SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C.  20549

                                  FORM 10-K

                  X ANNUAL REPORT UNDER SECTION 13 OR 15(D)
                   OF THE SECURITIES EXCHANGE ACT OF 1934

                 For the fiscal year ended December 31, 1998
                                     or
                _ TRANSITION REPORT UNDER SECTION 13 OR 15(D) 
                   OF THE SECURITIES EXCHANGE ACT OF 1934

              [NO FEE REQUIRED] for the transition period from
                            ________ to _________

                        Commission file No. ________

                                 Com21, Inc.
           (Exact name of registrant as specified in its charter)

              Delaware                              94-3201698 
   (State or other jurisdiction of      (IRS Employer Identification No.)
    incorporation or organization)

                              750 Tasman Drive
                         Milpitas, California  95035
                               (408) 953-9100
       (Address, including zip code, and telephone number, including
        area code, of the registrant's principal executive offices)

       Securities registered under Section 12(b) of the Exchange Act
       Securities registered under Section 12(g) of the Exchange Act:
                       Common Stock, $0.001 par value

Indicate by a checkmark 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 a 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. _

At December 31, 1998, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $266,947,779, based on the
last trade price as reported by The Nasdaq National Market. For purposes of
this calculation, shares owned by officers, directors, and 10% stockholders
known to the registrant have been excluded. Such exclusion is not intended,
nor shall it be deemed, to be an admission that such persons are affiliates
of the registrant.

At December 31, 1998, there were 18,685,560 shares of the registrant's Common
Stock, $0.001 par value, issued and outstanding.

Information required by Part III of this Form 10-K is incorporated therein by
reference from the Company's definitive Proxy Statement with respect to its
1999 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A
within 120 days after December 31, 1998.


<TABLE>
                                 COM21, INC.

                                    INDEX
<CAPTION>
PART I:                                                              Page
<S>       <C>                                                        <C>     
                      
Item 1    Business                                                      3

Item 2    Properties                                                   30

Item 3    Legal Proceedings                                            30

Item 4    Submission of Matters to a Vote of Security Holders          31

PART II:  

Item 5    Market for Registrant's Common Equity and Related 
          Stockholder Matters                                          31

Item 6    Selected Financial Data                                      32

Item 7    Management's Discussion and Analysis of Financial 
          Condition and Results of Operations                          33

Item 7A   Quantitative and Qualitative Disclosures About Market Risk   37

Item 8    Financial Statements and Supplementary Data                  38

Item 9    Changes in and Disagreements With Accountants on Accounting
          and Financial Disclosure                                     54

PART III:  

Item 10   Directors and Executive Officers of the Registrant           54

Item 11   Executive Compensation                                       54

Item 12   Security Ownership of Certain Beneficial Owners and
          Management                                                   54

Item 13   Certain Relationships and Related Transactions               54

PART IV:  

Item 14   Exhibits, Financial Statement Schedules, and Reports on
          Form 8-K                                                     54
                        Exhibit Index                                  55
                        Signatures                                     56
</TABLE>
                                      2

In addition to historical information, this Annual Report on Form 10-K
contains forward-looking statements including statements regarding our
strategy, financial performance and revenue sources that involve a number of
risks and uncertainties, including those discussed below at "Risk Factors."
While this outlook represents our current judgement on the future direction
of the business, such risks and uncertainties could cause actual results to
differ materially from any future performance suggested below. Readers are
cautioned not to place undue reliance on the forward-looking statements,
which speak only as of the date of this Annual Report. Com21 undertakes no
obligation to publicly release any revision's to forward-looking statements
to reflect events or circumstances arising after the date of this document.
See "Risk Factors."

