<PAGE>


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


                                    FORM 10-K

[X]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
       ACT OF  1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

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

                        COMMISSION FILE NUMBER 000-23698

                          APPLIED DIGITAL ACCESS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                 CALIFORNIA                              68-0132939
       (STATE OR OTHER JURISDICTION OF       (IRS EMPLOYER IDENTIFICATION NO.)
        INCORPORATION OR ORGANIZATION)

                 9855 SCRANTON ROAD, SAN DIEGO, CALIFORNIA 92121
               (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE)

                                 (619) 623-2200
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                           COMMON STOCK, NO PAR VALUE
                                (TITLE OF CLASS)
                 ---------------------------------------------

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

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

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant,  based upon the closing  sale price of the Common  Stock on February
28,  1997 as  reported  on the  Nasdaq  National  Market,  was  approximately  $
60,265,807.  For the  purposes of this  calculation,  shares  owned by officers,
directors and 5%  shareholders  known to the  registrant  have been deemed to be
owned by affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

There were  12,331,239  shares of the  Registrant's  Common Stock, no par value,
outstanding as of February 28, 1997.

                       DOCUMENTS INCORPORATED BY REFERENCE

(1) Portions of the Registrant's  1996 Annual Report to Shareholders,  a copy of
which is  attached  hereto as Exhibit  13.1,  referred  to herein as the "Annual
Report", are incorporated as provided in Part II.

(2)  Portions of the  Registrant's  Proxy  Statement  for the Annual  Meeting of
Shareholders  to be  held  May  20,  1997,  referred  to  herein  as the  "Proxy
Statement", are incorporated as provided in Part III.


<PAGE>



  PART I


ITEM 1.  BUSINESS

     THE DISCUSSION OF THE COMPANY'S BUSINESS CONTAINED IN THIS ANNUAL REPORT ON
FORM 10-K MAY CONTAIN  CERTAIN  FORWARD-LOOKING  STATEMENTS.  FOR  DISCUSSION OF
FACTORS WHICH MAY AFFECT THE OUTCOME  PROJECTED IN SUCH  STATEMENTS,  PLEASE SEE
"RISKS AND  UNCERTAINTIES"  AT PAGES 13 THROUGH 16 OF THIS ANNUAL REPORT ON FORM
10-K.  THE COMPANY  UNDERTAKES NO OBLIGATION TO RELEASE  PUBLICLY THE RESULTS OF
ANY  REVISIONS  TO  THESE  FORWARD-LOOKING   STATEMENTS  TO  RELFECT  EVENTS  OR
CIRCUMSTANCES ARISING AFTER THE DATE HEREOF.

     Applied  Digital Access Inc.  ("ADA" or the "Company") was  incorporated in
California  in August  1987.  The  Company's  headquarters  are  located at 9855
Scranton Road, San Diego,  California  92121,  and its telephone number is (619)
623-2200.

     ADA is a leading provider of network  performance  management products that
include systems, software, and services used to manage the quality, performance,
availability and reliability of  telecommunications  service providers' ("TSPs")
networks.  ADA's  products are designed to enable  service  providers to improve
their quality of service, to increase productivity,  to lower operating expenses
and to  effectively  deploy new  services.  ADA has  positioned  its business to
assist  service  providers in addressing the rapidly  increasing  demand for new
services,  higher  bandwidth  and  access to the  Internet.  ADA's  systems  and
software   provide   network   management   functions   such  as   provisioning,
configuration managment, performance management, testing and traffic management.
ADA has approached the industry  demand for network  management  products with a
three-faceted approach: (1) Network Systems and Sensors that provide testing and
performance  monitoring functions as well as selected transport  functions;  (2)
Network  Management  software  that  enables  service  providers to manage their
network  operations;  and (3) Services that are  customized to meet the evolving
needs of our service provider market.  In 1996, the Company formed two strategic
business units:  the Network  Systems and Sensors  business unit and the Network
Management  business unit. The business units are synergistic with the evolution
of the Company from a single product line to multiple product lines. The Network
Systems and Sensors  business unit is built around the  Company's  T3AS products
and services including its T3AS Test and Performance  Monitoring System (T3AS"),
Centralized  Test System ("CTS") and Protocol  Analysis Access System  ("PAAS"),
and the Remote  Module,  a DS1  network  interface  unit  ("NIU").  The  Network
Management  business unit focuses on Operations Systems ("OS") software products
including  Traffic Data  Collection  and  Engineering  System  ("TDC&E"),  Fault
Management   System  ("FMS")  and  OS  design  services  all  acquired   through
acquisitions, as well as Graphical Test Assistant ("GTA") and Sectionalizer.

     The application of ADA's T3AS products enables TSPs telephone  companies to
quickly access high-speed data and voice circuits from remote network management
centers. The Company believes its T3AS system is the only  permanently-installed
system  that can  remotely  access  circuits  at both  the DS3 and DS1  rates to
provide an integrated  suite of test and  performance  monitoring  capabilities.
Using the T3AS system's  test  capabilities,  customer-reported  problems can be
quickly identified and localized without dispatching repair personnel.  The T3AS
system's  performance  monitoring  capabilities help TSPs detect  degradation of
service and initiate action before service to the customer is  interrupted.  The
Company has  primarily  focused  its sales  efforts on the seven  regional  bell
operating companies ("RBOCs") which are under increasing competitive pressure to
provide  high-quality  high-speed data and voice transmission at lower costs. To
date, six of the seven RBOCs, Ameritech,  BellSouth,  NYNEX,  Southwestern Bell,
Pacific Bell, and U S WEST, and a major interexchange  carrier have approved and
are  currently  deploying  the  Company's  T3AS  products.  The Company has sold
equipment to an independent telephone company, Sprint Central  Telephone-Nevada,
and  several  competitive  access  providers,  and has  increased  its sales and
marketing efforts aimed at independent  telephone companies,  competitive access
providers and interexchange carriers.

     In February 1996, the Company acquired certain assets of Applied  Computing
Devices,  Inc. ("ACD"), a company that developed and marketed traffic management
and  fault  management  OS to TSPs.  These  products  are  complementary  to the
Company's  Network  Systems product line. In July,  1996, ADA purchased  certain
assets of MPR Teltech Ltd. ("MPR Teltech"),  a subsidiary of BC TELECOM, Inc. BC
TELECOM, Inc. is Canada's second largest telecommunications  company. The assets
acquired were part of MPR Teltech's operating unit known as the Special Services
Network  division  ("SSN").  SSN  was  an OS  software  development  group  with
expertise in development of network  management  systems for TSPs. SSN developed
OS software primarily for Northern Telecom, Ltd. ("Nortel"). SSN has become part
of ADA's  Canadian  subsidiary,  ADA-Canada,  and develops  network  performance
management OS products for the Company and its customers,  including Nortel. ADA
has also  licensed  certain  technology  from  Nortel  for  Network  Performance
Management applications in connection with the acquisition.

                                       2
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BACKGROUND


     The volume of digital information transmitted through the telecommunication
system has grown rapidly in recent years.  This growth has been driven primarily
by the proliferation of personal  computers and workstations,  the prevalence of
networking and use of the Internet, the adoption of client/server computing, the
increase in cellular  telephone  and  facsimile  use, and the  deployment of new
digital information applications including multimedia,  video conferencing,  and
image-processing.  As a result,  TSPs  have  been  required  to  rapidly  deploy
high-speed data and voice circuits operating at a 1.54 megabit-per-second  rate,
called  DS1, or T1, and at a 45  megabit-per-second  rate,  called DS3.  The DS3
transmission   rate  is  the  highest   electrical   telecommunication   circuit
transmission rate in North America.

     The  present  structure  of the  telecommunications  industry in the United
States is largely a result of the  court-mandated  divestiture  of AT&T in 1984.
The  AT&T  divestiture  resulted  in  the  creation  of  the  seven  RBOCs,  the
competitive  long  distance  telephone  company  market,  and the  emergence  of
competitive  access providers  ("CAPs") and competitive local exchange companies
("CLECs") which offer local telephone  service in competition  with the RBOCs or
independent telephone companies ("ITOCs"). Regulation through competition is the
philosophy  that  resulted in the breakup of AT&T,  and it  continues  to be the
philosophy  of  the  Federal  Communications  Commission.  The  passage  of  the
Telecommunication Bill of 1996 allows each of these telephone companies to enter
the  territories and businesses of the others.  While the Company  believes that
the new law will bring new opportunities for network equipment suppliers,  it is
too   early  to   assess   the   long-term   impact  of  this  new  law  on  the
telecommunications industry and ADA's business.

     Local telephone companies have faced increased  competition from both CLECs
and  from  the  local  service  competitive  initiatives  of the  long  distance
telephone  companies and will potentially face competition from  non-traditional
providers of telephone service such as cable television  companies.  The Company
believes that many of the new competitive  entrants will continue to focus their
efforts on corporate and government  communications networks which are among the
most  profitable  market  segments.  Customers in these segments  require highly
reliable data and voice communications  circuits to enable them to conduct their
day-to-day business without  interruption.  These new competitors are often able
to offer  higher-quality and lower-cost service than local telephone  companies,
and as a result,  have gained significant  market share in these segments.  This
increased  competition  has brought  pressure on local  telephone  companies  to
protect their  existing  revenue bases by improving the quality of their service
and to reduce their costs.  At the same time,  these local  telephone  companies
continue to re-engineer and downsize their  organizations.  The large reductions
in staff have often  resulted in the loss of highly  experienced  and  technical
people, leaving less experienced staff to operate and maintain the networks.

     Prior  to  the   divestiture,   AT&T   was   responsible   for   end-to-end
telecommunication  service.  When problems occurred with a telephone connection,
customers called AT&T to diagnose and fix the problem.  Today,  however,  a long
distance  data or voice  circuit often  involves  three or more TSPs:  the local
telephone  companies  on each  end  and  the  long  distance  telephone  company
providing the connection  between the two local  companies.  Responsibility  for
service in long distance  high-speed data and voice networks is transferred from
one carrier to another at their network boundaries.

     The  Company  believes  that  the  segmentation  of the  telecommunications
network has made it more  difficult  for  telephone  companies  to identify  and
respond to problems in their networks.  For example,  many stock brokerage firms
communicate  real-time  stock  quotes and buy and sell  orders to and from their
brokers over high-speed data communications  lines. Such firms monitor their own
circuits and can detect when data communications service begins to degrade. When
a degradation in service is noted,  the  telecommunications  manager of the firm
contacts the  telephone  company  that manages the network - typically  the long
distance carrier.  Initially,  the long distance telephone company does not know
where the problem is located and must  initiate  three trouble  reports,  one in
each local telephone company and one in its own company.  Each telephone company
then dispatches multiple repair crews with portable test equipment to attempt to
locate  the  problem.  Typically,  repair  crews are  dispatched  to a number of
locations,  including  the network  boundary  between the long  distance and the
local telephone company, the

                                       3

<PAGE>


telephone  building  nearest  the user,  and to outside  facilities  such as the
cables and equipment  beneath  streets and on poles between the central  offices
and the end-user  customer.  This system of  maintenance  results in a number of
inefficiencies. For example, the Company believes telephone company repair crews
often incur needless  expense only to report "no trouble  found."  Despite their
best efforts, repair crews often inadvertently interrupt or damage circuits that
are working and may make unnecessary repairs.

