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

FORM 10-K/A
AMENDMENT NO. 2 TO FORM 10-K

(Mark One)

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

For the fiscal year ended December 27, 1997

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

For the transition period from _______ to _______

Commission File Number 0-23263

EXCEL SWITCHING CORPORATION
---------------------------
(Exact name of registrant as specified in its charter)

Massachusetts 04-2992806
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

255 INDEPENDENCE DRIVE
----------------------
HYANNIS, MASSACHUSETTS 02601
----------------------------
(Address of principal executive offices) (Zip code)

(508) 862-3000
--------------
(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,
$.01 par value

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 Registrant's Common Stock, $.01 par value,
held by non-affiliates of the Registrant as of September 1, 1998 was
$118,175,644 based on the price of $18.75 on that date as reported on the Nasdaq
National Market. As of September 1, 1998, 33,551,472 shares of the
Registrant's Common Stock, $.01 par value, were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

(1) Specified portions of the Company's Proxy Statement, which is expected to
be filed within 120 days after the end of the Company's fiscal year, are
incorporated by reference into Part III (Items 10, 11, 12 and 13) of this
Report.

This Amendment No. 2 on Form 10-K/A to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 27, 1997 (the "Report") is being filed
to amend and restate Item 7 to the Report. Such Item 7 is hereby amended and
restated in its entirety. The other exhibits to the Report are not being
amended and have been previously filed with the Securities and Exchange
Commission with the Report.

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

The following discussion and analysis should be read in conjunction with "Item
1. Business", "Item 6. Selected Financial Data", the Company's Consolidated
Financial Statements and Notes thereto and the information described under the
caption "Risk Factors" below.

OVERVIEW

Excel Switching Corporation ("Excel" or the "Company") has been profitable
since it was founded in 1988 and has financed its operations principally through
cash generated from operations. The Company has experienced significant revenue
growth resulting, in part, from the increasing acceptance of programmable
switching as a means of addressing the enhanced services and wireless and
wireline infrastructure needs of network providers. The Company designed and
shipped its first programmable switching product, the XLDX, during the fourth
quarter of 1988, to Comverse Network Systems (formerly Boston Technology, Inc.)
("Comverse"). Excel subsequently expanded its product offering to include a
family of open, programmable switching platforms. The LNX and PCX switching
platforms were introduced in 1991 and have been subsequently enhanced. The
Company introduced the EXS switching system in 1995 and the CSN switching
platform in 1996. Through December 27, 1997, the Company's revenues have been
derived from sales to application developers, OEMs and systems integrators.

During the early years of the Company's operations, revenues from Comverse
represented substantially all of the Company's annual revenues. The Company has
continued to establish customer relationships with other application developers,
OEMs and systems integrators, penetrate new markets, and improve the capacity,
functionality and features of its family of products. Currently, Excel sells its
products to over 130 customers engaged in a variety of segments of the global
telecommunications industry. During 1997, Comverse represented approximately
26.0% of the Company's revenues.

The Company's products are sold through its direct sales force primarily to
application developers, OEMs and systems integrators which incorporate the
Company's products into their service and product offerings. The Company sells
each of its switching platforms with a varying combination of network interface
line cards and service resource cards that are specified by customer and
application requirements. The Company also sells additional network interface
line cards and service resource cards that allow customers to expand capacity
and functionality and provide for redundancy of their installed systems.

Revenues from product sales are recognized upon shipment, at which time the
Company provides an estimate of anticipated post sale support, warranty costs
and sales returns. The increase in the reserve for sales returns can be
attributed to the volume increase in sales, the timing and significance of new
product introductions and the increased complexity of the uses of the Company's
equipment. In addition, the Company estimates reserves to adjust for the
realizability of accounts receivable and inventory. While the Company believes
its estimates for post sale support, warranty costs, sales returns and the
realizability of accounts receivable and inventory are adequate, actual results
could differ from those estimates.

Revenues from sales of software development tools and services such as
technical support, training and product maintenance have not been significant to
date. The Company has not capitalized any software development costs and all
research and development costs have been expensed as incurred.

The Company's profitability is influenced by a number of factors, including
pricing, cost of materials, product and technological advancements from research
and development efforts and the expansion of its operations. The Company
anticipates the addition of personnel and related infrastructure as it seeks to
increase revenues, and to meet other strategic goals such as developing new
products and technologies, broadening strategic partnerships with, and
incorporating new applications for, its customers, entering new markets and
expanding internationally. The Company anticipates that engineering, research
and development expenses will increase in absolute dollars, and may increase as
a percentage of revenues, as the Company pursues engineering efforts to provide
enhanced functionality to its products, increase port capacity and develop
additional software features.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the percentage of
revenues represented by certain items reflected in the Company's Consolidated
Statements of Income:

FISCAL YEAR
----------------------------------------------------------
1995 1996 1997

--------- --------- --------
Revenues...................................................... 100.0% 100.0% 100.0%
Cost of revenues.............................................. 33.5 39.2 30.0
----- ----- -----
Gross profit................................................ 66.5 60.8 70.0
----- ----- -----
Operating Expenses:
Engineering, research and development....................... 22.4 17.9 14.9
Selling and marketing....................................... 8.1 10.7 13.0
General and administrative.................................. 11.7 10.3 9.0
----- ----- -----
Total operating expenses...................................... 42.2 38.9 36.9
----- ----- -----
Income from operations........................................ 24.3 21.9 33.1
Other income (expense)........................................ .1 (.6) 1.6
----- ----- -----
Income before provision for income taxes...................... 24.4 21.3 34.7
Provision for income taxes.................................... 9.4 8.5 13.7
----- ----- -----
Net income.................................................... 15.0% 12.8% 21.0%
===== ===== =====

FISCAL YEAR ENDED DECEMBER 27, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER 28,
1996

Revenues. The Company's revenues consist of sales, primarily in the United
States, of its open, programmable switching platforms and related network
interface line cards and service resource cards. Revenues increased 43.0% from
$62.1 million in 1996 to $88.7 million for 1997. The increase resulted, in part,
from the Company's continuing efforts to enhance the scalability, performance,
capacity and functionality of its products through the modification and
introduction of features and products. The increase in revenues also resulted
from the introduction of new or expanded offerings by existing customers
incorporating the Company's products, the expansion of customers' existing
markets and the introduction of new applications by new and existing customers.
In addition, revenues increased due to increased market penetration resulting
from the efforts of the Company's expanded selling and marketing organizations.

