TELTREND INC, 10-K, 1996-10-25

TELTREND INC
10-K, 1996-10-25
TELEPHONE & TELEGRAPH APPARATUS

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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 JULY 27, 1996

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

FOR THE TRANSITION PERIOD FROM ____________ TO ______________

COMMISSION FILE NUMBER 0-26114

TELTREND INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-3476859
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)

620 STETSON AVENUE
ST. CHARLES, ILLINOIS 60174
(Address of Principal Executive Offices, Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (630) 377-1700

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

COMMON STOCK, $.01 PAR VALUE PER SHARE
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to 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.

Yes ____ No X

As of October 23, 1996, 6,425,239 shares of the Company's Common
Stock, $.01 par value ("Common Stock") were outstanding. On that date, the
aggregate market value of voting stock (based upon the last sale price of the
registrant's Common Stock on October 23, 1996) held by non-affiliates of the
registrant was $228,849,049 (6,227,185 shares at $36.75 per share).

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PART I

ITEM 1 - DESCRIPTION OF BUSINESS

A. GENERAL DEVELOPMENT OF BUSINESS

(I) BACKGROUND

Teltrend Inc. ("Teltrend" or the "Company") designs, manufactures and
markets a broad range of transmission products, such as channel units,
repeaters and termination units, used by the telephone companies ("Telcos") to
provide voice and data services over the telephone network. Substantially all
of the Company's products are sold directly to the Regional Bell Operating
Companies and their local affiliates (collectively, the "RBOCs") for use with
the copper wireline in the local telephone subscriber loop (the "Local Loop").

The Company was incorporated in Delaware in 1987 and, prior to the
consummation of the Recapitalization (defined below) in June 1995, conducted
its business through its second tier subsidiary, Teltrend Subsidiary Inc. (the
"Operating Subsidiary"), in which the Company owned, through its wholly owned
subsidiary, TI Holdings Inc. (the "Holding Subsidiary"), approximately 99% of
the outstanding stock. The Company acquired the Operating Subsidiary from
unrelated third parties in a 1988 leveraged transaction in which the Operating
Subsidiary incurred significant indebtedness (the "Acquisition").

The Company's principal executive offices are located at 620 Stetson
Avenue, St. Charles, Illinois, 60174 and its telephone number at that location
is (630) 377-1700. Teltrend is a registered trademark of the Company. This
Annual Report on Form 10-K ("Report") also contains trade names and trademarks
of companies other than the Company. Unless the context otherwise requires,
all references to the "Company" or "Teltrend" in this Report refer to Teltrend
Inc. and, for periods prior to the consummation of the Recapitalization,
collectively to Teltrend Inc. and its subsidiaries. The Company's fiscal year
ends on the last Saturday of July each year. All references to fiscal years in
this Report refer to fiscal years ending in the calendar year indicated (e.g.,
Fiscal 1996 refers to the year ended July 27, 1996).

(II) THE RECAPITALIZATION

During the fourth quarter of Fiscal 1995, the Company completed a
recapitalization (the "Recapitalization"). The principal components of the
Recapitalization included: (i) the reclassification of all of the Company's
existing capital stock whereby each issued and outstanding share of Class A
common stock, $.01 par value per share, of the Company was converted into
6.086133 shares of a new class of common stock, $.01 par value per share (the
"Common Stock"), of the Company and each issued and outstanding share of Class
B common stock, $.01 par value per share, and Class C common stock, $.01 par
value per share, of the Company was cancelled (the "Common Stock Conversion");
(ii) the sale by the Company of 3,737,500 shares of Common Stock in an initial
public offering (the "IPO") at a price per share of $16.00 (less underwriting
discounts and commissions of $1.12 per share); (iii) the issuance by the
Company of shares of a new Class A common stock, $.01 par value per share (the
"Class A Stock"), to certain stockholders in exchange for an equal number of
shares of Common Stock in an amount calculated so that such stockholders'
aggregate Common Stock holdings as a result of the Common Stock Conversion did
not exceed 4.9% of the total outstanding Common Stock upon consummation of the
Recapitalization (the "Common Stock Exchange"); (iv) the merger of all of the
Company's subsidiaries with and into the Company; and (v) the payment, using
the net proceeds of the IPO, of all of the Company's outstanding indebtedness
under its Series B Debentures and its credit agreement with The Prudential
Insurance Company of America and Pruco Life Insurance Company (the "Former
Credit Agreement," which consisted of term loans, a revolving loan facility and
Series A Debentures), as well as certain related obligations.

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For further details regarding the Recapitalization, reference should
be made to the Company's Registration Statement on Form S-1 (Registration No.
33-91104 and Commission File No. 0-26114), originally filed with the Securities
and Exchange Commission on April 11, 1995, as amended.

(III) THE SECOND PUBLIC OFFERING

During the second quarter of Fiscal 1996, the Company sold an
additional 575,000 shares of its Common Stock pursuant to a registered public
offering (the "Second Public Offering") of shares of Common Stock by the
Company and certain stockholders of the Company. The net proceeds of the
Second Public Offering received by the Company totalled approximately $14.7
million (after deducting underwriting discounts, commissions and expenses).
The Company has not yet identified specific uses for such net proceeds, but may
use some or all of the net proceeds to acquire related product lines or
businesses, although as of the date hereof there are no existing agreements,
understandings, commitments or negotiations pending with respect to any such
acquisitions.

In connection with the Second Public Offering all of the outstanding
shares of Class A Stock were sold, and upon such sale automatically converted
into an equal number of shares of Common Stock. Accordingly, no shares of the
Company's Class A Stock were outstanding as of July 27, 1996.

B. NARRATIVE DESCRIPTION OF BUSINESS

(I) GENERAL

The Company designs, manufactures and markets a broad range of
transmission products, such as channel units, repeaters and termination units,
that are used by Telcos to provide voice and data services over the existing
telephone network, primarily in the Local Loop. In recent years, the demand
for high speed digital transmission over the telephone network has increased
rapidly as a result of the demand for high capacity voice lines and the growing
communications requirements of local area network ("LAN") interconnections,
wide area networks ("WANs"), on-line data networks (which typically connect
point-of-sale credit card authorization terminals, automatic teller machines,
lottery terminals and reservation stations to a central computer), the
Internet, other on-line data services and, to a lesser extent, video
conferencing. The Company's current products enhance the transmission of voice
and data over the copper network and permit the Telcos to maximize use of the
existing infrastructure of copper wireline.

The Company's principal customers are the seven RBOCs, but the Company
also sells its products to certain independent Telcos and other companies. The
Company's principal product lines include: (i) Tl products which allow Telcos
to deploy 1.544 Mbit/sec digital services; (ii) Voice Frequency ("VF") products
which are primarily used to provide analog data transmission services via
dedicated lines; (iii) Dataphone Digital Services ("DDS") products which are
used to provide switched and dedicated line digital transmissions at rates from
2.4 to 64 Kbit/sec; (iv) Integrated Services Digital Network ("ISDN") products
which provided switched digital transmission of voice or data at rates of up to
128 Kbit/sec over copper wireline; and (v) plain old telephone service ("POTS")
and special plain old telephone service ("SPOTS") products which are used to
provide traditional analog voice and modem services.

(II) INDUSTRY BACKGROUND

OVERVIEW. Transmission through the telephone network has
traditionally been accomplished by analog transmission. Analog transmission,
however, has been unable to provide the requisite data rates and reliability to
support the growing communications requirements of LAN interconnections, WANs,
on-line data networks and services and, to a lesser extent, video conferencing.
Digital transmission emerged in the 1970s as a reliable high bandwidth
alternative to analog transmission. As a result, demand for digital
communications service by end-users is growing, and will likely continue to
grow.

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INCREASING DEPLOYMENT OF DIGITAL SERVICE IN THE LOCAL LOOP. While
Telcos generally utilize fiber optic or other systems to permit high speed
digital transmission between their switching facilities ("Central Offices") and
from their Central Offices to digital loop carrier ("DLC") systems within the
Local Loop, transmission over copper wireline remains the principal method by
which telecommunication services are provided in the "last mile", the final
link between the Central Office or DLC and end-user. Increasing demand for
digital transmission by end-users has given the Telcos considerable incentive
to upgrade service in the Local Loop. Although replacement of the "last mile"
copper wireline in the Local Loop with fiber optic, coaxial cable, hybrid
fiber-coax, wireless and other higher bandwidth and quality transmission media
has occurred to a certain extent, widespread replacement of the copper wireline
has not occurred because of the labor and capital intensive nature of the
replacement process. Consequently, technologies have emerged which enhance the
transmission capabilities of the copper wireline and allow the Telcos to
respond to customer demand for digital service in the Local Loop at affordable
rates and at a level of quality approaching that of fiber.

TECHNOLOGICAL DEVELOPMENTS AND TRENDS. DDS, when introduced in the
early 1970s, was one of the first digital transmission services offered by
Telcos in the Local Loop. DDS provides dedicated service at rates up to 64
Kbit/sec and has typically been deployed for point-of-sale applications and
other on-line data networks. The next digital service to be widely deployed in
the Local Loop was T1, which is a 1.544 Mbit/sec dedicated service that can be
provided over two twisted pair of copper telephone wires. Applications for T1
service include connections between the Central Office and customer Private
Branch Exchanges ("PBXs") and T1 multiplexers and, more recently, cellular
base-stations. Traditional T1 service is provided by "conditioning" the
existing copper wireline to meet the standards for T1 service. This
conditioning requires the removal of all bridge taps, the separation of the
wire pairs and the installation of mid-span repeaters to regenerate the signal
every 3,000 to 6,000 feet (which is necessary because the T1 signal degrades as
it passes along the copper wireline). Consequently, installation and
maintenance of repeatered T1 lines is labor intensive and can be costly,
depending on the length of the loop and the amount of conditioning required
along the copper wireline. High bit-rate Digital Subscriber Line ("HDSL")
technology is an accepted alternate method of providing T1 service across the
copper network which does not require conditioning the lines or the
installation of line repeaters for distances of up to 12,000 feet.

Switched digital services are increasingly being deployed in the Local
Loop in response to customer demand for flexible, high bandwidth transmission
services. Whereas dedicated lines are fixed connections between two points,
switched services permit the flexibility of connecting with any similarly
equipped location. A new DDS service provides switched 56 Kbit/sec digital
transmission service. In addition, basic rate ISDN technology has been
developed which allows a Telco to deliver switched digital transmission over
the copper network at rates up to 128 Kbit/sec (plus an additional 16 Kbit/sec
for special services). These technologies can support telecommuting, video
conferencing and remote-LAN access. Although basic rate ISDN technology has
been available for over ten years, it had not been widely deployed by Telcos
until recently. Its recent increase in popularity is largely attributable to
the emergence of widespread Internet usage.

Other emerging technologies to provide high bandwidth digital services
include primary rate ISDN, a switched digital line which operates at T1 speeds,
and Asynchronous Digital Subscriber Line ("ADSL"), which provides sufficient
capacity for delivery of video-on-demand over the copper wireline.

OTHER INDUSTRY TRENDS. Faced with increasing competition for
customers, Telcos are demanding enhanced functionality in the equipment they
deploy to deliver telecommunications services. In response, equipment
manufacturers have developed, and will likely continue to develop, products
which can be tested, adjusted and reconfigured from a remote location (i.e.,
"intelligent" products) to assist Telcos in achieving labor cost savings and
efficiency gains.

The technologies which have emerged to replace the existing copper
infrastructure (such as fiber optic, coaxial cable, hybrid fiber-coax and
wireless systems) remain relatively costly to install. While the transition
from copper wireline to telecommunications networks based on newer technology
is generally expected to be gradual, it

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is anticipated that the markets for and the pace of deployment of these
technologies will grow as their costs decrease. Accordingly, demand for
products applicable to the copper wireline will decrease and new products and
services will need to be developed to address the demands of these growing
markets. See Subparagraph c. (ii) of this Item 1 -- "Factors That May Affect
Future Results -- Rapid Technological Changes and Dependence on New Products"
and Subparagraph c. (i) of this Item 1 -- "Factors That May Affect Future
Results--Dependence on Two Product Lines."

(III) PRODUCTS

(A) GENERAL

Digital and analog signals from each subscriber are gathered at a
Telco's Central Office. While most of these lines are connected directly to
the Central Office switch, special service lines are attached to an assembly
which provides the speed and functionality of the particular circuit. These
circuit assemblies, known as channel units, connect the subscriber line to a
channel bank or similar equipment which converts voice and data transmission
signals as required (e.g., from analog to digital), combines or separates them
as necessary (e.g., into or from a single digital stream for T1 service) and
directs the signals through the telephone network. Channel banks are typically
located in the Central Offices. A DLC within the Local Loop performs the same
function as a channel bank and typically interfaces fiber optic or some other
medium which has been deployed between the Central Office and the copper
wireline that runs to the end-user's premises. Along the copper wireline in
the Local Loop, electronic equipment such as repeaters may be required to
restore and amplify the signal. In the case of dedicated lines, a Telco
typically installs a termination unit at the end-user's premises which allows
testing and adjustment of the subscriber line.

The Company manufactures a broad range of products necessary to
provision the Local Loop which are designed for installation either at the
end-user's premises, along the Local Loop or at the Central Offices. The
Company's products include channel units, repeaters and termination units used
by the Telcos for the provisioning, testing and termination of analog and
digital transmission services in the Local Loop at speeds of up to 4.400
Mbit/sec.

Most of the Company's products consist of a single printed circuit
board upon which a microprocessor and other electronic components are mounted.
These units generally plug into a housing at either the customer's location,
the Central Office or an intermediate point along the telephone network. While
the Company offers many of the housings into which these units plug, some of
the units are designed specifically to plug into housings or systems
manufactured by others, and virtually all of the units are plug compatible with
various industry-standard systems (such as Lucent Technologies Inc. ("Lucent")
SLC-5 DLC system). To meet customer requirements, the Company regularly
produces customized versions of its standard products to incorporate
customer-specific "firmware" (embedded memory) or unique hardware (such as a
customized electronic assembly) or to mount unique parts on an otherwise
standard printed circuit board. Many of the Company's products enhance
traditional voice and data transmission products, incorporating onboard
microprocessors which allow them to perform many functions automatically and to
be provisioned and tested from a remote location thereby reducing labor costs
and achieving efficiency gains.

(B) THE COMPANY'S PRODUCT LINES

T1/WIRELESS PRODUCTS. The Company is a supplier of intelligent
repeatered T1 products for the Local Loop. These products allow Telcos to
quickly deploy high speed (1.544 Mbit/sec) digital service over the existing
infrastructure of copper wireline in the Local Loop at affordable rates and a
level of quality which approaches that of fiber. T1 service is frequently
deployed for PBX and dedicated lines. The Company was the first to
successfully introduce cost-effective intelligent T1 repeaters, which spurred
the sales growth of the Company's T1 products.

Within its T1 product line the Company currently offers intelligent
network interface units ("NIUs"), intelligent office repeaters, intelligent
line repeaters, T1 maintenance shelves and T1 mountings. The Company's

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NIUs are installed by Telcos to terminate a T1 line at the customer's premises
and to allow testing of the circuit. The Company's T1 repeater products are
installed by Telcos to regenerate a T1 signal that has degraded due to
transmission over a long distance of copper wireline. These repeaters contain
addressable loopback circuits that allow rapid fault isolation from a remote
location. This remote testing capability allows Telcos to offer improved
service at lower cost in the increasingly competitive telecommunications
environment.

HDSL technology is an accepted alternate method of providing T1
service over the copper wireline in the Local Loop. HDSL is easier to
provision than traditional T1 service because it eliminates the need to
condition the wireline and to install line repeaters for distances of up to
12,000 feet. Telcos continue to deploy traditional repeated T1 service,
since it is presently more cost-effective than HDSL on short lines and on
established repeated T1 routes. However, the Company expects that demand for
T1 products (which provide traditional repeated T1 service) will decline as
the cost of HDSL systems declines. The Company is currently introducing a
4-wire HDSL product line. See Subparagraph c. (i) of this Item 1 -- "Factors
That May Affect Future Results--Dependence on Two Product Lines."

In Fiscal 1996, the Company introduced a new T1 product line called
the CellPak. The CellPak provides T1 transport in a completely self-contained,
pre-tested, outdoor package for connecting a cellular or Personal
Communications Services antenna cell site back to its local telephone central
office using metallic or fiber optic lines.

Coordination problems that are often encountered between the wireless
operator and the telephone company are greatly reduced by the CellPak, both in
original installation and in maintenance situations. Teltrend CellPak systems
are available with HDSL, conventional T1 or fiber optic feeds. In Fiscal 1996,
the Company experienced small initial sales of the CellPak.

Sales of the Company's T1 products accounted for approximately 48.0%,
55.6% and 53.9% of the Company's total net sales for Fiscal 1994, 1995 and
1996, respectively.

VF/DLC PRODUCTS. The Company is a supplier of intelligent VF
products. Within its VF product line the Company currently offers data station
termination ("DST") units, VF channel units and mountings which Telcos use
primarily to provide dedicated analog data lines. The Company's DST and VF
channel units are installed by Telcos at the customer premises and in a channel
bank or DLC system, respectively, to terminate both ends of an analog data
line. In addition, these units contain onboard microprocessors which allow all
testing and adjustment to be performed from a remote location.

The Company's VF products are principally used by Telcos to provision
the 4-wire analog data lines typically leased by Telco customers to connect
geographically dispersed computer terminals (such as point-of-sale credit card
authorization terminals, automatic teller machines, lottery terminals and
reservation stations) to a central computer. Although there are several other
ways to link these terminals to a central computer (most notably DDS), analog
data lines remain a primary method for accomplishing these links for several
reasons. An analog data line is the only practical way to add a terminal to an
existing analog data network (of which there is a large installed base). In
addition, analog data line transmission is often the more economical, more
easily installed or, in certain locations, the only service available.

The Company believes that the domestic market for its VF products is
decreasing, and will likely continue to decrease, as digital data transmission
services within the Local Loop become less costly and more widely deployed.
However, the Company will endeavor to partially offset the effects of this
decline by expanding its marketing efforts for its VF products to international
markets. See Paragraph a. of Item 7 -- "Management's Discussion and Analysis
of Financial Condition and Results of Operations--General." See also Paragraph
b. of Item 7 -- "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Results of Operations."

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Sales of the Company's VF products accounted for approximately 43.7%,
32.0% and 21.0% of the Company's total net sales for Fiscal 1994, 1995 and
1996, respectively.

Voice services, referred to generally as plain old telephone service
or special plain old telephone service, still represent the dominant use of the
telephone network in the United States. The Company manufactures POTS/SPOTS
channel units which plug into a channel bank or DLC system and provide the
interface necessary for Telcos to furnish these voice services. The Company's
POTS/SPOTS channel units are microprocessor controlled and provide the exacting
gain, reflection and low noise performance required to accommodate advanced
POTS/SPOTS features, such as caller identification, which are increasingly
being offered by Telcos. The flexibility of microprocessor design has allowed
the Company to solve a variety of special performance problems encountered in
the telephone network.

Late in Fiscal 1995, Teltrend introduced a new product, called the
CyberBlock. The CyberBlock improves voice and data transmission over ordinary
telephone loops. In addition to solving various common voice and modem
problems, the CyberBlock also furnishes a lower cost way for telephone
companies to provision 2-wire special service lines. The CyberBlock employees
a modern microprocessor design which allows it to automatically adjust gain and
equalization of the loop in both directions. The CyberBlock has been used in
small quantities at all RBOC's and is officially approved by two RBOC's.

Teltrend experienced a resurgence in it's digital loop carrier
business in Fiscal 1996. The Company introduced a new, advanced 2-wire foreign
exchange unit ("2FXO") for the Lucent SLC-96 and D4 systems. The 2FXO uses
microprocessor control to compensate for a myriad of network anomalies caused
by variations in PBX's and central office switches. It thereby eliminates a
host of operational and billing problems commonly experienced with foreign
exchange lines.

DDS/ISDN PRODUCTS. The Company's DDS products are used by Telcos to
deliver digital service across two twisted pair of copper wires in the Local
Loop at speeds from 2.4-64 Kbit/sec. The majority of DDS service is provided
by means of a dedicated line, but switched 56 Kbit/sec DDS service is also
available. As with the Company's analog VF data transmission products, DDS
service is typically used by customers who need to connect geographically
dispersed computer terminals to a central computer. In recent years, DDS has
benefited from the trend towards digital service described above.

The Company manufactures DDS channel units (known as "dataports"),
which the Telcos plug into a channel bank or DLC system to connect a DDS line
to the rest of the telephone network. The Company also manufactures
intelligent DDS termination units, which are installed by Telcos at the
end-user's premises to configure and maintain a DDS line.

The Company is currently manufacturing, developing and marketing
products based on basic rate ISDN technology. This technology allows Telcos to
provide to their customers two 64 Kbit/sec digital channels, plus an additional
16 Kbit/sec for special purposes, over a single twisted pair of copper wires.
Whereas most digital transmission services require a dedicated line, ISDN is a
switched service. This offers the end-user the flexibility of conventional
dial-up service with the speed and quality of digital transmission. In
addition, multiple ISDN lines can be aggregated to provide the bandwidth
required for applications such as video conferencing.

The Company currently manufactures and markets an ISDN channel unit
which plugs into Lucent's SLC-5 DLC system. The Company began shipping this
product in February 1995 and has made sales to Ameritech, Bell Atlantic,
Pacific Bell, SBC Communications (formerly known as Southwestern Bell),
Southern New England Telephone and Bell South. In addition, this product is
presently being studied by NYNEX.

The Company, in August 1996, introduced an ISDN line repeater unit,
which is required every 12,000 to 18,000 feet along a line furnishing ISDN
service, and an ISDN channel unit for use with channel banks at Telco

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Central Offices (which is necessary to interface the ISDN signal for
interoffice transport where the local Central Office switch cannot support ISDN
service). However, there can be no assurance that sales of such products will
become significant. See Subparagraph c. (xi) of this Item 1 -- "Factors That
May Affect Future Results -- Proprietary Rights and Risks of Third Party Claims
of Infringement."

BROADBAND PRODUCTS. The Company is currently introducing a 4-wire
HDSL product line. HDSL technology allows Telcos to provide T1 service without
the need to condition the copper wireline or install mid-span repeaters for
distances of up to 12,000 feet. The Company does not expect this product line
to generate significant sales during Fiscal 1997. The HDSL market in the
United States is highly competitive and currently dominated by three companies,
PairGain Technologies, Inc. ("PairGain"), ADC Telecommunications, Inc. ("ADC")
and ADTRAN, Inc. ("ADTRAN"). See Subparagraph b. (ix) of this Item 1 --
"Narrative Description of Business -- Competition".

On June 25, 1996, at SuperComm '96 in Dallas, the Company exhibited
its entry into the ADSL ultra-high-speed Internet access market. This entry
has been made through agreements with Aware, Inc. ("Aware") under which the
Company acquired the Aware ADSL modem design and certain design support. The
Aware modem design allows data to be transmitted to subscribers at a rate of
4,400,000 bits per second at distances up to 12,000 feet. Higher data rates
are possible at reduced loop lengths. The current upstream data rate is
440,000 bits per second the modem uses industry standard discrete multitone
technology ("DMT").

(IV) CUSTOMERS

The Company sells substantially all of its products to the seven RBOCs
and a small portion of its products to independent Telcos, such as GTE and
Sprint, long-distance companies and international Telcos. Sales to the seven
RBOCs accounted for approximately 96.5%, 96.3% and 95.2% of the Company's total
net sales in Fiscal 1994, 1995 and 1996, respectively. In Fiscal 1996, sales
to BellSouth, US WEST, SBC Communications, Ameritech and NYNEX accounted for
20.6%, 18.4%, 18.2%, 15.2%, and 10.7%, respectively, of the Company's total net
sales and one of the customers purchased T1 products which accounted for
approximately 15.6% of the Company's total net sales. No other customer
accounted for more than 10% of the Company's total net sales during Fiscal
1996. See Subparagraph c. (iii) of this Item 1 -- "Factors That May Affect
Future Results--Reliance on Certain Customers."

Prior to selling a product to a customer, the Company generally must
first submit that product for qualification by the customer. Accordingly, the
Company is continually submitting successive generations of its current
products as well as new products to its customers for qualification. Although
the qualification process varies somewhat among customers, the Company's
experience is that the process can take anywhere from a few weeks to a year or
more and generally consists of the following three phases:

o Laboratory Evaluation. The product's function and performance are
tested against all relevant industry standards, including those set by
Bell Communications Research, Inc. ("Bellcore").

o Field Trial. A number of telephone lines are equipped with the
product for simulated operation in a field trial. The field trial is
used to evaluate performance, assess ease of installation and
establish troubleshooting procedures.

o Product Selection and Deployment. Prior to product selection and
deployment, the customer develops and implements a variety of methods
and procedures relating to ordering, stocking, installation,
maintenance, returns and all other activities associated with the use
of the product.

(V) MARKETING, SALES AND DISTRIBUTION

As of July 27, 1996, the Company's marketing, sales and distribution
programs were conducted by 40 employees. The majority of the Company's sales
in the United States are made by its field sales organization, which

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consists of 23 salespersons deployed throughout the United States. The
marketing, sales and customer service employees based at the Company's
headquarters support these field salespersons and often become involved in the
sales process. The Company also sells its products through distributors.
Although the Company has agreements with many of these distributors, these
agreements do not establish minimum purchase commitments and are generally
terminable by either party on 60 days notice. For each of the Company's last
five fiscal years, no distributor has accounted for more than 1.5% of the
Company's total net sales. The Company believes that its success has, to a
significant degree, been due to the performance of its sales and distribution
teams and that its future success will depend, in part, on its ability to
attract and retain qualified sales and marketing personnel who can successfully
increase the Company's sales revenue in the highly competitive
telecommunications equipment marketplace.

The Company has multi-year supply agreements with virtually all of its
major customers, which cover products representing a majority of the Company's
sales. These agreements only govern the terms and conditions applicable to
purchases of the Company's products, including prices, and do not establish any
minimum purchase commitments. Sales of the Company's products under these
agreements are made on a purchase order basis. Because these contracts
generally prohibit the Company from increasing the price of its products sold
thereunder for stated periods of time, any significant increase in the
Company's costs during such periods which the Company is unable to offset with
a corresponding increase in prices due to such prohibitions could have a
material adverse effect on the Company. See Subparagraph c. (iii) of this Item
1 -- "Factors That May Affect Future Results--Reliance on Certain Customers."
In addition, the Company has arrangements with three of its customers which
require the Company to maintain a portion of its finished goods inventory at
the various locations of such customers. Approximately 45% of the Company's
finished goods inventory is currently maintained at these locations. The
Company may enter into additional similar arrangements as the RBOCs
increasingly seek ways to reduce their inventory costs. These arrangements
generally require the Company to maintain higher inventory levels than would
otherwise be required. See Subparagraph c. (vii) of this Item 1 -- "Factors
That May Affect Future Results- -Increased Inventory Levels and Need to Make
Advance Purchase Commitments" and Subparagraph c. (xii) of this Item 1 --
"Factors That May Affect Future Results--Potential Product Recalls and Warranty
Expenses."

(VI) RESEARCH AND PRODUCT DEVELOPMENT

The Company works closely with its current and potential customers in
connection with product development. Using feedback received from such
customers, the Company identifies and develops new products and enhancements to
its existing products.

As of July 27, 1996, the Company's research and product development
was carried out by 73 engineers and engineering support personnel. These
individuals are organized into teams corresponding to the Company's product
lines, with each team being responsible for providing technical support for the
Company's existing products and conceiving new products in cooperation with
others within the Company. Utilizing computer-aided design tools, each product
team also implements the Company's ongoing "value engineering" programs which
are designed to periodically replace all of the Company's major products with
successive generations having additional product features, such as
"intelligence" or new mechanics and/or lower costs.

To date, all product development expenses have been charged to
operations as incurred. The Company's expenditures on research and product
development were approximately $4.9 million, $5.3 million and $7.9 million for
Fiscal 1994, 1995 and 1996, respectively. The Company believes its future
success will depend in part on its ability to, on a cost effective and timely
basis, continue to enhance its products, develop and introduce new products for
the telephone network transmission market and other markets, address new
industry standards and changing customer needs and achieve market acceptance
for its products. Accordingly, the Company intends to continue to
make significant investments in research and product development, with a goal
of increasing its annual research and development expenses to between 11% and
12% of its annual net sales. The attainment of this goal has been made
difficult by the fact that sales have been increasing at a rate faster than the
rate at which the Company has been able to add qualified research and
development personnel; however, the Company, in Fiscal 1996, has made progress
toward this goal. See Subparagraph c. (ii) of this Item 1 -- "Factors That May
Affect Future Results--Rapid

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Technological Changes and Dependence on New Products." See also Subparagraph
b. (i) of Item 7 -- "Results of Operations -- Fiscal 1996 Compared with Fiscal
1995."