     Long distance  telephone  companies  measure quality of service provided by
the  local   telephone   companies   in  two   principal   ways:   failure  rate
(customer-reported    troubles    per   100    circuits    per    month),    and
mean-time-to-restore  (the time  needed to respond to and  resolve a  customer's
complaint).  These measures frequently influence long distance telephone company
and end-user  customer  decisions about which local telephone company to use. To
date, local telephone  companies' level of services  measured by these standards
has often placed them at a competitive disadvantage.  In order to reduce failure
rates and improve  restoration times, the Company believes  telephone  companies
are motivated to change the traditional  methods of handling service problems as
described above. They are looking for solutions that do not require  dispatching
repair crews with portable test  equipment  when  problems  occur and,  instead,
allow them to monitor circuits remotely from a central management site. They are
also seeking  effective  methods of remotely  testing and monitoring DS3 and DS1
circuits at the network boundary.  Finally,  telephone  companies are looking to
improve  their  quality  of  service  by moving  from  reactive  maintenance  to
preventive maintenance through performance monitoring. These network quality and
performance requirements have created a need for a cost-effective solution.


THE APPLIED DIGITAL ACCESS SOLUTION

     ADA focuses on providing Network Performance  Management solutions to TSPs.
These  solutions  are  comprised  of  products  that  address  traffic,   fault,
performance,  and test  management.  The Company has  focused its  research  and
development  activities on creating  products that provide  answers,  instead of
data, to telecommunications  service providers, and on making network management
easier.

     ADA developed the T3AS, the first permanently  installed network element to
remotely  access  the  network  at both the DS3 and the DS1 rates  providing  an
integrated  suite  of test  and  performance  monitoring  capabilities.  ADA has
enhanced T3AS and has developed additional network elements,  such as CTS, PAAS,
and Remote Module.

     The Company believes its T3AS products enable TSPs to greatly improve their
reliability of service,  reduce circuit repair time,  reduce network  management
expense, and proactively maintain network quality. By providing remote access to
DS3 and DS1 circuits  located at network  boundaries from the telephone  company
network  management  centers,  the T3AS products  allow  telephone  companies to
remotely test individual circuits reported as problematic within seconds instead
of hours.  The  continuous  monitoring  capability of T3AS allows TSPs to detect
circuit  degradation  before  receiving  customer  complaints,  and to  initiate
maintenance  actions  to  restore  the  circuit  to full  functionality  without
affecting the end-user.  Finally,  the Company  believes  proactive  maintenance
enabled by  performance  monitoring  can  reduce  the number of trouble  reports
initiated by end-users.

     ADA's Remote  Module,  a DS1 NIU,  enables TSPs to identify  where reported
troubles are located.  When DS1 services are monitored  with T3AS and the Remote
Module,  telephone  companies  can  nonintrusively  isolate  troubles  on  these
circuits.  Additionally,  these  products  monitor  the  performance  of the DS1
service on a full-time  basis.  The Company  refers to this  application  of its
products as Network Administrative Boundary  Sectionalization.  This application
addresses the multiple  boundaries and multiple hand-offs that TSPs must perform
in order to provide a service or set of services to end-users.

     TSPs position T3AS systems  (installed at the network  boundary between the
long distance  telephone company and the local telephone company) in combination
with Remote Modules (installed on DS1 services at the boundary between the local
telephone  company and the-end user) to immediately  determine  whether reported
troubles are in their  network.  This enables the telephone  companies to reduce
their  mean-time-to-restore,  since  responsibility  for problems is immediately
localized to the responsible telephone company, and repair crews that would have
been  dispatched  unnecessarily  can now focus on troubles that really are their
responsibility.  When dispatching repair crews is necessary, the T3AS system can
localize the problem to allow more efficient deployment.

                                       4


<PAGE>

As a result,  the total  number of work crews in the field is  reduced,  thereby
reducing the number of inadvertent interruptions of operational circuits and the
subsequent initiation of new trouble reports.

     Through acquistion and internal development,  the Company has added network
management  software  products  and  services  that are  complementary  to ADA's
network  element product line,  customer base, and focus on Network  Performance
Management.

STRATEGY

     The Company  seeks to  maintain  its  leadership  position as a supplier of
network performance management systems for high-speed  telecommunication service
providers  and  to  become  a  leading  provider  of OS  solutions  for  network
management of telecommunications networks by:

     1.   FOCUSING SALES AND MARKETING EFFORTS ON TSPs WITH LARGE
          NETWORKS.

ADA's initial sales have been to the RBOCs and their  affiliates,  all of which,
have a  compelling  need to  improve  the  quality  and reduce the cost of their
services. Competitive pressures are forcing telephone companies to move toward a
centralized  network  management  infrastructure  that uses  integrated test and
performance  monitoring  systems.  The Company has broadened  Aits target market
with  applications  that are  appropriate  for  CAPs,  long  distance  telephone
companies, and other telephone service providers.

     2.   DEVELOPING PRODUCTS FOR NETWORK BOUNDARY APPLICATIONS.

     The initial  application for the Company's products has been at the network
boundary  between the long distance  telephone  company and the local  telephone
company.  Installation of the T3AS system at these  boundaries  allows the local
telephone  company to  quickly  determine  if a  reported  trouble is within its
network.  It also allows the local telephone  companies to continuously  monitor
their  circuits  and  react to  degradation  of the  signal  before  service  is
affected.  With the Company's Remote Module, a DS1 NIU, the boundary between the
local  telephone   company  and  the  end-user  can  now  be  continuously   and
nonintrusively  monitored.  The combination of these two products'  capabilities
enables telephone companies to improve their ability to address the increasingly
competitive business environment.


     3   DEVELOPING  AND ENHANCING  PRODUCTS AND SERVICES TO ADDRESS OS.

     The Company is  extending  its current  product  line and market to address
selected  applications  within the OS function.  OS are computer  software-based
systems that provide operations support for telecommunications functions. The OS
market is very large and its applications  have  historically  been addressed by
companies  such as AT&T and  Bellcore.  Some of the older  products  from  these
suppliers,  called "legacy systems," can no longer provide  telephone  companies
with the  real-time  information  that is needed to  manage  complex  high-speed
telecommunications  networks.  The market  for  intelligent  network  management
systems has become  fragmented,  and the Company  perceives a need for solutions
that  address  the  OS  applications  of  testing,   surveillance,   performance
monitoring and traffic management, among others.

     4   EXPANDING TO OTHER APPLICATIONS.

     The  Company  believes  that there are  additional  applications  for ADA's
product  line that  extend its  utility to the  network  boundaries  between the
telephone  companies  and other  users,  such as corporate  customers,  cellular
telephone  companies,  cable television  companies,  and other telephone service
providers.

     5   DEVELOPING PRODUCTS TO ADDRESS NEW TRANSMISSION STANDARDS.

     The Company intends to extend its current products and develop new products
to accommodate new  telecommunication  transmission  standards such as SONET and
SDH  optical  transmission  standards,  which  are  expected  to  receive  broad
acceptance in the North America and international markets, respectively.



                                       5

<PAGE>

PRODUCTS

         NETWORK SYSTEMS AND SENSORS

         T3AS SYSTEM

         The Company's first product, the T3AS system, is an integrated test and
performance  monitoring system for high-speed  telecommunications  networks. The
T3AS system connects to the network at boundaries where many telephone  circuits
are combined,  and where access to individual  circuits or groups of circuits is
often   difficult.   The   Company   believes   its  T3AS  system  is  the  only
permanently-installed  network  management system remotely accessing circuits at
the DS3 and DS1 rates that provides an integrated  suite of test and performance
monitoring  capabilities,  including  performance  monitoring  of  DS3  and  DS1
circuits  and  testing of embedded  DS1,  DS0 and  subrate  circuits.  (Each DS3
circuit contains 28 DS1 circuits and 672 DS0 circuits. Each DS1 circuit contains
24 DS0 circuits. A DS0 circuit provides basic voice telephone service.) The T3AS
system interfaces with the TSPs network  management OS using industry-  standard
interfaces  and  protocols.  T3AS also  interfaces  with  digital  cross-connect
systems in the telephone  network to provide  additional  test  capability  when
circuit access is provided through such systems.  The T3AS system supports up to
48 DS3  circuits,  or 1,120 DS1 circuits  when  accessing the network at the DS1
rate of transmission.

         A fully  configured  T3AS  system  occupies  two  seven-foot  telephone
equipment racks. The T3AS system can be configured to meet the specific needs of
a customer by  selecting  an  appropriate  set of modules from a set of standard
modules. List prices for T3AS systems,  including recommended spare modules, can
range from approximately $60,000 to $650,000, depending on the number and mix of
standard modules selected by the customer.

         T3AS DISTRIBUTED SYSTEM

         The  Company's  Distributed  System  allows  individual  High-Speed  or
Low-Speed  Subsystems  to be installed  at  locations  remote from the T3AS Base
System. The Distributed System supports  applications where the number of DS3 or
DS1 circuits at a particular remote location does not warrant the cost of a full
T3AS system,  such as at network  boundaries with fewer than six DS3 circuits or
140 DS1 circuits between a local telephone company and a long distance telephone
company,  and at network  boundaries between the local telephone company and the
end-user.  Users can  easily  upgrade  their  existing  T3AS  systems  by adding
Distributed System hardware modules and software.

         LOW-SPEED SUBSYSTEM

         The Low-Speed Subsystem expands the Company's product line by providing
test  and  performance   monitoring   capabilities  for  DS1  circuits.  This
subsystem is intended for network  boundaries  where  circuits  cross at the DS1
rate.  The Low-Speed  Subsystem  units are  interchangeable  with the High-Speed
Subsystem  units in the T3AS racks.  Each Low-Speed  Subsystem has a capacity of
140  DS1  circuits  and  can  be  deployed  in a  Distributed  System  to  share
administration  and test  resources  with the other  subsystems of the T3AS Base
System.

         T3AS CENTRALIZED TEST SYSTEM

         The  T3AS  platform  was  designed  to be a highly  flexible,  scalable
platform  that  enables  TSPs  to  use  the  system  in a  traditional  testhead
configuration.  Telephone networks that employ digital  cross-connect systems or
SONET  add-drop   multiplexers   require  test  access  for  circuits  that  are
transported  within those systems.  The T3AS Centralized Test System consists of
the Test Resource  Subsystem and the  Administration  Subsystem,  in addition to
application  software to provide this capability.  The T3AS's full complement of
test suites is  available  to TSP network  management  centers.  This product is
installed  where test access is highly  critical  and  efficient  use of network
resources is important.