Revenues from the Company's five largest customers represented approximately
57.1% and 50.9% of the Company's revenues for 1996 and 1997, respectively.
Comverse represented approximately 36.7% and 26.0% of the Company's revenues for
these same periods, respectively. Additionally, 10.2% of the Company's revenues
in 1997 were derived from QUALCOMM Incorporated. Although the Company's largest
customers have varied from period to period, the Company believes that revenues
derived from current and potential large customers will continue to represent a
significant proportion of revenues, and that its results of operations in any
given period will continue to depend to a significant extent upon sales to a
limited number of customers. There can be no assurance that the Company's
principal customers will continue to purchase product at current levels, if at
all.

Gross Profit. Cost of revenues consists primarily of the cost of purchased
components and subassemblies, contract manufacturing costs, labor and overhead
relating to material procurement, final assembly, testing and quality control,
and warranty and post sale support costs. Cost of revenues increased 9.5% from
$24.3 million in 1996 to $26.6 million for 1997. Gross margin increased from
60.8% in 1996 to 70.0% in 1997. The increase in gross margin was primarily
attributable to lower component prices, changes in product mix and increased
manufacturing efficiencies as the Company increased its production volume in
1997, all of which the Company estimates represents approximately one half of
the gross margin increase from 1996 to 1997. In addition, gross margins for 1996
were negatively impacted by the introduction of the EXS switching system and
related technology which resulted in valuation adjustments of certain existing
inventory components, which the Company estimates represents the other half of
the gross margin increase from 1996 to 1997.

Engineering, Research and Development. Engineering, research and development
costs consist primarily of compensation and related costs of engineering and
development personnel, materials and supplies consumed in prototype development,
related facility costs and depreciation of engineering and test equipment. All
research and development costs, including software development costs, have been
expensed as incurred. Engineering, research and development costs increased
19.2% from $11.1 million in 1996 to $13.3 million for 1997. As a percentage of
revenues, these costs were 17.9% and 14.9%, respectively, in such periods. The
increase in engineering, research and development costs in absolute dollars was
primarily attributable to an increase in engineering and research personnel
partially offset by decreases in the consumption of prototype supplies and
materials. Engineering and research personnel increased from 68 employees at the
end of 1996 to 98 employees at the end of 1997.

Selling and Marketing. Selling and marketing costs consist primarily of
compensation and related costs for sales, marketing and customer support
personnel, travel and advertising, trade show and other promotional activities.
Selling and marketing costs increased 73.5% from $6.6 million in 1996 to $11.5
million for 1997. As a percentage of revenues, these costs were 10.7% and 13.0%,
respectively, in such periods. The increase in selling and marketing costs in
absolute dollars was primarily attributable to an increase in sales, marketing
and customer support personnel and an increase in trade show and promotional
activities during 1997. Sales, marketing and customer support personnel
increased from 51 employees at the end of 1996 to 69 employees at the end of
1997.

General and Administrative. General and administrative costs include
compensation and related costs of management, finance, management information
systems and administrative personnel, professional services, costs to implement
and maintain manufacturing and management information systems and other general
corporate expenses. General and administrative costs increased 23.7% from $6.4
million in 1996 to $7.9 million for 1997. As a percentage of revenues, these
costs were 10.3% and 9.0%, respectively, in such periods. The increase in
general and administrative costs in absolute dollars was primarily attributable
to an increase in general and administrative personnel from 35 employees at the
end of 1996 to 44 employees at the end of 1997.

Other Income (Expense). Other income (expense), which primarily includes
interest income and interest expense, increased from ($384,000) in 1996 to $1.4
million in 1997. This increase was primarily attributable to an increase in
interest income derived from larger balances of invested cash and securities.

Provision for Income Taxes. The Company's effective rate for Federal and
state income taxes was 40.1% and 39.5% for 1996 and 1997, respectively. The
decrease in effective rates is primarily attributable to a decrease in the
effective state income tax rate and the utilization of certain tax credits.

FISCAL YEAR ENDED DECEMBER 28, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1995

Revenues. Revenues increased from $36.2 million in 1995 to $62.1 million in
1996. The increase resulted, in part, from the Company's continuing efforts to
enhance the scalability, performance, capacity and functionality of its products
through the modification and introduction of features and products, including
the introduction of the EXS switching system in 1995 and the CSN switching
platform in 1996. The increase in revenues also resulted from the introduction
of new or expanded offerings by existing customers incorporating the Company's
products, the introduction of new applications by new and existing customers and
the expansion of the Company's selling and marketing efforts.

Revenues from the Company's five largest customers represented approximately
70.1% and 57.1% of the Company's revenues for 1995 and 1996, respectively.
During 1995 and 1996, Comverse represented approximately 40.6% and 36.7%,
respectively, of the Company's revenues. Additionally, 11.4% of the Company's
revenues in 1995 were derived from sales to Ericsson Messaging Systems Inc.

Gross Profit. Cost of revenues increased from $12.1 million in 1995 to $24.3
million in 1996. The gross margin decreased from 66.5% in 1995 to 60.8% in 1996.
The decrease in gross margin in 1996 resulted primarily from the introduction of
the EXS switching system and related technology, which resulted in valuation
adjustments of certain existing inventory components. Increased warranty and
related support costs also contributed to the decline in gross margin. In
addition, gross margin was negatively impacted by the Company's relocation of
its manufacturing operations in November 1995, the subsequent expansion of this
facility in 1996 and increased compensation and related costs associated with
the Company's efforts to strengthen its manufacturing infrastructure.