(VII) CUSTOMER SERVICE AND SUPPORT

The majority of service, repair and technical support of the Company's
products is performed at the Company's headquarters. Under certain
circumstances, the Company will also provide comprehensive on-site field
support to its customers. The Company offers telephone technical support to
its customers 24 hours a day, seven days a week and also provides training to
its principal customers with respect to its products.

Most of the Company's products carry a seven year limited warranty,
which generally covers defects in materials or workmanship and failure to meet
published specifications but excludes damages caused by improper use and all
other express or implied warranties. Products returned which have
malfunctioned or failed to operate during the warranty period through no fault
of the customer are either repaired or replaced promptly. The Company's
warranty covers only Company products and is not extended to related equipment
or components used in conjunction with these products. For each of the past
five fiscal years, the Company's warranty expense has been relatively
insignificant, representing less than 1.0% of the Company's annual net sales.
The Company believes its low return rate is the result of its rigorous product
quality program. Although the Company maintains a comprehensive quality
control program and has a high level of confidence in the quality and
reliability of its products, there can be no assurance that in the future
certain of the Company's products will not suffer from defects or other
deficiencies. In addition, the Company is a party to supply contracts with
certain of its major customers pursuant to which the Company may, under certain
circumstances, be required to accept certain returns of products or to
indemnify such customers against certain liabilities arising out of use of the
Company's products. See Subparagraph c. (xii) of this Item 1 -- "Factors That
May Affect Future Results--Potential Product Recalls and Warranty Expenses."

(VIII) MANUFACTURING AND SUPPLIERS

To successfully compete for Telco business, telecommunications
equipment manufacturers must offer products which assist Telcos in meeting
customer demand for high quality, reliable transmission services. The Company
is committed to customer satisfaction in the design and manufacture of its
products and maintains comprehensive quality control systems to monitor product
and service quality throughout all of its processes. This commitment has
resulted in the Company achieving CSQP (Customer Supplier Quality Process) and
ISO 9001 Registration recognition from Bellcore.

At July 27, 1996, the majority of the Company's manufacturing and
quality processes were conducted by 257 employees. The Company's manufacturing
process consists of several distinct phases: material planning and procurement,
assembly, burn-in, testing and quality audit. The Company procures electronic
and mechanical components from outside manufacturers and assembles them using a
substantially automated production process. Incoming components are subject to
quality inspection and testing. In addition, all of the Company's products are
100% tested prior to shipment to customers. The Company's quality control
systems are designed to assure product conformance with Bellcore standards,
high reliability in the field and complete customer satisfaction. To date, the
Company has experienced no significant field failure conditions.

Generally, the Company uses industry standard components for its
products. Some components, however, including application specific integrated
circuits ("ASICs"), are custom made to the Company's specifications. In
addition, the Company uses proprietary design integrated circuits ("PDICs") in
the manufacture of its products which are the design and property of the
manufacturer from which they are purchased. Certain key components required to
manufacture the Company's products, principally its ASICs and PDICs, are
currently available from only one source. The Company continually evaluates
its sources of supply and will establish additional supply relationships where
available and advisable to increase the reliability of receipt of components.
The Company generally obtains its components on a purchase order basis.
Components that currently are readily available may become difficult to obtain
in the future. In response to long order lead times and delays in the supply
of key components, the Company

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keeps an inventory of certain components at its production facility on a
consignment basis. The Company has no material foreign supplier and those
components purchased from foreign suppliers are generally available
domestically. See Subparagraph c. (vi) of this Item 1 -- "Factors That May
Affect Future Results--Dependence on Certain Suppliers."

The Company's customers typically require delivery of products shortly
after an order is placed which requires the Company to maintain relatively high
inventory levels and increases the risk of inventory obsolescence. In addition,
certain of the components used by the Company require an order lead time of up
to six months and the Company must regularly make advance noncancelable
commitments to purchase relatively large quantities of such components. The
Company continually monitors and reviews its inventories and purchasing
practices in an effort to minimize inventory related costs and the risk of
obsolescence. Members of the Company's management team meet each month to
review current inventories for potential obsolescence and, based on a rolling
six-month sales forecast, inventory aging data and purchasing trends, establish
appropriate inventory reserves and inventory purchasing levels for the
succeeding month. See Subparagraph c. (vii) of this Item 1 -- "Factors That
May Affect Future Results -- Increased Inventory Levels and Need to Make
Advance Purchase Commitments." See also Item 7 -- "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

(IX) COMPETITION

The markets for the Company's products are highly competitive and
characterized by rapid technological change, evolving industry standards,
changes in customer requirements, price-competitive bidding and frequent
product introductions and enhancements. With the development of the worldwide
telecommunications market and increasing demand for high speed digital
transmission over the existing telephone network, many manufacturers such as
the Company have emerged to offer products for these markets. Moreover, the
Company expects competition to increase both from existing competitors and from
other companies which may enter the Company's existing or future markets,
including the RBOCs. In addition, during this past year AT&T Corp. ("AT&T",
formerly known as American Telephone & Telegraph Company) divided its existing
business units into three distinct entities. One of these entities, Lucent, is
comprised of AT&T's telecommunications equipment manufacturing unit, and
currently manufactures certain products also manufactured and sold by the
Company. There can be no assurance that the operation of Lucent, as an
independent entity, after its spin-off from AT&T will not have a material
adverse effect on the Company. See Subparagraph c. (iii) of this Item 1 --
"Factors That May Affect Future Results--Reliance on Certain Customers" and
Subparagraph c. (viii) of this Item 1 -- "Factors That May Affect Future
Results--Potential Competition from RBOCs and AT&T. See also Subparagraph b.
(x) of this Item 1 -- "Narrative Description of Business -- Regulation." The
Company competes for customers on the basis of price, product features,
conformance with Bellcore and other industry standards and specifications,
performance and reliability, technical support and the maintenance of close
working customer relationships.

The Company's competitors in the United States and elsewhere are
numerous and, in most cases, have significantly greater financial,
technological, manufacturing, marketing and personnel resources and experience
than the Company. In addition, certain of the Company's competitors have
long-standing relationships with certain Telcos which may adversely affect the
Company's ability to successfully compete for business at these Telcos. The
Company's principal competitor with respect to T1 products is Westell, Inc. In
addition, because HDSL is easier to provision than traditional T1 service, the
Company is facing increasing competition with respect to its T1 products from
suppliers of HDSL systems, which is an accepted alternate method of delivering
T1 services in the Local Loop. The HDSL market is dominated by PairGain, ADC
and ADTRAN. The Company's principal competitor with respect to VF products is
Tellabs, Inc. and the domestic market for VF products generally is experiencing
decreasing demand as higher speed digital data transmission services become
less costly and more widely deployed. The Company's principal competitor with
respect to DDS products is ADTRAN. Lucent and Pulse Communications, Inc.
("Pulsecomm"), a subsidiary of Hubbell Incorporated, are the Company's
principal competitors with respect to the Company's POTS/SPOTS products. With
respect to the Company's ISDN products, the Company's principal competitor is
ADTRAN. See Subparagraph c. (i) of this Item 1 -- "Factors That May Affect
Future Results--

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<PAGE> 12

Dependence on Two Product Lines" and Subparagraph c. (iv) of this Item 1 --
"Factors That May Affect Future Results -- Highly Competitive Industry."

(X) REGULATION

The telecommunications industry is subject to regulation in the United
States and other countries. Federal and state regulatory agencies regulate
most of the Company's domestic customers. While such regulation does not
typically affect the Company directly, the effects of such regulation on the
Company's customers may adversely impact the Company's sales and operating
results. For example, the sale of the Company's products may be affected by
the imposition upon certain of the Company's customers of common carrier
tariffs, the taxation of telecommunications services and regulatory policies
affecting terms on which common carriers conduct their business. These
policies are under continuous review and are subject to change. See
Subparagraph c. (ix) of this Item 1 -- "Factors That May Affect Future
Results--Government Regulation."

The Telecommunications Act of 1996 (the "Telecommunications Act"),
enacted on February 8, 1996, has generally eliminated the restrictions which
had previously prohibited the RBOCs from manufacturing telecommunications
equipment (subject to first satisfying certain conditions designed to
facilitate local exchange competition and receipt of prior approval by the
Federal Communications Commission). These restrictions had been imposed under
the Modification of Final Judgment, which governed the structure of the 1984
divestiture by AT&T of its local operating telephone company subsidiaries. The
passage of the Telecommunications Act may have an adverse effect on the Company
because the RBOCs, which are presently the Company's principal customers, may
now become manufacturers of some or all of the products currently manufactured
and sold by the Company and, consequently, may no longer purchase
telecommunications equipment produced by the Company at the levels historically
experienced. See Subparagraph c. (viii) of this Item 1 -- "Factors That May
Affect Future Results -- Potential Compensation from RBOCs and AT&T."

(XI) PROPRIETARY RIGHTS

The name "Teltrend" is a registered trademark of the Company. The
Company has also registered four of its product names and has applied for
trademark registration for eight additional product identifiers or names. The
Company has pursued and intends to continue to pursue patent protection of
inventions that it considers important to the Company's business and for which
such protection is available. The Company presently holds patents on ten
inventions relating to its products and has nine patent applications pending.
The Company also has a registered copyright with respect to a certain software
program used in a number of its products. In addition, as part of its
confidentiality procedures, the Company generally enters into nondisclosure
agreements with its key employees and certain 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
rights or that the Company's proprietary rights will preclude competitors from
developing products or technology equivalent or superior to that of the
Company. Moreover, the laws of some foreign countries do not protect the
Company's proprietary rights in its products to the same extent as do the laws
of the United States.

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<PAGE> 13

The Company is a party to agreements with two of the RBOCs whereby the
Company licenses certain telecommunications technology, including digital
channel banks and signal decoding systems, in connection with the manufacture
of its products.

Prior to the IPO, the Operating Subsidiary also licensed certain
technology from AT&T, the technology has since been transferred to Lucent. The
term of this license continued through July 1995, subject to a right of
continuation under certain circumstances at substantially higher royalty rates.
In connection with the Recapitalization, the Company sought AT&T's consent to
assignment of this license from the Operating Subsidiary to the Company. At
that time, AT&T indicated it would give such consent after resolving certain
issues with the Company with respect to the license. However, the term of the
license agreement expired before the parties had the opportunity to resolve
these issues and the parties have since discussed a replacement license
agreement. There can be no assurance that the Company will be able to obtain a
replacement license agreement at royalty rates which do not exceed those in
effect during Fiscal 1995, and any substantial increase in royalty rates could
have a material adverse effect on the Company. The Company is also evaluating
its continuing obligations with respect to the Operating Subsidiary's Pre-IPO
license agreement with AT&T (now Lucent), including the extent to which its
current products employ technology covered by the unexpired patents licensed
thereunder. Any resolution of these issues which applies the maximum royalty
increase provided for in the license to a substantial number of the Company's
products could have a material adverse effect on the Company's results of
operations. See Subparagraph c. (xi) of this Item 1 -- "Factors That May
Affect Future Results -- Proprietary Rights and Risks of Third Party Claims of
Infringement."

Further, in the context of its discussions with AT&T and Lucent,
Lucent indicated that the Company's initial ISDN product may make use of
certain of Lucent's patented technology and has expressed a willingness to
enter into licensing negotiations with respect to such technology. The Company
is currently evaluating Lucent's claim. However, there can be no assurance as
to the resolution of this matter. See Subparagraph c. (xi) of this Item
1 -- "Factors That May Affect Future Results -- Proprietary Rights and Risks of
Third Party Claims of Infringement."

(XII) EMPLOYEES

As of July 27, 1996, the Company had 391 full-time employees,
including 73 in engineering, 40 in sales and marketing, 257 in manufacturing
and quality assurance and 21 in finance and administration. The Company's
future success will depend largely upon its ability to attract and retain
highly qualified personnel. 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.

(XIII) BACKLOG

At July 27, 1996, the Company's backlog of orders believed to be firm
was approximately $4.0 million, compared to approximately $4.5 million at July
29, 1995. The Company believes that backlog is not a meaningful indicator of
net sales that can be expected for any future period.

C. FACTORS THAT MAY AFFECT FUTURE RESULTS

(I) DEPENDENCE ON TWO PRODUCT LINES

The Company's T1 products accounted for approximately 48.0%, 55.6% and
53.9% of the Company's total net sales in Fiscal 1994, 1995 and 1996,
respectively. For these same periods, sales of the Company's VF products
accounted for approximately 43.7%, 32.0% and 21.0%, respectively, of the
Company's total net sales. The Company expects to derive the majority of its
net sales for the foreseeable future from the sale of its T1 and, to a lesser
extent, VF products. Consequently, the Company's inability to maintain or
increase net sales of its T1 and VF products in the future, or to offset any
shortfall in sales of such products with sales within its other existing or
future product lines, could have a material adverse effect on the Company.

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<PAGE> 14

The Company believes that the domestic market for its VF products is
decreasing and will continue to decrease as the higher speed digital data
transmission services demanded by customers within the Local Loop become less
costly and more widely deployed.

The Company is facing increasing competition with respect to its T1
products from suppliers of systems based on HDSL technology as an alternate
method of delivering T1 services in the Local Loop. Because HDSL is easier to
provision than traditional T1 service, the Company expects that HDSL products
will adversely affect the demand for its T1 products as the costs of HDSL
systems decline. Consequently, while net sales of the Company's T1 products
have increased from year to year since Fiscal 1991, there can be no assurance
that the Company will be able to sustain or improve this trend. If increasing
competition causes the Company to reduce selling prices for its T1 or VF
products, there can be no assurance that the Company will be able to increase
unit sales volumes of such products, reduce its costs of sales of such products
or maintain or increase revenues or gross margins attributable to such products
to offset in full or in part the reduced revenue effects of such selling price
reductions. Although the Company is currently introducing its own HDSL product
line, the HDSL market is highly competitive and is dominated by three
competitors, PairGain, ADC and ADTRAN. Accordingly, there can be no assurance
that the Company's new HDSL product line will achieve market acceptance or
generate any significant sales in the future. See Subparagraph b. (ii) of this
Item 1 -- "Narrative Description of Business -- Products" and Subparagraph b.
(ix) of this Item 1 -- "Narrative Description of Business -- Competition."

(II) RAPID TECHNOLOGICAL CHANGES AND DEPENDENCE ON NEW PRODUCTS

The market for the Company's products is characterized by rapidly
changing technology, evolving industry standards, changes in customer
requirements, price-competitive bidding and frequent product introductions and
enhancements. The introduction of telephone network voice and data
transmission products involving new technologies, the emergence of new industry
standards or changes in customer requirements or service offerings could
adversely affect the Company's ability to sell its existing products and
products currently under development. All of the Company's existing products
are designed primarily to facilitate and enhance the delivery of communications
over the existing copper wireline in the Local Loop and the Company expects
that Telcos will increasingly replace this copper wireline with fiber optic,
coaxial cable, wireless and other technologies (each of which uses a
significantly different method of delivery). Furthermore, the Company faces
increasing competition with respect to its T1 products from suppliers of HDSL
systems as an alternate method of delivering conventional T1 services. See
Subparagraph b. (ii) of this Item 1 -- "Narrative Description of Business --
Products" and Subparagraph b. (ix) of this Item 1 -- "Narrative Description of
Business -- Competition." The Company believes that the continued installation
of new technologies in the Local Loop will adversely affect demand for certain
of its existing products and that its future success will largely depend upon
its ability, on a cost-effective and timely basis, to continue to enhance its
existing products and develop and achieve commercial acceptance of new
products. There can be no assurance that developments by others will not
render the Company's products or technologies obsolete or unmarketable or that
the Company will be able to successfully anticipate or adapt to changing
technology, industry standards or customer requirements on a timely basis. Any
failure by the Company to anticipate and respond to technological developments
or changes in industry standards or customer requirements could have a material
adverse effect on the Company. See Subparagraph c. (i) of this Item 1 --
"Factors That May Affect Future Results--Dependence on Two Product Lines."

(III) RELIANCE ON CERTAIN CUSTOMERS

The Company depends, and is likely to continue to depend, on the RBOCs
for substantially all of its net sales. Sales to the RBOCs accounted for
approximately 96.5%, 96.3% and 95.2% of the Company's total net sales in Fiscal
1994, 1995 and 1996, respectively. Among the RBOCs, sales to BellSouth, US
WEST, SBC Communications, Ameritech and NYNEX accounted for approximately
20.6%, 18.4%, 18.2%, 15.2% and 10.7%, respectively, of the Company's net sales
in Fiscal 1996. During this same period, one of these customers purchased T1
products which accounted for approximately 15.6% of the Company's total net
sales. The Company has no supply agreements with any of the RBOCs or its other
customers which establish minimum purchase commitments

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and there can be no assurance that sales of the Company's products to the RBOCs
or other customers will continue or that the Company's customer base will
become less concentrated. See Subparagraph c. (viii) of this Item 1 --
"Factors That May Affect Future Results -- Potential Competition from RBOCs and
AT&T." The loss of one or more of the RBOCs as a customer, the reduction of
orders for the Company's products, or a failure or delay in the deployment of
the Company's products by the RBOCs could materially and adversely affect the
Company. See Subparagraph c. (x) of this Item 1 -- "Factors That May Affect
Future Results -- Fluctuations in Operating Results." In addition, recent
contract negotiations with certain RBOCs have resulted in lower prices for
selected products. See Item 7 -- "Management's Discussion and Analysis of
Financial Condition and Results of Operations." In addition, the RBOCs and the
Company's other customers are significantly larger than, and are able to exert
a high degree of influence over, the Company.

Prior to selling its products to an RBOC or other Telco, the Company
must undergo a potentially lengthy product qualification process. Thereafter,
the Company continually submits successive generations of its current products
as well as new products to such customers for qualification. Although the
Company has been able to successfully obtain such qualifications in the past,
there can be no assurance that the Company's products will maintain their
current or obtain future qualifications. Furthermore, Telco work force
reductions and staff reassignments have in the past delayed the product
qualification process. There can be no assurance that such delays, if
experienced in the future, will not have a material adverse effect on the
Company. See Subparagraph b. (iv) of this Item 1 -- "Narrative Description of
Business -- Customers."

The Company is a party to multi-year supply contracts with virtually
all of its major customers which govern the terms and conditions applicable to
purchases of the Company's products, including prices, but do not establish
minimum purchase commitments. Because such contracts generally prohibit the
Company from increasing the price of its products sold thereunder for stated
periods of time, any significant increase in the Company's costs during such
periods which the Company is unable to offset with a corresponding increase in
prices due to such prohibitions could have a material adverse effect on the
Company. These contracts are entered into in the ordinary course of the
Company's business and are common and customary within the Company's industry.
Because the Company's customer contracts do not establish minimum purchase
commitments and may generally be terminated by the customer upon short notice,
the Company is not substantially dependent on any of such contracts. Rather,
it is the Company's relationships with its customers which are material to the
Company's business and upon which the Company's business is substantially
dependent. Accordingly, the expiration or termination of any such contract
would not, in and of itself, have a material adverse effect on the Company or
its operations, provided that the Company's good relationships with its
customers remained intact. See Subparagraph b. (v) of this Item 1 --
"Narrative Description of Business -- Marketing, Sales and Distribution."

(IV) HIGHLY COMPETITIVE INDUSTRY

The markets for the Company's products are highly competitive,
especially with respect to price, product features, quality and conformance to
industry standards. The Company's competitors in the United States and
elsewhere are numerous and the Company expects its competition to increase in
the future both from existing and new competitors, including possibly the RBOCs
and AT&T. Increased competition could reduce gross profit margins and may
require increased spending by the Company on product development and sales and
marketing, or may otherwise adversely affect the Company. The Company has
generally been required to reduce the selling prices of its products over time
to meet increasing competition and will likely be required to do so in the
future. The Company's ability to maintain or increase net sales will depend
largely upon its ability to increase unit sales volumes of its products to
counter declines in the average sales prices of its products. Declining
average sales prices would also adversely affect gross margins on the Company's
products if not offset by reductions in the Company's cost of sales. There can
be no assurance that the Company will be able to increase unit sales volumes of
its products, reduce its costs of sales of such products or maintain or
increase revenues or gross margins attributable to such products. Most of the
Company's competitors and potential competitors have significantly greater
financial, technological, manufacturing, marketing and personnel resources and
experience than the Company. In addition, certain of the Company's competitors
have long-standing relationships with certain Telcos which may adversely affect
the

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Company's ability to successfully compete for business at these Telcos. See
Subparagraph b. (ix) of this Item 1 -- "Narrative Description of Business --
Competition."

(V) ACCUMULATED DEFICIT AND HISTORY OF LOSSES

At July 27, 1996, the Company had an accumulated deficit of
approximately $56.6 million, which is partially attributable to a write-off of
goodwill effective as of the end of Fiscal 1992 in the net amount of
approximately $48.1 million. Although the Company recorded net losses for each
of the years in the three year period ended July 31, 1993, the Company achieved
profitability on an annual basis in Fiscal 1994, 1995 and 1996. There can be
no assurance that the Company's net sales or profits will grow on a quarterly
or annual basis in the future. See Subparagraph c. (x) of this Item 1 --
"Factors That May Affect Future Results -- Fluctuations in Operating Results"
and Item 7 -- "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

(VI) DEPENDENCE ON CERTAIN SUPPLIERS

Certain key components which are required to manufacture the Company's
products are available from only one source. Such components include the
Company's application specific integrated circuits, which are built to Company
specifications, and its proprietary design integrated circuits, which are the
design and property of the manufacturer from which they are purchased. The
Company generally obtains its components on a purchase order basis.
Accordingly, there can be no assurance that the Company will be able to
continue to obtain sufficient quantities of key components as required or that
such components, if obtained, will be available to the Company on commercially
favorable terms. Further, certain components require an order lead time of up
to six months. Failure by the Company to order sufficient quantities of
components in advance could prevent the Company from meeting customer demand
for its products.

The Company has been able to adjust its order lead times and/or
promised delivery dates to avoid material delivery delays of its products.
However, there can be no assurance that the Company will be able to continue to
adjust its order lead times and/or promised delivery dates to avoid material
delivery delays of its products in the future. Under certain of the Company's
supply contracts, a delay in the delivery of products would permit the customer
to cancel the purchase order or, in limited circumstances, assess a late
delivery charge. In addition, late deliveries could adversely affect the
Company's ability to obtain additional sales from a particular customer. The
Company's inability to obtain sufficient quantities of key components as
required, or to develop alternative sources of such components on commercially
favorable terms if and as required in the future, could result in delays or
reductions in product shipments or could otherwise have a material adverse
effect on the Company's customer relationships and, consequently, on its
business, results of operations and financial condition. See Subparagraph c.
(iii) of this Item 1 -- "Factors That May Affect Future Results -- Reliance on
Certain Customers" and Subparagraph b. (viii) of this Item 1 -- "Narrative
Description of Business -- Manufacturing and Suppliers."

(VII) INCREASED INVENTORY LEVELS AND NEED TO MAKE ADVANCE PURCHASE
COMMITMENTS

To respond to anticipated customer demand, the Company maintains high
inventory levels. In addition, at the request of three of its customers, the
Company has entered into arrangements to maintain certain of its finished goods
inventory at the various locations of such customers. Although the Company
believes these arrangements facilitate sales to its customers, they result in
higher levels of inventory than are necessary in the absence of such
arrangements. Maintaining high inventory levels substantially increases the
risk that the Company's profitability and results of operations may from time
to time be materially and adversely affected by inventory obsolescence. To
procure adequate supplies of certain components, the Company must regularly
make advance commitments to purchase relatively large quantities of such
components. At July 27, 1996, the Company had open noncancellable purchase
commitments of approximately $4.5 million, covering several different
components. The inability of the Company to incorporate such components in its
products could have a material adverse effect on the Company. See

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Subparagraph b. (viii) of this Item 1 -- "Narrative Description of Business --
Manufacturing and Suppliers" and Subparagraph b. (v) of this Item 1 --
"Narrative Description of Business -- Marketing, Sales and Distribution."

(VIII) POTENTIAL COMPETITION FROM RBOCS AND AT&T

The Telecommunications Act has generally eliminated the restrictions
which had previously prohibited the RBOCs from manufacturing telecommunications
equipment (subject to first satisfying certain conditions designed to
facilitate local exchange competition and receipt of prior approval by the
Federal Communications Commission). These restrictions had been imposed under
the Modification of Final Judgment, which governed the structure of the 1984
divestiture by AT&T of its local operating telephone company subsidiaries. The
passage of the Telecommunications Act may have an adverse effect on the Company
because the RBOCs, which are presently the Company's principal customers, may
now become manufacturers of some or all of the products currently manufactured
and sold by the Company and, consequently, may no longer purchase
telecommunications equipment produced by the Company at the levels historically
experienced.

In addition, the operation, as an independent entity, of Lucent after
its spin-off from AT&T may have an adverse effect on the business of the
Company. There can be no assurance that this will not have a material adverse
effect on the Company. See Subparagraph c. (xi) of this Item 1 -- "Factors
That May Affect Future Results -- Proprietary Rights and Risks of Third Party
Claims of Infringement."

(IX) GOVERNMENT REGULATION

The telecommunications industry is subject to regulation in the United
States and other countries. While such regulation does not typically apply
directly to the Company, federal and state regulatory agencies and commissions
regulate most of the Company's domestic customers. The effects of such
regulations, which are under continuous review and subject to change, on the
Company's customers may adversely affect the Company. For instance, the sale
of the Company's products may be materially and adversely affected by the
imposition upon certain of the Company's customers of common carrier tariffs,
the taxation of telecommunications services and regulatory policies affecting
terms on which common carriers conduct their business.

The Company's business and operating results may also be adversely
affected by the imposition of certain tariffs, duties and other import
restrictions on components which the Company obtains from non-domestic
suppliers, or by the imposition of export restrictions on products which the
Company sells internationally.

(X) FLUCTUATIONS IN OPERATING RESULTS

The Company's operating results have fluctuated and may continue to
fluctuate as a result of various factors affecting the Company and its
competitors including, but not limited to, the timing of significant orders and
shipments, competition, new product introductions by the Company or its
competitors, production or quality problems, availability and cost of
components and changes in general economic conditions. There can be no
assurance that the Company's customers will not defer or delay orders contrary
to their historical patterns or that they will not change their ordering
patterns with respect to the Company's products. Because of the relatively
fixed nature of most of the Company's operating expenses, any shortfall in net
sales in a particular quarter could have a material adverse effect on the
Company's operating results in that quarter and may result in adverse
fluctuation in the market price of the Common Stock. See Subparagraph c. (vi)
of this Item 1 -- "Factors That May Affect Future Results -- Dependence on
Certain Suppliers" and Paragraph a. of Item 8 -- "Financial Statements and
Supplementary Data -- Quarterly Financial Data."

-17-
<PAGE> 18

(XI) PROPRIETARY RIGHTS AND RISKS OF THIRD PARTY CLAIMS OF INFRINGEMENT

The telecommunications industry is characterized by an increasing
number of patents and frequent litigation based on allegations of patent
infringement. From time to time, third parties may assert exclusive patent,
copyright and other intellectual property rights to technologies which are
important to the Company. While the Company does not believe that its present
products and technology infringe the intellectual property rights of others,
there can be no assurance that third parties will not assert infringement
claims against the Company or that any such assertions will not result in
costly litigation. Further, there can be no assurance that the Company would
prevail against any such claims or that licenses of any third-party
intellectual property would be available to the Company on commercially
reasonable terms. In addition, a substantial number of the Company's products
are intended to plug into telephone network equipment designed and manufactured
by third parties, some of which are competitors of the Company. The design or
modification of such equipment so that it is incompatible with the Company's
products could adversely affect the Company's ability to maintain its current
level of, or achieve additional, net sales. The inability of the Company to
develop products for such equipment which do not infringe the intellectual
property rights associated with such equipment, or to obtain the right to use
such intellectual property on commercially reasonable terms, could have a
material adverse effect on the Company. In addition, any infringement claims
or litigation against the Company could have a material adverse effect on the
Company.

