10-K

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


                                     FORM 10-K

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

                    FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

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

                         COMMISSION FILE NUMBER 000-23698

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

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

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

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

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

              SECURITIES REGISTERED PURSUANT TO SECTION 12(g)
                                  OF THE ACT:
                        COMMON STOCK, $0.001 PAR VALUE
                                (TITLE OF CLASS)

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

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

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

The aggregate market value of the voting stock held by non-affiliates of the 
registrant, based upon the closing sale price of the Common Stock on February 
28, 1998 as reported on the Nasdaq National Market, was approximately 
$58,670,158. For the purposes of this calculation, shares owned by officers, 
directors and 5% shareholders known to the registrant have been deemed to be 
owned by affiliates. This determination of affiliate status is not 
necessarily a conclusive determination for other purposes.

There were 12,629,469 shares of the Registrant's Common Stock, $0.001 par 
value, outstanding as of February 28, 1998.

                     DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for the Annual Meeting of 
Shareholders to be held May 21, 1998, referred to herein as the "Proxy 
Statement", are incorporated by reference as provided in Part III.



 PART I

ITEM 1.  BUSINESS

         THE STATEMENTS CONTAINED IN THIS FORM 10-K THAT ARE NOT PURELY 
HISTORICAL ARE FORWARD LOOKING STATEMENTS. STATEMENTS WHICH USE THE WORDS 
"OBJECTIVE," "SEEK," "INTEND," "WILL," "ANITICPATE," "CAN," "CONTINUE," AND 
"EXPECT," ARE FORWARD LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS, 
INCLUDING STATEMENTS REGARDING THE COMPANY'S (i) PLANS FOR DEVELOPMENT OR 
ACQUISITION OF NEW PRODUCTS OR ENHANCEMENT OF EXISTING PRODUCTS, (ii) 
STRATEGY AND (iii) EXPANDED MARKETING EFFORTS, ARE BASED ON INFORMATION 
AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO 
OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENT. IT IS IMPORTANT TO 
NOTE THAT THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE IN 
SUCH FORWARD LOOKING STATEMENTS. AMONG THE FACTORS THAT COULD CAUSE ACTUAL 
RESULTS TO DIFFER MATERIALLY ARE THE FACTORS SET FORTH BELOW UNDER THE 
HEADING "RISKS AND UNCERTAINTIES."

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

         ADA's network systems products are deployed by a number of TSPs, 
including the five regional bell operating companies ("RBOCs"), several long 
distance or "interexchange carriers" ("IXCs"), including MCI, Worldcomm and 
IXC Communications, several competitive local exchange carriers ("CLECs") and 
competitive access providers ("CAPs"), including Brooks Fiber and 
Consolidated Communications, international carrier Chunghwa Telecom of 
Taiwan, and several independent telephone companies ("ITOCs"). Some of the 
Company's customers for its network management OS products and services 
include MCI, Worldcomm, British Columbia Telecom ("BC TEL"), Fujitsu 
Australia, OPTUS, GTE, Sprint/Centel Telephone, Metropolitan Fiber Systems 
("MFS"), Teleport Communications Group ("TCG"), MGC Communications ("MGC"), 
TDS Telecom ("TDS"), IntelCom Group ("ICG"), several enterprise networks and 
several other TSPs. 

RECENT DEVELOPMENTS

         In September 1997, the Company entered in to a Joint Development 
Agreement ("JDA") with Northern Telecom, Inc. ("Nortel") to develop unique 
Synchronous Optical Network ("SONET") products for the telecommunications 
industry. Nortel and the Company will each contribute technology and 
development resources to projects conducted under the JDA. The companies will 
equally share development costs, estimated to be several million dollars per 
quarter. Development of the first product under the JDA has commenced with 
initial availability expected in the first half of 1999. The JDA also 
contemplates additional projects as agreed to in the future by Nortel and 
ADA. However, there can be no assurance that the Company will be able to 
develop the initial product or any future products on a timely basis or that 
its development efforts will result in commercially successful products. 
Operating expenses for the year ended December 31, 1997 include a $2.2 
million offset to research and development

                                      -2-



costs representing Nortel's proportionate share of development costs that 
were incurred through December 31, 1997 in connection with the initial 
project being conducted under the JDA.

         In June 1997, the Company acquired from Northern Telecom an 
exclusive worldwide license to Northern Telecom's DSS II OS software product, 
subject to certain residual rights retained by Northern Telecom. The Company 
markets and supports the DSS II product under the new name, .Provisioner. The 
product is an OS software application for provisioning and configuration 
management for transport networks comprised of multiplexers, digital 
cross-connect systems ("DCSs") and other transport elements. The Company 
acquired the license and related assets for $3.1 million in cash. As part of 
the transaction, the Company also issued Nortel a warrant to purchase 150,000 
shares of the Company's common stock at an exercise price of $12 per share. 
The warrant has a 3 year term. In June 1997, the Company recorded a $1.6 
million charge for purchased research and development associated with the 
license and asset acquisition. The acquisition of .Provisioner was part of 
the Company's strategic plan to build upon its portfolio of network 
management OS products essential to the operation of TSP networks.

BACKGROUND

         The Telecommunications Deregulation Act of 1996 (the "1996 
Telecommunications Act") has greatly increased the competitive nature of the 
telecommunications industry and has changed traditional supplier-customer 
relationships among local telphone companies and long distance providers. 
TSPs, which include the RBOCs, IXCs, CLECs, CAPs, ITOCs, Internet servive 
providers ("ISPs"), and emerging carriers are entering the territories and 
businesses of each other, fiercely competing to supply business customers 
with highly profitable telecommunications networks and services. The 
competitive climate has created significant challenges for TSPs as they 
strive to meet objectives of increasing revenue and market share, while 
retaining current customers and lowering operating costs.

         The volume of digital information transmitted through the 
telecommunication system has grown rapidly in recent years. This growth has 
been driven primarily by the proliferation of personal computers and 
workstations, the prevalence of networking and use of the Internet, the 
adoption of client/server computing, the increase in cellular telephone and 
facsimile use, and the deployment of new digital information applications 
including multimedia, video conferencing, and image-processing. As a result, 
telephone companies have been required to rapidly deploy new high-speed data 
and voice circuits operating at a 1.54 megabit-per-second rate, called DS1, 
or T1, and at a 45 megabit-per-second rate, called DS3 or T3. The DS3 
transmission rate is the highest electrical telecommunication circuit 
transmission rate currently available in North America.

         The present structure of the telecommunications industry in the 
United States is largely a result of the court-mandated divestiture of AT&T 
in 1984. The AT&T divestiture resulted in the creation of the RBOCs, the 
competitive long distance telephone company market, and the emergence of CAPs 
and CLECs who offer local telephone service in competition with the RBOCs or 
ITOCs. Regulation through competition is the philosophy that resulted in the 
breakup of AT&T, and the Company believes it continues to be the philosophy 
of the Federal Communications Commission ("FCC"). The passage of the 1996 
Telecommunications Act allows each of these telephone companies to enter the 
territories and businesses of the others and has resulted in an unprecedented 
number of mergers and acquisitions among TSPs. While the Company believes 
that the new law will bring new opportunities for network equipment 
suppliers, it is too early to assess the long-term impact of this new law on 
the telecommunications industry and ADA's business. RBOCs have faced 
increased competition from both CLECs and from the local service competitive 
initiatives of the long distance telephone companies and will potentially 
face competition from non-traditional providers of telephone service such as 
cable television companies. The Company believes that many of the new 
competitive entrants will continue to focus their efforts on corporate and 
government communications networks which are among the most profitable market 
segments. Customers in these segments require highly reliable data and voice 
communications circuits to enable them to conduct their day-to-day business 
without interruption. These new competitors are often able to offer 
higher-quality and lower-cost service than local telephone companies, and as 
a result, have gained significant market share in these segments. This 
increased competition has brought pressure on RBOCs to protect their existing 
revenue bases by improving the quality of their service and to reduce their 
costs. At the same time, the RBOCs continue to re-engineer and downsize their 
organizations. The large reductions in staff have often resulted in the loss 
of highly experienced and technical people, leaving less experienced staff to 
operate and maintain the networks.

         Prior to the 1984 divestiture, AT&T was responsible for end-to-end 
telecommunication service. When problems occurred with a telephone 
connection, customers called AT&T to diagnose and fix the problem. Today, 
however, a long distance data or voice circuit often involves three or more 
telephone companies: the local telephone companies

                                      -3-



on each end and the long distance telephone company providing the connection 
between the two local companies. Responsibility for service in long distance 
high-speed data and voice networks is transferred from one carrier to another 
at their network boundaries.

         The Company believes that the segmentation of the telecommunications 
network has made it more difficult for telephone companies to identify and 
respond to problems in their networks. For example, many stock brokerage 
firms communicate real-time stock quotes and buy and sell orders to and from 
their brokers over high-speed data communications lines. Such firms monitor 
their own circuits and can detect when data communications service begins to 
degrade. When a degradation in service is noted, the telecommunications 
manager of the firm contacts the telephone company that manages the network - 
typically the long distance carrier. Initially, the long distance telephone 
company does not know where the problem is located and must initiate three 
trouble reports, one in each local telephone company and one in its own 
company. Each telephone company then dispatches multiple repair crews with 
portable test equipment to attempt to locate the problem. Typically, repair 
crews are dispatched to a number of locations, including the network boundary 
between the long distance and the local telephone company, the telephone 
building nearest the user, and to outside facilities such as the cables and 
equipment beneath streets and on poles between the central offices and the 
end-user customer. This system of maintenance results in a number of 
inefficiencies. For example, the Company believes telephone company repair 
crews often incur needless expense only to report "no trouble found." Despite 
their best efforts, repair crews often inadvertently interrupt or damage 
circuits that are working and may make unnecessary repairs.

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

THE APPLIED DIGITAL ACCESS SOLUTION

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

         ADA's test and monitoring systems, intelligent NIUs, and OS 
software, in stand-alone applications, and in integrated solutions, help TSPs 
improve performance to their business customers. The Company's products help 
TSPs provide better service to their business customers by providing new 
services faster, restoring service faster when circuits fail, optimizing 
performance on in-service circuits, and maximizing the performance of the 
public switched telephone network. When competing for profitable business 
customers, the integration of network management functions are valuable 
assets to TSPs. Without efficient integrated network management systems, TSPs 
are hard pressed to increase market share.

         The Company provides TSPs with network performance management 
products to provision new circuits, test circuits, monitor telephone network 
building blocks such as digital switches, digital cross-connect systems and 
SONET transmission systems, monitor transmission performance on high-speed 
digital circuits, and manage transmission facilities to optimize the 
performance of the telephone network in the era of increased demand from 
Internet usage. The Company believes its network systems products enable TSPs 
to greatly improve their reliability of service, reduce circuit repair time, 
reduce network management expense, and proactively maintain network quality.

                                      -4-



STRATEGY

         The Company seeks to maintain a leadership position as a supplier of 
network performance management solutions for high-speed TSPs and to become a 
leading provider of OS solutions for network management of telecommunications 
networks:

         1. DEVELOPING AND ENHANCING PRODUCTS FOR NETWORK BOUNDARY APPLICATIONS.

         The initial application for the Company's products has been at the 
network boundary between the IXC and the local TSP. Installation of the T3AS 
system at these boundaries allows the local TSP to quickly determine if a 
reported trouble is within its network. It also allows the local TSP to 
continuously monitor their circuits and react to degradation of the signal 
before service is affected. With the Company's Remote Module, a DS1 NIU, the 
boundary between the local telephone company and the end-user can now be 
monitored nonintrusively, either in a standalone application or continuously 
monitored as part of an integrated system using the Company's test and 
monitoring systems or test and monitoring capabilities in systems from other 
suppliers. While the Remote Module provides valuable information about 
circuit performance when used in a standalone mode, it provides better 
information when used in conjunction with a test and monitoring system 
elsewhere in the network. The Company believes the Remote Module provides the 
most valuable information when used in conjunction with test and monitoring 
systems also made by the Company. The combination of the products' 
capabilities enables TSPs to improve their ability to address the 
increasingly competitive business environment.

         2. FOCUSING SALES AND MARKETING EFFORTS ON A BROADER RANGE OF TSPS.

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

                                      -5-


         3. DEVELOPING AND ENHANCING PRODUCTS TO ADDRESS DATA PROTOCOLS.

         The Company believes that there are additional applications for 
ADA's product lines that extend its utility to new service offerings by its 
customers that address data protocols including frame relay, asynchronous 
transfer mode ("ATM") and Internet protocols. The Company's PAAS system 
currently provides customers with testing and monitoring capabilities for 
broadband networks. The Company has additional protocol monitoring and 
analysis products under development.

         4. DEVELOPING AND ENHANCING PRODUCTS AND SERVICES TO ADDRESS OS.

         The Company is extending its current product line and market to 
address selected applications within the OS function. OS are computer 
software-based systems that provide operations support for telecommunications 
functions. The OS market is very large and its applications have historically 
been addressed by companies such as AT&T and BellCore. Some of the older 
products from these suppliers, called "legacy systems," are limited in their 
ability to provide TSPs with the real-time information that is needed to 
manage complex high-speed telecommunications networks. The market for 
intelligent network management systems has become fragmented, and the Company 
perceives a need for solutions that address the OS applications of testing, 
surveillance, performance monitoring and traffic management, among others. 
The Company further believes that additional value can be provided to its TSP 
customers through integration of multiple OS applications, and through 
integration of the Company's OS applications with existing legacy systems, 
often using custom software development provided by the Company's design 
services group.

         5. DEVELOPING PRODUCTS TO ADDRESS NEW TRANSMISSION STANDARDS.

         The Company intends to extend its current products and develop new 
products to accommodate new telecommunication transmission standards. The 
Company entered into the JDA with Nortel to develop new products focused on 
SONET optical transmission standards. The Company does not expect to complete 
the first phase of development under the JDA until 1999. See "Risks and 
Uncertainties--Rapid Technological Change and Dependence on New Products."

         6. EXPANDING TO OTHER APPLICATIONS.

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

PRODUCTS

         NETWORK SYSTEMS

         CENTRALIZED TEST SYSTEM (CTS)

         CTS is a sophisticated digital test system device for voice 
frequency ("VF"), digital data service ("DDS"), high-capacity digital service 
("HCDS"), DS3, and packet based services, such as frame relay and ATM. CTS 
functions as a remote test unit ("RTU") and a test system controller for 
circuits transported through digital cross-connect systems. CTS accesses DS0, 
DS1 and DS3 circuits carried through synchronous or asynchronous interfaces 
on DCS. CTS is designed for applications with both centralized and 
distributed architectures. Its modular design, scalability test suite and 
integrated testing and fault isolation functions provide an economic and 
flexible solution for DCS or non-DCS based test and performance monitoring. 
CTS's evolutionary platform can be reconfigured as an in-line T3AS system 
without obsolescence of original modules to add new capabilities and

                                      -6-



full-time performance monitoring and non-intrusive testing. CTS is installed 
where test access is highly critical and efficient use of network resources 
is important.

         T3AS TEST AND PERFORMANCE MONITORING SYSTEM (T3AS)

         T3AS consists of digital test access units ("DTAU") that can be 
co-located or placed at network boundaries between TSPs. The performance 
monitoring capabilities of T3AS provide visibility to the services carried by 
the network. T3AS is physically located at network boundaries between TSPs to 
quickly isolate, identify and report the location of circuit troubles in 
these networks. The Company believes T3AS is the only integrated test and 
performance monitoring device that interfaces to the network at both the DS1 
and DS3 transport rates while providing visibility down to DS0, and subrate 
DSO, circuits. T3AS' technology and flexible architecture enable T3AS to 
function either as a DTAU or RTU. The T3AS system interfaces with the TSPs 
network management OS using industry-standard interfaces and protocols. T3AS 
can also function as a CTS to interface with digital cross-connect systems in 
the telephone network to provide additional test capability when circuit 
access is provided through such systems. The T3AS system supports up to 48 
DS3 circuits, or 1,120 DS1 circuits when accessing the network at the DS1 
rate of transmission. T3AS's distributed architecture allows individual 
high-speed or low-speed subsystems to be installed at locations remote from 
the T3AS base system. T3AS' distributed architecture supports applications 
where the number of DS3 or DS1 circuits at a particular remote location does 
not warrant the cost of a full T3AS system, such as at network boundaries 
with fewer than six DS3 circuits or 140 DS1 circuits between a local 
telephone company and a long distance telephone company, and at network 
boundaries between the local telephone company and the end-user. Users can 
easily upgrade their existing T3AS systems by adding distributed system 
hardware modules and software. The low-speed subsystem expands the Company's 
product line by providing test and performance monitoring capabilities 
similar to the high-speed subsystem, but for DS1 circuits. This subsystem is 
intended for network boundaries where circuits cross at the DS1 rate. The 
low-speed subsystem units are interchangeable with the high-speed subsystem 
units in the T3AS racks. Each low-speed subsystem has a capacity of 140 DS1 
circuits and can be deployed in a distributed system to share administration 
and test resources with the other subsystems of the T3AS base system.

         PROTOCOL ANALYSIS ACCESS SYSTEM

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

         REMOTE MODULE

         ADA's Remote Module is an intelligent DS1 NIU that nonintrusively 
monitors the performance of T1 circuits. Installed at network boundaries 
between the local TSP and the end-user, the Remote Module enables the TSP to 
determine whether circuit troubles originated in the TSP's network or in the 
end-user's network. When installed at the local TSP's network boundary at the 
end-user customer premises, and in tandem with a T3AS system at the network 
boundary between the long distance telephone company and the local service 
provider, the Remote Module provides a unique end-to-end view of the DS1 
circuit. This view of servicelevel performance is critical to improve service 
quality and reliability and to reduce costs. Telephone network management 
centers can view a DS1 circuit within their network and beyond the boundaries 
of their network, and can quickly identify and isolate failures from the 
performance monitoring information available. The Remote Module can provide 
similar, although less extensive functionality, in a standalone mode, or in 
conjunction with DTAUs and RTUs provided by other suppliers.

         NETWORK MANAGEMENT SOFTWARE

         TEST OS

         Test OS is a browser-based test management operating system that 
provides fast test access through point-and-click graphical user interfaces 
("GUI") that replace cumbersome test commands and hide distinctions in test 
equipment and software to simplify ease of use. Test OS is a highly scalable, 
flexible application that supports multiple users at

                                      -7-



varying access levels for tests at DS0, DS1 and DS3 rates. Graphical Test 
Assistant ("GTA") is a Test OS application that functions as a graphical test 
front-end system to T3AS and CTS for DS0, DS1 and DS3 testing. GTA provides 
simple point-and-click access to all T3AS and CTS testing functionality on a 
Windows NT or Windows 95 platform. While primarily designed for TSPs without 
a test management OS, GTA also complements existing test OSs by augmenting 
functionality.

         SECTIONALIZER

         Sectionalizer is expert system software that non-intrusively 
identifies the location of DS1 circuit troubles and provides answers in 
seconds rather than hours. Sectionalizer correlates and processes extended 
superframe performance monitoring data and presents that information 
pictorially to technicians enabling them to isolate problems in real time to 
determine whether they are on the customer's premises or other portions of 
the network. Hard to isolate sporadic troubles are identified through the 
software's correlation of historical circuit events. Sectionalizer 
complements the deployment of Remote Modules, T3AS and CTS by utilizing the 
equipment to rapidly identify and isolate network troubles and take a 
proactive perspective in networks management. Sectionalizer is the driving 
force behind ADA's Network Boundary Sectionalization application. 
Sectionalizer executes on T3AS, CTS, and Remote Module platforms.

         .PROVISIONER

         .Provisioner is an OS software application that provides service 
initiation and service management capability for transport networks comprised 
of multiplexers, DCSs, and other transport elements. .Provisioner enables 
TSPs to activate new circuits and services, and to manage transport networks 
from a single user interface concentrating on end-to-end services rather than 
on individual network elements. .Provisioner is a turn-key solution for 
multi-vendor operations. The modular architecture and object-oriented 
software support current and future applications, including management of 
frame relay and ATM networks.

         FAULT MANAGEMENT SYSTEM

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

         TRAFFIC DATA COLLECTION AND ENGINEERING

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

CUSTOMERS

         The Company sells its network perfomance management products and 
services to the TSP market and several enterprise networks. Historically, the 
Company's network test and performance monitoring products have been sold to 
the RBOCs. The RBOCs accounted for approximately 99%, 73% and 31% of the 
Company's total revenue in years 1995, 1996 and 1997, respectively. In 1997, 
the Company expanded its customer base for its network test and performance 
monitoring products to include the long distance, or IXC, market with sales 
of these products to MCI and Worldcomm. In 1996 and 1997, the Company 
acquired and developed several network management OS software products. The 
acquisitions added over 30 new customers to the Company's customer base. 
Customers for the Company's network management OS software products and 
services include MCI, Worldcomm, BC TEL, Fujitsu Australia, OPTUS, GTE, 
Sprint/Centel Telephone, MFS, TCG, MGC, TDS, ICG and other TSPs and 
enterprise networks. The Company has provided software design services to 
Northern Telecom's Network Management Services Division, Telus, BC Tel and 
Bell Canada. The Company has increased its sales and marketing efforts aimed 
at CLECs, CAPs, IXCs, and enterprise networks. There can be no assurance that 
these efforts will be successful. See "Risks and Uncertainties--Competition."

         The Company currently has purchase contracts with MCI, BellSouth, 
Ameritech and Southwestern Bell. MCI has also entered into license agreements 
with the Company. Other TSPs purchase the Company's systems products and 
license OS products under standard purchase orders. Since the MCI, BellSouth, 
Ameritech and Southwestern Bell contracts may be terminated at either the 
customers' or the Company's convenience, the Company believes that these 
purchase and license contracts are not materially different than purchasing 
or licensing under purchase orders. Most of the Company's customers are 
significantly

                                      -8-



larger than the Company and may be able to exert a high degree of influence 
over the Company. In addition, a small number of customers has historically 
accounted for substantially all of the Company's revenue in any given fiscal 
period. In 1997, Northern Telecom, MCI and Bell South accounted for 20%, 18%, 
and 17% of the Compay's revenue, respectively. In 1996, US WEST, NYNEX, and 
Northern Telecom accounted for 31%, 23%, and 15% of the Company's revenue, 
respectively.

         Prior to selling products to RBOCs and certain IXCs and ITOCs, a 
vendor must often first undergo a product qualification process for its 
product with these carriers. The Company typically spends from six to 18 
months or more discussing its products with a potential customer prior to the 
customer agreeing to put the product through its qualification process. 
Although the qualification process for a new product varies somewhat among 
these prospective customers, the Company's experience is that the process 
often takes a year or more and generally consists of the following phases:

         -        LABORATORY EVALUATION.  The product's function and 
         performance are tested against all relevant industry standards, 
         including BellCore standards.  This process can take from two weeks 
         to three months or more depending on a variety of factors.

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

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

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

         The loss of one or more of the Company's major customers, the 
reduction of orders or a delay in deployment of the Company's products could 
materially and adversely affect the Company's business, operating results and 
financial condition. Further, any failure on the part of any of the Company's 
customers to maintain their approval of the Company's products, failure of 
any of the Company's customers to deploy the Company's products or any 
attempt by any of the Company's customers to seek out alternative suppliers 
could have a material adverse effect on the Company's business, operating 
results and financial condition. In addition, there can be no assurance that 
the Company's products will be approved by new customers, or that such 
approval will not be significantly delayed. Furthermore, work force 
reductions and staff reassignments by the Company's customers have in the 
past delayed or indefinitely postponed the product approval process and the 
Company expects such reductions and reassignments to continue in the future. 
There can be no assurance that the impact of such reductions and 
reassignments will not have a material adverse effect on the Company's 
business, operating results and financial condition.

TECHNOLOGY

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

         The Company's software and hardware architecture facilitates 
important system capabilities such as fault tolerance and hitless access. 
Fault tolerance provides a one-to-one redundant circuit path that provides 
backup for each DS3 and DS1 circuit. DS3 and DS1 circuits may be transferred 
from the online main path to the redundant

                                      -9-



standby path without disruption of the embedded data streams. Transfers are 
accomplished automatically if a hardware or software malfunction is detected 
in the T3AS system. Transfers can also be accomplished manually when 
telephone company personnel initiate maintenance actions. "Hitless access" is 
an industry term used to describe a method of obtaining access to a low-speed 
circuit embedded in a high-speed circuit without affecting any other circuit 
embedded in the high-speed circuit. In the T3AS system, the Company's 
proprietary technology provides access to the DS3 circuit, any embedded DS1 
circuit, DS0 circuit, or other subrate circuit, without affecting any other 
circuit within the DS3 circuit.

         The CTS contains many of the core technology building blocks present 
in the T3AS. The T3AS is optimized for large cross sections of circuits and 
is positioned in series with the network DS3 and DS1, or T1 traffic. CTS, by 
contrast, contains DS3/T1/DS0 test resources that are shared among a cross 
section of circuits that are passing through DCSs. CTS interfaces to DCS 
systems to provide test capability. CTS provides firewall technology by 
taking in commands from a tester in a centralized maintenance center and 
translating these commands into a sequence of instructions that are sent to 
the DCS to configure the circuit access appropriately. In this fashion, the 
risk of improper circuit manipulation is minimized since the CTS system 
isolates the test technician from the details of the access and automatically 
configures the DCS appropriately.

         Both the in-line T3AS and the CTS systems are modularly expandable 
and support distributed configurations. Subsystems can be optionally 
co-located in a common rack or the individual subsystems can be located in 
remote locations many miles away and connected to the base system via a 
packetized T1 link that is used for transport of control information and DS0 
circuits under test. This technology provides for a virtual single network 
element configuration with a single interface to the OS while at the same 
time allowing the flexibility to locate modular subsystems in smaller remote 
locations. In addition, this technology provides a significant cost benefit 
since the cost of the common equipment located in the base location is shared 
among all remote subsystems. The subsystems can then be configured in a low 
cost streamlined fashion since they can rely on the shared base system to 
provide a significant amount of functionality.

         The Company has evolved it's performance management technology, 
originally focusing on the physical layer, and moving to higher levels 
addressing logical layers and higher protocol layers. This technology 
provides for end-to-end circuit performance management in a diverse network 
containing multiple hierarchical transport protocols.

         The Company's Remote Module introduces new technology that serves to 
extend the performance management capabilities of the T3AS to the customer 
premises boundary for use in NIU products. This capability facilitates 
sectionalization of network faults on T1 circuits. This technology provides 
support for T1 performance monitoring ("PM") and the ability to convey PM 
information into the network from the customer premises in a fashion that is 
completely transparent to the customer's data. This new technology has been 
offered up for standardization and the Company is working closely with the 
ANSI, T1R1 and T1M1 standards bodies on incorporating this technology into 
the new T1 standards. However, there can be no assurances that this new 
technolgy will be adopted by the ANSI, T1R1 and T1M1 standards bodies as an 
industry standard.

         The Company's OS software products include systems that perform 
digital cross connect and add-drop multiplexer service activation, circuit 
provisioning, node surveillance and switched fault management, and traffic 
data collection and reporting. The products provide capabilities as stand 
alone products or can be integrated into a total solution offering with other 
ADA products or a TSP's legacy or standards based service management 
framework. The software products are designed using the latest 
object-oriented methodologies from Booch. The development life cycle process 
is well documented and has been registered as ISO 9001 compliant. The 
enhanced products are written to support the latest in Relational Database, 
ODBC, JDBC, Corba compliant and client server technologies. GUI versions of 
the TDC&E and .Provisioner products support JAVA web browser enabling 
technology and all products have year 2000 compliance support activities 
scheduled in 1998. There can be no assurance that the Company will be 
successful in implementing its year 2000 modifications in a timely manner.

RESEARCH AND PRODUCT DEVELOPMENT

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

         Product line extensions require the Company to work closely with its 
current and potential customers. Using feedback received from such customers, 
the Company identifies and then develops new products and enhancements to its 
existing products that the Company believes will increase their usefulness or 
extend their application. Examples of product extensions of the Company's 
T3AS test and performance monitoring system include CTS, PAAS, distributed 
system and the low-speed subsystem. In addition, the Company continually 
seeks to reduce the manufacturing costs of its products by taking advantage 
of advances in hardware technology. Finally, new technologies, such as SONET, 
frame relay, and ATM are the focus of significant research and product 
development activity at ADA. The Company anticipates that the SONET and SDH 
optical transmission standards will become the industry standards over the 
coming years for the North American and international networks, respectively. 
The Company's current network circuit test and performance monitoring systems 
do not address either the SONET or SDH transmission standards.

         The market for the Company's products is characterized by rapid 
technological advances, evolving industry transmission standards, changing 
regulatory environments, price-competitive bidding, changes in customer 
requirements and frequent new product introductions and enhancements. The 
introduction of telecommunications network test and performance monitoring 
products involving superior technologies or the evolution of alternative 
technologies or new industry transmission standards could render the 
Company's existing products, as well as products currently under development, 
obsolete and unmarketable. The Company believes its future success will 
depend in part upon its ability, on a cost-effective and timely basis, to 
continue to enhance its products, to develop and introduce new products for 
the telecommunications network performance management market and other 
markets, to address new industry transmission standards and changing customer 
needs and to achieve broad market acceptance for its products.

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

         In 1995, 1996, and 1997, the Company spent $5.8 million, $7.4 
million and $9.2 million, respectively, on research and development efforts.

MANUFACTURING AND SUPPLIERS

                                     -10-


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

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

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

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

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

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

         To procure adequate supplies of certain components, the Company must 
make advance commitments to purchase relatively large quantities of such 
components in a number of circumstances. At December 31, 1997, the Company 
had open noncancelable purchase commitments of approximately $2.5 million 
covering several different components. A large portion of the Company's 
purchase commitments consist of custom parts, some of which are sole source 
such as VLSI ASICs, for which there is no alternative use or application. The 
inability of the Company to

                                     -11-



incorporate such components in its products could have a material adverse 
effect on the Company's business, operating results and financial condition.

MARKETING, SALES AND CUSTOMER SUPPORT

         The Company markets its products to the RBOCs, their local telephone 
company affiliates, ITOCs, CAPs and IXCs through an experienced direct sales 
force that works closely with senior management as well as the network 
management departments of these customers as part of the sales effort. As of 
February 28, 1998, the Company's sales organization consisted of 14 
professionals, including 13 regional sales managers and one vice president. 
Each of the regional sales managers operates from a site located near his or 
her strategic responsibility.

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

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

BACKLOG

         At December 31, 1997, the Company had a firm backlog of 
approximately $2,672,000, all of which is expected to be filled during fiscal 
1998. At December 31, 1996, backlog was approximately $1,885,000. The Company 
does not believe the year-to-year increase in backlog is meaningful. The 
Company has been operating in a book and ship mode for network systems 
products, a trend the Company anticipates will continue. Orders for network 
management OS products generally have longer lead times than network systems 
products but are generally delivered within six months of the order 
placement. There can be no assurance that the current level of backlog will 
continue. In addition, since orders constituting the Company's current 
backlog are subject to changes in delivery schedules, the backlog is not 
necessarily an indication of future revenue. In certain cases, ADA may permit 
orders to be canceled without penalty where management believes it may be in 
the best interests of ADA to do so. To date, cancellation of orders has not 
been material.

COMPETITION

       Competition in the Company's markets is intense and is characterized 
by rapidly changing technologies, conformance with evolving industry 
standards, frequent new product introductions and enhancements, rapid changes 
in customer requirements, and price-competitive bidding. To maintain and 
improve its competitive position, the Company must continue to develop and 
introduce, in a timely and cost-effective manner, new products and features 
that keep pace with increasing customer requirements. The Company expects 
competition in its markets to increase from existing competitors and from 
other companies which may enter the Company's current or future markets.

       The Company believes the principal competitive factors affecting the 
market for its network systems test and performance monitoring products are 
product features, price, conformance with BellCore and other industry 
transmission standards and specifications; performance and reliability; 
technical support; and the maintenance of close working relationships with 
customers. The Company's network systems products, especially CTS and Remote 
Module, are currently focused in highly competitive market niches. The 
environment for CTS and Remote Module is fiercely competitive with respect to 
price, product features, established customer-supplier relationships and 
conformance with industry standards. The Company believes the current 
competitors that provide partial solutions to either performance monitoring 
or testing of the DS3, and the DS1 and DS0 circuits that make up the DS3 
circuit, include Hekimian Laboratories, Inc. ("Hekimian"), Telecommunications 
Techniques Corporation ("TTC"), Anritsu Wiltron Corporation ("Wiltron") and 
some of the manufacturers of large transmission equipment and digital 
cross-connect test and performance monitoring equipment such as Lucent 
Technologies, Inc. ("Lucent"), Alcatel Data Networks ("Alcatel"), Ericsson 
Communications Inc. ("Ericsson"), ADC Telecommunications, and Tellabs, Inc. 
The Company's Remote Module product addresses the DS1 NIU market in which 
current competitors include Westell Inc., Teltrend Inc., and Troncom, Inc. 
Many of these

                                     -12-



competitors have significantly greater technical, financial, manufacturing, 
and marketing resources than the Company. In addition, in 1997, ANSI adopted 
certain of the Company's technology as an industry standard. As a result, the 
Company is obligated to grant licenses of this technology to third parties, 
including competitors, on fair and equitable terms and may also face 
competition from the licensees of its own technology.

       The Company believes there are an increasing number of current 
competitors in the network management OS market that provide network 
management and OS applications for circuit and services provisioning and 
services management, testing and test management, fault and alarm management 
and surveillance, network and circuit performance monitoring and traffic data 
collection and management telecommunications functions. The OS market is 
characterized by a wide range of companies that have varying degrees of 
market influence. The nature of the network management and OS market is such 
that improved technologies and tool sets have made the barriers to entry in 
this market relatively small resulting in fierce competition. The principal 
competitive factors affecting the Company's network management and OS 
products include product quality, performance, price, customer support, 
corporate reputation, and product features such as scalability, 
interoperability, functionality and ease of use. The Company's existing and 
potential competitors offer a variety of solutions to address network 
management needs. Competitors include suppliers of standard off-the-shelf 
products, custom software developers, large telecommunications equipment 
vendors, such as Lucent, Northern Telecom, Fujitsu, and Ericcson, that offer 
software applications to manage their own and other suppliers' equipment, 
hardware and software vendors including IBM, Sun Microsystems and Hewlett 
Packard, and providers of specific network management and OS applications 
such as BellCore, Objective Systems Integrators ("OSI"), TCSI Corporation 
("TCSI"), Architel and others. Additionally, many of the Company's existing 
and potential customers continuously evaluate whether they should develop 
their own network management and OS applications or license them from outside 
vendors. The Company expects competition in the OS market to increase 
significantly in the future.

       Additionally, several of the Company's competitors have 
long-established relationships with the Company's current and prospective 
customers which may adversely affect the Company's ability to successfully 
compete for business with these customers. In addition, product price 
reductions resulting from market share penetration initiatives or competitive 
pricing pressures could have a material and adverse effect on the Company's 
business, operating results, and financial condition. There can be no 
assurance that the Company will have the financial resources, technical 
expertise or manufacturing, marketing, distribution and support capabilities 
to compete successfully in the future.

PROPRIETARY RIGHTS

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

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

         The telecommunications industry is characterized by the existence of 
a large number of patents and frequent litigation based on allegations of 
patent infringement. There can be no assurance that third parties will not 
assert infringement claims against the Company in the future or that any such 
assertions will not result in costly litigation or

                                     -13-



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

EMPLOYEES

         As of February 28, 1998, ADA had approximately 272 full-time 
employees, including 149 in engineering, 68 in sales, marketing and customer 
support, 24 in operations and 31 in finance, and network and general 
administration. The success of the Company is dependent, in part, on its 
ability to attract and retain highly qualified personnel. Competition for 
such personnel is intense and the inability to attract and retain additional 
key employees or the loss of one or more current key employees could 
adversely affect the Company. There can be no assurance that the Company will 
be successful in hiring or retaining requisite personnel. Certain of the 
Company's executive officers have entered into severance arrangements with 
the Company. No other member of the Company's senior management is subject to 
an employment arrangement with the Company. The Company's employees are not 
represented by any collective bargaining agreements, and the Company has 
never experienced a work stoppage. The Company believes that its employee 
relations are good.

RISKS AND UNCERTAINTIES

COMPETITION. Competition in the Company's markets is intense and is 
characterized by rapidly changing technologies, conformance with evolving 
industry standards, frequent new product introductions and enhancements, 
rapid changes in customer requirements, and price-competitive bidding. To 
maintain and improve its competitive position, the Company must continue to 
develop and introduce, in a timely and cost-effective manner, new products 
and features that keep pace with increasing customer requirements. The 
Company expects competition in its markets to increase from existing 
competitors and from other companies which may enter the Company's current or 
future markets. The Company believes the principal competitive factors 
affecting the market for its network systems test and performance monitoring 
products are product features, price, conformance with BellCore and other 
industry transmission standards and specifications; performance and 
reliability; technical support; and the maintenance of close working 
relationships with customers. The Company's network systems 
products,especially CTS and Remote Module, are currently focused in highly 
competitive market niches. The environment for CTS and Remote Module is 
fiercely competitive with respect to price, product features, established 
customer-supplier relationships and conformance with industry standards. The 
Company believes the current competitors that provide partial solutions to 
either performance monitoring or testing of the DS3, and the DS1 and DS0 
circuits that make up the DS3 circuit, include Hekimian, TTC, Wiltron and 
some of the manufacturers of large transmission equipment and digital 
cross-connect test and performance monitoring equipment such as Lucent, 
Alcatel, Ericsson, ADC Telecommunications, and Tellabs, Inc. The Company's 
Remote Module product addresses the DS1 NIU market in which current 
competitors include Westell Inc., Teltrend Inc., and Troncom, Inc. Many of 
these competitors have significantly greater technical, financial, 
manufacturing, and marketing resources than the Company. In addition, in 
1997, ANSI adopted certain of the Company's technology as an industry 
standard. As a result, the Company is obligated to grant licenses of this 
technology to third parties, including competitors, on fair and equitable 
terms and may also face competition from the licensees of its own technology. 