Part I
Item 1.  Business

Com21, Inc. designs, develops, markets and sells value-added, high-speed
communications solutions for the broadband access market. Com21's ComUNITY
Access system enables cable operators to provide high-speed, cost-effective
Internet access to corporate telecommuter, small office/home office and
residential end-users in the U.S. and internationally. Com21's system also
enables cable operators to address the distinct price, performance, security
and other needs of these different end-user groups. Com21's products include
headend equipment, subscriber cable modems, network management software and
noise containment technologies. Cable operators can use Com21's ComUNITY
Access system to increase revenue opportunities by offering up to 16
different operator-defined transmission rates at varying price points to
address multiple markets. Com21's system is designed to be deployed on a
limited capital budget and can be upgraded and scaled as subscriber
penetration grows. Our system enables cable operators to lower their ongoing
cost of ownership through cost-effective noise management and remote cable
modem upgrades. The ComUNITY Access system is also designed to support future
applications, such as cable telephony and virtual private networks, which are
public data networks that transport private data and are generally referred
to as VPNs. Com21 is developing a DOCSIS-compliant cable modem for the North
American cable market, which is intended primarily to address the basic
requirements of the residential end-users, who typically tolerate lower
performance and security than business users. Com21 is working with Cisco
Systems, Inc. to enable interoperability of its DOCSIS-compliant cable modems
with Cisco's universal broadband router, which is a high speed router
intended to distribute different forms of data traffic over different network 
architectures. Com21 expects its first DOCSIS-compliant cable modem to be
commercially available in the first half of 1999. In 1998, we shipped
approximately 320 ComCONTROLLER headends and more than 77,000 ComPORT modems
for use in 154 locations worldwide. In the North American market, we sell
directly to cable operators such as Charter Communications, Cox
Communications, Prime Cable and TCI, and to system integrators such as
HSAnet. Internationally, we sell to systems integrators, including Philips
and Siemens, which in turn sell to cable operators. 

Industry Background 

        The volume of data traffic across communications networks has
increased significantly over the last several years due to the
proliferation of network-based communications and electronic commerce.
Businesses, ranging from large corporate enterprises to small
offices/home offices, are increasingly using the Internet, intranets
and extranets, not only for communication within and outside the enterprise,
but also to create cost-effective secure data connections known as virtual
private networks, between corporate sites or remote locations. VPNs extend
corporate network access to remote employees and external organizations,
including business partners, suppliers and customers. Consumers are 
increasingly accessing data networks, primarily the Internet, to 
communicate, collect and publish information and to purchase retail 
goods. Because of its global reach, accessibility, use of open 
standards and ability to enable real-time interaction, the Internet 
has become a valuable communications medium for both businesses and 
consumers. 

	The Internet and the devices used to provide access to it are 
expected to continue their rapid growth. International Data 
Corporation estimates that between 1995 and 1998 the number of 
devices that had access to the Internet grew from approximately 14 
million to 120 million and anticipates that the number of these 
devices will grow to more than 515 million by 2002. Similarly, the 
available content and number of users on the Internet is rapidly 
increasing. IDC estimates that the number of World Wide Web pages 
grew from approximately 18 million in 1995 to 829 million in 1998 
and is expected to increase to 7.7 billion by 2002. The number of 
Web users in the U.S. is expected to increase from approximately 39 
million in 1997 to 136 million in 2002. A substantial percentage of 
worldwide growth is expected to come from Western Europe and Asia, 
which is projected to grow from approximately 21 million users in 
1997 to 119 million users in 2002. In addition to the substantial 
increase in the number of users in recent years, demand has 
increased among business and consumer users for high-speed Internet 
access to multimedia and other bandwidth-intensive information, 
consisting of data, voice and video in the form of value-added 
services and applications. This has resulted in a growing need for 
improved transmission performance throughout the Internet. With the 
increasing dependence on communications networks and the growing 
demand for bandwidth-intensive information, existing transmission 
speeds have become less tolerable and can negatively affect 
business productivity.

                                      3

	Typically, the limiting factor in overall data transmission 
performance is the "last mile" of the communications 
infrastructure. This infrastructure consists primarily of copper 
twisted-pair wire or coaxial cable and was originally designed for 
analog transmission, such as analog voice or one-way analog video 
signals, rather than high-speed two-way broadband digital 
transmission. Today, there are multiple technologies that attempt 
to address the need for high-speed last mile connections, 
including: 

        - wireline telephone infrastructure technologies, such as: 
            - 56 kilobits per second, dial-up modem technologies; 
            - integrated services digital network, commonly known as
              ISDN in the telecommunications industry;
            - asymmetric digital subscriber line, commonly known 
              as ADSL in the telecommunications industry; and 
            - other digital subscriber line, commonly known as 
              XDSL in the telecommunications industry technologies; 

	- wireless infrastructure technologies, such as: 
            - direct broadcast satellite, commonly known as DBS 
              in the telecommunications industry; 
            - multichannel multipoint distribution service, commonly
              known as MMDS in the telecommunications industry; and
            - local multipoint distribution service, commonly 
              known as LMDS in the telecommunications industry; 

        - hybrid fiber-coaxial, cable infrastructure technologies, commonly
          known as HFC in the telecommunications industry such as: 
            - cable modems. 