The Company is a party to agreements with certain of the RBOCs
pursuant to which it licenses certain telecommunications technology, including
digital channel banks and signal decoding systems, in connection with the
manufacture of its products. The terms of virtually all of these licenses
agreements expired at varying times during Fiscal 1995, subject to a right of
continuation at an increased royalty rate with respect to specified Company
products. The Company is currently evaluating its continuing obligations under
these agreements and the extent to which its current products employ technology
covered by the unexpired patents licensed thereunder. There can be no
assurance that the results of the Company's evaluation of these agreements
and/or subsequent negotiations with the RBOCs will not result in the Company's
payment of royalties at increased rates with respect to all or a substantial
number of the Company's products. Any substantial increase in royalty rates
could have a material adverse effect on the Company.

Further, in the context of its discussions with AT&T and Lucent, Lucent
indicated that the Company's initial ISDN product may make use of certain of
Lucent's patented technology and has expressed a willingness to enter into
licensing negotiations with respect to such technology. The Company is
currently evaluating Lucent's claim. However, there can be no assurance as to
the resolution of this matter. See Subparagraph c. (xi) of this Item 1 --
"Factors That May Affect Future Results -- Proprietary Rights and Risks of
Third Party Claims of Infringement." See Subparagraph c. (viii) of this Item 1
- -- "Factors That May Affect Future Results -- Potential Competition from RBOCs
and AT&T."

-18-
<PAGE> 19

(XII) POTENTIAL PRODUCT RECALLS AND WARRANTY EXPENSES

The Company's products are required to meet rigorous standards imposed
by its customers, including written technical requirements and various
mechanical, electrical performance, environmental operating and storage
conditions, and to interface in a complex and changing environment with
telecommunication network equipment produced by numerous other suppliers. In
the event there are material deficiencies or defects in the design or
manufacture of the Company's products or if such products become incompatible
with existing third-party network equipment, the affected products could be
subject to a recall. Although the Company has not experienced any complete
recall of a product from the field in the past, the Company has from time to
time agreed to upgrade certain of its products in response to product design
issues raised by certain of its customers. There can be no assurance that the
Company will not experience a material product recall in the future. Any
product recall and associated negative publicity could have a material adverse
effect on the Company.

Most of the Company's products carry a seven year limited warranty,
which generally covers defects in materials or workmanship and failure to meet
published specifications, but excludes damages caused by improper use and all
other express or implied warranties. For the past five fiscal years, the
Company's warranty expense has been relatively insignificant. Although the
Company maintains a comprehensive quality control program and has a high level
of confidence in the quality and reliability of its products, there can be no
assurance that in the future certain of the Company's products will not suffer
from defects or other deficiencies. Such defects or deficiencies could result
in warranty returns in excess of those historically experienced by the Company
and could have a material adverse effect on the Company. In addition, the
Company is a party to supply contracts with virtually all of its major
customers. Although these supply contracts do not establish minimum purchase
commitments, they may, under certain circumstances, require the Company to
accept returns of products or indemnify such customers against certain
liabilities arising out of the use of the Company's products. Although to date
the Company has not experienced any significant product returns or
indemnification claims under these contracts, any such claims or returns could
have a material adverse effect on the Company. See Subparagraph b. (vii) of
this Item 1 -- "Narrative Description of Business -- Customer Service and
Support." Further, these contracts generally prohibit the Company from
increasing the price of its products sold thereunder for stated periods of time
and, accordingly, any significant increase in the Company's costs which it is
unable to offset with a corresponding price increase due to such prohibitions
could have a material adverse effect on the Company.

(XIII) POSSIBLE VOLATILITY OF STOCK PRICE

The Company believes factors such as announcements of new products or
technological innovations by the Company or third parties, as well as
variations in the Company's results of operations, the gain or loss of
significant customers, legislative or regulatory changes, general trends in the
industry, market conditions, analysts' estimates, the stock market and other
events or factors may cause the market price of the Common Stock to fluctuate
significantly. In addition, the stock market has experienced extreme price and
volume fluctuations which have particularly affected the market price for many
high technology companies and which have often been unrelated to the operating
performance of these companies. These broad market fluctuations may adversely
affect the market price of the Common Stock.

-19-
<PAGE> 20

ITEM 2 - PROPERTIES

The Company's headquarters and principal administrative, engineering
and manufacturing facilities are located in a facility containing approximately
105,000 square feet located on approximately six acres of land in St. Charles,
Illinois. The Company leases this building under an operating lease
arrangement which expires in September 1998. The Company believes its current
facilities are suitable for and adequate to support its present level of
operations and believes that anticipated growth through September 1998 can be
accommodated by either expanding its existing facility and/or leasing
additional space near that facility.

On August 20, 1996, the Company entered into an agreement to purchase
land for approximately $1.7 million. The Company plans to build a
manufacturing facility on this land in Fiscal 1997. The Company estimates the
cost of the manufacturing facility to be approximately $18.0 million and
expects to fund the purchase price of the land and the construction of the
manufacturing facility from existing cash, cash flows and possibly debt.

The Company is also currently negotiating a two year lease on a
building containing approximately 45,600 square feet located in West Chicago,
Illinois. The Company plans to relocate a small portion of its manufacturing
facility and the Broadband marketing and engineering group to the West Chicago
building.

ITEM 3 - LEGAL PROCEEDINGS

The Company is from time to time involved in various legal proceedings
arising in the ordinary course of its business. In addition, the Company has
from time to time been notified by others who assert exclusive rights to
certain technology. The Company evaluates these claims on a case by case basis
and enters into licensing arrangements when it appears necessary or desirable
to do so. The Company believes the resolution of any pending matters will not
materially affect the Company's financial position or results of operations.
See Subparagraph c. (xi) of Item 1 -- "Factors That May Affect Future Results
- -- Proprietary Rights and Risks of Third Party Claims of Infringement."

In January 1995, the United States Environmental Protection Agency
("EPA") identified the Company as one of a total of 128 potentially responsible
parties with respect to a scrap and salvage yard in Illinois (the "Site") which
has been the subject to a removal action pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"). The Company
has reported to the EPA that it sent limited quantities of scrap to the Site
and believes that it disposed of a small amount of scrap at the Site as
compared to the other potentially responsible paries, based on a review of
records submitted to the EPA by such parties. The Company has informally
settled this matter for $10,000.

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

None.

-20-
<PAGE> 21

PART II

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

The authorized capital stock of the Company consists of 15,000,000
shares of Common Stock, $.01 par value per share, (the "Common Stock") and
750,000 shares of Preferred Stock, par value $.01 per share (the "Preferred
Stock"). As of October 23, 1996, 6,425,239 shares of Common Stock, were
outstanding and no shares of Preferred Stock were outstanding.

The Common Stock began trading on the Nasdaq National Market on June
9, 1995 under the symbol "TLTN." Prior to that date, there was no market for
the Company's Common Stock. The following table sets forth for the period
indicated the high and low closing sale prices for the Common Stock as reported
on the Nasdaq National Market:

<TABLE>
<CAPTION>
PRICE RANGE OF COMMON STOCK
---------------------------

HIGH LOW
---- ---
<S> <C> <C>
FISCAL 1995:
-----------

Fourth Quarter (from June 9, 1995 through July 29, 1995) $22 1/2 $16 1/8

FISCAL 1996:
-----------

First Quarter (from July 30, 1995 through October 28, 1995) $33 $20
Second Quarter (from October 29, 1995 through January 27, 1996) $46 3/4 $28
Third Quarter (from January 28, 1996 through April 27, 1996) $51 $39 3/4
Fourth Quarter (from April 28, 1996 through July 27, 1996) $57 1/4 $35

FISCAL 1997:
-----------

First Quarter (from July 28, 1996 through October 23, 1996) $52 3/4 $32
</TABLE>

On October 23, 1996, the last reported sale price of the Common Stock
as reported on the Nasdaq National Market was $36.75 per share. On that same
date, there were 120 holders of record of the Common Stock.

The Company has not paid any dividends on its capital stock since
1988. Restrictions or limitations on the payment of dividends may be imposed
under the terms of credit agreements or other contractual obligations. The
terms of the Bank Facility prohibit the Company from declaring and paying in
any fiscal year dividends which exceed, in the aggregate, 50% of the Company's
net income for the immediately preceding fiscal year. See Paragraph c. of Item
7 -- "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources." In the absence of such
restrictions or limitations, the declaration and payment of dividends will be
at the sole discretion of the Board of Directors of the Company and subject to
certain limitations under the General Corporation Law of the State of Delaware.
The timing, amount and form of dividends, if any, will depend, among other
things, on the Company's results of operations, financial condition, cash
requirements, plans for expansion and other factors deemed relevant by the
Board of Directors. The Company intends to retain any future earnings for use
in its business and therefore does not anticipate paying any cash dividends in
the foreseeable future.

-21-
<PAGE> 22

ITEM 6 - SELECTED FINANCIAL DATA

The following selected financial data is qualified by reference to,
and should be read in conjunction with, the financial statements and the notes
thereto included under Paragraph b. of Item 8 of this Report. The statement of
operations data set forth below with respect to Fiscal 1994, 1995 and 1996 and
the balance sheet data at July 29, 1995 and July 27, 1996 are derived from, and
are qualified by reference to, the financial statements as audited by Ernst &
Young LLP included under Paragraph b. of Item 8 of this Report, and should be
read in conjunction with those financial statements and notes thereto. The
statement of operations data set forth below with respect to Fiscal 1992 and
1993 and the balance sheet data at July 25, 1992, July 31, 1993 and July 30,
1994 are derived from the Company's audited financial statements not included
in this Report.

SELECTED HISTORICAL FINANCIAL DATA(1)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales . . . . . . . . . . . . . . . . . . . $28,994 $39,365 $49,454 $62,052 $85,913
Cost of sales . . . . . . . . . . . . . . . . . 19,861 26,576 31,130 35,991 46,644
------ ------ ------ ------ ------
Gross profit . . . . . . . . . . . . . . . . . 9,133 12,789 18,324 26,061 39,269
------ ------ ------ ------ ------
Operating expenses:
Sales and marketing . . . . . . . . . . . . 3,347 4,016 4,914 5,908 7,309
Research and development . . . . . . . . . . 3,979 4,018 4,862 5,337 7,944
General and administrative . . . . . . . . . 2,067 2,236 2,536 3,332 4,159
Amortization of intangibles(2) . . . . . . . 1,286 -- 3 93 5
Write-off of goodwill . . . . . . . . . . . 48,067 -- -- -- --
------ ------- -------- ------ ------
Total operating expenses . . . . . . . . . . . 58,746 10,270 12,315 14,670 19,417
------ ------ ------ ------ ------
Income (loss) from operations . . . . . . . . . (49,613) 2,519 6,009 11,391 19,852
Other income (expense):
Interest . . . . . . . . . . . . . . . . . . (5,468) (5,622) (5,978) (8,501)(3) (18)
Other . . . . . . . . . . . . . . . . . . . 36 (204) 27 (187) 783
------ ------- ----- ------- ------
Income (loss) before income tax provision
(benefit) and extraordinary items . . . . . . (55,045) (3,307) 58 2,703 20,617
Income tax provision (benefit) . . . . . . . . (100) -- 50 (2,038)(4) 8,453
Income (loss) before extraordinary items . . . (54,945) (3,307) 8 4,741 12,164
Extraordinary items(5) . . . . . . . . . . . . -- -- -- 411 --
-------- ------- ------- ------ ------
Net income (loss) . . . . . . . . . . . . . . . $(54,945) $(3,307) $ 8 $4,330 $12,164
========= ======== ======= ====== ------
Net income per common share . . . . . . . . . . $ 1.86
Average common shares outstanding . . . . . . . 6,552,339
Pro forma earnings per share (unaudited)(6) . . $ .63 $ 1.19
Pro forma average common shares (unaudited)(6) 5,943,395 5,951,485

BALANCE SHEET DATA:
Working capital . . . . . . . . . . . . . . . . $ 1,412 $ 2,205 $ 3,292 $10,188 $ 35,901
Total assets . . . . . . . . . . . . . . . . . 13,538 15,415 19,109 28,699 57,284
Long-term debt, net of current portion . . . . 46,150 49,694 50,105 -- --
Stockholders' equity (deficit) . . . . . . . . (39,770) (43,077) (43,069) 15,417 42,645
</TABLE>
______________________________
(footnotes on following page)

-22-
<PAGE> 23

__________________________________________________
(footnotes to table on preceding page)

(1) The Company's fiscal year consists of four 13 week quarters, with each
of the first three quarters ending on the last Saturday of such
quarter and the fourth quarter ending on the last Saturday in July.

(2) Includes in Fiscal 1992 amortization of goodwill recorded by the
Company in connection with the Acquisition. See Subparagraph a.
(i) of Item 1 -- "General Development of Business -- Background."

(3) Fiscal 1995 includes approximately $2.9 million of additional interest
expense resulting from the accretion in the aggregate outstanding
principal amount of a portion of the Company's outstanding long-term
indebtedness. Substantially all of the Company's long-term indebtedness
was repaid in full upon consummation of the IPO and the other components
of the Recapitalization. See Subparagraph a. (ii) of Item 1 -- "General
Development of Business -- The Recapitalization." See also Item 7 --
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."

(4) In Fiscal 1995, the Company eliminated its valuation allowance for net
deferred tax assets of approximately $3.4 million. See Subparagraph b.
(ii) of Item 7 -- "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations -- Fiscal
1995 Compared with Fiscal 1994" and Note 10 of Notes to Financial
Statements under Paragraph b. of Item 8 -- "Financial Statements and
Supplementary Data -- Financial Statements."

(5) Extraordinary items include the Prepayment Penalty and the write-off of
the unamortized loan financing costs of $162,500 related to a portion of
the Company's long-term indebtedness which was repaid upon consummation
of the IPO and the other components of the Recapitalization, net of an
income tax benefit of $251,750 related to the Prepayment Penalty and
write-off. See Subparagraph a. (ii) of Item 1 -- "General Development
of Business -- The Recapitalization," Item 7 -- "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Notes
1 and 14 of Notes to Financial Statements under Paragraph b. of Item 8
-- "Financial Statements and Supplementary Data -- Financial
Statements."

(6) Pro forma earnings per share and average number of shares for Fiscal
1994 and Fiscal 1995 give effect to the IPO and the other components of
the Recapitalization, as if they occurred as of August 1, 1993. See
Subparagraph a. (ii) of Item 1 -- "General Development of Business --
The Recapitalization."

-23-
<PAGE> 24

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

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

The statements contained in the following Management's Discussion and
Analysis of Financial Condition and Results of Operations which are not
historical are "forward looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements, which are
generally followed (and therefore identified) by a cross reference to "Factors
That May Affect Future Results," represent the Company's present expectations
or beliefs concerning future events. The Company cautions that such statements
are qualified by important factors that could cause actual results to differ
materially from those in the forward looking statements, including the factors
described below under "Factors That May Affect Future Results." Results
actually achieved thus may differ materially from expected results included in
these statements.

A. GENERAL

The Company designs, manufactures and markets a broad range of
transmission products, such as channel units, repeaters and termination units,
that are used by Telcos to provide voice and data services over the existing
telephone network, primarily in the Local Loop. In recent years, the demand
for high speed digital transmission over the telephone network has increased
rapidly as a result of the demand for high capacity voice lines and the growing
communications requirements of LAN interconnections, WANs, on-line data
networks (which typically connect point-of-sale credit card authorization
terminals, automatic teller machines, lottery terminals and reservation
stations to a central computer), the Internet, other on-line data services and,
to a lesser extent, video conferencing. The Company's current products enhance
the transmission of voice and data over the copper network and permit the
Telcos to maximize use of the existing infrastructure of copper wireline.

-24-
<PAGE> 25

B. RESULTS OF OPERATIONS

The following table sets forth certain statements of operations data as
a percentage of net sales for Fiscal 1994, 1995 and 1996. The Company's fiscal
year typically consists of 52 weeks (four 13 week quarters), with every fifth
year consisting of 53 weeks.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY
----------------------
<S> <C> <C> <C>
1994 1995 1996
---- ----- -----
Net Sales . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of sales . . . . . . . . . . . . . . . . . . . 62.9 58.0 54.3
----- ----- ------
Gross profits . . . . . . . . . . . . . . . . . . . 37.1 42.0 45.7
----- ----- ------
Operating Expenses:
Sales and marketing . . . . . . . . . . . 9.9 9.5 8.5
Research and development . . . . . . . . . 9.9 8.6 9.3
General and administrative . . . . . . . . 5.1 5.4 4.8
Amortization of intangibles . . . . . . . -- 0.1 --
------ ------ -----
Total operating expenses . . . . . . . . . 24.9 23.6 22.6
===== ====== =====
Income from operations . . . . . . . . . . . . . . 12.2 18.4 23.1
Interest expense . . . . . . . . . . . . . . . . . (12.1) --
(13.7)(1)
Other expenses . . . . . . . . . . . . . . . . . . -- 0.3 (0.9)
------ ------ -----
Income before income taxes and extraordinary items 0.1 4.4 24.0
Income tax provision (benefit) . . . . . . . . . . 0.1 (3.3)(2) 9.8
----- ----- -----
Income before extraordinary items . . . . . . . . -- 7.7 14.2
Extraordinary items . . . . . . . . . . . . . . . . -- (0.7)(3) --
------ ----- -----
Net income . . . . . . . . . . . . . . . . . . . . -- 7.0% 14.2%
====== ===== =====
</TABLE>

____________________________

(1) Includes approximately $2.9 million of additional expense (4.7%
of net sales) resulting from the accretion of the outstanding principal
amount of a portion of the Company's long-term indebtedness on August 1,
1994. Substantially all of the Company's long-term indebtedness was repaid
upon consummation of the IPO and the other components of the
Recapitalization. See Subparagraph a. (ii) of Item 1 -- "General
Development of Business -- The Recapitalization." See also Subparagraph b.
(ii) of this Item 7 -- "Results of Operations -- Fiscal 1995 Compared with
Fiscal 1994" and Note 7 of Notes to Financial Statements under Paragraph b.
of Item 8 -- "Financial Statements and Supplementary Data."

(2) Includes elimination of a valuation allowance for net deferred
tax assets of approximately $3.4 million (5.4% of net sales). See
Subparagraph b. (ii) of this Item 7 -- "Results of Operations -- Fiscal
1995 Compared with Fiscal 1994" and Note 10 of Notes to Financial
Statements under Paragraph b. of Item 8 -- "Financial Statements."

(3) Includes the Prepayment Penalty and the write-off of the
unamortized loan financing costs of $162.500 (0.3%) of net sales) related
to a portion of the Company's long-term indebtedness which was repaid upon
consummation of the IPO and the other components of the Recapitalization,
net of an income tax benefit of $251,750 (0.4% of net sales) related to the
Prepayment Penalty and write-off. See Subparagraph a. (ii) of Item 1 --
"General Development of Business -- The Recapitalization," Subparagraph b.
(ii) of this Item 7 -- "Results of Operations -- Fiscal 1995 Compared with
Fiscal 1994" and Notes 1 and 14 of Notes to Financial Statements under
Paragraph b. of Item 8 -- "Financial Statements and Supplementary Data --
Financial Statements."

-25-
<PAGE> 26

(i) FISCAL 1996 COMPARED TO FISCAL 1995

NET SALES. Net sales for Fiscal 1996 increased 38.5%, or approximately
$23.9 million, to approximately $85.9 million, from approximately $62.1 million
in Fiscal 1995. The increase in net sales was due to an increase in unit
volume sales of all product lines except VF. Increases in unit volume sales
were recorded by T1, DDS, ISDN and POTS/SPOTS products of approximately $11.8
million, $7.4 million, $3.5 million and $2.6 million, respectively, which was
partially offset by a $1.9 million decrease in unit volume sales of VF
products. Unit volume sales of the Company's T1 products increased primarily
as a result of qualifying certain new products for sale during Fiscal 1995 and
the first quarter of Fiscal 1996. In addition, the Company experienced higher
sales of existing T1 products to certain customers who had previously purchased
lesser amounts of such products. The increase in unit volume DDS sales
resulted primarily from an increase in the number of RBOCs that had qualified
DDS products from two in the first quarter of Fiscal 1995 to all seven RBOCs by
the third quarter of Fiscal 1996. Sales of the Company's ISDN products
commenced in the third quarter of Fiscal 1995. By the fourth quarter of Fiscal
1996 five RBOCs and GTE had qualified one or more ISDN products for use.
POTS/SPOTS unit volume sales increased due to significant sales of 2FX0, a new
product, at two RBOCs in Fiscal 1996. Unit volume sales of VF products
declined as a result of the gradual decline, which the Company expects will
continue, in overall demand for analog VF products as telecommunication
applications increasingly require the improved speed and reliability offered by
digital transmission. See Subparagraph c. (i) of Item 1 -- "Factors That May
Affect Future Results -- Dependence on Two Product Lines."

GROSS PROFIT. Gross profit in Fiscal 1996 increased 50.7%, or
approximately $13.2 million, to approximately $39.3 million from approximately
$26.1 million for in Fiscal 1995. Gross profit margin for Fiscal 1996
increased to 45.7% from 42.0% for Fiscal 1995. While the increase in gross
profit was primarily attributable to the increase in net sales, the increase in
gross profit margin was due primarily to the ability of the Company to spread
fixed manufacturing overhead costs over a larger revenue base. Other factors
contributing to the increase in gross profit margin were the initial sales at
several customers of products with relatively high gross profit margins, and
reduced labor and material costs for many of the Company's established
products. Further increases in gross profit margin may be difficult to attain
because of recent contract negotiations with certain RBOCs which have resulted
in lower prices for selected products. See Paragraph a. of Item 8 --
"Financial Statements and Supplementary Data -- Quarterly Financial Data." See
Subparagraph c. (iii) of Item 1 -- "Factors That May Affect Future Results --
Reliance on Certain Customers."

SALES AND MARKETING. Sales and marketing expenses in Fiscal 1996
increased 23.7%, or approximately $1.4 million, to approximately $7.3 million
from approximately $5.9 million in Fiscal 1995. As a percentage of net sales,
sales and marketing expenses decreased to 8.5% for Fiscal 1996 from 9.5% for
Fiscal 1995. The increase in the dollar amount of sales and marketing expenses
was due primarily to increased sales commissions resulting from higher sales,
greater expenditures on new product and other marketing promotions and an
increase in expenses resulting from the hiring of additional sales and
marketing personnel.

RESEARCH AND DEVELOPMENT. Research and development expenses in Fiscal
1996 increased 48.8%, or approximately $2.6 million, to approximately $7.9
million from approximately $5.3 million in Fiscal 1995. As a percentage of
total net sales, research and development expenses increased to 9.3% in Fiscal
1996 from 8.6% in Fiscal 1995. The increase in dollar amount of this expenses
was due primarily to increases in personnel associated expenses, such as
recruiting and salaries for newly hired personnel, and related support
equipment. The Company's intention is to increase expenditures for research
and development at a rate greater than its rate of sales growth until its
research and development expenses total 11% to 12% of net annual sales. See
Subparagraph b. (vi) of Item 1 -- "Narrative Description of Business --
Research and Product Development."

GENERAL AND ADMINISTRATIVE. General and administrative expenses in
Fiscal 1996 increased 21.6%, or approximately $700,000, to approximately $4.2
million from approximately $3.4 million in Fiscal 1995. As a percentage of
total net sales, general and administrative expenses decreased to 4.8% in
Fiscal 1996 from 5.5% in Fiscal 1995. The dollar increase in this expense was
largely attributable to accruals for employee bonuses that are based, to a
significant degree, on Company performance; higher accruals for license fees;
and to additional professional fees and insurance expenses incurred as a result
of being a publicly-owned company during Fiscal 1996 as opposed to only two
months of Fiscal 1995.

INTEREST. The Company incurred $18,000 interest expense for Fiscal
1996, compared to approximately $8.5 million for Fiscal 1995. The decrease in
interest expense was due to the repayment of substantially all of the Company's
long-term indebtedness upon consummation of the IPO and the other components of
the Recapitalization in June 1995. During the first

-26-
<PAGE> 27

quarter of Fiscal 1996, the remaining long-term indebtedness, a note payable to
a former shareholder, was also repaid in full. See Subparagraph a. (ii) of
Item 1 -- "General Development of Business -- The Recapitalization."

INCOME TAXES. A provision for income taxes of approximately $8.5
million was recorded for Fiscal 1996. This provision is a function of the
level of the Company's net income before income taxes in Fiscal 1996. In
Fiscal 1995, a benefit from income taxes of approximately $2.0 million was
recorded. This benefit resulted from the elimination of the Company's
valuation allowance for net deferred tax assets in Fiscal 1995 as a consequence
of the Recapitalization which reduced the Company's debt burden and thus
provided the Company the ability to generate taxable income.

(ii) FISCAL 1995 COMPARED TO FISCAL 1994

NET SALES. Net sales for Fiscal 1995 increased 25.5%, or approximately
$12.6 million, to approximately $62.1 million, from approximately $49.5 million
in Fiscal 1994. The increase in net sales was due primarily to increases in
unit volume sales of T1 and DDS products of approximately $10.7 million and
$4.0 million, respectively, and sales of the Company's initial ISDN product of
approximately $1.6 million. These increases were partially offset by a
decrease in unit volume sales of POTS/SPOTS and VF products of approximately
$2.1 million and $1.7 million, respectively. See Subparagraph c. (ii) of Item 1
- -- "Factors That May Affect Future Results -- Reliance on Certain Customers."

Unit volume sales of the Company's T1 and DDS products increased
primarily as a result of the Company qualifying certain of these products for
sale at the RBOCs during late Fiscal 1994 and early Fiscal 1995. Additional
RBOCs qualified DDS products in the fourth quarter of Fiscal 1995. The
Company's initial ISDN product was qualified at four RBOCs during the second
and third quarters of Fiscal 1995 and sales of this ISDN product commenced in
the third quarter of Fiscal 1995.

Unit volume sales of the Company's VF products for Fiscal 1995
decreased primarily as a result of the decline in overall demand for analog VF
products as telecommunication applications increasingly require the improved
speed and reliability offered by digital transmission. The decrease in unit
volume sales of the Company's POTS/SPOTS products resulted primarily from a
decline in the number of units purchased by two RBOCs. Declining average
selling prices for the Company's VF and POTS/SPOTS products also contributed to
the decrease in net sales of these products.

GROSS PROFIT. Gross profit in Fiscal 1995 increased 42.2%, or
approximately $7.7 million, to approximately $26.1 million from approximately
$18.3 million in Fiscal 1994. Gross profit margin for Fiscal 1995 increased to
42.0% from 37.1% for Fiscal 1994. While the increase in gross profit was
primarily attributable to the increase in net sales, the increase in gross
profit margin was due primarily to the ability to spread fixed manufacturing
overhead costs over a larger revenue base and, to a lesser extent, reduced
labor expense and material costs for a majority of the Company's products.
Gross profit margin also benefited from the Company's ongoing cost reduction
efforts. The foregoing factors, however, were partially offset by the effect
of a change in product mix, as sales of the Company's VF products, which are at
higher margins than sales of the Company's other products, comprised a lower
percentage of the Company's total net sales for Fiscal 1995 compared to Fiscal
1994.

The gross profit margin of 46.2% in the fourth quarter of Fiscal 1995
was substantially above that of any other quarter in Fiscal 1995 or any quarter
in Fiscal 1994. This unusually high margin was attributable primarily to a
substantial increase in quarterly sales volume and a more favorable product
sales mix between and within the Company's product lines compared to the first
three quarters of Fiscal 1995 in each quarter of Fiscal 1994. The Company does
not expect to attain this level of gross profit margin going forward with its
anticipated sales mix unless and until the Company achieves quarterly sales
significantly in excess of those achieved in the fourth quarter of Fiscal 1995.
See Paragraph a. of Item 8 -- "Financial Statements and Supplementary Data --
Quarterly Financial Data."

SALES AND MARKETING. Sales and marketing expenses in Fiscal 1995
increased 20.2%, or approximately $1.0 million, to approximately $5.9 million
from approximately $4.9 million in Fiscal 1994. As a percentage of net sales,
sales and marketing expenses decreased to 9.5% for Fiscal 1995 from 9.9% for
Fiscal 1994. The increase in sales and marketing expenses was due primarily to
increased sales commissions generated by higher sales, greater expenditures on
new product and other marketing promotions, and an increase in expenses
resulting from additional personnel.

RESEARCH AND DEVELOPMENT. Research and development expenses in Fiscal
1995 increased 9.8%, or approximately $500,000, to approximately $5.3 million
from approximately $4.9 million in Fiscal 1994. The increase was due primarily
to

-27-
<PAGE> 28

increases in personnel and associated expenses and increases in outside
services and other product development expenses. As a percentage of total net
sales, research and development expenses decreased to 8.6% in Fiscal 1995 from
9.8% in Fiscal 1994. The decrease in research and development expenses as a
percentage of net sales resulted primarily from sales increasing at a faster
rate than the Company was able to add qualified research and development
personnel. The Company intends to increase expenditures for research and
development at a rate greater than its rate of sales growth, with a goal of
increasing its research and development expenses as a percentage of annual net
sales to between approximately 11% to 12% by Fiscal 1998.