         The Company believes there are an increasing number of current 
competitors in the network management OS market that provide network 
management and OS applications for circuit and services provisioning and 
services management, testing and test management, fault and alarm management 
and surveillance, network and circuit performance monitoring and traffic 
management telecommunications functions. The OS market is characterized by a 
wide range of companies that have varying degrees of market influence. The 
nature of the network management OS market is such that improved technologies 
and tool sets have made the barriers to entry in this market relatively small 
resulting in fierce competition. The principal competitive factors affecting 
the Company's network management OS products include product quality, 
performance, price, customer support, corporate reputation, and product 
features such as scalability, interoperability, functionality and ease of 
use. The Company's existing and potential competitors offer a variety of 
solutions to address network management needs. Competitors include suppliers 
of standard off-the-shelf products, custom software developers, large 
telecommunications equipment vendors that offer software applications to 
manage their own and other suppliers' equipment, such as Lucent, Northern 
Telecom, Fujitsu, and Ericsson, hardware and software vendors, including IBM, 
Sun Microsystems and Hewlett Packard, and providers of specific network 
management and OS applications, such as BellCore, OSI, TCSI, Architel and 
others. Additionally, many of the Company's existing and potential customers 
continuously evaluate whether they should develop their own network 
management and OS applications or license them from outside vendors. The 
Company expects competition in the OS market to increase significantly in the 
future. Additionally, several of the Company's competitors have 
long-established relationships with the Company's current and prospective 
customers which may adversely affect the Company's ability to successfully 
compete for business with these customers. In addition, product price 
reductions resulting from market share penetration initiatives or competitive 
pricing pressures could have a material and adverse effect on the Company's 
business, operating results, and financial condition. There can be no 
assurance that the Company will have the financial resources, technical 
expertise or manufacturing, marketing, distribution and support capabilities 
to compete successfully in the future.

                                     -14-



      FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; HISTORY OF LOSSES. The 
Company has experienced significant fluctuations in bookings, revenue and 
operating results from quarter to quarter due to a combination of factors and 
expects such fluctuations to continue in future periods. Factors that may 
cause the Company's results of operations to vary significantly from quarter 
to quarter include but are not limited to the size and timing of customer 
orders and subsequent shipment of systems products and implementation of OS 
software products to major customers, timing and market acceptance of product 
introductions or enhancements by the Company or its competitors, customer 
order deferrals in anticipation of new products, technological changes in the 
telecommunications industry, competitive pricing pressures, changes in the 
Company's operating expenses, personnel changes, management of a changing 
business, changes in the mix of products sold and licensed, disruption in 
sources of supply, changes in pricing policies by the Company's suppliers, 
regulatory changes, capital spending, delays of payments by customers and 
general economic conditions. The Company believes that in late 1997 it began 
experiencing seasonality in its product shipments and OS software licensing. 
Generally, TSPs place more orders for products and licenses in the second and 
fourth quarters, with the orders significantly down in the first quarter and 
relatively flat in the third quarter of each year. The Company expects that 
revenue may begin to reflect these seasonal order cycles more closely, which 
could result in quarterly fluctuations. There can be no assurance that the 
TSPs will not defer or delay orders contrary to the historical seasonal 
pattern or that they will not change their ordering patterns. Because of the 
relatively fixed nature of most of the Company's costs, including personnel 
and facilities costs, any unanticipated shortfall in revenue in any fiscal 
quarter would have a proportionately greater impact on the Company's 
operating income in that quarter and may result in fluctuations in the price 
of the Company's Common Stock.

      As the impact of the Company's Network Management business unit on the 
Company's revenue increases, the Company may be faced with greater 
fluctuations in operating income. The licensing and implementation of the 
Company's OS products generally involves a significant capital expenditure 
and a commitment of resources by prospective customers. Accordingly, the 
Company is dependent on its customers' decisions as to the timing and level 
of commitment and expenditures. In addition, the Company typically realizes a 
significant portion of license revenues in the last weeks or even days of a 
quarter. As a result, the magnitude of quarterly fluctuations in the Network 
Management business unit may not become evident until late in, or after the 
close of, a particular quarter. In addition, the Company does not recognize 
service revenues until the services are rendered. The time required to 
implement the Company's OS products can vary significantly with the needs of 
its customers and is generally a process that extends for several months. 
Because of their complexity, larger implementations may take multiple 
quarters to complete. Additionally, quarter-to-quarter product mix 
variations, customer orders tending to be placed in late in the quarter, and 
competitive pressures on pricing could have a materially adverse effect on 
the Company's operating results in any one quarter. The Company's expenses 
are based in part on the Company's expectations as to future revenues and to 
a large extent are fixed in the short term. If revenues do not meet 
expectations, the Company's business, operations and financial condition are 
likely to be materially adversely affected. The Company has experienced 
losses in the past and there can be no assurance that the Company will not 
experience losses in the future.

CONCENTRATION OF MAJOR CUSTOMERS; TELEPHONE COMPANY QUALIFICATION 
REQUIREMENTS. The market for the Company's products and services currently 
consists of the five RBOCs, IXCs, LECs, CLECs, CAPs, ISPs, enterprise 
networks and other TSPs. Historically, the Company's marketing efforts 
focused primarily on the RBOCs, which accounted for approximately 99%, 73% 
and 31% of the Company's total revenue in 1995, 1996, and 1997, respectively. 
However, the Company's strategy has been to focus its efforts on diversifying 
its customer base. RBOCs, IXCs and enterprise customers accounted for 31%, 
27% and 20% of the Company's total revenue in 1997, respectively. The 
increased customer base is primarily a function of the Company's acquisitions 
in 1996 of Applied Computing Devices, Inc. ("ACD") and the Special Services 
Network ("SSN") division of MPR Teltech Inc. and the acquisition of the DSS 
II license from Northern Telecom in 1997. As a result of these acquisitions, 
the Company added OS related products and services that the Company has been 
able to market to a wider group of customers. In addition, the Company added 
a number of TSPs that were new customers to the Company. To date, the OS 
customers tend to be long distance telephone companies, CAPs and enterprise 
vendors who have not invested in legacy systems from BellCore. While the 
Company believes its customer base diversification is beneficial to the 
Company, there can be no assurances that the Company will be able to continue 
expanding the distribution of its OS and system products and services to 
additional prospective customers. In addition, the Company's customers are 
significantly larger than the Company and may be able to exert a high degree 
of influence over the Company. The loss of one or more of the Company's major 
customers, the reduction of orders, a delay in deployment of the Company's 
products or the cancellation, modification or non-renewal of license or 
maintenance agreements could materially and adversely affect the Company's 
business, operating results and financial condition. BellSouth, Ameritech, 
Southwestern Bell and MCI have entered into purchase contracts with the 
Company. MCI has also entered into license agreements with the Company. Other 
TSPs purchase the Company's network system products and license OS products 
under standard purchase orders. Since the RBOC and MCI contracts may be 
terminated at either the customer's or the Company's convenience of the RBOC 
or MCI, the Company believes that the purchase contracts and license 
agreements are not materially different than purchasing or licensing under 
purchase orders. Prior to selling products to RBOCs and certain other TSPs, a 
vendor must often first undergo a product qualification process with the TSP 
for its products. Although the qualification process for a new product varies 
somewhat among these prospective customers, the Company's experience is that 
the process often takes a year or more. Currently, the five RBOCs, MCI, 
Worldcomm and several other customers have qualified the Company's products, 
when required. Any failure on the part of any of the Company's customers to 
maintain their qualification of the Company's products, failure of any of the 
TSPs to deploy the Company's products, or any attempt by any of the TSPs to 
seek out alternative suppliers could have a material adverse effect on the 
Company's business, operating results and financial condition. There can be 
no assurance that the Company's products will be qualified by new customers, 
or that such qualification will not be significantly delayed. Furthermore, 
work force reductions and staff reassignments by some of the Company's 
customers have in the past delayed the product qualification process, and the 
Company expects such reductions and reassignments to continue in the future. 
There can be no assurance that such reductions and reassignments will not 
have a material adverse effect on the Company's business, operating results 
and financial condition.

      HIGH DEPENDENCE ON TWO PRODUCT LINES. Historically, the majority of the 
Company's revenue has been derived from the sale of its network systems 
products and services. However, as a result of acquisitions completed in 1996 
and 1997, the Company added additional product lines and derived revenue from 
a product mix of both network systems products and services and network 
management OS software products and services. Revenue from network systems 
products and services, including CTS, T3AS and Remote Module generated 74% 
and 50% of the Company's total revenues in 1996 and 1997, respectively. 
Revenue from network management OS products and services, including software 
design services, .Provisioner, Test OS, TDC&E and FMS generated 26% and 50% 
of the Company's total revenue in 1996 and 1997, respectively. However, there 
can be no assurance that the Company's future revenues will not be heavily 
dependent on sales from one of its primary product lines. The Company is 
investing in the expansion of these two product lines through the 
enhancement, development and marketing of its NIU, CTS, PAAS, T3AS and OS 
products. Failure by the Company to enhance either its existing products and 
services or to develop new product lines and new markets could materially and 
adversely affect the Company's business, operating results and financial 
condition. There is no assurance that the Company will be able to develop and 
market new products and technology or otherwise diversify its source of 
revenue.

      MANAGEMENT OF CHANGING BUSINESS. As a result of acquisitions in 1996, 
the Company obtained additional office space and hired additional personnel 
in both Terre Haute, Indiana and British Columbia, Canada to support the 
business operations of the new products, services and technologies acquired. 
The Company continues to face significant management challenges related to 
the integration of the business operations of the new organizations' 
personnel, products, services and technologies acquired. In 1996, the Company 
formed two business units: the Network Systems business unit and the Network 
Management business unit. The business units are a result of the evolution of 
the Company from a single product line to multiple product lines. The Network 
Management business unit focuses on OS software products including 
 .Provisioner, Test OS, GTA. Sectionalizer, FMS, TDC&E, and OS design 
services. The Network Systems business unit is built around the

                                     -15-



Company's test and performance management products, including T3AS, CTS, 
Remote Module and PAAS products. There can be no assurance that the Company 
will be successful in managing its new business unit structure. In June 1997, 
the Company acquired a license from Nortel to its DSS II software product and 
technology. The Company markets and supports the DSS II product and 
technology under the new name .Provisioner. The Company is integrating the 
licensed technology into new product development. The acquisition of the 
software license has generated a shift in the Company's Canadian subsidiary's 
operations from a software design services business to a product business and 
the transition will likely place a significant strain on the Company's 
management, information systems and operations and there can be no assurance 
that such a transition can be successfully managed. In addition, in November 
1997, the Company opened an office in Richardson, Texas to expand new product 
development efforts. The acquisitions and resultant growth in the Company's 
infrastructure have placed, and are expected to continue to place, a 
significant strain on the Company's management, information systems and 
operations. The strain experienced to date has chiefly been in management of 
a geographically distributed organization, and in hiring sufficient numbers 
of qualified personnel to support the expansion of the business. The Company 
may also make future acquisitions where it believes it can acquire new 
products or otherwise rapidly enter new or emerging markets. Mergers and 
acquisitions of high technology companies are inherently risky and can place 
significant strains on the Company's management, information systems and 
operations. The Company is not able to forecast additional strains that may 
be placed on the Company's management, information systems and operations as 
a result of recent or future acquisitions or in the future. The Company's 
potential inability to manage its changing business effectively could have a 
material adverse effect on the Company's business, operating results, and 
financial condition.

      CUSTOMER MERGERS. Of the nine major TSPs currently involved in or that 
have recently completed merger transactions, seven are customers of the 
Company. Several of the mergers involve companies that purchase network 
systems and software products and services from the Company's competitors. 
Consequently, the completion of certain of these mergers may result in the 
loss of business and customers for the Company. Additionally, the impact of 
capital spending constraints during the merger transitions and thereafter 
could have a material adverse effect on the Company's business, operating 
results and financial condition. In addition, future merger transactions 
involving or contemplated by the Company's current or prospective

                                     -16-



customers may cause increased concentration among some of the Company's major 
customers or delays or decreases in their capital spending decisions, any of 
which could have a material adverse effect on the Company's business, 
operating results and financial condition.

      RAPID TECHNOLOGICAL CHANGE AND DEPENDENCE ON NEW PRODUCTS. The market 
for the Company's products is characterized by rapid technological advances, 
evolving industry transmission standards, changing regulatory environments, 
price-competitive bidding, changes in customer requirements, and frequent new 
product introductions and enhancements. The introduction of 
telecommunications network test and performance management products involving 
superior technologies or the evolution of alternative technologies or new 
industry transmission standards could render the Company's existing products, 
as well as products currently under development, obsolete and unmarketable. 
The Company believes its future success will depend in part upon its ability, 
on a cost-effective and timely basis, to continue to enhance its products, to 
develop and introduce new products for the telecommunications network and 
performance management market, to address new industry standards and changing 
customer needs and to achieve broad market acceptance for its products. In 
particular, the Company anticipates that the SONET and SDH optical 
transmission standards will become the industry transmission standards over 
the coming years for the North American and international networks, 
respectively. The Company's current network circuit test and performance 
monitoring systems do not address either the SONET or SDH transmission 
standards. The Company intends to extend its current products and develop new 
products to accommodate such new transmission standards and other advances in 
technology, as they evolve. The widespread adoption of SONET and/or SDH as 
industry transmission standards before the Company is able to successfully 
develop products which address such transmission standards could in the 
future adversely affect the sale and deployment of the Company's products.

      The Company's OS products are designed to operate on a variety of 
hardware and software platforms and with a variety of databases employed by 
its customers in their networks. The Company must continually modify and 
enhance its OS products to keep pace with changes in hardware and software 
platforms and database technology. As a result, uncertainties related to the 
timing and nature of new product announcements, introductions or 
modifications by systems vendors, particularly, Sun Microsystems and Hewlett 
Packard, and by vendors of relational database software, particularly, Oracle 
Corporation could materially adversely impact the Company's business, 
operations and financial condition. In addition, the failure of the Company's 
OS products to operate across the various existing and evolving versions of 
hardware and software platforms and database environments employed by 
customers would have a material adverse effect on the Company's business, 
operations and financial condition.

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

      Any failure by the Company to anticipate or respond on a cost-effective 
and timely basis to technological developments, changes in industry 
transmission standards or customer requirements, or any significant delays in 
product development or introduction could have a material adverse effect on 
the Company's business. There can be no assurance that the Company will be 
able to successfully develop new products to meet customer requirements, to 
address new industry transmission standards and technological changes or to 
respond to new product announcements by others, or that such products will 
achieve market acceptance.

      DEPENDENCE ON SUPPLIERS AND SUBCONTRACTORS. Certain components used in 
the Company's T3AS, CTS, PAAS and Remote Module products, including its VLSI 
ASICs, are available from a single source and other components are available 
from only a limited number of sources. The Company has few supply agreements 
and generally makes its purchases with purchase orders. Further, certain 
components require an order lead time of up to one year. Other components 
that currently are readily available may become difficult to obtain in the 
future. Failure of the Company to order sufficient quantities of these 
components in advance could prevent the Company from increasing production in 
response to customer orders in excess of amounts projected by the Company. In 
the past, the Company has experienced delays in the receipt of certain of its 
key components, which have resulted in delays in product deliveries. There 
can be no assurance that delays in key component and part deliveries will not 
occur in the future.

                                     -17-



The inability to obtain sufficient key components as required or to develop 
alternative sources if and as required in the future could result in delays 
or reductions in product shipments, which in turn could have a material 
adverse effect on the Company's customer relationships and operating results. 
Additionally, the Company uses third-party subcontractors for the manufacture 
of its subassemblies. This reliance on third-party subcontractors involves 
several risks, including the potential absence of adequate capacity, the 
unavailability of or interruption in access to certain process technologies, 
and reduced control over product quality, delivery schedules, manufacturing 
yields and costs. Shortages of raw materials or production capacity 
constraints at the Company's subcontractors could negatively affect the 
Company's ability to meet its production obligations and could result in 
increased prices for affected parts.

      HIGH INVENTORY LEVELS AND NEED TO MAKE ADVANCE PURCHASE COMMITMENTS. To 
respond to anticipated customer demand, the Company maintains high inventory 
levels. 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 products or components, the Company must 
make advance commitments to purchase relatively large quantities of such 
products or components in a number of circumstances. A large portion of the 
Company's purchase commitments consists of custom parts, some of which are 
sole-source such as VLSI ASICs, for which there is no alternative use or 
application. The inability of the Company to sell such products or 
incorporate such components in its other products could have a material 
adverse effect on the Company's business, operating results and financial 
condition.

      YEAR 2000 COMPLIANCE. Many installed computer systems and software 
products are coded to accept only two digit entries in the date code field. 
As the year 2000 approaches, these code fields will need to accept four digit 
entries to distinguish years beginning with "19" from those beginning with 
"20" dates. As a result, in less than two years, computer systems and/or 
software products used by many companies may need to be upgraded to comply 
with such year 2000 requirements. The Company is assessing its products, as 
well as its internal management information systems in order to identify and 
modify those products and systems that are not year 2000 compliant. Based 
upon a preliminary assessment, the Company expects such modifications will be 
made on a timely basis and does not believe that the cost of such 
modifications will have a material effect on the Company's operating results 
or financial condition. There can be no assurance, however, that the 
Company's preliminary assessment is accurate. If the Company encounters any 
unanticipated delays in or costs associated with the implementation of such 
changes, in particular with respect to the Company's products, the Company's 
business, operating results and financial condition could be materially 
adversely affected.

      PRODUCT RECALL AND DEFECTS. Producers of telecommunications network 
performance management products such as those being marketed by the Company, 
are often required to meet rigorous standards imposed by BellCore, the 
research and development entity created following the divestiture of AT&T to 
provide ongoing engineering support to the RBOCs. In addition, the Company 
must meet specialized standards imposed by many of its customers. The 
Company's products are also required to interface in a complex and changing 
environment with telecommunication network equipment made by numerous other 
suppliers. Since many of these suppliers are competitors of the Company, 
there can be no assurance that they will cooperate with the Company. In the 
event there are material deficiencies or defects in the design or manufacture 
of the Company's systems, or if the Company's systems become incompatible 
with existing third-party network equipment, the affected products could be 
subject to a recall. The Company has experienced two significant product 
recalls in its history and there can be no assurance that the Company will 
not experience any product recalls in the future. The cost of any subsequent 
product recall and associated negative publicity could have a material 
adverse effect on the Company's business, operating results and financial 
condition. In addition, the Company's development and enhancement of its 
complex OS products entails substantial risks of product defects. There can 
be no assurance that software errors will not be found in existing or new 
products or releases after commencement of commercial licensing, which may 
result in delay or loss of revenue, loss of market share, failure to achieve 
market acceptance, or may otherwise adversely impact the Company's business, 
operating results and financial condition.

      GOVERNMENT REGULATION. The majority of the Company's customers operate 
within the telecommunications industry which is subject to regulation in the 
United States and other countries. Most of the Company's customers must 
receive regulatory approvals in conducting their businesses. Although the 
telecommunications industry has recently experienced government deregulation, 
there is no assurance this trend will continue. Moreover, the federal and 
state courts and the FCC continue to interpret and clarify the provisions of 
the 1996 Telecommunications Act. In fact, recent regulatory rulings have 
affected the ability of the Company's customers to enter new markets and 
deliver new services which could impact their ability to make significant 
capital expenditures. The effect of judicial or regulatory rulings by federal 
and state agencies on the Company's customers may adversely impact the 
Company's business, operating results and financial condition.

                                     -18-



      POTENTIAL COMPETITION FROM RBOCS. The 1996 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 FCC). 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 1996 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.

      PROPRIETARY TECHNOLOGY. The Company relies on a combination of 
technical leadership, patent, trade secret, copyright and trademark 
protection and non-disclosure agreements to protect its proprietary rights. 
Although the Company has pursued and intends to continue to pursue patent 
protection of inventions that it considers important and for which such 
protection is available, the Company believes its success will be largely 
dependent on its reputation for technology, product innovation, 
affordability, marketing ability and response to customers needs. Currently, 
the Company has eleven U.S. patents granted and three U.S. patent 
applications allowed. One of the granted patents relates to the Company's 
Remote Module product. Additionally, the Company has six pending U.S. patent 
applications and four international (Patent Cooperation Treaty and European 
Patent Office) applications on file covering various circuit and system 
aspects of its products. There can be no assurance that the Company will be 
granted additional patents or that, if any patents are granted, they will 
provide the Company's products with significant protection or will not be 
challenged. Additionally, should a third party challenge any of the Company's 
current or future patents, there can be no assurance that the Company will be 
successful in defending its patents or that any litigation, regardless of 
outcome, will not result in substantial cost to and diversion of efforts by 
the Company. As part of its confidentiality procedures, the Company generally 
enters into non-disclosure agreements with its employees, consultants and 
suppliers, and limits access to and distribution of its proprietary 
information. Despite these precautions, it may be possible for a third party 
to copy or otherwise obtain and use the Company's technology without 
authorization. Accordingly, there can be no assurance that the Company will 
be successful in protecting its proprietary technology or that ADA's 
proprietary rights will preclude competitors from developing products or 
technology equivalent or superior to that of the Company. 

      The telecommunications industry is characterized by the existence of a 
large number of patents and frequent litigation based on allegations of 
patent infringement. The Company is currently not party to any litigation 
regarding any patents or other intellectual property rights. However, there 
can be no assurance that third parties will not assert infringement claims 
against the Company in the future or that any such assertions will not result 
in costly litigation or require the Company to obtain a license to 
intellectual property rights of such parties. There can be no assurance that 
any such licenses would be available on terms acceptable to the Company, if 
at all. Further, litigation, regardless of outcome, could result in 
substantial cost to and diversion of efforts by the Company. Any infringement 
claims or litigation by or against the Company could materially and adversely 
affect the Company's business, operating results and financial condition. 
Moreover, the laws of some foreign countries do not protect the Company's 
proprietary rights in the products to the same extent as do the laws of the 
United States.

      The Company relies on certain software that it licenses from third 
parties, including software that is integrated with internally developed 
software and used in the Company's products to perform key functions. There 
can be no assurance that these third party software licenses will continue to 
be available to the Company on commercially reasonable terms or that such 
licenses will not be terminated. Although the Company believes that 
alternative software is available from other third party suppliers, the loss 
of or inability of the third parties to enhance their products in a timely 
and cost-effective manner could result in delays or reductions in product 
shipments by the Company until equivalent software could be developed 
internally or identified, licensed, and integrated, which could have a 
material adverse effect on the Company's business, operating results and 
financial condition.

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

      VOLATILITY OF STOCK PRICE. The Company's future earnings and stock 
price may be subject to significant volatility, particularly on a quarterly 
basis. Any shortfall in revenue or earnings from levels expected by public 
market analysts and investors could have an immediate and significant adverse 
effect on the trading price of the Company's common

                                     -19-



stock. Fluctuation in the Company's stock price may also have an effect on 
customer decisions to purchase the Company's products which could have a 
material adverse effect on the Company's business, operating results and 
financial condition.

ITEM 2.  PROPERTIES

         The Company currently maintains its headquarters in a leased 
facility in San Diego, California, which contains all development, 
engineering, assembly, marketing and administrative functions, in 62,368 
square feet of space in one building. The lease expires in 2003. The 
Company has sub-leased a portion of the San Diego facility through 1998. The 
Company also leases additional office facilities in Terre Haute, Indiana, 
Burnaby, British Columbia and Richardson, Texas, all of which house product 
development and customer support operations. The Company leases 12,600, 
25,604 and 14,750 square feet of space in Terre Haute, Burnaby and 
Richardson, respectively. The Terre Haute, Burnaby and Richardson leases 
expire in September 1998, December 1999 and January 2005, respectively. The 
Terre Haute lease includes an option to extend the lease term one year from 
the September 1998 expiration date. The Company believes that its existing 
facilities will be adequate to meets its needs through 1998.

ITEM 3.  LEGAL PROCEEDINGS

         From time to time, ADA may be involved in litigation relating to 
claims arising out of its operations in the normal course of business. As of 
the date of this Annual Report, the Company is not a party to any legal 
proceedings.

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

         None.
                                 PART II

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

         Stock Market Information

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




                1997                       High                 Low
                ----                       ----                 ---
                                                       
            First Quarter                 $ 8.50             $ 4.88
            Second Quarter                  9.38               3.63
            Third Quarter                  10.00               6.50
            Fourth Quarter                 11.88               5.00

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



There were 237 shareholders of record as of February 28, 1998.

         Dividend Policy

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

                                     -20-



         Use of Proceeds

The following information is being provided in accordance with Rule 463
promulgated under the Securities Act of 1933, as amended (the "Securities Act"),
and Item 701 of Regulation S-K under the Securities Act.

The Company registered 2,590,000 shares of Common Stock (the "Shares") on 
registration statement No. 33-75258 which was declared effective on March 29, 
1994 (the "Offering"). The co-managing underwriters of the Offering were 
Alex. Brown & Sons Incorporated and Hambrecht & Quist Incorporated. The 
Company sold 2,590,000 Shares with an aggregate offering price of $31,080,000 
(or $12.00 per share). The net offering proceeds to the Company after 
deducting estimated total expenses were $28,334,000. From the effective date 
of the Offering to December 31, 1997, the Company has used all of the net 
proceeds for working capital, as was originally anticipated in the Offering.

ITEM 6.  SELECTED FINANCIAL DATA




(Dollars in thousands)                                  1993              1994             1995              1996             1997
                                                        ----              ----             ----              ----             ----
                                                                                                            
Revenue                                              $14,259           $35,597          $20,470           $24,422          $34,050

Gross Profit                                           7,125            20,791           11,753            11,813           15,116

Operating Expenses:

Research and  development                              3,902             5,335            5,807             7,356            9,164

In process research and development related
to acquisition                                             -                 -                -             3,286            1,578

Sales and marketing                                    2,406             3,363            4,234             6,312            7,995

General and administrative                             1,354             2,337            2,985             3,576            5,252
                                                     -------           -------          -------           -------          -------

    Total operating expenses                           7,662            11,035           13,026            20,530           23,989


Net income (loss)                                       (619)           10,620              759            (7,120)          (4,283)
                                                     -------           -------          -------           -------          -------

Net income (loss) per share, basic (1)               $  (.75)          $  1.01          $   .06           $  (.59)         $  (.34)
                                                     -------           -------          -------           -------          -------

Net income (loss) per share, diluted (1)
                                                     $  (.07)(2)       $   .88          $   .06           $  (.59)         $  (.34)
                                                     -------           -------          -------           -------          -------

Weighted average number of shares, 
basic (1)                                                820            10,542           11,806            12,084           12,460

Weighted average number of shares,
diluted (1)                                            8,693(2)         12,091           12,848            12,084           12,460


Working Capital                                      $ 2,251           $26,081          $36,728           $31,229          $26,788

Total assets                                           6,878            48,919           49,936            45,972           46,283

Long-term debt                                           117                82               49                33               15



(1) See Note 2 of Notes to Consolidated Financial Statements for an 
    explanation of the determination of the number of shares used in 
    computing net income per share. Amounts have been restated for the 
    adoption of Statement of Financial Accounting Standard No. 128 "Earnings 
    Per Share".

(2) Weighted average shares outstanding includes 55,105,577 shares of preferred
    stock which converted into 7,872,199 shares of common stock in connection 
    with the Company's initial public offering in March 1994 after giving 
    effect to the 1-for-7 reverse stock split, immediately prior to the 
    closing of the initial public offering.

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

Recent Developments

In September 1997, the Company entered into a JDA with Nortel to develop 
unique SONET network products for the telecommunications industry. Nortel and 
ADA will each contribute technology and development resources to projects 
conducted under the JDA. The companies will equally share development costs, 
estimated to be several million dollars per quarter. Development of the first 
product under the JDA has commenced with initial availability expected in the 
first half of 1999. The agreement also contemplates additional projects as 
agreed to in the future by Nortel and ADA. Operating expenses for the year 
ended December 31, 1997 include a $2.2 million offset to research and 
development costs representing Nortel's proportionate share of development 
costs that have been incurred through December 31, 1997 in connection with 
the initial project being conducted under the JDA.

In June 1997, the Company acquired an exclusive worldwide license to Northern 
Telecom's DSS II OS software product, subject to certain residual rights 
retained by Northern Telecom. The Company acquired the license and certain 
assets related to the DSS II product for a net amount of $3.1 million in 
cash, $2.2 million of which was paid in 1997 and $0.9 million of which was 
paid in January 1998. In June 1997, the Company recorded a charge of 
approximately $1.6 million for purchased research and development associated 
with the acquisition of the license and assets. As part of the transaction, 
the Company also issued Northern Telecom a warrant to purchase 150,000 shares 
of the Company's common stock at an exercise price of $12 per share. The 
warrant has a three year term. Northern Telecom retained the right to and 
will continue to support its current DSS II customer base outside of North 
America as part of its integrated network management portfolio for broadband 
network solutions. The Company obtained exclusive worldwide rights to market 
and sell the DSS II product under the new name, .Provisioner, and acquired 
all of Northern Telecom's North American DSS II customer relationships. The 
acquisition of .Provisioner was part of the Company's strategic plan to build 
upon its portfolio of network management OS software products essential to 
the operation of TSP networks. The first part of the plan involved the 
acquisition by the Company of its Vancouver-based development team known as 
British Columbia Group ("BCG") from MPR Teltech, Ltd., a subsidiary of BC 
Telecom, Inc., in July 1996. BCG has been responsible for design, 
development, and maintenance of DSS II and its predecessor DSS since 1986, 
most recently under contract to Northern Telecom's Network Services 
Management Division.

In June 1997, the Company signed a three year supply contract with MCI for 
the Company's systems and services products. This contract is a standard 
supply contract which specifies the terms and conditions under which MCI will 
order and the Company will supply products and services. The contract is not 
a commitment contract and does not guarantee any purchases of products and 
services or any level of purchases. Although MCI has purchased certain 
products of the Company under the terms of this contract, the Company is 
uncertain whether this contract will result in any future orders for the 
Company's products, or if it does, whether the orders will result in 
significant revenue.

                                     -21-



Results of Operations

         The following table sets forth certain statements of operations data 
as a percent of revenue, for the years ended December 31, 1997, 1996 and 1995.




                                                         Years Ended December 31,
                                                 -------------------------------------
                                                 1997              1996           1995
                                                 ----              ----           ----
                                                                         
Revenue                                          100%              100%           100%
Cost of revenue                                   44%               52%            43%
                                                  ---               ---            ---
Gross profit                                      56%               48%            57%

Operating Expenses:
Research and development                          27%               30%            28%

Purchased in-process research and
 development related to acquisitions               5%               13%             -
Sales and marketing                               23%               26%            21%
General and administrative                        15%                5%            14%
                                                  ---               ---            ---
Total operating expenses                          70%               84%            63%
                                                  ---               ---            ---
Operating income (loss)                          (15)%             (36)%           (6)%
Other income (expense), net                        3%                7%            10%
                                                  ---               ---            ---
Income (loss) before income taxes                (12)%             (29)%            4%
Provision for income taxes                        (1)%               -              -
                                                  ---               ---            ---
Net income (loss)                                (13)%             (29)%            4%
                                                  ---               ---            ---
                                                  ---               ---            ---



1997 COMPARED WITH 1996

         Revenue totaled $34,050,000 in 1997, a 39% increase from $24,422,000 
in 1996. The increase is primarily the result of revenue generated from 
network management OS software design services and products acquired through 
acquisitions during 1997 and 1996. Revenue from the Company's network systems 
products and services totaled $17,061,000 in 1997, a 6% decrease from 
$18,144,000 in 1996. The decrease was the net result of decreased sales of 
the Company's T3AS system offset by sales of the Company's CTS products to 
MCI and Worldcomm and increased sales of the Company's Remote Module to 
BellSouth. Revenue from network management OS services and products totaled 
$16,989,000 in 1997, a 171% increase from $6,278,000 in 1996. The majority of 
the increase was the result of increased sales of software design services to 
Northern Telecom and sales of the Company's .Provisioner software product to 
BC Tel and MCI. Since the Company acquired its software design services 
business in July 1996, the increased revenue in 1997 was mostly the result of 
a full year of software design services revenue. The license of .Provisioner 
was acquired from Northern Telecom in June 1997. The acquisition of the 
software license from Northern Telecom has generated a shift in the Company's 
BCG operations from a software design services business to a product 
business. The Company markets and supports the DSS II product and technology 
under the new name .Provisioner. The Company also intends to integrate the 
licensed technology into new product development. Although the Company has 
continued to market and develop the software design services business, future 
revenue levels for software design services are expected to be significantly 
lower than in the past due to the shift in BCG's operations. Although the 
Company believes it will be successful in transitioning the majority of its 
OS operations from a software design services business to a product business, 
there can be no assurance the Company will be able to maintain historical OS 
revenue levels in the future. As a result, the Company may experience 
quarterly revenue fluctuations in the future that could have a material 
adverse effect on the Company's business, operating results and financial 
condition. In 1997, Northern Telecom, MCI and Bell South accounted for 20%, 
18%, and 17% of the Company's revenue, respectively. In 1996, US WEST, NYNEX, 
and Northern Telecom accounted for 31%, 23%, and 15% of the Company's 
revenue, respectively.

         Gross profit totaled $18,934,000 in 1997, a 60% increase from 
$11,813,000 in 1996. Gross profit as a percent of revenue was 55% in 1997 
compared to 48% in 1996. The increases in gross profit and gross profit as a 
percent of revenue resulted primarily from increased sales of higher margin 
network management OS software products partially offset by decreased sales 
of network systems products as well as a change in product mix for network 
systems products from T3AS systems to a product mix weighted toward the 
Company's CTS and Remote Module NIU products which carry lower product 
margins compared to the Company's T3AS system. The highly competitive CTS and 
NIU markets are subject to severe pressures which have contributed to 
significantly lower overall gross profits on these products. Additionally, 
gross profit for the year increased due to the shift of a majority of 
engineering labor previously associated with design services revenue from the 
cost of revenue line to research and development operating expenses as a 
result of the transition of most of BCG's operations from design services to 
product development. During 1997, the Company transitioned the majority of 
BCG's operations from OS software design services to OS product development 
as a result of the acquisition of the license to the DSS II product from 
Northern Telecom. There can be no assurance that the Company will be able to 
maintain the current gross profit margins or gross profit as a percent of 
revenue levels. Factors which may materially and adversely affect the 
Company's gross profit in the future include its level of revenue, 
competitive pricing pressures in the telecommunication network management 
market, new product introductions by the Company or its competitors, 
potential inventory obsolescence and scrap, possible recalls, production or 
quality problems, timing of development expenditures, changes in material 
costs, disruptions in sources of supply, regulatory changes, seasonal 
patterns of bookings, capital spending, and changes in general economic 
conditions.

                                     -22-



         Research and development expenses totaled $9,164,000 in 1997, a 25% 
increase from $7,356,000 in 1996. The increase was primarily due to a shift 
of a majority of engineering labor previously associated with design services 
revenue from the cost of revenue line to research and development operating 
expenses as a result of the transition of most of BCG's operations from 
design services to product development as discussed above in the gross profit 
analysis, and the addition of research and development personnel as part of 
the JDA with Nortel. Research and development personnel expenses increased 
57% compared to 1996, mostly related to the shift in the BCG's operations to 
a product oriented business. The Company believes that its future success 
depends on its ability to maintain its technological leadership through 
enhancement of its existing products and development of innovative new 
products and services that meet customer needs. Therefore, the Company 
intends to continue to make significant investments in research and product 
development in association with planned development projects. The competition 
for highly qualified engineering personnel is intense. There can be no 
assurance that the Company will be successful in attracting and retaining key 
personnel required to develop new products which could have a material 
adverse effect on the Company's future operating results.

         In 1997, the Company recorded a one-time charge for purchased 
research and development costs related to the acquisition of the DSS II 
software license and related assets of $1,578,000. In 1996, the Company 
acquired certain assets of both ACD in Terre Haute, Indiana and the SSN 
division of MPR Teltech, in Vancouver, British Columbia. See Note 14 of Notes 
to Consolidated Financial Statements for additional information. In 
conjunction with the ACD and SSN acquisitions, the Company recorded one-time 
charges for purchased research and development costs of $1,186,000 and 
$2,100,000, respectively.

         Sales and marketing expenses totaled $7,995,000 in 1997, a 27% 
increase from $6,312,000 in 1996. The increase is due to increased personnel 
costs in the network management business unit supporting the shift from a 
design services business to a product based business, a full year of expenses 
for the personnel acquired in 1996 and increased commission expenses as a 
result of increased sales. The Company expects that sales and marketing 
expenses will continue to increase in absolute dollars as the Company 
continues to hire additional sales, marketing and technical support personnel 
to support planned product introductions in both the Network Systems and 
Network Management business units.

         General and administrative expenses totaled $5,260,000 in 1997, a 
47% increase from $3,576,000 in 1996. The majority of the increase was 
attributable to the amortization of goodwill and intangible assets associated 
with the SSN acquisition in the third quarter of 1996 and the license 
acquisition from Northern Telecom in June 1997, as well as increased 
personnel and infrastructure expenses required to support the expanded 
operations of the Company as a result of the 1996 and 1997 acquisitions. The 
Company expects that general and administrative expenses will increase in 
absolute dollars as the Company invests in the expansion of its internal 
networking capabilities to integrate the Company's geographically distributed 
organization.

         Interest income totaled $904,000 in 1997, a 46% decrease from 
$1,673,000 in 1995. The decrease is the result of a decrease in cash 
investments during 1997 compared to 1996.

         In 1997 and 1996, the Company provided for income taxes related to 
the operations of the Company's Canadian subsidiary, based on an effective 
Canadian tax rate of 46%. At December 31, 1997, the Company had federal 
income tax-loss carry-forwards of approximately $15,644,000 and California 
state income tax-loss carry-forwards of approximately $7,561,000. The 
Company's use of approximately $1,166,000 of its federal tax-loss 
carry-forwards, and $408,000 of its federal and $105,000 of its California 
tax credit carryforwards are significantly limited as a result of ownership 
changes associated with equity financings in January 1989 and March 1991. See 
Note 11 of Notes to Consolidated Financial Statements. Management is not able 
to estimate levels of tax deductions which will be generated as a result of 
these transactions in future periods. See Note 11 of Notes to Consolidated 
Financial Statements.