Engineering, Research and Development. Engineering, research and development
costs increased from $8.1 million in 1995 to $11.1 million in 1996. As a
percentage of revenues, engineering, research and development expenses were
22.4% and 17.9% for 1995

and 1996, respectively. The increases in engineering, research and development
costs in absolute dollars were primarily attributable to continuing efforts to
expand the Company's research and development infrastructure. Engineering,
research and development personnel increased from 38 employees at the end of
1995 and to 68 employees at the end of 1996. Increases also resulted from the
timing and amount of the consumption of materials used for prototypes in the
development process. The Company's relocation in 1995 to a larger facility and
capital investments made in 1995 and 1996 in engineering and test equipment
resulted in increased occupancy costs and depreciation expenses for both years.

Selling and Marketing. Selling and marketing costs increased from $2.9
million in 1995 to $6.6 million in 1996. As a percentage of revenues, these
costs were 8.1% and 10.7% for 1995 and 1996, respectively. The increase in
selling and marketing costs reflects the expansion of the Company's sales,
marketing and customer support personnel from 28 employees at the end of 1995
and to 51 employees at the end of 1996. During 1995 and 1996, the Company's
expanded efforts to market and promote its products through trade shows,
advertising, public relations and other promotional activities also resulted in
increased selling and marketing costs. The Company's relocation in 1995 and the
opening of four sales offices in 1996 resulted in increased occupancy costs in
1995 and 1996.

General and Administrative. General and administrative costs increased from
$4.2 million in 1995 to $6.4 million in 1996. As a percentage of revenues, these
costs were 11.7% and 10.3% for 1995 and 1996, respectively. The increase in
general and administrative costs in absolute dollars resulted primarily from an
increase in general and administrative personnel from 21 employees at the end of
1995 to 35 employees at the end of 1996. The Company's efforts to expand and
strengthen the administrative infrastructure included the additions of a Chief
Financial Officer, Chief Operating Officer and other personnel in the areas of
finance, human resources and purchasing. During 1996, the Company made
significant investments in its manufacturing and management information systems,
including the implementation of its enterprise resource planning system. The
Company's relocation to larger facilities in 1995 resulted in increased
occupancy and depreciation costs in 1995 and 1996.

Other Income (Expense). Other income (expense) was $38,000 and ($384,000)
for 1995 and 1996, respectively.

Provision for Income Taxes. The Company's effective rate for Federal and
state income taxes was 38.7% and 40.1% for 1995 and 1996, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, Excel has funded its operations primarily through cash
provided by operations. In November 1997, the Company received total net
proceeds of approximately $87.1 million from the initial public offering of its
common stock. See Item 5. "Market for Registrant's Common Equity and Related
Stockholder Matters".

At December 27, 1997, the Company's principal sources of liquidity consisted
of cash, cash equivalents and marketable securities of approximately $114.9
million, working capital of approximately $116.4 million and $15.0 million of
funds available under a bank line of credit.

During 1995, 1996 and 1997, cash provided by operating activities totaled $1.2
million, $7.3 million and $27.2 million, respectively. The increase in 1996 was
primarily attributable to increases in net income, accrued expenses and accrued
income taxes, partially offset by an increase in deferred income taxes and a
decrease in accounts payable. The increase in 1997 was primarily attributable to
an increase in profitability, accounts payable and accrued expenses.

The Company's investing activities consumed $4.1 million, $4.1 million and
$70.4 million in 1995, 1996 and 1997, respectively. During 1997, net purchases
of marketable securities consumed approximately $67.0 million. The remaining
expenditures primarily reflect the acquisition, renovation and expansion of the
Company's facilities and the purchase of capital equipment.

During 1995, the Company purchased and renovated two buildings and related
land for approximately $3.2 million. These acquisitions and renovations were
financed, in part, by the proceeds from a $2.6 million secured loan from a bank.
This loan was paid in full in January 1998.

In 1995, the Company entered into a building lease which requires monthly
payments of approximately $13,000 through July 2000. The lease can be extended
through July 2005 and includes a purchase option exercisable, beginning in
August 1998, for $875,000. The Company intends to exercise this option as early
as possible, and accordingly, has reflected this lease as a capital transaction.

On June 30, 1997, the Company purchased property to be used for the
construction of an additional building. The purchase price of $575,000 and the
estimated construction costs were to be financed, in part, by a $2.1 million
Real Estate Promissory Note with a bank, of which $460,000 was advanced to the
Company during 1997. Borrowings under this note bore interest at prime plus .25%
and were secured by the property and certain other assets. Monthly payments of
interest began in July 1997. In January 1998, the Company paid in full all
outstanding balances under this note.

During 1997, the Company began construction of a 46,000 square foot building
to be used for engineering and research activities. Construction is expected to
be completed by the end of the second quarter of 1998 at an estimated cost of
approximately $3.7 million. In January 1998, the Company executed a Purchase
and Sale Agreement to purchase approximately 108,000 square feet of additional
land for approximately $324,000 and also completed an agreement providing Excel
with an option to purchase up to an additional 274,000 square feet of land at a
total cost of approximately $821,000. This option does not expire until January
2000 subject to an annual, non-refundable payment of approximately $71,000. The
total costs of the facility and land acquisition will be funded by existing cash
resources.

The Company's unsecured line of credit arrangement with a bank provides up to
$15.0 million in credit availability. Borrowings under this agreement bear
interest, at the Company's discretion, at either the bank's base rate or the
Eurodollar rate plus 2.5%. The agreement requires the Company to comply with
certain financial covenants, including a liabilities to tangible net worth
ratio, a current assets to current liabilities ratio and a minimum
profitability covenant. The agreement also restricts the Company's ability to
pay cash dividends. The Company was in compliance with these covenants as of
December 27, 1997. There were no amounts outstanding under this line of credit
at December 28, 1996 or December 27, 1997.