	While each of these technologies has certain advantages, the 
cable infrastructure currently provides the highest available 
transmission speed, with peak data transmission speeds of 30 
megabits per second and "always-on" availability providing instant 
access. In addition, cable infrastructure is widely deployed. Paul 
Kagan Associates, Inc. estimates that at the end of 1997, cable 
infrastructure passed approximately 95 million U.S. homes and more 
than 185 million homes in Western Europe and Asia. Recognizing the 
opportunity to capture additional revenues by offering data-over-
cable services, cable operators have begun to address the 
burgeoning market for cable modem Internet access. Industry sources 
estimate that there are currently in excess of 450 commercial 
deployments of cable modem systems worldwide, including sites in 
the U.S., Argentina, Australia, Brazil, Canada, France, Japan, The 
Netherlands and Switzerland. 

	To fully realize the benefits of two-way data-over-cable 
communications, cable operators must activate a data transmission 
return path that travels from subscriber sites upstream to the 
cable operator through the cable plant. Previously, cable operators 
had not been required to activate an upstream return path because 
television broadcast only requires downstream transmission. A 
critical factor related to two-way cable modem service involves the 
reduction, containment and management of "noise" in the upstream 
return path. Noise accumulates from subscriber sites on the 
upstream channel and interferes with transmission throughout the 
entire cable plant. Excessive noise impairs the quality of upstream 
transmissions and, in certain cases, results in significant 
performance degradation. Cable plant noise consists of ambient 
background noise in the cable plant itself and specific ingress 
noise introduced through subscriber sites as a result of loose 
fittings and connectors, cracks in coaxial cable shielding and 
other physical plant imperfections. Common sources of ingress noise 
at subscriber sites include electronic motors in appliances, 
consumer electronics devices and office equipment. One approach to 
dealing with excessive noise involves signal encoding or modulation 
techniques that compensate for higher noise levels. These 
techniques, however, typically result in decreased data 
transmission rates. Other approaches for identifying and containing 
ingress noise, such as the installation of high pass filters at 
subscriber sites, are expensive and inefficient because they block 
upstream transmission entirely and must be physically removed prior 
to enabling two-way cable modem service. Once the high pass filter 
is removed, ingress noise can re-enter the system from that site. 
As a result, reducing noise to the low tolerance level required by 
most two-way cable modem systems involves significant cost and time 
for the cable operator, often delaying the commencement of service 
and the consequent generation of revenue from subscribers. 

                                      4

	Cable operators have been upgrading their plants to an HFC 
cable infrastructure that enables them to offer more channels, to 
add greater services and consequently to compete better with DBS 
television providers' digital video offerings. HFC cable 
infrastructure also facilitates reliable upstream data transmission 
and contains noise by isolating portions of the network into 
smaller distinct nodes. Each node typically serves 500 to 2,000 
homes and has a separate return path to the headend. In order to 
enable data service over HFC, cable operators must install return 
path receivers at the headend based on the number of nodes to be 
activated rather than on the number of potential cable modem 
subscribers. To reduce the number of return path receivers that 
cable operators would otherwise have to purchase, cable operators 
can recombine separate return paths. However, the number of return 
paths that can be combined is limited by the accumulated noise from 
each path. As a result, early deployment costs can be significant 
compared to the revenues generated by initial cable modem 
subscribers. 

	In order to accelerate time-to-market and revenue generation, 
and to reduce initial deployment costs, some cable modem Internet 
access systems offer one-way "telephone return" service, with cable 
transmission downstream and slower dial-up modem transmission 
upstream. This approach enables earlier deployment of cable modem 
systems by postponing the need to address upstream noise issues and 
enables cost-effective determination of which markets are most 
likely to be economically feasible for larger-scale, two-way 
installations. However, with most currently available cable modems, 
the eventual upgrade from one-way to two-way service requires the 
purchase of a new two-way modem and generally requires a field 
service visit to replace and install the dedicated one-way modem 
with a two-way modem. 