         As a result of the factors discussed above, the Company incurred a 
net loss of $4,283,000, or $.34 per basic and diluted share in 1997 compared 
to net loss of $7,120,000, or $.59 per basic and diluted share in 1996. 
Excluding $1,578,000 in one-time charges for purchased research and 
development costs associated with the license acquisition from Northern 
Telecom, the Company would have recorded a net loss of $2,705,000, or $.22 
per basic and diluted share in 1997. Excluding $3,286,000 in one-time charges 
for purchased research and development costs associated with the ACD and SSN 
asset acquisitions, the Company would have recorded a net loss of $3,834,000, 
or $.32 per basic and diluted share in 1996.

1996 COMPARED WITH 1995

         Revenue totaled $24,422,000 in 1996, a 19% increase from $20,470,000 
in 1995. The increase is primarily the result of revenue generated from 
network management OS software design services and products acquired through 
acquisitions during 1996. Revenue from the Company's T3AS products and 
services totaled $18,144,000 in 1996, an 11% decrease from $20,470,000 in 
1995. The decrease was the result of lower T3AS sales compared to

                                     -23-



last year due to continued capital constraints at several of the Company's 
customers, the highly competitive market for the Company's CTS and NIU 
products, and the impact of regulatory actions on the Company's customers. 
Revenue from OS services and products totaled $6,278,000 in 1996. The Company 
did not have any OS product revenue in 1995. In 1996, US WEST, NYNEX, and 
Northern Telecom accounted for 31%, 23%, and 15% of the Company's revenue, 
respectively. In 1995, U S WEST, Ameritech, NYNEX and Bell South accounted 
for 45%, 19%, 18% and 13% of the Company's revenue, respectively. 

         Gross profit totaled $11,813,000 in 1996, a slight increase from 
$11,753,000 in 1995. Gross profit as a percent of revenue was 48% in 1996 
compared to 57% in 1995. The decrease in gross profit as a percent of revenue 
resulted primarily from a product mix weighted toward lower margin T3AS 
products and services and lower-margin revenue from OS software design 
services. The majority of the Company's Canadian subsidiary's operations 
supported OS software design services. Since the cost of design services 
revenue includes both direct and indirect costs of supplying the services, 
the majority of the Canadian subsidiary's operating costs are included in 
cost of revenue. 

         Research and development expenses totaled $7,356,000 in 1996, a 27% 
increase from $5,807,000 in 1995. The increase was primarily due to the 
addition of research and development personnel as a result of the ACD asset 
acquisition, increases in depreciation expense, and increases in 
non-recurring engineering (NRE) expenses due to timing of planned development 
projects during 1996 compared to 1995. Research and development personnel 
expenses increased 26% compared to 1995, mostly related to the ACD asset 
acquisition. 

         In 1996, the Company recorded one-time charges for purchased 
research and development costs related to the ACD asset acquisition and the 
SSN asset acquisition of $1,186,000 and $2,100,000, respectively.

         Sales and marketing expenses totaled $6,312,000 in 1996, a 49% 
increase from $4,234,000 in 1995. The majority of the increase resulted from 
the addition of technical customer support personnel, the addition of 
customer support and marketing personnel related to the ACD asset 
acquisition, and increased promotional expenses. 

         General and administrative expenses totaled $3,576,000 in 1996, a 
20% increase from $2,985,000 in 1995. The majority of the increase is the net 
result of increased expenses for the amortization of goodwill and intangibles 
related to the SSN asset acquisition and increased personnel expenses related 
to acquisitions in 1996 offset by a decrease in legal expenses compared 
to 1995 as a result of greater legal expense in 1995 related to the 
settlement of a shareholder suit. 

         Interest income totaled $1,673,000 in 1996, a 17% decrease from 
$2,023,000 in 1995. The decrease is the result of a decrease in cash 
investments during 1996 compared to 1995.

         In 1996, the Company provided for income taxes related to the 
operations of the Company's Canadian subsidiary, based on an effective 
Canadian tax rate of 46%. The Company did not provide for U.S. income taxes 
in 1996 or 1995 due to net losses for income tax purposes. At December 31, 
1996, the Company had federal income

                                     -24-



tax-loss carry-forwards of approximately $12,987,000 and California state 
income tax-loss carry-forwards of approximately $5,835,000. 

         As a result of the factors discussed above, the Company incurred a 
net loss of $7,120,000, or $.59 per basic and diluted share in 1996 compared 
to net income of $759,000, or $.06 per basic and diluted share in 1995. 
Excluding $3,286,000 in one-time charges for purchased research and 
development costs associated with the ACD and SSN asset acquisitions, the 
Company would have recorded a net loss of $3,834,000, or $.32 per basic and 
diluted share in 1996.

Quarterly Results

         The Company has experienced significant fluctuations in bookings, 
revenue and operating results from quarter to quarter due to a combination of 
factors and expects such fluctuations to continue in future periods. Factors 
that may cause the Company's results of operations to vary significantly from 
quarter to quarter include but are not limited to the size and timing of 
customer orders and subsequent shipment of systems products and 
implementation of OS software products to major customers, timing and market 
acceptance of product introductions or enhancements by the Company or its 
competitors, customer order deferrals in anticipation of new products, 
technological changes in the telecommunications industry, competitive pricing 
pressures, changes in the Company's operating expenses, personnel changes, 
management of a changing business, changes in the mix of products sold and 
licensed, disruption in sources of supply, changes in pricing policies by the 
Company's suppliers, regulatory changes, capital spending, delays of payments 
by customers and general economic conditions. The Company believes that in 
late 1997 it began experiencing seasonality in its product shipments and OS 
software licensing. Generally, TSPs place more orders for products and 
licenses in the second and fourth quarters with the orders significantly down 
in the first quarter and relatively flat in the third quarter of each year. 
The Company expects that revenue may begin to reflect these seasonal order 
cycles more closely, which could result in quarterly fluctuations. There can 
be no assurance that the TSPs will not defer or delay orders contrary to the 
historical seasonal pattern or that they will not change their ordering 
patterns. Because of the relatively fixed nature of most of the Company's 
costs, including personnel and facilities costs, any unanticipated shortfall 
in revenue in any fiscal quarter would have a proportionately greater impact 
on the Company's operating income in that quarter and may result in 
fluctuations in the price of the Company's Common Stock.

         As the impact of the Company's Network Management business unit on 
the Company's revenue increases, the Company may be faced with greater 
fluctuations in operating income. The licensing and implementation of the 
Company's OS products generally involves a significant capital expenditure 
and a committment of resources by prospective customers. Accordingly, the 
Company is dependent on its customers' decisions as to the the timing and 
level of commitment and expenditures. In addition, the Company typically 
realizes a significant portion of license revenues in the last weeks or even 
days of a quarter. As a result, the magnitude of quarterly fluctuations in 
the Network Management business unit may not become evident until late in, or 
after the close of, a particular quarter. In addition, the Company does not 
recognize service revenues until the services are rendered. The time required 
to implement the Company's OS products can vary significantly with the needs 
of its customers and is generally a process that extends for several months. 
Because of their complexity, larger implementations may take multiple 
quarters to complete. Additionally, quarter-to-quarter product mix 
variations, customer orders tending to be placed late in the quarter, and 
competitive pressures on pricing could have a materially adverse effect on 
the Company's operating results in any one quarter. The Company's expenses 
are based in part on the Company's expectations as to future revenues and to 
a large extent are fixed in the short term. If revenues do not meet 
expectations, the Company's business, operations and financial condition are 
likely to be materially adversely affected.

Liquidity and Capital Resources

         Cash and investments totaled $13,179,000 at December 31, 1997 and 
$21,461,000 at December 31, 1996. The 1997 decrease in cash and investments 
compared to 1996 is primarily due to cash payments for the acquisition of the 
DSS II license from Northern Telecom, purchases of property and equipment and 
1997 operating losses.

         Net working capital totaled $26,788,000 at December 31, 1997 and 
$31,229,000 at December 31, 1996. The 1997 decrease in working capital 
compared to 1996 was primarily the result of a decrease in cash and 
investments and increased accounts payable associated with inventory 
purchases for fourth quarter revenue shipments, partially offset by an 
increase in accounts receivable.

         The Company's 1997 operating activities used $3,528,000 in cash 
primarily the result of increased accounts receivable resulting from a 
majority of the Company's fourth quarter sales occurring late in the quarter 
and increased operating expenses related to internal funding of the JDA with 
Nortel, partially offset by increased accounts payable and decreased 
inventory levels. In 1996, the Company's operating activities used $2,265,000 
in cash primarily as a result of net operating losses.

         In 1997, the purchase cost of the DSS II license acquisition totaled 
$3,383,000, of which all but $867,000 had been paid in cash by year end. The 
tangible assets acquired as part of the DSS II license acquisition consisted 
mostly of computer and lab equipment. Cash used for capital expenditures 
totaled approximately $2,432,000 in 1997 and $1,709,000 in 1996. Most of the 
capital additions were for the purchase of computers, lab equipment and 
software tool kits to support the Company's expanded research and product 
development efforts, improvements to the Company's internal network 
infrastructure to support the Company's multiple locations and the BCG 
operations move to a new facility in February 1997. The Company did not 
acquire any capital equipment through capital lease arrangements in 1997 or 
1996. The Company expects that the level of capital expenditures will 
increase in 1998 as a result of planned facility moves in Richardson, Texas 
and planned research and development projects.

         Assuming no material changes in the Company's current operating 
plans, the Company believes that cash generated from operations and the total 
of its cash and investments, will be sufficient to meet its working capital 
and capital expenditure requirements for at least the next twelve months. 
Significant additional capital resources, however, may be required to fund 
acquisitions of complementary businesses, products or technologies. 
Alternatively, the Company may need to issue additional shares of its capital 
stock or incur indebtedness in connection with any such acquisitions. At 
present, the Company does not have any agreements or commitments with respect 
to any such acquisition and there can be no assurance that the Company will 
be able to obtain such agreements or commitments on reasonable terms, or at 
all.

                                     -25-



         The Company believes the impact of inflation on its business 
activities has not been significant to date.

Impact of New Accounting Pronouncements

        In June 1997, the Financial Accounting Standards Board issued SFAS 
No. 130, COMPREHENSIVE INCOME, and SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF 
AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 130 establishes standards for 
reporting and display of comprehensive income and its components in a full 
set of general purpose financial statements. Comprehensive income is defined 
as the change in equity in a business enterprise during a period from 
transactions and other events and circumstances from nonowner sources. SFAS 
No. 131 requires publicly-held companies to report financial and other 
information about key revenue-producing segments of the entity for which such 
information is available and is utilized by the chief operating decision 
maker. Specific information to be reported for individual segments includes 
profit or loss, certain revenue and expense items and total assets. The 
impact of adopting SFAS No. 130 and SFAS No. 131, both effective for the 
Company in 1998, has not yet been determined.

        In October 1997, the American Institute of Certified Public 
Accountants issued State of Position 97-2 ("SOP 97-2"), SOFTWARE REVENUE 
RECOGNITION. This statement establishes requirements for revenue recognition 
for software companies for fiscal years beginning after December 15, 1997. 
The Company is currently evaluating the impact of SOP 97-2 and has not 
determined the result, if any, on the Company's financial position, results 
of operations or cash flows.

        The Company has adopted the provisions of SFAS No. 128, EARNINGS PER 
SHARE, effective December 31, 1997. SFAS No. 128 requires the presentation of 
basic and diluted earnings per share. Basic EPS is computed by dividing 
income available to common stockholders by the weighted average number of 
common shares outstanding for the period. Diluted EPS is computed giving 
effect to all dilutive potential common shares that were outstanding during 
the period. Dilutive potential common shares consist of the incremental 
common shares issuable upon the conversion of convertible preferred stock 
(using the "if converted") method) and exercise of stock options and warrants 
for all periods. All prior period earnings per share amounts have been 
restated to comply with SFAS No. 128.

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         Not Required.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The Financial Statements are set forth on pages F-1 through F-24 of 
this Annual Report.

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

         Not applicable.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

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

         Section 16(a) Beneficial Ownership Reporting Compliance. The 
information under the caption "Section 16(a) Beneficial Ownership Reporting 
Compliance," appearing in the Proxy Statement, is incorporated herein by 
reference.

ITEM 11. EXECUTIVE COMPENSATION

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information under the heading "Security Ownership of Certain 
Beneficial Owners and Management," appearing in the Proxy Statement, is 
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

                                     PART IV

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

   (a)                     1.   FINANCIAL STATEMENTS

         The following financial statements of the Company are included on 
pages F-1 through F-24 of this Annual Report on Form 10-K:

         Report of Independent Accountants

         Consolidated Balance Sheets at December 31, 1996 and December 31, 
         1997

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

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

                                     -26-



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

         Notes to Consolidated Financial Statements

                  2.   FINANCIAL STATEMENT SCHEDULES

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

         Report of Independent Accountants
         Schedule II  -  Valuation and Qualifying Accounts

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

     (b)          REPORTS ON FORM 8-K

                  The Company filed a report on Form 8-K on December 23, 1997 
in connection with its reincorporation in Delaware.

     (c)                   EXHIBITS




EXHIBIT                                                                                               PAGE
NUMBER                                                                                               NUMBER
- ------                                                                                               ------
                                                                                               
        2.1(5)   Asset Purchase Agreement between Applied Digital Access, Inc. and Applied              --
                 Computing Devices, Inc. dated February 29, 1996

        2.2(7)   Asset Purchase Agreement between Applied Digital Access, Inc. and MPR                  --
                 Teltech, Ltd. dated July 16, 1996

       2.3(11)   Asset Purchase Agreement between the Company and Northern Telecom                      --
                 Limited dated June 27, 1997 (the "Asset Purchase Agreement") (with certain
                 confidential portions omitted).  

       3.3(13)   Certificate of Incorporation of the Company.                                           --

       3.4(14)   Certificate of Agreement of Merger of the Company and its California                  --
                 predecessor.

      +3.5(15)   Bylaws of the Company.                                                                 --

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

       10.2(1)   Lease for the Company's facilities at 9855 Scranton Road, dated June 15, 1993.         --

       10.3(1)   Agreement dated July 1, 1991 by and between the Company and BellSouth



                                     -27-






EXHIBIT                                                                                               PAGE
NUMBER                                                                                               NUMBER
- ------                                                                                               ------
                                                                                               
                 Services Incorporated, as amended (with certain confidential portions omitted).        --

       10.4(1)   Software License Agreement dated January 16, 1992 by and between the                   --
                 Company and GCOM (with certain confidential portions omitted).

       10.5(1)   Master Agreement for Operations Systems Modifications for the Integration of           --
                 Network Elements, dated June 17, 1991 by and between the Company and
                 BellCore, as amended.

       10.6(1)   Addendum #1 to Master Agreement for Operations Systems Modifications for               --
                 the Integration of Network Elements, dated June 17, 1991 by and between the
                 Company and BellCore dated July 10, 1991.

       10.7(1)   Addendum #2 to Master Agreement for Operations Systems Modifications for               --
                 the Integration of Network Elements, dated June 17, 1991 by and between the
                 Company and BellCore dated November 19, 1993.

       10.8(1)   Addendum #3 to Master Agreement for Operations Systems Modification for                --
                 the Integration of Network Elements dated June 17, 1991 by and between the
                 Company and BellCore dated December 27, 1993.

      +10.9(1)   Severance Agreement dated November 27, 1990 by and between the Company                 --
                 and Peter P. Savage.

     +10.10(1)   Severance Agreement dated June 20, 1988 by and between the Company and                 --
                 Paul R. Hartmann.

     +10.11(1)   1994 Stock Option/Stock Issuance Plan Form of Stock Option Agreement.                  --

     +10.12(1)   1994 Stock Option/Stock Issuance Plan Form of Stock Issuance Agreement.                --

     +10.13(1)   1994 Employee Stock Purchase Plan Form of Stock Purchase Agreement.                    --

     +10.14(1)   Form of Employee Proprietary Information Agreement.                                    --

      10.15(1)   Binary Software License Agreement dated March 7, 1989 between the                      --
                 Company and Software Components Group, Inc., as amended.

      10.16(2)   Reinstatement Agreement dated September 22, 1994 between the Company and               --
                 BellSouth Telecommunications Incorporated (with certain confidential portions
                 omitted) (Exhibit 10.2).

      10.17(2)   Purchase Agreement for Telecommunications Products and Related Services                --
                 between Ameritech Services, Inc. (with certain confidential portions omitted)
                 (Exhibit 10.3).

      10.18(3)   First Amendment to Office Lease dated September 23, 1994 between the                   --
                 Company and Sorrento Tech Associates.

      10.19(4)   Purchase Agreement for Telecommunications Products and Related Services
                 between Southwestern Bell Telephone Company and the Company, dated




                                     -28-






EXHIBIT                                                                                               PAGE
NUMBER                                                                                               NUMBER
- ------                                                                                               ------
                                                                                               
                 September 8, 1995 (with certain confidential portions omitted)                         --

     +10.20(6)   Applied Digital Access, Inc. 1994 Stock Option/Stock Issuance Plan, as                 --
                 amended.

      10.21(8)   Master Agreement between Northern Telcom, Ltd. and Applied Digital Access,             --
                 Inc. dated July 16, 1996.

      10.22(8)   Stock Purchase Agreement between Applied Digital Access, Inc. and MPR                  --
                 Teltech, Ltd. dated July 16, 1996.

      10.23(8)   License Agreement between Northern Telcom, Ltd. and Applied Digital                    --
                 Access, Inc. dated July 16, 1996

      10.24(8)   Second Amendment to Lease between Sorrento Tech Associates and Applied                --
                 Digital Access, Inc. dated August 8, 1996.

      10.25(8)   Lease Agreement between Rose Hulman Institute of Technology, through its              --
                 authorized leasing agent, Ragle and Company, and Applied Digital Access,
                 Inc. dated September 15, 1996.

      10.26(9)   Sublease agreement between the Company and ENOVA Corporation dated                    --
                 December 9, 1996.

      10.27(9)   First Amendment to Sublease between the Company and ENOVA Corporation                 --
                 dated January 24, 1997.

      10.28(9)   Office Lease Agreement between 2725321 Canada Inc. and Applied Digital                --
                 Access - Canada, Inc. dated January 1, 1997.

      10.29(10)  License Agreement between Northern Telecom, Ltd. and the Company dated                --
                 as of January 24, 1997 [(with certain confidential portions omitted)][VERIFY CT
                 DONE-NOT NOTED ON 10Q].

      10.30(11)  License Agreement between Northern Telecom, Ltd. and the Company dated                --
                 as of June 27, 1997 (with certain confidential portions omitted).

      10.31(11)  Applied Digital Access, Inc. 1997 Registration Rights Agreement between the           --
                 Company and Northern Telecom, Ltd. dated as of June 27, 1997.

      10.32(11)  Stock and Warrant Purchase Agreement between the Company and Northern                 --
                 Telecom, Ltd. dated as of June 27, 1997.

      10.33(11)  Master Purchase Agreement between MCI Telecommunications Corporation                  --
                 and the Company dated June 16, 1997 (with certain confidential portions
                 omitted).

      10.34(11)  Master Agreement between Northern Telecom, Ltd. and the Company dated as              --
                 of June 26, 1997 (with certain confidential portions omitted).

      10.35(12)  Joint Development Agreement between Northern Telecom, Inc. and the                    --
                 Company dated September 30, 1997  (with certain confidential portions
                 omitted).

     +10.36(15)  Applied Digital Access, Inc. Amended and Restated 1996 Non-qualified Stock
                 Option Plan


                                     -29-






EXHIBIT                                                                                               PAGE
NUMBER                                                                                               NUMBER
- ------                                                                                               ------
                                                                                               
    +10.37(15)   Amended and Restated 1996 Non-qualified Stock Option Plan Form of Stock
                 Option Agreement.

        +10.38   Severance Agreement dated March 24, 1995 by and between the Company and
                 Donald J. O'Connor.

        +10.39   Severance Agreement dated March 12, 1997 by and between the Company and
                 Steven F.X. Murphy.

         10.40   Lease Agreement between Campbell Creek, Ltd. and the Company dated as of
                 October 1, 1997.

         10.41   First Amendment to Lease Agreement between Campbell Creek, Ltd. and the
                 Company dated as of January 22, 1998.

         10.42   Second Amendment to Sublease between the Company and ENOVA
                 Corporation dated December 31, 1997.

        +10.43   Form of Indemnification Agreements between the Company and each of its
                 directors.

        +10.44   Form of Indemnification Agreements between the Company and each of its
                 officers.

        +10.45   Applied Digital Access, Inc. 1994 Employee Stock Purchase Plan, as amended.

        +10.46   Management Team Incentive Compensation Plan, as amended.

         23.1    Consent of Independent Accountants.

         24.1    Power of Attorney (See page 32).

         27.1    Financial Data Schedule.


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

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

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

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

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

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

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

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

         (9)      Incorporated by reference to the Company's Annual Report on
                  Form 10-K for the year ended December 31, 1996 (File No.
                  0-23698).

         (10)     Incorporated by reference to the Company's Quarterly Report on
                  Form 10-Q for the quarter ended March 31, 1997 (File No.
                  0-23698).

         (11)     Incorporated by reference to the Company's Quarterly Report on
                  Form 10-Q for the quarter ended June 30, 1997 (File No.
                  0-23698).



                                     -30-






EXHIBIT                                                                                               PAGE
NUMBER                                                                                               NUMBER
- ------                                                                                               ------
                                                                                               
         (12)     Incorporated by reference to the Company's Quarterly
                  Report on Form 10-Q for the quarter ended September 30, 1997
                  (File No. 0-23698).

         (13)     Incorporated by reference to the Company's Current Report on Form 8-K dated December 23,
                  1997(File No. 0-23698).

         (14)     Incorporated by reference to the Company's Current Report on Form 8-K/A dated January 12, 1998
                  (File No. 0-23698).

         (15)     Incorporated by reference to the Company's Registration
                  Statement on Form S-8 (File No. 333- 48105).




                                     -31-


                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the 
Securities Exchange Act of 1934, the Registrant has duly caused this report 
to be signed on its behalf by the undersigned, thereunto duly authorized.

                                  APPLIED DIGITAL ACCESS, INC.


Date:  March 30, 1998             By:      /s/ Peter P. Savage
                                      ------------------------
                                           Peter P. Savage
                                           President and Chief Executive Officer


                                POWER OF ATTORNEY

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

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




    Signature                              Title                             Date
    ---------                              -----                             ----
                                                                   
/s/ Peter P. Savage               President, Chief Executive             March 30, 1998
- --------------------------        Officer and Director
  (Peter P. Savage)               (Principal Executive
                                  Officer)


/s/ James L. Keefe                Vice President, Finance and            March 30, 1998
- --------------------------        Administration, Secretary,
  (James L. Keefe)                Chief Financial Officer
                                  (Principal Financial and
                                  Accounting Officer)


/s/ Kenneth E. Olson              Director                               March 30, 1998
- --------------------------
  (Kenneth E. Olson)


/s/ Christopher B. Paisley        Director                               March 30, 1998
- --------------------------
  (Christopher B. Paisley)


/s/ Edward F. Tuck                Director                               March 30, 1998
- --------------------------
  (Edward F. Tuck)



                                     -32-







                   APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY
                                   ----------

               REPORT ON AUDITED CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
                                   ----------






                       APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY

                       INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                        ----------


                                                                                   PAGE
                                                                                   ----
                                                                                
1.   CONSOLIDATED FINANCIAL STATEMENTS:

     Report of Independent Accountants .........................................    F-2

     Consolidated Balance Sheets as of December 31, 1996 and 1997...............    F-3

     Consolidated Statements of Operations for the Years Ended
     December 31, 1995, 1996 and 1997...........................................    F-4

     Consolidated Statements of Shareholders' Equity for the Years Ended
     December 31, 1995, 1996 and 1997...........................................    F-5

     Consolidated Statements of Cash Flows for the Years Ended
     December 31, 1995, 1996 and 1997...........................................    F-6

     Notes to Consolidated Financial Statements.................................    F-7


2.   FINANCIAL STATEMENT SCHEDULE:

     Schedule II - Valuation and Qualifying Accounts for the
     Years Ended December 31, 1995, 1996 and 1997...............................  F-24


                                       F-1



                       REPORT OF INDEPENDENT ACCOUNTANTS




To the Board of Directors and Shareholders of
    Applied Digital Access, Inc. and subsidiary


We have audited the accompanying consolidated balance sheets of Applied Digital
Access, Inc. and subsidiary as of December 31, 1996 and 1997 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Applied
Digital Access, Inc. and subsidiary as of December 31, 1996 and 1997 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.






San Diego, California
January 23, 1998

                                       F-2


                   APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS

                                 ----------


                                                                                       DECEMBER 31,
                                                                                       ------------
                                                                                    1996           1997
                                                                                    ----           ----
                                      ASSETS                                       (DOLLARS IN THOUSANDS)
                                                                                           
Current assets:
      Cash and cash equivalents...................................................$  1,504        $  4,400
      Investments - available for sale............................................  19,957           8,779
      Accounts receivable, less allowance for doubtful
           accounts of $50 .......................................................   6,798          12,981
      Inventory, net..............................................................   7,363           5,859
      Deferred income taxes.......................................................     130             130
      Prepaid expenses and other current assets...................................   1,089           3,775
                                                                                  --------        --------
                 Total current assets.............................................  36,841          35,924

Property and equipment, net.......................................................   4,936           6,165
Intangible assets, net............................................................   2,823           2,822
Deferred income taxes.............................................................   1,372           1,372
                                                                                  --------        --------
                 Total assets.....................................................$ 45,972        $ 46,283
                                                                                  --------        --------
                                                                                  --------        --------

                     LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
      Accounts payable............................................................$  2,120        $  3,478
      Accrued expenses ...........................................................   1,491           2,846
      Accrued warranty............................................................   1,398           1,323
      Current portion of obligations under capital leases.........................      16              18
      Deferred revenue............................................................     587           1,471
                                                                                  --------        --------
                 Total current liabilities........................................   5,612           9,136

Obligations under capital leases, net of current portion..........................      33              15
                                                                                  --------        --------
                 Total liabilities................................................   5,645           9,151
                                                                                  --------        --------

Commitments and contingency

Shareholders' equity:
      Preferred stock, no par value, 7,500,000 shares authorized,
           no shares issued.......................................................      -              -
      Common stock, $0.001 par value, 30,000,000 shares authorized,
           12,255,334 and 12,605,082 shares issued and outstanding at
           December 31, 1996 and 1997, respectively...............................  50,631          51,610
      Additional paid-in capital..................................................   2,492           2,492
      Unrealized gain on investments .............................................      25              84
      Deferred compensation.......................................................     (50)             -
      Accumulated deficit......................................................... (12,771)        (17,054)
                                                                                  --------        --------
                 Total shareholders' equity.......................................  40,327          37,132
                                                                                  --------        --------
                 Total liabilities and shareholders' equity.......................$ 45,972        $ 46,283
                                                                                  --------        --------
                                                                                  --------        --------

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

                                       F-3



                      APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY

                         CONSOLIDATED STATEMENTS OF OPERATIONS

                                      ----------



                                                                                                YEARS ENDED DECEMBER 31,
                                                                                                ------------------------
                                                                                             1995         1996         1997
                                                                                             ----         ----         ----
                                                                                                 (DOLLARS IN THOUSANDS,
                                                                                                 EXCEPT PER SHARE DATA)
                                                                                                             
Revenue          ......................................................................... $20,470        $24,422     $34,050
Cost of revenue  .........................................................................   8,717         12,609      15,116
                                                                                           -------        -------     -------
     Gross profit.........................................................................  11,753         11,813      18,934
                                                                                           -------        -------     -------
Operating expenses:
     Research and development.............................................................   5,807          7,356       9,164
     In-process research and development related
         to acquisitions..................................................................      -           3,286       1,578
     Sales and marketing..................................................................   4,234          6,312       7,995
     General and administrative...........................................................   2,976          3,529       5,252
                                                                                           -------        -------     -------
                 Total operating expenses.................................................  13,017         20,483      23,989
                                                                                           -------        -------     -------
                 Operating loss...........................................................  (1,264)        (8,670)     (5,055)
                                                                                           -------        -------     -------
Interest income  .........................................................................   2,023          1,673         904
                                                                                           -------        -------     -------
                 Income (loss) before income taxes........................................     759         (6,997)     (4,151)
                                                                                           -------        -------     -------
Provision for income taxes................................................................      -             123         132
                                                                                           -------        -------     -------
                 Net income (loss)........................................................ $   759        $(7,120)    $(4,283)
                                                                                           -------        -------     -------
                                                                                           -------        -------     -------
                 Net income (loss) per share, basic and diluted ..........................   $.06          $(.59)      $(.34)
                                                                                             ----           -----      ------
                                                                                             ----           -----      ------
                 Shares used in per share computations ...................................  12,848         12,084      12,460
                                                                                            ------         ------      ------
                                                                                            ------         ------      ------

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

                                       F-4


                       APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY

                    CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                                   ----------



                                                                      UNREALIZED
                                                         ADDITIONAL      GAIN
                                              COMMON      PAID-IN     (LOSS) ON         DEFERRED    ACCUMULATED
                                              STOCK       CAPITAL     INVESTMENTS     COMPENSATION    DEFICIT        TOTAL
                                              -----       -------     -----------     ------------    -------        -----
                                                                         (DOLLARS IN THOUSANDS)
                                                                                                   
Balance, January 1, 1995......................$48,281     $2,492       $(436)          $(153)        $ (6,410)        $43,774

Exercise of stock options and warrants
for 261,662 shares of common stock............     76        -           -               -                -                76

Issuance of 62,493 shares of common
stock under stock purchase plan...............    643        -           -               -                -               643

Unrealized gain on investments................    -          -           583             -                -               583

Amortization of deferred compensation
related to stock options......................    -          -           -                52              -                52

Net income ...................................    -          -           -               -                759             759
                                              -------     ------      ------           -----         --------         -------
Balance, December 31, 1995.................... 49,000      2,492         147            (101)          (5,651)         45,887

Exercise of stock options for 149,261
shares of common stock........................    115        -           -               -                -               115

Issuance of 56,857 shares of common
stock under stock purchase plan...............    428        -           -               -                -               428

Unrealized loss on investments................    -          -          (122)            -                -              (122)

Amortization of deferred compensation
related to stock options......................    -          -           -                51              -                51

Issuance of 150,000 shares of common
stock in connection with acquisition..........  1,088        -           -               -                -             1,088

Net loss .....................................    -          -           -               -             (7,120)         (7,120)
                                              -------     ------      ------           -----         --------         -------

Balance, December 31, 1996.................... 50,631      2,492          25             (50)         (12,771)         40,327

Exercise of stock options for 221,235
shares of common stock........................    381        -           -               -                -               381

Issuance of 128,513 shares of common
stock under stock purchase plan...............    598        -           -               -                -               598

Unrealized gain on investments................    -          -            59             -                -                59

Amortization of deferred compensation
related to stock options......................    -          -           -                50              -                50

Net loss .....................................    -          -           -               -             (4,283)         (4,283)
                                              -------     ------      ------           -----         --------         -------
Balance, December 31, 1997....................$51,610     $2,492      $   84           $ -           $(17,054)        $37,132
                                              -------     ------      ------           -----         --------         -------
                                              -------     ------      ------           -----         --------         -------


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

                                       F-5



                        APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY

                           CONSOLIDATED STATEMENTS OF CASH FLOWS

                                        ----------


                                                                                                  YEARS ENDED DECEMBER 31,
                                                                                                  ------------------------
                                                                                             1995           1996         1997
                                                                                             ----           ----         ----
                                                                                                   (DOLLARS IN THOUSANDS)
                                                                                                                
Cash flows from operating activities:
    Net income (loss)...................................................................   $    759         $(7,120)     $(4,283)
    Adjustments to reconcile net income (loss) to net cash used
        by operating activities:
           In-process research and development related to acquisitions..................        -             3,286        1,578
           Depreciation and amortization................................................        904           1,819        3,089
           Amortization of discount or premium on investments...........................        119              95         (119)
           Amortization of deferred compensation........................................         52              51           50
           Change in accounts receivable and inventory reserves.........................        103             (68)         101
           Changes in operating assets and liabilities:
               Accounts receivable......................................................     (2,792)         (1,440)      (6,183)
               Inventory................................................................     (2,232)           (723)       1,403
               Prepaid expenses and other current assets................................       (327)            207       (2,686)
               Accounts payable.........................................................       (440)            300        1,358
               Accrued expenses.........................................................       (515)            648        1,355
               Accrued warranty ........................................................        (15)             93          (75)
               Deferred revenue.........................................................        -               587          884
                                                                                             ------          ------       ------
                  Net cash used by operating activities.................................     (4,384)         (2,265)      (3,528)
                                                                                             ------          ------       ------
Cash flows from investing activities:
    Purchases of investments............................................................    (33,863)        (20,923)     (18,517)
    Maturities of investments...........................................................     38,595          30,923       29,792
    Purchases of property and equipment.................................................     (1,948)         (1,709)      (2,432)
    Purchase costs related to asset acquisitions........................................        -            (6,356)      (3,382)
    Purchase of license agreement.......................................................        -              (350)          -
                                                                                             ------          ------       ------
                  Net cash provided by investing activities.............................      2,784           1,585        5,461
                                                                                             ------          ------       ------
Cash flows from financing activities:
    Principal payments on obligations under capital leases..............................       (126)            (32)         (16)
    Proceeds from exercise of stock options and warrants................................         76             115          381
    Proceeds from issuance of common stock, net of  costs...............................        643             428          598
                                                                                             ------          ------       ------
                  Net cash provided by financing activities.............................        593             511          963
                                                                                             ------          ------       ------
                  Net increase (decrease) in cash and cash equivalents..................     (1,007)           (169)       2,896

Cash and cash equivalents at beginning of year..........................................      2,680           1,673        1,504
                                                                                             ------          ------       ------
           Cash and cash equivalents at end of year.....................................     $1,673          $1,504       $4,400
                                                                                             ------          ------       ------
                                                                                             ------          ------       ------


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

                                       F-6




                     APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY

                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                     ----------


 1.     NATURE OF OPERATIONS:

        Applied Digital Access, Inc. and subsidiary (the "Company") designs,
        engineers and manufactures network test and performance monitoring
        systems, software and services for the management and test of
        telecommunication circuits. Current sales are concentrated with
        telecommunication service providers or affiliated companies in the
        United States and Canada.

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


 2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

        PRINCIPLES OF CONSOLIDATION

        The consolidated financial statements include the accounts of the
        Company and its wholly-owned subsidiaries. All significant intercompany
        transactions and balances have been eliminated.

        CASH AND CASH EQUIVALENTS

        Cash and cash equivalents consist of cash and short-term investments
        with original maturities of 90 days or less when purchased.

        INVENTORY

        Inventory is stated at the lower of cost or market using the first-in,
        first-out method.

        The Company currently buys certain key components of its products from a
        limited number of suppliers. Although there are a limited number of
        suppliers of the components, management believes that other suppliers
        could provide similar key components on comparable terms. A change in
        suppliers, however, could cause a delay in manufacturing and a possible
        loss of sales, which would adversely affect operating results.

                                       F-7
Continued


                      APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                    ----------

 2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

        INVESTMENTS

        The Company determines the appropriate classification of its debt
        securities at the time of purchase and re-evaluates such designations at
        each balance sheet date. Investments are classified as "available for
        sale" and are carried at their fair value. Realized gains and losses are
        determined using the specific identification method and are included in
        other income. Gross unrealized holding gains or losses are excluded from
        earnings and reported, net of the related tax effect, as a separate
        component of shareholders' equity. The amortized cost of debt securities
        is adjusted for the amortization of premiums and accretion of discounts
        to maturity. Such amortization is included in interest income. Fair
        value is determined based on quoted market prices.

        PROPERTY AND EQUIPMENT

        Property and equipment is stated at cost and depreciated over the
        estimated useful lives of the assets (3 to 7 years) using the
        straight-line method. Leased property meeting certain criteria is
        capitalized and the present value of the related lease payments is
        recorded as an obligation. Amortization of capitalized leased assets is
        computed on the straight-line method over the shorter of the lease term
        or the assets' estimated useful lives.

        Maintenance and repairs are charged to expense as incurred. Upon the
        retirement or other disposition, the property and related accumulated
        depreciation or amortization are removed from the accounts and any
        resulting profit or loss is reflected in income.

        INTANGIBLE ASSETS

        The Company amortizes costs in excess of fair value of net assets of
        businesses acquired using the straight-line method over 3 to 5 years.
        Recoverability is reviewed annually or sooner if events or changes in
        circumstances indicate that the carrying value may exceed fair value.

        REVENUE RECOGNITION

        Revenue is generally recognized at the time of shipment or delivery,
        based on specified shipping terms, or when services have been performed.
        When customer acceptance criteria are specified in the customer order,
        revenue recognition is deferred until the acceptance criteria are met.

                                       F-8
Continued


                      APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                    ----------

 2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

        INCOME TAXES

        Deferred income taxes are recognized for the tax consequences in future
        years for differences between the tax basis of assets and liabilities
        ("temporary differences") and their financial reporting amounts at each
        year end based on enacted tax laws and statutory rates applicable to the
        periods in which the temporary differences are expected to affect
        taxable income. Valuation allowances are established when necessary to
        reduce deferred tax assets to the amount expected to be realized. Income
        tax expense is the tax payable for the period and the change during the
        period in deferred tax assets and liabilities.

        ADVERTISING COSTS

        Advertising costs are expensed as incurred.  Total advertising expense 
        was approximately  $141,000,  $217,000 and $250,000 for the years 
        ended December 31, 1995, 1996 and 1997, respectively.

        STOCK-BASED COMPENSATION

        Statement of Financial Accounting Standards ("SFAS") No. 123, ACCOUNTING
        FOR STOCK-BASED COMPENSATION, encourages, but does not require,
        companies to record compensation cost for stock-based employee
        compensation plans at fair value. The Company has chosen to continue to
        account for stock-based compensation using the intrinsic value method
        prescribed in Accounting Principles Board Opinion No. 25, ACCOUNTING FOR
        STOCK ISSUED TO EMPLOYEES, and related interpretations. Accordingly,
        options granted at below fair market value result in deferred
        compensation to the extent of the difference between the fair market
        value at the date of grant and the exercise price. The deferred
        compensation is charged to earnings ratably over the vesting period.
        During the three year period ended December 31, 1997, no options were
        granted at below fair market value.