                                       6

<PAGE>

         PROTOCOL ANALYSIS ACCESS SYSTEM

         The T3AS  platform  can be  configured  to provide  access to broadband
circuits  that are  provisioned  for advanced data services such as frame relay,
SMDS or ATM. Surveillance and testing capabilities in broadband networks may not
be as  automated  as they  are in  traditional  telephone  networks.  Diagnosing
troubles  within  the  network  often  requires   coordination   among  multiple
organizations  and dispatches to customer sites.  PAAS provides  circuit testing
and connects circuits to a protocol analyzer for more detailed  troubleshooting.
T3AS PAAS provides a cost-effective method to access circuits from a centralized
network management center.

         REMOTE MODULE

         ADA's  Remote  Module is an  intelligent  DS1 NIU that  non-intrusively
monitors  the  performance  of DS1  circuits.  Installed  at network  boundaries
between the local TSP and the end-user,  the Remote  Module  enables the service
provider  to  determine  whether  circuit  troubles  originated  in the  service
provider's  network or in the  end-user's  network.  When installed at the local
service provider's network boundary at the customer premises, and in tandem with
a T3AS  system at the  network  boundary  between  the long  distance  telephone
company and the local  service  provider,  the Remote  Module  provides a unique
end-to-end view of the DS1 circuit.  This view of  service-level  performance is
critical  to  improve  service  quality  and  reliability  and to reduce  costs.
Telephone network management centers can view a DS1 circuit within their network
and beyond the boundaries of their network, and can quickly identify and isolate
failures from the performance monitoring information available.

         NETWORK MANAGEMENT SOFTWARE

         GRAPHICAL TEST ASSISTANT

         The Graphical Test Assistant (GTA) is a graphical test front-end system
to  T3AS  and  CTS  for  DS0,   DS1  and  DS3  testing.   GTA  provides   simple
point-and-click access to all T3AS and CTS testing functionality on a Windows NT
or Windows 95 platform.  While primarily  designed for service providers without
test OS, GTA also complements existing test OS by augmenting functionality.

         SECTIONALIZER

         Sectionalizer  is the  driving  force  behind  ADA's  Network  Boundary
Sectionalization   application.   This  software  presents  a  simple  graphical
representation of the DS1 circuit and highlights the portion of the circuit that
is responsible  for  degradation  in  performance.  Sectionalizer  also provides
second-by-second  information  regarding circuit performance and stores up to 30
days of circuit  history  for use by network  management  personnel  to research
intermittent  circuit  troubles.  The  intelligence of network elements like the
T3AS and the Remote Module, in combination with Sectionalizer software,  enables
TSPs to take a proactive  perspective  in managing their  networks.  This is the
first time that answers to  identified  troubles can be seen in minutes,  rather
than hours.

         TRAFFIC DATA COLLECTION AND ENGINEERING

         Traffic  Data  Collection  and   Engineering   (TDC&E)  is  a  software
application  that provides the capability to collect traffic data from a variety
of existing network  elements,  in addition to emerging network elements such as
ATM switches.  TDC&E supports all major traffic engineering functions and  lends
an accurate, quantifiable reporting mechanism to marketing and quality assurance
functions.

         FAULT MANAGEMENT SYSTEM

         Fault Management System (FMS), is an alarm and network  surveillance OS
that is used in  combination  with other OS software  installed in TSP networks.
This  application is designed to receive and analyze  information  about managed
network elements.  Key features of this system include real-time event and alarm
acquisition, event processing and correlation, and historical fault analysis and
reporting.  In  addition,  automated  responses  can be  programmed  based  upon
selected event occurrences.  FMS provides  operational system features to manage
the state of a multi-network-element, multi-vendor hybrid network.

                                       7
<PAGE>

CUSTOMERS

         The Company  sells its products and services to the  telecommunications
service provider network management market which consists of the seven RBOCs and
their  local  telephone  company   affiliates,   the  ITOCs,  CAPs,  CLECs,  the
interexchange  carriers,  and enterprise networks. The Company's network systems
products conform to the North American  transmission  standard.  Countries which
conform to this standard include the United States,  Canada,  Taiwan, Korea and,
at the DS1 level or below,  Japan. The Company's  initial marketing efforts have
focused on the RBOCs.  Accordingly,  at present the  Company's  customer base is
highly concentrated.  To date,  substantially all of the Company's revenues have
been  derived  from five  RBOCs.  To date,  six of the seven  RBOCs,  Ameritech,
BellSouth,  NYNEX, Pacific Bell,  Southwestern Bell and U S WEST, have qualified
and deployed the Company's T3AS products.  The Company has sold equipment to one
ITOC, Sprint Central Telephone-Nevada and two CAPs, and has stepped up its sales
and  marketing  efforts  aimed  at  ITOCs,  CAPs  and  long  distance  telephone
companies.  Additionally,  one system has been sold  through a  distributor  and
deployed at the government  telephone company in Taiwan.  The acquisition of ACD
has brought new ITOC and CAP customers to the Company, such as GTE, Metropolitan
Fiber Systems,  Teleport  Communications  Group, Intelcom Group Access Services,
and Frontier Communications.  The SSN acquisition added Nortel and Bell Sygma as
customers for the Company's OS design services.

         BellSouth,  U S WEST, Ameritech and Southwestern Bell have entered into
purchase  contracts  with the  Company.  The other two RBOCs and Sprint  Central
Telephone-Nevada purchase the Company's products under standard purchase orders.
Since the BellSouth,  U S WEST, Ameritech and Southwestern Bell contracts may be
terminated  at their  convenience,  the  Company  believes  that  selling to its
customers  under these  contracts is not materially  different  than  purchasing
under purchase orders.  The RBOCs are significantly  larger than the Company and
may be able to exert a high degree of influence over the Company. In addition, a
small number of customers has historically  accounted for  substantially  all of
the Company's revenue in any given fiscal period.

         The  seven  RBOCs  are  NYNEX,  Bell  Atlantic,  BellSouth,  Ameritech,
Southwestern  Bell, U S WEST and Pacific  Bell.  An RBOC may have several  local
telephone company affiliates within its territory.  Prior to selling products to
an RBOC,  a vendor must first  undergo a product  qualification  process for its
product  with the  RBOC.  The  Company  typically  spends  from six to 18 months
discussing  its T3AS  products with a potential  customer  prior to the customer
agreeing to put the product  through its  qualification  process.  Although  the
qualification  process for a new product varies somewhat among these prospective
customers,  the  Company's  experience is that the process often takes a year or
more and generally consists of the following phases:

          - LABORATORY  EVALUATION.  The product's  function and performance are
     tested   against  all   relevant   industry   standards,   including   Bell
     Communications, Inc. ("Bellcore") standards. This process can take from two
     weeks to three months depending on a variety of factors.

          - FIELD  TRIAL.  A number of  telephone  lines are  equipped  with the
     product for  simulated  operation in a field trial lasting from three weeks
     to three months.  These field trials are used to evaluate  performance,  to
     assess  the  ease  of   installation   and  to  establish   troubleshooting
     procedures.  The RBOCs grant  conditional  product approval upon successful
     completion  of a field trial,  enabling  field  personnel to order  limited
     quantities of the product under one-time approvals.

          - FIRST  OFFICE  APPLICATION.  In a  first  office  application,  live
     circuits  are  placed on the T3AS  system.  The system is then used on live
     circuits for periods ranging from one to six months to verify functionality
     and operation.

          - PRODUCT  SELECTION AND  DEPLOYMENT.  Prior to product  selection and
     deployment  which may take from one to four months,  the RBOC  develops and
     implements  a variety  of  methods  and  procedures  that  cover  ordering,
     stocking,  installation,  maintenance,  returns  and all  other  activities
     associated with the use of the product.

         The loss of one or more of the Company's major customers, the reduction
of orders or a delay in deployment of the Company's  products  could  materially
and adversely  affect the Company's  business,  operating  results and financial
condition.  Further,  any  failure  on the part of any of the RBOCs to  maintain
their approval of the Company's products,  failure of any of the RBOCs to deploy
the  Company's  products  or  any  attempt  by  any of the  RBOCs  to  seek  out
alternative  suppliers  could have a material  adverse  effect on the  Company's
business,  operating results and financial condition. In addition,  there can be
no assurance that the Company's products will be approved by new customers,

                                       8

<PAGE>

or that such approval will not be significantly delayed.  Furthermore, RBOC work
force  reductions  and  staff   reassignments   have  in  the  past  delayed  or
indefinitely postponed the product approval process and the Company expects such
reductions  and  reassignments  to  continue  in  the  future.  There  can be no
assurance that the impact of such reductions and  reassignments  will not have a
material  adverse  effect  on the  Company's  business,  operating  results  and
financial condition.

TECHNOLOGY

     The T3AS  system  consists  of a  real-time  OS and an  extensive  suite of
proprietary  applications  software that is executed on proprietary  distributed
processing hardware.  The operating system implements the distributed processing
functionality of T3AS by linking,  in a maximum  capacity system,  more than 350
dedicated  microprocessors  in  a  real-time  computing  environment.  The  T3AS
software architecture is designed to enable new system features and capabilities
to be installed easily through field software  upgrades.  Up to 145 simultaneous
users can be supported by the T3AS system. All performance monitoring parameters
and   telephone   circuit  tests  have  been   verified  for   compliance   with
Bellcore-published  technical requirements,  by Bellcore, and also independently
verified by the Company's customers.

     The  Company's  software and hardware  architecture  facilitates  important
system capabilities such as fault tolerance and hitless access.  Fault tolerance
provides a one-to-one  redundant  circuit path that provides backup for each DS3
and DS1 circuit.  DS3 and DS1 circuits may be  transferred  from the online main
path to the  redundant  standby path  without  disruption  of the embedded  data
streams.  Transfers  are  accomplished  automatically  if a hardware or software
malfunction is detected in the T3AS system.  Transfers can also be  accomplished
manually when telephone company personnel initiate maintenance actions. "Hitless
access" is an industry  term used to describe a method of obtaining  access to a
low-speed  circuit embedded in a high-speed  circuit without affecting any other
circuit embedded in the high-speed  circuit.  In the T3AS system,  the Company's
proprietary  technology  provides  access to the DS3  circuit,  any embedded DS1
circuit,  DS0 circuit,  or other subrate  circuit,  without  affecting any other
circuit within the DS3 circuit.

     The Company has submitted  contributions to the appropriate  working groups
within  the T1El and T1M1  standards  bodies to  standardize  the two new status
signals for sectionalization of network trouble on DSl circuits.