GENERAL AND ADMINISTRATIVE. General and administrative expenses in
Fiscal 1995 increased 34.9%, or approximately $900,000, to approximately $3.4
million from approximately $2.5 million in Fiscal 1994. General and
administrative expenses as a percentage of total net sales increased from 5.1%
in Fiscal 1994 to 5.5% in Fiscal 1995. The increase in expenditures was
largely attributable to the Termination Fee of $500,000 paid in connection with
the Recapitalization and to additional expenses incurred as a result of
becoming a publicly-owned company. See Subparagraph a. (ii) of Item 1 --
"General Development of Business -- The Recapitalization." See also Paragraph
c. of this Item 7 -- "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."

INTEREST. Interest expense in Fiscal 1995 increased 42.2%, or
approximately $2.5 million, to approximately $8.5 million from approximately
$6.0 million in Fiscal 1994. The increase in interest expense was due
primarily to an accretion of approximately $2.9 million in the outstanding
principal amount of a portion of the Company's outstanding long-term
indebtedness. Substantially all of the Company's long-term indebtedness was
repaid upon consummation of the IPO and the other components of the
Recapitalization. The Company has incurred minimal interest expense since the
Recapitalization. See Subparagraph a. (ii) of Item 1 -- "General Development
of Business -- The Recapitalization," Paragraph c. of this Item 7 --
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 7 of Notes to Financial
Statements under Paragraph b. of Item 8 -- "Financial Statements and
Supplementary Data -- Financial Statements."

INCOME TAXES. Because the Company had no significant taxable income
for Fiscal 1989 through 1994 and, with its level of debt and related interest
expense, could not reasonably anticipate generating any taxable income in the
foreseeable future, the Company had a valuation allowance for the full value of
net deferred tax assets as of the end of Fiscal 1994 of approximately $3.4
million. In connection with the Recapitalization, the Company eliminated
substantially all of its interest expense and, consequently, expects to have
taxable income for the foreseeable future. Accordingly, the Company eliminated
its valuation allowance for net deferred tax assets in Fiscal 1995. See Notes
1, 7 and 10 of Notes to Financial Statements under Paragraph b. of Item 8 --
"Financial Statements and Supplementary Data -- Financial Statements."

EXTRAORDINARY ITEMS. Extraordinary items include the Prepayment
Penalty of $500,000, and write-off of the unamortized loan financing costs of
$162,500 related to a portion of the Company's long-term indebtedness which was
repaid upon consummation of the IPO and the other components of the
Recapitalization, net of a tax benefit of $251,750 related to the Prepayment
Penalty and write-off. See Subparagraph a. (iii) of Item 1 -- "General
Development of the Business -- The Recapitalization," Paragraph c. of this Item
7 -- "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources" and Notes 1 and 14 of Notes
to Financial Statements under Paragraph b. of Item 8 -- "Financial Statements
and Supplementary Data -- Financial Statements."

C. LIQUIDITY AND CAPITAL RESOURCES

Prior to consummation of the IPO and other components of the
Recapitalization in June 1995, the Company financed its operations and growth
primarily with cash flow from operations, borrowings under the Former Credit
Agreement and the issuance of Series A and Series B Debentures. Since the
consummation of the IPO and the other components of the Recapitalization, the
Company has financed its operations solely with cash flow generated from
operations. At July 27, 1996, the Company had no long-term indebtedness and
had working capital of approximately $35.9 million, which included cash and
cash equivalents of approximately $22.9 million. The increase in working
capital from approximately $10.2 million at the end of Fiscal 1995 was due
primarily to the Second Public Offering that occurred at the beginning of the
second quarter of Fiscal 1996, and to cash flow from operations.

Cash used for capital expenditures was approximately $3.2 million in
Fiscal 1996 compared to approximately $2.4 million for Fiscal 1995. Most of
the expenditures were for the purchase of manufacturing test equipment and
engineering equipment.

-28-
<PAGE> 29

The Company had commitments to purchase raw materials, under purchase contracts
with various vendors totaling approximately $9.7 million at July 27, 1996 and
$13.8 million at July 29, 1995.

As of July 27, 1996, the Company had no material commitments for
capital expenditures. However, on August 20, 1996, the Company entered into an
agreement to purchase land for approximately $1.7 million. The Company plans
to build a manufacturing facility on this land beginning in Fiscal 1997. The
Company estimates the cost of the manufacturing facility to be approximately
$18.0 million and expects to fund the purchase price of the land and the
construction of the manufacturing facility from existing cash, cash flows and
possibly debt.

As of July 27, 1996, the Company had net trade accounts receivable of
approximately $11.9 million, compared to approximately $8.1 million as of the
end of Fiscal 1995. This increase was due primarily to increased net sales and
to a small increase in the average number of days receivables outstanding. For
Fiscal 1996, inventories increased by approximately $4.4 million, from
approximately $7.9 million at the end of Fiscal 1995 to approximately $12.3
million as of July 27, 1996. The increase in inventory was primarily a result
of the Company's effort to acquire sufficient raw material to respond to
anticipated customer demand for both existing and new products. See "Factors
That May Affect Future Results -- Increased Inventory Levels and Need to Make
Advance Purchase Commitments".

In connection with the IPO, the Company entered into a new credit
facility (the "Bank Facility"), which provides, subject to certain restrictions
and based on the Company's accounts receivable and inventory levels, up to
$15.0 million on an unsecured basis for working capital financing. At July 27,
1996, there were no amounts outstanding under the Bank Facility; however, based
on the Company's accounts receivable and inventory levels the Company was
eligible to borrow approximately $14.7 million under the Bank Facility.
Borrowings under the Bank Facility will mature on June 30, 1998 and bear
interest at a floating rate based on (i) LIBOR or the prime rate offered by the
lender from time to time, and (ii) the Company's debt-to-equity ratio,
determined quarterly by the Company. The terms of the Bank Facility prohibit
the Company from declaring and paying dividends in any fiscal year which
exceed, in the aggregate, 50% of the Company's net income for the immediately
preceding fiscal year.

The Company expects that existing cash and cash equivalents, cash from
operations, plus available borrowings under the Bank Facility will be adequate
to fund the Company's working capital needs for the foreseeable future.

D. NET OPERATING LOSS CARRYFORWARDS

At July 27, 1996, the Company had net operating loss carryforwards
("NOLs") of approximately $2.8 million. These NOLs, if not utilized to offset
taxable income in future periods, will expire in the fiscal years 2008 and
2009. See Note 10 of Notes to Financial Statements under Paragraph b. of Item
8 -- "Financial Statements and Supplementary Data -- Financial Statements."

The Company experienced an "ownership change" within the meaning of
Section 382 of the Internal Revenue Code of 1986, as amended (the "Code") upon
consummation of the IPO and the other components of the Recapitalization. The
Company's ability to use its NOLs existing at such time to offset its taxable
income, if any, generated in taxable periods after the ownership will thus be
subject to an annual limitation (the "Annual NOL Limitation") described below.

The amount of the Annual NOL Limitation is determined by multiplying
the value of the Company immediately before the IPO and the federal long-term
tax-exempt rate, as determined under Sections 382(f) and 1274(d) of the Code.
Based on its estimation of the Annual NOL Limitation, the Company believes that
it will be entitled to fully use its NOLs (to the extent the Company generates
taxable income) over the next three fiscal years. The Company's estimation of
the Annual NOL Limitation is based on a determination of the Company's value at
the time of the ownership change and the application of the existing Treasury
regulations, both of which are subject to varying interpretations. In
addition, the Company's NOLs may be subject to reduction prior to the
application of the Annual NOL Limitation due to audit adjustments for taxable
periods ending on or before the consummation of the IPO.

-29-
<PAGE> 30

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

A. QUARTERLY FINANCIAL DATA

The Financial Statements and related Notes to Financial Statements of
the Company identified in the Index to Financial Statements appearing under
Item 14, Exhibits, Financial Statement Schedules and Reports on Form 8-K, are
incorporated herein by reference.

The Company has experienced significant fluctuations in net sales and
operating results from quarter to quarter due to a number of factors and
expects such fluctuations to continue in future periods. Because of the
Company's highly concentrated customer base, net sales and operating results
may vary significantly from quarter to quarter due to the timing of customer
orders or payments. See Subparagraph c. (iii) of Item 1 -- "Factors That May
Affect Future Results -- Reliance on Certain Customers." Additional factors
that may cause the Company's net sales and operating results to vary
significantly from quarter to quarter include, among others: timing of
shipments; disruptions in sources of supply; competition and pricing in the
telecommunication network voice and data transmission products market; new
product introductions by the Company or its competitors; possible recalls;
production or quality problems; timing of new product development; further
expansion of marketing and sales operations; changes in material costs;
regulatory changes; capital spending; and changes in general economic
conditions. The Company has not, to date, experienced seasonality in its
product shipments. Because of the relatively fixed nature of most of the
Company's costs, including personnel and facilities costs, any unanticipated
shortfall in net sales in any quarter could have a material adverse effect on
the Company's operating results in that quarter and may result in adverse
fluctuations in the market price of the Common Stock. See Subparagraph c. (vi)
of Item 1 -- "Factors That May Affect Future Results -- Dependence on Certain
Suppliers" and Subparagraph c. (x) of Item 1 -- "Factors That May Affect Future
Results -- Fluctuations in Operating Results."

-30-
<PAGE> 31

B. FINANCIAL STATEMENTS

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Balance Sheets as of July 29, 1995 and July 27, 1996 . . . . . . . . . . . . . . . . . . . . . . . 33

Statements of Income for the years ended July 30, 1994, July 29,
1995 and July 27, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Statements of Changes in Stockholders' Equity (Deficit) for the years
ended July 30, 1994, July 29, 1995 and July 27, 1996 . . . . . . . . . . . . . . . . . . . . . . 35

Statements of Cash Flows for the years ended July 30, 1994, July 29,
1995 and July 27, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37-44
</TABLE>

-31-
<PAGE> 32

REPORT OF INDEPENDENT AUDITORS (DEFICIT)

To the Stockholders and Board of Directors
Teltrend Inc.

We have audited the accompanying balance sheets of Teltrend Inc. as of
July 29, 1995 and July 27, 1996, and the related statements of income, changes
in stockholders' equity (deficit) and cash flows for each of the years ended
July 30, 1994, July 29, 1995 and July 27, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Teltrend Inc. as of
July 29, 1995 and July 27, 1996, and the results of its operations and its cash
flows for each of the years ended July 30, 1994, July 29, 1995 and July 27,
1996 in conformity with generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

Chicago, Illinois
August 29, 1996

<PAGE> 33

TELTREND INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
JULY 29, JULY 27,
1995 1996
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,416,421 $ 22,889,192
Trade accounts receivable, net of allowance for
doubtful accounts of $102,000 and $260,192 8,099,570 11,940,566
Inventories 7,929,022 12,349,169
Deferred income taxes 2,328,058 2,227,232
Prepaid expenses and other current assets 696,924 1,133,831
------------ ------------
23,469,995 50,539,990
Machinery and equipment 10,539,248 12,554,728
Leasehold improvements 782,712 895,506
Accumulated depreciation (6,962,526) (7,579,651)
----------- -------------
4,359,434 5,870,583
Deferred income taxes 671,942 766,694
Other assets, less accumulated amortization of
$422,098 and $496,357 197,600 106,819
------------ -------------
$28,698,971 $ 57,284,086
=========== =============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 5,413,870 $ 6,017,340
Accrued expenses 6,909,942 8,621,970
Income taxes payable 720,772 --
Current portion of long-term debt 237,464 --
------------ ------------
13,282,048 14,639,310

Stockholders' equity (deficit):
Common stock:
Common stock, $0.01 par value, 15,000,000 shares
authorized and 5,748,679 and 6,422,596 issued and
outstanding respectively 57,487 64,226
Class A Common Stock, convertible into Common
Stock, $0.01 par value, 1,000,000 shares authorized
and 75,122 and none issued and outstanding, respectively 751 --
Additional paid-in capital 84,107,304 99,165,221
Accumulated deficit (68,748,619) (56,584,671)
----------- -----------
15,416,923 42,644,776
----------- -----------
$28,698,971 $57,284,086
=========== ============
</TABLE>

The accompanying notes are an integral part of these financial statements.

-33-
<PAGE> 34

TELTREND INC.

STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------------

JULY 30, JULY 29, JULY 27,
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Net sales $ 49,453,915 $ 62,052,041 $ 85,912,819
Cost of sales 31,129,738 35,991,032 46,643,923
------------ ------------ ------------
Gross profit 18,324,177 26,061,009 39,268,896
Operating expenses:
Sales and marketing 4,914,140 5,907,864 7,308,716
Research and development 4,862,261 5,337,455 7,943,964
General and administrative 2,538,542 3,424,860 4,163,984
------------ ------------ ------------
12,314,943 14,670,179 19,416,664
------------ ------------ ------------
Income from operations 6,009,234 11,390,830 19,852,232
Other expense (income):
Interest expense to related parties 5,925,526 8,422,937 --
Interest expense -- others 52,384 78,419 17,931
Interest income (2,727) (17,350) (826,672)
Other -- net (24,115) 204,306 44,112
------------ ------------ ------------
5,951,068 8,688,312 (764,629)
------------ ------------ ------------
Income before income taxes and
extraordinary items 58,166 2,702,518 20,616,861
Benefit (provision) for income taxes (50,000) 2,038,250 (8,452,913)
------------ ------------ -----------
Income before extraordinary items 8,166 4,740,768 12,163,948
Extraordinary items -- (410,750) --
------------ ------------ -----------
Net income $ 8,166 $ 4,330,018 $ 12,163,948
============ ============ ===========
Net income per common share $ 1.86
============
Average common shares outstanding 6,552,339
============
Pro-forma net income (unaudited) $ 3,744,721 $ 7,105,524
============ ============
Pro-forma net income per common
share (unaudited) $ 0.63 $ 1.19
============ ============
Pro-forma average common shares
outstanding (unaudited) 5,943,395 5,951,485
============ ============
</TABLE>

The accompanying notes are an integral part of these financial statements.

-34-
<PAGE> 35

TELTREND INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
COMMON ADDITIONAL ACCUMULATED
STOCK PAID-IN-CAPITAL DEFICIT
------- --------------- --------------
<S> <C> <C> <C>
Balance, July 31, 1993 $ 3,902 $ 30,006,143 $(73,086,803)
Net income -- -- 8,166
--------- ----------- --------------
Balance, July 30, 1994 3,902 30,006,143 (73,078,637)
Conversion of shares as described in Recapitalization 16,558 (16,558) --
Initial public offering 37,375 54,079,817 --
Options exercised 403 37,902 --
Net income -- -- 4,330,018
----------- ---------------- ---------------
Balance, July 29, 1995 $58,238 $ 84,107,304 $(68,748,619)
Secondary public offering 5,750 14,750,001 --
Options exercised 238 3,581 --
Tax benefit from exercise of stock options -- 304,335 --
Net income -- -- 12,163,948
------------ ---------------- --------------
Balance, July 27, 1996 $ 64,226 $ 99,165,221 $ (56,584,671)
=========== ============== ==============
</TABLE>

The accompanying notes are an integral part of these financial statements.

-35-
<PAGE> 36

TELTREND INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------------------------------
JULY 30, JULY 29, JULY 27,
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 8,166 $ 4,330,018 $ 12,163,948
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 1,785,732 1,336,941 1,741,465
Write-off of deferred financing costs -- 162,500 --
(Gain) loss on sale of equipment (34,322) 191,706 6,739
Issuance of additional Series A and
Series B debentures in lieu of interest payments 3,598,011 3,099,204 --
Changes in certain assets and liabilities:
Accounts receivable (1,404,156) (2,101,261) (3,840,996)
Inventories (2,780,621) 851,478 (4,420,147)
Deferred income taxes -- (3,000,000) 6,074
Prepaid expenses and other current assets (118,432) (254,472) (436,907)
Accounts payable 672,460 1,977,061 603,470
Income taxes payable -- 720,772 (416,348)
Accrued expenses 1,852,708 261,337 1,712,028
-------------- ------------- -------------
Net cash provided by operating activities 3,579,546 7,575,284 7,119,236

FINANCING ACTIVITIES:
Exercise of common stock options -- 38,308 3,819
Proceeds from public stock offerings -- 54,117,191 14,755,751
Payment of long-term debt (18,237,463) (69,954,098) (237,464)
Proceeds from issuance of long-term debt 15,800,000 15,000,000 --
-------------- ------------- -------------
Net cash (used for) provided by financing activities (2,437,463) (798,599) 14,522,106

INVESTING ACTIVITIES:
Capital expenditures (1,091,624) (2,419,686) (3,203,557)
Proceeds from sale of equipment 64,180 49,670 18,464
Other investing activities 56,020 (133,980) 16,522
-------------- ------------- --------------
Net cash used for investing activities (1,083,464) (2,503,996) (3,168,571)
-------------- ------------- -------------
Net increase in cash 58,619 4,272,689 18,472,771
Cash and cash equivalents, beginning of year 85,113 143,732 4,416,421
-------------- ------------- -------------
Cash and cash equivalents, end of year $ 143,732 $ 4,416,421 $ 22,889,192
============== ============= =============
</TABLE>

The accompanying notes are an integral part of these financial statements.

-36-
<PAGE> 37

TELTREND INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

THE RECAPITALIZATION

During the fourth quarter of Fiscal 1995, Teltrend Inc. (the
"Company") completed a Recapitalization (the "Recapitalization"). The
principal components of the Recapitalization included (i) the conversion of all
of the Company's existing capital stock whereby each issued and outstanding
share of Class A common stock, $.01 par value per share, of the Company (the
"Old Class A Stock") was converted into 6.086133 shares of a new class of
common stock, $.01 par value per share (the "Common Stock"), of the Company and
each issued and outstanding share of Class B common stock, $.01 par value per
share (the "Old Class B Stock"), and Class C common stock, $.01 par value per
share (the "Old Class C Stock"), of the Company was canceled (the "Common Stock
Conversion"), (ii) the sale by the Company of 3,737,500 shares of Common Stock
in an initial public offering (the "IPO") at a price per share of $16.00 (less
underwriting discounts and commissions of $1.12 per share), (iii) the issuance
by the Company of shares of a new Class A common stock, $.01 par value per
share (the "Class A Stock"), to certain stockholders in exchange for an equal
number of shares of Common Stock (the "Common Stock Exchange"), (iv) the merger
of all of the Company's subsidiaries with and into the Company, and (v) the
payment, using the net proceeds of the IPO, of all of the Company's outstanding
indebtedness under its Series B Debentures and its credit agreement with The
Prudential Insurance Company of America and Pruco Life Insurance Company (the
"Former Credit Agreement," which consisted of term loans, a revolving loan
facility and Series A Debentures), as well as certain related obligations (the
"Debt Payment").

SECOND PUBLIC OFFERING

During the second quarter of Fiscal 1996, the Company sold an
additional 575,000 shares of its Common Stock pursuant to a registered public
offering (the "Second Public Offering") of shares of Common Stock. The net
proceeds of the Second Public Offering received by the Company totalled
approximately $14.7 million (after deducting underwriting discounts,
commissions and expenses). In connection with the Second Public Offering all
of the outstanding shares of Class A Stock were sold, and upon such sale
automatically converted into an equal number of shares of Common Stock.
Accordingly, no shares of the Company's Class A Stock were outstanding as of
July 27, 1996.

PRO-FORMA NET INCOME PER SHARE

Pro forma net income and pro forma net income per share data is based
on historical net income adjusted to reflect the Recapitalization as if it had
occurred as of August 1, 1993.

NOTE 2. DESCRIPTION OF BUSINESS

The Company is an independent equipment supplier to the special
service segment of the telecommunication industry. The Company manufactures
and markets telecommunication equipment and related products that monitor,
clarify, convert, switch, transmit, or otherwise process signals in
telecommunication lines of voice and data communication networks. The
Company's year-end is the last Saturday in July for financial reporting and tax
purposes.

-37-
<PAGE> 38

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.

INVENTORIES

Inventories are stated at the lower of cost as determined by the first
in, first out method or market value.

INCOME TAXES

The Company accounts for income taxes using the liability method as
required by Financial Accounting Standards Board Statement No. 109, "Accounting
for Income Taxes".

EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements are recorded at cost. The
Company uses the straight-line method of computing provisions for depreciation
and amortization of equipment and leasehold improvements over estimated useful
lives ranging from three to ten years.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.

EARNINGS PER SHARE

The Company computes earnings per share by dividing net income by the
weighted average number of shares of common stock and common stock equivalents
outstanding.

STOCK OPTIONS

Stock options are accounted for in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB #25"). Under APB #25, no compensation expense is recognized when the
exercise price of the option equals the fair value of the underlying stock on
the grant date.

RECLASSIFICATION

Certain amounts in the Fiscal 1995 Financial Statements have been
reclassified to conform to Fiscal 1996 presentation.

NOTE 4. RETIREMENT INVESTMENT PLAN

The Company has a defined-contribution plan covering all full and
part-time personnel who have a minimum of one-half year of service and have
attained the age of 21. The plan became effective January 1, 1990.
Participants may contribute between 1% and 15% of their annual compensation.
Through December 31, 1993, the Company contributed $.25 for each $ 1.00
contributed to the plan by the participant up to a maximum of 4% of the
participant's annual compensation. Effective January 1, 1994, the Company
increased contributions to $.40 for each $1.00 contributed to the plan by the
participant up to a maximum of 5% of the participant's annual compensation.

-38-
<PAGE> 39

Company contributions were $81,250, $142,369 and $183,900 for the years ended
July 30, 1994, July 29, 1995 and July 27, 1996 respectively.

NOTE 5. INVENTORIES

Inventories at July 29, 1995 and July 27, 1996 were as follows:
<TABLE>
<CAPTION>
1995 1996
----- ----
<S> <C> <C>
Raw materials . . . . . . . . . . . . . . . . . . . . . . . $4,481,146 $ 7,904,341
Work-in-process . . . . . . . . . . . . . . . . . . . . . . 1,386,683 1,795,233
Finished goods . . . . . . . . . . . . . . . . . . . . . . 2,061,193 2,649,595
---------- -----------
$7,929,022 $12,349,169
========== ===========
</TABLE>

NOTE 6. ACCRUED EXPENSES

Accrued expenses at July 29, 1995 and July 27, 1996 consisted of:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Salaries, wages and bonuses . . . . . . . . . . . . . . . . $2,676,853 $3,756,607
Warranty . . . . . . . . . . . . . . . . . . . . . . . . . 1,672,882 1,453,340

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,560,207 3,412,023
---------- ----------
$6,909,942 $8,621,970
</TABLE>

NOTE 7. LONG TERM DEBT

Long-term debt at July 29, 1995 was $237,464 which consisted of a note
payable at 9% interest to a former stockholder. The final payment was due in
November, 1995, however, the note plus accrued interest was prepaid in August,
1995. There was no long-term debt at July 27, 1996.

Interest paid in fiscal years 1994, 1995 and 1996 was $2,237,346,
$6,526,593 and $17,931 respectively.

In connection with the Recapitalization, the term notes, Series A and
B Debentures and revolving note payable were retired with the proceeds of the
IPO. Also, in connection with the Recapitalization, the Company entered into a
new credit facility (the "Bank Facility") which provides, subject to certain
restrictions, up to $15 million on an unsecured basis for working capital
financing. As of July 29, 1995 and July 27, 1996, no amounts were outstanding
under the Bank Facility. At July 29, 1995 and July 27, 1996, Teltrend was
eligible to borrow up to $10,038,945 and $14,685,834, respectively.

Under the Bank Facility agreement, the Company is restricted to
declare and pay dividends on its Common Stock not to exceed 50% of net income
for the immediately preceding fiscal year.

-39-
<PAGE> 40

NOTE 8. COMMON STOCK OPTIONS

Prior to the Recapitalization, the Company had a stock option plan
(the "Plan") which provided for the grant of both incentive stock options and
nonqualified stock options to purchase shares of the Old Class A Stock. Unless
the applicable agreement expressly provided otherwise, each option granted
under the Plan was exercisable as to 20% of the shares covered thereby
immediately upon grant and as to an additional 20% of such shares on each of
the next four anniversaries of the date of grant.

In fiscal year 1994, the Board of Directors approved a resolution to
decrease the exercise price of all options outstanding under the Plan to the
then-estimated value of $.1643 per share from $4.1077 per share. In connection
with the Recapitalization, all options outstanding under the Plan were
converted into options to purchase shares of Common Stock and the Company's
Board of Directors amended the Plan to provide that no additional options could
be granted thereunder in the future. As of July 27, 1996, 96,754 options were
outstanding under the Plan.

In fiscal year 1990, a key employee was granted an option (the "Key
Employee Option") separate from the Plan to purchase 82,163 shares of Old Class
A Stock. The Key Employee Option was exercisable as to 20% of the shares
covered thereby upon grant and as to an additional 20% of such shares on each
of the next four anniversaries of date of grant at an exercise price of $.1643
per share ($4.1077 per share prior to 1994) and expired ten years from date of
grant. As of July 29, 1995, the key employee had exercised the Key Employee
Option as to all of the 82,163 shares of Old Class A Stock covered thereby.

During June 1995 the Company adopted the Teltrend Inc. 1995 Stock
Option Plan (the "1995 Stock Option Plan") which provides for the grant of both
incentive stock options in accordance with Section 422A of the Internal Revenue
Code and nonqualified stock options. A maximum of 440,000 shares of Common
Stock may be issued in the aggregate to key employees of the Company. The
Compensation Committee of the Company's Board of Directors which administers
the 1995 Stock Option Plan will determine when and to whom options will be
granted. Unless the applicable agreement expressly provides otherwise, options
shall become exercisable as to 25% of the shares covered thereby on the first
anniversary of the date of grant and as to an additional 25% of such shares on
each of the next three anniversaries of the date of grant. As of July 27,
1996, 399,000 options were outstanding under the 1995 Stock Option Plan.

During January 1996, the Company adopted the Teltrend Inc. 1996
Non-Employee Director Stock Option Plan (the "Director Option Plan") which
provides for the grant of nonqualified stock options. A maximum of 240,000
shares of Common Stock may be issued to non-employee directors of the Company.
Each individual elected as a director of the Company at the January 11, 1996
Annual Meeting who qualified as a non-employee director received an option to
purchase up to 12,000 shares of Common Stock as of the date of the Annual
Meeting. Thereafter, each non-employee director, who has not previously served
on the Company's Board of Directors, will receive an option to purchase up to
12,000 shares of Common Stock on the date of his or her initial election to the
Board. A non-employee director may receive only one option grant under the
Director Option Plan.

Options granted under the Director Option Plan will vest and become
exercisable as to 25% of the shares covered thereby on the first anniversary of
the date of grant and as to an additional 25% of such shares on each of the
next three anniversaries of the date of grant. As of July 27, 1996, 60,000
options were outstanding under the Director Option Plan.

-40-
<PAGE> 41

Transactions involving stock options granted under the Plan (after
giving effect to the Recapitalization), the Key Employee Option, the 1995 Stock
Option Plan and the Director Option Plan are summarized as follows:

<TABLE>
<CAPTION>
NUMBER OF
OPTIONS PRICE
--------- -----
<S> <C> <C>
Outstanding, July 31, 1993 . . . . . . . . . . . 318,567 .16
Granted . . . . . . . . . . . . . . . . . . . . . 5,483 .16
Exercised . . . . . . . . . . . . . . . . . . . . -- --

Canceled . . . . . . . . . . . . . . . . . . . . (10,437) .16
--------

Outstanding, July 30, 1994 . . . . . . . . . . . 313,613 .16
Granted . . . . . . . . . . . . . . . . . . . . . 54,808 .16

Granted . . . . . . . . . . . . . . . . . . . . . 330,000 16.00
Exercised . . . . . . . . . . . . . . . . . . . . (233,139) .16
Canceled . . . . . . . . . . . . . . . . . . . . (14,734) .16
--------

Outstanding, July 29, 1995 . . . . . . . . . . . 450,548 11.76
Granted . . . . . . . . . . . . . . . . . . . . . 129,000 28.75 to 47.00
Exercised . . . . . . . . . . . . . . . . . . . . (23,794) .16
--------
Outstanding, July 27, 1996 . . . . . . . . . . . 555,754 19.10
--------
</TABLE>

Of the 555,754 stock options outstanding at July 27, 1996, 140,361 are
currently exercisable.