        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 reported amounts of assets and liabilities
        and disclosure of contingent assets and liabilities at the date of the
        financial statements, and the reported amounts of revenues and expenses
        during the reporting period. Actual results could differ from estimates.

                                       F-9
Continued


                      APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                    ----------

 2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

        NEW ACCOUNTING PRONOUNCEMENTS

        In June 1997, the Financial Accounting Standards Board issued SFAS No.
        130, COMPREHENSIVE INCOME, and SFAS No. 131, DISCLOSURE ABOUT SEGMENTS
        OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 130 establishes
        standards for reporting and display of comprehensive income and its
        components in a full set of general purpose financial statements.
        Comprehensive income is defined as the change in equity in a business
        enterprise during a period from transactions and other events and
        circumstances from nonowner sources. SFAS No. 131 requires publicly-held
        companies to report financial and other information about key
        revenue-producing segments of the entity for which such information is
        available and is utilized by the chief operating decision maker.
        Specific information to be reported for individual segments includes
        profit or loss, certain revenue and expense items and total assets. The
        impact of adopting SFAS No. 130 and SFAS No. 131, both effective for the
        Company in 1998, has not yet been determined.

        In October 1997, the American Institute of Certified Public Accountants
        issued State of Position 97-2 ("SOP 97-2"), SOFTWARE REVENUE
        RECOGNITION. This statement establishes requirements for revenue
        recognition for software companies for fiscal years beginning after
        December 15, 1997. The Company is currently evaluating the impact of SOP
        97-2 and has not determined the result, if any, on the Company's
        financial position, results of operations or cash flows.

        The Company has adopted the provisions of SFAS No. 128, EARNINGS PER
        SHARE, effective December 31, 1997. SFAS No. 128 requires the
        presentation of basic and diluted earnings per share. Basic EPS is
        computed by dividing income available to common stockholders by the
        weighted average number of common shares outstanding for the period.
        Diluted EPS is computed giving effect to all dilutive potential common
        shares that were outstanding during the period. Dilutive potential
        common shares consist of the incremental common shares issuable upon the
        conversion of convertible preferred stock (using the "if converted")
        method) and exercise of stock options and warrants for all periods. All
        prior period earnings per share amounts have been restated to comply
        with SFAS No. 128.

        RECLASSIFICATIONS

        Certain reclassifications have been made to the prior year financial
        statements to conform to the current year presentation.

                                       F-10
Continued


                      APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                    ----------

 3.     STATEMENTS OF CASH FLOWS:

        Non-cash investing and financing activities for the years ended December
31, 1995, 1996 and 1997 are as follows:


                                                                       1995        1996         1997
                                                                       ----        ----         ----
                                                                          (DOLLARS IN THOUSANDS)
                                                                                       
        Issuance of stock in connection with acquisition              $  -         $1,088       $  -


        Cash payments for interest and income taxes for the years ended December
        31, 1995, 1996 and 1997 are as follows:


                                                                       1995        1996         1997
                                                                       ----        ----         ----
                                                                          (DOLLARS IN THOUSANDS)
                                                                                       

        Interest                                                      $ 13          $ 7         $  4
        Income taxes                                                   506            -          229


 4.     INVESTMENTS:

        Marketable  securities at December 31, 1996 and 1997 consist of 
        obligations of the U.S. Government and its agencies and are summarized 
        as follows:


                                                                       1996        1997
                                                                       ----        ----
                                                                    (DOLLARS IN THOUSANDS)
                                                                           
        Cost                                                        $19,936      $8,767
        Gross unrealized gains                                           57          31
        Gross unrealized losses                                         (36)        (19)
                                                                    -------      ------
             Estimated fair value                                   $19,957      $8,779
                                                                    -------      ------
                                                                    -------      ------


 5.     INVENTORY:

        Inventory at December 31, 1996 and 1997 consists of the following:


                                                                       1996        1997
                                                                       ----        ----
                                                                    (DOLLARS IN THOUSANDS)
                                                                           
        Raw materials                                               $4,211       $3,419
        Work-in-process                                              2,558        2,223
        Finished goods                                               1,063          787
                                                                    ------       ------
                                                                     7,832        6,429
        Less inventory reserve                                        (469)        (570)
                                                                    ------       ------
                                                                    $7,363       $5,859
                                                                    ------       ------
                                                                    ------       ------

                                       F-11
Continued


                      APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                    ----------

 6.     PROPERTY AND EQUIPMENT:

        Property and equipment at December 31, 1996 and 1997 consists of the
        following:



                                                                1996                  1997
                                                                ----                  ----
                                                                 (DOLLARS IN THOUSANDS)
                                                                               
                Computers                                      $  4,254              $ 5,655
                Machinery, furniture and equipment                3,614                4,782
                Purchased computer software                         894                1,371
                Leasehold improvements                              766                  911
                                                               --------              -------
                                                                  9,528               12,719
                Less accumulated depreciation and amortization   (4,592)              (6,554)
                                                               --------              -------
                                                               $  4,936              $ 6,165
                                                               --------              -------
                                                               --------              -------


        Property and equipment acquired under capital leases totaled
        approximately $216,000 at December 31, 1996 and 1997. Accumulated
        amortization related to assets under capital leases totaled
        approximately $106,000 and $140,000 as of December 31, 1996 and 1997
        respectively.

 7.     INTANGIBLE ASSETS:

        Intangible assets at December 31,1996 and 1997 consist of the following:



                                                                1996                1997
                                                                ----                ----
                                                                 (DOLLARS IN THOUSANDS)
                                                                             


                Goodwill and know-how                          $2,588              $ 3,619
                Purchased technology, customer contracts          337                  337
                License agreement                                 350                  350
                                                               ------              -------
                                                                3,275                4,306
                Less accumulated amortization                    (452)              (1,484)
                                                               ------              -------
                                                               $2,823               $2,822
                                                               ------              -------
                                                               ------              -------


                                       F-12
Continued


                      APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                    ----------

 8.     ACCRUED EXPENSES:

        Accrued expenses at December 31, 1996 and 1997 consist of the following:



                                                          1996                1997
                                                          ----                ----
                                                           (DOLLARS IN THOUSANDS)
                                                                        
                Accrued payroll and related costs        $  443               $  902
                Income taxes                                444                  388
                Accrued vacation                            431                  583
                Other                                       173                  973
                                                         ------               ------
                                                         $1,491               $2,846
                                                         ------               ------
                                                         ------               ------


 9.     COMMITMENTS AND CONTINGENCY:

        LEASES

        The Company leases office space and equipment under operating leases.
        Certain of these leases include renewal or purchase options. Rent
        expense related to these leases was approximately $386,000, $613,000 and
        $673,000 for the years ended December 31, 1995, 1996 and 1997,
        respectively.

        The Company also leases certain property and equipment under capital
        leases.

        Minimum commitments under these leases are as follows:



                                                             OPERATING        CAPITAL
           YEAR ENDING DECEMBER 31,                            LEASES          LEASE
           ------------------------                          ---------        -------
                                                              (DOLLARS IN THOUSANDS)
                                                                        
               1998                                           $1,006          $ 20
               1999                                            1,297            16
               2000                                              980            -
               2001                                            1,004            -
               2002                                            1,034            -
               Thereafter                                      1,127            -
                                                              ------          ----
                  Total minimum lease payments                $6,448            36
                                                              ------
                                                              ------
                  Less amounts representing interest                            (3)
                                                                              ----
                  Obligations under capital leases                              33
                    Less current portion                                       (18)
                                                                              ----
                                                                              $ 15
                                                                              ----
                                                                              ----


                                       F-13
Continued


                      APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                    ----------

 9.     COMMITMENTS AND CONTINGENCY:

        PURCHASE COMMITMENTS

        At December 31, 1996 and 1997, the Company has open purchase commitments
        of approximately $3,731,000 and $4,413,000 respectively, which include
        approximately $2,264,000 and $1,938,000 of cancelable purchase
        commitments.

        LEGAL PROCEEDING

        In March 1995, a class action lawsuit was filed against the Company and
        two of its officers, one of whom is also a director of the Company, in
        the U.S. District Court for the Southern District of Southern
        California. The suit alleged violations of Section 10(b) and Rule 10b-5
        of the Securities Exchange Act of 1934, as amended (the "Act"), arising
        out of alleged misrepresentations and omissions made by the Company and
        the named officers. The suit also alleged violation of Section 20(a) of
        the Act arising out of alleged "control" of the Company by the officer
        defendants. The suit was brought on behalf of purchasers of the
        Company's securities during the period October 10, 1994 through March
        29, 1995, and sought unspecified damages. In December 1995, the Company
        entered into a settlement agreement pursuant to which all claims were
        dismissed with prejudice. The total settlement amount was approximately
        $1,500,000, of which the Company paid approximately $446,000 with the
        remaining amount paid by the Company's Directors' and Officers'
        liability insurance carriers. Obligations of the Company with respect to
        this matter were provided for in the financial statements during the
        year ended December 31, 1995 and paid during the year ended December 31,
        1996.


10.     SHAREHOLDERS' EQUITY:

        STOCK COMPENSATION PLANS

        The Company applies Accounting Principles Board Opinion No. 25,
        ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations in
        accounting for its stock-based compensation plans. Accordingly, no
        compensation cost has been recognized for its fixed stock option plans
        and its stock purchase plan. Had compensation costs for the Company's
        stock-based compensation plans been determined based on the fair value
        at the grant dates for awards in 1995, 1996 and 1997 under those plans
        consistent with the methods of SFAS No. 123, the Company's net income
        (loss) and earnings per share would have been reduced to the pro forma
        amounts indicated below:

                                       F-14
Continued


                      APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                    ----------

10.     SHAREHOLDERS' EQUITY, CONTINUED:



                                                           1995        1996         1997
                                                           ----        ----         ----
                                                              (DOLLARS IN THOUSANDS)
                                                                         
                Net income (loss):
                      As reported                         $ 759      $(7,120)     $(4,283)
                      Pro forma                            (195)      (8,352)      (6,830)

                Net income (loss) per common share:
                      As reported, basic                   $.06        $(.59)       $(.34)
                      As reported, diluted                  .06         (.59)        (.34)
                      Pro forma, basic and diluted         (.02)        (.69)        (.55)


        FIXED STOCK OPTION PLANS

        In May 1996, the Company adopted the 1996 Non-Qualified Stock Option
        Plan (the "1996 Plan"). The 1996 Plan does not affect the 1994 Plan
        described below. Under the 1996 Plan, the Company is authorized to issue
        400,000 shares of common stock. The 1996 Plan is intended to promote the
        interests of the Company or its parents or subsidiary corporations.
        Under the 1996 Plan, eligible individuals may be granted options to
        purchase shares of the Company's common stock at not less than 85% of
        the fair market value of such shares on the date of grant. Such options
        shall be exercisable in one or more installments as specified in the
        Notice of Grant and have a maximum term of 10 years. Persons eligible to
        receive stock options under the 1996 Plan are key employees of the
        Company other than officers who are responsible for the growth and
        financial success of the Company and consultants and other independent
        contractors who provide valuable services to the Company.

        In February 1994, the Company adopted the 1994 Stock Option/Stock
        Issuance Plan (the "1994 Plan"). The 1994 Plan supersedes and
        consolidates the 1988 Stock Option Plan and Restricted Stock Purchase
        Plan (the "1988 Plan"). Outstanding stock options and unvested share
        issuances under the 1988 Plan were incorporated into and assumed in the
        1994 Plan. In May of 1996, the Board of Directors received shareholder
        approval to increase the authorized shares to 3,800,000 under the 1994
        Plan. The 1994 Plan is divided into three separate components: the
        Discretionary Option Grant Program (the "Discretionary Program"); the
        Automatic Option Grant Program (the "Automatic Program") and the Stock
        Issuance Program (the "Issuance Program"). Under the Discretionary
        Program, eligible individuals may be granted options to purchase shares
        of the Company's stock at not less than 85% of the fair market value of
        such shares on the date of grant. Under the Automatic Program,
        non-employee Directors will automatically be granted options to purchase
        common stock at 100% of the fair market value on the grant date. Under
        the Issuance

                                       F-15
Continued


                      APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                    ----------

10.     SHAREHOLDERS' EQUITY, CONTINUED:

        Program, eligible individuals may be allowed to purchase shares of the
        Company's common stock at discounts from the fair market value of such
        shares of up to 15%. Such shares may be issued as fully-vested shares or
        as shares to vest over time and have a maximum term of 10 years (5 years
        for options granted to a 10% shareholder). Persons eligible to receive
        stock issuances under the Issuance Program and/or option grants under
        the Discretionary Program are officers and other key employees of the
        Company and certain consultants or other independent contractors, as
        defined in the plan. The individuals eligible to receive option grants
        under the Automatic Program are individuals who are elected, re-elected
        or appointed as non-employee Board members.

        The fair value of each option grant is estimated on the date of grant
        using the Black-Scholes option-pricing model with the following
        weighted-average assumptions used for grants in 1996 and 1997: no
        dividend yield; expected volatility; risk-free interest rates on or
        about the date of grant represented by the interest rate on U.S.
        Treasury Bills with a term of maturity equal to the vesting period of
        the options, and expected lives of 5 years.

        The following table summarizes stock option transactions for each of the
three years in the period ended December 31, 1997:



                                                        1994 AND 1996 PLANS                     OTHER
                                                     -------------------------           -------------------
                                                                      WEIGHTED                      WEIGHTED
                                                                       AVERAGE                       AVERAGE
                                                                      EXERCISE                      EXERCISE
                                                     SHARES             PRICE             SHARES      PRICE
                                                     ------             -----             ------      -----
                                                                                        
              Outstanding at
                 January 1, 1995                    1,439,744          $4.22                27,587      $.14
                     Granted                          737,025         $12.30                   -          -
                     Exercised                       (205,068)          $.35               (10,500)     $.14
                     Canceled                        (300,392)        $18.30                   -          -
                                                    ---------                              -------
              Outstanding at
                 December 31, 1995                  1,671,309          $5.63                17,087      $.14
                     Granted                          874,887          $9.01                   -         -
                     Exercised                       (149,261)          $.77                   -         -
                     Canceled                        (598,732)        $18.30                   -         -
                                                    ---------                              -------
              Outstanding at
                 December 31, 1996                  1,798,203          $5.54                17,087      $.14
                     Granted                        1,404,976          $6.58                   -          -
                     Exercised                       (252,337)         $6.34                   -          -
                     Canceled                        (299,984)         $7.65                   -
                                                    ---------                              -------
               Outstanding at
                 December 31, 1997                  2,650,858          $6.20                17,087      $.14
                                                    ---------                              -------
                                                    ---------                              -------

                                       F-16
Continued


                      APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                    ----------

10.     SHAREHOLDERS' EQUITY, CONTINUED:

        The range of exercise prices of stock options outstanding at December
        31, 1997 is as follows:
 


                                          OPTIONS OUTSTANDING                                  OPTIONS EXERCISABLE
                          -----------------------------------------------------           --------------------------
                                             WEIGHTED                 WEIGHTED                              WEIGHTED
          RANGE OF                           AVERAGE                  AVERAGE                               AVERAGE
          EXERCISE          NUMBER           REMAINING                EXERCISE                NUMBER        EXERCISE
           PRICES         OUTSTANDING   CONTRACTUAL LIFE               PRICE               EXERCISABLE       PRICE
           ------         -----------   ----------------               -----               -----------      --------
                                                                                             
        $.14 - $1.05        544,785           4.60                    $  .30                544,785          $   .30
        $2.80 - $6.44       568,613           9.40                      6.06                 30,707             5.70
        $6.50 - $6.63       320,543           8.56                      6.51                 65,811             6.51
        $6.88               533,721           9.12                      6.88                143,244             6.88
        $7.00 - $16.13      700,283           8.26                      0.09                417,912            10.25
                          ---------           ----                    ------              ---------           ------
        $.14 - $16.13     2,667,945           7.97                    $ 6.16              1,202,459           $ 5.02
                          ---------           ----                    ------              ---------           ------
                          ---------           ----                    ------              ---------           ------


        At December 31, 1996 and 1997,  1,191,381 and 339,959 shares, 
        respectively, are available for granting of options under the 1994 and 
        1996 Plans.

        STOCK PURCHASE PLAN

        The Amended 1994 Employee Stock Purchase Plan, originally adopted in
        February 1994 (the "Stock Purchase Plan"), authorizes the Company to
        issue up to 300,000 shares of common stock to participating employees.
        The Stock Purchase Plan is intended to provide qualifying employees with
        the opportunity to acquire an interest in the Company by accumulating
        amounts for the employees' account through payroll deductions and the
        periodic application of such amounts to the purchase of shares of the
        Company's common stock. Under the terms of the Stock Purchase Plan,
        qualified employees can choose each year to have up to 15% of their
        annual base earnings withheld to purchase the Company's common stock.
        The purchase price of the stock will be equal to 85% of the lower fair
        market value of the common stock on (i) the commencement date of the
        offering period or (ii) the purchase date. The Stock Purchase Plan
        terminates on December 31, 2003. Under the Stock Purchase Plan, the
        Company sold 56,857 and 97,413 shares to employees in 1996 and 1997,
        respectively. There are 31,102 shares of common stock available for 
        purchase under the Stock Purchase Plan at December 31, 1997.

        In order to disclose the pro forma net income and earnings per share as
        required by SFAS No. 123 (see Stock Compensation Plans above), the fair
        value of the employees' purchase rights is estimated using the
        Black-Scholes model with the following assumptions for 1996 and 1997: no
        dividend yield, expected volatility of 69.76%; risk-free interest rates
        on the date of grant represented by the interest rate on U.S. treasury
        bills with a term of maturity equal to the period from the subscription
        date to the purchase date. The weighted-average fair value of those
        purchase rights granted in 1996 and 1997 was $9.56 and $6.58,
        respectively.

                                       F-17
Continued


                      APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                    ----------

11.     INCOME TAXES:

        The provision for income taxes for the years ended December 31, 1996 and
        1997 consists of current taxes for foreign operations.

        Differences between the statutory rate and the effective tax rate for 
        the year ended December 31, 1995, 1996 and 1997 are as follows:



                                                                         1995        1996          1997
                                                                         ----        ----          ----
                                                                                         
                Taxes at federal statutory rate                          34.0%      (34.0%)       (34.0%)
                Foreign income taxes                                      -  %        1.8%          3.2%
                Net operating loss carryforwards and research and
                      development tax credits (utilized) not utilized   (33.0%)      33.0%         33.0%
                Change in valuation allowance                              - %        -  %          -  %
                Other                                                    (1.0%)       1.0%          1.0%
                                                                        -----       -----         -----
                      Provision for income taxes                          -  %        1.8%          3.2%
                                                                        -----       -----         -----
                                                                        -----       -----         -----


        The components of the deferred tax assets at December 31, 1996 and 1997
        are as follows:


                                                                             1996               1997
                                                                             ----               ----
                                                                            (DOLLARS IN THOUSANDS)
                                                                                        
 
                Allowances and reserves                                   $   773              $   780
                Vacation accrual                                              146                  178
                Capitalized research and development                        2,211                2,577
                Net operating loss carryforwards                            4,774                5,908
                Tax credits                                                 1,429                1,991
                Accelerated depreciation                                     (252)                (287)
                Other                                                          10                   10
                                                                          -------              -------
                      Total gross deferred tax asset                        9,091               11,157

                Less valuation allowance                                   (7,589)              (9,655)
                                                                          -------              -------
                      Net deferred tax asset                              $ 1,502              $ 1,502
                                                                          -------              -------
                                                                          -------              -------


        The Company has recorded a net deferred tax asset of $1,502,000 as of
        December 31, 1997 and 1996. Realizability is dependent on generating
        sufficient taxable income prior to expiration of the net operating loss
        carryforwards. Although realization is not assured, management believes
        it is more likely than not that the net deferred tax asset will be
        realized. The amount of the deferred tax asset considered realizable,
        however, could be reduced in the near term if estimates of future
        taxable income during the carryforward period are reduced.

                                       F-18
Continued


                      APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                    ----------

11.     INCOME TAXES, CONTINUED:

        At December 31, 1997, the Company has net operating loss carryforwards
        for federal income tax purposes of approximately $15,644,000, of which
        $5,378,000 is attributable to disqualifying dispositions of stock
        options. The Company also has net operating loss carryforwards for
        California tax purposes of approximately $7,561,000 at December 31,
        1997, of which $2,724,000 is attributable to disqualifying dispositions
        of stock options. The amount attributable to the disposition of stock
        options will not impact the Company's effective tax rate in future
        periods as the impact will be reflected as a component of equity when
        recognized.

        The Company also has research and development tax credit carryforwards
        of approximately $1,620,000 for federal and $371,000 for California tax
        purposes at December 31, 1997. These carryforwards will begin expiring,
        if unused, in 2003.

        The Internal Revenue Code (the "Code") imposes limits on the
        availability of net operating loss carryforwards and certain tax credits
        that arose prior to certain cumulative changes in a corporation's
        ownership resulting in a change of control of the Company. The Company's
        use of approximately $1,166,000 of its federal net operating loss
        carryforwards and $408,000 of its federal and $105,000 of its California
        tax credit carryforwards are significantly limited because the Company
        underwent "ownership-changes" in January 1989 and March 1991. In each
        year following the change, the Company will be able to offset taxable
        income by a limited amount of the pre-ownership change carryforwards.
        This limitation is determined by the value of the Company immediately
        prior to the ownership change multiplied by the long-term tax-exempt
        rate. Net operating losses and tax credits that are unavailable in any
        year as a consequence of this limitation may be carried forward for
        future use subject to certain restrictions.


12.     EMPLOYEE BENEFITS:

        The Company has a 401(k) defined contribution plan available to all
        employees who have been with the Company for more than one month.
        Employees may contribute up to 15% of their salary each year and the
        Company may elect to make a discretionary contribution to the plan once
        a year. All plan participants who are employed at the end of the plan
        year and have completed 1,000 hours of service in that plan year are
        eligible to receive a share of the employer contribution. Participant's
        rights to the employer contributions vest 25% per year of service with
        the participant being fully vested at the end of the fourth year of
        service. The Company did not make a discretionary contribution in 1995,
        1996 or 1997.

                                       F-19
Continued


                      APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                    ----------

12.     EMPLOYEE BENEFITS, CONTINUED:

        In 1995, the Company adopted a profit sharing plan available to all
        employees. The plan provides financial benefits to employees when the
        Company exceeds certain targeted objectives. The Compensation Committee
        of the Board of Directors annually determines the maximum amount that is
        allocated to the plan. Employees are eligible to participate in the plan
        at the start of the quarter following their employment at the Company.
        The Company allocated $-0-, $-0- and approximately $418,000 in 1995,
        1996 and 1997, respectively.


13.     CONCENTRATION OF CREDIT RISK:

        Financial instruments which potentially subject the Company to
        concentrations of credit risk consist principally of cash and cash
        equivalents, investments and trade receivables.

        The Company has approximately $4,908,000 of cash and cash equivalents in
        excess of FDIC insured limits at two financial institutions at December
        31, 1997. The Company has not experienced any losses on its cash and
        cash equivalents.

        All of the Company's investments, all of which mature in 1998, are in
        obligations of the U.S. Government and its agencies at December 31,
        1997.

        At December 31, 1996 and 1997, the Company's trade receivables are
        concentrated with "Regional Bell Operating Companies" and independent
        phone companies and suppliers or affiliated companies in the United
        States, all of which management believes are large companies with
        substantial financial resources. Sales are typically made on credit,
        with terms that vary depending upon the customer and the nature of the
        product. The Company does not hold collateral to secure payment.
        Although the Company maintains a reserve for uncollectible receivables
        that it believes to be adequate, a payment default on a significant sale
        or customer receivable could materially and adversely affect its
        operating results and financial condition.

        Sales to major customers for each year are as follows (% of revenue):



                                               1995        1996       1997
                                               ----        ----       ----
                                                             
                     Nynex                     18%         23%          8%
                     Bell South                13%          7%         17%
                     US West                   45%         31%          4%
                     Ameritech                 19%          9%          3%
                     Nortel                     -          15%         20%
                     MCI                        -           -          18%

                                       F-20
Continued


                      APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                    ----------

13.     CONCENTRATION OF CREDIT RISK, CONTINUED:

        Sales to an affiliate of a shareholder during the years ended December
        31, 1995, 1996 and 1997 were approximately $3,836,000, $2,263,000 and
        $922,000 respectively, of which approximately $140,000 and $342,800 are
        included in accounts receivable at December 31, 1996 and 1997,
        respectively.


14.     ACQUISITIONS:

        In February 1996, the Company acquired certain assets of Applied
        Computing Devices, Inc. ("ACD"), a company that developed and marketed
        operations systems software used primarily by independent telephone
        companies to manage certain functions in their networks. The customer
        set and products of ACD complement those of the Company and the Company
        intends to continue to market and enhance these products. The Company
        acquired the assets for $1,700,000 in cash and incurred approximately
        $200,000 in related costs. The assets were acquired at an auction held
        in Federal Bankruptcy Court, Southern District of Indiana. The
        transaction, which was accounted for as a purchase, included the
        acquisition of in-process research and development valued at
        approximately $1,200,000, property and equipment valued at approximately
        $377,000 and purchased technology valued at approximately $337,000. The
        Company recorded a one-time charge in the first quarter of 1996 for the
        $1,200,000 associated with purchased research and development costs.

        In July 1996, the Company acquired certain assets of MPR Teltech, a
        subsidiary of BC TELCOM, Inc. The assets acquired were part of MPR
        Teltech's operating unit commonly known as the Special Services Network
        division ("SSN"). The Company and its Canadian subsidiary, ADA-Canada,
        acquired the assets for $4,200,000 million in cash and 150,000 shares of
        the Company's common stock, and incurred approximately $200,000 in
        related costs. SSN was an operations systems software development group
        with expertise in development of network management systems for public
        carriers. SSN developed operations systems software primarily for
        Northern Telecom ("Nortel"). SSN has become part of ADA-Canada and will
        develop network performance management operations systems software
        products for the Company and its customers, including Nortel. The
        transaction, which was accounted for as a purchase, included the
        acquisition of in-process research and development valued at
        approximately $2,100,000, property and equipment valued at approximately
        $900,000 and goodwill and know-how valued at approximately $2,588,000.
        The Company recorded a one-time charge in the third quarter of 1996 for
        the $2,100,000 associated with purchased research and development costs.

                                       F-21
Continued


                      APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                    ----------

14.     ACQUISITIONS, CONTINUED:

        In June 1997, the Company acquired an exclusive worldwide license to
        Nortel's Digital Support System II(TM) ("DSSII") operations system
        software product, subject to certain residual rights retained by Nortel.
        The Company acquired the license and certain assets related to the DSSII
        product for an amount of $3,100,000, $2,232,000 of which was paid in 
        cash and the remainder of which is payable in cash and/or stock at the
        Company's option on January 15, 1998. The Company recorded a charge of 
        approximately $1,578,000 for purchased research and development 
        associated with the acquisition of the license and the assets. As part 
        of the transaction, the Company also issued Nortel a warrant to purchase
        150,000 shares of the Company common stock at an exercise price of $12 
        per share. The warrant has a three year term.

        The following condensed pro forma results of operations information has
        been presented to give effect to the acquisitions as if such
        transactions had occurred at the beginning of each of the periods
        presented. The historical results of operations have been adjusted to
        reflect additional depreciation and amortization expense based upon the
        value allocated to assets acquired in the purchases. The pro forma
        results of operations information is presented for information purposes
        only and is not necessarily indicative of the operating results that
        would have occurred had the acquisitions been consummated as of the
        beginning of the periods presented, nor is it necessarily indicative of
        future operating results.

                            CONDENSED PRO FORMA RESULTS OF OPERATIONS
                          (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
                                        (UNAUDITED)



                                                               YEARS ENDED DECEMBER 31,
                                                               ------------------------
                                                                  1996          1997
                                                                  ----          ----
                                                                        
                Revenue                                          $29,660      $34,050
                Net loss                                         ( 7,474)      (4,283)
                Net loss per share, basic and diluted               (.61)        (.34)
                Weighted average shares used in computation       12,165       12,605


        Sales to Canadian customers, generated from both the Company's United
        States and Canadian operations in fiscal 1996 and 1997 were
        approximately $4,351,000 and $9,861,000, respectively. The identifiable
        assets of the Company's operations at December 31, 1996 and 1997 were
        approximately $970,000 and $1,997,000, respectively.

                                       F-22
Continued


                      APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                    ----------

15.     EARNINGS PER SHARE ("EPS") DISCLOSURES:

        In accordance with the disclosure requirements of SFAS No. 128, a
        reconciliation of the numerator and denominator of basic and diluted EPS
        is provided as follows (dollars in thousands, except per share amounts).



                                                                YEAR ENDED DECEMBER 31
                                                                ----------------------
                                                            1995        1996         1997
                                                            ----        ----         ----
                                                                           
               Numerator - basic and diluted EPS:
                Net income (loss)                         $   759      $(7,120)     $(4,283)

               Denominator - basic and diluted EPS:
                Weighted average common stock
                   outstanding                             11,899       12,255       12,605
                                                          -------      -------      -------
               Basic and diluted earnings per share         $.06        $(.59)       $(.34)
                                                            ----        -----        ------
                                                            ----        -----        ------

                                       F-23


                                                                     SCHEDULE II

                  APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY

                       VALUATION AND QUALIFYING ACCOUNTS
              FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

                                   ----------



                                                                 BALANCE AT
                                                                  BEGINNING                                             BALANCE AT
              DESCRIPTION                          YEAR            OF YEAR         ADDITIONS       DEDUCTIONS          END OF YEAR
              -----------                          ----            -------         ---------       ----------          -----------
                                                                                                        
Allowance for doubtful accounts                    1995          $  50,000         $    -          $     -             $  50,000
                                                   1996             50,000              -                -                50,000
                                                   1997             50,000              -                -                50,000

Inventory reserve                                  1995            434,617          150,000          (47,055)            537,562
                                                   1996            537,562              -            (68,092)            469,470
                                                   1997            469,470          312,496         (211,966)            570,000


                                       F-24

EX-10.38

March 24, 1995


Mr. Don O'Connor
64 Tallmadge Ave
Chatham, NJ  07928


Dear Don:


We are very pleased to offer you the position of Vice President Customer 
Support with Applied Digital Access, Inc., reporting to Pete Savage, Chief 
Executive Officer.  We are very excited that you will be joining the ADA team 
as a regular full-time employee. Your compensation will be $5,208.33, paid 
semimonthly (equivalent to $125,000.00 on an annualized basis).  In addition, 
you will receive the other benefits afforded to all regular full-time 
employees of ADA.  These include two weeks paid vacation, partially paid 
health insurance coverage through participation in ADA's Section 125 
Cafeteria Plan, the opportunity to participate in a 401(k) plan, and the 
opportunity to participate in ADA's Stock Purchase Plan.

When you report on board as a regular full-time employee of ADA, we will pay 
to you a one-time bonus of $10,000.

As Vice President Customer Support, you will be an officer of the Company and 
will participate in the Management Team Incentive Compensation Plan.  This 
plan provides for a cash payment of 30% of base salary at plan as approved by 
the Compensation Committee of the Board of Directors.

As a key part of your compensation package, we will recommend to the Board of 
Directors that you be granted an option to purchase 50,000 shares of ADA 
common stock in accordance with ADA's Incentive Stock Option Plan.  This 
stock will vest over a four-year period, with one-fourth fully vested at the 
end of your first twelve months of employment at ADA and the remainder 
vesting monthly thereafter.  The exercise price of shares granted under ADA's 
Incentive Stock Option Plan will be determined at the time your option is 
granted by ADA's Board of Directors.

To assist you in relocating to San Diego, we will provide reimbursement for 
up to $50,000 for relocation and interim living expenses as incurred.  This 
amount will be subject to Federal and State withholding regulations.  We will 
reimburse you for the those taxes to be paid up to a maximum of $20,000.  If 
you leave ADA before the end of two years from your date of hire, this 
relocation assistance will be deemed subject to prorated repayment based on 
the number of months you work at ADA.

We will guarantee, upon acceptance of this offer of employment, that you will 
be employed by ADA for a minimum of twelve months.  Thereafter, you will be 
entitled to three months salary as severance in the 



event of your involuntary separation of employment from ADA, or the severance 
arrangement in force, whichever is greater.

Except as noted above, employment with Applied Digital Access is not for a 
specific term and can be terminated by you or by ADA at any time for any 
reason, with or without cause.  Any contrary representations which may have  
been made to you are superseded by this offer.  Any modification to this 
at-will term of your employment must be in writing and signed by you and by 
ADA's President.

ADA is committed to a drug-free workplace and has a zero-tolerance drug 
policy. Illegal possession or use of drugs of any kind, at any time, on or 
off company premises within or outside of working hours may result in 
immediate dismissal. 

Smoking is not permitted on company property or at any company off-premises 
events.

This offer is contingent on your executing the enclosed Proprietary 
Information and Inventions Agreement and providing ADA with the legally 
required proof of your identity and authorization to work in the United 
States. Please sign both copies of this letter, retain one copy for your 
files, and return the second copy to us as soon as possible.  Don, we are 
delighted to have you join our team.   We look forward to working with you, 
and to enjoying the success our team will realize together.

Sincerely,


      /s/ Peter P. Savage                         /s/ Richard W. Carter
- -------------------------                         ----------------------
          Peter P. Savage                          Richard W. Carter
          President - CEO                         Vice President, Finance

Please indicate your acceptance of this offer by signing below:  My first day 
of employment will be 5/30/95 or before.

Accepted  /s/ D. J. O'Connor  Date 3/25/95
        --------------------       -------
               Don O'Connor

EX-10.39

                                                                March 12, 1997
Mr. Steven F. X. Murphy
5023 Reno Road N.W.
Washington, DC  20008


Dear Steve:


I am pleased to offer you the position of Vice President - Sales and 
Marketing with Applied Digital Access, Inc., reporting to me.  Everyone at 
ADA is enthusiastic about you joining the ADA team as a regular full-time 
employee.

Your compensation will be $6,250.00, paid semimonthly (equivalent to 
$150,000.00 annualized).  In addition, you will receive the other benefits 
afforded to all regular full-time employees of ADA.  These include two weeks 
paid vacation, partially paid health insurance coverage through participation 
in ADA's Section 125 Cafeteria Plan, the opportunity to participate in a 
401(k) plan, and the opportunity to participate in ADA's Stock Purchase Plan.

As Vice President - Sales and Marketing, you will be an officer of the 
Company and will participate in the Management Team Incentive Compensation 
Plan.  The Sales Management Incentive Compensation portion of the Plan 
provides for incentive compensation of up to $125,000 at plan, and up to 
$175,000 at 110% of plan as approved by the Compensation Committee of the 
Board of Directors.  The incentive compensation is earned depending on actual 
performance against company and business unit objectives as described in the 
attached compensation plan summary.  You will be entitled to draw up to 
$50,000 of this incentive compensation semimonthly.  In the unlikely event of 
you not earning the amount you actually draw, at the discretion of the 
Compensation Committee, you may be required to refund to the company amounts 
drawn which are greater than your earnings under the plan.

As a key part of your compensation package, I will recommend to the Board of 
Directors that you be granted an option to purchase 75,000 shares of ADA 
common stock in accordance with ADA's Incentive Stock Option Plan.  This 
stock will vest over a four-year period, with one-fourth fully vested at the 
end of your first twelve months of employment at ADA and the remainder 
vesting monthly thereafter.  The exercise price of shares granted under ADA's 
Incentive Stock Option Plan will be the closing price of ADA stock on the 
NASDAQ exchange on the day your option is granted by ADA's Board of Directors.



To assist you in relocating to San Diego, we will provide reimbursement for 
up to $50,000 for documented and reasonable relocation and interim living 
expenses as incurred.  This amount will be subject to Federal and State 
withholding regulations.  We will reimburse you for those taxes to be paid up 
to a maximum of $20,000.  If you voluntarily leave ADA before the end of two 
years from your date of hire, this relocation assistance will be deemed 
subject to prorated repayment based on the number of months you work at ADA.

Employment with Applied Digital Access is not for a specific term and can be 
terminated by you or by ADA at any time for any reason, with or without 
cause, and with or without prior notice.  Any contrary representations which 
may have been made to you are superseded by this offer.  No person affiliated 
with ADA has the authority to enter into any verbal agreement to change the 
at will nature of your employment.  Longevity of employment, promotions, pay 
raises, bonuses, and positive performance evaluations will not change the 
at-will status of your employment with ADA.  Any modification to this at-will 
term of your employment must be expressed in writing and signed by you and by 
me.

In the event your employment is terminated by the company for any reason 
other than Cause (as defined below), you will be entitled to a continuation 
of base salary (less applicable taxes, other required withholdings and any 
amount owed by you to the company) for a period of three months from the date 
of termination, such three month period to be known as the severance term. 
Severance payments shall be payable in equal installments monthly commencing 
one month after the date of termination.  The Company's obligation to make 
severance payments will terminate upon the earlier of (1) the date three 
months after termination of employment or (2) the date on which you commence 
employment with another employer.  During the severance term, you will 
continue to be treated as a company employee for purposes of all company 
provided employee benefits, other than incentive compensation, bonus, profit 
sharing or similar plans, stock option vesting and vacation eligibility.

In the event your employment is terminated by the company for any reason 
other than Cause, you also will be entitled to be paid, at the same time such 
payments are made to other officers of the Company, your pro rata share for 
any bonus or profit sharing plans in which you participated for the portion 
of the year that you remained employed by the Company to the extent not 
inconsistent with the terms of any such plan.

In the event your employment is terminated by the company for any reason 
other than Cause, you will be relieved of your obligation to repay relocation 
expenses to the company, and to repay any draw that is in excess of earned 
amounts, up to the date of your termination.



For these purposes, "Cause" means:

(i)   failure by you to substantially perform your duties herein, other than
      failure resulting from complete or partial incapacity due to physical
      or mental illness or impairment,
(ii)  an act by you which constitutes misconduct and/or which is injurious
      to the company, or
(iii) a violation of federal or state laws or regulation applicable to the
      business of the Company, or
(iv)  any violation of the Company's Proprietary Information and Inventions
      Agreement.

ADA is committed to a drug-free workplace and has a zero-tolerance drug 
policy. Illegal possession or use of drugs of any kind, at any time, on or 
off company premises within or outside of working hours may result in 
immediate dismissal. 