	Cable operators are seeking to accelerate the acceptance of 
cable modem service by their subscribers. Many major domestic cable 
operators have established or invested in value-added data-over-
cable services such as @Home Network and Time Warner Cable's and US 
West Media Group's joint Roadrunner service. In addition, several 
domestic cable operators and other interested parties have 
collaborated through the Multimedia Cable Network Systems, or MCNS, 
industry group to develop the data-over-cable service interface 
specification, DOCSIS, as a standard for multi-vendor interoperable 
cable modems. Compliance with the DOCSIS standard should enable 
interoperability between different manufacturers' cable modems and 
headend equipment. The DOCSIS standard is expected to be widely 
adopted for the North American cable market. A number of suppliers 
are developing DOCSIS-compliant two-way cable modems, and some have 
recently become commercially available in select markets. 

	Beyond the challenges of deploying cable modem Internet 
services, most cable modem systems enable operators to offer one 
level of service at a flat monthly rate and do not enable 
customized features that meet the special requirements of distinct 
market segments. Moreover, single service offerings curtail the 
pricing flexibility of cable operators, thus preventing cable 
operators from maximizing revenue opportunities. For example, a 
residential subscriber with only limited access and speed 
requirements such as sending and receiving e-mail, may elect not to 
subscribe to a 256 kilobits per second service at $50 per month. In 
contrast, a business subscriber would pay significantly more for 
enhanced service. The lost revenue opportunity is particularly 
acute in business markets, where telecommuting and small 
office/home office users are generally willing to pay more for the 
additional speed, security and VPN features they require. 

	In addition to data-over-cable service, telephony-over-cable 
service has recently been made possible for cable operators due to 
regulatory changes both in the U.S. and internationally. Such 
deregulation has allowed cable operators to compete in the local 
telephone market. 

	Com21 believes that there is a significant opportunity for a 
provider of a cable modem system solution that would reduce the 
total cost of deployment and ownership of a cable modem system and 
enable different tiers of data transmission service and other 
value-added features for distinct market segments. To reduce the 
total cost of deployment and ownership, there is a need for a cable 
modem system that provides reliable two-way data service on noisy 
cable plants without significantly reducing data transmission 
rates, and one that enables cable operators to remotely identify 
sources of ingress noise and manages system noise in a manner that 
permits equipment purchases to be more closely scaled with 
subscriber penetration. In order to accelerate time-to-market, such 
a system would also provide for cost-effective remote software-
based migration of cable modems from one-way to two-way service. By 
enabling higher noise tolerance with a software-based migration 
path from one-way to two-way service, cable operators could more 
rapidly deploy data service and observe penetration patterns in 
order to identify prime markets for the service. In addition, the 
ability to offer different tiers of service and value-added 
features such as VPNs and enhanced security for distinct business 
and consumer market segments would enable cable operators to more 
fully exploit the cable modem opportunity. Com21 believes that such 
a system solution would be attractive to cable operators because it 
would allow cable operators to increase revenues and profitability, 
while lowering deployment cost and risk and accelerating time-to-
market.

                                      5

The Com21 Solution

	Com21 designs, develops, markets and sells value-added, high-
speed communications solutions for the broadband access market. 
Com21's ComUNITY Access system enables cable operators to provide 
high-speed, cost-effective Internet access to corporate 
telecommuter, small office/home office and residential users in the 
U.S. and internationally. Com21's system also enables cable 
operators to address the distinct price, performance, security and 
other needs of these different end-user groups. Com21's products 
include headend equipment, subscriber cable modems, network 
management software and noise containment technologies. Com21's 
cable modem systems provide the following key benefits: 

	Increased Service Revenues. Com21's ComUNITY Access system 
enables cable operators to increase revenues by offering up to 16 
different cable operator-defined transmission rates at varying 
price points to multiple markets. In a typical flat-rate cable 
modem system, all subscribers are charged the same price, 
regardless of individual bandwidth service and pricing 
requirements. This results in lost revenue opportunities for cable 
operators. In addition, the ComUNITY Access system enables cable 
operators to provide value-added services, such as multiple VPNs 
and enhanced security, targeted to business users. To accommodate 
future value-added broadband applications, our underlying ATM-based 
technology can also enable integrated services such as toll-quality 
cable telephony and desktop video. 