The exercise of non-qualified stock options results in state and
federal tax benefits to the Company relating to the difference between the
market price at the date of exercise and the option price. During Fiscal Year
1996, $304,335 was credited to additional paid-in capital.

NOTE 9. LEASE COMMITMENTS

The Company leases its office and manufacturing facilities and pays
real estate taxes, insurance, and general repairs and maintenance on the leased
facilities. Rent expense for the fiscal years ended July 30, 1994, July 29,
1995 and July 27, 1996 totaled $689,151, $690,373 and $697,280 respectively.

Future minimum annual rental payments required under the lease are as
follows:

<TABLE>
<S> <C>
Fiscal Year 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 514,040
Fiscal Year 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 499,448
Fiscal Year 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 83,241
----------
$1,096,729

</TABLE>

-41-
<PAGE> 42

NOTE 10. INCOME TAXES

Deferred income taxes reflect the net tax effect of temporary
differences between the amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred taxes are as follows:
<TABLE>
<CAPTION>
JULY 29, JULY 27,
1995 1996
-------- --------
<S> <C> <C>
Deferred tax assets (liabilities):
Net operating loss carryforwards . . . . . . . . . . . . $1,353,290 $964,334
Product warranty accruals . . . . . . . . . . . . . . . 635,695 581,336
Inventory reserves . . . . . . . . . . . . . . . . . . . 710,695 826,118

Vacation accrual . . . . . . . . . . . . . . . . . . . . 279,636 362,152
Medical reserve . . . . . . . . . . . . . . . . . . . . 195,195 242,487
Unicap adjustment . . . . . . . . . . . . . . . . . . . 193,402 86,528

Other . . . . . . . . . . . . . . . . . . . . . . . . . (6,763) 173,035
---------- ----------
Total deferred tax assets . . . . . . . . . . 3,361,150 3,235,990
Tax over book depreciation . . . . . . . . . . . . . . . (361,150) (242,064)
---------- ----------

Net recorded deferred tax assets . . . . . . . . . . . . $3,000,000 $2,993,926
========== ==========
Recognized in balance sheet:
Net deferred tax assets -- current . . . . . . . . . . . $2,328,058 $2,227,232
Net deferred tax assets -- noncurrent . . . . . . . . . 671,942 766,694
---------- ----------

Net deferred tax assets . . . . . . . . . . . . $3,000,000 $2,993,926
========== ==========
</TABLE>
In fiscal year 1994, a valuation allowance was recorded for the full
value of net deferred tax assets as the Company had no history of generating
taxable income and with the level of recorded debt and related interest expense
could not forecast taxable income. Upon consummation of the Recapitalization
in the fourth quarter of fiscal year 1995, substantially all outstanding
long-term debt was repaid. This debt repayment along with improved operating
results generated significant taxable income in fiscal year 1995 and 1996. The
Company has forecast significant taxable income for the next several years,
which has eliminated the need for a valuation allowance at July 29, 1995 and
July 27, 1996.

At July 29, 1995 and July 27, 1996, the Company has available for tax
purposes approximately $4.0 million and $2.8 million, respectively, of net
operating loss carryforwards which expire in fiscal years 2008 and 2009.

Significant components of the provision (benefit) for income taxes are
as follows:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Current provision
Federal . . . . . . . . . . . . . $30,000 $ 731,750 $7,407,115
State . . . . . . . . . . . . . . 20,000 230,000 1,039,724
------- ---------- ---------
50,000 961,750 8,446,839

Deferred tax (benefit) provision . . . . . (3,000,000) 6,074
------- ----------- ---------
Provision (benefit) for income taxes $50,000 $(2,038,250) $8,452,913
======= ============ ==========
</TABLE>

Income taxes paid in fiscal years 1994, 1995 and 1996 totaled $0,
$35,000 and $9,080,000 respectively.

-42-
<PAGE> 43

Total income tax provision (benefit) for each year varied from the
amount computed by applying the statutory U.S. federal income tax rates to
income before taxes and extraordinary items for the reasons set forth in the
following reconciliation.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------

1994 1995 1996
------- -------- ----
<S> <C> <C> <C>
Income tax provision at the statutory rate . . . $19,780 $ 918,860 $7,215,901

Increase (reduction) resulting from:

Decrease in valuation reserve for non-
realizable tax benefits . . . . . . . . (86,844) (3,375,548) --
State income taxes, net of federal tax
benefit . . . . . . . . . . . . . . . . 95,800 230,000 1,039,724

Other, net . . . . . . . . . . . . . . . 21,264 188,438 197,288
------- ----------- ----------
Actual income tax provision (benefit) . . . . . . $50,000 $(2,038,250) $8,452,913
======= =========== ==========
</TABLE>

NOTE 11. COMMITMENTS AND CONTINGENT LIABILITIES

The Company has commitments to purchase raw materials under purchase
contracts with various vendors totaling approximately $13,755,501 at July 29,
1995 and $9,719,931 at July 27, 1996.

On August 20, 1996, the Company entered into an agreement to purchase
land for an estimated $1.7 million. The Company plans to build a manufacturing
facility on this land beginning in Fiscal Year 1997.

NOTE 12. RELATED PARTY TRANSACTIONS

Pursuant to an agreement between the Company and one of its principal
stockholders, the stockholder provided management and consulting services to
the Company for fees and related expenses of approximately $258,000 for the
year ended July 30, 1994 and $717,000, which includes an additional fee of
$500,000 paid in consideration of the early termination of the management and
consulting contract upon consummation of the Recapitalization, for the year
ended July 29, 1995.

NOTE 13. SIGNIFICANT CUSTOMERS

For the year ended July 27, 1996, four customers comprised
approximately 20.6%, 18.4%, 18.2% and 15.2% of net sales 22.3%, 20.7%, 17.1%
and 12.6% for the year ended July 29, 1995 and 25.9%, 17.3%, 16.9% and 12.8%
for the year ended July 30, 1994.

NOTE 14. EXTRAORDINARY ITEMS

Extraordinary items for the year ended July 29, 1995 include a
$500,000 prepayment penalty paid upon prepayment of the Former Credit Agreement
in connection with the Recapitalization, the write-off of the unamortized loan
financing costs of $162,500 related to the Former Credit Agreement and a tax
benefit of $251,750 relating to the prepayment penalty and write-off.

-43-
<PAGE> 44

NOTE 15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
FISCAL 1995 OCTOBER 29, JANUARY 28, APRIL 29, JULY 29,
----------- 1994 1995 1995 1995
----------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . $ 14,837,525 $14,793,491 $14,985,824 $17,435,201
Gross profit . . . . . . . . . . . . . . . . . . . . 6,082,413 5,841,491 6,090,752 8,046,353
Income (loss) before extraordinary items . . . . . . (1,753,237)(1) 605,762 695,739 5,192,504(2)

Net income (loss) . . . . . . . . . . . . . . . . . (1,753,237) 60,762 695,739 4,781,754(3)
Pro forma net income . . . . . . . . . . . . . . . . 1,678,879 1,379,937 1,423,783 2,622,925
Pro forma net income per share of common equity . . . 0.28 0.23 0.24 0.44

FISCAL 1996 OCTOBER 28, JANUARY 27, APRIL 27, JULY 27,
----------- 1995 1996 1996 1996
----------------- -------------- ------------- --------------

Net sales . . . . . . . . . . . . . . . . . . . . . . $20,851,281 $20,531,673 $20,763,736 $23,766,129

Gross profit . . . . . . . . . . . . . . . . . . . . 9,457,120 9,081,897 9,734,209 10,995,670
Net income . . . . . . . . . . . . . . . . . . . . 2,828,641 2,716,180 3,126,274 3,492,853
Net income per share of common equity . . . . . . . . 0.47 0.41 0.46 0.52
</TABLE>

_________________________________________________________________

(1) In the quarter ended October 29, 1994, the Company incurred a $2.9
million charge for the accretion of the outstanding principal amount
of the Series A and B Debentures under the Former Credit Agreement.

(2) In the quarter ended July 29, 1995, the valuation reversed for
non-realizable tax benefits of $3,375,548 was reserved. See Note 10.

(3) The Company incurred an extraordinary charge in the quarter ended July
29, 1995 in connection with the Recapitalization. The charge included
a $500,000 prepayment penalty which was paid upon the prepayment of
the Former Credit Agreement in connection with the Recapitalization
and the write-off of deferred financing costs associated with the
Former Credit Agreement, net of taxes. See Note 14.

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

None.

-44-
<PAGE> 45

PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The name of and
certain information regarding each current director and executive officer of
the Company.

HOWARD L. KIRBY, JR., PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR--Mr. Kirby has served as the President, Chief Executive Officer and a
director of the Company since January 1990. Mr. Kirby began his career in the
telecommunications industry in 1962 with Collins Radio Company (which
subsequently became a part of Rockwell International Corporation), where he
spent 20 years in various management positions in engineering, marketing and
sales. From 1982 to 1984, Mr. Kirby was the Director of Planning and Business
Development for U.S. Telephone, now part of Sprint Corporation. In 1984, Mr.
Kirby became the Vice President and General Manager at Pulse Communications,
Inc., a subsidiary of Hubbell Incorporated, and held that position until he
joined the Company in 1990. Mr. Kirby is 61 years old.

CARL M. MUELLER, DIRECTOR AND CHAIRMAN OF THE BOARD OF DIRECTORS--Mr.
Mueller has been a director of the Company since September 1990. Mr. Mueller
retired as Vice Chairman of Bankers Trust Company in June 1985. Mr. Mueller is
a director of BT Capital Partners Corporation and Cabot Oil & Gas Corporation.
Mr. Mueller is also a director of AEA Investors Inc. ("AEA"), a private
investment firm which, prior to the IPO, owned 49% of the voting securities of
and provided certain financing to the Company. Mr. Mueller is 76 years old.

FRANK T. CARY, DIRECTOR--Mr. Cary has been a director of the Company
since January 1989. Mr. Cary is a former Chairman of the Board and Chief
Executive Officer of International Business Machines Corporation. He is a
director of Capital Cities/ABC, Inc., Celgene Corporation, Cygnus Inc., ICOS
Corporation, Lincare Holdings, Inc. and SPS Transaction Services, Inc. Mr. Cary
is also a director of AEA. Mr. Cary is 75 years old.

HARRY CRUTCHER, III, DIRECTOR--Mr. Crutcher has been a director of the
Company since July 1996. He has been a practicing attorney for more than
thirty years, specializing in financial transactions. He spends the majority
of his time as a business, management and financial consultant. His companies,
Crutcher Enterprises, Inc. and Resorts Financial Services Co., are involved in
acquisitions, restructuring, and strategic planning related to operating
businesses, particularly in the resort and hospitality industry. Mr. Crutcher
is 58 years old.

WILLIAM R. DELK, DIRECTOR--Mr. Delk has been a director of the
Company since January 1996. Mr. Delk has over 35 years experience in the
telecommunications industry, having held various positions from 1959 to 1984
with Southern Bell and from 1984 to 1994 with BellSouth Corporation and its
subsidiaries (which accounted for 12.6% of the Company's total net sales during
fiscal 1995). Mr. Delk retired in December 1994 as Vice President of Bellsouth
Telecommunications, Inc., a position he had held since April 1993 and in which
his responsibilities included procurement, supply handling and delivery,
service management and other support functions for a nine-state operation.
From January 1988 through March 1993, Mr. Delk was a Vice President of
BellSouth Enterprises, Inc., responsible for personnel and executive
compensation, information systems and public relations. Mr. Delk is 58 years
old.

DONALD R. HOLLIS, DIRECTOR--Mr. Hollis has been a director of the
Company since July 1996. Mr. Hollis is currently the president of DRH
Strategic Consulting, Inc. which assists clients in developing strategies for
leveraging technology, and the president of Hollis Enterprises of Vermont, Inc.
which provides services to consumers and small businesses. From 1981 to 1996,
Mr. Hollis was an Executive Vice President of First Chicago Corporation ("First
Chicago") responsible for First Chicago's technology and commercial transaction
processing businesses. Prior to that Mr. Hollis had various positions at Chase
Manhatten Bank, Interactive Data Corporation, the Glidden Company and
Smith-Corona Marchant. Mr. Hollis is 60 years old.

-45-
<PAGE> 46

BERNARD F. SERGESKETTER, DIRECTOR--Mr. Sergesketter has been a
director of the Company since January 1996. Since August 1994, Mr.
Sergesketter has been the president and Chief Executive Officer of Sergesketter
& Associates Inc., a firm which provides consulting services in the
telecommunications, quality management and organizational development areas.
Prior to that, Mr. Sergesketter had various positions (including positions in
engineering, finance, sales and marketing) during his 36 year career with AT&T
including, from January 1983 to August 1994, Vice President -- Central Region.
As Vice President -- central Region of AT&T, Mr. Sergesketter's principal
responsibilities were for AT&T's sales and marketing operations in the Midwest.
Mr. Sergesketter is 60 years old.

HENRY F. SKELSEY, DIRECTOR-- Mr. Skelsey has been a director of the
company since January 1989 and was the Company's Vice President, Assistant
Secretary and Assistant Treasurer from April 7, 1995 to February 20, 1996. Mr.
Skelsey has been a Managing Director of AEA since 1988. Prior to his joining
AEA, Mr. Skelsey was a Vice President in the Merchant Banking Division of
Shearson Lehman Brothers Inc., an investment banking firm. Mr. Skelsey is also
presently a director of Dal-Tile International Inc. Mr. Skelsey is 38 years
old.

GILBERT H. HOSIE, VICE PRESIDENT, SALES--Mr. Hosie joined the Company
in 1985 and served in various sales and marketing positions until he was
elected to serve as the Company's Vice President, Sales in August 1994. Mr.
Hosie began his career as a technician for New York Telephone Company in 1964.
In 1969, he became District Sales Manager for General Electric Company and held
that position for six years. In 1975, Mr. Hosie joined Wescom Telephone
Products Division ("Wescom") of Rockwell International Corporation ("Rockwell")
as its Midwest Regional Manager and remained at Wescom until he joined the
Company in 1985. Mr. Hosie is 55 years old.

DOUGLAS P. HOFFMEYER, VICE PRESIDENT, FINANCE, SECRETARY AND
TREASURER--Mr. Hoffmeyer joined the Company in 1986 and has served as the
Company's Vice President, Finance, Secretary and Treasurer since 1988. Mr.
Hoffmeyer began his career in 1969 with the public accounting firm of Arthur
Andersen & Co., where he remained for five years before taking a partnership
with a Chicago-area accounting firm. Mr. Hoffmeyer is 49 years old.

LAURENCE L. SHEETS, VICE PRESIDENT/GENERAL MANGER, BROADBAND
PRODUCTS--Mr. Sheets has served as the Company's Vice President/General
Manager, Broadband Products since July 1996. Mr. Sheets joined Bell Telephone
Laboratories ("Bell Labs") as a member of its technical staff in 1966 and, in
1978, was promoted to Distinguished Member of Technical Staff. In 1984, Mr.
Sheets joined Rockwell where he held various positions, including Manager of
Advanced Technology at Wescom, until joining the Company in 1991. From January
1991 to July 1996, Mr. Sheets was the Vice President, Engineering for the
Company. Mr. Sheets is 53 years old.

MICHAEL S. GRZESKOWIAK, VICE PRESIDENT, OPERATIONS--Mr. Grzeskowiak
has served as the Company's Vice President, Operations since February 1990. He
began his career at Western Electric Company (now Lucent) in 1967, supporting
factory and field installations for switching systems. In 1975, he joined
Wescom where he held various positions, including Director of Manufacturing,
Director of Production Operations and Director of Manufacturing Planning, until
he joined the Company in 1990. Mr. Grzeskowiak is 51 years old.

DONALD G. BOZEMAN, VICE PRESIDENT/GENERAL MANAGER, T1 AND WIRELESS
PRODUCTS--Mr. Bozeman has served the Company as the Vice President/General
Manager, T1 and Wireless Products since July 1996. Mr. Bozeman began his
career in 1962 as a design engineer at Western Electric Company and
subsequently held various engineering, sales and product development positions
with a number of firms. From 19983 to 1986, Mr. Bozeman was employed by Telco
Systems, Inc. as its Vice President of Corporate Development and later as the
President of its Voice Frequency Division. Mr. Bozeman served as Vice
President of Marketing for Pulsecomm from 1986 until 1991. Mr. Bozeman joined
the Company in February 1992, and from August 1994 to July 1996, Mr. Bozeman
was the Vice President, Marketing for the Company. Mr. Bozeman is 61 years
old.

-46-
<PAGE> 47

JACK C. PARKER, VICE PRESIDENT/GENERAL MANAGER, VF AND DLC
PRODUCTS--Mr. Parker joined the Company in September 1996 as the Company's Vice
President/General Manger, VF and DLC Products. Mr. Parker began his career
with Harris Corporation's Aerospace Group in 1969. From 1972 to 1980, Mr.
Parker was employed by General Electric's Telecommunications Division (which was
later acquired by Wescom, which was, in turn, later acquired by Rockwell) where
he served as an electronic design engineer and supervisor. In 1980, Mr. Parker
joined Tellabs Inc. as the Manager of Digital Processing. In 1985, Mr. Parker
joined the Pulsecom Division of Hubbell Corporation as a Vice President of
Engineering, before returning to Harris Corporation as the Vice President of
the Loop Systems Business Unit of the Dracon Division and later as the Vice
President of Engineering. Most recently, Mr. Parker was the Vice President of
Engineering and Marketing at the Canog Perkins Division of Inductotherm Inc.
Mr. Parker is 50 years old.

THEODOR A. MAXEINER, CONTROLLER, ASSISTANT SECRETARY AND ASSISTANT
TREASURER--Mr. Maxeiner joined the Company as its Accounting Manager in 1985
and has served as the Company's Controller, Assistant Secretary and Assistant
Treasurer since 1988. Mr. Maxeiner is 51 years old.

NORMAN C. GUENTHER, ASSISTANT VICE PRESIDENT, QUALITY--Mr. Guenther
joined the Company in 1987 as Director of Quality Assurance and has served as
the Company's Assistant Vice President, Quality since May 1990. Prior to
joining the Company, Mr. Guenther spent six years in the United States Air
Force as a telecommunications system controller and held various quality
engineering and control positions with private firms. Mr. Guenther is 47 years
old.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

The Securities Exchange Act of 1934 requires all directors and executive
officers of the Company to report any changes in the ownership of common stock
of the Company to the Securities and Exchange Commission and the Company.

Based solely upon a review of these reports and written representations that no
additional reports were required to be filed in Fiscal 1996, the Company
believes that all reports were filed on a timely basis, with the exception of
initial Form 3 reports for William R. Delk and Bernard F. Sergesketter, which
were due on January 21, 1991 (ten days after their election to the Company's
Board of Directors) but were not filed until February 8, 1996.

-47-
<PAGE> 48

ITEM 11 - EXECUTIVE COMPENSATION

The following table sets forth in summary form the aggregate
compensation paid to or accrued for the President and Chief Executive Officer
and each of the four additional most highly compensated executive officers of
the Company (collectively, with the President and Chief Executive Officer, the
"Named Executive Officers") for services rendered in all capacities to the
Company for the Company's fiscal years ended July 30, 1994, July 29, 1995 and
July 27, 1996.

<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS(1)
------------------------------------ --------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND FISCAL SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION(2)
PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($)
---------------------------------- ---- -------- --------- --------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Howard L. Kirby, Jr. . . . . . . 1996 $219,519 $250,000 __ __ $4,085
President and Chief Executive 1995 200,000 200,000 __ 127,000(3) 2,923
Officer 1994 200,000 130,000 __ 82,163(4) 3,031

Gilbert H. Hosie . . . . . . . . 1996 137,789 90,000 __ __ __
Vice President, Sales 1995 134,827 75,000 __ 28,200(3) __
1994 126,000 65,000 2,423(5) 26,170(4) 194

Douglas P. Hoffmeyer . . . . . . 1996 134,462 90,000 __ __ 3,785
Vice President, Finance, 1995 128,769 75,000 __ 35,200(3) 1,950
Secretary and Treasurer 1994 126,000 50,000 __ 26,170(4) 1,789

Laurence L. Sheets . . . . . . . 1996 137,789 90,000 2,000(6) __ 3,752
Vice President/General 1995 132,231 70,000 1,000(6) 35,200(3) 1,454
Manager, Broadband Products 1994 126,000 65,000 __ 26,170(4) 1,454

Michael S. Grzeskowiak . . . . . 1996 132,789 70,000 __ __ 3,752
Vice President, Operations 1995 128,769 65,000 __ 31,200(3) 1,888
1994 126,000 50,000 __ 26,170(4) 1,789
</TABLE>

_______________________________

(1) The compensation for the Company's executives does not include
restricted stock awards or payouts pursuant to any long term
incentive plans; therefore, these columns are omitted from the
Summary Compensation Table.

(2) None of the Named Executive Officers exercised any of their
options during the fiscal year ended July 27, 1996.

(3) Represents options to purchase Common Stock granted pursuant to
the 1995 Option Plan (as defined) at an exercise price of $16.00
per share. The options granted vest and become exercisable as to
25% of the shares covered thereby on the first anniversary of the
date of grant and as to an additional 25% of such shares on each
of the next three anniversaries of the date of grant. See "--
1995 Option Plan."

(4) Represents options to purchase Common Stock at an exercise price
of $0.16 per share, after giving effect to the Price Adjustment
(as defined) and the equitable adjustment of all of the Company's
outstanding options to purchase equity securities in connection
with the IPO. See "-- Pre-IPO Option Plan." All of the options
reflected above as being granted to Messrs. Hosie, Hoffmeyer,
Sheets and Grzeskowiak during the fiscal year ended July 30, 1994
were granted

-48-
<PAGE> 49

pursuant to the Pre-IPO Option Plan (as defined). The options reflected
above as being granted to Mr. Kirby during the fiscal year ended July 30,
1994 are non-qualified and were granted by the Company pursuant to a
separate agreement with Mr. Kirby. All of such options were originally
granted at various times from October 1988 through April 1991 at exercise
prices of up to approximately $16.43 per share, which exercise prices were
adjusted to approximately $4.11 per share in November 1991, subject to
further downward adjustments in certain circumstances. As of May 13, 1994,
the Company's Stock Option Committee (whose responsibilities were assumed
by the Compensation Committee upon consummation of the IPO) adjusted the
exercise price of all of the Company's then-outstanding stock options to
$0.16 per share (the "Price Adjustment") and the Company entered into
amended and restated stock option agreements with all of its options. The
options reflected above vested and became exercisable as to 20% of the
shares covered thereby on the date of grant and as to an additional 20% of
such shares on each of the next four anniversaries of the date of grant.
The amended and restated stock option agreements entered into by the
Company in connection with the Price Adjustment retained the vesting
schedules of the original agreements.

(5) Reflects amounts paid by the Company for accrued but unused
vacation time.

(6) Reflects amount paid by the Company in respect of a patent award.

PRE-IPO OPTION PLAN

Under the Company's stock option plan in effect prior to the IPO (the
"Pre-IPO Option Plan"), certain key employees of the Company were eligible to
receive non-qualified stock options or "incentive stock options," within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), to acquire shares of a class of the Company's equity securities in
existence prior to the recapitalization of the Company in connection with the
IPO, as described below. Prior to consummation of the IPO, the Company from
time to time granted non-qualified stock options to certain of its employees
under the Pre-IPO Option Plan (the "Pre-IPO Options"). Pre-IPO Options granted
to an optionee are evidenced by an agreement between the optionee and the
Company which contains such terms not inconsistent with the Pre-IPO Option Plan
as deemed necessary or desirable (the "Pre-IPO Option Agreements"). Pursuant
to the Pre-IPO Option Plan, unless otherwise set forth in a Pre-IPO Option
Agreement, each Pre-IPO Option becomes exercisable as to 20% of the securities
covered thereby on the date of grant, and as to an additional 20% of such
shares on each successive one-year anniversary of the date of grant.
Notwithstanding the foregoing, all Pre-IPO Options vest and become immediately
exercisable upon certain change of control transactions with respect to the
Company. All non-vested Pre- IPO Options of an optionee lapse upon such
optionee's termination of employment with the Company for any reason. Except
as may otherwise be provided in a Pre-IPO Option Agreement, an optionee's
vested Pre-IPO Options lapse 45 days after termination of such optionee's
employment with the Company for any reason other than death or disability, in
which case such options terminate 90 days after such termination. However, all
such options lapse immediately in the event an optionee's employment with the
Company is terminated for cause.

In connection with the IPO, the Company underwent a recapitalization (the
"Recapitalization") pursuant to which certain of the Company's then outstanding
equity securities were converted into shares of Common Stock (the "Common Stock
Conversion") and the remainder of the Company's equity securities were
cancelled. As part of the consummation of the Recapitalization, all Pre-IPO
Options were converted into options to acquire shares of Common Stock, with the
number of shares subject to such options and the exercise price thereof
adjusted appropriately (the "Equitable Adjustment"). As of October 23, 1996,
there were outstanding Pre-IPO Options to purchase 95,113 shares of Common
Stock at an exercise price of $0.16 per share (of which, Pre-IPO Option Plan
Options to purchase 65,774 shares of Common Stock were exercisable on or within
60 days of October 23, 1996). In connection with the IPO, the Pre-IPO Option
Plan was amended to provide that no new options would be granted thereunder.

-49-
<PAGE> 50

1995 OPTION PLAN

In connection with the IPO, the Company adopted the Teltrend Inc. 1995 Stock
Option Plan (the "1995 Option Plan"). Pursuant to the 1995 Option Plan, select
key employees of the Company and its directors are eligible to receive awards
of stock options in consideration for their services to the Company. Options
granted under the 1995 Option Plan may be either nonqualified stock options or
"incentive stock options," within the meaning of Section 422 of the Code.
Subject to antidilution and similar provisions, a maximum of 440,000 shares of
Common Stock may be issued in the aggregate under the 1995 Option Plan. As of
October 23, 1996, the Company has granted options to purchase 429,000 shares of
Common Stock under the 1995 Option Plan (of which, options to purchase 84,000
shares of Common Stock were exercisable on or within 60 days of October 23,
1996).

The 1995 Option Plan is administered by the Compensation Committee of the
Company's Board of Directors, which determines when and to whom options will be
granted and the number of shares covered by each such option. Options may be
granted under the 1995 Option Plan on such terms and conditions as the
Compensation Committee may approve, provided that all options must be granted
with an exercise price not less than 100% of the fair market value of the
underlying Common Stock on the date of grant (110% in the case of "incentive
stock options" granted to a "ten percent stockholder," as provided in Section
422 of the Code). No option may be exercised after the expiration of ten years
from the date of grant (five years in the case of "incentive stock options"
granted to a "ten percent stockholder"). Options granted under the 1995 Option
Plan become exercisable at such times and under such conditions as the
Compensation Committee determines. However, unless the Compensation Committee
otherwise provides, options granted under the 1995 Option Plan become
exercisable as to 25% of the shares covered thereby on the first anniversary of
the date of grant and as to an additional 25% of such shares on each of the
next three anniversaries of the date of grant. The portion of an option that
is not exercisable will automatically lapse upon an optionee's termination of
employment with the Company for any reason other than the death or disability
of the optionee, in which case the portion of such option that is not yet
vested shall immediately and automatically vest and become exercisable.
Exercisable options lapse 45 days after the termination of employment with the
Company for any reason other than (i) death or disability, in which case such
options lapse 90 days after termination, or (ii) cause. Notwithstanding the
foregoing, all options, whether or not exercisable, automatically lapse upon
the termination of the optionee's employment for cause. Unless otherwise
determined by the Compensation Committee, in the event of certain change of
control transactions with respect to the Company, all outstanding options
become exercisable and, upon exercise, entitle the holder thereof to receive
the same amount and kind of stock, securities, cash, property or other
consideration that holders of Common Stock are entitled to receive in such
transaction.

1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN

At the 1996 Annual Meeting of Stockholders (the "1996 Annual Meeting") the
Company adopted the Teltrend Inc. 1996 Non-Employee Director Stock Option Plan
(the "Director Option Plan"). Pursuant to the Director Option Plan, each
individual elected as a director of the Company at the 1996 Annual Meeting who
was not an employee of the Company received, upon his election, an option to
purchase up to 12,000 shares of Common Stock. Thereafter, pursuant to the
Directors Option Plan, each non-employee director who has not previously served
on the Company's Board of Directors receives an option to purchase up to 12,000
shares of Common Stock on the date of his or her initial election to the Board.
Each non-employee director may receive only one option grant under the Director
Option Plan.

