDED DECEMBER 31, 1998:
     Allowance for doubtful accounts             $   228,284   $  147,091           --       $  119,258    $    256,117
     Allowance for obsolete inventory                112,116    1,153,556           --        1,105,672         160,000
     Warranty provision                            2,155,325    2,640,076           --        2,150,663       2,644,738

YEAR ENDED DECEMBER 31, 1999:
     Allowance for doubtful accounts             $   256,117   $  162,103           --       $  100,673    $    317,547
     Allowance for obsolete inventory                160,000           --           --               --         160,000
     Warranty provision                            2,644,738    1,602,570           --        2,369,577       1,877,731

</TABLE>





                                      -23-