	Reduced Deployment Costs. The ComUNITY Access system was 
designed to lower deployment costs by providing a flexible solution 
to address the needs of cable operators and their subscribers at 
each step of cable modem system deployment. Com21 believes its 
radio frequency technology tolerates higher levels of background 
and ingress noise than do other commercially available radio 
frequency technologies, thereby avoiding the costs otherwise 
necessary to limit noise before deploying two-way cable modem 
service. Com21's Return Path Multiplexer reduces the number of 
return path receivers required in a cable operator's headend 
equipment, which allows cable operators to purchase less headend 
equipment initially and then cost-effectively scale the system over 
time as subscriber penetration grows. 

	Accelerated Time-to-Market. The ComUNITY Access system 
provides a comprehensive solution that enables cable operators to 
bring broadband services to market quickly. In the initial stage of 
deployment, the ComUNITY Access system can be implemented as a one-
way telephone return system. Upon implementation of a two-way 
service, a cable operator can upgrade to a two-way system with a 
simple software download to the end-user's existing ComPORT cable 
modem. Com21 is also developing the capability to enable future 
DOCSIS-compliant cable modems to communicate with PCs through a 
universal serial bus interface, which will reduce the time and 
resources needed to connect modems at subscribers' locations. 

	Reduced Deployment Risk. The ComUNITY Access system's 
comprehensive solution mitigates deployment risk by enabling cable 
operators to rapidly implement data-over-cable service using 
telephone return service and observe service penetration patterns. 
Cable operators can then deploy the capital necessary to upgrade 
the plant and build a larger-scale two-way cable modem system only 
in those markets where they observe sufficient penetration to 
warrant such investment. 

	Reduced Long-Term Cost of Ownership. The ComUNITY Access 
system reduces the long-term cost of ownership for cable operators. 
Because a cable modem system's operational and maintenance expenses 
typically exceed the costs of the capital equipment over the 
expected life of the system, a system that requires less plant 
maintenance will reduce the long-term cost of ownership for cable 
operators. Com21's Network Management Provisioning System lowers 
ongoing operating costs by enabling cable operators to remotely 
detect, diagnose and manage network problems from a single 
workstation. In addition, ComPORT cable modems can be remotely 
upgraded with software downloads. The ComUNITY Access system can be 
deployed with lower operational overhead because the cable operator 
can use Com21's Ingress Noise Blocker as an intelligent filter to 
prevent ingress noise from contaminating the upstream return path. 
The INB opens only to allow data to be transmitted upstream, and is 
closed otherwise, preventing aggregation of noise in the upstream 
return path. The INB also enables a cable operator to more quickly 
identify ingress noise sources. This reduces maintenance costs 
because a cable operator need not devote substantial amounts of 
personnel and resources to the identification of the source and 
site of intermittent ingress noise. 

	Differentiated Services to End-Users. In addition to high-
speed, always-on and cost advantages, the ComUNITY Access system 
enables cable operators to offer differentiated services with 
significant benefits to their subscribers. In addition to value-
added services such as VPNs and enhanced security, each ComPORT 
cable modem can support up to eight PCs. The ComUNITY Access system 
supports multiple protocols, including IP, IPX, AppleTalk and 
NETBEUI. ComPORT modems have an expansion slot to accommodate 
application interface modules which can support future applications 
such as cable telephony and VPNs. 

                                      6

The Com21 Strategy

	As part of its business strategy, Com21's objectives are to: 

	Enhance Value to Cable Operators. Com21's principal strategy 
is to provide products that enhance the value of cable operators' 
cable modem deployments over the life of the investment. Cable 
operators assess the viability, and ultimately the success, of an 
investment in a cable modem system by considering the cost of 
initial investment in cable modem equipment, service reliability, 
overall operating and maintenance expenses and the service revenues 
that can be generated. Com21's ComUNITY Access system is designed 
to be deployed on a limited capital budget and can be upgraded and 
scaled as subscriber penetration grows. Com21's system enables 
cable operators to lower their ongoing cost of ownership through 
cost-effective noise management and remote cable modem upgrades. 
Cable operators can use Com21's system to increase revenues by 
offering multiple tiers of service at varying prices to multiple 
market segments. As a result of the value provided by its products, 
the Company believes it will continue to be able to successfully 
differentiate and sell its products based upon tangible benefits 
delivered to the cable operator. 