Subject to antidilution and similar provisions, a maximum of 240,000 shares
of Common Stock will be available for issuance pursuant to the Director Option
Plan. As of October 23, 1996, the Company has granted options to purchase
84,000 shares of Common Stock under the Director Option Plan (none of which are
exercisable on or within 60 days of October 23, 1996).

Grants of options under the Director Option Plan are automatic. All
questions of interpretation of the Director Option Plan or any options issued
thereunder are determined by the Compensation Committee of the Board of
Directors. The exercise price of all option granted under the Director Option
Plan will equal the fair market value per share of Common Stock on the grant
date, defined generally as the closing sales price of the Common Stock as
reported on the Nasdaq National Market on such date. Options granted under the
Director Option Plan will vest and become exercisable as to 25% of the

-50-
<PAGE> 51

shares covered thereby on the first anniversary of the date of grant and
as to an additional 25% of such shares of each of the next three anniversaries
of the date of grant. All options granted under the Director Option Plan will
expire on the tenth anniversary of the date of grant.

OPTION/SAR GRANT TABLE

None were granted to any of the Named Executive Officers during the fiscal
year ended July 27, 1996.

OPTION EXERCISES AND HOLDINGS

The following table sets forth certain information concerning option
exercises during the fiscal year ended July 27, 1996 by the Named Executive
Officers and the number and value of securities underlying options held by each
of the Named Executive Officers at the end of the fiscal year ended July 27,
1996.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES

SHARES NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
ACQUIRED VALUE UNEXERCISED OPTIONS/SARs AT IN-THE-MONEY OPTIONS/SARs AT
ON EXERCISE REALIZED FISCAL YEAR-END FISCAL YEAR-ENDED(4)
----------- -------- --------------- --------------------
Name (#)(1) ($)(1) EXERCISABLE UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE(2)
---- --- --- ----------- ------------- ----------- -------------

<S> <C> <C> <C> <C> <C> <C>
Howard L. Kirby, Jr....... -- -- 31,750 (2) 95,250 658,813 (2) 1,976,435

Gilbert H. Hosie.......... -- -- 33,220 (3) 21,150 1,103,848 (3) 438,863

Douglas P. Hoffmeyer...... -- -- 7,800 (2) 23,400 161,850 (2) 485,550

Laurence L. Sheets........ -- -- 8,800 (2) 26,400 182,600 (2) 547,800

Michael S. Grzeskowiak.... -- -- 7,800 (2) 23,400 161,850 (2) 485,550

</TABLE>

_____________________________

(1) None of the Named Executive Officers of the Company exercised any
of their options during the fiscal year ended July 27, 1996.

(2) Reflects options to purchase Common Stock of the Company at an
exercise price of $16.00 per share granted pursuant to the 1995
Option Plan.

(3) Reflects options to purchase Common Stock of the Company,
including options to purchase 26,170 shares of Common Stock at an
exercise price of $0.16 per share granted pursuant to the Pre-IPO
Option Plan (as adjusted pursuant to the Equitable Adjustment).
Also includes, option to purchase 7,050 shares of Common Stock at
an exercise price of $16.00 per share granted pursuant to the 1995
Option Plan.

(4) Values for "in-the-money" options represent the positive spread
between the respective exercise prices of outstanding options and
the value of securities underlying such options as of July 27,
1996.

LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR.

None.

-51-
<PAGE> 52

EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

None of the Named Executive Officers has an employment agreement with the
Company, nor are any such Named Executive Officers party to any agreements
entitling them to termination or severance payments upon a change in control of
the Company, except that non-vested stock options held by employees of the
Company generally vest and become exercisable upon certain change of control
transactions involving the Company. See "-- Pre-IPO Option Plan" and "-- 1995
Option Plan." The Company's policy is to enter into confidentiality agreements
with each of its key employees, including the Named Executive Officers,
pursuant to which such employees agree not to disclose any confidential and
proprietary information of the Company or third parties to whom the Company is
obligated to keep such information confidential.

CASH BONUS PLAN

For the fiscal years ended July 30, 1994, July 29, 1995 and July 27, 1996, an
aggregate of approximately $743,000, $1,266,000 and $1,735,000, respectively,
was earned by executive officers and employees of the Company pursuant to an
informal cash bonus plan. The Compensation Committee and the Board of
Directors of the Company have the authority, in their sole discretion, to
determine whether, to whom and in what amounts to award future bonuses, as well
as to adopt or approve any future bonus plans.

401 (K) PLAN

In 1990, the Company adopted the Teltrend Retirement Investment Plan (the
"401(k) Plan") that covers all full and part-time employees of the Company who
have attained the age of 21 and have a minimum of one-half year of service.
Under the 401(k) Plan, an employee may elect to defer not less than 1% and no
more than 15% of the total annual compensation that would otherwise be paid to
the employee, provided, however, that employees' contributions may not exceed
certain maximum amounts determined under Section 402(g) of the Code. Employee
and Company matching contributions are invested in a guaranteed investment
return account or various mutual funds, according to the directions of the
employee. Through December 31, 1993, out of the first 4% of an employee's
salary, the Company generally contributed $0.25 for each $1.00 contributed to
the plan by the employee. Effective January 1, 1994, subject to certain
limitations, out of the first 5% of an employee's salary, the Company generally
matches out of its profits $0.40 for every $1.00 of deferred income an employee
contributes to the 401(k) Plan. The Company may also from time to time make
additional discretionary contributions on behalf of certain plan participants
out of the Company's profits. Any employee contribution to the 401(k) Plan is
fully vested and nonforfeitable, although certain matching and discretionary
contributions by the Company are generally subject to vesting over a three-year
period. The Named Executive Officers participate in the 401(k) Plan on the
same basis as all other eligible employees of the Company.

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<PAGE> 53

REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION

The Report of the Compensation Committee on Executive Compensation and the
Performance Graph below shall not be deemed incorporated by reference by any
general statement incorporating by reference this Annual Report on Form 10-K or
any portion hereof into any filing under the Securities Act of 1933, as amended,
or the Securities Exchange Act of 1934, as amended, and shall not otherwise be
deemed filed under such acts.

The Compensation Committee, composed of directors who are not employees of
the Companys, is responsible for determining compensation for the company's nine
executive officers and for establishing the Company's compensation philosophy
and policies. The compensation Committee recommends to the Board of Directors
the compensation to be paid to the Company's Chief Executive Officer and the
other executive officers. The Compensation Committee is also responsible for
administering the Company's Pre-IPO Option Plan and the 1995 Option Plan. The
Compensation Committee reviews the Company's compensation program, including its
executive compensation program, on at least an annual basis to ensure that the
program continues to meet the goals of its compensation philosophy. In
conducting its review of executive compensation matters the Compensation
Committee, from time to time, utilizes the compensation data and advisory
services of independent compensation consultants.

EXECUTIVE COMPENSATION PHILOSOPHY

The Company's executive compensation program is based on principles
designed to align executive compensation with the company's objectives,
management initiatives and business and financial performance. These principles
are applied by the Compensation Committee to: (1) attract, motivate and retain
executives of the highest quality; (ii) link the total annual compensation of
each executive officer to such executive's individual performance, the
performance of the business unit he manages, and the Company's overall
performance; and (iii) provide long-term incentives for consistent high levels
of performance.

OVERVIEW OF EXECUTIVE COMPENSATION PROGRAM

The Company's total compensation program for its executive officers consist
of both cash and equity-based compensation. Each executive officer's annual
compensation consists of a base salary, eligibility for matching and
discretionary contributions to the 401(k) Plan and eligibility for an annual
bonus under the Company's informal cash bonus plan. The Chief Executive Officer
generally proposes on an annual basis the base salary and cash bonus for each of
the company's executive officers, including himself. His recommendations, and
the Compensation Committee's evaluation thereof, are based on the subjective
evaluation of a number of factors and criteria, including the compensation paid
by the company to its executive officers during the immediately preceding fiscal
year, the rate of inflation, the Company's performance during the fiscal year,
and the compensation paid to the executive officers of certain other companies,
including the Peer Group (as defined), which the Chief Executive Officer and the
Compensation Committee believes are comparable based on their geographic
locations or the nature of their business (the "Compensation Comparison Group").
The weight and importance given each year to the foregoing factors, the
individual components of each factor and the decision whether to consider
additional factors, lies within the subjective discretion of the Chief Executive
Officer with respect to the formulation of his compensation recommendations and,
subsequently, with the Compensation Committee with respect to its evaluation and
approval of such recommendations in formulating its recommendation to the Board
of Directors. In addition to annual compensation, the Company provides
long-term incentives to its executive officers through its stock option plans.
Because the compensation levels of the Company's executive officers are
generally below compensation levels that would be affected by the limitations on
the deduction of executive salaries imposed by Section 162(m) of the code
("Section 162(m)"), the Compensation Committee has not formulated a policy with
respect to Section 162(m).

-53-
<PAGE> 54

FISCAL 1996 EXECUTIVE COMPENSATION

The Compensation Committee determined the base salaries of the Company's
executive officers during Fiscal 1996 based upon the Chief Executive Officer's
recommendations and its subjective evaluation of the factors and criteria
described above. Fiscal 1996 salaries for the Company's executive officers were
based largely on the salaries paid to such executive officers in Fiscal 1995.
In Fiscal 1996, the Company's executive officers received slight base salary
increases, which averaged 5%. The Compensation Committee did utilize the
services of an independent compensation consultant to accumulate the data,
including the salaries of executive officers of the Compensation Comparison
Group, that the Compensation Committee used to establish base salaries for the
Company's executive officers, including the Chief Executive Officer. For
Fiscal 1996, base salaries for the Company's executive officers recommended by
the Chief Executive Officer and determined by the Compensation Committee were,
in general, at the medium range when compared to the base salaries of the
Compensation Comparison Group executive. However, the Compensation Committee
does not currently have an established policy with regard to the salaries of the
Company's executive officers, including the salary of the Chief Executive
Officer, relative to the salaries paid to the Compensation Comparison Group
executive officers.

The Compensation Committee also determined the bonuses to be paid to the
Company's executive officers for Fiscal 1996 pursuant to the Company's informal
cash bonus plan based upon the Chief Executive Officer's recommendations and its
subjective evaluation of the factors and criteria described above. Fiscal 1996
bonuses for the Company's executive officers were higher than those awarded for
Fiscal 1995 and were based primarily on the fact that the Company's net sales,
income from operations and earnings per share for Fiscal 1996 exceeded plan.

During Fiscal 1996, upon the recommendations of management, the
Compensation Committee subjectively determined that options be granted to
various management employees; however, the Chief Executive Officer and the other
Named Executive Officers of the Company did not receive any options in Fiscal
1996. The Compensation Committee did not assign any measurable weighing to any
of the factors it considered in approving the grant of stock options to these
managers. However, the Compensation Committee did consider the amounts and
terms of prior option awards in determining the recipients of option grants in
Fiscal 1996.

FISCAL 1996 CHIEF EXECUTIVE OFFICER COMPENSATION

In Fiscal 1996, the Compensation Committee established a base salary for
the Chief Executive Officer of $235,000 per year. This was the base
salary recommended to the Compensation Committee by the Chief Executive Officer.
The Chief Executive Officer participates in the informal cash bonus plan. For
Fiscal 1996, the Compensation Committee awarded a $250,000 cash bonus to the
Chief Executive Officer under the informal cash bonus plan. This award was
$20,000 greater than the amount recommended to the Compensation Committee by
the Chief Executive Officer and was based on the factors and criteria discussed
above with regard to the bonuses awarded for Fiscal 1996 to the Company's other
executive officer.

THE COMPENSATION COMMITTEE,

FRANK T. CARY
CARL M. MUELLER
HENRY F. SKELSEY

-54-
<PAGE> 55

PERFORMANCE GRAPH

The following graph compares the cumulative total return on the Company's
Common Stock from June 9, 1995 (the date the Company's Common Stock first
became registered under Section 12 of the Securities Exchange Act of 1934, as
amended) through July 27, 1996 (the end of the Company's last fiscal year),
with the cumulative total return of the Nasdaq Composite stock index and a peer
group of companies selected by the Company (the "Peer Group") for purposes of
the comparison and described more fully below. Dividend reinvestment has been
assumed and, with respect to companies in the Peer Group, the returns of each
such company have been weighted to reflect relative stock market
capitalization. Past financial performance should not be considered a reliable
indicator of future performance, and investors should not use historical trends
to anticipate results or trends in future periods.

COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG THE COMPANY, NASDAQ COMPOSITE INDEX AND PEER GROUP INDEX

<TABLE>
<CAPTION>
June 9, 1995 July 29, 1995 July 27, 1996
------------ ------------- -------------
<S> <C> <C> <C>
Teltrend Inc. . . . . . . . . . . . . . . . . . . $100.00 $137.50 $227.91

Nasdaq Composite Index . . . . . . . . . . . . . . $100.00 $113.56 $121.82

Peer Group Index . . . . . . . . . . . . . . . . . $100.00 $124.04 $199.16
</TABLE>

Assumes $100 invested on June 9, 1995 in the Company's Common Stock, the
Nasdaq Composite Index and the Peer Group Index.

The Peer Group selected by the Company is comprised of the following
companies: ADC Telecommunications, Inc., ADTRAN, Inc., PairGain Technologies,
Inc., Telco Systems, Inc. and Tellabs, Inc. The Peer Group was selected by the
Company in good faith based upon similarities in the nature of the business of
the companies included in the Peer Group to the Company's business.

-55-
<PAGE> 56

COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS

The Board of Directors of the Company met six times during the fiscal year
ended July 27, 1996. The Board of Directors presently has two standing
committees -- an Audit Committee and a Compensation Committee. Prior to the
IPO, the Company also had a Stock Option Committee that made determinations
regarding the grant of stock options pursuant to the Company's Pre-IPO Option
Plan (as defined). The responsibilities of the Stock Option Committee were
assumed by the Company's Compensation Committee upon consummation of the IPO.
The Board of Directors does not have a nominating committee, and the usual
functions of such a committee are performed by the entire Board of Directors.
The Audit Committee and the Compensation Committee each met once during the
fiscal year ended July 27, 1996. The Company anticipates that the Board of
Directors will hold six regular meetings each year.

The Audit Committee recommends the Company's independent auditors and
consults with them regarding the scope, timing and results of their audit and
Company's internal accounting controls. Further, the Audit Committee reviews
related party transactions in accordance with the rules promulated by the
National Association of Securities Dealers, Inc. The current members of the
Audit Committee are Carl M. Mueller, Frank T. Cary and Henry F. Skelsey.

The Compensation Committee reviews and makes recommendations to the Board
with respect to the salaries and incentive compensation for executive officers
and key personnel. The Compensation Committee also generally administers the
Company's stock option plans. In its capacity as administrator of the Company's
stock option plans, the Compensation Committee grants stock options and
determines the terms thereof. The current members of the Compensation Committee
are Carl M. Mueller, Frank T. Cary and Henry F. Skelsey, who were also the
members of the Stock Option Committee prior to the IPO.

The Board of Directors will consider nominees for director recommended by
stockholders. However, the Company's Bylaws establish an advance notice
procedure for stockholders to make nominations of candidates for election as
directors or to birng other business before an annual meeting of stockholders of
the Company.

All of the Company's current directors attended at least 75% of the
meetings of the Company's Board of Directors and committees thereof on which
they served during the fiscal year ended July 27, 1996.

COMPENSATION OF DIRECTORS

Directors who are employees of the Company receive no additional
compensation for serving on the Board of Directors or its committees. For 1996,
all directors who are not employees of the Company are compensated at the rate
of $20,000 per year, except for the Chairman who receives $30,000 per year, plus
$1,000 per meeting of the Board attended and reimbursement for their expenses
incurred in attending such meetings. In addition, such directors who serve on
the Compensation or Audit Committee receive no additional compensation, except
they receive $1,000 for each committee meeting attended which occurs on a date
on which there is not also a meeting of the Board of Directors. In addition,
under the Teltrend Inc. 1996 Non-Employee Director Stock Option Plan each
director who is not an employee of the Company will receive upon his or her
initial election a one-time grant of an option to purchase 12,000 shares of
Common Stock. See Item 11 -- "Executive Compensation -- 1996 Non-Employee
Director Stock Option Plan."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Company's Compensation Committee consists of Messrs. Mueller, Cary and
Skelsey. Prior to the IPO, the Company also had a Stock Option Committee which
made determinations regarding the award of stock options and consisted of
Messrs. Mueller, Cary and Skelsey. Mr. Skelsey was, until February 20, 1996,
an officer of the Company and had been prior to the Recapitalization an officer
of the Holding Subsidiary and the Operating Subsidiary.

-56-
<PAGE> 57

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information as of October 23, 1996 with
respect to the beneficial ownership of the Company's Common Stock by (a) each
director of the Company, (b) each of the executive officers of the Company
named in the Summary Compensation Table, and (c) all directors and executive
officers of the Company as a group. To the best of the Company's knowledge, as
of October 23, 1996 no person beneficially owned more than 5% of any class of
the Company's voting securities. Except as otherwise indicated, all the
persons listed below have the sole voting and investment power with respect to
all shares held by them, except to the extent such power may be shared with a
spouse.

<TABLE>
<CAPTION>
NUMBER PERCENT
NAME OF BENEFICIAL OWNER OF SHARES OF CLASS
------------------------ --------- --------
<S> <C> <C>
Howard L. Kirby, Jr.*+ . . . . . . . . . . . . . . . . . . . . 114,300(1) 1.78%

Gilbert H. Hosie* . . . . . . . . . . . . . . . . . . . . . . . 33,220(2) **

Douglas P. Hoffmeyer* . . . . . . . . . . . . . . . . . . . . . 33,970(3) **

Laurence L. Sheets* . . . . . . . . . . . . . . . . . . . . . . 34,970(4) **

Michael S. Grzeskowiak* . . . . . . . . . . . . . . . . . . . . 33,970(5) **

Carl M. Mueller+ . . . . . . . . . . . . . . . . . . . . . . . 1,895 **

Frank T. Cary+ . . . . . . . . . . . . . . . . . . . . . . . . 815 **

William R. Delk+ . . . . . . . . . . . . . . . . . . . . . . . **
---

Bernard F. Sergesketter+ . . . . . . . . . . . . . . . . . . . **
---
Henry F. Skelsey+ . . . . . . . . . . . . . . . . . . . . . . . 1,000 **

Donald R. Hollis+ . . . . . . . . . . . . . . . . . . . . . . . **
---
Harry Crutcher, III+ . . . . . . . . . . . . . . . . . . . . . **
---

All directors and executive officers as a group (16 persons) . 310,540(6) 4.83%

</TABLE>

_________________________

* Executive Officer

+ Current Director

** Less than one percent

(1) Includes currently exercisable options to purchase 31,750 shares
of Common Stock at an exercise price per share of $16.00

(2) Includes currently exercisable options to purchase 26,170 shares
of Common Stock at an exercise price per share of $0.16 and,
includes currently exercisable options to purchase 7,050 shares of
Common Stock at an exercise price per share of $16.00.

(3) Includes currently exercisable options to purchase 7,800 shares of
Common Stock at an exercise price per share of $16.00

(4) Includes currently exercisable options to purchase 8,800 shares
of Common Stock at an exercise price per share of $16.00.

(5) Includes currently exercisable options to purchase 7,800 shares of
Common Stock at an exercise price per share of $16.00.

(6) Includes currently exercisable options to purchase 37,886 shares
of Common Stock at an exercise price per share of $0.16, and
74,600 shares of Common Stock at an exercise price per share of
$16.00.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

-57-
<PAGE> 58

PART IV

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

A. (1) FINANCIAL STATEMENTS

The Financial Statements of Teltrend Inc. filed as part of this Report on
Form 10-K are listed in Item 8 of this Form 10-K.

(2) FINANCIAL STATEMENT SCHEDULES

None.

(3) EXHIBITS

<TABLE>

<S> <C>
2.1 Plan of Recapitalization of the Registrant, which became
effective on June 14, 1995 in connection with the Registrant's
initial public offering.(1)

3.1 Restated Certificate of Incorporation of Registrant, as
amended.(1)

3.2 Amended and Restated Bylaws of the Registrant.(2)

4.1 Specimen form of Common Stock certificate.(2)

4.2 Articles Fourth, Seventh, Eighth, Tenth and Twelfth of the
Restated Certificate of Incorporation of the Registrant, as
amended.(4)

4.3 Articles I, II (Sections 1 and 3), IV (Sections 1 through 6),
V (Section 3) and VI of the Amended and Restated Bylaws of the
Registrant.(4)

4.4 Credit Agreement between the Registrant and LaSalle National
Bank, dated June 14, 1995.(1)

*10.1 Indemnification Agreement, dated June 8, 1995, between the
Registrant and Howard L. Kirby, Jr.(1)

*10.2 Schedule of each of the directors and executive officers of
the Registrant with whom the Registrant has entered into an
Indemnification Agreement (filed as exhibit 10.2).

*10.3 Teltrend Inc. 1995 Stock Option Plan.(2)

*10.4 Form of Nonqualified Stock Option Agreement under the Teltrend
Inc. 1995 Stock Option Plan.(1)

*10.5 Schedule of Nonqualified Stock Option Agreements which have
been entered into by directors or executive officers of the
Registrant (filed as exhibit 10.5).

*10.6 TI Investors Inc. Stock Option Plan.(2)

*10.7 Forms of Nonqualified Stock Option Agreement under the TI
Investors Inc. Stock Option Plan, dated August 1, 1994,
between Donald G. Bozeman, together with Amended and Restated
Nonqualified Stock Option Agreement under the TI Investors Inc.
Stock Option Plan, dated May 13, 1994, between the Registrant
and Donald G. Bozeman.(1)

*10.8 Teltrend Inc. 1996 Non-Employee Director Stock Option Plan.(5)

</TABLE>

-59-
<PAGE> 59
<TABLE>
<S> <C>

*10.9 Schedule of Nonqualified Stock Option Agreements which have
been entered into by directors of the Registrant (filed as
exhibit 10.9).

*10.10 Amended and Restated Stock Option Agreements, dated May 13,
1994, between the Registrant and Gilbert
H. Hosie.(1)

10.11 Registration Rights and Lock-Up Agreement between the
Registrant, The Prudential Insurance Company of America,
Pruco Life Insurance Company, AEA Investors Inc. and
Stockholders of the Registrant prior to consummation of
the Registrant's initial public offering.(1)

10.12 Debt Payment and Conversion Agreement, dated as of April 10,
1995, between the Registrant, Teltrend Subsidiary
Inc., The Prudential Insurance Company of America, Pruco Life
Insurance Company and AEA Investors Inc.(2)

10.13 Stock Exchange Agreement, dated as of May 26, 1995, between the
Registrant, the Prudential Insurance Company
of America and Pruco Life Insurance Company.(2)

10.14 Management Agreement, dated as of September 2, 1988, between
AEA Investors Inc. and the Registrant.(2)

10.15 Lease, dated April 22, 1983, between CMD Corporation and the
Registrant, together with First Amendment to
Lease, dated August 9, 1985, between Morgan Guaranty Trust
Company of New York and the Registrant and
Memorandum of Lease, First Amendment to Lease and
Ratification of First Amendment to Lease, dated August 29,
1988.(2)

10.16 Second Amendment to Lease, dated September, 1995, between
Morgan Guaranty Trust Company of New York and the
Registrant.(4)

10.17 Form of Custody Agreement and Power of Attorney, dated as of
October 2, 1995, by and among the Registrant,
LaSalle National Trust, N.A., as Depositary, Henry F. Skelsey
and Prescott C. Romeyn, as attorneys-in-fact,
and the Selling Stockholders.(3)

10.18 Real Estate Sale Agreement, dated August 20, 1996, between the
Registrant and Itasca Bank & Trust Co., as
Trustee under Trust Agreement dated June 29, 1992 and known as
Trust No. 11038 and The Kautz Road Business
Park Joint Venture (filed as Exhibit 10.18).

23.1 Consent of Ernst & Young LLP (filed as exhibit 23.1).

27 Financial Disclosure Schedule (filed as exhibit 27).

- ------------------
(1) Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended April 29, 1995
(Commission File No. 0-26114).

(2) Incorporated by reference to the Registrant's Registration
Statement on Form S-1, as amended (Registration No. 33-91104),
originally filed with the Securities and Exchange Commission
April 11, 1995.

(3) Incorporated by reference to the Registrant's Registration
Statement on Form S-1, as amended (Registration No. 33-97796),
originally filed with the Securities and Exchange Commission
October 4, 1995.

</TABLE>

(4) Incorporated by reference to Registrant's Report on Form 10-K
for the fiscal year ended July 29, 1995 (Commission File No. 0-
26114).

(5) Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended January 27, 1996
(Commission File No. 0-26114).

* Indicates a management contract or compensatory plan or
arrangement required to be filed as an exhibit to this Report
pursuant to Item 14(c).
</TABLE>

Teltrend Inc. will furnish any of the above exhibits to its stockholders upon
written request addressed to the Secretary at the address given on the cover
page of this Form 10-K. The charge for furnishing copies of the exhibits is
$.25 per page, plus postage.

B. REPORT ON FORM 8-K

None.

<PAGE> 61

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, on
October 25, 1996.

TELTREND INC.

By /s/ Howard L. Kirby, Jr.
----------------------------
Howard L. Kirby, Jr.
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the
Registrant in the capacities indicated on October 25, 1996.

<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<S> <C>
/s/ Howard L. Kirby, Jr. President and Chief Executive Officer and Director
-----------------------------------------------
Howard L. Kirby, Jr. (Principal Executive Officer)

/s/ Douglas P. Hoffmeyer Vice President, Finance, Secretary and Treasurer
----------------------------------------------
Douglas P. Hoffmeyer (Principal Financial and Accounting Officer)

/s/ Carl M. Mueller
------------------------------------------------
Carl M. Mueller Chairman of the Board of Directors

/s/ Frank T. Cary
-----------------------------------------------
Frank T. Cary Director

/s/ Harry Crutcher, III
-----------------------------------------------
Harry Crutcher, III Director

/s/ William R. Delk
----------------------------------------------
William R. Delk Director

/s/ Donald R. Hollis
----------------------------------------------
Donald R. Hollis Director

/s/ Bernard F. Sergesketter
----------------------------------------------
Bernard F. Sergesketter Director

/s/ Henry F. Skelsey
----------------------------------------------
Henry F. Skelsey Director

</TABLE>

<PAGE> 62

THIS REPORT CONTAINS THE FOLLOWING TRADEMARKS OF THE COMPANY, SOME OF WHICH ARE
REGISTERED: CELL PAK AND CYBERBLOCK. ANY OTHER PRODUCT OR BRAND NAMES ARE
TRADEMARKS, REGISTERED TRADEMARKS OR SERVICE MARKS OF THEIR RESPECTIVE
COMPANIES.

-63-

<PAGE> 1

EXHIBIT 10.2

SCHEDULE OF EACH OF THE DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT WITH WHOM THE REGISTRANT HAS ENTERED
INTO AN INDEMNIFICATION AGREEMENT

NAME DATE OF AGREEMENT
- ---- -----------------

<S> <C>
Howard L. Kirby, Jr. June 8, 1996

Laurence L. Sheets June 8, 1996

Gilbert H. Hosie June 8, 1996

Michael S. Grzeskowiak June 8, 1996

Douglas P. Hoffmeyer June 8, 1996

Donald G. Bozeman June 8, 1996

Norman C. Guenther June 8, 1996

Theodor A. Maxeiner June 8, 1996

Carl M. Mueller June 8, 1996

Henry F. Skelsey June 8, 1996

Frank T. Cary June 8, 1996

William R. Delk April 10, 1996

Bernard F. Sergesketter April 10, 1996

Donald R. Hollis July 31, 1996

Harry Crutcher, III July 31, 1996

</TABLE>

<PAGE> 1

EXHIBIT 10.4

SCHEDULE OF NON-QUALIFIED STOCK OPTION AGREEMENTS UNDER
THE 1995 STOCK OPTION PLAN

<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
- ---- ----------------

<S> <C>
Howard L. Kirby, Jr. 127,000

Laurence L. Sheets 35,200

Gilbert H. Hosie 28,200

Michael S. Grzeskowiak 31,200

Douglas P. Hoffmeyer 31,200

Donald G. Bozeman 31,200

Norman C. Guenther 9,200

Theodor A. Maxeiner 9,200

Jack C. Parker 30,000

</TABLE>

<PAGE> 1

EXHIBIT 10.9

SCHEDULE OF NON-QUALIFIED STOCK OPTION AGREEMENTS UNDER
THE 1996 NON-EMPLOYEE DIRECTOR PLAN

<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
- ---- ----------------

<S> <C>
Frank T. Cary 12,000

Harry Crutcher III 12,000

William R. Delk 12,000

Donald R. Hollis 12,000

Carl M. Mueller 12,000

Bernard F. Sergesketter 12,000

Henry F. Skelsey 12,000

</TABLE>

<PAGE> 1

EXHIBIT 10.18

REAL ESTATE SALE AGREEMENT

THIS REAL ESTATE SALE AGREEMENT ("Agreement"), is entered into as of
the 20th day of August, 1996, by and between TELTREND, INC., a Delaware
Corporation ("Purchaser"), and Itasca Bank & Trust Co. as Trustee under Trust
Agreement dated June 29, 1992 and known as Trust No. 11038 ("Seller") and The
Kautz Road Business Park Joint Venture ("Seller's Beneficiary").