Smoking is not permitted on company property or at any company off-premises 
events.

This offer is contingent on your executing the enclosed Proprietary 
Information and Inventions Agreement and providing ADA with the legally 
required proof of your identity and authorization to work in the United 
States.

Please sign both copies of this letter, retain one copy for your files, and 
return the second copy to us as soon as possible.  Everyone is delighted to 
have you join our team.   I look forward to working with you, and to enjoying 
the success our team will realize together.

                                   Very truly yours,


                                   /s/ Peter P. Savage
                                   -----------------------------
                                   Peter P. Savage
                                   President and CEO

Please indicate your acceptance of this offer by signing below:

  My first day of employment will be March 31, 1997.

  Accepted /s/ Steven F. X. Murphy           Date 3/17/97
           ---------------------------------      -------
               Steven F. X. Murphy

EX-10.40

LEASE AGREEMENT

STATE OF TEXAS

COUNTY OF DALLAS

     THIS LEASE AGREEMENT, made and entered into by and between the Landlord
and Tenant hereinafter named.

WITNESSETH:

     1 . DEFINITIONS AND BASIC PROVISIONS. The following definitions and basic
provisions shall be used in conjunction with and limited by the reference
thereto in the provisions of this lease:

(a)  "Landlord": Campbell Creek, Ltd.

(b)  "Tenant": Applied Digital Access, Inc.   

(c)  "Building":

     i) Name: Campbell Creek Business Park -Phase II. Building 2.

                                  2350 Campbell Creek Blvd.
                         Address: Richardson, Texas 75082

    ii)  Agreed Rentable Area of the Building: Building 2 - 54,165 square feet.
    
(d)  "Premises": That portion of the Building which is cross-hatched on Exhibit
     "A" attached hereto and made a part hereof. The Premises consists of 
     approximately 14,750 square feet of rentable area (all rentable area 
     being determined by measuring from the outer surfaces of exterior wall 
     and from the centerline of demising wall). All measurements shall utilize 
     and conform with BOMA Standards and shall be subject to field measurements 
     upon completion of Tenant's



Improvements (as hereinafter defined). In the event of an adjustment to the
square footage contained in the Premises necessitated by such field
measurement, Landlord shall adjust Tenant's Basic Rental and Tenant's Pro Rata
Share percentage (both as hereinafter defined) in direct proportion to such
change of the rentable area.

     The Building, the land (the "Land") on which the Building is situated
(which land is particularly described on Exhibit A- I attached hereto), and all
improvements and appurtenances to the Building and the Land are referred to
collectively herein as the "Property".

(e)  "Tenants's Pro Rata Share" percentage: 27.23% of Building 2 (the
     rentable area of Premises divided by the rentable area of the 
     Building, expressed in a percentage).

(f)  Base Expense Rate: $3.90 per square foot

(g)  "Project": All buildings, structures and other improvements located on the
     land which is described on Exhibit "B" attached hereto and made a part 
     hereof, together with such land.

(h) "Lease Term": A period of 84 months, which is anticipated to commence on
the earlier of January 1, 1998 or upon Substantial Completion (as defined in
Exhibit D attached hereto) and to end on December 31, 2004 ("EXPIRATION DATE"),
The date on which this Lease actually commences is herein called the
"Commencement Date".

(i)  "Basic Rental":



          Rental                         Rate Per Square         "Basic Monthly
          Period                         Foot of Rentable Area   Rental"
                                                           
January 1, 1998 - March 31, 1998         $15.25                  $10,166.67
April 1, 1998 - June 30, 1998            $15.25                  $15,250.00
July 1, 1998 - December 31, 2004         $15.25                  $18,744.79


(j) "SECURITY Deposit": $18.744.79

(k) "Permitted Use": General Office/Technical Purposes and any other
lawful use incidental thereto.

(l) "Common Areas": All landscaped areas, parking areas, service roads,
loading facilities, sidewalks and other improvements and facilities in the
Project which are designated by Landlord from time to time for the common use
and enjoyment of more than

- -2


one tenant in the Project.

     (m) "Environmental Law": Any federal, state, or local law, statute,
         ordinance, or regulation pertaining to health, industrial hygiene, 
         or the environmental conditions on, under, or about the Premises, 
         including without limitation, the Comprehensive Environmental 
         Response, Compensation, and Liability Act of 1980 ("CERCLA") as 
         amended, 42 U.S.C. Section 9601 et seq. ("RCRA"), the Texas Water 
         Code ("TWC"), the Texas Solid Waste Disposal Act, Texas Health & 
         Safety Code ("THSC") Section 361.001 et seq., and regulations, rules, 
         guidelines, or standards promulgated pursuant to such laws, as such
         statutes, regulations, rules, guidelines, and standards as are 
         amended from time to time.

     2. LEASE GRANT. Landlord, in consideration of the rent to be paid and the
other covenants and agreements to be performed by Tenant and upon the terms and
conditions hereinafter stated, does hereby lease, demise and let unto Tenant
the Premises commencing on the Commencement Date and ending on the last day of
the Lease Term, unless sooner terminated as herein provided. If this lease is
executed before the Premises are available and Ready For Occupancy (as
hereinafter defined) and Landlord cannot deliver possession on the anticipated
Commencement Date, then Landlord shall not be deemed to be in default
hereunder, and Tenant agrees to accept possession of the Premises at such time
as Landlord is able to tender the same and such date shall be the Commencement
Date and this lease shall continue for the entire Lease Term. Landlord hereby
waives payment of rent covering any period prior to the tendering of possession
of the Premises to Tenant hereunder, unless such delay is caused by Tenant or
anyone acting under or for Tenant and such abatement shall be Tenant's-sole
remedy by reason of the Premises not being Ready For Occupancy. Likewise,
should Tenant occupy the Premises prior to the anticipated commencement date
specified in Section I(h), the Commencement Date shall be altered to coincide
with said occupancy with the anticipated ending date set forth in Section I(h)
remaining unchanged. For the purposes hereof, the term "Ready For Occupancy"
shall mean the first to occur of the following: (a) the date Landlord
substantially completes the work required of it under terms of Exhibit "D"
attached hereto AND SECURES A CERTIFICATE OF INSURANCE OR FINAL INSPECTION TO
BE ISSUED BY THE CITY OF RICHARDSON; or (b) the date Landlord would have
substantially completed the work required of it under the terms of Exhibit "D"
but for delays caused by Tenant, or its agents, employees or contractors; or
(c) the date Tenant takes possession of the Premises. By occupying the
Premises ON THE COMMENCEMENT DATE, Tenant shall be deemed to have accepted the
same as suitable for the purposes herein intended and waives any defects in the
Premises (WITH THE EXCEPTION OF ANY LATENT STRUCTURAL DEFECTS OR ANY LATENT OR
PATENT DEFECTS IN THE IN THE WORK OF EXHIBIT "D") and all related improvements
and appurtenances in the Building and to have acknowledged that the same comply
fully with Landlord's covenants and obligations. After the commencement date of
this Lease, Tenant shall, upon request from Landlord, execute and deliver to
Landlord a Letter of Acceptance of the Premises, which letter shall also state
the Commencement Date and the Expiration.

- -3


Date.

3. RENT. In consideration of this lease, Tenant promises and agrees to pay
Landlord the Basic Monthly Rental without demand, deduction or set off, for
each month of the entire Lease Term. One such monthly installment together with
the Security Deposit shall be payable by Tenant to Landlord contemporaneously
with the execution hereof, and a like monthly installment shall be due and
payable without demand on or before the first day of each calendar month during
the term hereof beginning with the first calendar month following the
Commencement Date. Rent for any fractional month at the beginning or end of the
Lease Term shall be prorated, with any DIFFERENCES BETWEEN THE PREPAID MONTHLY
INSTALLMENT AND THE PRORATED RENT TO BE CREDITED TO THE SECOND MONTHLY
INSTALLMENT. The Security Deposit shall be held by Landlord without liability
for interest and as security for the performance by Tenant of Tenant's
covenants and obligations under this lease, it being expressly understood that
such deposit shall not be considered an advance payment of rental or a measure
of Landlord's damages in case of default by Tenant. Upon the occurrence of any
event of default by Tenant, Landlord may, from time to time, without prejudice
to any other remedy, use such deposit to the extent necessary to make good any
arrearages of rent and any other damage, injury, expense or liability caused to
Landlord by such event of default. Following any such application of the
Security Deposit, Tenant shall pay to Landlord on demand the amount so applied
in order to restore the Security Deposit to its original amount. If Tenant is
not then in default hereunder, any remaining balance of such deposit shall be
returned by Landlord to Tenant within thirty (30) days of termination of this
lease. If Landlord transfers its interest in the Premises during the Lease
Term, Landlord may assign the Security Deposit to the transferee and thereafter
shall have no further liability for the return of such Security Deposit.

4.   RENTAL ESCALATION.

     (a) The Basic Rental includes a component equal to the "Base Expense Rate"
(as defined in subsection l(f) hereof). In the event that the Operating
Expenses (HEREINAFTER DEFINED) per rentable square foot for any calendar year
during the Lease Term, exceed the Base Expense Rate, then Tenant shall be
obligated to pay to Landlord Tenant's Pro Rata Share of the amount by which
such Operating Expenses exceed the Base Expense Rate. All amounts which Tenant
is obligated to pay to Landlord under the terms of this Lease which are not
Basic Rental are herein called "Additional Rent". Basic Rental, Additional Rent
and all other sums required to be paid to Landlord by Tenant under this Lease
shall constitute rent and are sometimes collectively referred to as "Rent".

     (b)The term "Operating Expenses" shall mean all costs and expenses of
owning, operating and maintaining the Project including, but not limited to the
following: (i) ad

- -4


valorem taxes assessed against the Project together with any special
assessments and other real estate costs in the nature of taxes, assessments or
governmental impositions of any type for which Landlord is responsible (in the
event there is a change in the general system of real estate taxation such that
any alternative taxes, of whatever nature, are imposed upon Landlord in lieu
of, in whole or in part, general ad valorem taxes on the Project, or the
revenue of the Project, then such alternative taxes shall be deemed "ad valorem
taxes" or "real estate costs"); (ii) expense of operation, maintenance and
repair of the Common Areas, including, but not limited to, landscape, landscape
management, sprinkler maintenance and associated supply costs, license, permits
and inspection fees, trash removal, parking lot restriping and repairs,
exterior electrical repairs, and pest control for the Common Areas, in a manner
deemed reasonable by Landlord and appropriate and for the best interest of the
tenants of the Project; (iii) REASONABLE actual expenses incurred for
employees, such as wages, fringe benefits, taxes, unemployment and disability
insurance, workmen's compensation insurance, social security benefits and any
REASONABLE other expenses incurred in connection with such employees (the term
"employees" includes employees such as property manager, superintendents,
engineers, electricians, clerks, mechanics, helpers, security officers,
porters, cleaners and window washers, as well as contract laborers performing
services for the Project and other persons, firms, or corporations providing
contract services for the benefit of the Project); (iv) full contract cost of
third-party contractors for all of the foregoing; (v) all utility services for
utilities consumed for the benefit of the Common Areas, (vi) reasonable
consulting, legal, accounting and management fees for managing the Project,
provided however management fees shall not exceed five percent (5%) of gross
rentals during the Term; (vii) actual costs of insurance, including fire and
extended coverage, loss of rental insurance and general liability insurance;
(viii) amortization of REASONABLE costs of capital alterations or improvements
which would generally be regarded as ownership, operating, maintenance and
management costs which would normally be amortized over a period not to exceed
five (5) years; (ix) the reasonable costs and expenses of a consultant, if any, 
or of contesting validity or amount of such real estate taxes, and (x) costs 
of any energy-saving or labor-saving device or other equipment installed in the
Project amortized over such a period as is reasonably determined by Landlord,
but only to the extent of Landlord's good faith estimate of the actual the
Operating Expense savings.

     (c) Said Operating Expenses shall not include administrative salaries and
wages of persons not involved in the day-to-day operations of the Project,
state or federal income taxes (unless such taxes are in lieu of general 
ad valorem taxes as hereinbefore provided), or periodic alterations or 
improvements to the construction of the Project (except as specifically 
provided for herein), and in no case shall Tenant be charged additional 
rent for

- -5


any Operating Expenses such as painting, repainting, decorating, redecorating,
special cleaning service or special security service to the extent any of the
foregoing are directly related to the sole advantage of any particular occupant
of the Project other than Tenant.

     (d) In the event that during the Lease Term said Operating Expenses for
any calendar year exceed, per rentable square foot (determined by dividing the
total Operating Expenses for such calendar year by the total rental square
footage of the Project), the Base Expense Rate, Tenant shall, in addition to
the Basic Rental specified in this Lease, pay Tenant's Pro Rata Share of such
increases to Landlord as Additional Rent, in each calendar year or partial year
during the term of this Lease, payable in monthly installments as hereinafter
provided.

               (i) On or before the first day of each calendar year during 
the Lease term, Landlord shall give Tenant written notice of Tenant's 
estimated Additional Rent for the upcoming calendar year and the amount of 
the monthly installment due for each month during such year. Tenant shall pay 
to Landlord on the first day of each month thereafter the amount of the 
applicable monthly installment, without demand, offset or deduction, 
provided, however, if the applicable installment covers a partial month, then 
such installment shall be prorated on a daily basis. Within one hundred 
twenty (120) days after the end of each calendar year or as soon thereafter 
as is reasonably possible, Landlord shall prepare and deliver to Tenant a 
statement showing Tenant's actual Additional Rent for the previous calendar 
year. If Tenant's total monthly payments of Additional Rent for the 
applicable year are less than Tenant's actual Additional Rent, then Tenant 
shall pay to Landlord the amount of such underpayment. If Tenant's total 
monthly payments of Additional Rent for the applicable year are more than 
Tenant's actual Additional Rent, then Landlord shall credit against the next 
Additional Rent payment or payments due from Tenant the amount of such 
overpayment. Unless Tenant takes written exception to any item within thirty 
(30) days after the furnishing of an annual statement, such statement shall 
be considered as final and accepted by Tenant. Any amount due Landlord as 
shown on any such statement shall be paid by Tenant within thirty (30) days 
after it is furnished to Tenant.

               (ii) If, during any calendar year during the Lease Term, the 
Building is not at least 95% occupied, then the Operating Expenses incurred 
for such calendar year shall, for the purpose of making the calculations to 
be made pursuant to this Section 4, be adjusted to reflect the amount of 
Operating Expenses which Landlord determines would have been incurred had the 
Building been occupied to the extent of at least 95% of the rentable area of 
the Building during the entirety of such calendar year.

- -6


               (iii) Landlord shall be permitted, at anytime during any 
calendar year when it reasonably forecasts that Operating Expenses for such 
calendar year will exceed the Base Expense Rate together with any monthly 
escalation reserves then being paid, to notify Tenant of such forecast. In 
such event the amount of the monthly escalation reserves for the period 
following such notice shall be increased by the amount which Landlord 
reasonably forecasts will be necessary to pay the Operating Expenses for such 
calendar year.

Notwithstanding anything to the contrary contained herein, for the purpose of
determining Additional Rent, Operating Expenses (exclusive of the Non-Capped
Operating Expenses, as hereinafter defined) for any calendar year shall not be
increased over the amount of Operating Expenses (exclusive of Non-Capped
Operating Expenses) during the calendar year in which the term of this Lease
commences by more than eight percent (8%) per year on a cumulative basis,
compounded annually. It is understood and agreed that there shall be no cap on
Non-Capped Operating Expenses, which are hereby defined to mean all Utility
Expenses, Real Estate Taxes and Insurance Premiums.

     (e) AT ANY TIME WITHIN SIXTY (60) DAYS OF TENANT'S RECEIPT OF ANY 
STATEMENT FROM LANDLORD RELATING TO ADDITIONAL RENT, LANDLORD SHALL FURNISH 
TENANT FOLLOWING TENANT'S WRITTEN REQUEST THEREFOR, BUT NO MORE THAN ONCE IN 
ANY CALENDAR YEAR, INCLUDING INVOICES AND OTHER SOURCE DOCUMENTS RELATING TO 
EXPENSES. SUCH AUDIT SHALL BE LIMITED TO THE ITEMS NECESSARY TO A 
DETERMINATION OF THE APPLICABLE EXPENSES. IN ANY EVENT, IF IT IS DETERMINED 
THAT TENANT WAS OVERCHARGED BY MORE THAN FOUR PERCENT (4%), SUCH OVERCHARGE 
SHALL ENTITLE TENANT TO CREDIT AGAINST ITS NEXT PAYMENTS OF ADDITIONAL RENT 
THE AMOUNT OF THE OVERCHARGE AND THE COSTS ASSOCIATED WITH THE AUDIT (AND, IF 
SUCH CREDIT OCCURS FOLLOWING THE EXPIRATION OF THE TERM, LANDLORD SHALL 
PROMPTLY PAY THE AMOUNT OF SUCH CREDIT TO TENANT). IF THE AUDIT DETERMINES 
THAT THE TENANT WAS OVERCHARGED LESS THAN FOUR PERCENT (4%), SUCH OVERAGE 
SHALL ENTITLE TENANT TO CREDIT AGAINST ITS NEXT PAYMENT OF ADDITIONAL RENT 
THE AMOUNT OF THE OVERCHARGE AND A TENANT SHALL PAY FOR ALL COSTS ASSOCIATED 
WITH THE AUDIT. IF THE AUDIT SHALL DETERMINE THAT TENANT WAS UNDERCHARGED FOR 
THE OPERATING EXPENSES, TENANT SHALL PROMPTLY PAY THE AMOUNT OF SUCH 
UNDERCHARGE TO LANDLORD AND TENANT SHALL PAY FOR ALL COSTS ASSOCIATED WITH 
THE AUDIT.

     5. SERVICES. Tenant shall pay for the actual costs of utilities
(electricity, telephone, gas, water and sewer) that it consumes within the
Premises ("Premises Utilities"). Tenant shall pay the charges for such Premises
Utilities directly to the utility company that provides such utility service to
the Premises. Landlord shall, at its sole cost and expense, connect the
Premises to the main off-premises electrical supply and install all necessary
meters.

Landlord shall furnish, or cause to be furnished, at Landlord's own cost and
expense (as part

- -7


of the Operating Expenses) the following services, subject to all other
provisions of this Lease.

     (a) All utilities (except Premises Utilities) including electricity, 
         water, gas (if any), except telephone, for the Building Common Areas;

     (b) Air conditioning, both heating and cooling service (as required by the
         seasons) in accordance with equipment specified in Tenant's 
         Construction Plans. Such service shall include operating maintenance 
         and expensable replacement costs where necessary;

     (c) All exterior landscaping, landscaping maintenance and exterior 
         common area maintenance;

     (d) Trash and waste removal from the Building and daily trash and waste
         removal from the Premises (Monday through Friday);

     (e) Exterior Building glass cleaning no less than twice per year;

     (f) Maintenance and repairs to the Building fire and safety systems 
         pursuant to approved plans and specifications;

     (g) Full daily janitorial service five (5) days per week in and about the
         Premises and the  Building;

     (h) Pest and rodent control service on an as-needed basis.

     (i) Daily security guard service in the form of a roving patrol in the 
         parking lot. Notwithstanding anything to the contrary, Tenant 
         expressly acknowledges and agrees that Landlord is not warranting 
         the efficiency of any such security personnel, service, procedures 
         or equipment. Landlord shall not be responsible or liable in any 
         manner for failure of any such security personnel, services, 
         procedures or equipment to prevent, control, or apprehend anyone 
         suspected of causing personal injury or damage in, or around, the 
         Building or the Project.

     Failure to any extent to furnish or any stoppage or interruption of these
defined services resulting from any cause shall not render Landlord liable in
any respect for damages to any person, property or business, nor shall the same
be construed as an eviction of Tenant or work an abatement of Basic Rental or
Additional Rent, nor relieve Tenant from fulfillment of any covenant or
agreement contained herein and Tenant shall have no claim, offset or abatement
rights as a result of any of the foregoing. NOTWITHSTANDING ANYTHING TO
CONTRARY CONTAINED

- -8


HEREIN, IN THE EVENT LANDLORD SHALL FAIL TO PROVIDE THE SERVICES PROVIDED FOR
IN THIS PARAGRAPH 5 FOR A PERIOD OF TEN (10) CONSECUTIVE DAYS AFTER TENANT'S
WRITTEN NOTICE TO LANDLORD, TENANT'S BASIC RENT SHALL BE ABATED THEREAFTER
UNTIL SUCH SERVICES ARE RESTORED.

     6. LEASEHOLD IMPROVEMENTS. Landlord shall install and construct the Tenant
Improvements as defined in and in accordance with Exhibit D (hereinafter, the
"Work Letter"), attached hereto and made a part hereof. The condition of the
Premises prior to construction of Tenant Improvements shall be in "Shell
Condition". "Shell Condition" shall be defined as meaning no existing tenant
improvements, but shall include a Building shell that is constructed in
accordance with the Project Criteria and specifications attached hereto as
Rider 5 and in accordance with all applicable governmental laws, codes and
regulations, is clear of debris and has all main electrical and plumbing, fire
sprinkler and mechanical trunk lines to the Premises.

7.  USE.

    (a) Tenant shall use the Premises only for the Permitted Use. Tenant will
not occupy or use the Premises, or permit any portion of the Premises to be
occupied or used, for any business or purpose other than the Permitted Use or
for any use or purpose which is unlawful in part or in whole or deemed to be
disreputable in any manner, or which may be dangerous to life, limb or
property, or keep any substance or carry on or permit any operation which might
emit offensive odors from the Premises, or any use which is extrahazardous on
account of fire, nor permit anything to be done which will in any way increase
the rate of fire insurance on any building in the Project or their contents;
and in the event that, by reason of acts of Tenant, there shall be any increase
in rate of insurance on any building in the Project or their contents created
by Tenant's acts or conduct of business then such acts of Tenant shall be
deemed to be an event of default hereunder and Tenant hereby agrees to pay to
Landlord the amount of such increase on demand and acceptance of such payment
shall not constitute a waiver of any of Landlord's other rights provided
herein. Tenant will conduct its business and control its agents, employees and
invitees in such a manner as not to create any nuisance, nor interfere with,
annoy or disturb other tenants or Landlord in management of the Project. Tenant
will maintain the Premises in a clean, healthful and safe condition and will
comply with all laws, ordinances, order, rules and regulations (state, federal,
municipal and other agencies or bodies having any jurisdiction thereof) with
reference to use, condition or occupancy of the Premises, including without
limitation any Environmental Law. Tenant shall indemnify and hold Landlord
harmless from any and all costs, expenses (including reasonable attorney's
fees) claims and causes of action arising from Tenant's failure to comply with
this Section. Tenant will not, without the prior written consent of Landlord,
paint, install lighting or decoration, or install any signs, window or door
lettering or advertising media of any type or window awning on or about the
Premises or any part thereof. Should Landlord agree in writing to any of the
foregoing items in the preceding

- -9


sentence, Tenant will maintain such permitted item in good condition and repair
at all times. Outside storage, including but not limited to trucks or other
vehicles, is prohibited without Landlord's prior written consent.

     (b) Tenant shall comply with provisions of Rider No. 4 attached hereto,
as it relates to Hazardous Substances and Materials.

8.  REPAIRS AND MAINTENANCE.

     (a) Landlord's Obligation: Landlord shall at its sole cost and expense (as
part of the Operating Expenses, except as specifically excluded above), and
throughout the Lease Term and any extensions thereof, provide maintenance and
repairs (including replacement parts and labor) to the Building and the
Premises, including (i) the ROOF (INCLUDING, BUT NOT LIMITED TO, ROOF MEMBRANE,
SKY-LIGHTS, SMOKE VENTS AND OTHER ROOF PENETRATIONS WHICH ARE A PART OF THE
ORIGINAL CONDITION OF THE BUILDING SET FORTH IN RIDER NO. 5), walls (including
glass curtain walls, windows, and exterior doors), foundation, and other
structural elements of the Building; (ii) heating, ventilating, air
conditioning, mechanical, electrical, plumbing, lighting, and other systems and
equipment; (iii) interior walls, ceilings and floors; and (iv) driveways,
sidewalks, curbs, signs (except Tenant's signs), landscaping, and other
exterior areas (including painting and striping of parking areas).
Notwithstanding any of the foregoing to the contrary, Landlord shall not be
required to repaint or replace the floor coverings and wall coverings in the
Premises during the term of the Lease.

(b) Tenant's Obligation: Tenant shall, at Tenant's sole cost and expense, (i)
keep the interior of the Premises (including, but not limited to, all fixtures,
walls, ceilings, floors, doors, windows [except replacement of exterior plate
glass unless the replacement is by reason of damage caused by Tenant or its
employees, contractors, invitees, agents or guests], appliances and equipment
which are a part of the Premises) in good repair and condition, (ii) repair or
replace any damage or injury done to the Building or any other part of the
Project caused by Tenant, Tenant's contractors agents, employees, licensees,
invitees or visitors or resulting from a breach of its obligations,(EXCEPT TO
THE EXTENT COVERED BY LANDLORD'S INSURANCE, IN WHICH CASE TENANT SHALL BE
RESPONSIBLE ONLY FOR THE DEDUCTIBLE OF SUCH INSURANCE COVERAGE) and (iii)
indemnify and hold Landlord harmless from any and all costs, expenses
(including reasonable attorneys' fees), claims and causes of action arising
from or incurred by and/or asserted in connection with such maintenance,
repairs, replacements, damage or injury or Tenant's breach of its obligations
under this Lease. All repairs and replacements performed by or on behalf of
Tenant shall be performed in a good and workmanlike manner and in accordance
with the standards applicable to alterations or improvements performed by
Tenant.

- -10


     (c) If Tenant should fail to perform any of its obligations WITHIN ANY
APPLICABLE CURE PERIOD hereunder with respect to repairs and maintenance, then
Landlord may, if it so elects, in addition to any other remedies provided
herein, effect such repairs and maintenance. Any sums expended by Landlord in
effecting such repairs and maintenance shall be deemed to be so much additional
rental owing by Tenant to Landlord and shall be due and payable, on demand,
together with interest thereon at the rate of eighteen percent (18%) per annum
from the date of each such expenditure by Landlord to the date of repayment by
Tenant.

     9. ALTERATIONS AND IMPROVEMENTS. At the end or other termination of this
Lease, Tenant shall deliver the Premises to Landlord with all improvements
located thereon (except as otherwise herein provided) in good repair and
condition, reasonable wear and tear, casualty and condemnation excepted, and
shall deliver to Landlord all keys to the Premises. The cost and expense of any
repairs necessary to restore the condition of the Premises to said condition in
which they are to be delivered to Landlord shall be borne by Tenant. Tenant
will not make or allow to be made any alterations or physical additions in or
to the Premises without the prior written consent of Landlord, which consent
shall not be unreasonably withheld as to non-structural alterations PROVIDED
THAT NO CONSENT SHALL BE REQUIRED FOR NON-STRUCTURAL ALTERATIONS NOT EXCEEDING
$15,000.00 IN THE AGGREGATE, WHICH ARE OTHERWISE IN COMPLIANCE WITH THIS LEASE,
PROVIDED, HOWEVER, TENANT SHALL PROVIDE LANDLORD WITH AS-BUILT DRAWINGS AND A
COMPUTER DISKETTE (DXF FORMAT) WITHIN TEN (10) DAYS OF COMPLETION OF SUCH
ALTERATIONS. In such cases, Tenant agrees to cause such alterations to comply
with all applicable governmental laws, ordinances and regulations. Tenant shall
promptly pay for the costs of all work performed and shall indemnify Landlord
against liens, costs, damages or expenses incurred therewith including
reasonable attorney's fees incurred by Landlord if Landlord shall be joined in
any action or proceeding involving such work. Under no circumstances shall
Tenant commence such work until Landlord has been provided with evidence that
Tenant's contractor(s) is licensed and carries adequate public liability and
builders risk insurance and workman compensation as required by the State of
Texas and in amounts deemed satisfactory by Landlord. Upon completion of the
alterations, Tenant shall deliver to the Landlord "as-built" plans. At Tenant's
option, if Landlord performs such alterations, Tenant shall pay Landlord, as
Additional Rent, the cost thereof plus fifteen percent (15%) as reimbursement
for Landlord's overhead. All alterations, additions or improvements (whether
temporary or permanent in character) made in or upon the Premises, either by
Landlord or Tenant, shall be at Landlord's option, Landlord's property on
termination of this lease and shall remain on the Premises without compensation
to Tenant. All furniture, movable trade fixtures and equipment installed by
Tenant may be removed by Tenant at the termination of this lease if Tenant so
elects, and shall be so removed if required by Landlord, or if not so removed
shall, at the option of Landlord, become the property of Landlord. All such
installations, removals and restoration shall be accomplished in a good and
workmanlike manner so as not to damage the Premises or the primary structure or
structural qualities of any building improvements or the plumbing, electrical
lines or other utilities.

- -11


     10. COMMON AREAS. The use and occupation by Tenant of the Premises in
accordance with the terms of this lease shall include a right to use the Common
Areas in common with other tenants of the Project; subject, however, to the
terms and conditions of this Lease and to the Rules and Regulations for the use
of the Premises and the Common Areas which are attached hereto as Exhibit "C"
and made a part hereof as the same may be reasonably amended by Landlord from
time to time, with which Tenant covenants and agrees to comply.

     All Common Areas shall be subject, at all times, to the exclusive control
and management by Landlord, and Landlord shall have the right from time to time
to change the dimensions and location and to establish, modify and enforce
reasonable rules and regulations with respect to all Common Areas. Landlord
shall have the right to construct additional buildings or improvements,
construct additional stories on existing buildings and to maintain, and operate
lighting facilities on all said areas and improvements; to change the area,
level, location and arrangement of parking areas and other facilities and to
restrict parking by Tenant or tenants and their officers, agents, employees and
contractors to designated parking area. Landlord also reserves the right to
dedicate portions of the Common Areas for streets, parks, utilities or other
public areas, PROVIDED, HOWEVER, IN NO EVENT SHALL THE PARKING RATIO FOR TENANT
BE REDUCED BELOW A RATIO OF ONE SPACE PER 300 SQUARE FEET LEASED. If the amount
of the Common Areas is diminished, Landlord shall not be subject to any
liability nor shall Tenant be entitled to any compensation or abatement of
Basic Rental or Additional Rent, nor shall such diminution of Common Areas be
deemed an actual or constructive eviction.

     11. ASSIGNMENT AND SUBLETTING. Tenant shall not have the right to assign
or in any manner transfer this Lease or to sublet the whole or any part of the
Premises nor to grant any license, concession or other right of occupancy of
any portion of the Premises without the prior written consent of Landlord,
which consent shall not be unreasonably withheld. Landlord shall have the
option, upon receipt from Tenant of a written request for Landlord's consent to
a subletting or assignment, to cancel this Lease as of the date which is sixty
(60) days following the receipt by Landlord of the request from Tenant to
sublet or assign. The option of Landlord to cancel this Lease, as provided for
below, shall be exercised, if at all, within sixty (60) days following
Landlord's receipt of such written notice, by delivering to Tenant written
notice of Landlord's intention to exercise the option to so cancel this Lease.
If Tenant desires at any time to enter into an assignment of this Lease or a
sublease of the Premises or any portion thereof, Tenant shall give written
notice to Landlord of its desire to do so, which notice shall contain (a) the
name of the proposed assignee or subtenant, (b) the nature of the proposed
assignee's or subtenant's business to be carried on in the Premises, (c) the
terms and provisions of the proposed assignment or sublease, and (d) resumes,
business plans, references, financial information, and other information as
Landlord may reasonably request concerning the proposed assignee or subtenant.
Notwithstanding any permitted assignment or subletting, Tenant shall at all
times remain directly, primarily and fully responsible and liable for the
payment of the rent herein specified and for compliance with all of its other
obligations under the

- -12


terms, provisions and covenants of this Lease. No assignee or sublessee of the
Premises or any portion thereof may assign or sublet the Premises or any
portion thereof WITHOUT THE PRIOR WRITTEN CONSENT OF THE LANDLORD, WHICH
CONSENT SHALL NOT BE UNREASONABLY WITHHELD OR DELAYED. Consent by Landlord to
one or more assignments or sublettings shall not operate as a waiver of
Landlord's rights as to any subsequent assignments or sublettings. Upon the
occurrence of an "event of default" as hereinafter defined, if the Premises or
any part thereof are then assigned or sublet Landlord, in addition to any other
remedies herein provided, or provided by law, may at its option collect
directly from such assignee or subtenant all rents becoming due to Tenant under
such assignment or sublease and apply such rent against any sums due to
Landlord from Tenant hereunder, and no such collection shall be construed to
constitute a novation or a release of Tenant from the further performance of
Tenant's obligations hereunder. In the event of the transfer and assignment by
Landlord of its interest in this Lease and the Project ( or the part thereof in
which the Premises are located) Landlord shall thereby be released from any
further obligations hereunder, and Tenant agrees to look solely to such
successor in interest of the Landlord for performance of such obligations.
Tenant shall not mortgage, pledge or otherwise encumber its interest in this
lease or in the Premises. NOTWITHSTANDING THE FOREGOING, TENANT SHALL HAVE THE
RIGHT TO SUBLET ANY PORTION OF THE PREMISES OR ASSIGN THE LEASE TO ANY PARENT,
SUBSIDIARY OR AFFILIATE OF TENANT WITHOUT LANDLORD APPROVAL, PROVIDED, HOWEVER,
IN ALL SUCH EVENTS, TENANT SHALL REMAIN LIABLE FOR THE LEASE.

12. LIABILITY.

(a) TENANT'S INDEMNITY. Tenant will indemnify and hold Landlord, Property
Manager and their respective partners, officers, directors, employees and
agents harmless from all claims, demands, actions, damages, loss, liabilities,
judgments, costs and expenses, including without limitation, attorney's fees
and court costs (each a "Claim" and collectively the "Claims") which (i) are
suffered by, recovered from or asserted against Landlord, (ii) are not paid by
insurance carried by Tenant or Landlord, and (iii) arise from or in connection
with (a) the use or occupancy of the Premises and/or the Common Areas, by
Tenant or its employees, guests, invitees, officers and agents or any accident,
injury or damage occurring in or at the Premises, or (b) any breach by Tenant
of any representation or covenant in this Lease; provided, however, such
indemnification of Landlord by Tenant shall not include any Claim waived by
Landlord under Paragraph 26 of this Lease, any Claim to the extent caused by
the negligence, gross negligence or willful misconduct of Landlord or any Claim
relating to hazardous or toxic materials except to the extent such Claim arises
out of a breach by Tenant.

- -13


(b) LANDLORD'S INDEMNI1Y. Landlord will indemnify and hold Tenant and its
officers, directors, employees and agents harmless from all Claims which are
suffered by, recovered from or asserted against Tenant and which are not paid
by proceeds of insurance carried by Landlord or Tenant and which arise from or
in connection with (i) any accident, injury or damage occurring in or on the
Common Areas caused by Landlord's actions, or arising from negligence or
willful misconduct of Landlord, its agents, employees, contractors, or (ii) any
breach by Landlord of any representation or covenant in this Lease, provided,
however, such indemnification of Tenant by Landlord shall not include any Claim
waived by Tenant under Paragraph 26 of this Lease, any Claim to the extent
caused by the negligence, gross negligence or willful misconduct of Tenant or
any Claim relating to hazardous or toxic materials except to the extent such
Claim arises out of a breach by Landlord.

Tenant shall procure and maintain throughout the term of this lease a policy or
policies of insurance, at its sole cost and expense, insuring both Landlord and
Tenant against all claims, demands or actions arising out of or in connection
with: (i) the Premises; (ii) the condition of the Premises; (iii) Tenant's
operations in and maintenance and use of the Premises; and (iv) Tenant's
liability assumed under this Lease, the limits of such policy or policies to be
in the amount of not less than $3,000,000.00 per occurrence in respect of
injury to persons (including death), and in the amount of not less than
$1,000,000.00 per occurrence in respect of property damage or destruction,
including loss of use thereof. All such policies shall be procured by Tenant
from responsible insurance companies. Certified copies of Certificates of
insurance of such policies, shall be delivered to Landlord prior to the
commencement date of this lease. Not less than thirty (30) days prior to the
expiration date of any such policies, certificates of insurance certified
copies of the renewals thereof (bearing notations evidencing the payment of
renewal premiums) shall be delivered to Landlord. Such policies shall further
provide that not less than thirty (30) days written notice shall be given to
Landlord before such policy may be canceled or changed to reduce insurance
provided thereby.

13. CASUALTY INSURANCE

(a) Landlord shall, at all times during the Lease Term, maintain a policy or
policies of insurance issued by and binding upon one or more solvent insurance
companies insuring the Project, against loss or damage by fire, explosion and
other casualties insurable pursuant to standard fire and extended coverage
insurance forms

- -14


then in common use in the State of Texas. Landlord shall not be required to
insure any furniture, fixtures, equipment, machinery, goods, or supplies or
other personal property which Tenant may have brought into or which might
otherwise be located in or about the Premises. Landlord shall not be required
to insure alterations or improvements made to the Premises the cost of which is
in excess of the credit given by Landlord pursuant to Section 6 of this lease
or any alterations or improvement made by Tenant after the commencement date.

(b) Any insurance provided for in subsection 13(a) above may be effected by
self insurance or by a policy of blanket insurance. Tenant shall have no rights
in any policy or policies maintained by Landlord.

     14. MORTGAGES. Tenant accepts this Lease subject to any deeds of trust,
security interests or mortgages which might now or hereafter constitute a lien
upon the Premises and to zoning ordinances and other building and fire
ordinances and governmental regulations relating to the use of the Premises. If
any such mortgage or deed of trust is enforced by the holder thereof, Tenant
shall, upon written request, attorn to the holder of such mortgage or deed of
trust or purchaser at such foreclosure sale, or any other person succeeding to
the interest of Landlord as a result of such enforcement, as the case may be,
and execute instruments affirming such attornment PROVIDED SUCH SUCCESSOR IN
INTEREST TO LANDLORD ASSUMES ALL OBLIGATIONS OF LANDLORD THEREAFTER ARISING.
Tenant shall at any time hereafter, on demand, execute any instruments,
releases or other documents that may be required by any mortgagee for the
purpose of subjecting and subordinating this Lease to the lien of any such deed
of trust, security interest or mortgage; PROVIDED, HOWEVER, SUCH SUBORDINATION
AGREEMENTS SHALL EXPRESSLY PROVIDE THAT TENANT'S OCCUPANCY OF THE PREMISES
SHALL NOT BE DISTURBED SO LONG AS TENANT PERFORMS ALL OF ITS COVENANTS AND
OBLIGATIONS HEREUNDER. With respect to any deed of trust, security interest or
mortgage hereafter constituting a lien on the Premises Landlord, at its sole
option, shall have the right to waive the applicability of this Section 14 so
that this lease will not be subject and subordinate to any such deed of trust,
security interest or mortgage.