The Company does not have any other significant capital commitments and
believes that available funds and cash generated from operations, will be
sufficient to meet the Company's working capital requirements for at least the
foreseeable future. The Company plans to finance its long-term capital needs
with available funds, together with available borrowings and cash flow from
operations. To the extent that such funds are insufficient to finance the
Company's activities, the Company may have to raise working capital through the
issuance of additional equity or debt securities. There can be no assurance that
additional financing will be available on acceptable terms.

Year 2000 Compliance: Management has initiated a Company-wide program to
assess the impact of the Year 2000 issue on the Company's computer systems and
applications as well as the Company's product offerings. Management believes
that a majority of the Company's product offerings are currently Year 2000
compliant and that its primary internal information systems used to support its
operations are compatible with the Year 2000. However, the Company utilizes
other third party equipment, telecommunication products and other third party
software applications which may or may not be Year 2000 compliant. Although the
Company is currently taking steps to address the impact, if any, of the Year
2000 issue surrounding such third party products, failure of any critical third-
party products to operate properly in the Year 2000 may have a material adverse
effect on results of operations or require the Company to incur unanticipated
expenses to remedy any problems. In addition, as the Company purchases many
critical components from single or sole source suppliers, failure of any such
vendor to adequately address issues relating to the Year 2000 problem may have a
material adverse effect on the Company's business, financial condition and
results of operations.

RECENT ACCOUNTING ANNOUNCEMENT

On February 10, 1998, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 98 (SAB 98). This bulletin revises the SEC's
guidance for calculating earnings per share with respect to equity securities
issued prior to an initial public offering and is effective for fiscal years
ending after December 15, 1997. The prior years' earnings per share have been
retroactively restated to reflect the adoption of SAB 98. As a result of this
restatement, the Company's previously reported diluted earnings per share has
been increased by $.01 in each of the fiscal years 1993, 1995 and 1996 to $.05,
$.07 and $.24, respectively.

RISK FACTORS

This Report contains statements which may be "forward-looking" statements and
are subject to risks and uncertainties that could cause actual results to differ
significantly from expectations. In particular, statements contained in
"Management's Discussion and

Analysis of Financial Condition and Results of Operations" which are not
historical facts, including, but not limited to, statements regarding the
anticipated adequacy of cash resources to meet the Company's working capital
requirements, statements regarding the intention to exercise a purchase option
on an existing building lease and statements regarding the anticipated
proportion of revenues to be derived from a limited number of customers, may
constitute forward looking statements. Factors that could cause or contribute to
such differences include those discussed below, as well as those discussed
elsewhere in this Report.

Fluctuations in Results of Operations. The Company's results of operations
have varied significantly in the past and may vary significantly in the future,
on a quarterly and annual basis, as a result of a variety of factors, many of
which are outside the Company's control. These factors include, without
limitation: (i) the timing and size of orders which are received and can be
shipped in any particular period; (ii) the commercial success of the Company's
products; (iii) delays in the introduction of products or product enhancements
by the Company and the Company's ability to introduce new products and
technologies on a timely basis; (iv) the financial stability of the Company's
major customers; (v) the timing of new product introductions or announcements by
the Company or its competitors; (vi) the availability of adequate supplies of
key components and assemblies and the adequacy of third-party manufacturing
capabilities; (vii) the seasonality of the placement of customer orders; (viii)
the timing and nature of selling and marketing expenses such as tradeshows and
advertising campaigns; (ix) the timing of development expenditures and personnel
changes; (x) the publication of opinions about the Company and its products, or
its competitors or their products, by industry analysts; (xi) customer order
deferrals in anticipation of product enhancements or new product offerings by
the Company or its competitors; and (xii) customer cancellation of orders and
the gain or loss of significant customers, including those due to industry
combinations. Moreover, any downturn in general economic conditions could
precipitate significant reductions in corporate spending for telecommunications
infrastructure, which could result in delays or cancellations of orders for the
Company's products. The Company's expense levels are relatively fixed and are
based, in significant part, on expectations of future revenues. Consequently, if
revenue levels are below expectations, expense levels could be
disproportionately high as a percentage of revenues, and the Company's business,
financial condition and results of operations would be materially adversely
affected. The Company has historically operated with little backlog because its
products are generally shipped within 60 days of acceptance of an order by the
Company. As a result, revenues in any quarter are substantially dependent on
orders booked and shipped in that quarter and on sales by the Company's
customers to end users. See "--Concentration of Customers" and "Business--
Customers."

The Company has experienced significant fluctuations in revenues, expenses and
results from operations from quarter to quarter, and such fluctuations are
likely to continue. The Company typically receives more product orders and
generates greater revenues in the fourth quarter. During the last several
years, revenues in the first quarter have typically been lower than those
recorded in the preceding fourth quarter. The Company believes that this
concentration of order placements in specific quarterly periods is due to
customer's' buying patterns and budgeting cycles. A significant portion of the
Company's revenues have been generated from a limited number of customers and it
is difficult to predict the timing of future orders and shipments to these and
other customers. The Company anticipates that its results of operations in any
given period will continue to depend to a significant extent upon sales to a
small number of customers. See "--Concentration of Customers" and "Business--
Customers."