RECITALS:

A. Seller owns certain vacant land situated within the corporate
limits of the City of Geneva, County of Kane, State of Illinois ("City"),
consisting of approximately twenty-five (25) acres, as depicted on Exhibit "A"
attached hereto and made a part hereof ("Land"); and

B. Seller is agreeable to selling the Land, together with all
improvements located thereon [there are no buildings located on the Land] and
all rights, privileges, easements, and appurtenances thereto owned by Seller,
including, without limitation, all mineral rights; all easements,
rights-of-way, and other appurtenances used or connected with the beneficial
use or enjoyment of the Land; and all right, title, and interest in and to all
streets adjacent to, abutting, or serving the Land (collectively the
"Premises"); and

C. Purchaser desires to purchase the Premises provided the
contingencies herein are satisfied, and Seller desires to sell the Premises to
Purchaser; and

D. The Premises constitute a portion of a larger tract of land
consisting of approximately one hundred twelve (112) acres (including the
Premises), which tract in total is referred to herein as "Seller's Tract", and
the balance of which tract, after deducting the Premises is referred to as
"Seller's Remainder Tract".

NOW, THEREFORE, in consideration of the mutual undertakings
hereinafter set forth, the sufficiency of which is hereby acknowledged, the
parties hereto agree to be bound upon the following terms and conditions:

1. PURCHASE AND SALE. Seller shall sell to Purchaser, and
Purchaser shall purchase from Seller, the Premises strictly in accordance with
the terms, conditions, and provisions hereinafter set forth.

2. PURCHASE PRICE. The purchase price ("Purchase Price") for the
Premises shall be One and 60/100 Dollars ($1.60) per square foot of land
contained in the Premises, net of public roads and rights-of-way for public
roads [but not net of rights-of-way for utility, drainage and other easements]
as calculated pursuant to the survey to be delivered under Section 11 of this
Agreement.

1
<PAGE> 2

3. PAYMENT TERMS.

3.01 INITIAL EARNEST MONEY: Within five (5) business days
following the execution and delivery of this Agreement by Purchaser and Seller,
Purchaser shall deposit with Chicago Title and Trust Company, 1725 S.
Naperville Road, Wheaton, Illinois ("Deposit Escrowee"), under a strict joint
order escrow ("Deposit Escrow") executed by legal counsel for Seller and
Purchaser, the sum of Twenty Five Thousand and NO/100ths Dollars ($25,000.00)
("Initial Earnest Money"). The Deposit Escrowee shall invest the Initial
Earnest Money in an interest bearing federally insured money market account or
other investment device backed by the U.S. Government, as Seller and Purchaser
may from time to time jointly direct, to be held and administered in accordance
with the terms of this Agreement. The interest earned on the Initial Earnest
Money shall accrue to the benefit of Purchaser. The Initial Earnest Money
shall be fully refundable to Purchaser except as otherwise provided in Sections
3.02 and 27 of this Agreement.

3.02 ADDITIONAL EARNEST MONEY: Within five (5) business days
following the expiration of the Due Diligence Contingency Period, as defined in
Exhibit "C" attached hereto, provided Purchaser has not first terminated this
Agreement pursuant to the provisions of said Exhibit "C", Purchaser shall
deposit the additional sum of Seventy-Five Thousand and NO/100 Dollars
($75,000.00) into the Deposit Escrow ("Additional Earnest Money"). The Initial
Earnest Money and Additional Earnest Money are collectively referred to herein
as the Earnest Money. Upon the deposit of the Additional Earnest Money by
Purchaser, the entirety of the Earnest Money shall become non-refundable,
except in the event of a default by Seller or as otherwise provided in Section
5 of this Agreement, provided that in the event this transaction Closes, as
hereinafter defined, the Earnest Money and all interest earned thereon shall be
applied toward the Purchase Price. The Additional Earnest Money shall be
invested by the Deposit Escrowee in the same manner as provided for the Initial
Earnest Money, as from time to time jointly directed by Seller and Purchaser.
The Earnest Money and all interest earned on all or any portion thereof are
referred to collectively as the "Deposit".

3.03 BALANCE OF PURCHASE PRICE: The balance of the Purchase Price,
plus or minus prorations and credits, shall be paid to Seller in U.S. funds, in
cash, by cashier's check, or wire transfer of immediately available funds at
Closing.

4. TITLE AND DEED. Notwithstanding anything contained herein to
the contrary, Seller shall convey merchantable title to the Premises to
Purchaser at Closing by delivering a recordable Trustee's deed conveying title
to the Premises to Purchaser, or Purchaser's nominee as directed by Purchaser
by written notice to Seller, in fee simple, free and clear of all liens and
encumbrances, except those title exceptions set forth in Exhibit "B" attached
hereto and made a part hereof ("Permitted Exceptions").

2
<PAGE> 3

5. EVIDENCE OF TITLE. Within ten (10) business days following
the date of this Agreement, Seller shall deliver to Purchaser, at Seller's
expense, a current commitment for ALTA extended coverage title insurance, Form
B-1990 ("Commitment"), in the amount of Ten Thousand Dollars and NO/100
($10,000.00) issued by Chicago Title Insurance Company ("Title Company"),
covering the Seller's Tract and showing title in fee simple in Seller subject
only to (a) the Permitted Exceptions; (b) liens or encumbrances of a definite
and ascertainable amount ("Removable Exceptions"), which Removable Exceptions
to title shall be removed at the Closing and (c) standard general exceptions 1
through 5, which Seller will caused to be waived or insured over within 10
business days after Seller receives the survey to be provided by Purchaser
pursuant to Section 11. Not less than five (5) business days prior to the
Closing Date, as hereinafter defined, Seller shall furnish to Purchaser a
current date down of the Commitment limited to the Premises, in the amount of
the Purchase Price showing title in fee simple in Seller and subject only to
the Permitted Exceptions and the Removable Exceptions, the latter of which
shall be removed by Seller at the Closing. If the date down Commitment, or the
survey to be provided pursuant to Section 11 hereof, indicates that title to
all or any part of the Premises is subject to defects other than the Permitted
Exceptions, then Seller shall have a reasonable period of time (the "Cure
Period"), not to exceed thirty (30) days after delivery to Purchaser of the
Commitment date down, or the survey, as the case may be, during which to
remedy, in a manner reasonably satisfactory to Purchaser, or remove such
defect(s). In such event the Closing Date shall be extended for a period of
thirty-five (35) days to allow Seller to attempt to remedy the defects. Seller
shall deliver to Purchaser not later than four (4) days following the
expiration of the Cure Period, a further date down of the Commitment to verify
the removal of such defects. If Seller is unable or, with respect to matters
not resulting from Seller's acts or omissions, unwilling to remove such defects
or remedy the same in a manner reasonably satisfactory to Purchaser within the
Cure Period, Purchaser shall have the option of (a) proceeding with this
Agreement and adding such title defects to the Permitted Exceptions with the
right to deduct from the Purchase Price defects, liens or encumbrances of an
ascertainable amount, or (b) declaring this Agreement null and void in which
event Seller shall instruct the Deposit Escrowee to immediately thereupon cause
the refund of the Deposit to Purchaser, subject to Purchaser's compliance with
the requirements of Section 27 with respect to mechanics' liens. Seller shall
at all times during this Agreement act in good faith and shall not negligently
or willfully cause or allow any unpermitted exceptions to be brought against
title to the Premises, and the failure of Seller to comply with this provision
shall constitute a material default by Seller under this Agreement. The
Commitment shall be conclusive evidence of good title as to all matters insured
by the policy, subject to the Permitted Exceptions as therein stated. The
Commitment fee, title examination fee, Owner's title policy and recording fees
for any mortgage release deeds shall be paid by Seller. All loan policy
premiums and recording fees for the deed of conveyance and any documents
required for Purchaser's mortgage, if any, shall be paid by

3
<PAGE> 4

Purchaser. Seller shall direct the Title Company to deliver to Purchaser
copies of all title documents at the time the Commitment is first delivered to
Purchaser. Nothing herein contained shall be construed as requiring Seller to
spend more than $10,000 for the purpose of removing or curing title exceptions
or survey defects except liens or encumbrances of a definite or ascertainable
amount.

6. PERFORMANCE CONTINGENCIES. Purchaser's obligation to Close
this transaction and purchase the Premises shall be contingent upon the
satisfaction or waiver by Purchaser of those contingencies set forth in Exhibit
"C" attached hereto and made a part hereof ("Performance Contingencies"). All
Performance Contingencies set forth in Exhibit "C" shall remain in force and
effect for the specific period of time ("Contingency Period") identified in
Exhibit "C". In the event a Performance Contingency is not satisfied in the
manner and within the Contingency Period set forth in Exhibit "C", Purchaser
may, within five (5) business days following the expiration of the Contingency
Period, give written notice to Seller identifying Purchaser's inability to
satisfy such condition and expressly terminating this Agreement as a result
thereof ("Contingency Termination Notice"). In the event Purchaser serves a
Contingency Termination Notice upon Seller in a timely fashion this Agreement
shall thereupon terminate and be of no further force or effect. Failure of
Purchaser to serve Seller with a Contingency Termination Notice prior to the
expiration of the Contingency Period for any applicable Performance Contingency
shall constitute the irrevocable waiver of such Performance Contingency by
Purchaser. In the event a Contingency Termination Notice is given under the
Due Diligence Performance Contingency, the Initial Earnest Money and accrued
interest shall be refunded to Purchaser. In the event a Contingency
Termination Notice is given under the Governmental Approval Performance
Contingency, the Deposit shall not be refunded to Purchaser except as otherwise
expressly provided in Section 3.02 of this Agreement.

7. CLOSING.

7.01. CLOSING DATE: The date on which the transaction herein
described shall be consummated is herein referred to as the "Closing Date" and
the transaction in which Purchaser, or its nominee acquires title to the
Premises is referred to herein as the "Closing". Subject to the provisions of
Section 5 (Evidence of Title) and Section 6 (Performance Contingencies) of this
Agreement, the Closing of this transaction shall occur on February 3, 1997 or
such earlier or later date mutually agreed to in writing by Purchaser and
Seller, provided all terms, provisions, and conditions of this Agreement to be
performed by Seller have been satisfied by Seller or waived by Purchaser in
writing. If the Closing Date or any other date on which any payments,
deliveries, or actions are required herein shall fall on a Saturday, Sunday, or
legal holiday, the date contemplated thereby shall be extended to the next
business day thereafter. The Closing shall take place at the office of Chicago
Title Insurance Company, Wheaton, Illinois, through a deed and money escrow
("Closing Escrow") with the Title Company serving as the escrow agent ("Escrow
Agent"). At or prior

4
<PAGE> 5

to Closing, legal counsel for the parties shall execute the standard form deed
and money escrow instructions then in use by the Escrow Agent, amended to
conform to the terms of this Agreement. Upon the opening of the Closing
Escrow, anything herein to the contrary notwithstanding, payment of the
Purchase Price and delivery of the deed required under Section 4 hereof shall
be made through the Closing Escrow, and the Deposit shall be deposited into the
Closing Escrow pursuant to joint written direction given by Purchaser and
Seller to the Deposit Escrowee.

7.02. CLOSING DOCUMENTS:

7.02.1. In addition to the Commitment to be provided under Section 5,
Seller shall deliver to the Escrow Agent at Closing the following:

(i) Seller's recordable Trustee's deed conveying marketable fee
simple title of the Premises to Purchaser or Purchaser's
nominee, with plat act affidavit attached, if applicable.

(ii) Pay off letters or release deed(s) sufficient to release
mortgages of record as to the Premises, if any.

(iii) An affidavit of title in standard form.

(iv) ALTA statements in duplicate.

(v) Real estate transfer declarations for state, county and local
authorities.

(vi) Joint Direction to Deposit Escrowee to pay the Deposit into
the Closing Escrow.

(vii) The Survey as provided in Section II of this Agreement.

(viii) Closing Statement.

(ix) FIRPTA Statement certifying that Seller is not a "foreign
person", "foreign corporation", "foreign partnership", or
"foreign estate", as those terms are defined in Section 1445
of the Internal Revenue Code and the income tax regulations
promulgated thereunder.

(x) Personal Undertaking (GAP) as required by the Title Company.

(xi) Letter from the Illinois Department of Revenue, addressed to
Purchaser, certifying that Seller does not owe any taxes to
the State of Illinois which could result in liability to
Purchaser for failing to withhold proceeds of the sale of the
Premises to pay such taxes in accordance with Section 902(d)
of the Illinois Income Tax

5
<PAGE> 6

Act and Section 444(j) of the Retailer's Occupation Tax Act,
if applicable.

(xii) Such other customary documents as reasonably may be required
by Purchaser's attorney to consummate the transaction
contemplated by this Agreement.

7.02.2. The Purchaser shall deliver to the Escrow Agent at Closing the
following documents:

(i) ALTA statements in duplicate.

(ii) Executed counterpart of Seller's closing statement.

(iii) Joint Direction to Deposit Escrowee to pay Deposit into the
Closing Escrow.

(iv) Balance of Purchase Price by cash, cashier's check, or wire
transfer of immediately available funds.

(v) Such other customary documents as reasonably may be required
by Seller's attorney to consummate the transaction
contemplated by this Agreement.

8. APPORTIONMENTS.

8.01. REAL ESTATE TAXES: Current real estate taxes and special
assessments, if any, on the Premises shall be apportioned on an accrual basis
as of the Closing Date. Proration of taxes for 1996 and 1997, if applicable,
shall be calculated based upon one hundred and ten (110%) of the latest known
assessed valuation, tax rate, and state and county equalization rates
applicable to the Premises. In the event the applicable tax bill combines the
Premises with other property, the parties shall break out the portion thereof
attributable to the Premises for vacant land under agricultural use based upon
the number of square feet contained in the portion of the Premises affected by
such tax bill divided by the total number of square feet of land included in
such tax bill. Seller and Purchaser shall have the right and authority to file
and prosecute tax assessment objections for tax years for which each shall have
a continuing tax liability. Purchaser shall cooperate with Seller concerning
any such tax objection. Any reduction in taxes resulting from such tax
objection shall be divided between the parties on a basis commensurate with the
proration of taxes provided hereunder, after first deducting the costs and
expenses, including reasonable attorney's fees, incurred in the prosecution of
such tax objection. The parties shall reprorate taxes upon the issuance of the
tax bill and any party owing additional taxes as a result thereof shall
reimburse the other party in such amount within ten (10) business days
following the issuance of such tax bill. The parties shall fully cooperate in
attempting to obtain an expected tax division of the Premises from the Seller's
Remainder Tract. So long as the tax bill(s) are issued on a combined basis,
each party shall fully cooperate in the timely payment of its

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proportionate share of such bill, to the extent prorations were not otherwise
provided at closing.

8.02. ESCROW FEE: Escrow fees for the Deposit Escrow and Closing
Escrow shall be paid by Seller and Purchaser in equal shares. Purchaser shall
pay all fees pertaining to Purchaser's money lender's escrow, if any.

8.03. COSTS OF DOCUMENT PREPARATION AND ATTORNEYS FEES: Each party
shall pay the fees of its attorney and the cost of preparing all documents
which this Agreement requires such party to furnish.

9. POSSESSION. Possession of the Premises shall be given to
Purchaser at the time of Closing and delivery of the Trustee's deed.

10. TRANSFER TAXES. The expense and cost of all federal, state,
and county documentary stamps and transfer taxes, if any, relating to the sale
and conveyance of the Premises shall be borne and remitted by the Seller at
Closing. The expense and cost of any municipal documentary stamp or transfer
tax shall be borne and remitted by the party against whom such tax is assessed
pursuant to the ordinance establishing the same, provided that if such
ordinance is silent in such regard, said tax shall be paid by Purchaser.

11. SURVEY. During the Due Diligence Contingency Period
Purchaser shall, at its initial expense, procure a survey of the Premises as
finally configured pursuant to the provisions of Section 22 of this Agreement.
The survey shall be an ALTA/ACSM extended boundary survey of the Premises
prepared by an Illinois registered land surveyor in accordance with the
Illinois Land Survey Standards. Such survey shall be certified to Purchaser or
Purchaser's nominee, Purchaser's lending institution, and the Title Company.
Such survey shall be prepared in accordance with the minimum detail
requirements established by ALTA/ACSM in 1986 (with respect to a "Class A"
survey) or the Illinois Land Survey Standards, whichever is more inclusive, and
therefore, shall include, without limitation, the spotting and location of all
fences, drainage and utility easements [nothing herein contained shall require
the "spotting" of underground drain or farm tile], public rights-of-way or
center line recordations, encroachments, building set back requirements of
record, private roads, other easements, improvements constructed thereon, if
any, and all other matters required for such survey, or such lesser standards
as Purchaser may approve in its sole discretion. The survey shall also include
a flood plain and wetland certification by the surveyor certifying the absence
of the same from any portion of the Premises, and shall certify the square foot
area of land, net of public roads and rights-of way for public roads, [but not
net of rights-of-way for utility, drainage and other easements], contained in
the Premises to be used in calculating the Purchase Price pursuant to Section 2
of this Agreement. The survey shall be certified accurate as of the Closing
Date by the surveyor. All

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costs incurred by Purchaser with respect to the survey shall be reimbursed or
paid by Seller at Closing. In the event the survey reflects easements,
encroachments, overlaps, or other defects not contained in the Permitted
Exceptions to title, Seller shall have the same rights and duties relating to
the remedy of such survey defects as are provided in Section 5 pertaining to
the remedy of title defects; provided, however, that in no event shall Seller
be required to spend more than $10,000 for the purpose of removing or curing
easements, encroachments, gaps, overlaps or other survey defects. In the event
Seller is unable or, with respect to survey defects not caused by Seller's acts
or omissions, unwilling to so remedy such survey defects, Purchaser shall have
the same rights and options (relating to the termination of this Agreement and
the right to proceed and reduce the Purchase Price for defects curable by the
payment of ascertainable amounts) as provided in Section 5 hereof pertaining to
Seller's failure to cure title defects.

12. REAL ESTATE COMMISSIONS. Each party represents to the other
that it has not incurred and will not incur any liability for brokerage fees or
commissions as a result of this transaction except as expressly provided
herein, and agrees to hold the other party harmless from and against all such
claims for fees or commissions purported to be due insofar as any such claim is
based upon any conversation or contract with the indemnifying party. Seller
acknowledges that Anderson Associates, Inc. ("Anderson"), and Goldie B. Wolfe
("Wolfe") and Company ("Brokers") brought about this sale, and Seller shall pay
the entirety of the real estate sale commission owed to Brokers in an amount
equal to six per cent (6%) of the Purchase Price [to be divided equally between
the Brokers], to be paid in cash or check at the Closing of this transaction,
and Seller shall hold Purchaser harmless and indemnified from such commission.
Said commission shall become due and payable only in the event this transaction
Closes. Purchaser represents that no real estate broker except Wolfe has shown
the Premises to Purchaser, its officers, employees, agents and representatives,
or any of them, and that it has dealt with no other broker except Anderson in
connection with this transaction. Purchaser has disclosed that it had initial
contact with Grubb & Ellis pursuant to signage that was located on the
property.

13. SELLER'S REPRESENTATIONS AND COVENANTS. Seller and Seller's
Beneficiary represent and covenant to Purchaser that to the best of their
actual knowledge:

13.01. Seller is the sole owner of fee simple title to the Premises
and has full and unlimited power and authority to enter into this Agreement,
bind the Premises to the commitments made hereunder, and convey or cause the
conveyance of the Premises to Purchaser, or Purchaser's nominee.

13.02. This Agreement shall not constitute or cause a default or
breach of any agreement or undertaking of Seller heretofore entered into
concerning the Premises.

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13.03. Seller has no actual knowledge and has received no actual
notice of any claim, demand, damage, action, or cause of action of any person,
entity, or governmental agency or instrumentality affecting the Premises not
otherwise expressly provided for herein.

13.04. The Premises is located within the corporate boundaries of
the City, and is not subject to or bound by any annexation agreement,
subdivision improvement agreement, special service area agreement or ordinance,
recapture or reimbursement agreement for any public or private utilities, or
any other form of contractual commitment, except as expressly set forth in
Exhibit "D" attached hereto.

13.05. Except as otherwise expressly set forth in Exhibit "D"
attached hereto, the Premises is not subject to any lease agreement, no parties
are in possession of the Premises other than Seller, and sole and exclusive
possession of the Premises shall be delivered to Purchaser at Closing.

13.06. Seller has no actual knowledge of and has received no actual
notice concerning any existing or proposed special assessments, special taxing
districts, or utility or governmental service moratoriums effecting the
Premises. Seller makes no representations as to when City sanitary sewer and
water will be available at the Premises.

13.07. Seller has no actual knowledge of any substandard load bearing
soil and has received no actual notice from any governmental authority of any
toxic or hazardous waste, substance or material (as defined by any applicable
federal, state or local law, ordinance or regulation) contained or located
within the Premises, and Seller is not in possession of, nor has any actual
knowledge of, any ground water study, soil test, environmental audit, or other
soil information concerning the Premises which Seller has not delivered to
Purchaser upon the execution of this Agreement and listed in Exhibit "D"
attached hereto. Seller and its beneficiaries have received no actual notice
from any governmental entity that the Premises have been, or are being, owned,
leased, used and operated otherwise than in compliance with all applicable
federal, state and local environmental laws as enacted, amended or
reauthorized. Neither Seller nor any of its trust beneficiaries, nor any
member of their families, have ever lived upon or farmed the Premises.
Accordingly, Seller makes no representations as to the non-existence of any
underground storage tanks located on the Premises.

13.08. No portion of the Premises has been condemned or otherwise
taken by any public authority, and Seller has no actual knowledge that any such
condemnation is threatened or contemplated.

13.09. Seller has no actual knowledge of and has received no actual
notice from any governmental body claiming any violation by the Premises of any
law, ordinance, code or regulation.

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13.10. Between the date of this Agreement and the Closing, Seller
shall:

(i) not knowingly violate any laws, ordinances, regulations, and
restrictions affecting the Premises and its use;

(ii) not create, incur, or suffer to exist any mortgage, lien,
pledge, or other encumbrance in any way affecting the Premises;

(iii) not commit any waste or nuisance upon the Premises; and

(iv) not, without first obtaining the written consent of Purchaser,
enter into any contracts or agreements pertaining to the
Premises which can not be terminated at Closing without cost
to Purchaser.

14. PURCHASER'S REPRESENTATIONS AND COVENANTS. Purchaser
represents and covenants to Seller that:

14.01. To the best of Purchaser's knowledge, no consent by anyone,
other than Seller, to the transaction contemplated by this Agreement is
required, and Purchaser has the power and authority to execute and deliver this
Agreement and all other documents to be executed by it in connection herewith
and to perform the obligations hereunder and under such other documents.

14.02. The execution of this Agreement by Purchaser is the duly
authorized and legally binding action of Purchaser, and upon execution hereof,
Purchaser shall be bound by and subject to the terms and provisions of this
Agreement.

15. SURVIVAL OF REPRESENTATIONS AND COVENANTS. The
representations and covenants of the parties contained in this Agreement,
including, without limitation, the provisions of Sections 13 and 14 hereof,
shall be deemed to be continuing representations and covenants up to and
including the Closing Date, with the same force and effect as though such
representations and covenants had been made on and as of Closing. The
representations and covenants of the parties shall further survive the Closing
hereunder, shall not merge with any deed of conveyance, and shall be continuing
representations and covenants of the parties hereto for a period of three (3)
years following the Closing Date; provided, however, that the three-year time
limitation set forth above shall not apply in the case of fraud or an
intentional misrepresentation. Each party hereby agrees to reimburse and
indemnify, defend and hold harmless the other party and its beneficiaries, and
their respective successors and assigns, from and against all liability,
damages and losses whatsoever, including reasonable attorneys' fees, resulting
from any misrepresentation or breach of covenant made by the indemnifying party
in this Agreement or in any document, certificate or exhibit given or delivered
to the other party pursuant to this Agreement.

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16. EMINENT DOMAIN/CONDEMNATION. In the event that at any time
prior to Closing proceedings are instituted or threatened for the condemnation
of any part of the Premises by any governmental body or authority having the
power of eminent domain, Seller agrees immediately to notify Purchaser of such
action or threatened action [provided Seller has actual notice of any such
threatened condemnation action] and Purchaser, at Purchaser's election, may (1)
participate in such condemnation proceedings negotiations or, (2) at the time
of such notice or at any time during the pendency of such condemnation
proceeding, terminate this Agreement , in which event the Deposit shall be
immediately repaid to Purchaser, anything contained to the contrary in this
Agreement notwithstanding. In the event that Purchaser does not elect to
terminate this Agreement, any monies that are paid as a result of such
condemnation proceedings either prior to or after the Closing shall be paid to
Purchaser on or after the Closing Date, and Seller shall have no claim with
respect thereto, provided this transaction Closes.

17. ILLINOIS INCOME TAX WITHHOLDING. At least fifteen (15) days
prior to Closing, Seller shall deliver to Purchaser evidence that the sale of
the Premises to Purchaser hereunder is not subject to, and does not subject
Purchaser to liability under Section 902(d) of the Illinois Income Tax Act or
Section 444(j) of the Retailers Occupation Tax Act, if applicable (herein
referred to as the "Acts") and that at least thirty (30) days prior to the
Closing, Seller shall have notified the Illinois Department of Revenue (herein
referred to as the "Department") of the intended sale and requested the
Department to make a determination as to whether the Seller has an assessed,
but unpaid, amount of tax, penalties, or interest under the Acts. Seller
agrees that, in the absence of a release letter from the Department, Purchaser
may, at the Closing, deduct and withhold from the proceeds that are due Seller
the amount necessary to comply with the withholding requirements imposed by the
Act. Purchaser shall deposit the amount so withheld in a separate escrow with
the Title Company pursuant to the terms and conditions acceptable to Seller and
Purchaser, but in any event, complying with the Act.

18. NON-FOREIGN CERTIFICATE. Seller shall provide Purchaser, on
or before the Closing Date, with a non-foreign certificate sufficient in form
and substance to relieve Purchaser of any and all withholding obligations under
federal law, which certificate shall be reasonably satisfactory to Purchaser
and the Title Company. In the event that Seller does not furnish Purchaser
with said certificate or if Purchaser has reason to believe that said
certificate would be wholly or partially false if given and so notifies Seller,
in writing, on or before the Closing Date, Purchaser shall be entitled to
withhold up to ten (10%) percent of the Purchase Price in an escrow account to
be held by Title Company until such time as Seller furnishes Purchaser with a
qualifying statement from the Internal Revenue Service sufficient to relieve
Purchaser of any and all withholding obligations under federal law, or until
Purchaser is required to deliver said funds to the Internal Revenue Service,
whichever first occurs.

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19. PERMIT FEES AND MUNICIPAL CONTRIBUTIONS. Purchaser shall be
responsible for, and shall pay, all building and occupancy permit fees and
connection and extension fees payable to the City as a part of Purchaser's
improvement of the Premises.