RESEARCH AND PRODUCT DEVELOPMENT

     The Company believes its future success will depend in part on its ability,
on a cost-effective  and timely basis, to continue to enhance T3AS products,  to
develop  and  introduce  new  products  for  the  telephone   network  test  and
performance-monitoring  market  and  other  markets,  to  address  new  industry
transmission  standards and changing  customer needs and to achieve broad market
acceptance for its products.  Therefore, the Company intends to continue to make
significant investments in research and product development.

     Product  line  extensions  require  the  Company to work  closely  with its
current and potential  customers.  Using feedback  received from such customers,
the Company  identifies and then develops new products and  enhancements  to its
existing  products that the Company  believes will increase their  usefulness or
extend their  application.  Examples of product  extensions  of the T3AS include
CTS, PAAS,  Distributed  System and the Low-Speed  subsystem.  In addition,  the
Company  continually seeks to reduce the  manufacturing  cost of its products by
taking advantage of advances in hardware technology.  Finally, new technologies,
such as SONET, SDH, Frame Relay, ATM, and the newly-created standard for testing
of DS3 circuits,  are the focus of significant  research and product development
activity  at ADA.  The  Company  anticipates  that  the  SONET  and SDH  optical
transmission  standards will become the industry standards over the coming years
for the North American and international networks,  respectively.  The Company's
current  T3AS  products  do not  address  either  the SONET or SDH  transmission
standards.

     The  market  for  the  Company's   products  is   characterized   by  rapid
technological  advances,  evolving industry transmission  standards,  changes in
customer  requirements and frequent new product  introductions and enhancements.
The introduction of telecommunications  network test and performance  monitoring
products  involving  superior  technologies  or  the  evolution  of  alternative
technologies or new industry  transmission  standards could render the Company's
existing

                                        9

<PAGE>


products,  as  well  as  products  currently  under  development,  obsolete  and
unmarketable.  The Company  believes its future success will depend in part upon
its ability,  on a  cost-effective  and timely basis, to continue to enhance its
products,  to develop and  introduce  new  products  for the  telecommunications
network test and performance monitoring market and other markets, to address new
industry transmission standards and changing customer needs and to achieve broad
market acceptance for its products.

     The Company intends to extend its current products and develop new products
to accommodate such new transmission standards and other advances in technology,
as they  evolve.  The  widespread  adoption  of  SONET  and/or  SDH as  industry
transmission  standards  before the  Company is able to  successfully  develop a
product  which  addresses  such  transmission  standards  could  in  the  future
adversely affect the sale and deployment of the Company's products.  Any failure
by the Company to anticipate or respond on a cost-effective  and timely basis to
technological  developments,  changes  in  industry  transmission  standards  or
customer  requirements  or any  significant  delays in  product  development  or
introduction  could have a material  adverse  effect on the Company's  business.
There can be no assurance that the Company will be able to successfully  develop
new products to address new industry  transmission  standards and  technological
changes  or to  respond  to new  product  announcements  by  others or that such
products will achieve market acceptance.

     In fiscal  1994,  1995,  and 1996,  the Company  spent $5.3  million,  $5.8
million and $7.4 million,  respectively,  on internal  research and  development
efforts.


MANUFACTURING AND SUPPLIERS

     The  Company's  manufacturing  operations  consist  primarily  of  material
planning and procurement,  final assembly, module testing, burn-in, final system
testing and quality  control.  The Company  procures all components from outside
manufacturers  and believes it has good  relationships  with its suppliers.  All
final  assembly  and  tests  are  completed  by the  Company  at its  production
facility.  The Company utilizes  contract  manufacturing  (both  consignment and
turnkey  operations)  for the  assembly  of  certain  sub-assemblies,  including
printed circuit board modules.  The Company also purchases  sub-assemblies  that
have been  modified to the  Company's  specifications  from  original  equipment
manufacturers.

     In January 1997, the Company acheived ISO 9001 certification for its
headquarters  facility  in San  Diego,  California.  The  Company  was  formerly
registered to the internationally recognized ISO 9001 standards by Bellcore, its
registrar.  ISO 9001  Quality  Standards  were  developed  by the  International
Organization for Standardization. It is a quality system standard for ensuring a
total quality management system in engineering and  manufacturing.  The scope of
the   Company's   registration   is   for   the   design   and   manfacture   of
telecommunications network performance management products, including associated
software that help telecommunications providers manage their networks.

     All products are  rigorously  tested  prior to shipment to  customers.  All
printed circuit board modules are tested  individually  and as part of a system.
The  Company's  quality  control  program is modeled  to  support  the  Bellcore
standards. To date, the Company has not experienced significant field failures.

     In the event there are  material  deficiencies  or defects in the design or
manufacture  of  the  Company's  systems  or if  the  Company's  systems  become
incompatible with existing third-party network equipment,  the affected products
could be  subject to a recall.  The  Company  has  experienced  two  significant
product recalls in its history.  There can be no assurance that the Company will
not experience product recalls in the future. The cost of any subsequent product
recall could have a material adverse effect on the Company's business, operating
results and  financial  condition.  In addition,  the Company  could  materially
suffer from the potential negative publicity associated with a recall.

     Generally,  the Company uses industry standard components for its products.
Some components, however, including VLSI ASICs, are custom made to the Company's
specifications.  Certain components used in the Company's T3AS and Remote Module
products, including its VLSI ASICs, are currently available from only one source
and other  components are available  from only a limited number of sources.  The
Company has no supply agreements and generally makes its purchases with purchase
orders.  Further,  certain  components  require  an order lead time of up to one
year. Other components that currently are readily available may become difficult
to obtain in the future.  Failure of the Company to order sufficient  quantities
of these  components  in advance  could  prevent  the  Company  from  increasing
production  of products  in  response  to  customer  orders in excess of amounts
projected by the Company. In the past, the Company has experienced delays in the
receipt of  certain of its key  components,  which  have  resulted  in delays in
product  deliveries.  There can be no assurance that delays in key component and
product  deliveries  will not  occur in the  future.  The  inability  to  obtain
sufficient key components as required or to develop  alternative  sources if and
as  required  in the  future  could  result in delays or  reduction  in  product
shipments,  which in turn could have a material  adverse effect on the Company's
customer relationships and operating results.

                                       10

<PAGE>


     Additionally,   the  Company  uses  third-party   subcontractors   for  the
manufacture of its  subassemblies.  This reliance on third-party  subcontractors
involves several risks,  including the potential  absence of adequate  capacity,
the unavailability of or interruption in access to certain process  technologies
and reduced  control over product  quality,  delivery  schedules,  manufacturing
yields  and  costs.  Shortages  of  raw  materials  to  or  production  capacity
constraints  at  the  Company's   subcontractors  could  negatively  affect  the
Company's  ability to meet its  production  obligations  and result in increased
prices for affected parts. To procure adequate  supplies of certain  components,
the  Company  must  make  advance   commitments  to  purchase  relatively  large
quantities  of  such  components  in a  number  of  circumstances.  The  Company
believes,  however, that by relying on a limited number of suppliers, it is in a
better  position  to control  quality,  reduce  manufacturing  costs and improve
product standardization.

     To procure adequate supplies of certain  components,  the Company must make
advance  commitments to purchase  relatively large quantities of such components
in a number of  circumstances.  At  December  31,  1996,  the  Company  had open
noncancellable  purchase  commitments  of  approximately  $3.4 million  covering
several  different  components.  A  large  portion  of  the  Company's  purchase
commitments  consist of custom parts, some of which are sole source such as VLSI
ASICs,  for which there is no alternative use or  application.  The inability of
the Company to incorporate such components in its products could have a material
adverse  effect on the  Company's  business,  operating  results  and  financial
condition.

MARKETING, SALES AND CUSTOMER SUPPORT

     The Company  markets  its  products  to the RBOCs,  their  local  telephone
company  affiliates,   ITOCs,  CAPs  and  long  distance  companies  through  an
experienced direct sales force that works closely with senior management as well
as the network  management  departments of these  customers as part of the sales
effort. As of February 28, 1997, the Company's sales organization consisted of 9
professionals,  including 8 regional sales managers and one vice president. Each
of the  regional  sales  managers  operates  from a site located near his or her
strategic responsibility.  The sales managers are located in Arizona,  Colorado,
Georgia, Illinois, Indiana, Kansas, New York and Texas.

     The Company also provides engineering and installation services ("E&I") for
customers.  These  services  are  performed  at the  customer  site and  involve
assisting the customer with the installation of the Company's  products into the
customers  network  structure.  These services are performed by customer support
field applications and field support engineers.

     All service,  repair and technical  support of the  Company's  products are
performed  in-house.  The Company  also  provides  comprehensive  on-site  field
support to its customers.  The Company offers technical support to its customers
on a  24-hours-a-day,  7-days-a-week  basis.  The  Company's  standard  hardware
warranty is two years. Its standard software warranty is one year.

BACKLOG

     At December 31, 1996, ADA had a firm backlog of  approximately  $1,885,000.
All of the  Company's  backlog at  December  31,  1996 is  expected to be filled
during  fiscal  1997.  At  December  31,  1995,   ADA  had  a  firm  backlog  of
approximately $5,047,000. Customers have placed orders quarterly and the Company
has been operating in a book-and-ship mode, a trend the Company anticipates will
continue.  There can be no  assurance  that the  current  level of backlog  will
continue.  In addition,  since orders constituting the Company's current backlog
are subject to changes in delivery schedules,  the backlog is not necessarily an
indication of future revenue.

     In certain  cases,  ADA may permit  orders to be canceled  without  penalty
where management believes it may be in the best interests of ADA to do so. There
have been no cases to date where ADA's management  believed it to be in the best
interests of the Company to permit  customers to cancel  outstanding  orders and
the Company  does not  currently  expect to permit  customers to cancel any such
orders  in the  future.  To date,  cancellation  of system  orders  has not been
material.

                                       11


<PAGE>

COMPETITION

     Although  other  competititors   provide  partial  testing  and  monitoring
solutions  to the  telecommunications  network  management  market,  the Company
believes  there  are  currently  no  competitors   that  provide  an  integrated
comprehensive  solution to performance monitoring and testing of the DS3 circuit
as  does  the  Company's  T3AS  system.   The  Company  believes  the  principal
competitive  factors in this  market are  conformance  with  Bellcore  and other
industry transmission standards and specifications;  product features, including
price,  performance and reliability;  technical support;  and the maintenance of
close working  relationships with customers.  There can be no assurance that the
Company will compete successfully in the future with respect to these factors.