The Company also believes that the purchase of its products generally involves
a significant commitment of a customer's capital resources. Therefore, any
downturn in any customer's business could have a material adverse effect on the
Company's revenues, business, financial condition and quarterly results of
operations. In addition, the Company historically has recognized a large portion
of its revenues from sales booked and shipped in the last month of a quarter
such that the magnitude of quarterly fluctuations may not become evident until
late in, or at the end of, a particular quarter. Because a number of the
Company's individual orders are for significant amounts, the failure to ship a
significant order in a particular quarter could materially adversely affect
revenues and results of operations for such quarter. To the extent that
significant sales occur earlier than expected, results of operations for
subsequent quarters may be materially adversely affected. Due to these and other
factors, the Company's quarterly revenues, expenses and results of operations
could vary significantly in the future, and period-to-period comparisons should
not be relied upon as indications of future performance. There can be no
assurance that the Company will be able to increase its revenues in future
periods or be able to sustain its level of revenues or its rate of revenue
growth on a quarterly or annual basis. See "--Length of Sales Cycle" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Due to all of the foregoing factors, it is possible that in some future
quarter, the Company's results of operations will be below the expectations of
public market analysts and investors. In such event, the market price of the
Company's Common Stock would likely be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Dependence on Relationships with Application Developers, OEMs and Systems
Integrators. The Company sells substantially all of its products to, and
maintains strategic relationships with, application developers, original
equipment manufacturers ("OEMs") and

systems integrators which incorporate the Company's products into their service
and product offerings. As a result, sales of the Company's products are
dependent upon the continued market acceptance of the service and product
offerings of the Company's customers. Although the Company maintains contractual
relationships with a substantial number of its customers, such contracts do not
provide for minimum purchase requirements, nor do they contain provisions
requiring the exclusive purchase of the Company's products. The development of
an application or service for the telecommunications market can involve a
substantial amount of time and expense. The delay or failure of a customer's
application development program incorporating the Company's products could delay
or prevent expected sales of the Company's products. The inability or cessation
of customers to integrate the Company's products into their service and product
offerings, product development delays by application developers and other
customers, lack of market acceptance of the service and product offerings of the
Company's customers or a customer's decision to market products manufactured by
a competitor of the Company, or the manufacture of such products themselves,
would have a material adverse effect on the Company's business, financial
condition and results of operations.

Additionally, selling through indirect channels may limit the Company's
information concerning the volume of products sold by the Company's customers to
end users and the Company's contact with its end users. As a result, the
Company's ability to forecast revenues accurately (notwithstanding the forecasts
of its customers), evaluate end-user satisfaction and recognize emerging end-
user requirements may be hindered. See "Business--Sales and Marketing."

Length of Sales Cycle. The time between the date of initial contact with a
potential customer and large-scale commercialization of a new customer
application or system based on the Company's products is often lengthy,
typically ranging from 12 to 24 months or more, and is subject to delays over
which the Company has little or no control, including customers' budgetary
constraints, customers' internal acceptance reviews, the success and continued
internal support of customers' own development efforts, and the possibility of
cancellation of projects by customers. Although the Company attempts to develop
its products with the goal of shortening the time to market of its customers'
products, the timing of the commercialization of a new customer application or
service based on the Company's products is primarily dependent on the success
and timing of a customer's own internal development program. Delays can also be
caused by late deliveries by other vendors, changes in implementation priorities
and slower than anticipated growth in demand for the services that the Company's
products support. A delay in, or cancellation of, the sale of the Company's
products could have a material adverse effect on the Company's business,
financial condition and results of operations and cause the Company's results of
operations to vary significantly from quarter to quarter. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

Concentration of Customers. Approximately 40.6%, 36.7% and 26.0% of the
Company's revenues in 1995, 1996 and 1997, respectively, were derived from sales
to Comverse Network Systems (formerly Boston Technology, Inc.), approximately
10.2% of the Company's revenues in 1997 were derived from sales to QUALCOMM
Incorporated and approximately 11.4% of the Company's revenues in 1995 were
derived from sales to Ericsson Messaging Systems, Inc. In 1995, 1996 and 1997,
the Company's five largest customers accounted for approximately 70.1%, 57.1%
and 50.9%, respectively, of the Company's revenues. Although the Company's
largest customers have varied from period to period, the Company anticipates
that its results of operations in any given period will continue to depend to a
significant extent upon sales to a small number of customers. None of the
Company's customers has entered into a long-term supply agreement requiring any
of them to purchase a minimum amount of product from the Company. There can be
no assurance that the Company's principal customers will continue to purchase
product from the Company at current levels, if at all, or that the Company will
be able to replace such purchases with sales to other customers. In January
1998, Boston Technology, Inc. merged with Comverse Technologies, Inc. In
September 1997, Octel Communications Corporation, one of the Company's five
largest customers in 1996 and 1997, was acquired by Lucent Technologies Inc. The
Company cannot estimate the potential impact on its business of these two recent
transactions. The loss of one or more major customers could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business--Customers."

Evolving Market For Telecommunications Services. The Company's future
success will depend on continued growth in the market for telecommunications
services. The global telecommunications marketplace is evolving and it is
difficult to predict its potential size or future growth rate. There can be no
assurance that deregulation and continued improvements and expansions of
infrastructure will continue to cause this market to grow or that increased
regulation will not present barriers to the sales of existing or future
products. There can also be no assurance that telecommunications applications
and infrastructure needs will not emerge for which the Company's products are
not designed. If this market fails to grow or grows more slowly or in a
different direction than the Company currently anticipates, the Company's
business, financial condition and results of operations could be materially
adversely affected. See "Business--Industry Background."

Concentrated Product Family. The Company currently derives substantially all
of its revenues from its family of open, programmable switching platforms and
expects that this concentration will continue in the foreseeable future. As a
result, any decrease in the overall level of sales of, or the prices for, open,
programmable switching platforms due to product enhancements, introductions or
announcements by the Company's competitors, a decline in the demand for open,
programmable switches, product obsolescence, price competition, technological
change or any other reason could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

Risk of New Product Introductions. The Company intends to continue to invest
in product and technology development, including increasing port capacity and
performance, the development of additional related software applications and
tools, the improvement of third-party application integration, and the continued
provision of updated product features and enhancements. There can be no
assurance that the Company will not experience difficulties that could delay or
prevent the successful development, introduction or marketing of such new
products and enhancements, or that its new products and enhancements will
adequately meet the requirements of the marketplace and achieve market
acceptance. Announcements of currently planned or other new product offerings by
the Company or its competitors may cause customers to defer or cancel the
purchase of existing Company products. The Company's inability to develop on a
timely basis new products or enhancements to existing products, or the failure
of such new products or enhancements to achieve market acceptance, could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "--Rapid Technological Change," "Business--
Products and Technology" and "Business--Research and Product Development."