20. IRPTA COMPLIANCE. Purchaser understands that Seller has never
farmed the Subject Property and has no idea as to whether or not any "hazardous
substances" are, or ever have been, on or under the surface of the Subject
Property. Purchaser shall, at its sole cost and expense, be entitled to have
an environmental professional who meets the minimum qualifications of 415 ILCS
5/22.2(j)(6)(E)(iii) perform such environmental audits as Purchaser deems
advisable. Nevertheless, Seller presents to the best of Seller's actual
knowledge, the Subject Property (i) does not contain any facilities which are
subject to reporting under Section 312 of the Federal Emergency Planning and
Community Right-to-Know Act of 1986 (and federal regulations promulgated
thereunder), and (ii) does not have located upon it any underground storage
tanks which require notification under the Federal Solid Waste Disposal Act
(either of which being hereinafter referred to as an "IRPTA Condition"). Based
on the Seller's actual knowledge as aforesaid, the Subject Property does not
fall within the definition of "Real Property" set forth in the Illinois
Responsible Property Transfer Act of 1988, as amended, 765 ILCS 90/1, et seq.
(hereinafter referred to as "IRPTA") and Seller shall not provide any
Disclosure Document as required by IRPTA. If, as a result of any environmental
audit, inspection or tests conducted by Purchaser or its agents on the Subject
Property, Purchaser determines that any IRPTA Condition is present, Purchaser
shall promptly (but in no event later than ten (10) days prior to the Closing
hereunder) notify Seller of same and provide to Seller the portions of such
test reports and such other information as may be relevant to the presence,
nature and extent of such IRPTA Condition. Thereafter, if Seller concurs with
Purchaser's assertion that an IRPTA Condition exists, then:

a. Seller shall deliver to Purchaser on or before the
Closing a Disclosure Document as required by IRPTA (the date of delivery of
same being hereinafter called the "Disclosure Document Delivery Date"); and

b. Purchaser shall, on or before the Closing, notify
Seller as to whether Purchaser intends to terminate this Contract pursuant to
the provisions of IRPTA. If Purchaser makes such election to terminate, then
the Deposit shall be refunded to Purchaser, subject to Purchaser's compliance
with the requirements of Section 27 with respect to mechanics' liens, anything
to the contrary in this Agreement. If Purchaser does not elect to terminate
this Contract, then:

(1) Purchaser shall be deemed to have elected to take the
Subject Property subject to the matters set forth on said Disclosure
Document; and

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(2) Closing hereunder shall occur on the date specified
in paragraph 7.01; and

(3) At the closing, the parties shall cause the title
insurer to record the Disclosure Document and to file an additional
copy thereof with the Illinois Environmental Protection Agency as
required by IRPTA, all at Seller's expense.

21. DIVISION OF SELLERS' TRACT. The parties intend that the
Premises shall be divided from the Seller's Remainder Tract by the deed of
conveyance to be delivered at Closing, utilizing a metes and bounds description
established by the surveyor on the survey to be provided under Section 11 of
this Agreement. In the event the use of a metes and bounds description is not
permitted by any governmental authority with jurisdiction thereover, Purchaser
may [and Seller shall give Purchaser a credit in the amount of the reasonable
cost thereof at closing] (i) cause to be prepared a final plat of subdivision
subdividing the Premises from Seller's Remainder Tract, (ii) obtain the City's
approval and execution of said final plat, and (iii) obtain all other necessary
approvals and signatures for said final plat and record the same on or before
closing.

22. SIZE AND CONFIGURATION OF PREMISES. Seller understands and
agrees that Purchaser has not yet determined the exact size and configuration
of the Premises required for Purchaser's intended use thereof. Purchaser shall
have the right to make such determination during the Due Diligence Contingency
Period, as defined in Exhibit "C" attached hereto, based upon site data and
engineering information obtained by Purchaser during said time period.
Purchaser estimates that approximately twenty five (25) acres will be required
for Purchaser's intended use in general conformity with the configuration
identified in Exhibit "A" attached hereto. However, Purchaser may increase or
decrease the square foot area of land contained within the Premises up to
twenty percent (20%) and adjust the configuration thereof ("Premises
Adjustment") by giving Seller written notice of the same ("Premises Adjustment
Notice") prior to the expiration of the Due Diligence Contingency Period,
provided that any such Premises Adjustment (i) shall establish a westerly
boundary line for the Premises which is essentially straight and on a course
parallel with the easterly boundary line, and (ii) shall not create any gaps
between the northerly boundary of the Premises and the southerly right-of-way
line of Averill Road, except for the out parcel located adjacent to the
northeasterly portion of the Premises which is not owned by Seller ("Out
Parcel"). The location of the Averill Road right-of-way shall be established
in compliance with the Plat of Dedication prepared by Pavia-Marting & Co. and
dated by Kevin M. Westerkamp, as surveyor, July 16, 1996, a copy of which is
attached hereto as Exhibit "E" ("Plat of Dedication"). The Premises Adjustment
shall be identified in the survey prepared by Purchaser pursuant to Section 23
hereof and a copy of said survey shall accompany the Premises Adjustment
Notice. Any Premises Adjustment moving the

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westerly boundary of the Premises to the west shall be configured so as to
square off the adjacent portions of Seller's Remainder Tract in a manner which
avoids unusable appendages of land.

23. AVERILL ROAD.

23.01. AVERILL ROAD EXTENSION: Provided this transaction closes,
Purchaser agrees to design and construct Averill Road from the west property
line of Seller's Tract to, and including, its intersection with Kautz Road
within the right-of-way established therefor pursuant to the Plat of Dedication
("Averill Road Extension"). Seller shall, at Seller's expense, cause the Plat
of Dedication to be recorded with the Kane County Recorder's office on or
before the Closing Date. The design and specifications for the improvements to
be constructed as the Averill Road Extension shall be as required and approved
by the City ("Averill Road Improvements").

23.02. DETERMINATION OF COST: Seller's and Purchaser's obligation
to close this transaction shall be conditioned upon Pavia-Marting & Co.
("Seller's Engineer") determining, through a properly prepared engineer's
estimate of probable costs, utilizing generally accepted standards in the civil
engineering profession ("Seller's Averill Cost Estimate"), that the estimated
cost of the Averill Road Extension, consisting of (i) the preparation of final
engineering plans, (ii) construction supervision, (iii) construction of all
improvements, and (iv) repair and maintenance during the one year maintenance
guarantee following the City's acceptance of said road (collectively "Averill
Road Costs") will not exceed $900,000.00 ("Averill Cost Cap"). Seller shall
cause the Seller's Averill Cost Estimate to be prepared and delivered to
Purchaser and Seller within 14 days following Purchaser's delivery of the
Averill Studies, as hereinafter defined, to Seller's Engineer ("Averill
Estimate Due Date"). In the event the Seller's Averill Cost Estimate estimates
that the Averill Road Costs will exceed the Averill Cost Cap, either Seller or
Purchaser may terminate this Agreement by giving written notice thereof
("Averill Termination Notice") to the other party within ten (10) business days
following the Averill Estimate Due Date. In such event, this Agreement shall
become null and void and the Deposit shall be refunded to Purchaser. In the
event the Seller's Averill Cost Estimate does not estimate a total cost
exceeding the Averill Cost Cap, or in the event neither Purchaser or Seller
deliver an Averill Termination Notice in a timely manner, the aforesaid
condition precedent shall be deemed irrevocably waived and, provided this
transaction Closes, the Averill Road Costs actually incurred in completing the
Averill Road Extension shall be shared by the parties in accordance with the
provisions of Exhibit "F" attached hereto. The portion of the Averill Road
Costs allocated to Seller in Exhibit "F" is referred to herein as "Seller's
Averill Road Contribution". The portion of the Averill Road Costs allocated to
Purchaser in Exhibit "F" is referred to herein as "Purchaser's Averill Road
Contribution".

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23.03. AVERILL STUDIES: To facilitate the preparation of
Seller's Averill Cost Estimate, within thirty (30) days following the date of
this Agreement Purchaser shall, at Purchaser's expense, obtain and deliver to
Seller and Seller's Engineer (i) soil boring tests every 300 feet along the
proposed centerline of the Averill Road Extension ("Soil Tests"), and (ii)
preliminary engineering plans for the Averill Road Extension ("Preliminary
Averill Plans") prepared by Cemcon, Ltd. ("Purchaser's Engineer"). The Soil
Tests and Preliminary Averill Plans are collectively referred to herein as the
"Averill Studies". In the event this transaction Closes, the cost incurred by
Purchaser for the Averill Studies, not to exceed $12,000.00 ("Averill Studies
Costs"), shall be credited to Purchaser agaianst the Purchase Price at Closing
("Averill Studies Closing Credit"). In the event this Agreement is terminated
for any reason other than Purchaser's default, Seller shall reimburse Purchaser
for the Averill Studies Costs (not to exceed $12,000.00) within five (5)
business days following such termination.

23.04. GOVERNMENT FUNDING: In the event the City or any other
governmental body or agency obtains grants for, or otherwise provides funding
for all or any portion of the Averill Road Costs (excluding any portion of such
funding collected from property owners within the Seller's Tract benefitted by
Averill Road through recapture ordinance, special assessment or other
extraordinary funding method), each parties aggregate Averill Road Contribution
shall be reduced by a percentage amount equal to the percentage of the Averill
Road Costs paid by the City or other governmental body or agency. For example,
if such governmental funding pays fifty percent (50%) of the Averill Road
Costs, each parties aggregate Averill Road Contribution shall be reduced by
fifty percent. The amount of any goverment payment of the Averill Road Costs
funded through recapture ordinance, special assessment or other extraordinary
funding method applied to Seller's Tract shall constitute a credit toward each
parties Averill Road Contribution in the amount to be thereby collected from
each party, excluding interest and administrative costs. In no event, however,
shall governmental funding through the use of recapture ordinance, special
assessment or other extraordinary method cause a parties Averill Road
Contribution to be increased beyond the amount provided in Exhibit "F" attached
to this Agreement.

23.05. POSTING OF SECURITY: Provided this transaction Closes,
Purchaser shall be responsible for posting all letters of credit or other
security devices required by the City pertaining to the Averill Road
Improvements (including the security for the one year maintenance guarantee
following City acceptance of the Averill Road Improvements), to guarantee said
improvements will be completed and fully paid for, free and clear of Mechanic's
Lien claims against the Premises and Seller's Remiander Tract. The cost of all
such letters of credit and other security devices incurred by Purchaser shall
be included in the Averill Road Costs, and shared by the Parties pursuant to
Exhibit "F" attached hereto.

23.06. CREDIT AT CLOSING/POST CLOSING ADJUSTMENT: At Closing
Purchaser shall receive a credit against the Purchase Price

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in an amount equal to the estimated Seller's Averill Road Share, as calculated
by applying (i) one hundred ten percent (110%) of the average total costs
estimated in the Seller's Averill Cost Estimate and the estimate of the Averill
Road Costs prepared by Purchaser's Engineer,to (ii) the share allocations set
forth in Exhibit "F" attached hereto ("Averill Closing Credit"). Purchaser
shall pay the Averill Road Costs in a timely manner as they became due and
owing, utilizing the Averill Closing Credit and Purchaser's Averill Road
Contribution. If at anytime during the construction or maintenance guarantee
period of the Averill Road Extension, the Averill Closing Credit becomes
insufficient to cover Seller's Averill Road Contribution, Purchaser shall
notify Seller thereof, with written verification of such deficiency attached
("Deficiency Notice"), and Seller shall thereafter promptly pay to Purchaser
such additional amounts of Seller's Averill Road Contribution from time to time
required to provide for the timely payment of bills for the Averill Road Costs.
In the event Purchaser is required to advance any portion of Seller's Averill
Road Contibution beyond the amount of the Averill Closing Credit to make timely
payment of an Averill Road Cost, all such advanced funds shall accrue interest
at the rate of fifteen percent (15%) per annum, compounded monthly, from the
date of payment by Purchaser to the date of reimbursement by Seller, and shall
constitute a lien against that portion of Seller's Remainder Tract then owned
by Seller upon the filing of a notice of lien by Purchaser against such
property. In the event the final Seller's Averill Road Contribution,
calculated using the actual Averill Road Costs following (i) completion of the
Averill Road Improvements, (ii) acceptance thereof by the City and (iii)
release by the City of all security posted by the Purchaser for Averill Road
(items (i), (ii) and (iii) collectively the "Completion Events"), is less than
the Averill Closing Credit, Purchaser shall, within twenty (20) business days
following the occurance of all of the Completion Events, pay the entirety of
the excess of the Averill Closing Credit to Seller.

24. DEFAULT/REMEDY.

24.01. DEFAULT BY PURCHASER: In the event of a default by Purchaser
of any of Purchaser's obligations under this Agreement, and the failure of
Purchaser to cure such default within fifteen (15) days after Seller notifies
Purchaser in writing of such default (the "Purchaser Cure Period"), Seller
shall be entitled to seek all remedies available to it in equity and at law,
including the specific performance of Purchaser's obligations hereunder.

24.02. DEFAULT BY SELLER: In the event of a default by Seller of any
of Seller's obligations under this Agreement, and the failure of Seller To cure
such default within fifteen (15) days after Purchaser notifies Seller in
writing of such default (the "Seller Cure Period") Purchaser may, at its
option, pursue any one of the following remedies either separately or
cumulatively:

(a) to terminate this Agreement, in which event neither party
shall have any further rights or obligations hereunder and the
Deposit shall be paid to Purchaser;

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(b) to enforce specific performance of Seller's obligations
hereunder, including specifically the conveyance of the
Premises in the condition required hereby; and/or

(c) to pursue any other legal or equitable remedies available to
Purchaser; provided that in no event shall Purchaser be
entitled to recover damages in excess of $10,000 for Seller's
failure to clear title or cure survey defects or remedy
environmental problems.

24.03. All costs and expenses, including reasonable attorney's fees,
incurred by a non-defaulting party as a result of the default of another party
shall be paid by the defaulting party.

25. MISCELLANEOUS.

25.01. NOTICES: Any notice required or desired to be given under
this Agreement shall be in writing and shall be deemed to have been given when
delivered personally, on the date of confirmed facsimile transmission, or on
the date deposited in a United States Post Office, registered or certified
mail, postage prepaid, return receipt requested, and addressed as follows:

If to Seller: Itasca Bank & Trust Co.
308 West Irving Park Road
Itasca, Illinois, 60143
Attention: Stan Perry
Phone: (708) - 773-0350
Fax: (708) - 773-0716

With a copy to: Mrs. James Clapper
38 W 042 Silver Glen
St. Charles, Illinois, 60174
Phone: (708) - 584-4230
Fax: (708) - 232-7344

With a copy to: Law Offices of Bryan E. Mraz & Associates
Attention: Edward S. Mraz
111 East Irving Park Road
Roselle, Illinois, 60172
Phone: (708) - 529-2541
Fax: (708) - 529-2019

If to Purchaser: Teltrend, Inc.
620 Stetson
St. Charles, Illinois 60174
Attention: Douglas P. Hoffmeyer
Phone: (708) - 377-1700
Fax: (708) - 377-0128

With a copy to: Rathje, Woodward, Dyer & Burt
300 E. Roosevelt Road
P.O. Box 786
Wheaton, Illinois 60187

17
<PAGE> 18

Attention: Henry S. Stillwell III
Phone: (708) - 668-9936
Fax: (708) - 668-7350

or to such other address as either party may from time to time specify in
writing to the other in accordance with the terms hereof.

25.02. ASSIGNMENT: Neither Seller nor Purchaser shall have the right
to assign this Agreement or any right or interest hereunder without the prior
written consent of the other party. Notwithstanding the foregoing, Purchaser
shall have the right and authority to assign this Agreement, and all rights
[but not Purchaser's duties without Seller's express written consent] of
Purchaser hereunder, to an entity "affiliated" with Purchaser or owned by
Purchaser, in whole or in part, without further consent by Seller.

25.03. SUCCESSORS AND ASSIGNS: This Agreement shall be binding
upon, and inure to the benefit of the parties hereto and their respective
grantees, successors and assigns.

25.04. AMENDMENTS: Except as otherwise provided herein, this
Agreement may be amended or modified by, and only by, a written instrument duly
authorized and executed by Seller and Purchaser.

25.05. GOVERNING LAW AND INTERPRETATION: This Agreement shall be
governed by the laws of the State of Illinois. The terms "hereby," "hereof,"
"hereto," "herein," "hereunder," and any similar terms shall refer to this
Agreement, and the term "hereafter" shall mean after, and the term "heretofore"
shall mean before, the date of this Agreement. Words of the masculine,
feminine, or neuter gender shall mean and include the correlative words of
other genders, and the words importing the singular number shall mean and
include the plural number and vice versa. Words importing persons shall
include firms, associations, partnerships (including limited partnerships),
trusts, corporations, and other legal entities, including public bodies, as
well as natural persons. The terms "include," "including," and similar terms
shall be construed as if followed by the phrase "without being limited to."

25.06. SECTION HEADINGS: The section headings inserted in this
Agreement are for convenience only and are not intended to, and shall not be
construed to, limit, enlarge or affect the scope or intent of this Agreement
nor the meaning of any provision hereof.

25.07. COUNTERPARTS: This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same document.

18
<PAGE> 19

25.08. MERGER OF PRIOR AGREEMENTS: This Agreement supersedes all
prior agreements and understandings, written and oral, between the parties
hereto relating to the subject matter hereof.

25.09. EFFECTIVE DATE: The effective date of this Agreement shall be
the date first above set forth on the first page of this Agreement.

25.10. TIME OF ESSENCE: Time is of the essence of this Agreement.

25.11. RECITALS AND EXHIBITS: The recitals set forth at the
beginning of this Agreement and the exhibits attached hereto are hereby
incorporated into this Agreement and made a part of the substance hereof.

25.12. EXPIRATION OF OFFER: This Agreement when executed by
Purchaser shall constitute an offer to purchase the Premises by Purchaser,
which offer shall be effective for a period of twenty-one (21) days following
the date of delivery hereof to Seller. In the event Seller fails to execute
and deliver this Agreement to Purchaser within said twenty-one day period, this
offer to purchase shall automatically expire and be of no force or effect,
regardless of Seller's execution hereof following said time period, unless this
Agreement is re-executed and dated by Purchaser verifying Purchaser's
acceptance thereof.

26. TAX FREE EXCHANGE: Purchaser agrees to use all reasonable
efforts to cooperate with Seller in trading the Premises pursuant to Section
1031 of the Internal Revenue Code for other real estate to be designated by
Seller prior to or at the Closing Date; provided, however, that in no event
shall Purchaser incur any additional out of pocket expenses, including, but not
limited to, attorney's fees, brokers' commissions, title charges, recording
charges, and escrow fees, which are not reimbursed at the Closing. In
particular, Purchaser shall confirm the Closing Date by written notice at least
90 days prior thereto so that Seller can identify the trade property, and, if
requested by Seller, to sign an option contract, reasonably approved by
Purchaser's attorney, for the purchase of the trade property. In no event
shall Purchaser be obligated to pay any option money or take legal title to the
trade property. The Seller shall be solely responsible for the exchange
transaction complying with the requirements of IRC Section 1031. This
transaction is not conditioned upon the effectuation of a tax free exchange.

27. MECHANICS' LIEN CLAIMS: In no event shall the Deposit or any
Earnest Money be refunded to Purchaser until it has delivered to CTI such sworn
statements, mechanics' lien waivers and other documents as CTI may require to
insure Sellers Title to the Seller's Tract, including the Premises and Seller's
Remainder Tract, free and clear of mechanics' lien claims arising out of the
activities of Purchaser and its surveyors, architects, planners, engineers,
soils consultants, any other consultants or experts

19
<PAGE> 20

retained by Purchaser, or any of them, on or with respect to Seller's Tract.

IN WITNESS WHEREOF, the parties hereto have placed their hands and
seals to this Agreement as of the date first above written.

PURCHASER: SELLER:

Teltrend, Inc., a Delaware Itasca Bank & Trust Co. as
corporation Trustee u/t/a dated 6/29/92
a/k/a Trust No. 11038

By: /s/ Douglas P. Hoffmeyer By: /s/ Barbara Lore
--------------------------- ---------------------------
Title: V.P. Financial Title: Vice President and
Senior Trust Officer

Attest: /s/ Claire L. Martin Attest: /s/ A. Preb
--------------------------- ------------------------
Title: Administrative Assistant Title: Assistant Secretary

20
<PAGE> 21

SCHEDULE OF EXHIBITS

EXHIBIT "A": Depiction of Premises

EXHIBIT "B": Permitted Exceptions to Title

EXHIBIT "C": Performance Contingencies

EXHIBIT "D": Miscellaneous Disclosures

EXHIBIT "E": Averill Road Plat of Dedication

EXHIBIT "F": Averill Road Cost Allocation

<PAGE> 22

EXHIBIT "A"

DEPICTION OF PREMISES*

A drawing showing the approximate location of the boundary lines of
the Premises is appended hereto as Exhibit A1, expressly incorporated herein by
this reference.

* The legal description of the Premises shall be inserted on
receipt of the survey as provided for under Sections 11 and 22
of this Agreement.
<PAGE> 23

EXHIBIT "B"

PERMITTED EXCEPTIONS

Matters set forth in Special Exceptions 3, 4 (which will be waived
upon delivery of the Trustee's Deed), 5, 7, 8 (which shall be limited to Kautz
and Averill Roads), 9, 10, 12, 13, and 14 set forth in Chicago Title Insurance
Company's ("CTI") Commitment for Title Insurance No. 1410 000430830 Kane dated
May 20, 1996, and to the Exclusions from Coverage and Conditions and
Stipulations as contained in CTI's ALTA Owners 1992 Policies, and to the
Commitment Conditions and Stipulations incorporated by reference in that
Commitment.
<PAGE> 24

EXHIBIT "C"

PERFORMANCE CONTINGENCIES

The obligation of Purchaser to Close on the sale and purchase of the
Premises shall be conditioned upon the following Performance Contingencies:

A. ITEMIZATION OF PERFORMANCE CONTINGENCIES:

(1) Purchaser having obtained title documents, soil
tests, soil borings, percolation tests, environmental
audits, and other feasibility tests, engineering
studies,[ ] location studies, and market studies
showing that the permitted title exceptions, physical
aspects, location, access to public rights-of-way,
and the condition of the Premises are acceptable to
Purchaser and suitable for Purchaser's intended use
of the Premises and that the intended use is
economically feasible, in Purchaser's sole and
absolute discretion ("Purchaser's Due Diligence
Performance Contingency");

(2) Purchaser having obtained all necessary and
appropriate approvals and permits from the City for
zoning, final planned unit development plans and
final engineering for the Premises; approval for
perimeter road curb cuts from the City and City of
West Chicago; and the enforceable commitment of the
City that it will, at its expense, install, not later
than the three (3) months following the Closing Date
the electrical system, sanitary sewer lines, and
water mains through [ ] the Seller's Tract
("Utilities") so as to bring the utilities to the
property line of the Premises in operating condition
with sufficient capacity to service the Premises when
developed for Purchaser's intended use ("Governmental
Approvals") as reasonably necessary to effectuate
Purchaser's intended use of the Premises
("Governmental Approval Performance Contingency").
Seller shall cooperate with Purchaser in a prompt and
timely manner with respect to Purchaser's efforts to
obtain the Governmental Approvals, and Seller shall
execute all necessary and appropriate petitions,
authorizations and other documents associated
therewith; provided, however, that in no event shall
Seller be required to execute any petition,
authorization or other document which might, in the
reasonable opinion of Seller's tax counsel, result in
disqualification under Section 1031 of the Internal
Revenue Code. Seller shall appear at

1
<PAGE> 25

meetings and public hearings before the Corporate
Authorities of the City to give testimony in support
of Purchaser's applications if requested by
Purchaser. All costs arising from or pertaining to
the Governmental Approvals shall be paid by
Purchaser. Purchaser shall exercise due diligence
and good faith in seeking to obtain the Governmental
Approvals prior to the expiration of the Governmental
Approval Contingency Period.

B. CONTINGENCY PERIODS:

(1) Purchaser shall have ninety (90) days following the
date of this Agreement to satisfy the Due Diligence
Performance Contingency ("Purchaser's Due Diligence
Contingency Period").

(2) Purchaser shall have one hundred twenty (120) days
following the expiration of the Purchaser's Due
Diligence Contingency Period to satisfy the
Governmental Approval Performance Contingency
("Governmental Approval Contingency Period"). The
Due Diligence Contingency Period and Governmental
Approval Contingency Period are sometimes referred to
herein collectively as the "Contingency Periods".

C. PURCHASER'S INTENDED USE:

For purposes of this Agreement, all references to Purchaser's intended
use shall mean the use of the Premises for the construction, use and
maintenance of not less than 350,000 square feet of manufacturing, office and
warehouse space, with appropriate on-site parking, for the relocation of
Purchaser's existing operations.

D. ENGINEERING AND OTHER FEASIBILITY TESTS AND RIGHT OF ENTRY:

From and after the date of this Agreement, and at all times prior to
the expiration of the Contingency Periods, Purchaser, its representatives, and
agents shall have the right to enter upon the Premises (i) to examine, inspect,
and make tests as to the feasibility and adaptability of the Premises for
Purchaser's intended use thereof, such tests to include, without limitation,
test borings, soil tests, topographical studies, engineering analysis and
environmental audits; and (ii) for the collection of all information that is
necessary or appropriate in connection with the foregoing or for Purchaser's
intended use of the Premises (all of the foregoing examinations, inspections,
studies, and tests being hereinafter referred to as the "Studies"). All such
Studies are to be made at Purchaser's expense. Purchaser shall repair, to the
extent reasonably practicable, any damage caused to the

2
<PAGE> 26

Premises as a result of such Studies, and Purchaser shall indemnify, save, hold
harmless, and defend Seller from any claim of loss or damage made by any third
party arising from the entry onto the Premises by Purchaser, its
representatives, or agents. Purchaser shall not cause or allow any lien claim
to be filed against the Premises as a result of said Studies, and shall remove
any such lien claim so filed within ten (10) days following its filing of
record. Purchaser shall at all times during the Contingency Periods carry
comprehensive general liability insurance with combined single limit coverage
of not less than $2,000,000.00, naming Seller as an additional insured, and
shall deliver to Seller a certificate of insurance verifying the existence of
such coverage prior to entering upon the Premises.

3
<PAGE> 27

EXHIBIT "D"

MISCELLANEOUS DISCLOSURES

To be completed by Seller prior to execution. If no additional
disclosures or document identifications are required, state "None". Absent any
items set forth herein by Seller following Seller's execution of this
Agreement, the inclusion of the word "None" shall be implied. If additional
disclosures are listed, this Agreement shall not be deemed effective until this
Exhibit "D" is reviewed by Purchaser and each disclosure set forth herein
approved by Purchaser, as evidenced by Purchaser's initials opposite each
disclosure.

1. Annexation Agreement between Seller and the City of Geneva, Illinois,
recorded as Document No. 94K066055, in Kane County, Illinois.

2. Phase One Environmental Audit prepared by George Noble & Associates.

3. Farm Lease between Seller and Miller Brothers.

<PAGE> 28

EXHIBIT "E"

AVERILL ROAD PLAT OF DEDICATION

(See following sheet)

<PAGE> 29

EXHIBIT "F"

AVERILL ROAD COST ALLOCATION

Cumulative Dollar Expended Seller's Share Purchaser's Share
- -------------------------- -------------- -----------------

1. $ 0 through $100,000 0% 100%
2. $101,000 through $700,000 100% 0%
3. $700,001 through $800,000 0% 100%
4. $800,001 through $900,000 100% 0%
5. over $900,000 50% 50%

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration
Statements on Form S-8 (File Nos. 33-95316 and 33-95314) of Teltrend Inc. of
our report dated August 29, 1996, with respect to the financial statements of
Teltrend Inc. included in the Annual Report on Form 10-K for the year ended
July 27, 1996.

/s/ ERNST & YOUNG LLP

Chicago, Illinois
October 25, 1996

-64-

<ARTICLE> 5
<CIK> 0000943822
<NAME> Teltrend, Inc.

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-27-1996
<PERIOD-START> JUL-30-1995
<PERIOD-END> JUL-27-1996
<CASH> 22,889,192
<SECURITIES> 0
<RECEIVABLES> 12,609,361
<ALLOWANCES> 260,192
<INVENTORY> 12,346,169
<CURRENT-ASSETS> 50,539,990
<PP&E> 13,450,234
<DEPRECIATION> 7,579,651
<TOTAL-ASSETS> 57,284,086
<CURRENT-LIABILITIES> 14,639,310
<BONDS> 0
0
0
<COMMON> 64,226
<OTHER-SE> 42,580,550
<TOTAL-LIABILITY-AND-EQUITY> 57,284,086
<SALES> 85,912,819
<TOTAL-REVENUES> 85,912,819
<CGS> 46,643,923
<TOTAL-COSTS> 46,643,923
<OTHER-EXPENSES> 44,112
<LOSS-PROVISION> 158,192
<INTEREST-EXPENSE> 17,931
<INCOME-PRETAX> 20,616,861
<INCOME-TAX> 8,452,913
<INCOME-CONTINUING> 12,163,948
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,163,948
<EPS-PRIMARY> 1.86
<EPS-DILUTED> 1.86

</TABLE>