     Although  the  Company  believes  that  there  are  fewer  than 10  current
competitors that provide partial solutions to either  performance  monitoring or
testing of the DS1 or DS0 circuits that make up the DS3 circuit,  this market is
fiercely  competitive.  Such competitors and prospective  competitors  include a
number of companies, such as manufacturers of DS1 test and monitoring equipment,
manufacturers  of  NIUs,   manufacturers  of  digital   cross-connect  test  and
performance   monitoring  equipment  and  manufacturers  of  large  transmission
equipment.  Many of these  companies  manufacture  products  that  are  directly
competitive  with the Company's  Low-Speed  Subsystems,  T3AS  Centralized  Test
Systems and Remote  Module,  and many of these  competitors  have  significantly
greater technical,  financial,  manufacturing,  and marketing resources than the
Company.  In addition,  the Company  believes there are an increasing  number of
current  competitors in the OS market that provide OS applications  for testing,
surveillance,    performance    monitoring    and    traffic    management    of
telecommunications   functions.  In  each  of  the  NIU,  CTS  and  OS  markets,
competition is expected to increase  significantly in the future.  For instance,
the NIU market is fiercely  competitive with respect to price, product features,
established  suppliers,  and conformance with industry standards.  In the OS
market,  improved  technologies and tool sets have made the barriers to entry in
this market relatively small.

     Several of the Company's  competitors have  long-established  relationships
with the Company's current and prospective customers.  There can be no assurance
that the Company  will have the  financial  resources,  technical  expertise  or
manufacturing,  marketing,  distribution  and  support  capabilities  to compete
successfully in the future.


PROPRIETARY RIGHTS

     ADA  relies  on  a  combination  of  technical  leadership,  trade  secret,
copyright and trademark protection and non-disclosure  agreements to protect its
proprietary rights.  Although the Company has pursued and intends to continue to
pursue patent protection of inventions that it considers important and for which
such protection is available,  the Company  believes its success will be largely
dependent on its reputation for technology,  product innovation,  affordability,
marketing ability and response to customer's needs.  Currently,  the Company has
six U.S. patents granted and two U.S. patent applications  allowed.  One of the
granted  patents relates to the Company's  Remote Module product.  Additionally,
the Company has nine  pending U.S.  patent  applications  and two  international
(Patent  Cooperation  Treaty)  applications on file covering various circuit and
system aspects of its products.  There can be no assurance that the Company will
be granted  additional  patents or that,  if any patents are granted,  they will
provide  the  Company's  products  with  significant  protection  or will not be
challenged.

     The Company  believes that the rapid rate of  technological  change and the
relatively long development  cycle for integrated  circuits are also significant
factors in the protection of the Company's proprietary  position.  The Company's
proprietary  VLSI ASICs  incorporate  unique  system  architectures  and circuit
approaches that have been developed through a broad,  in-depth  understanding of
the telephone network.  Availability of these proprietary devices, knowledge and
experience  of  the  Company's  personnel,   new  product  development,   market
recognition  and  product  support  are key  factors  in the  protection  of the
Company's proprietary position. As part of its confidentiality  procedures,  the
Company generally enters into  non-disclosure  agreements with its employees and
suppliers, and limits access to and distribution of its proprietary information.
Despite  these  precautions,  it may be  possible  for a third  party to copy or
otherwise  obtain  and  use  the  Company's  technology  without  authorization.
Accordingly,  there can be no assurance  that the Company will be  successful in
protecting  its  proprietary  technology or that ADA's  proprietary  rights will
preclude  competitors  from  developing  products or  technology  equivalent  or
superior to that of the Company.

     The  telecommunications  industry is  characterized  by the  existence of a
large number of patents and frequent  litigation  based on allegations of patent
infringement.  The Company is not aware of any  infringement  by its products or

                                       12


<PAGE>

technology of the proprietary  rights of others.  There can be no assurance that
third  parties will not assert  infringement  claims  against the Company in the
future or that any such  assertions  will not  result in  costly  litigation  or
require the Company to obtain a license to intellectual  property rights of such
parties.  There can be no assurance that any such licenses would be available on
terms acceptable to the Company, if at all. Further,  litigation,  regardless of
outcome,  could result in  substantial  cost to and  diversion of efforts by the
Company.  Any  infringement  claims or  litigation  against  the  Company  could
materially and adversely  affect the Company's  business,  results of operations
and financial  condition.  Moreover,  the laws of some foreign  countries do not
protect the Company's  proprietary  rights in the products to the same extent as
do the laws of the United States.

EMPLOYEES

     As of  Feb  28,  1997,  ADA  had  approximately  219  full-time  employees,
including 127 in engineering, 44 in sales, marketing and customer support, 25 in
operations and 23 in finance and  administration.  The success of the Company is
dependent,  in part,  on its  ability to attract  and  retain  highly  qualified
personnel.  Competition  for such  personnel  is intense  and the  inability  to
attract and retain  additional  key employees or the loss of one or more current
key employees could adversely affect the Company. There can be no assurance that
the Company will be successful in hiring or retaining requisite  personnel.  The
Company's President and Chief Executive Officer, Mr. Peter Savage, the Company's
Vice President,  Systems Engineering,  Mr. Paul Hartmann, and the Company's Vice
President,  Customer Support,  Mr. Donald O'Connor,  have entered into severance
arrangements  with  the  Company.  No  other  member  of  the  Company's  senior
management  is  subject  to an  employment  arrangement  with the  Company.  The
Company's employees are not represented by any collective bargaining agreements,
and the Company has never experienced a work stoppage. The Company believes that
its employee relations are good.




RISKS AND UNCERTAINTIES

CONCENTRATION OF MAJOR CUSTOMERS;  TELEPHONE COMPANY QUALIFICATION REQUIREMENTS.
The market for the  Company's  products  currently  consists of the seven RBOCs,
other local telephone companies, CAPs and long distance telephone companies. The
Company's  marketing  efforts to date have focused on the RBOCs which  accounted
for 73% of the Company's revenue in 1996. Accordingly,  at present the Company's
customer  base is highly  concentrated  and there can be no  assurance  that its
customer base will become less concentrated.  Further,  the Company's  customers
are significantly larger than the Company and may be able to exert a high degree
of influence  over the Company.  The loss of one or more of the Company's  major
customers,  the  reduction of orders,  or a delay in deployment of the Company's
products could materially and adversely affect the Company's business, operating
results  and  financial  condition.  Prior to selling  products  to a  telephone
company,  a vendor must first  undergo a product  qualification  process for its
products with the telephone  company.  Although the qualification  process for a
new product varies  somewhat among these  prospective  customers,  the Company's
experience is that the process often takes a year or more. Currently, six of the
seven RBOCs have qualified and deployed the Company's T3AS products. Any failure
on the part of any of the RBOCs or other  telephone  companies to maintain their
qualification  of the Company's  T3AS  products,  failure of any of the RBOCs or
other telephone companies to deploy the Company's T3AS products,  or any attempt
by any of the  RBOCs  or  other  telephone  companies  to seek  out  alternative
suppliers  could  have a  material  adverse  effect on the  Company's  business,
operating results and financial condition.  BellSouth,  Ameritech,  Southwestern
Bell and U S West have entered into purchase  contracts with the Company.  Other
RBOCs,  independent  telephone companies,  and other telephone service providers
purchase the Company's  products under standard purchase orders.  Since the RBOC
contracts may be terminated at the convenience of the RBOC, the Company believes
that the purchase  contracts are not materially  different than purchasing under
purchase orders.  There can be no assurance that the Company's  products will be
qualified by new customers, or that such qualification will not be significantly
delayed.  Furthermore,   telephone  company  work  force  reductions  and  staff
reassignments have in the past delayed the product  qualification  process,  and
the Company expects such reductions and reassignments to continue in the future.
There can be no assurance that such reductions and reassignments will not have a
material  adverse  effect  on the  Company's  business,  operating  results  and
financial condition.

                                       13

<PAGE>


     HIGH  DEPENDENCE  ON SINGLE  PRODUCT  LINE.  The majority of the  Company's
revenue to date has been  derived from the sale of T3AS  products and  services.
The Company  expects that a majority of its revenue will  continue to be derived
from T3AS  products  and  services  in the near term.  However,  the  Company is
investing  in the  expansion  of its  product  lines  through  the  enhancement,
development and marketing of its NIU, CTS, PAAS, and OS products. Failure by the
Company to enhance either its existing T3AS products and services  including CTS
and PAAS.  or its NIU and OS products,  and to develop new product lines and new
markets could materially and adversely affect the Company's business,  operating
results and financial condition.  There is no assurance that the Company will be
able to develop and market new products and  technology  or otherwise  diversify
its source of revenue.

     COMPETITION.  The Company  believes there are currently no competitors that
provide an  integrated  comprehensive  solution to  performance  monitoring  and
testing of the DS3  circuit  as does the  Company's  T3AS  system.  The  Company
believes the principal  competitive  factors in this market are conformance with
Bellcore and other industry transmission  standards and specifications;  product
features,  including price, performance and reliability;  technical support; and
the maintenance of close working  relationships with customers.  There can be no
assurance that the Company will compete  successfully in the future with respect
to these factors and others that may arise.  Although the Company  believes that
there are fewer than 10 current  competitors  that provide partial  solutions to
either performance monitoring or testing of the DS1 or DS0 circuits that make up
the DS3  circuit,  this market is fiercely  competitive.  Such  competitors  and
prospective competitors include a number of companies,  such as manufacturers of
DSI test and  monitoring  equipment,  manufacturers  of NIUs,  manufacturers  of
digital   cross-connect   test  and   performance   monitoring   equipment   and
manufacturers  of  large  transmission   equipment.   Many  of  these  companies
manufacture  products that are directly competitive with the Company's Low-Speed
Subsystems,  T3AS Centralized Test Systems and Remote Module,  and many of these
competitors have significantly greater technical, financial,  manufacturing, and
marketing  resources than the Company.  In addition,  the company  believes that
there are an  increasing  number of current  competitors  in the OS market  that
provide OS applications for testing,  surveillance,  performance  monitoring and
traffic management of telecommunications  functions. In each of the NIU, CTS and
OS markets, competition is expected to increase significantly in the future. For
instance,  the NIU market is fiercely competitive with respect to price, product
features, established suppliers, and conformance with industry standards, and in
the OS market,  improved  technologies  and tool sets have made the  barriers to
entry in this market  relatively small.  Additionally,  several of the Company's
competitors  have  long-established  relationships  with the  Company's  current
prospective  customers.  In addition,  product price  reductions  resulting from
market share penetration initiatives or competitive pricing pressures could have
a material and adverse effect on the Company's business,  operating results, and
financial  condition.  There can be no assurance  that the Company will have the
financial   resources,   technical   expertise  or   manufacturing,   marketing,
distribution and support capabilities to compete successfully in the future.