     15. INSPECTION. Without being deemed guilty of an eviction of Tenant and
without abatement of Rent, Landlord and Landlord's agents and representatives
shall have the right WITH REASONABLE NOTICE to enter upon and inspect the
Premises at any reasonable time during business hours, for the purpose of (i)
ascertaining the condition of the Premises or in order to make such repairs as
may be permitted to be made by Landlord and (ii) during THE LAST SIX (6) MONTHS
showing the Premises to prospective lenders, purchasers or tenants. Tenant
hereby waives any claims for damages for any injury or inconvenience to or
interference with Tenant's business, any loss of occupancy or Quite Enjoyment
of the Premises and any other loss occasioned thereby. During the last six (6)
months of the Lease Term Landlord shall have the right to erect on the grounds
of the

- -15


Building or the Premises a suitable sign indicating the Premises are available
for lease or for sale.

     16. CONDEMNATION. If the whole or any substantial part of the Premises
should be taken for any public or quasi-public use under governmental law,
ordinance or regulation, or by right of eminent domain, or by private purchase
in lieu thereof and the taking would prevent or materially interfere with the
use of the Premises for the purposes contemplated by the Permitted Use, this
lease shall terminate and the Basic Rent and Additional Rent shall be abated
during the unexpired portion of this lease, effective when the physical taking
of said Premises shall occur.

     If part of the Premises shall be taken for any public or quasi-public use
under any governmental law, ordinance or by right of eminent domain, or by
private purchase in lieu thereof, and this lease is not terminated as provided
in the subparagraph above, this lease shall not terminate but the rent payable
hereunder during the unexpired portion of this lease shall be reduced to such
extent as may be fair and reasonable under all of the circumstances.

     In the event of any such taking or private purchase in lieu thereof,
Landlord shall receive the entire award (which shall include sales proceeds)
payable as a result of the condemnation, taking or sale thereof. Tenant shall,
however, have the right to recover from such authority through a separate award
which does not reduce Landlord's award, any compensation as may be awarded to
Tenant on account of moving and relocation expenses of Tenant's physical
property.

     17. INSURANCE, FIRE OR OTHER CASUALTY. In the event that the Premises
should be damaged or destroyed by fire, tornado or other casualty to such an
extent that rebuilding or repairs cannot be completed ONE HUNDRED TWENTY (120)
days after the date on which such repairs commence, Landlord may at its option
terminate this lease, in which event the Basic Rental and Additional Rent shall
be abated during the unexpired portion of this lease effective with the date of
such damage. In the event the Premises should be damaged by fire, tornado or
other casualty covered by Landlord's insurance, but only to such extent that
rebuilding or repairs can be completed within ONE HUNDRED TWENTY (120) days
after the date of such damage, or if the damage should be more serious but
Landlord does not elect to terminate this lease, in either such event Landlord
shall within sixty (60) days after the date of such damage commence to rebuild
or repair the Premises and shall proceed with reasonable diligence to restore
the Premises to substantially the same condition in which they were immediately
prior to the happening of the casualty, except that Landlord shall not be
required to rebuild, repair or replace any part of the furniture, equipment,
fixtures and other improvements which may have been placed by Tenant or other
tenants within the Project or the Premises and Landlord shall not be obligated
to replace any improvements whose cost was in excess of the credit provided by
Landlord to Tenant under Section 6 of this lease. In the event that the
Premises are totally untenantable, Landlord shall abate the rent during the
time the Premises are unfit for occupancy. If the Premises are not totally
untenantable, Landlord shall allow Tenant a fair diminution of rent during the
time

- -16


the Premises are partially unfit for occupancy. With respect to the previous
two sentences, if the casualty was caused by Tenant, its agents, employees,
licensees or invitees, Basic Rental and Additional Rent shall be abated only to
the extent Landlord is compensated for such by loss of rents insurance, if any.
Notwithstanding the foregoing, (i) in the event any mortgagee under a deed of
trust, security agreement or mortgage on the Project should require that the
insurance proceeds be used to retire the mortgage debt or (ii) in the event
that the Project is damaged to such an extent that Landlord does not deem it
feasible to rebuild same (even though the Premises might not have been
substantially damaged) Landlord shall have no obligation to rebuild and this
Lease shall terminate upon notice to Tenant. Any insurance which may be carried
by Landlord or Tenant against loss or damage to the Project or to the Premises
shall be for the sole benefit of the party carrying such insurance and under
its sole control.

18. HOLDING OVER. Should Tenant, or any of its successors in interest, hold
over the Premises, or any part thereof, after the expiration of the term of
this lease, unless otherwise agreed in writing, such holding over shall
constitute and be construed as a tenant at sufferance tenancy at will only,
subject, however, to all of the terms, provisions, covenants and agreements on
the part of Tenant hereunder; such parties shall be subject to immediate
eviction and removal and Tenant or any such party shall pay Landlord as rent
for the period of such holdover an amount equal to the Basic Rental and
Additional Rent payable for the last month of the term of this lease plus FIFTY
PERCENT (50%) of such amount. Tenant shall also pay any damages sustained by
Landlord as a result of such holdover. The holding over by Tenant for any part
of a month shall entitle Landlord to collect the rent called for under this
Section 18 for the entirety of such month. The inclusion of this Section 18
shall not be construed as Landlord's consent for the Tenant to hold over.

     19. TAXES ON TENANT'S PROPERTY. Tenant shall be liable for all taxes
levied or assessed against personal property, furniture or fixtures placed by
Tenant in the Premises. If any such taxes for which Tenant is liable are levied
or assessed against Landlord or Landlord's property and if Landlord elects to
pay the same or if the assessed value of Landlord's property is increased by
inclusion of personal property, furniture or fixtures placed by Tenant in the
Premises, and Landlord elects to pay the taxes based on such increase, Tenant
shall pay to Landlord upon demand that part of such taxes for which Tenant is
primarily liable hereunder.

     20. EVENTS OF DEFAULT. The following events shall be deemed to be events
of default by Tenant under this Lease:

     (a) Tenant shall fail to pay any of the Basic Rental or Additional Rent
hereby reserved and such failure shall continue for a period of ten (10) days
after WRITTEN NOTICE the date such payment was due, PROVIDED, HOWEVER, LANDLORD
SHALL NOT BE REQUIRED TO GIVE MORE THAT TWO (2) SUCH NOTICES PER YEAR.

- -17


     (b) Tenant shall fail to comply with any term, provision or covenant of
this lease, other than the payment of rent, and shall not cure such failure
within THIRTY (30) days after written notice thereof to Tenant

     (c)Tenant or any guarantor of Tenant's obligations shall become insolvent
or shall make an assignment for the benefit of creditors.

     (d) Tenant or any guarantor shall file a petition under any section or
chapter of the National Bankruptcy Code, as amended, or under any similar law
or statute of the United States or any State thereof; or Tenant shall be
adjudged bankrupt or insolvent in proceedings filed against Tenant thereunder
and such adjudication shall not be vacated or set aside within thirty (30)
days.

     (e)receiver or trustee shall be appointed for all or substantially all of
the assets of Tenant and such receivership shall not be terminated or stayed
within thirty (30) days.

     (f) Tenant shall desert or vacate any substantial portion of the Premises
WITHOUT PAYMENT OF RENT for a period of five (5) or more days without written
permission of Landlord.

          With respect to the defaults in subsections (c) through (f) above,
Landlord shall not be obligated to give Tenant notices of default and Tenant
shall have no right to cure such defaults.

     21. REMEDIES. Upon the occurrence of any event of default specified in
Section 20 hereof, Landlord shall have the option to pursue any one or more of
the following remedies without any notice or demand whatsoever:

     (a) Terminate this lease in which event Tenant shall immediately surrender
the Premises to Landlord, and if Tenant fails to do so, Landlord may, without
prejudice to any other remedy which it may have for possession or arrearages in
rent, enter upon and take possession and expel or remove Tenant and any other
person who may be occupying said Premises or any part thereof, by force if
necessary, without being liable for prosecution or any claim of damages
thereof; and Tenant agrees to pay to Landlord on demand the amount of all loss
and damage which Landlord may suffer by reason of such termination, whether
through inability to relet the Premises on satisfactory terms or otherwise,
including (i) accrued Rent to the date of termination and Late Charges, plus
interest thereon from the date due through the date paid, the unamortized cost
of Tenant's improvements, broker's fees and commissions, attorney's fees,
moving allowances and any other costs Landlord incurred in making this Lease,
the cost of recovering the Premises and the costs of reletting the

- -18


Premises; (ii) the Present Value of the Rent that would have accrued under the
Lease for the balance of the term but for such termination, reduced by the fair
market rental value of the Premises for such balance of the lease term
discounted at the Present Value; (iii) plus any other ACTUAL AND REASONABLE
costs or amounts necessary to compensate Landlord for its damages.

     (b) Enter upon and take possession of the Premises and expel or remove
Tenant and any other person who may be occupying the Premises or any part
thereof, by force if necessary, without being liable for prosecution or any
claim for damages therefor, and if Landlord so elects, relet the Premises on
such terms as Landlord shall deem advisable and receive the rent thereof; and
Tenant agrees to pay to Landlord on demand any deficiency that may arise by
reason of such reletting for the remainder of the Lease Term.

     (c) Enter upon the Premises by force if necessary, without being liable
for prosecution or any claim for damages therefor, and do whatever Tenant is
obligated to do under the terms of this lease; and Tenant agrees to reimburse
Landlord on demand for any expenses which Landlord may incur in thus effecting
compliance with Tenant's obligations under this lease, and Tenant further
agrees that Landlord shall not be liable for any damages resulting to the
Tenant from such action.

     In the event Tenant fails to pay any Basic Rental or Additional Rent
hereunder as and when such is due, to help defray the additional cost to
Landlord for processing such late payments, Tenant shall pay to Landlord on
demand a late charge in an amount equal to percent ten percent (10%) of such
rent or additional rent, and the failure to pay such late charge, within ten
(10) days after demand therefore, shall be an event of default hereunder. The
provision for such late charge shall be in addition to all of Landlord's other
rights and remedies hereunder or at law and shall not be construed as
liquidated damages or as limiting Landlord's remedies in any manner.

     No re-entry or taking possession of the Premises by Landlord shall be
construed as an election on its part to terminate this lease, unless a written
notice of such intention be given to Tenant. Notwithstanding any such reletting
or re-entry or taking possession, Landlord may at any time thereafter elect to
terminate this lease for a previous default. Pursuit of any of the foregoing
remedies shall not preclude pursuit of any of the other remedies herein
provided or any other remedies provided by law, nor shall pursuit of any remedy
herein provided constitute a forfeiture or waiver of any rent due to Landlord
hereunder or of any damages accruing to Landlord by reason of the violation of
any of the terms, provisions and covenants herein contained. Landlord's
acceptance of rent following an event of default hereunder shall not be
construed as Landlord's waiver of such event of default. No waiver by Landlord
of any violation or breach of any of the terms, provisions, and covenants
herein contained shall be deemed or construed to constitute a waiver of any
other violation or breach of any of the terms, provisions, and covenants herein
contained. Forbearance by

- -19


Landlord to enforce one or more of the remedies herein provided upon an event
of default shall not be deemed or construed to constitute a waiver of any other
violation or default. The loss or damage that Landlord may suffer by reason of
termination of this lease or the deficiency from any reletting as provided for
above shall include the expense of repossession and any repairs or remodeling
undertaken by landlord following possession. Should Landlord at any time
terminate this lease for any default, in addition to any other remedy Landlord
may have, Landlord may recover from Tenant all damages Landlord may incur by
reason of such default, including the cost of recovering the Premises and the
loss of rental for the remainder of the Lease Term.

     In addition to the foregoing remedies, upon the occurrence of any event of
default Landlord is entitled and is hereby authorized, without any notice to
Tenant whatsoever, to enter upon the Premises by use of master key, a duplicate
key, or other peaceable means, and to change, alter, and/or modify the door
locks on all entry doors of the Premises, thereby permanently excluding Tenant,
and its officers, principals, agents, employees, representatives and invitees
therefrom. In the event that Landlord has either permanently repossessed the
Premises pursuant to the foregoing provisions of this Lease, or has terminated
that lease by reason of Tenant's default, Landlord shall not thereafter be
obligated to provide Tenant with a key to the Premises at any time, regardless
of any amounts subsequently paid by Tenant; provided, however, that in any such
instance, during Landlord's normal business hours and at the convenience of
Landlord, and upon receipt of written request from Tenant accompanied by such
Landlord will either (at Landlord's option) (i) escort Tenant or its authorized
personnel to the Premises to retrieve any personal belongings or other property
of Tenant not subject to the Landlord's Lien or security interest described
herein, or (ii) obtain a list from Tenant of such personal property as Tenant
intends to remove, whereupon Landlord shall remove such property and make it
available to Tenant at a time and place designated by Landlord. However, if
Landlord elects option (ii), Tenant shall pay, in cash in advance, all costs
and expenses estimated by Landlord to be incurred in removing such property and
making it available to Tenant and all moving and/or storage charges theretofore
incurred by Landlord with respect to such property. If Landlord elects to
exclude Tenant from the Premises without permanently repossessing or
terminating pursuant to the foregoing provisions of this Lease, then Landlord
shall not be obligated to provide Tenant a key to reenter the Premises until
such time as all delinquent rental and other amounts due under this Lease have
been paid in full and all other defaults, if any, have been completely cured to
Landlord's satisfaction (if such cure occurs prior to any actual permanent
repossession or termination), and Landlord has been given assurance reasonably
satisfactory to Landlord evidencing Tenant's ability to satisfy its remaining
obligations under this lease. This remedy of Landlord shall be in addition to,
and not in lieu of, any of its other remedies set forth in this Lease, or
otherwise available to Landlord at law or in equity. The foregoing provisions
shall override and control over any conflicting provisions of the Texas
Property Code as well as any successor statute governing the right of a
landlord to change the door locks of a commercial tenant.

- -20


     22. SURRENDER OF PREMISES. No act or thing done by the Landlord or its
agents during the term hereby granted shall be deemed an acceptance of a
surrender of the Premises, and no agreement to accept a surrender of the
Premises shall be valid unless the same be made in writing and subscribed by
the Landlord.

     23. ATTORNEYS' FEES. If on account of any breach or default by Tenant OR
LANDLORD in Tenant's OR LANDLORD'S OBLIGATIONS under this lease it should be
necessary or appropriate for Landlord to bring any action under this lease or
to enforce or defend any of Landlord's OR TENANT'S rights hereunder, then
LANDLORD OR TENANT agrees in each and any such case to pay to Landlord a
reasonable attorneys' fee.

24.  LANDLORD'S LIEN: Section Deleted

- -21


     25. MECHANIC'S LIEN. Tenant shall have no authority, express or implied,
to create or place any lien or encumbrance of any kind or nature whatsoever
upon, or in any manner to bind, the interest of Landlord in the Premises or to
charge the rentals payable hereunder for any claim in favor of any person
dealing with Tenant, including those who may furnish materials or perform labor
for any construction or repairs, and each such claim shall attach to, if at
all, only the leasehold interest granted to Tenant by this instrument. Tenant
covenants and agrees that it will pay or cause to be paid all sums legally due
and payable by it on account of any labor performed or materials furnished in
connection with any work performed on the Premises on which any lien is or can
be validly and legally asserted against its leasehold interest in the Premises
or the improvements thereon and that it will save and hold Landlord harmless
from any and all loss, cost or expense based on or arising out of asserted
claims or liens against the leasehold estate or against the right, title and
interest of the Landlord in the Premises or under the terms of this lease.

     26. WAIVER OF SUBROGATION. Anything in this lease to the contrary
notwithstanding, the parties hereto waive any and all rights of recovery,
claim, action or cause of action, against each other, their agents, officers,
and employees, for any loss or damage that may occur to the Premises hereby
demised, or any improvements thereto, the Project or any improvements thereto,
by reason of fire, the elements, or any other cause which is insured against
pursuant to valid and collectible insurance policies (OR ANY INSURANCE PROVIDED
FOR IN SECTION 13), which are then in effect, regardless of cause or origin,
including negligence of the parties hereto, their agents, officers, and
employees.

     27. SIGNS. Tenant shall have the right to install signs upon the Premises
in accordance with Rider No. 2 attached hereto.

     28. NOTICES. Each provision of this Agreement, or of any applicable
governmental laws, ordinances, regulations, and other requirements with
reference to the sending, mailing or delivery of any notice, or with reference
to the making of any payment by Tenant to Landlord, shall be deemed to be
complied with when and if the following steps are taken:

     (a) All rent and other payment required to be made by Tenant to Landlord
hereunder shall be payable to Landlord in Dallas County, Texas, at the address
hereinbelow set forth, or at such other address as Landlord may specify from
time to time by written notice delivered in accordance herewith.

     (b) Any notice or document required to be delivered hereunder shall be
deemed to be delivered when actually received and whether or not received when
deposited in the United States mail, postage prepaid, certified or registered
mail (with return receipt

- -22


requested) addressed to the parties hereto at the respective addresses set out
opposite their names below, or at such other address as they have theretofore
specified by written notice delivered in accordance herewith. Notice also may
be given by telex or facsimile, provided each such transmission is confirmed
(and such confirmation is supported by documented evidence) as received.

LANDLORD:     CAMPBELL CREEK LTD.                         
              4099 MCEWEN ROAD, SUITE 370                 
              DALLAS, TEXAS 75244  ATTN: PROPERTY MANAGER 

TENANT:

APPLIED DIGITAL ACCESS, INC..
9855 SCRANTON ROAD
SAN DIEGO. CALIFORNIA 92121
ATTN: PRESIDENT        FAX-.619.623.2208

     29. FORCE MAJEURE. Whenever a period of time is herein prescribed for
action to be taken by Landlord or Tenant, Landlord or Tenant shall not be
liable or responsible for, and there shall be excluded from the computation for
any such period of time, any delays due to strikes, riots, acts of God,
shortages of labor or materials, war, governmental laws, regulations or
restrictions or any other causes of any kind whatsoever which are beyond the
control of Landlord or Tenant, provided, however, in no event shall the
foregoing apply to the financial obligations of either Landlord or Tenant to
the other under this Lease.

     30. SEVERABILITY. If any clause or provision of this lease is illegal,
invalid or unenforceable under present or future laws, then and in that event,
it is the intention of the parties hereto that the remainder of this lease
shall not be affected thereby, and it is also the intention of the parties to
this lease that in lieu of each clause or provision of this lease that is
illegal, invalid, or unenforceable, there be added as a part of this lease a
clause or provision as similar in terms to such illegal, invalid or
unenforceable clause or provision as may be possible and be legal, valid and
enforceable.

     31. ENTIRE AGREEMENT; AMENDMENTS; BINDING EFFECT. This Lease contains the
entire agreement between the parties and may not be altered, changed or
amended, except by instrument in writing signed by both parties hereto. No
provision of this Lease shall be deemed to have been waived by Landlord unless
such waiver be in writing signed by Landlord and addressed to Tenant, nor shall
any custom or practice which may grow up between the parties in the
administration of the terms hereof be construed to waive or lessen the right of
Landlord to insist

- -23


upon the performance by Tenant in strict accordance with the terms hereof. The
terms, provisions, covenants and conditions contained in this lease shall apply
to, inure to the benefit of, and be binding upon the parties hereto, and upon
their respective successors in interest and legal representatives, except as
otherwise herein expressly provided.

     32. QUIET ENJOYMENT. Provided Tenant has performed all of the terms,
covenants, agreements and conditions of this lease, including the payment of
rent, to be performed by Tenant, Tenant shall have the quiet possession of
peaceably and quietly hold and enjoy the Premises for the term hereof, without
hindrance from Landlord, subject to the terms and conditions of this lease.

     33. EXISTENCE OF BROKER. Tenant represents and warrants that it has not
contacted or dealt with any real estate broker or agent in connection with the
execution of this lease, except as listed below, and Tenant agrees to indemnify
and hold harmless Landlord against all liabilities and costs (including but not
limited to attorneys' fees) incurred by Landlord as a result of Tenant's breach
of the warranties and representations contained herein.

          BROKER: CB CORNMERCIAL (SUCH BROKER IS REPRESENTED BY PAT O'KEEFE AND
          ANTHONY BOLNER)

     34. GENDER. Words of any gender used in this lease shall be held and
construed to include any other gender, and words in the singular number shall
be held to include the plural, unless the context otherwise requires.

     35. JOINT AND SEVERAL LIABILITY. If there be more than one Tenant, the
obligations hereunder imposed upon Tenant shall be joint and several. If there
be a guarantor of Tenant's obligations hereunder, the obligations hereunder
imposed upon Tenant shall be the joint and several obligations of Tenant and
such guarantor and Landlord need not first proceed against the Tenant hereunder
before proceeding against such guarantor, nor shall any such guarantor be
released from its guaranty for any reason whatsoever, including without
limitation, in case of any amendments hereto, waivers hereof or failure to give
such guarantor any notices hereunder.

     36. ESTOPPEL CERTIFICATE. Tenant agrees promptly following any request by
Landlord to execute and deliver to Landlord within ten (10) days any documents,
evidencing the status of the Lease as may be required, either by a lender
("Lender") making a loan to Landlord to be secured by a deed of trust or
mortgage covering the Premises or the Project or a purchaser ("Purchaser") of
the Premises or the Project from Landlord (including an estoppel certificate
(i) certifying that this Lease is unmodified and in full force and effect, or,
if modified, stating the nature of such modification and certifying that this
Lease, as so modified, is in full force and effect and the date to which the
rent and other charges are paid in advance, if any, (ii) acknowledge that there
are

- -24


not, to Tenant's knowledge, any uncured defaults on the part of the Landlord
hereunder, or so specifying such defaults, if any, as are claimed, and (iii)
such other matters as Landlord may reasonably request). If required by a Lender
or a Purchaser Tenant will deliver to Landlord current financial statements of
Tenant.

     37. CAPTIONS. The captions contained in this lease are for convenience of
reference only, and in no way limit or enlarge the terms and conditions of this
lease.

     38. NO LIGHT, AIR OR VIEW EASEMENT. Any diminution or shutting off of
light, air or view by any structure which may be erected on the Project or
lands adjacent to the Project shall in no way affect this Lease or impose any
liability on Landlord (even if Landlord is the adjacent land owner).

     39. RELOCATION. - Section Deleted.

     40. PARKING. The parking areas shall be designated for automobile parking
on a nonexclusive basis for all Property tenants (including Tenant) and their
respective employees, customers, invitees and visitors, provided, however,
Tenant shall be entitled to five (5) visitor spaces at a location mutally
acceptable to Landlord and Tenant. Parking and delivery areas for all vehicles
shall be in accordance with parking regulations established from time to time
by Landlord, with which Tenant agrees to conform. Tenant shall only permit
parking by its employees, customers and agents of automobiles in appropriate
designated parking areas. Tenant covenants that all items during the term of
the Lease, Tenant will not use in excess of one (1) parking space for each 250
rentable square feet in the Premises from Tenant's employees, invitees and
agents.

     41. AUTHORITY OF TENANT. Tenant and each person signing this Lease on
behalf of Tenant represents to Landlord as follows: Tenant, if a corporation,
is duly incorporated and legally existing under the laws of the state of its
incorporation and is duly qualified to do business in the

- -25


State of Texas. Tenant, if a partnership or joint venture, is duly organized
under the Texas Uniform Partnership Act. Tenant, if a limited partnership, is
duly organized under the applicable limited partnership act of the State of
Texas or, if organized under the laws of a state other than Texas, is qualified
under said Texas limited partnership act. Tenant has all requisite power and
all governmental certificates of authority, licenses, permits, qualifications
and other documentation to lease the Premises and to carry on its business as
now conducted and as contemplated to be conducted. Each person signing on
behalf of Tenant is authorized to do so. The foregoing representations in this
Paragraph 41 shall also apply to any corporation, partnership, joint venture or
limited partnership which is a general partner or joint venturer of Tenant.

Executed by Landlord this 1st day of October, 1997.

LANDLORD:

CAMPBELL CREEK, LTD.

By:       /s/ James H. Kirchoff
Name:     James H. Kirchhoff
Title:    Vice President

TENANT:

Applied Digital Access, Inc.

By:       /s/ James L. Keefe
Name:     James L. Keefe
Title:    Chief Financial Officer

EX-10.41

                                       
                     THIS FIRST AMENDMENT TO LEASE AGREEMENT

THIS FIRST AMENDMENT TO LEASE AGREEMENT (this "Amendment") is executed 
effective as of the 22nd day of January, 1998, by and between CAMPBELL CREEK, 
LTD., a Texas limited partnership ("Landlord"), and Applied Digital Access, 
Inc.

                                  WITNESSETH

WHEREAS, on October 1, 1997, Landlord and Tenant executed and entered into 
that certain Lease Agreement (the "Lease") covering that certain premises 
consisting of approximately 14,750 square feet of rentable area (the 
"Premises") located at 2350 Campbell Creek Boulevard, Richardson, Texas, as 
more particularly described in the Lease (except as otherwise expressly 
defined herein, each capitalized term used herein shall have the meaning 
ascribed to such term in the Lease); and

WHEREAS, Tenant desires that the Lease be modified and amended to reflect its 
utilization of the allowance towards Excess Costs as set forth in Section 2.3 
of Exhibit "D", Workletter.

NOW, THEREFORE, for and in consideration of the mutual covenants herein 
contained and other good and valuable consideration, Landlord and Tenant do 
hereby agree as follows:

1.   Effective February 1, 1998, Paragraph 1(h), "Lease Term" of the Lease 
shall be amended to the following:

A period of 84 months which shall commence on February 1, 1998 (the 
"Commencement Date") and end on January 31, 2005 (the "Expiration Date").  
The Commencement Date shall not be further adjusted upon Substantial 
Completion (as defined in Exhibit D of the Lease).

2.   Effective February 1, 1998, Paragraph 1(i), "Basic Rental", of the Lease 
is hereby modified and amended to read in its entirety as follows:



                                    Annual Rate  
                                   Per Sq. Ft of 
      Rental Period                Rentable Area           "Basic Monthly Rental"
                                                          
February 1, 1998 - April 30, 1998       $9.86                    $12,125.61
May 1, 1998 - July 31, 1998             $14.00                   $17,208.94
August 1, 1998 - January 31, 2005       $16.84                   $20,703.73


3.   Exhibit "D", Workletter' Section 2.3, Construction Deposit, the second 
paragraph shall be amended to provide for Landlord to pay up to eight dollars 
($8.00) per rentable square foot of such Excess Costs.

4.   Tenant desires to use all eight dollars ($8.00) pursuant to Section 2.3, 
as amended herein, of the Lease.  Paragraph 2 of this Amendment reflects 
adjustment to the Basic Rental due to the amortization of $8.00 per rentable 
square foot at an interest rate of the ten percent (10%) over the Lease Term 
(as defined herein).

5.   Any and all terms and provisions of the Lease are hereby amended and 
modified wherever necessary, and even though not specifically addressed 
herein, so as to conform to the amendments set forth in the preceding 
paragraphs hereof.

6.   Any and all of the terms and provisions of the Lease shall, except as 
expressly amended and modified hereby, remain in full force and effect.

7.   This Amendment may be executed in any number of counterparts, any one 
of which shall constitute an original and all counterparts being but one 
instrument.




EXECUTED effective as 22nd day of January, 1998.

LANDLORD: CAMPBELL CREEK, LTD. a Texas Limited Partnership
By:  Granite Properties, Inc.
By:  /s/  James H. Kirchoff
     ------------------------------
Name:     James H. Kirchoff
Title:    Vice President

TENANT:        APPLIED DIGITAL ACCESS, INC.
By:  /s/  Wayne M. Lettiere
     ------------------------------
Name:   Wayne M. Lettiere
Title:  VP Operations

EX-10.42

                            SECOND AMENDMENT TO SUBLEASE

     THIS SECOND AMENDMENT TO SUBLEASE ("Amendment") is made as of this 31st 
day of December 1997, by and between APPLIED DIGITAL ACCESS, a California 
corporation ("Sublessor"), and ENOVA CORPORATION, a California corporation 
("Sublessee"), with reference to that certain Sublease being entered into by 
and between Sublessor and Sublessee executed by Sublessee on December 9, 1996 
as amended by that certain First Amendment to Sublease date January 24, 1997 
("Sublease").  For the purposes of this Amendment, the term "Sublease" shall 
mean, collectively, the Sublease, the First Amendment to Sublease, and this 
Second Amendment to Sublease, and the capitalized terms used herein shall 
have the meanings ascribed to them in the Sublease unless otherwise 
indicated. Except as modified as provided herein, the Sublease shall remain 
in full force and effect.  To the extent that there is any conflict between 
this Amendment and the Sublease, the provisions of this Amendment shall 
prevail.

1.   TERM.  Paragraph 4(b) of the Sublease dated December 9, 1996, is revised 
     to add the following language:

     "The Term of this Sublease shall be extended on a month to month basis, 
     that is, for no fixed term, commencing January 1, 1998; provided, 
     however, at any time on or after January 1, 1998, either Sublessor or 
     Sublessee must give ninety (90) days prior written notice to the other 
     of intent to terminate this Sublease ("Termination Notice"), and upon 
     expiration of said Termination Notice this Sublease shall terminate."

2.   RENTAL.  Commencing January 1, 1998, Sublessee shall pay to Sublessor 
     monthly rent as follows:
          January 1, 1998 through August 31, 1998: $28,291.01 per month.
          September 1, 1998 through August 31, 1999: $28,992.44 per month.
          September 1, 1999 through August 31, 2000 $29,927.68 per month.
          September 1, 2000 through August 31, 2001: $30,629.11 per month.

     Sublessee acknowledges and agrees that (i) the monthly rental amounts 
     set forth above incorporate the Sublessee's pro rata share of the 
     estimated Tenant's Building Share of Building Expenses and of Tenant's 
     Project Share of Project Expenses as of the date of this Amendment, and 
     (ii) in the event that Landlord increases the estimated Tenant's 
     Building Share of Building Expenses and Tenant's Project Share of 
     Project Expenses, a proportionate increase in such monthly rental 
     amounts will be made.

3.   OPERATING EXPENSE RECONCILIATION.  For calendar year 1998, and for each 
     calendar year or portion thereof thereafter in which Sublessee occupies 
     the subleased Premises, Sublessee shall pay, as additional rent to 
     Sublessor, its pro rata share of annual Building Expenses and Project 
     Expenses (as defined in Paragraph 5 of the Master Lease) paid by 
     Sublessor to Lessor in excess of $3.72 per rentable square foot of 
     Sublessor's Premises (the "Baseline Amount").  In the event an 
     adjustment is made to the monthly rental amounts set forth in Section 2 
     as a result of an increase by the Landlord of the estimated Tenant's 
     Building Share of Building Expenses and Tenant's Project Share of 
     Project Expenses, a proportionate adjustment shall be made to the 
     Baseline Amount.

                                       1



     Such payment shall be made within 30 days of the delivery by Sublessor to
     Sublessee of Landlord's Expense Statement for the previous year's operating
     expenses.

     Sublessee's pro rata share shall be 37.49% (calculated by dividing the
     rentable area of the subleased Premises, by the rentable area of
     Sublessor's Premises or 23,381/62,368 = 37.49%).  For calendar years in
     which Sublessee occupies the subleased Premises for less than a full
     calendar year, Sublessee's pro rata share shall be further prorated based
     on a 365 day/year basis.  This obligation shall survive termination of the
     sublease.
4.   HOLDING OVER.  If Sublessee does not vacate the Property upon the 
     expiration of or earlier termination of the Sublease and Sublessor 
     thereafter accepts rent from Sublessee, Sublessee's occupancy of the 
     Property shall be a "month-to-month" tenancy, subject to all of the 
     terms of this Sublease applicable to a month-to-month tenancy.
5.   EFFECT OF AMENDMENT:  Ratification:  Except to the extent that the 
     Sublease is modified by this Amendment, the terms and provisions of the 
     Sublease shall remain unmodified and in full force and effect.  In the 
     event of conflict between the terms of the Sublease and the terms of 
     this Amendment, the terms of the Amendment shall prevail.
6.   ATTORNEYS' FEES.  The provisions of the Sublease respecting payment of 
     attorneys' fees shall also apply to this Amendment.
7.   COUNTERPARTS.  If this Amendment is executed in counterparts, each 
     counterpart shall be deemed an original.
8.   AUTHORITY TO EXECUTE AMENDMENT.  Each individual executing this 
     Amendment on behalf of a partnership or corporation represents that he 
     or she is duly authorized to execute and deliver this Amendment on 
     behalf of the partnership and/or corporation and agrees to deliver 
     evidence of his or her authority to Sublessor upon request by Sublessor.
9.   GOVERNING LAW.  This Amendment and any enforcement of the agreements and 
     modifications set forth above shall be governed by and construed in 
     accordance with the laws of the State of California.

     IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date and year first above written.

SUBLESSOR                                    SUBLESSEE
APPLIED DIGITAL ACCESS,                      ENOVA CORPORATION,
a Delaware corporation                       a California corporation



    /s/ James Keefe                             /s/ Jerry Deems
- ------------------------------------       -------------------------------
James Keefe, Chief Financial Officer       Jerry Deems, Vice President, CITO

Date Signed:      1/12/98                  Date Signed:     1/6/98
             ------------------                         ---------------
                                  LESSOR'S CONSENT

The undersigned, Lessor under the Master Lease referenced in the preamble to 
this Amendment, hereby consents to the subletting of the Premises described 
herein on the terms and conditions 

                                       2


contained in this Sublease.  This consent shall apply only to this Sublease 
and shall not be deemed to be a consent to any other Sublease. Lessor hereby 
provides to Sublessee the right to remain in the subleased premises under the 
same terms and conditions set forth in this Sublease in the event of 
Sublessor's default.

ACCEPTED AND AGREED TO:
- -----------------------
LESSOR
SORRENTO TECH ASSOCIATES,
a California limited partnership

BARNES CANYON RPF REALTY CORP.
a Connecticut corporation
General Partner


     By:                               Date Signed: 
        ------------------------------              ---------------------
        Mark S. Knapp, Vice President

                                       3

EX-10.43

                                       
                           INDEMNIFICATION AGREEMENT


     THIS AGREEMENT is made and entered into this 23rd day of December, 1997 
between Applied Digital Access, Inc., a Delaware corporation ("Corporation"), 
whose address is 9855 Scranton Road, San Diego, California 92121 and 
__________________ ("Director"), whose address is __________________.
                                       
                                   RECITALS:

     A.    WHEREAS, Director, a member of the Board of Directors of 
Corporation, performs a valuable service in such capacity for Corporation; and

     B.    WHEREAS, the stockholders of Corporation have adopted Bylaws (the 
"Bylaws") providing for the indemnification of the officers, directors, 
agents and employees of Corporation to the maximum extent authorized by 
Section 145 of the Delaware General Corporation Law, as amended (the "Law"); 
and

     C.    WHEREAS, the Bylaws and the Law, as amended and in effect from 
time to time or any successor or other statutes of Delaware having similar 
import and effect, currently purports to be the controlling law governing 
Corporation with respect to certain aspects of corporate law, including 
indemnification of directors and officers; and

     D.   WHEREAS, in accordance with the authorization provided by the Law, 
Corporation may from time to time purchase and maintain a policy or policies 
of Directors and Officers Liability Insurance ("D & O Insurance"), covering 
certain liabilities which may be incurred by its directors and officers in 
the performance of services as directors and officers of Corporation; and

     E.   WHEREAS, as a result of developments affecting the terms, scope and 
availability of D & O Insurance there exists general uncertainty as to the 
extent and overall desirability of protection afforded members of the Board 
of Directors by such D & O Insurance, if any, and by statutory and bylaw 
indemnification provisions; and

     F.   WHEREAS, in order to induce Director to continue to serve as a 
member of the Board of Directors of Corporation, Corporation has determined 
and agreed to enter into this contract with Director.

     NOW, THEREFORE, in consideration of Director's continued service as a 
director after the date hereof, the parties hereto agree as follows:

     1.   CERTAIN DEFINITIONS.  The following terms used in this Agreement 
shall have the meanings set forth below.  Other terms are defined where 
appropriate in this Agreement.

          (a)  "Disinterested Director" shall mean a director of Corporation 
who is not or was not a party to the Proceeding in respect of which 
indemnification is being sought by Director.

                                       


          (b)  "Expenses" shall include all direct and indirect costs 
(including, without limitation, attorneys' fees, retainers, court costs, 
transcripts, fees of experts, witness fees, travel expenses, duplicating 
costs, printing and binding costs, telephone charges, postage, delivery 
service fees, all other disbursements or out-of-pocket expenses and 
reasonable compensation for time spent by Director for which he or she is 
otherwise not compensated by Corporation) actually and reasonably incurred in 
connection with a Proceeding or establishing or enforcing a right to 
indemnification under this Agreement, applicable law or otherwise; provided, 
however, that "Expenses" shall not include any Liabilities.

          (c)  "Final Adverse Determination" shall mean that a determination 
that Director is not entitled to indemnification shall have been made 
pursuant to Section 5 hereof and either (i) a final adjudication in a 
Delaware court or decision of an arbitrator pursuant to Section 13(a) hereof 
shall have denied Director's right to indemnification hereunder, or (ii) 
Director shall have failed to file a complaint in a Delaware court or seek an 
arbitrator's award pursuant to Section 13(a) for a period of one hundred 
twenty (120) days after the determination made pursuant to Section 5 hereof.

          (d)  "Independent Legal Counsel" shall mean a law firm or member of 
a law firm selected by Corporation and approved by Director (which approval 
shall not be unreasonably withheld) and that neither is presently nor in the 
past five years has been retained to represent:  (i) Corporation, in any 
material matter, or (ii) any other party to the Proceeding giving rise to a 
claim for indemnification hereunder.  Notwithstanding the foregoing, the term 
"Independent Legal Counsel" shall not include any person who, under the 
applicable standards of professional conduct then prevailing, would have a 
conflict of interest in representing either Corporation or Director in an 
action to determine Director's right to indemnification under this Agreement.