The development of new, technologically advanced products is a complex and
uncertain process requiring the accurate anticipation of technological and
market trends. The introduction of new or enhanced products also requires the
Company to manage the transition from older products in order to minimize
disruption in customer ordering patterns, avoid excessive levels of older
product inventories and ensure that adequate supplies of new products can be
delivered to meet anticipated customer demand. There can be no assurance that
the Company will successfully develop, introduce or manage the transition to new
products. Furthermore, products such as those offered by the Company may contain
undetected or unresolved errors when they are first introduced or as new
versions are released. There can be no assurance that despite extensive testing
by the Company, errors will not be found in new products or upgrades after
commencement of commercial shipments, resulting in delays in or loss of market
acceptance and sales, diversion of development resources, injury to the
Company's reputation or increased service and warranty costs, any of which could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Research and Product Development."

Rapid Technological Change. The telecommunications equipment market is
subject to rapid technological change, evolving industry standards and frequent
new product introductions and enhancements that may render existing products
obsolete. As a result, the Company's position in this market could erode rapidly
due to unforeseen changes in product features and functions of competing
products. The Company's growth and future results of operations will depend in
part on its ability to respond to these changes by enhancing its existing
products and developing and introducing, on a timely and cost-effective basis,
new products and features to meet or exceed technological advances in the
marketplace. The failure of the Company to respond to rapidly changing
technologies could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Industry
Background" and "Business--Research and Product Development."

Management of Growth and Hiring of Additional Personnel. The Company has
experienced growth in revenues and expansion of its operations which have placed
significant demands on the Company's management, engineering staff and
facilities. The Company has recently hired additional engineering, marketing,
accounting and finance personnel, including its Vice President of Research and
Development within the last 12 months. The Company is also implementing
additional financial and management procedures which the Company believes will
address increasing demands on resources. However, the Company believes that
further improvements in management and operational controls are needed, and will
continue to be needed, to manage any future growth. Continued growth will also
require the Company to hire more engineering, selling and marketing and
administrative personnel, expand customer support capabilities, expand
management information systems and improve its inventory management practices.
The Company has at times experienced, and continues to experience, difficulty in
recruiting qualified personnel. Recruiting qualified personnel is an intensely
competitive and time-consuming process. There can be no assurance that the
Company will be able to attract and retain the necessary personnel to accomplish
its growth strategies or that it will not experience constraints that will
adversely affect its ability to satisfy customer demand in a timely fashion or
to support satisfactorily its customers and operations. If the Company's
management is unable to manage growth effectively, the Company's business,
financial condition and results of operations could be materially adversely
affected. See "Business--Employees."

While the Company believes its current and planned facilities are adequate to
meet its needs through the next 12 months, future growth may require the Company
to obtain additional or alternative facilities. Due to the limited supply of
suitable additional or alternative office and manufacturing space in the Cape
Cod, Massachusetts area, there can be no assurance that such space can be leased
or acquired without substantial required renovations. Relocation of any segment
of the Company's operations may disrupt business and have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the local permitting and variance procedures for the renovation of
buildings or new construction in the Cape Cod area is more onerous than found in
metropolitan areas. Accordingly, there can be no assurance that the Company will
not be required in the future to devote significant resources to the permitting
and renovation of additional facilities or in relocating some or all of the
Company's facilities. See "Item 2--Properties."

Dependence on Key Personnel. The Company's success depends to a significant
degree upon the continued contributions of its President, Chief Executive
Officer and principal stockholder, Robert P. Madonna, and its key management,
engineering, selling and marketing and manufacturing personnel, many of whom
would be difficult to replace. The Company does not have employment contracts
with its key personnel. The loss of the services of any key personnel, the
inability to attract or retain qualified personnel in the future or delays in
hiring required personnel, particularly software engineers, could have a
material adverse effect on the Company's business, financial condition and
results of operations.

Highly Competitive Market. The market for telecommunications products is
highly competitive and subject to rapid technological change. The Company
competes or may compete directly or indirectly with the following categories of
companies: (i) other manufacturers of programmable switches such as Summa Four,
Inc., Redcom Laboratories, Inc. and Harris Corporation; (ii) large, well-
established switch and telecommunications equipment manufacturers such as
Alcatel Alsthom Compagnie Generale d'Electricite SA, DSC Communications
Corporation, Lucent Technologies Inc., Northern Telecom Limited, Siemens AG and
Telefonaktiebolaget LM Ericsson; and (iii) to a lesser degree, systems
integrators and application developers whose switches are based on PC card-level
products manufactured by companies such as Aculab Inc., Dialogic Corporation and
Natural MicroSystems Corporation. In addition, several smaller companies have
begun to manufacture programmable switching platforms. Due to the rapidly
evolving markets in which the Company competes, additional competitors with
significant market presence and financial resources, including large
telecommunications equipment manufacturers and computer hardware and software
companies, may enter those markets, thereby further intensifying competition.
Additionally, there can be no assurance that one or more of the Company's
application developers will not begin to develop or market products in
competition with the Company. Increased competition could result in price
reductions and loss of market share which would materially adversely affect the
Company's business, financial condition and results of operations. Many of the
Company's current and potential competitors have significantly greater
financial, selling and marketing, technical, manufacturing and other resources
than the Company. Some of the Company's competitors currently offer financing
alternatives to their customers, a service that the Company does not provide.
Moreover, the Company's competitors may also foresee the course of market
developments more accurately than the Company. Although the Company believes it
has certain technological and other advantages over its competitors, realizing
and maintaining such advantages will require a continued high level of
investment by the Company in research and product development, marketing and
customer service and support. There can be no assurance that the Company will
have sufficient resources to continue to make such investments or that the
Company will be able to make the technological advances necessary to compete
successfully with its existing competitors or with new competitors. See
"Business--Competition."