     MANAGEMENT OF CHANGING  BUSINESS.  As a result of acquisitions in 1996, the
Company obtained additional office space and hired additional  personnel in both
Terre  Haute,  Indiana and  British  Columbia,  Canada to support  the  business
operations of the new products,  services and technologies acquired. The Company
faces  significant  management  challenges  related  to the  integration  of the
operations,  products and  technologies  acquired as well as the  management  of
separate  geographic  locations.  In 1996,  the  Company  formed  two  strategic
business units:  the Network  Systems and Sensors  business unit and the Network
Management  business unit. The business units are synergistic with the evolution
of the Company from a single product line to multiple product lines. The Network
Systems and Sensors  business unit is built around the  Company's  T3AS products
and services  including CTS and PAAS, as well as the Remote Module product.  The
Network Management business unit focuses on OS products including TDC&E, FMS and
OS  design  services  all  acquired  through  acquisitions,  as  well as GTA and
Sectionalizer.  There can be no assurance that the Company will be successful in
managing its new business unit structure. The Company is currently transitioning
portions of the OS design service business to a product-oriented  business. This
transition will likely place a significant  strain on the Company's  management,
information  systems and  operations  and there can be no assurance  that such a
transition can be successfully managed. The acquisitions and resultant growth in
the Company's infrastructure have placed, and are expected to continue to place,
a  significant  strain on the  Company's  management,  information  systems  and
operations. The strain experienced to date has chiefly been in hiring sufficient
numbers of qualified  personnel to support the  expansion of the  business.  The
Company is not able to  forecast  additional  strains  that may be placed on the
Company's  management,  information  systems and  operations  as a result of the
acquisitions or in the future. The Company's  potential  inability to manage its
changing  business  effectively  could  have a  material  adverse  effect on the
Company's business, results of operations, and financial condition.

     MERGERS. Of the eight major TSPs currently involved in merger transactions,
six are customers of the Company.  Several of the mergers involve companies that
purchase network systems,  software and services from the Company's competitors.
Consequently,  the completion of certain of these mergers may result in the loss
of business and customers for the Company.  Additionally,  the impact of capital
spending constraints during the merger transitions could have a material adverse
effect on the Company's business, operating results and financial condition.

                                       14

<PAGE>


     RAPID TECHNOLOGICAL  CHANGE AND DEPENDENCE ON NEW PRODUCTS.  The market for
the  Company's  products  is  characterized  by  rapid  technological  advances,
evolving  industry  standards,  changing  regulatory  environments,  changes  in
customer requirements,  and frequent new product introductions and enhancements.
The introduction of telephone network test and  performance-monitoring  products
involving superior technologies or the evolution of alternative  technologies or
new industry transmission  standards,  such as ATM, Frame Relay and SONET, could
render the Company's  existing  products,  as well as products  currently  under
development,  obsolete and unmarketable. The Company believes its future success
will depend in part upon its ability,  on a cost-effective  and timely basis, to
continue to enhance its current products,  to develop and introduce new products
for the telephone network test and performance-monitoring market, the OS market,
and other markets, to address new industry  transmission  standards and changing
customer  needs,  and to achieve broad market  acceptance  for its products.  In
particular,  the Company anticipates that the SONET and SDH optical transmission
standards will become the industry transmission  standards over the coming years
for the North American and international networks,  respectively.  The Company's
current  T3AS  products  do not  address  either  the SONET or SDH  transmission
standard.  The Company  intends to extend its current  products  and develop new
products to accommodate such new  transmission  standards,  as they evolve.  The
widespread  adoption  of SONET  and/or SDH as  industry  transmission  standards
before the Company is able to  successfully  develop a product  which  addresses
such  transmission  standards could adversely  affect the sale and deployment of
the Company's T3AS products. Any failure by the Company to anticipate or respond
on a cost-effective and timely basis to technological  developments,  changes in
industry  transmission  standards or customer  requirements,  or any significant
delays in product  development  or  introduction  could have a material  adverse
effect on the  Company's  business.  There can be no assurance  that the Company
will be able to successfully develop new products to meet customer requirements,
to address new industry  transmission  standards and technological changes or to
respond to new  product  announcements  by others,  or that such  products  will
achieve market acceptance.

     DEPENDENCE ON SUPPLIERS AND  SUBCONTRACTORS;  NEED TO MAKE ADVANCE PURCHASE
COMMITMENTS.  Certain  components used in the Company's T3AS products and Remote
Module  product,  including its VLSI ASICs and other  components,  are available
from a single source.  The Company has no supply  agreements and generally makes
its purchases with purchase orders. Further, certain components require an order
lead  time of up to one  year.  Other  components  that  currently  are  readily
available may become  difficult to obtain in the future.  Failure of the Company
to order sufficient  quantities of these components in advance could prevent the
Company from  increasing  production in response to customer orders in excess of
amounts  projected  by the  Company.  In the past,  the Company has  experienced
delays in the receipt of certain of its key  components,  which have resulted in
delays in  product  deliveries.  There can be no  assurance  that  delays in key
component  and part  deliveries  will not occur in the future.  The inability to
obtain sufficient key components as required or to develop  alternative  sources
if and as required in the future could result in delays or reductions in product
shipments,  which in turn could have a material  adverse effect on the Company's
customer  relationships and operating  results.  Additionally,  the Company uses
third-party  subcontractors  for  the  manufacture  of its  subassemblies.  This
reliance on third-party  subcontractors  involves  several risks,  including the
potential absence of adequate capacity, the unavailability of or interruption in
access to  certain  process  technologies,  and  reduced  control  over  product
quality,  delivery schedules,  manufacturing yields and costs.  Shortages of raw
materials or production  capacity  constraints  at the Company's  subcontractors
could negatively affect the Company's ability to meet its production obligations
and could result in increased  prices for affected  parts.  To procure  adequate
supplies of certain  components,  the Company must make advance  commitments  to
purchase  relatively  large  quantities  of  such  components  in  a  number  of
circumstances. A large portion of the Company's purchase commitments consists of
custom parts,  some of which are sole-source such as VLSI ASICs, for which there
is  no  alternative  use  or  application.  The  inability  of  the  Company  to
incorporate such components in its products could have a material adverse effect
on the Company's business, operating results and financial condition.

     PRODUCT RECALL.  Producers of telecommunications network  equipment,
including  test access and  performance  monitoring  systems such as those being
marketed by the Company,  are often required to meet rigorous  standards imposed
by  Bellcore,   the  research  and  development  entity  created  following  the
divestiture  of AT&T to provide  ongoing  engineering  support to the RBOCs.  In
addition,  the Company must meet specialized standards imposed by its customers.
The  Company's  systems are also required to interface in a complex and changing
environment with telecommunication network equipment made by numerous suppliers.
In the  event  there are  material  deficiencies  or  defects  in the  design or
manufacture  of the  Company's  systems,  or if  the  Company's  systems  become
incompatible with existing third-party network equipment,  the affected products
could be  subject to a recall.  The  Company  has  experienced  two  significant
product  recalls in its history and there can be no  assurance  that the Company
will not

                                       15


<PAGE>

experience any product recalls in the future. The cost of any subsequent product
recall and associated negative publicity could have a material adverse effect on
the Company's business, operating results and financial condition.

     GOVERNMENT  REGULATION.  The majority of the  Company's  customers  operate
within the  telecommunications  industry  which is subject to  regulation in the
United States and other countries.  Most of the Company's customers must receive
regulatory   approvals   in   conducting   their   businesses.    Although   the
telecommunications  industry has recently experienced  government  deregulation,
there is no  assurance  this trend will  continue.  In fact,  recent  regulatory
rulings  have  affected  the  ability of the  Company's  customers  to enter new
markets and deliver  new  services  which  could  impact  their  ability to make
significant  capital  expenditures.  The effect of regulatory rulings by federal
and state agencies on the Company's customers may adversely impact the Company's
business, operating results and financial condition.

     PROPRIETARY  TECHNOLOGY.  The Company  relies on a combination of technical
leadership,  trade secret, copyright and trademark protection and non-disclosure
agreements to protect its proprietary  rights.  Although the Company has pursued
and  intends to continue  to pursue  patent  protection  of  inventions  that it
considers  important and for which such  protection  is  available,  the Company
believes its success will be largely dependent on its reputation for technology,
product innovation, affordability,  marketing ability and response to customer's
needs. Currently,  the Company has nine U.S. patents granted and two U.S. patent
applications allowed. One of the granted patents relates to the Company's Remote
Module  product.   Additionally,  the  Company  has  nine  pending  U.S.  patent
applications and two international  (Patent Cooperation Treaty)  applications on
file covering  various circuit and system aspects of its products.  There can be
no assurance that the Company will be granted additional patents or that, if any
patents are granted,  they will provide the Company's  products with significant
protection or will not be challenged. As part of its confidentiality procedures,
the Company generally enters into  non-disclosure  agreements with its employees
and  suppliers,  and  limits  access  to and  distribution  of  its  proprietary
information.  Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use the Company's technology without authorization.
Accordingly,  there can be no assurance  that the Company will be  successful in
protecting  its  proprietary  technology or that ADA's  proprietary  rights will
preclude  competitors  from  developing  products or  technology  equivalent  or
superior  to  that  of  the   Company.   The   telecommunications   industry  is
characterized  by the  existence  of a large  number  of  patents  and  frequent
litigation based on allegations of patent infringement. The Company is not aware
of  infringement  by its products or  technology  of the  proprietary  rights of
others.   There  can  be  no  assurance  that  third  parties  will  not  assert
infringement  claims  against  the  Company  in the  future  or  that  any  such
assertions will not result in costly litigation or require the Company to obtain
a license  to  intellectual  property  rights of such  parties.  There can be no
assurance that any such licenses  would be available on terms  acceptable to the
Company, if at all. Further, litigation,  regardless of outcome, could result in
substantial  cost to and diversion of efforts by the Company.  Any  infringement
claims or litigation  against the Company could  materially and adversely affect
the Company's business, results of operations and financial condition. Moreover,
the laws of some  foreign  countries  do not protect the  Company's  proprietary
rights in the products to the same extent as do the laws of the United States.

     DEPENDENCE ON KEY  PERSONNEL.  The success of the Company is dependent,  in
part,  on  its  ability  to  attract  and  retain  highly  qualified  personnel.
Competition  for such  personnel  is intense  and the  inability  to attract and
retain additional key employees or the loss of one or more current key employees
could adversely  affect the Company.  There can be no assurance that the Company
will be successful in hiring or retaining requisite personnel.

     VOLATILITY OF STOCK PRICE.  The Company's  future  earnings and stock price
may be subject to significant volatility, particularly on a quarterly basis. Any
shortfall in revenue or earnings from levels  expected by public market analysts
and investors  could have an immediate  and  significant  adverse  effect on the
trading price of the Company's common stock.  Fluctuation in the Company's stock
price may also have an effect on customer  decisions to purchase  the  Company's
products which could have a material  adverse effect on the Company's  business,
operating results and financial condition,

                                       16


<PAGE>


ITEM 2.  PROPERTIES

     The Company  currently  maintains its  headquarters in a leased facility in
San Diego, California,  which contains all development,  engineering,  assembly,
marketing and  administrative  functions,  in 38,987 square feet of space in one
building.  The lease expires in fiscal 1999. The Company also leases  additional
office facilities in Terre Haute, Indiana, and Vancouver, British Columbia, both
of which house product development and customer support operations.  The Company
leases  12,600 and 25,604  square feet of space in Terrre  Haute and  Vancouver,
respectively. The Terre Haute lease expires in September 1997, and the Vancouver
lease  expires  in  December  1999. The Terre Haute lease includes an option to
extend the lease term one year from the September 1997 expiration date.  The
Company  believes  that  its  existing facilities will be adequate to meets its
needs through 1997.