          (e)  "Liabilities" shall mean liabilities of any type whatsoever 
including, but not limited to, any judgments, fines, ERISA excise taxes and 
penalties, penalties and amounts paid in settlement (including all interest 
assessments and other charges paid or payable in connection with or in 
respect of such judgments, fines, penalties or amounts paid in settlement) of 
any proceeding.

          (f)  "Proceeding" shall mean any threatened, pending or completed 
action, claim, suit, arbitration, alternative dispute resolution mechanism, 
investigation, administrative hearing or any other proceeding whether civil, 
criminal, administrative or investigative, including any appeal therefrom.

          (g)  "Change of Control" shall mean the occurrence of any of the 
following events after the date of this Agreement:

               (i)  A change in the composition of the Board of Directors of 
Corporation (the "Board"), as a result of which fewer than two-thirds (2/3) 
of the incumbent directors are directors who either (1) had been directors of 
Corporation twenty-four (24) 

                                       -2-


months prior to such change or (2) were elected, or nominated for election, 
to the Board with the affirmative votes of at least a majority of the 
directors who had been directors of Corporation 24 months prior to such 
change and who were still in office at the time of the election or 
nomination; or

               (ii) Any "person" (as such term is used in section 13(d) and 
14(d) of the Securities Exchange Act of 1934, as amended) through the 
acquisition or aggregation of securities is or becomes the beneficial owner, 
directly or indirectly, of securities of Corporation representing twenty 
percent (20%) or more of the combined voting power of Corporation's then 
outstanding securities ordinarily (and apart from rights accruing under 
special circumstances) having the right to vote at elections of directors 
(the "Capital Stock"), except that any change in ownership of Corporation's 
securities by any person resulting solely from a reduction in the aggregate 
number of outstanding shares of Capital Stock, and any decrease thereafter in 
such person's ownership of securities, shall be disregarded until such person 
increases in any manner, directly or indirectly, such person's beneficial 
ownership of any securities of Corporation.

     2.   INDEMNITY OF DIRECTOR.  Corporation hereby agrees to hold harmless 
and indemnify Director to the fullest extent authorized or permitted by the 
provisions of the Law, as may be amended from time to time.

     3.   ADDITIONAL INDEMNITY.  Subject only to the exclusions set forth in 
Section 4 hereof, Corporation hereby further agrees to hold harmless and 
indemnify Director:

          (a)  against any and all expenses (including attorneys' fees), 
witness fees, judgments, fines and amounts paid in settlement actually and 
reasonably incurred by Director in connection with any threatened, pending or 
completed action, suit or proceeding, whether civil, criminal, administrative 
or investigative (including an action by or in the right of Corporation) to 
which Director is, was or at any time becomes a party, or is threatened to be 
made a party, by reason of the fact that Director is, was or at any time 
becomes a director, officer, employee or agent of Corporation, or is or was 
serving or at any time serves at the request of Corporation as a director, 
officer, employee or agent of another corporation, partnership, joint 
venture, trust, employee benefit plan or other enterprise; and

          (b)  otherwise to the fullest extent as may be provided to Director 
by Corporation under the non-exclusivity provisions of the Bylaws of 
Corporation and the Law.

     4.   LIMITATIONS ON ADDITIONAL INDEMNITY.  No indemnity pursuant to 
Section 3 hereof shall be paid by Corporation:

          (a)  except to the extent the aggregate of losses to be indemnified 
thereunder exceeds the sum of such losses for which the Director is 
indemnified pursuant to Section 2 hereof or reimbursed pursuant to any D & O 
Insurance purchased and maintained by Corporation;

          (b)  in respect of remuneration paid to Director if it shall be 
determined by a final judgment or other final adjudication that such 
remuneration was in violation of law;

                                      -3-


          (c)  on account of any action, suit or proceeding in which judgment 
is rendered against Director for an accounting of profits made from the 
purchase or sale by Director of securities of Corporation pursuant to the 
provisions of Section 16(b) of the Securities Exchange Act of 1934 and 
amendments thereto or similar provisions of any federal, state or local 
statutory law;

          (d)  on account of Director's conduct which is finally adjudged to 
have been knowingly fraudulent or deliberately dishonest, or to constitute 
willful misconduct if such conduct has been established by a judgment or 
other final adjudication adverse to Director (an "Adverse Judgment");

          (e)  provided there has been no Change of Control, on account of or 
arising in response to any action, suit or proceeding (other than an action, 
suit or proceeding referred to in Section 14(b) hereof) initiated by Director 
or any of Director's affiliates against Corporation or any officer, director 
or stockholder of Corporation unless such action, suit or proceeding was 
authorized in the specific case by action of the Board of Directors of 
Corporation;

          (f)  if a final decision by a Court having jurisdiction in the 
matter shall determine that such indemnification is not lawful; or

          (g)  on account of any action, suit or proceeding to the extent 
that Director is a plaintiff, a counter-complainant or a cross-complainant 
therein (other than an action, suit or proceeding permitted by Section 4(e) 
hereof).

     5.   PROCEDURE FOR DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION.

          (a)  Whenever Director believes that he or she is entitled to 
indemnification pursuant to this Agreement, Director shall submit a written 
request for indemnification to Corporation.  Any request for indemnification 
shall include sufficient documentation or information reasonably available to 
Director to support his or her claim for indemnification.  Director shall 
submit his or her claim for indemnification within a reasonable time not to 
exceed five years after any judgment, order, settlement, dismissal, 
arbitration award, conviction, acceptance of a plea of nolo contendere or its 
equivalent, final termination or other disposition or partial disposition of 
any Proceeding, whichever is the later date for which Director requests 
indemnification.  The President or the Secretary or other appropriate officer 
shall, promptly upon receipt of Director's request for indemnification, 
advise the Board of Directors in writing that Director has made such a 
request.  Determination of Director's entitlement to indemnification shall be 
made not later than ninety (90) days after Corporation's receipt of his or 
her written request for such indemnification.

          (b)  The Director shall be entitled to select the forum in which 
Director's request for indemnification will be heard, which selection shall 
be included in the written request for indemnification required in Section 
5(a). This forum shall be any one of the following:

                                     -4-


               (i)   The stockholders of Corporation;

               (ii)  A quorum of the Board of Directors consisting of 
Disinterested Directors;

               (iii) Independent Legal Counsel, who shall make the 
determination in a written opinion; or

               (iv)  A panel of three arbitrators, one selected by 
Corporation, another by Director and the third by the first two arbitrators 
selected.  If for any reason three arbitrators are not selected within thirty 
(30) days after the appointment of the first arbitrator, then selection of 
additional arbitrators shall be made by the American Arbitration Association. 
If any arbitrator resigns or is unable to serve in such capacity for any 
reason, the American Arbitration Association shall select his or her 
replacement.  The arbitration shall be conducted pursuant to the commercial 
arbitration rules of the American Arbitration Association now in effect.

               If Director fails to make such designation, his or her claim
shall be determined by the forum selected by Corporation.

     6.   PRESUMPTION AND EFFECT OF CERTAIN PROCEEDINGS.  Upon making a 
request for indemnification, Director shall be presumed to be entitled to 
indemnification under this Agreement and Corporation shall have the burden of 
proof to overcome that presumption in reaching any contrary determination.  
The termination of any Proceeding by judgment, order, settlement, arbitration 
award or conviction, or upon a plea of nolo contendere or its equivalent 
shall not affect this presumption or, except as may be provided in Section 4 
hereof, establish a presumption with regard to any factual matter relevant to 
determining Director's rights to indemnification hereunder.  If the person or 
persons so empowered to make a determination pursuant to Section 5(b) hereof 
shall have failed to make the requested determination within thirty (30) days 
after any judgment, order, settlement, dismissal, arbitration award, 
conviction, acceptance of a plea of nolo contendere or its equivalent, or 
other disposition or partial disposition of any Proceeding or any other event 
which could enable Corporation to determine Director's entitlement to 
indemnification, the requisite determination that Director is entitled to 
indemnification shall be deemed to have been made.

     7.   CONTRIBUTION.  If the indemnification provided in Sections 2 and 3 
is unavailable and may not be paid to Director for any reason other than 
those set forth in Section 4, then in respect of any threatened, pending or 
completed action, suit or proceeding in which Corporation is or is alleged to 
be jointly liable with Director (or would be if joined in such action, suit 
or proceeding), Corporation shall contribute to the amount of expenses 
(including attorneys' fees), judgments, fines and amounts paid in settlement 
actually and reasonably incurred and paid or payable by Director in such 
proportion as is appropriate to reflect (i) the relative benefits received by 
Corporation on the one hand and Director on the other hand from the 
transaction from which such action, suit or proceeding arose, and (ii) the 
relative fault of Corporation on the one hand and of Director on the other 
hand in connection with the events which resulted in such expenses, 
judgments, fines or settlement amounts, as well as any other relevant 
equitable 

                                      -5-


considerations. The relative fault of Corporation on the one hand and of 
Director on the other shall be determined by reference to, among other 
things, the parties' relative intent, knowledge, access to information and 
opportunity to correct or prevent the circumstances resulting in such 
expenses, judgments, fines or settlement amounts.  Corporation agrees that it 
would not be just and equitable if contribution pursuant to this Section 7 
were determined by pro rata allocation or any other method of allocation 
which does not take account of the foregoing equitable considerations.

     8.   INSURANCE AND FUNDING.  Corporation hereby represents and warrants 
that it shall purchase and maintain insurance to protect itself and/or 
Director against any Expenses and Liabilities in connection with any 
Proceeding to the fullest extent permitted by the Law.  In the event of a 
Change of Control, Corporation shall establish a letter of credit, as 
provided in Section 9, to ensure the payment of such amounts as may be 
necessary to effect indemnification or advancement of Expenses as provided in 
this Agreement.

     9.   LETTER OF CREDIT.

          (a)  In order to secure the obligations of Corporation to indemnify 
and advance Expenses to Director pursuant to this Agreement, Corporation 
shall obtain at the time of any Change of Control, upon request of any 
director, an irrevocable standby letter of credit naming the directors of the 
Corporation in office at the time of a Change of Control as joint 
beneficiaries (the "Letter of Credit").  The Letter of Credit shall be in an 
appropriate amount not less than two million dollars ($2,000,000), shall be 
issued by a commercial bank headquartered in the United States having assets 
in excess of $10 billion and capital according to its most recent published 
reports equal to or greater than the then applicable minimum capital 
standards promulgated by such bank's primary federal regulator and shall 
contain terms and conditions reasonably acceptable to all directors.  The 
Letter of Credit shall provide that Director may from time to time draw 
certain amounts thereunder, upon written certification by Director to the 
issuer of the Letter of Credit that (i) Director has made written request 
upon Corporation for an amount not less than the amount he or she is drawing 
under the Letter of Credit and that Corporation has failed or refused to 
provide him with such amount in full within thirty (30) days after receipt of 
the request, and (ii) Director believes that he or she is entitled under the 
terms of this Agreement to the amount which he or she is drawing upon under 
the Letter of Credit.  The issuance of the Letter of Credit shall not, in any 
way, diminish Corporation's obligation to indemnify Director against Expenses 
and Liabilities to the full extent required by this Agreement.

          (b)  Once Corporation has obtained the Letter of Credit, 
Corporation shall maintain and renew the Letter of Credit or substitute 
letter of credit meeting the criteria of Section 9(a) during the term of this 
Agreement so that the Letter of Credit shall have an initial term of five 
years, be renewed for successive five-year terms, and always have at least 
one year of its term remaining.

     10.  CONTINUATION OF OBLIGATIONS.  All agreements and obligations of 
Corporation contained herein shall continue during the period Director is a 
director, officer, 

                                     -6-


employee or agent of Corporation (or is or was serving at the request of 
Corporation as a director, officer, employee or agent of another corporation, 
partnership, joint venture, trust, employee benefit plan or other enterprise) 
and shall continue thereafter so long as Director shall be subject to any 
possible claim or threatened, pending or completed action, suit or 
proceeding, whether civil, criminal or investigative, by reason of the fact 
that Director was serving Corporation or such other entity in any capacity 
referred to herein.

     11.  NOTIFICATION AND DEFENSE OF CLAIM.  Promptly after receipt by 
Director of notice of the commencement of any action, suit or proceeding, 
Director will, if a claim in respect thereof is to be made against 
Corporation under this Agreement, notify Corporation of the commencement 
thereof; but the omission so to notify Corporation will not relieve it from 
any liability which it may have to Director otherwise than under this 
Agreement. With respect to any such action, suit or proceeding as to which 
Director notifies Corporation of the commencement thereof:

          (a)  Corporation will be entitled to participate therein at its own
expense;

          (b)  Except as otherwise provided below, to the extent that it may 
wish, Corporation jointly with any other indemnifying party similarly 
notified will be entitled to assume the defense thereof, with counsel 
reasonably satisfactory to Director.  After notice from Corporation to 
Director of its election to assume the defense thereof, Corporation will not 
be liable to Director under this Agreement for any legal or other expenses 
subsequently incurred by Director in connection with the defense thereof 
other than reasonable costs of investigation or as otherwise provided below.  
Director shall have the right to employ his or her own counsel in such 
action, suit or proceeding but the fees and expenses of such counsel incurred 
after notice from Corporation of its assumption of the defense thereof shall 
be at the expense of Director unless (i) the employment of counsel by 
Director has been authorized by Corporation, (ii) Director shall have 
reasonably concluded that there may be a conflict of interest between 
Corporation and Director in the conduct of the defense of such action or 
(iii) Corporation shall not in fact have employed counsel to assume the 
defense of such action, in each of which cases the fees and expenses of 
Director's separate counsel shall be at the expense of Corporation.  
Corporation shall not be entitled to assume the defense of any action, suit 
or proceeding brought by or on behalf of Corporation or as to which Director 
shall have made the conclusion provided for in (ii) above; and

          (c)  Provided there has been no Change of Control, Corporation 
shall not be liable to indemnify Director under this Agreement for any 
amounts paid in settlement of any action or claim effected without its 
written consent, which consent shall not be unreasonably withheld.  
Corporation shall be permitted to settle any action except that it shall not 
settle any action or claim in any manner which would impose any penalty, 
out-of-pocket liability, or limitation on Director without Director's written 
consent.

     12.  ADVANCEMENT AND REPAYMENT OF EXPENSES.

          (a)  In the event that Director employs his or her own counsel 
pursuant to Section 11(b)(i) through (iii) above, Corporation shall advance 
to Director, prior to any final disposition of any threatened or pending 
action, suit or proceeding, whether civil, criminal,

                                    -7-



administrative or investigative, any and all reasonable expenses (including 
legal fees and expenses) incurred in investigating or defending any such 
action, suit or proceeding within ten (10) days after receiving copies of 
invoices presented to Director for such expenses.

          (b)  Director agrees that Director will reimburse Corporation for 
all reasonable expenses paid by Corporation in defending any civil or 
criminal action, suit or proceeding against Director in the event and only to 
the extent it shall be ultimately determined by a final judicial decision 
(from which there is no right of appeal) that Director is not entitled, under 
the provisions of the Law, the Bylaws, this Agreement or otherwise, to be 
indemnified by Corporation for such expenses.

     13.  REMEDIES OF DIRECTOR.

          (a)  In the event that (i) a determination pursuant to Section 5 
hereof is made that Director is not entitled to indemnification, (ii) 
advances of Expenses are not made pursuant to this Agreement, (iii) payment 
has not been timely made following a determination of entitlement to 
indemnification pursuant to this Agreement, or (iv) Director otherwise seeks 
enforcement of this Agreement, Director shall be entitled to a final 
adjudication in an appropriate court of his or her rights.  Alternatively, 
Director at his or her option may seek an award in arbitration to be 
conducted by a single arbitrator pursuant to the commercial arbitration rules 
of the American Arbitration Association now in effect, whose decision is to 
be made within ninety (90) days following the filing of the demand for 
arbitration.  The Corporation shall not oppose Director's right to seek any 
such adjudication or arbitration award.

          (b)  In the event that a determination that Director is not 
entitled to indemnification, in whole or in part, has been made pursuant to 
Section 5 hereof, the decision in the judicial proceeding or arbitration 
provided in paragraph (a) of this Section 13 shall be made de novo and 
Director shall not be prejudiced by reason of a determination that he or she 
is not entitled to indemnification.

          (c)  If a determination that Director is entitled to 
indemnification has been made pursuant to Section 5 hereof or otherwise 
pursuant to the terms of this Agreement, Corporation shall be bound by such 
determination in the absence of (i) a misrepresentation of a material fact by 
Director or (ii) a specific finding (which has become final) by an 
appropriate court that all or any part of such indemnification is expressly 
prohibited by law.

          (d)  In any court proceeding pursuant to this Section 13, 
Corporation shall be precluded from asserting that the procedures and 
presumptions of this Agreement are not valid, binding and enforceable.  The 
Corporation shall stipulate in any such court or before any such arbitrator 
that Corporation is bound by all the provisions of this Agreement and is 
precluded from making any assertion to the contrary.

          (e)  Expenses reasonably incurred by Director in connection with 
his or her request for indemnification under this Agreement, meeting 
enforcement of this Agreement or to recover damages for breach of this 
Agreement shall be borne by Corporation.

                                    -8-


          (f)  Corporation and Director agree herein that a monetary remedy 
for breach of this Agreement, at some later date, will be inadequate, 
impracticable and difficult of proof, and further agree that such breach 
would cause Director irreparable harm.  Accordingly, Corporation and Director 
agree that Director shall be entitled to temporary and permanent injunctive 
relief to enforce this Agreement without the necessity of proving actual 
damages or irreparable harm. The Corporation and Director further agree that 
Director shall be entitled to such injunctive relief, including temporary 
restraining orders, preliminary injunctions and permanent injunctions, 
without the necessity of posting bond or other undertaking in connection 
therewith.  Any such requirement of bond or undertaking is hereby waived by 
Corporation, and Corporation acknowledges that in the absence of such a 
waiver, a bond or undertaking may be required by the court.

     14.  ENFORCEMENT.

          (a)  Corporation expressly confirms and agrees that it has entered 
into this Agreement and assumed the obligations imposed on Corporation hereby 
in order to induce Director to continue as a director of Corporation, and 
acknowledges that Director is relying upon this Agreement in continuing in 
such capacity.

          (b)  In the event Director is required to bring any action to 
enforce rights or to collect moneys due under this Agreement and is 
successful in such action, the Corporation shall reimburse Director for all 
Director's reasonable fees and expenses in bringing and pursuing such action.

     15.  SEPARABILITY.  Each of the provisions of this Agreement is a 
separate and distinct agreement and independent of the others, so that if any 
or all of the provisions hereof shall be held to be invalid or unenforceable 
to any extent for any reason, such invalidity or unenforceability shall not 
affect the validity or enforceability of the other provisions hereof, or the 
obligation of the Corporation to indemnify the Director to the full extent 
provided by the Bylaws or the Law, and the affected provision shall be 
construed and enforced so as to effectuate the parties' intent to the maximum 
extent possible.

     16.  GOVERNING LAW.  This Agreement shall be governed by and interpreted 
and enforced in accordance with the internal laws of the State of Delaware.

     17.  CONSENT TO JURISDICTION.  The Corporation and Director each 
irrevocably consent to jurisdiction of the courts of the State of Delaware 
for all purposes in connection with any action or proceeding which arises out 
of or relates to this Agreement and agree that any action instituted under 
this Agreement shall be brought only in the state courts of the State of 
Delaware.

     18.  BINDING EFFECT.  This Agreement shall be binding upon Director and 
upon Corporation, its successors and assigns, and shall inure to the benefit 
of Director, his or her heirs, executors, administrators, personal 
representatives and assigns and to the benefit of Corporation, its successors 
and assigns.

                                    -9-


     19.  ENTIRE AGREEMENT.  This Agreement represents the entire agreement 
between the parties hereto and there are no other agreements, contracts or 
understandings between the parties hereto with respect to the subject matter 
of this Agreement, except as specifically referred to herein.  This Agreement 
supersedes any and all agreements regarding indemnification heretofore 
entered into by the parties.

     20.  AMENDMENT AND TERMINATION.  No amendment, modification, waiver, 
termination or cancellation of this Agreement shall be effective for any 
purpose unless set forth in writing signed by both parties hereto.

     21.  SUBROGATION.  In the event of payment under this agreement, 
Corporation shall be subrogated to the extent of such payment to all of the 
rights of recovery of Director, who shall execute all documents required and 
shall do all acts that may be necessary to secure such rights and to enable 
Corporation effectively to bring suit to enforce such rights.

     22.  NON-EXCLUSIVITY OF RIGHTS.  The rights conferred on Director by 
this Agreement shall not be exclusive of any  other right which Director may 
have or hereafter acquire under any statute, provision of Corporation's 
Certificate of Incorporation or Bylaws, agreement, vote of stockholders or 
directors, or otherwise, both as to action in his official capacity and as to 
action in another capacity while holding office.

     23.  SURVIVAL OF RIGHTS.  The rights conferred on Director by this 
Agreement shall continue after Director has ceased to be a director, officer, 
employee or other agent of Corporation or such other entity.

     24.  NOTICES.  All notices, requests, demands and other communications 
hereunder shall be in writing and shall be addressed to Director or to 
Corporation, as the case may be, at the address shown on page 1 of this 
Agreement, or to such other address as may have been furnished by either 
party to the other, and shall be deemed to have been duly given if (i) 
delivered by hand and receipted for by the party to whom said notice or other 
communication shall have been directed, or (ii) mailed by certified or 
registered mail with postage prepaid, on the third business day after the 
date on which it is so mailed.

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement on 
and as of the day and year first above written.

DIRECTOR:                     APPLIED DIGITAL ACCESS, INC.



                              By:
- ----------------------------     ---------------------------------------------
                                   (Signature)

                                   -10-


- -----------------------------    ---------------------------------------------
Print Name                         Print Name and Title


                                    -11-

EX-10.44

                                       
                           INDEMNIFICATION AGREEMENT


     THIS AGREEMENT is made and entered into this 23rd day of December, 1997 
between Applied Digital Access, Inc., a Delaware corporation ("Corporation"), 
whose address is 9855 Scranton Road, San Diego, California 92121 and 
__________________ ("Officer"), whose address is __________________.

                                   RECITALS:

     A.    WHEREAS, Officer, an officer (but not currently a member of the 
Board of Directors) of Corporation, performs a valuable service in such 
capacity for Corporation; and

     B.    WHEREAS, the stockholders of Corporation have adopted Bylaws (the 
"Bylaws") providing for the indemnification of the officers, directors, 
agents and employees of Corporation to the maximum extent authorized by 
Section 145 of the Delaware General Corporation Law, as amended (the "Law"); 
and

     C.    WHEREAS, the Bylaws and the Law, as amended and in effect from 
time to time or any successor or other statutes of Delaware having similar 
import and effect, currently purports to be the controlling law governing 
Corporation with respect to certain aspects of corporate law, including 
indemnification of directors and officers; and

     D.   WHEREAS, in accordance with the authorization provided by the Law, 
Corporation may from time to time purchase and maintain a policy or policies 
of Directors and Officers Liability Insurance ("D & O Insurance"), covering 
certain liabilities which may be incurred by its directors and officers in 
the performance of services as directors and officers of Corporation; and

     E.   WHEREAS, as a result of developments affecting the terms, scope and 
availability of D & O Insurance there exists general uncertainty as to the 
extent and overall desirability of protection afforded officers by such D & O 
Insurance, if any, and by statutory and bylaw indemnification provisions; and

     F.   WHEREAS, in order to induce Officer to continue to serve as an 
officer of Corporation, Corporation has determined and agreed to enter into 
this contract with Officer.

     NOW, THEREFORE, in consideration of Officer's continued service as an 
officer after the date hereof, the parties hereto agree as follows:

     1.   CERTAIN DEFINITIONS.  The following terms used in this Agreement 
shall have the meanings set forth below.  Other terms are defined where 
appropriate in this Agreement.

          (a)  "Disinterested Director" shall mean a director of Corporation 
who is not or was not a party to the Proceeding in respect of which 
indemnification is being sought by Officer.

          (b)  "Expenses" shall include all direct and indirect costs 
(including, without 



limitation, attorneys' fees, retainers, court costs, transcripts, fees of 
experts, witness fees, travel expenses, duplicating costs, printing and 
binding costs, telephone charges, postage, delivery service fees, all other 
disbursements or out-of-pocket expenses and reasonable compensation for time 
spent by Officer for which he or she is otherwise not compensated by 
Corporation) actually and reasonably incurred in connection with a Proceeding 
or establishing or enforcing a right to indemnification under this Agreement, 
applicable law or otherwise; provided, however, that "Expenses" shall not 
include any Liabilities.

          (c)  "Final Adverse Determination" shall mean that a determination 
that Officer is not entitled to indemnification shall have been made pursuant 
to Section 5 hereof and either (i) a final adjudication in a Delaware court 
or decision of an arbitrator pursuant to Section 13(a) hereof shall have 
denied Officer's right to indemnification hereunder, or (ii) Officer shall 
have failed to file a complaint in a Delaware court or seek an arbitrator's 
award pursuant to Section 13(a) for a period of one hundred twenty (120) days 
after the determination made pursuant to Section 5 hereof.

          (d)  "Independent Legal Counsel" shall mean a law firm or member of 
a law firm selected by Corporation and approved by Officer (which approval 
shall not be unreasonably withheld) and that neither is presently nor in the 
past five years has been retained to represent:  (i) Corporation, in any 
material matter, or (ii) any other party to the Proceeding giving rise to a 
claim for indemnification hereunder.  Notwithstanding the foregoing, the term 
"Independent Legal Counsel" shall not include any person who, under the 
applicable standards of professional conduct then prevailing, would have a 
conflict of interest in representing either Corporation or Officer in an 
action to determine Officer's right to indemnification under this Agreement.

          (e)  "Liabilities" shall mean liabilities of any type whatsoever 
including, but not limited to, any judgments, fines, ERISA excise taxes and 
penalties, and penalties and amounts paid in settlement (including all 
interest assessments and other charges paid or payable in connection with or 
in respect of such judgments, fines, penalties or amounts paid in settlement) 
of any proceeding.

          (f)  "Proceeding" shall mean any threatened, pending or completed 
action, claim, suit, arbitration, alternative dispute resolution mechanism, 
investigation, administrative hearing or any other proceeding whether civil, 
criminal, administrative or investigative, including any appeal therefrom.

          (g)  "Change of Control" shall mean the occurrence of any of the 
following events after the date of this Agreement:

               (i)  A change in the composition of the Board of Directors of 
Corporation (the "Board"), as a result of which fewer than two-thirds (2/3) 
of the incumbent directors are directors who either (1) had been directors of 
Corporation twenty-four (24) months prior to such change or (2) were elected, 
or nominated for election, to the Board with the affirmative votes of at 
least a majority of the directors who had been directors of Corporation 24 
months prior to such change and who were still in office at the time of the 
election or 

                                     -2-



nomination; or

               (ii) Any "person" (as such term is used in section 13(d) and 
14(d) of the Securities Exchange Act of 1934, as amended) through the 
acquisition or aggregation of securities is or becomes the beneficial owner, 
directly or indirectly, of securities of Corporation representing twenty 
percent (20%) or more of the combined voting power of Corporation's then 
outstanding securities ordinarily (and apart from rights accruing under 
special circumstances) having the right to vote at elections of directors 
(the "Capital Stock"), except that any change in ownership of Corporation's 
securities by any person resulting solely from a reduction in the aggregate 
number of outstanding shares of Capital Stock, and any decrease thereafter in 
such person's ownership of securities, shall be disregarded until such person 
increases in any manner, directly or indirectly, such person's beneficial 
ownership of any securities of Corporation.

     2.   INDEMNITY OF OFFICER.  Corporation hereby agrees to hold harmless 
and indemnify Officer to the fullest extent authorized or permitted by the 
provisions of the Law, as may be amended from time to time.

     3.   ADDITIONAL INDEMNITY.  Subject only to the exclusions set forth in 
Section 4 hereof, Corporation hereby further agrees to hold harmless and 
indemnify Officer:

          (a)  against any and all legal expenses (including attorneys' 
fees), witness fees, judgments, fines and amounts paid in settlement actually 
and reasonably incurred by Officer in connection with any threatened, pending 
or completed action, suit or proceeding, whether civil, criminal, 
administrative or investigative (including an action by or in the right of 
Corporation) to which Officer is, was or at any time becomes a party, or is 
threatened to be made a party, by reason of the fact that Officer is, was or 
at any time becomes a director, officer, employee or agent of Corporation, or 
is or was serving or at any time serves at the request of Corporation as a 
director, officer, employee or agent of another corporation, partnership, 
joint venture, trust, employee benefit plan or other enterprise; and

          (b)  otherwise to the fullest extent as may be provided to Officer 
by Corporation under the non-exclusivity provisions of the Bylaws of 
Corporation and the Law.

     4.   LIMITATIONS ON ADDITIONAL INDEMNITY.  No indemnity pursuant to 
Section 3 hereof shall be paid by Corporation:

          (a)  except to the extent the aggregate of losses to be indemnified 
thereunder exceeds the sum of such losses for which Officer is indemnified 
pursuant to Section 2 hereof or reimbursed pursuant to any D & O Insurance 
purchased and maintained by Corporation;

          (b)  in respect of remuneration paid to Officer if it shall be 
determined by a final judgment or other final adjudication that such 
remuneration was in violation of law;

          (c)  on account of any action, suit or proceeding in which judgment 
is rendered against Officer for an accounting of profits made from the 
purchase or sale by Officer of 

                                     -3-


securities of Corporation pursuant to the provisions of Section 16(b) of the 
Securities Exchange Act of 1934 and amendments thereto or similar provisions 
of any federal, state or local statutory law;

          (d)  on account of Officer's conduct which is finally adjudged to 
have been knowingly fraudulent or deliberately dishonest, or to constitute 
willful misconduct if such conduct has been established by a judgment or 
other final adjudication adverse to Officer (an "Adverse Judgment");

          (e)  provided there has been no Change of Control, on account of or 
arising in response to any action, suit or proceeding (other than an action, 
suit or proceeding referred to in Section 14(b) hereof) initiated by Officer 
or any of Officer's affiliates against Corporation or any officer, director 
or stockholder of Corporation unless such action, suit or proceeding was 
authorized in the specific case by action of the Board of Directors of 
Corporation;

          (f)  if a final decision by a Court having jurisdiction in the 
matter shall determine that such indemnification is not lawful; or

          (g)  on account of any action, suit or proceeding to the extent 
that Officer is a plaintiff, a counter-complainant or a cross-complainant 
therein (other than an action, suit or proceeding permitted by Section 4(e) 
hereof).

     5.   PROCEDURE FOR DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION.

          (a)  Whenever Officer believes that he or she is entitled to 
indemnification pursuant to this Agreement, Officer shall submit a written 
request for indemnification to Corporation.  Any request for indemnification 
shall include sufficient documentation or information reasonably available to 
Officer to support his or her claim for indemnification.  Officer shall 
submit his or her claim for indemnification within a reasonable time not to 
exceed five years after any judgment, order, settlement, dismissal, 
arbitration award, conviction, acceptance of a plea of nolo contendere or its 
equivalent, final termination or other disposition or partial disposition of 
any Proceeding, whichever is the later date for which Officer requests 
indemnification.  The President or the Secretary or other appropriate officer 
shall, promptly upon receipt of Officer's request for indemnification, advise 
the Board of Directors in writing that Officer has made such a request.  
Determination of Officer's entitlement to indemnification shall be made not 
later than ninety (90) days after Corporation's receipt of his or her written 
request for such indemnification.

          (b)  The Officer shall be entitled to select the forum in which 
Officer's request for indemnification will be heard, which selection shall be 
included in the written request for indemnification required in Section 5(a). 
This forum shall be any one of the following:

               (i)  The stockholders of Corporation;

               (ii) A quorum of the Board of Directors consisting of 
Disinterested 

                                     -4-


Directors;

               (iii)     Independent Legal Counsel, who shall make the 
determination in a written opinion; or

               (iv) A panel of three arbitrators, one selected by 
Corporation, another by Officer and the third by the first two arbitrators 
selected.  If for any reason three arbitrators are not selected within thirty 
(30) days after the appointment of the first arbitrator, then selection of 
additional arbitrators shall be made by the American Arbitration Association. 
 If any arbitrator resigns or is unable to serve in such capacity for any 
reason, the American Arbitration Association shall select his or her 
replacement.  The arbitration shall be conducted pursuant to the commercial 
arbitration rules of the American Arbitration Association now in effect.

               If Officer fails to make such designation, his or her claim 
shall be determined by the forum selected by Corporation.

     6.   PRESUMPTION AND EFFECT OF CERTAIN PROCEEDINGS.  Upon making a 
request for indemnification, Officer shall be presumed to be entitled to 
indemnification under this Agreement and Corporation shall have the burden of 
proof to overcome that presumption in reaching any contrary determination.  
The termination of any Proceeding by judgment, order, settlement, arbitration 
award or conviction, or upon a plea of nolo contendere or its equivalent 
shall not affect this presumption or, except as may be provided in Section 4 
hereof, establish a presumption with regard to any factual matter relevant to 
determining Officer's rights to indemnification hereunder.  If the person or 
persons so empowered to make a determination pursuant to Section 5(b) hereof 
shall have failed to make the requested determination within thirty (30) days 
after any judgment, order, settlement, dismissal, arbitration award, 
conviction, acceptance of a plea of nolo contendere or its equivalent, or 
other disposition or partial disposition of any Proceeding or any other event 
which could enable Corporation to determine Officer's entitlement to 
indemnification, the requisite determination that Officer is entitled to 
indemnification shall be deemed to have been made.

     7.   CONTRIBUTION.  If the indemnification provided in Sections 2 and 3 
is unavailable and may not be paid to Officer for any reason other than those 
set forth in Section 4, then in respect of any threatened, pending or 
completed action, suit or proceeding in which Corporation is or is alleged to 
be jointly liable with Officer (or would be if joined in such action, suit or 
proceeding), Corporation shall contribute to the amount of expenses 
(including attorneys' fees), judgments, fines and amounts paid in settlement 
actually and reasonably incurred and paid or payable by Officer in such 
proportion as is appropriate to reflect (i) the relative benefits received by 
Corporation on the one hand and Officer on the other hand from the 
transaction from which such action, suit or proceeding arose, and (ii) the 
relative fault of Corporation on the one hand and of Officer on the other 
hand in connection with the events which resulted in such expenses, 
judgments, fines or settlement amounts, as well as any other relevant 
equitable considerations. The relative fault of Corporation on the one hand 
and of Officer on the other shall be determined by reference to, among other 
things, the parties' relative intent, knowledge, access to information and 
opportunity to correct or prevent the circumstances resulting in such 
expenses, judgments, 

                                     -5-


fines or settlement amounts.  Corporation agrees that it would not be just 
and equitable if contribution pursuant to this Section 7 were determined by 
pro rata allocation or any other method of allocation which does not take 
account of the foregoing equitable considerations.

     8.   INSURANCE AND FUNDING.  Corporation hereby represents and warrants 
that it shall purchase and maintain insurance to protect itself and/or 
Officer against any Expenses and Liabilities in connection with any 
Proceeding to the fullest extent permitted by the Law.  In the event of a 
Change of Control, Corporation shall establish a letter of credit, as 
provided in Section 9, to ensure the payment of such amounts as may be 
necessary to effect indemnification or advancement of Expenses as provided in 
this Agreement.

     9.   LETTER OF CREDIT.

          (a)  In order to secure the obligations of Corporation to indemnify 
and advance Expenses to Officer pursuant to this Agreement, Corporation shall 
obtain at the time of any Change of Control, upon request of any officer, an 
irrevocable standby letter of credit naming the officers of the Corporation 
in office at the time of a Change of Control as joint beneficiaries (the 
"Letter of Credit").  The Letter of Credit shall be in an appropriate amount 
not less than one million dollars ($1,000,000), shall be issued by a 
commercial bank headquartered in the United States having assets in excess of 
$10 billion and capital according to its most recent published reports equal 
to or greater than the then applicable minimum capital standards promulgated 
by such bank's primary federal regulator and shall contain terms and 
conditions reasonably acceptable to all directors.  The Letter of Credit 
shall provide that Officer may from time to time draw certain amounts 
thereunder, upon written certification by Officer to the issuer of the Letter 
of Credit that (i) Officer has made written request upon Corporation for an 
amount not less than the amount he or she is drawing under the Letter of 
Credit and that Corporation has failed or refused to provide him with such 
amount in full within thirty (30) days after receipt of the request, and (ii) 
Officer believes that he or she is entitled under the terms of this Agreement 
to the amount which he or she is drawing upon under the Letter of Credit.  
The issuance of the Letter of Credit shall not, in any way, diminish 
Corporation's obligation to indemnify Officer against Expenses and 
Liabilities to the full extent required by this Agreement.

          (b)  Once Corporation has obtained the Letter of Credit, 
Corporation shall maintain and renew the Letter of Credit or substitute 
letter of credit meeting the criteria of Section 9(a) during the term of this 
Agreement so that the Letter of Credit shall have an initial term of five 
years, be renewed for successive five-year terms, and always have at least 
one year of its term remaining.

     10.  CONTINUATION OF OBLIGATIONS.  All agreements and obligations of 
Corporation contained herein shall continue during the period Officer is a 
director, officer, employee or agent of Corporation (or is or was serving at 
the request of Corporation as a director, officer, employee or agent of 
another corporation, partnership, joint venture, trust, employee benefit plan 
or other enterprise) and shall continue thereafter so long as Officer shall 
be subject to any possible claim or threatened, pending or completed action, 
suit or proceeding, whether civil, criminal or investigative, by reason of 
the fact that Officer was serving Corporation or such other entity in 

                                      -6-



any capacity referred to herein.