Dependence on Single and Sole Source Suppliers. The Company purchases many
critical components from single or sole source vendors. The inability to develop
alternative sources for these components or to obtain sufficient quantities of
these components could result in delays or reductions in product shipments which
could materially adversely affect the Company's business, financial condition
and results of operations. In the event of a reduction or interruption of
supply, a significant amount of time, in some cases as much as three to four
months, could be required before the Company would begin receiving adequate
supplies from such alternative suppliers. Further, in such event, the Company's
business, financial condition and results of operations would be materially
adversely affected. In addition, the manufacture of certain of these single or
sole source components is extremely complex, and the Company's reliance on the
suppliers of these components exposes the Company to potential production
difficulties and quality variations, which could negatively impact cost and
timely delivery of the Company's products. Certain components are available from
only one supplier, for which there is no substitute at this time. If supply of
these components should cease, the Company would be required to redesign its
products. No assurance can be given that supply problems will not occur or, if
such problems do occur, that satisfactory solutions would be available. The
Company does not have long-term contracts with its suppliers and there can be no
assurance that these suppliers will continue to be able to produce these
components or to meet the Company's requirements. Any significant interruption
in the supply, or degradation in the quality, of any such component could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Manufacturing."

Although the Company generally requires its customers to submit quarterly
forecasts of their needs, the Company's customers frequently require rapid
delivery after placement of a purchase order. Because the Company does not
maintain significant component inventories, a delay in shipment by a supplier
could lead to lost sales. Lead times for materials and components may vary
significantly and depend on factors such as specific supplier performance,
contract terms and general market demand for components. If orders vary from
forecasts, the Company may experience excess or inadequate inventory of certain
materials and components. While the Company has not experienced shortages and
allocations of these components to date, any shortages in the future, including
those occasioned by increased sales, could result in delays in fulfillment of
customer orders. Such delays, shortages and allocations could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Manufacturing."

Dependence on Third-Party Manufacturers. The Company relies on a limited
number of independent manufacturers, some of which are small, privately-held
companies, to provide certain components and assemblies made to the Company's
specifications. These manufacturers substantially complete production of the
Company's products, which are then shipped to the Company for final assembly and
quality control. In the event that any of the Company's subcontractors were to
experience financial, operational, production or quality assurance difficulties
or a catastrophic event that resulted in a reduction or interruption in supply
to the Company, the Company's business, financial condition and results of
operations would be materially adversely affected until the Company was able to
establish sufficient manufacturing capabilities from alternative sources. There
can be no assurance that alternative manufacturing sources will be able to meet
the Company's future requirements or that existing or alternative sources will
continue to be available to the Company at favorable prices. See "Business--
Manufacturing."

Compliance with Regulations and Evolving Industry Standards. The market for
the Company's products is characterized by the need to meet a significant number
of communications regulations and standards, some of which are evolving as new
technologies are deployed. In the United States, the Company's products must
comply with various regulations including those promulgated by the Federal
Communications Commission and standards established by Underwriters Laboratories
and Bell Communications Research. Furthermore, there are regulations and
standards imposed by various foreign countries where the Company's products are
installed. The failure of the Company's products to comply, or delays in
compliance, with the various existing and evolving industry regulations and
standards could delay the introduction of the Company's products. Moreover, the
enactment by federal, state or foreign governments of new laws or regulations,
changes in the interpretation of existing laws or regulations or a reversal of
the trend toward deregulation in the telecommunications industry could
materially adversely affect the Company's customers, and thereby materially
adversely affect the Company's business, financial condition and results of
operations. See "Business--Industry Background."

Dependence on Proprietary Rights. The Company's success and its ability to
compete is dependent, in part, upon its proprietary rights. The Company relies
primarily on a combination of patent, copyright, trademark and trade secret
laws, as well as confidentiality procedures and contractual restrictions to
establish and protect its proprietary rights. There can be no assurance that
such measures will be adequate to protect the Company's proprietary rights.
Further, the Company may be subject to additional risks as it enters into
transactions in countries where intellectual property laws are not well
developed or are difficult to enforce. Legal protections of the Company's
proprietary rights may be ineffective in such countries. Litigation to defend
and enforce the Company's intellectual property rights could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, financial condition and results of operations,
regardless of the final outcome of such litigation. Despite the Company's
efforts to safeguard and maintain its proprietary rights both in the United
States and abroad, there can be no assurance that the Company will be successful
in doing so or that the steps taken by the Company in this regard will be
adequate to deter misappropriation or independent third-party development of the
Company's technology or to prevent an unauthorized third party from copying or
otherwise obtaining and using the Company's products or technology. There also
can be no assurance that others will not independently develop similar
technologies or duplicate any technology developed by the Company. Any such
events could have a material adverse effect on the Company's business, financial
condition and results of operations.

The Company has entered into agreements with a small number of its customers
requiring the Company to deposit its source code and, on occasion, manufacturing
blueprints, tooling diagrams and production specifications, in escrow with a
third party. These escrow agreements typically provide that these customers have
a non-exclusive right to use such code and other materials in the event that
there is a bankruptcy proceeding by or against the Company, if the Company
ceases to conduct business or if the Company defaults on its support
obligations. The use of such agreements may increase the likelihood of
misappropriation by third parties.

As the number of entrants to the Company's markets increases and the
functionality of the Company's products increases and overlaps with the products
of other companies, the Company may become subject to claims of infringement or
misappropriation of the

intellectual property rights of others. In its distribution agreements, the
Company agrees to indemnify its customers for any expenses or liabilities
resulting from claimed infringements of patents, trademarks or copyrights of
third parties. In certain limited instances, the amount of such indemnities may
be greater than the revenues the Company may have received from the customer.
There can be no assurance that third parties will not assert infringement or
misappropriation claims against the Company in the future with respect to
current or future products. Any claims or litigation, with or without merit,
could be time-consuming, result in costly litigation, cause product shipment
delays or require the Company to enter into royalty or licensing arrangements.
Such royalty or licensing arrangements, if required, may not be available on
terms acceptable to the Company, if at all, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the Company changed its name from Excel Inc. to Excel Switching
Corporation in September 1997. Searches performed on the term Excel have
revealed several registrations and numerous uses of that term, and terms
substantially similar to it, alone and in combination with other terms and
designs. Accordingly, there can be no assurance that third parties will not
assert trademark infringement claims relating to the name Excel in the future.
See "Business--Intellectual Property."