ITEM 3.  LEGAL PROCEEDINGS

         None.

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

         None.
                                     PART II

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

STOCK MARKET INFORMATION

Applied  Digital  Access' Common Stock is listed on the NASDAQ National Market
and is traded on the over the counter  market under the symbol "ADAX." The
following table set forth the high and low sales prices the  Company's  common
stock for the periods indicated.

<TABLE>
<CAPTION>

     1996                  High                  Low
     ----                  ----                  ---
<S>                        <C>                  <C>
First Quarter              $17.00               $ 9.50
Second Quarter              19.00                 9.75
Third Quarter               11.75                 6.25
Fourth Quarter               8.75                 4.75

<CAPTION>
     1995                  High                  Low
     ----                  ----                  ---
<S>                        <C>                  <C>
First Quarter              $30.50               $ 13.00
Second Quarter              16.75                 10.25
Third Quarter               17.50                 10.50
Fourth Quarter              15.00                 10.00
</TABLE>

There were 247 shareholders of record as of February 28, 1997.

DIVIDEND POLICY

Applied  Digital  Access has not  declared  or paid any cash  dividends  on it
Common Stock to date. The Company currently intends to retain all earnings, if
any, to fund the development and growth of its business and therefore does not
anticipate paying any cash dividends within the foreseeable future.

                                       17

<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>

(Dollars in thousands)                          1992           1993           1994           1995           1996
                                                ----           ----           ----           ----           ----

<S>                                         <C>           <C>             <C>             <C>            <C>
Revenue                                     $  7,453      $  14,259       $  35,597       $ 20,470       $  24,422

Gross Profit                                   2,914          7,125          20,791         11,753          11,813

Operating Expenses:

Research and  development                      3,181          3,902           5,335          5,807           7,356

In process research and development
related to acquistions                           -              -               -              -             3,286

Sales and marketing                            1,916          2,406           3,363          4,234           6,312

General and administrative                     1,416          1,354           2,337          2,985           3,576
                                               -----          -----           -----          -----           -----

    Total operating expenses                   6,513          7,662          11,035         13,026          20,530


Net income (loss)                             (3,621)          (619)         10,620            759           (7,120)
                                              -------          -----         ------            ---           -------


Net income (loss) per share                 $  (4.96)       $  (.75)        $   .88        $  .06              (.59)
                                            --------         -------         -------        ------              ----

Net income (loss) per share,                $  (.46)       $   (.07)        $   .88        $  .06              (.59)
supplementary (1)                           --------         -------         -------        ------              ----

Weighted average number of  shares and
commom share equivalents (1)                    730             820          12,091        12,848            12,084

Weighted average number of shares and
common share equivalents, supplementary (1)   7,914           8,693          12,091        12,848            12,804

Working Capital                           $   3,082       $   2,251          26,081        36,728            31,229

Total assets                                  5,389           6,878          48,919        49,936            45,972

Long-term debt                                  431             117              82            49                33

</TABLE>
(1)    See Note 2 to the Financial Statements, a copy of which is attached
       hereto as Exhibit 13.1.

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

         "Management's  Discussion  and  Analysis  of  Financial  Condition  and
Results  of  Operations"  on  pages  14  through  17 of  the  Annual  Report  is
incorporated herein by reference.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The  Financial  Statements  on pages  18  through  22 and the  Notes to
Financial   Statements  on  pages  23  through  29  of  the  Annual  Report  are
incorporated herein by reference.

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

         Not applicable.
                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

          Identification   of  Directors.   The  information  under  the caption
"Election of  Directors,"  appearing  in the Proxy  Statement,  is  incorporated
herein by reference.

          Identification  of  Executive  Officers.   The  information  under the
headings "Executive Officers," appearing in the Proxy Statement, is incorporated
herein by reference.

          Compliance with Section 16(a) of the Exchange Act. Based solely upon a
review of Forms 3, 4 and 5 and  amendments  thereto  furnished to the Registrant
and upon  written  representations  of all  individuals  required  to file forms
pursuant to Section  16(a),  the  Registrant  knows of no such  individual  that
failed to file Forms 3, 4 and 5 on a timely basis during the last fiscal year.

ITEM 11.  EXECUTIVE COMPENSATION

          The information  under the headings  "Executive Compensation and Other
Information,"  appearing  in the  Proxy  Statement,  is  incorporated  herein by
reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

          The information under the headings "Principal Shareholders" and
"Common Stock Ownership of  Management,"  appearing in the Proxy  Statement,  is
incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

          The information under the heading "Certain Transactions," appearing in
the Proxy Statement, is incorporated herein by reference.

                                     PART IV


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

     (a)                   1.   FINANCIAL STATEMENTS

          The following financial statements of the Company, included in the
1996 Annual  Report to  Shareholders  for the year ended  December  31, 1996 are
incorporated  herein by reference as required under Item 8 of this annual report
on Form 10-K:


                                       18

<PAGE>

         Report of Independent Accountants

         Balance Sheets at December 31, 1995 and December 31, 1996

         Statements of Operations for the years ended December 31, 1994, 1995
         and 1996

         Statements of Shareholders' Equity for the years ended December 31,
         1994, 1995 and 1996

         Statements of Cash Flows for the years ended December 31, 1994, 1995
         and 1996

         Notes to Consolidated Financial Statements

               2.   FINANCIAL STATEMENT SCHEDULES

         The  following  financial  statement  schedules are included in Item 14
         (d):

         Report of Independent Accountants
         Schedule II  -  Valuation and Qualifying Accounts

         All other  schedules  for  which  provision  is made in the  applicable
accounting  regulations  of the  Securities  and  Exchange  Commission  are  not
required under the related instructions or are inapplicable,  and therefore have
been omitted.

     (b)      REPORTS ON FORM 8-K

              No  reports on Form 8-K have been filed  during  the last  quarter
              of the period  covered by this report.

     (c)      EXHIBITS

      EXHIBIT                                                            PAGE
      NUMBER                                                             NUMBER
      ------                                                             ------
     2.1(6)    Asset Purchase Agreement between Applied Digital Access,      --
               Inc. and Applied Computing Devices, Inc. dated February
               29, 1996

     2.2(8)    Asset Purchase Agreement between Applied Digital Access,      --
               Inc. and MPR Teltech, Ltd. dated July 16, 1996

     3.1(1)    Amended and Restated Articles of Incorporation (Exhibit 3.3). --

    +3.2(1)    Amended and Restated Bylaws of the Company as amended         --
               (Exhibit 3.4). Form of Written Consent of Holders of
               Series A, Series B, Series C, Series -- 10.1(1) D and
               Series E Preferred Stock to Conversion effective
               immediately prior to the closing.

    10.1(1)    Registration Rights Agreement by and between the              --
               Company and certain shareholders of the Company,
               dated May 22, 1992 as amended pursuant to the Amendment
               to Registration Rights Agreement dated April 9, 1993.

    10.2(1)    Series A Preferred Stock Purchase Agreement by and            --
               between the Company and the purchasers identified on
               Exhibit A to the Agreement, dated August 17,
               1987 as amended and restated on December 24, 1987.

    10.3(1)    Series B Preferred Stock Purchase Agreement by and            --
               between the Company and the purchasers identified on
               Exhibit A to the Agreement, dated January 20, 1989.


                                       19

<PAGE>

      EXHIBIT                                                            PAGE
      NUMBER                                                             NUMBER
      ------                                                             ------

     10.4(1)   Modification Agreement and Consent by and between the         --
               Company and the holders of the Company's Series A
               Preferred Stock, dated January 20, 1989.

     10.5(1)   Supplemental Series B Preferred Stock Purchase                --
               Agreement by and between the Company and the
               Purchasers identified on Exhibit A to the Agreement, dated
               January 30, 1989.

     10.6(1)   Stock Purchase and Capital Contribution Agreement by          --
               and between the Company and the purchasers identified
               on Exhibit A to the Agreement, dated February 28, 1991.

     10.7(1)   Series D Preferred Stock Purchase Agreement by and            --
               between the Company and the purchasers identified on
               Exhibit A to the Agreement, dated March 13, 1991.

     10.8(1)   Capital Contribution Agreement by and between the             --
               Company and the persons identified on Exhibit A to
               the Agreement, dated March 13, 1991.

     10.9(1)   Series E Preferred Stock Purchase Agreement by and            --
               between the Company and the purchasers identified on
               Exhibit A to the Agreement, dated May 22, 1992,
               as amended pursuant to the Amendment No. One to Series
               E Preferred Stock Purchase Agreement dated July 22, 1992
               and the Amendment to Series E Preferred Stock
               Purchase Agreement dated April 9, 1993.

    10.10(1)   Modification Agreement and Consent by and between the         --
               Company and the holders of the Company's Series A
               Preferred Stock, Series B Preferred Stock, Series
               C Preferred Stock and Series D Preferred Stock,
               dated May 22, 1992.

    10.11(1)   Standby Loan Facility Agreement by and between                --
               the Company and the purchasers identified on Exhibit A
               to the Agreement, dated April 9, 1993, as amended
               pursuant to an Amendment to Standby Loan Facility Agreement
               dated April 9, 1993. Related form of Note and form of Warrant.

    10.12(1)   Lease for the Company's facilities at 9855 Scranton           --
               Road, dated June 15, 1993.

    10.13(1)   Master Equipment Lease Agreement dated July 8, 1988           --
               by and between the Company and Comdisco, Inc., as amended.

    10.14(1)   Warrant Agreement, dated July 8, 1988 by and                  --
               between the Company and Comdisco, Inc., as amended.

    10.15(1)   Warrant Agreement dated August 15, 1991 by and                --
               between the Company and Comdisco, Inc.

    10.16(1)   Agreement dated July 1, 1991 by and between the               --
               Company and BellSouth Services Incorporated, as amended
               (with certain confidential portions omitted).

    10.17(1)   Manufacturing Agreement dated April 30, 1993 by and           --
               between the Company and Comptronix Corporation.

    10.18(1)   Manufacturing Agreement dated November 19, 1993               --
               by and between the Company and Arrow Electronics,
               Inc. (with certain confidential portions omitted).

                                       20

<PAGE>

      EXHIBIT                                                            PAGE
      NUMBER                                                             NUMBER
      ------                                                             ------

    10.19(1)   Software License Agreement dated January 16, 1992 by          --
               and between the Company and GCOM (with certain
               confidential portions omitted).