     11.  NOTIFICATION AND DEFENSE OF CLAIM.  Promptly after receipt by 
Officer of notice of the commencement of any action, suit or proceeding, 
Officer will, if a claim in respect thereof is to be made against Corporation 
under this Agreement, notify Corporation of the commencement thereof; but the 
omission so to notify Corporation will not relieve it from any liability 
which it may have to Officer otherwise than under this Agreement. With 
respect to any such action, suit or proceeding as to which Officer notifies 
Corporation of the commencement thereof:

          (a)  Corporation will be entitled to participate therein at its own 
expense;

          (b)  Except as otherwise provided below, to the extent that it may 
wish, Corporation jointly with any other indemnifying party similarly 
notified will be entitled to assume the defense thereof, with counsel 
reasonably satisfactory to Officer.  After notice from Corporation to Officer 
of its election to assume the defense thereof, Corporation will not be liable 
to Officer under this Agreement for any legal or other expenses subsequently 
incurred by Officer in connection with the defense thereof other than 
reasonable costs of investigation or as otherwise provided below.  Officer 
shall have the right to employ his or her own counsel in such action, suit or 
proceeding but the fees and expenses of such counsel incurred after notice 
from Corporation of its assumption of the defense thereof shall be at the 
expense of Officer unless (i) the employment of counsel by Officer has been 
authorized by Corporation, (ii) Officer shall have reasonably concluded that 
there may be a conflict of interest between Corporation and Officer in the 
conduct of the defense of such action or (iii) Corporation shall not in fact 
have employed counsel to assume the defense of such action, in each of which 
cases the fees and expenses of Officer's separate counsel shall be at the 
expense of Corporation.  Corporation shall not be entitled to assume the 
defense of any action, suit or proceeding brought by or on behalf of 
Corporation or as to which Officer shall have made the conclusion provided 
for in (ii) above; and

          (c)  Provided there has been no Change of Control, Corporation 
shall not be liable to indemnify Officer under this Agreement for any amounts 
paid in settlement of any action or claim effected without its written 
consent, which consent shall not be unreasonably withheld.  Corporation shall 
be permitted to settle any action except that it shall not settle any action 
or claim in any manner which would impose any penalty, out-of-pocket 
liability, or limitation on Officer without Officer's written consent.

     12.  ADVANCEMENT AND REPAYMENT OF EXPENSES.

          (a)  In the event that Officer employs his or her own counsel 
pursuant to Section 11(b)(i) through (iii) above, Corporation shall advance 
to Officer, prior to any final disposition of any threatened or pending 
action, suit or proceeding, whether civil, criminal, administrative or 
investigative, any and all reasonable expenses (including legal fees and 
expenses) incurred in investigating or defending any such action, suit or 
proceeding within ten (10) days after receiving copies of invoices presented 
to Officer for such expenses.

          (b)  Officer agrees that Officer will reimburse Corporation for all 
reasonable 

                                     -7-


expenses paid by Corporation in defending any civil or criminal action, suit 
or proceeding against Officer in the event and only to the extent it shall be 
ultimately determined by a final judicial decision (from which there is no 
right of appeal) that Officer is not entitled, under the provisions of the 
Law, the Bylaws, this Agreement or otherwise, to be indemnified by 
Corporation for such expenses.

     13.  REMEDIES OF OFFICER.

          (a)  In the event that (i) a determination pursuant to Section 5 
hereof is made that Officer is not entitled to indemnification, (ii) advances 
of Expenses are not made pursuant to this Agreement, (iii) payment has not 
been timely made following a determination of entitlement to indemnification 
pursuant to this Agreement, or (iv) Officer otherwise seeks enforcement of 
this Agreement, Officer shall be entitled to a final adjudication in an 
appropriate court of his or her rights.  Alternatively, Officer at his or her 
option may seek an award in arbitration to be conducted by a single 
arbitrator pursuant to the commercial arbitration rules of the American 
Arbitration Association now in effect, whose decision is to be made within 
ninety (90) days following the filing of the demand for arbitration.  The 
Corporation shall not oppose Officer's right to seek any such adjudication or 
arbitration award.

          (b)  In the event that a determination that Officer is not entitled 
to indemnification, in whole or in part, has been made pursuant to Section 5 
hereof, the decision in the judicial proceeding or arbitration provided in 
paragraph (a) of this Section 13 shall be made de novo and Officer shall not 
be prejudiced by reason of a determination that he or she is not entitled to 
indemnification.

          (c)  If a determination that Officer is entitled to indemnification 
has been made pursuant to Section 5 hereof or otherwise pursuant to the terms 
of this Agreement, Corporation shall be bound by such determination in the 
absence of (i) a misrepresentation of a material fact by Officer or (ii) a 
specific finding (which has become final) by an appropriate court that all or 
any part of such indemnification is expressly prohibited by law.

          (d)  In any court proceeding pursuant to this Section 13, 
Corporation shall be precluded from asserting that the procedures and 
presumptions of this Agreement are not valid, binding and enforceable.  The 
Corporation shall stipulate in any such court or before any such arbitrator 
that Corporation is bound by all the provisions of this Agreement and is 
precluded from making any assertion to the contrary.

          (e)  Expenses reasonably incurred by Officer in connection with his 
or her request for indemnification under this Agreement, meeting enforcement 
of this Agreement or to recover damages for breach of this Agreement shall be 
borne by Corporation.

          (f)  Corporation and Officer agree herein that a monetary remedy 
for breach of this Agreement, at some later date, will be inadequate, 
impracticable and difficult of proof, and further agree that such breach 
would cause Officer irreparable harm.  Accordingly, Corporation and Officer 
agree that Officer shall be entitled to temporary and permanent injunctive 
relief to 

                                     -8-


enforce this Agreement without the necessity of proving actual damages or 
irreparable harm. The Corporation and Officer further agree that Officer 
shall be entitled to such injunctive relief, including temporary restraining 
orders, preliminary injunctions and permanent injunctions, without the 
necessity of posting bond or other undertaking in connection therewith.  Any 
such requirement of bond or undertaking is hereby waived by Corporation, and 
Corporation acknowledges that in the absence of such a waiver, a bond or 
undertaking may be required by the court.

     14.  ENFORCEMENT.

          (a)  Corporation expressly confirms and agrees that it has entered 
into this Agreement and assumed the obligations imposed on Corporation hereby 
in order to induce Officer to continue as an officer of Corporation, and 
acknowledges that Officer is relying upon this Agreement in continuing in 
such capacity.

          (b)  In the event Officer is required to bring any action to 
enforce rights or to collect moneys due under this Agreement and is 
successful in such action, the Corporation shall reimburse Officer for all of 
Officer's reasonable fees and expenses in bringing and pursuing such action.

     15.  SEPARABILITY.  Each of the provisions of this Agreement is a 
separate and distinct agreement and independent of the others, so that if any 
or all of the provisions hereof shall be held to be invalid or unenforceable 
to any extent for any reason, such invalidity or unenforceability shall not 
affect the validity or enforceability of the other provisions hereof, or the 
obligation of the Corporation to indemnify the Officer to the full extent 
provided by the Bylaws or the Law, and the affected provision shall be 
construed and enforced so as to effectuate the parties' intent to the maximum 
extent possible.

     16.  GOVERNING LAW.  This Agreement shall be governed by and interpreted 
and enforced in accordance with the internal laws of the State of Delaware.

     17.  CONSENT TO JURISDICTION.  The Corporation and Officer each 
irrevocably consent to jurisdiction of the courts of the State of Delaware 
for all purposes in connection with any action or proceeding which arises out 
of or relates to this Agreement and agree that any action instituted under 
this Agreement shall be brought only in the state courts of the State of 
Delaware.

     18.  BINDING EFFECT.  This Agreement shall be binding upon Officer and 
upon Corporation, its successors and assigns, and shall inure to the benefit 
of Officer, his or her heirs, executors, administrators, personal 
representatives and assigns and to the benefit of Corporation, its successors 
and assigns.

     19.  ENTIRE AGREEMENT.  This Agreement represents the entire agreement 
between the parties hereto and there are no other agreements, contracts or 
understandings between the parties hereto with respect to the subject matter 
of this Agreement, except as specifically referred to herein.  This Agreement 
supersedes any and all agreements regarding indemnification heretofore 

                                     -9-


entered into by the parties.

     20.  AMENDMENT AND TERMINATION.  No amendment, modification, waiver, 
termination or cancellation of this Agreement shall be effective for any 
purpose unless set forth in writing signed by both parties hereto.

     21.  SUBROGATION.  In the event of payment under this agreement, 
Corporation shall be subrogated to the extent of such payment to all of the 
rights of recovery of Officer, who shall execute all documents required and 
shall do all acts that may be necessary to secure such rights and to enable 
Corporation effectively to bring suit to enforce such rights.

     22.  NON-EXCLUSIVITY OF RIGHTS.  The rights conferred on Officer by this 
Agreement shall not be exclusive of any other right which Officer may have or 
hereafter acquire under any statute, provision of Corporation's Certificate 
of Incorporation or Bylaws, agreement, vote of stockholders or directors, or 
otherwise, both as to action in his official capacity and as to action in 
another capacity while holding office.

     23.  SURVIVAL OF RIGHTS.  The rights conferred on Officer by this 
Agreement shall continue after Officer has ceased to be a director, officer, 
employee or other agent of Corporation or such other entity.

     24.  NOTICES.  All notices, requests, demands and other communications 
hereunder shall be in writing and shall be addressed to Officer or to 
Corporation, as the case may be, at the address shown on page 1 of this 
Agreement, or to such other address as may have been furnished by either 
party to the other, and shall be deemed to have been duly given if (i) 
delivered by hand and receipted for by the party to whom said notice or other 
communication shall have been directed, or (ii) mailed by certified or 
registered mail with postage prepaid, on the third business day after the 
date on which it is so mailed.

                                      -10-


     IN WITNESS WHEREOF, the parties hereto have executed this Agreement on 
and as of the day and year first above written.

Officer:                      APPLIED DIGITAL ACCESS, INC.



                              By:
- ----------------------------     -------------------------------------------
                                   (Signature)



- ----------------------------     -------------------------------------------
Print Name                         Print Name and Title




                                     -11-

EX-10.45

                                       
                  1994 Employee Stock Purchase Plan, as Amended

                           APPLIED DIGITAL ACCESS, INC.

                        1994 EMPLOYEE STOCK PURCHASE PLAN



     I.        PURPOSE

          This Applied Digital Access, Inc. 1994 Employee Stock Purchase Plan 
(the "Plan") is intended to provide Qualifying Employees with the opportunity 
to acquire a proprietary interest in the Company by accumulating amounts for 
the Employee's Account through payroll deductions and the periodic 
application of such amounts to the purchase of shares of the Company's Common 
Stock.

     II.       DEFINITIONS

          For purposes of plan administration, the following terms shall have 
the meanings indicated:

          ACT shall mean the Securities Act of 1933 (as amended).

          ACCOUNT means the amount held for the benefit of a Participant 
hereunder which Account will be increased by any payroll deductions from the 
Participant and will be decreased by amounts applied to the purchase of 
shares or refunded to or for the benefit of the Participant hereunder.

          BOARD means the Company's Board of Directors.

          CODE means the Internal Revenue Code of 1986, as amended from time 
to time.

          COMMON STOCK means shares of the Company's Common Stock.

          COMPANY means Applied Digital Access, Inc., a California 
corporation, and any corporate successor to all or substantially all of the 
assets or voting stock of Applied Digital Access, Inc. which adopts the Plan.

          CORPORATE AFFILIATE means any company which is a parent or 
subsidiary corporation of the Company (as determined in accordance with Code 
Section 424), including any parent or subsidiary corporation which becomes 
such after the Effective Date.

          EFFECTIVE DATE means the first day of the term of this Plan as set 
forth in Article XI.A, which term is scheduled to commence upon the effective 
date of the S-8 Registration Statement covering the shares of Common Stock 
issuable under the Plan.  However, for any Corporate Affiliate which becomes 
a Participating Company in the Plan after the first day of the initial option 
period, a subsequent Effective Date shall be designated with respect to 
participation by its Qualifying Employees.

          ENTRY DATE means the date on which a Participant first joins the 
option period in effect under the Plan.

          PARTICIPANT means any Qualifying Employee of a Participating 
Company who has enrolled and is actively participating in the Plan.

          PARTICIPATING COMPANY means the Company and any Corporate Affiliate 
designated from time to time by the Board.

                                     


          QUALIFYING EMPLOYEE means any person who is engaged, on a 
regularly-scheduled basis of more than twenty (20) hours per week and more 
than five (5) months per calendar year, in the rendition of personal services 
to the Company, or any Participating Company in exchange for amounts which 
constitute wages under Section 3121(a) of the Code, provided that no person 
who owns (within the meaning of Code Section 424(d)) or holds outstanding 
options or other rights to purchase stock possessing five percent (5%) or 
more of the total combined voting power or value of all classes of stock of 
the Company or any of its Corporate Affiliates shall be a Qualifying 
Employees.

          QUARTER means a calendar quarter and (except for the first Quarter 
of the initial option period or as otherwise designated by the Plan 
Administrator), each Quarter shall begin on the first business day of the 
Quarter and shall end on the last business day of such Quarter.  The first 
Quarter of the initial option period under this Plan shall commence on the 
Effective Date and shall end on June 30, 1994.

          REGULAR COMPENSATION means the basic earnings paid to a Participant 
by Participating Companies plus (i) any pre-tax contributions made by the 
Participant to any Code Section 401(k) salary deferral plan or any Code 
Section 125 cafeteria benefit program (now existing or hereafter 
established), (ii) commissions, and (iii) bonuses payable pursuant to any 
formal bonus plan which has been approved and adopted by the Board.  Regular 
Compensation shall not include (I) overtime payments, profit-sharing 
distributions and other incentive-type payments or (II) contributions (other 
than Code Section 401(k) or Code Section 125 contributions) made on the 
Participant's behalf under any employee benefit or welfare plan (now existing 
or hereafter established).

          SERVICE means the period during which an individual remains a 
Qualifying Employee and all periods of Service shall be measured from such 
individual's most recent date of hire by the Company or such Corporate 
Affiliate.

     III.      ADMINISTRATION

          The Plan shall be administered by a committee comprised of two (2) 
or more non-employee Board members appointed from time to time by the Board 
(the "Plan Administrator").  The Plan Administrator shall have full authority 
to administer the Plan, including authority to interpret and construe any 
provision of the Plan.  Decisions of the Plan Administrator shall be final 
and binding on all parties who have an interest in the Plan.

     IV.       OPTION PERIODS

          A.        Shares of Common Stock shall be offered for purchase 
under the Plan through a series of successive option periods during the term 
of the Plan until the maximum number of shares of Common Stock available for 
issuance under the Plan shall have been issued.

          B.        The initial option period will begin on the Effective 
Date and will end on the last business day in December, 1995.  Subsequent 
option periods will coincide with calendar years.

          C.        Each Participant will have purchase rights as set forth 
in Article VII for each option period, the purchase price for which shall be 
collected through payroll deductions and which purchase rights shall be 
exercised in successive installments each Quarter within the option period.

          D.        The acquisition of Common Stock through participation in 
the Plan for any option period shall neither limit nor require the 
acquisition of Common Stock by the Participant in any subsequent option 
period.

                                      


     V.        ELIGIBILITY AND PARTICIPATION

          A.        Each Qualifying Employee shall be eligible to participate 
in an option period under the Plan in accordance with the following 
provisions:

          -    All Qualifying Employees on the Effective Date may enter the 
     initial option period on the Effective Date by enrolling in accordance 
     with Section V.C below.

          -    A Qualifying Employee with at least three (3) months of 
     Service on the first day of any subsequent option period may enter that 
     option period on such first day by enrolling in accordance with Section 
     V.C below.

          -    A Qualifying Employee who was not previously eligible to
     enter an option period may enter that option period on the first day
     of the Quarter next following the date such Qualifying Employee has at
     least three (3) months of Service by enrolling in accordance with
     Section V.C below.

          B.        A Qualifying Employee who does not enroll for an option 
period on the first date such Qualifying Employee is permitted to enroll 
hereunder may not subsequently enroll in that option period.

          C.        To enroll in the Plan, a Qualifying Employee must 
complete the enrollment forms prescribed by the Plan Administrator and file 
such forms with the Plan Administrator (or its designate) on or before the 
date such Qualifying Employee is first permitted to enter the Option Period.

          D.        The payroll deduction authorized by the Participant for 
purposes of acquiring shares of Common Stock under the Plan may be any 
multiple of one percent (1%) of the Regular Compensation paid to the 
Participant during each Quarter of the option period, up to a maximum of 
fifteen percent (15%) of Regular Compensation.  The deduction rate so 
authorized shall continue in effect for the remainder of the option period, 
except to the extent such rate is changed in accordance with the following 
guidelines:

               -    The Participant may, at any time during a Quarter,
     reduce the rate of payroll deduction.  Such reduction shall become
     effective as soon as possible after filing of the requisite reduction
     form with the Plan Administrator (or its designate), but the
     Participant may not effect more than one such reduction during the
     same Quarter.

               -    The Participant may, prior to the commencement of any
     new Quarter within the option period, increase or decrease the rate of
     payroll deduction for the new Quarter by filing the appropriate form
     with the Plan Administrator (or its designate).  The new rate shall
     become effective as of the first day of the next Quarter.

               Payroll deductions will automatically cease upon the 
termination of the Participant's purchase right in accordance with the 
applicable provisions of Section VII below.



     VI.       STOCK SUBJECT TO PLAN

          A.        The maximum number of shares of Common Stock which may be 
issued under the Plan shall be 300,000 shares of Common Stock (subject to 
adjustment under Section VI.B below).

          B.        In the event any change is made to the Company's 
outstanding Common Stock by reason of any stock dividend, stock split, 
combination of shares or other change affecting such outstanding Common Stock 
as a class without receipt of consideration, then appropriate adjustments 
shall be made by the Plan Administrator to (i) the class and maximum number 
of shares issuable over the term of the Plan, (ii) the class and maximum 
number of shares purchasable per Participant during any one option period and 
(iii) the class and number of shares and the price per share in effect under 
each purchase right at the time outstanding under the Plan.  Such adjustments 
shall be designed to preclude the dilution or enlargement of rights and 
benefits under the Plan.

     VII.      PURCHASE RIGHTS

          Each Participant in a particular option period shall have the right 
to purchase shares of Common Stock in a series of successive quarterly 
installments during such option period on the terms and conditions set forth 
below (the "Purchase Rights").  Each Participant shall execute a purchase 
agreement embodying such terms and conditions and such other provisions (not 
inconsistent with the Plan) as the Plan Administrator may require.

          PURCHASE PRICE.  The Purchase Rights shall be exercised at the end 
of each Quarter at a purchase price equal to eighty-five percent (85%) of the 
LOWER of (i) the fair market value per share of the Common Stock on the 
Participant's Entry Date or (ii) the fair market value per share of the 
Common Stock on the last business day of the Quarter.  However, for each 
Participant whose Entry Date is other than the first day of the option 
period, the amount determined under clause (i) shall not be less than the 
fair market value of the Common Stock on the first day of such option period.

          VALUATION.  For purposes of determining the fair market value per 
share of Common Stock on any relevant date, the following procedures shall be 
in effect:

          -    If fair market value is to be determined on or after the
          date the Common Stock is first registered under Section 12(g) of
          the Securities Exchange Act of 1934, then the fair market value
          shall be the closing selling price on that date, as officially
          quoted on the NASDAQ National Market System, or if there is no
          quoted selling price for such date, then the closing selling
          price on the next preceding day for which there does exist such a
          quotation.

          -    If fair market value is to be determined prior to such
          Section 12(g) registration of the Common Stock, then the fair
          market value of the Common Stock on such date shall be determined
          by the Plan Administrator after taking into account such factors
          as the Plan Administrator deems appropriate.

          NUMBER OF PURCHASABLE SHARES.  The number of shares purchasable by 
a Participant each Quarter shall be the number of whole shares obtained by 
dividing the amount in Participant's Account at the end of such Quarter by 
the purchase price in effect for the Quarter.

          Notwithstanding the above, no Participant shall have the right to 
purchase shares of Common Stock to the extent that, immediately after the 
grant, such Participant would own (within the meaning of Code Section 424(d)) 
or hold outstanding options or other rights to purchase, stock possessing 
five 

                                       


percent (5%) or more of the total combined voting power or value of all 
classes of stock of the Company or any of its Corporate Affiliates.

          PAYMENT.  Payment for the Common Stock purchased under the Plan 
shall be effected by means of the Participant's authorized payroll 
deductions.  Such deductions shall begin on the first pay day coincident with 
or immediately following the Participant's Entry Date into the option period 
and shall (unless sooner terminated by the Participant) continue through the 
pay day ending with or immediately prior to the last day of the option 
period.  The amounts so collected shall be credited to the Participant's 
Account under the Plan, but no interest shall be paid on the balance from 
time to time outstanding in such Account.  The amounts collected from a 
Participant may be commingled with the general assets of the Company and may 
be used for general corporate purposes.

          TERMINATION OF PURCHASE RIGHT.  The following provisions shall 
govern the termination of outstanding purchase rights:

               (i)    A Participant may, at any time prior to the last five 
     (5) business days of the Quarter, terminate his/her outstanding purchase 
     right under the Plan by filing the prescribed notification form with the 
     Plan Administrator (or its designate).  No further payroll deductions 
     shall be collected from the Participant with respect to the terminated 
     purchase right, and any payroll deductions collected for the current 
     Quarter shall, at the Participant's election, be immediately refunded or 
     held for the purchase of shares on the end of the Quarter. If no such 
     election is made, then such funds shall be refunded as soon as possible 
     after the close of such Quarter.

               (ii)   After the termination of purchase rights for an option 
     period, the Participant may not subsequently rejoin that option period.  
     In order to resume participation in any subsequent option period, such 
     individual must re-enroll in the Plan for that option period.

               (iii)  If a Participant ceases to be a Qualifying Employee for 
     any reason whatsoever during an option period then all payroll 
     deductions shall terminate and all funds held in the Participant's 
     Account will be promptly paid to the Participant or the Participant's 
     legal representative.  No further purchases of shares hereunder shall 
     occur after the Participant has ceased to be a Qualifying Employee.

               (iv)   A Participant may withdraw all or any portion of the 
     payroll deductions credited to his or her Plan account and not 
     previously applied toward the purchase of Common Stock by delivering to 
     the Company's designated office a written notice on a form provided by 
     the Company for such purpose.  A Participant who withdraws the entire 
     remaining balance in his/her Plan Account pursuant to this paragraph 
     shall be deemed to have terminated his/her purchase right for the option 
     period.  Amounts withdrawn shall be returned to the Participant as soon 
     as practicable after the withdrawal and may not be applied to the 
     purchase of shares in any offering period under the Plan.  The Company 
     may from time to time establish or change limitations on the frequency 
     of withdrawals permitted under this paragraph, establish a minimum 
     dollar amount that must be retained in the Participant's Account, or 
     terminate the withdrawal right provided by this paragraph.

          STOCK PURCHASE.  Subject to the limitations set forth herein, funds 
held in a Participant's Account at the end of a Quarter (and which are not 
required to be refunded hereunder) shall be applied to the purchase of whole 
shares of Common Stock for the Participant on the last business day of the 
Quarter at the purchase price in effect for such Quarter.  Any payroll 
deductions not applied to such purchase because they are not sufficient to 
purchase a whole share shall be held for the purchase of Common Stock in the 
next 



Quarter.  Any payroll deductions not applied to the purchase of Common Stock 
for any other reason shall be promptly refunded to the Participant.

          PRORATION OF PURCHASE RIGHTS.  If the total number of shares of 
Common Stock which would otherwise be purchased hereunder on any date exceed 
the number of shares then available for issuance under the Plan, the Plan 
Administrator shall make a pro-rata allocation of the available shares to 
Participants on a uniform and nondiscriminatory basis.

          RIGHTS AS SHAREHOLDER.  A Participant shall have no shareholder 
rights with respect to the shares subject to his/her outstanding purchase 
right until the shares are actually purchased on the Participant's behalf in 
accordance with the applicable provisions of the Plan.  No adjustments shall 
be made for dividends, distributions or other rights for which the record 
date is prior to the date of such purchase.

          A Participant shall be entitled to receive, as soon as practicable 
after purchase hereunder, a stock certificate for the number of shares 
purchased for the Participant.  Such certificate may, upon the Participant's 
request, be issued in the names of the Participant and his/her spouse as 
community property or as joint tenants with right of survivorship.

          ASSIGNABILITY.  No purchase right granted under the Plan shall be 
assignable or transferable by the Participant other than by will or by the 
laws of descent and distribution following the Participant's death, and 
during the Participant's lifetime the purchase right shall be exercisable 
only by the Participant.

          CHANGE IN OWNERSHIP.  Should the Company or its shareholders enter 
into an agreement to dispose of all or substantially all of the assets or 
outstanding capital stock of the Company by means of:

               (i)  a sale, merger or other reorganization in which the
     Company will not be the surviving corporation (other than a
     reorganization effected primarily to change the State in which the
     Company is incorporated), or

               (ii) a reverse merger in which the Company is the surviving
     corporation but in which more than 50% of the Company's outstanding
     voting stock is transferred to holders different from those who held
     the stock immediately prior to the reverse merger,

          then all outstanding purchase rights under the Plan shall 
automatically be exercised immediately prior to the consummation of such 
sale, merger, reorganization or reverse merger by applying the amounts in 
each Participant's Account to the purchase of whole shares of Common Stock at 
eighty-five percent (85%) of the LOWER of (i) the fair market value of the 
Common Stock on the Participant's Entry Date into the option period in which 
such transaction occurs or (ii) the fair market value of the Common Stock 
immediately prior to the consummation of such transaction.  However, the 
applicable share limitations of Articles VII and VIII shall continue to apply 
to any such purchase, and the clause (i) amount above shall not, for any 
Participant whose Entry Date for the option period is other than the start 
date of such option period, be less than the fair market value of the Common 
Stock on such start date.

          The Company shall use its best efforts to provide at least ten 
(10)-days advance written notice of the occurrence of any such sale, merger, 
reorganization or reverse merger, and Participants shall, following the 
receipt of such notice, have the right to terminate their outstanding 
purchase rights in accordance with the applicable provisions of this Article 
VII.

     VIII.          ACCRUAL LIMITATIONS



          A.        No Participant shall be entitled to accrue rights to 
acquire Common Stock pursuant to any purchase right outstanding under this 
Plan if and to the extent such accrual, when aggregated with (I) rights to 
purchase Common Stock accrued under any other purchase right outstanding 
under this Plan and (II) similar rights accrued under other employee stock 
purchase plans (within the meaning of Section 423 of the Code) of the Company 
or its Corporate Affiliates, would otherwise permit such Participant to 
purchase more than $25,000 worth of stock of the Company or any Corporate 
Affiliate (determined on the basis of the fair market value of such stock on 
the date or dates such rights are granted to the Participant) for each 
calendar year such rights are at any time outstanding.

          B.        For purposes of applying such accrual limitations, the 
right to acquire Common Stock pursuant to each purchase right outstanding 
under the Plan shall accrue as follows:

                    (i)   The right to acquire Common Stock under each such
     purchase right shall accrue in a series of successive quarterly
     installments as and when the purchase right first becomes exercisable
     for each quarterly installment on the last business day of each
     Quarter for which the right remains outstanding.

                    (ii)  No right to acquire Common Stock under any
     outstanding purchase right shall accrue to the extent the Participant
     has already accrued in the same calendar year the right to acquire
     $25,000 worth of Common Stock (determined on the basis of the fair
     market value on the date or dates of grant) pursuant to one or more
     purchase rights held by the Participant during such calendar year.

                    (iii) If by reason of such accrual limitations, any
     purchase right of a Participant does not accrue for a particular
     Quarter, then the payroll deductions which the Participant made during
     that Quarter with respect to such purchase right shall be promptly
     refunded.

          C.        In the event there is any conflict between the provisions 
of this Article VIII and one or more provisions of the Plan or any instrument 
issued thereunder, the provisions of this Article VIII shall be controlling.

     IX.       STATUS OF PLAN UNDER FEDERAL TAX LAWS

          The Plan is designed to qualify as an employee stock purchase plan 
under Code Section 423.

     X.        AMENDMENT AND TERMINATION

          A.        The Board may alter, amend, suspend or discontinue the 
Plan following the close of any Quarter.  However, the Board may not, without 
the approval of the Company's shareholders:

               (i)   materially increase the number of shares issuable under 
     the Plan or the maximum number of shares which may be purchased per 
     Participant during any one option period under the Plan, except that the 
     Plan Administrator shall have the authority, exercisable without such 
     stockholder approval, to effect adjustments to the extent necessary to 
     reflect changes in the Company's capital structure pursuant to Section 
     VI.B;

               (ii)  alter the purchase price formula so as to reduce the 
     purchase price payable for the shares issuable under the Plan; or



               (iii) materially increase the benefits accruing to 
     Participants under the Plan or materially modify the requirements for 
     eligibility to participate in the Plan.

          B.        The Company shall have the right, exercisable in the sole 
discretion of the Plan Administrator, to terminate all outstanding purchase 
rights under the Plan immediately following the close of any Quarter.  Should 
the Company elect to exercise such right, then the Plan shall terminate in 
its entirety.  No further purchase rights shall thereafter be granted or 
exercised, and no further payroll deductions shall thereafter be collected, 
under the Plan.

     XI.       GENERAL PROVISIONS

          A.        The term of this Plan shall commence on the effective 
date of the S-8 Registration Statement covering the common stock issuable 
under the Plan, PROVIDED that the term shall not commence, and no shares of 
Common Stock shall be issued hereunder, until (i) the Plan shall have been 
approved by the shareholders; (ii) the Company shall have complied with all 
applicable requirements, all applicable listing requirements of any 
securities exchange on which shares of the Common Stock are listed and all 
other applicable requirements established by law or regulation and the Plan 
Administrator shall have determined to commence granting Purchase Rights 
hereunder.  In the event shareholder approval is not obtained, or Company 
compliance with the Act is not effected, within twelve (12) months after the 
date on which the Plan is adopted by the Board, the Plan shall terminate and 
have no further force or effect.

          B.        The Plan shall terminate on December 31, 2003.

          C.        All costs and expenses incurred in the administration of 
the Plan shall be paid by the Company.

          D.        Neither the action of the Company in establishing the 
Plan, nor any action taken under the Plan by the Board or the Plan 
Administrator, nor any provision of the Plan itself shall be construed so as 
to grant any person the right to remain in the employ of the Company or any 
Corporate Affiliate for any period, and such person's employment may be 
terminated at any time, with or without cause.

EX-10.46

APPLIED DIGITAL ACCESS                                            CONFIDENTIAL
                                                          
                     MANAGEMENT TEAM INCENTIVE COMPENSATION PLAN

                                                   rev 3:    February 13, 1997


PURPOSE:  The Management Team Incentive Compensation Plan identifies a portion
of the total compensation of each participant as "at risk" compensation.  Total
compensation includes both base salary and "at risk" compensation.


REVIEW AND APPROVAL:  This plan has been approved by the CEO and the
Compensation Committee of the Board of Directors.


PHILOSOPHY:  People in the company should be compensated in proportion to:
             - their personal contribution and success, 
             - the contribution and success of their department, 
             - the contribution and success of their business unit, and 
             - the success of the entire company.

The amount of "at risk" compensation should be proportional to management level
in the company.

The proportion of the "at risk" compensation element that is dependent on
company performance should be proportional to management level in the company.

Measurements must be simple and quantitative against agreed upon objectives.

Company and business unit objectives are set at the beginning of the fiscal year
and remain unchanged for the entire year.

Department objectives should be reviewed quarterly and modified to reflect
changing business conditions.


PARTICIPANTS in the Plan are designated by the CEO and approved by the
Compensation Committee, and include the President/CEO, Officers, Business
Unit General Managers, Vice Presidents, Directors, Managers, and Supervisors.

People who become participants during the year shall have the amount they may
earn under the plan prorated according to their time in the plan.


AMOUNT OF COMPENSATION AT RISK:  The percentage of base salary that comprises
"at risk" compensation is:         

               CEO                 50%       

CONFIDENTIAL     MIC                                                         1



               Officers - BUGM          40%
               Officers - Dept Head     40%
               VP (non officer)         35%
               Directors                30%
               Managers                 25%
               Supervisors              20%

Base salary is the participant's salary at the start of the fiscal year.


SETTING OBJECTIVES - Objectives fall into four categories: department, business
unit, company, and individual/discretionary.  Objectives will be set at the
beginning of each fiscal year in discussions between the participant and manager
based on company objectives set in company planning sessions.  Additional
objectives may be added during the year.  All objectives will be approved by the
CEO and may be reviewed by the Compensation Committee.

Future department objectives and performance against previously set objectives
will be reviewed each quarter.    


WEIGHTING OBJECTIVES - The weighting of each category of objective is:



                      % of base      % of incentive compensation based on:
                      at risk        company       business unit   department   individual
                                                                 
CEO                      50%          100%               --             --           --
Officers - BUGM          40%           40%               30%            --           30%
Officers - Dept Head     40%           30%               20%            20%          30%
VP (non officer)         35%           30%               20%            20%          30%
Directors                30%           20%               30%            20%          30%
Managers                 25%           20%               20%            30%          30%
Supervisors              20%           20%               20%            30%          30%


Within categories, each objective shall be weighted to reflect importance to
company success.  Quality shall be emphasized in weighting objectives.


EVALUATING PERFORMANCE AGAINST OBJECTIVES:  Accomplishments against objectives
will be determined in a quarterly review.  A quantitative determination of
accomplishment against each objective will be made and a percent score assigned
to each objective.  Each score will be multiplied by its weighting factor.  The
sum of the weighted scores in the 'company', 'business unit', and 'department'
categories multiplied by the participant's base salary shall determine the
amount earned in each category.  

CONFIDENTIAL     MIC                                                         2



The amount earned in the 'individual/discretionary' category shall be determined
by the individual's immediate supervisor as part of the individual's performance
appraisal.

The sum of the company, business unit, department, and individual/discretionary
categories shall be the total entitlement.


PAYMENTS:   A determination of the amount of "at risk" compensation earned 
will be made at the end of each quarter.  These determinations will be 
approved by the CEO and the Compensation Committee.  A payment equal to 1/2 
of the earned amount in the 'company', 'business unit', and 'department' 
categories will be made to each participant after release of earnings for the 
quarter.  The remainder of the 'company', 'business unit', and 'department' 
payments and all of the discretionary payment will be held until the close of 
the year when yearly results are available.  The amount payable at the end of 
the year will be determined by total year results.


PARTICIPANTS MUST BE EMPLOYED BY THE COMPANY ON THE DAY OF ANY PAYMENT IN ORDER
TO BE ELIGIBLE FOR THAT PAYMENT. 


COMPANY AND BUSINESS UNIT OBJECTIVES:   Company and business unit objectives
shall be established each year.  Additional objectives may be added during the
year.  Company and business unit objectives shall not change during the year.  

Quantitative objectives may include:  Revenue, Bookings, Gross Margin, 
Operating Income, and Earnings per Share (EPS).

Strategic objectives may include:  Product introduction schedules, and account
capture.


DEPARTMENT OBJECTIVES:   Department objectives shall be established each year,
and modified each quarter to reflect changed business conditions.  Department
objectives shall include quality of the products (output) of each department. 
In addition, the following objectives shall be included:

     Engineering:        Product development schedules
                         Quality of developed products

     Operations:         Gross Margin
                         Inventory turns
                         Product ship schedules
                         Product quality

     Finance:            Quality of financial reports/analyses
                         Control of assets

CONFIDENTIAL     MIC                                                         3



     Marketing:          Bookings - established and new products 
                         Product introduction schedules
                         Customer and product support

     Sales:              In accordance with the Sales Compensation Plan


FINANCIAL OBJECTIVES:   Accomplishments against company and business unit
financial objectives may be determined by the company's unaudited financial
results as approved by the Board of Directors at its January meeting. 
Adjustments, if any, may be made after completion of the annual audit.  

Revenue and bookings elements will be scored linearly from zero at 80% of plan
to a maximum of 150 at 110% of plan.   The operating income element will be
scored linearly from zero at 95% of plan OI percentage to 100 at 100% of plan OI
percentage,  then linearly to a score of 150 at 105% of plan OI percentage.  
Elements shall be evenly weighted in determining the company score.


STRATEGIC OBJECTIVES:   Strategic objectives may be established that include
quantitative and qualitative measurements.  The achievement criteria in each
case shall be established as quantitatively as possible.


SCORING OF ACHIEVEMENT AGAINST DEPARTMENT OBJECTIVES:
SCHEDULE OBJECTIVES:   Achievement against schedule shall be measured according
to the following formula:

          score = [ 1 - (2 x time late)/schedule time]

ex:  if the task measured was 5 weeks late on a schedule that originally was 20
weeks long, the score would be:

          score = [ 1 - ( 2 x 5 weeks)/20 weeks] = 50%

It is possible to score higher than 100% if the task is completed ahead of
schedule.
OTHER OBJECTIVES:   Measurements of accomplishments against objectives will be
set by each department head with the approval of the CEO.  These measures will
link measurable performance with a numeric score.  Examples of these
measurements include:

Quality:             percent of modules returned within 120 days
                     number of problems discovered after shipment or 
                     installation
     
Response time:       average time to respond to customer requests      

CONFIDENTIAL     MIC                                                         4



Delivery schedules:  actual delivery time versus customer requested delivery 
                     time.

Asset control:       book to physical inventory variances, numbers of items in
                     error and dollars difference.

Other measures shall be developed as appropriate and as agreed to by the
business unit GM, department head and the CEO.


CONTINUOUS IMPROVEMENT:    The objective for each measured element of
performance shall be raised from time to time to improve performance in each
area.

CONFIDENTIAL     MIC                                                         5

EX-23.1

                                  Exhibit 23.1

                        Consent of independent accountants




We consent to the incorporation by reference in the Registation Statement of 
Applied Digital Access, Inc. on Form S-8 of our report dated January 23, 1998 
on our audits of the financial statements and financial statement schedule of 
Applied Digital Access, Inc. as of December 31, 1997 and 1996, and for the 
years ended December 31, 1997, 1996 and 1995, which report is included in the 
Annual Report on Form 10-K of Applied Digital Access, Inc. for the year ended 
December 31, 1997.




COOPERS & LYBRAND L.L.P.

San Diego, California
March 31, 1998

EX-27.1

 


<ARTICLE> 5
<MULTIPLIER> 1,000
       
                             
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                          DEC-31-1997
<PERIOD-START>                             JAN-01-1997
<PERIOD-END>                               DEC-31-1997
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