Risks Associated with International Sales. In 1996 and 1997, sales to
customers located outside of the United States accounted for less than 4% and
8%, respectively, of the Company's revenues in each such period. However, the
Company sells its products to application developers, OEMs and systems
integrators located within the United States which market products and services
based on the Company's products worldwide. The Company intends to expand its
operations outside the United States and enter additional international markets,
which will require significant management attention and financial resources.
International sales are subject to a variety of risks, including difficulties in
establishing and managing international distribution channels, in servicing and
supporting products sold outside the United States and in translating products
and related materials into foreign languages. International operations are also
subject to difficulties in collecting accounts receivable, staffing and managing
personnel and enforcing intellectual property rights. Other factors that can
adversely affect international operations include fluctuations in the value of
foreign currencies and currency exchange rates, changes in import/export duties
and quotas, introduction of tariff or non-tariff barriers and economic or
political changes in international markets. Any inability to obtain foreign
regulatory approvals on a timely basis could have a material adverse effect on
the Company's business, financial condition and results of operations. If the
Company's international sales increase, its revenues may also be affected to a
greater extent by seasonal fluctuations resulting from lower levels of sales
which typically occur during the summer months in Europe and other parts of the
world. There can be no assurance that these factors will not have a material
adverse effect on the Company's future international sales and, consequently, on
the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".

Risks Relating to Potential Acquisitions. The Company may, from time to
time, pursue the acquisition of other companies, assets, products and
technologies although the Company has no present commitments or agreements with
respect to any such acquisitions. Acquisitions involve a number of operating
risks that could materially adversely affect the Company's results of
operations, including the diversion of management's attention to assimilate the
operations, products and personnel of the acquired companies, the amortization
of acquired intangible assets, and the potential loss of key employees of the
acquired companies. Furthermore, acquisitions may involve businesses in which
the Company lacks experience. Because management has limited experience in
acquisitions and the Company has no experience in integrating acquired companies
or technologies into its operations, there can be no assurance that the Company
will be able to manage one or more acquisitions successfully, or that the
Company will be able to integrate the operations, products or personnel gained
through any such acquisitions without a material adverse effect on the Company's
business, financial condition and results of operations.

Control by Principal Stockholder. Robert P. Madonna, the Company's
President, Chief Executive Officer, Chairman of the Board and principal
stockholder, beneficially owns approximately 83.6% of the outstanding shares of
Common Stock of the Company. As a result, Mr. Madonna has the ability to elect
the Company's directors and to determine the outcome of corporate actions
requiring stockholder approval, irrespective of how other stockholders of the
Company may vote. This concentration of ownership may have the effect of
delaying or preventing a change in control of the Company which may be favored
by a majority of the remaining stockholders, or cause a change of control not
favored by the Company's other stockholders.

Shares Eligible for Future Sale. Sales of substantial amounts of shares of
the Company's Common Stock 180 days after the Company's initial public
offering on November 4, 1997 could adversely affect the market price of the
Common Stock. Upon expiration of lock-up agreements with the Underwriters on
May 4, 1998, approximately 27,918,400 additional shares of Common Stock will
be available for sale in the public market, subject to the provisions of Rule
144 under the Securities Act. At December 27, 1997, approximately 7,179,990
shares of Common Stock were issued or issuable pursuant to vested options
under the Company's stock plans, of which approximately 107,700 shares are not
subject to lock-up agreements with the Underwriters and were eligible

for sale in the public market in accordance with Rule 701 under the Securities
Act beginning February 4, 1998. The Company intends to file one or more
registration statements on Form S-8 under the Securities Act on or about May
4, 1998 to register up to 11,275,840 shares of Common Stock subject to
outstanding stock options granted pursuant to the Company's Stock Option
Program as of December 27, 1997, of which options to purchase 7,149,990 shares
of Common Stock were vested as of December 27, 1997 and 3,625,000 shares of
Common Stock issuable pursuant to the Company's 1997 stock plans. Such
registration statements are expected to become effective upon filing. At such
time, approximately 7,327,050 shares of Common Stock issuable upon the
exercise of options granted as of December 27, 1997 and covered by these
registration statements will be vested and eligible for sale in the public
market upon the exercise of underlying options to the extent not previously
sold pursuant to Rule 701.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Amendment No. 2 to the Annual
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized, this 21st day of September 1998.

EXCEL SWITCHING CORPORATION

By: /s/ Robert P. Madonna
---------------------
Robert P. Madonna
President, Chief Executive Officer and Chairman
of the Board

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment No. 2 to the Annual Report on Form 10-K has been signed by the
following persons in the capacities and on the dates indicated.

SIGNATURE TITLE(S) DATE
--------- -------- ----
- -----------------------------------------------------------------------------------------------------

September 21, 1998
/s/ Robert P. Madonna Director, President, Chief Executive
- ------------------------------- Officer and Chairman of the Board
Robert P. Madonna (Principal Executive Officer)

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

September 21, 1998
/s/ Stephen S. Galliker Vice President, Finance and
- ------------------------------- Administration and Chief Financial
Stephen S. Galliker Officer (Principal Financial and
Accounting Officer)

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

September 21, 1998
/s/ Christopher Stavros Director, Vice President, General
- ------------------------------- Counsel and Clerk
Christopher Stavros

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

September 21, 1998
/s/ Edward L. Breslow Director
- -------------------------------
Edward L. Breslow
- -----------------------------------------------------------------------------------------------------

September 21, 1998
/s/ John Loughlin Director
- -------------------------------
John Loughlin