    10.20(1)   Master Agreement for Operations Systems Modifications         --
               for the Integration of Network Elements, dated June 17,
               1991 by and between the Company and Bellcore, as amended.

    10.21(1)   Addendum #1 to Master Agreement for Operations Systems        --
               Modifications for the Integration of Network
               Elements, dated June 17, 1991 by and between the
               Company and Bellcore dated July 10, 1991.

    10.22(1)   Addendum #2 to Master Agreement for Operations Systems        --
               Modifications for the Integration of Network
               Elements, dated June 17, 1991 by and between the
               Company and Bellcore dated November 19, 1993.

    10.23(1)   Addendum #3 to Master Agreement for Operations Systems        --
               Modification for the Integration of Network Elements
               dated June 17, 1991 by and between the Company and
               Bellcore dated December 27, 1993.

    10.24(1)   Sales Representative Agreement dated October 11, 1991         --
               by and between the Company and Taiwan Victory Technology
               Corporation (with certain confidential portions omitted).

   +10.25(1)   The Company's 1988 Stock Option Plan, as amended.             --

   +10.26(1)   The Company's Restricted Stock Purchase Plan, as amended.     --

   +10.27(1)   1988 Stock Option Plan Form of Incentive Stock                --
               Option Agreement.

   +10.28(1)   1988 Stock Option Plan Form of Non-Qualified Stock            --
               Option Agreement.

   +10.29(1)   1988 Stock Option Plan Form of Stock Purchase Agreement.      --

   10.30(1)    Stock Option Agreement dated May 22, 1991, by and             --
               between the Company and the Boundary Fund.

    10.31(1)   Stock Purchase Agreement dated September 30,                  --
               1991, by and between the Company and the Boundary Fund.

   +10.32(1)   Stock Option Agreement dated May 22, 1991, by and between     --
               the Company and Richard E. Pospisil.

   +10.33(1)   Stock Purchase Agreement dated December 23, 1993,             --
               by and between the Company and Richard E. Pospisil.

   +10.34(1)   Consulting Services Agreement dated July 11, 1993             --
               by and between the Company and Thomas L. Engdahl.

   +10.35(1)   Settlement Agreement and General Release dated                --
               June 11, 1993 by and between the Company and Thomas
               L. Engdahl, as amended.

   +10.36(1)   Stock Pledge Agreement dated August 10, 1993 by               --
               and between the Company and  Thomas L. Engdahl.

   +10.37(1)   Promissory Note Secured by Stock Pledge Agreement             --
               dated August 10, 1993 executed by Thomas L. Engdahl
               in favor of the Company.

   +10.38(1)   Severance Agreement dated November 27, 1990 by                --
               and between the Company and  Peter P. Savage.


                                       21


<PAGE>


      EXHIBIT                                                            PAGE
      NUMBER                                                             NUMBER
      ------                                                             ------

   +10.39(1)   Promissory Note dated June 12, 1992 executed                  --
               by Peter Savage in favor of the Company.

   +10.40(1)   Severance Agreement dated June 20, 1988 by and                --
               between the Company and Paul  R. Hartmann.

   +10.41(1)   Management Team Incentive Compensation Plan.                  --

   +10.42(1)   The Company's 1994 Stock Option/Stock Issuance Plan.          --

   +10.43(1)   1994 Stock Option/Stock Issuance Plan Form                    --
               of Stock Option Agreement.

   +10.44(1)   1994 Stock Option/Stock Issuance Plan Form of                 --
               Stock Issuance Agreement.

   +10.45(1)   1994 Employee Stock Purchase Plan.                            --

   +10.46(1)   1994 Stock Purchase Plan Form of Stock Purchase Agreement.    --

    10.47(1)   Form of Employee Proprietary Information Agreement.           --

   +10.48(1)   Form of Indemnification Agreements between the Company        --
               and each of its directors.

   +10.49(1)   Form of Indemnification Agreements between the Company        --
               and each of its officers.

   10.50(1)    Binary Software License Agreement dated March 7,              --
               1989 between the Company and Software Components Group,
               Inc., as amended.

   10.51(2)    General Purchase Agreement dated April 11, 1994               --
               between the Company and U.S. West Communications, Inc.
               (with certain confidential portions omitted)
               (Exhibit 10.1).

   10.52(3)    Reinstatement Agreement dated September 22, 1994              --
               between the Company and BellSouth Telecommunications
               Incorporated (with certain confidential
               portions omitted) (Exhibit 10.2).

   10.53(3)    Purchase Agreement with Telecommunications Products           --
               and Related Services  between the Company and Ameritech
               Services, Inc. (with certain confidential portions
               omitted) (Exhibit 10.3).

   10.54(4)    First Amendment to Office Lease dated September 23,           --
               1994 between the Company and Sorrento Tech Associates.

  +10.55(4)    Settlement Agreement and General Release dated                --
               January 17, 1995 between the Company and Charles H. Divine.

   10.56(5)    Purchase Agreement for Telecommunications Products            --
               and Related Services between Southwestern Bell
               Telephone Company and Applied Digital Access,
               Inc., dated September 8, 1995 (with certain
               confidential portions omitted) (Exhibit 10.1).

  +10.57(7)    Apllied Digital Access 1994 Stock Option/Stock                --
               Issuance Plan, as amended.

  +10.58(7)    Applied Digital Access 1994 Employee Stock                    --
               Purchase Plan, as amended

  +10.59(7)    Applied Digital Access 1996 Non-Qualified Option Plan         --


                                       22


<PAGE>


     EXHIBIT                                                             PAGE
      NUMBER                                                             NUMBER
      ------                                                             ------

   10.60(9)    Master Agreement between Northern Telcom, Ltd.                --
               and Applied Digital Access, Inc. dated July 16, 1996

   10.61(9)    Stock Purchase Agreement between Applied Digital              --
               Access, Inc. and MPR Teltech, Ltd. dated July 16, 1996.

   10.62(9)    License Agreement between Northern Telcom, Ltd.               --
               and Applied Digital Access, Inc.

   10.63(9)    Second Amendment to Lease between Sorrento                    --
               Tech Associates and Applied Digital Access, Inc.
               dated August 8, 1996

   10.64(9)    Lease Agreement between Rose Hulman Institute of              --
               Technology, through its authorized leaseing agent,
               Ragle and Company, and Applied Digital Access, Inc.
               dated September 15, 1996.

   10.65(9)    Agreement for Extension of Term, Amendement No.               --
               2 to General Purchasing Agreement between US
               WEST Communications, Inc. and Applied Digital
               Access, Inc. dated August 15, 1996

      10.66    Sublease agreement between Applied Digital Access,            --
               Inc. and ENOVA Corporation dated December 9, 1996

      10.67    First Amendment to Sublease between  Applied                  --
               Digital Access and ENOVA Corporation dated January 24, 1997

      10.68    Agreement for Extension of Term, Amendement No. 3 to          --
               General Purchasing Agreement between US WEST
               Communications, Inc. and Applied Digital Access,
               Inc. dated January 30, 1997

      10.69    Office Lease Agreement between 2725321 Canada Inc.            --
               and Applied Digital Access - Canada, Inc.
               dated January 1, 1997.

       11.1    Statement regarding computation of earnings per share.

       13.1    Applied Digital Access, Inc., 1996 Annual Report to Shareholders.

       23.1    Consent of Coopers & Lybrand L.L.P.

       24.1    Power of Attorney. (See page 25).

       27.1    Financial Data Schedule

         +        Management contract or compensatory plan.

       (1)     Incorporated by reference to the Company's  Registration
               Statement on Form S-1 (No. 33-75258), as amended.

       (2)     Incorporated by reference to the Company's  Quarterly Report on
               Form 10-Q for the quarter ended March 31, 1994
               (File No. 0-23698).

       (3)     Incorporated by reference to the Company's  Quarterly Report on
               Form 10-Q for the quarter ended September 30, 1994
               (File No. 0-23698).

       (4)     Incorporated by reference to the Company's Annual Report
               on Form 10-K for the fiscal year ended December 31, 1995
               (File No. 0-23698).

       (5)      Incorporated by reference to the Company's  Quarterly Report
                on Form 10-Q for the quarter ended September 30, 1995
                (File No. 0-23698).

       (6)      Incorporated by reference to the Company's Current Report on
                Form 8-K dated March 15, 1996 (File No. 0-23698).

       (7)      Incorporated by reference to the Company's  Registration
                Statement on Form S-8 (No. 333-08297), as amended

       (8)      Incorporated by reference to the Company's Current Report on
                Form 8-K dated July 31, 1996 (File No. 0-23698).


                                       23



<PAGE>

       (9)     Incorporated by reference to the Company's  Quarterly Report on
               Form 10-Q for the quarter ended September 30, 1996
               (File No. 0-23698).


Supplemental Information

     Copies of the  Registrant's  Proxy  Statement  for the  Annual  Meeting  of
shareholders  to be held May 20, 1997 and copies of the form of proxy to be used
for such Annual Meeting were furnished to the Commission  prior to the time they
were distributed to the shareholders.



















                                       24

<PAGE>


                                   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 DIGITAL ACCESS, INC.


Date:  March 29, 1997                           By:      /s/ Peter P. Savage
                                                      ------------------------
                                                             Peter P. Savage
                                                             President and
                                                             Chief Executive
                                                             Officer

<PAGE>


                                POWER OF ATTORNEY

         Know  all men by these  presents,  that  each  person  whose  signature
appears below constitutes and appoints Peter P. Savage or James L. Keefe, his or
her attorney-in-fact,  with power of substitution in any and all capacities,  to
sign any  amendments  to this Annual  Report on Form 10-K,  and to file the same
with exhibits  thereto,  and other documents in connection  therewith,  with the
Securities and Exchange Commission, hereby ratifying and confirming all that the
attorney-in-fact  or his or her substitute or substitutes  may do or cause to be
done by virtue hereof.

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

SIGNATURE                    TITLE                                   DATE
---------                    -----                                   ----

/s/ Peter P. Savage              President, Chief Executive       March 29, 1997
---------------------
  (Peter P. Savage)              Officer and Director
                                 (Principal Executive
                                 Officer)

/s/ James L. Keefe               Vice President, Finance and     March 29, 1997
---------------------
  (James L. Keefe)               Administration, Secretary,
                                 Chief Financial Officer
                                 (Principal Financial and
                                 Accounting Officer)

/s/ Kenneth E. Olson             Director                        March 29, 1997
----------------------
  (Kenneth E. Olson)


/s/ Christopher B. Paisley        Director                       March 29, 1997
---------------------------
  (Christopher B. Paisley)


/s/ Edward F. Tuck                Director                       March 29, 1997
-----------------------
  (Edward F. Tuck)

                                       25