	Leverage Technology Leadership. Com21's ATM-based architecture 
is the foundation upon which Com21 has built an end-to-end Ethernet 
broadband communications system with networking advantages. 
Technological developments in multi-service scheduling 
optimization, protocol simulation and application specific 
integrated circuit (commonly referred to as an ASIC) integration 
enable us to offer a scalable system to deliver tiered service 
levels, VPNs and low-latency voice and video applications. 
Moreover, the Com21's internal development of a network management 
system, high performance, cost-effective radio frequency 
transmitters/receivers and fast radio frequency switching systems 
lowers the cost to cable operators of deploying and operating 
Com21's equipment. Com21 focuses on the development of value-added 
features for its products, such as its recently announced 
enterprise cable telephony module for the ComPORT, which is 
designed to enable cable operators to offer toll-quality voice 
services to their business customers. 

	Capitalize on Emerging DOCSIS Standard. Com21 believes the 
DOCSIS standard will accelerate the rate of adoption of cable modem 
technology by providing multi-vendor interoperability. Com21 
intends to continue to play an integral role in the development of 
the DOCSIS standard. In this regard, we have participated in the 
evolution of the DOCSIS standard as a core reviewer and content 
reviewer to DOCSIS 1.0 and 1.1, and by contributing our protocol 
expertise to the development of DOCSIS 1.2. We intend to leverage 
our technology leadership, particularly in the areas of high 
performance ASIC hardware, radio frequency modulation and noise 
reduction to differentiate its DOCSIS-compliant cable modems from 
the competition. We are currently developing a family of DOCSIS-
compliant products, the first of which we anticipate will be 
commercially available in the first half of 1999. Com21 is in the 
process of establishing a consumer-oriented sales channel, focusing 
on both electronic commerce and traditional approaches to 
distribute its DOCSIS-compliant cable modems. 

	Aggressively Penetrate Global Markets. Com21 believes the 
market for cable modem systems is global and has developed 
strategies to sell its products in regions where cable is widely 
available, such as the U.S., Canada, Europe and Japan, and in 
regions where cable is being aggressively deployed, such as China 
and Latin America. In 1998, Com21 shipped approximately 320 
ComCONTROLLER headends and more than 77,000 ComPORT modems, as 
compared to approximately 170 ComCONTROLLER headends and more than 
12,000 ComPORT modems in 1997. Com21 has shipped its systems for 
use in 67 locations in North America and 87 locations 
internationally. In North America, we sell directly to cable 
operators such as Charter Communications, Cox Communications, Prime 
Cable and TCI and to systems integrators such as HSAnet. To 
facilitate market penetration, Com21's ComUNITY Access system has 
been certified for use in @Home service areas. Internationally, we 
sell primarily to systems integrators, including Philips and 
Siemens, which in turn sell to cable operators. 

	Integrate Toll-Quality Voice. Com21 intends to integrate toll-
quality voice capability into its ComUNITY Access system and its 
future DOCSIS product line. We are an active participant and have 
been selected as a vendor author in CableLabs' PacketCable cable 
telephony initiative. Com21's existing products have been designed 
with quality of service capability to support toll-quality voice 
transmission over a cable plant. Com21 believes that the 
opportunity for cable telephony will be accelerated by AT&T's 
acquisition of TCI and has recently demonstrated its enterprise 
cable telephony module at the Western Cable Show in December 1998. 

	Increase Cost Efficiencies. While we intend to continue to 
seek premium prices for our products, it anticipates that the cable 
modem market will be characterized by declining prices. As a 
result, we seek to reduce product costs, particularly with respect 
to its end-user cable modems. In 1998, we improved our tuner design 
to reduce manufacturing costs, integrated its cable modem design 
into one printed circuit board and increased the proportion of 
standard components used in the manufacture of our products. Com21 
intends to realize future cost reductions from economies of scale 
and relocation of manufacturing. We are working to achieve a higher 
level of ASIC integration and to improve the design of its products 
in order to increase manufacturing efficiencies. In addition, we 
are developing plans to monitor continuous improvement of our 
internal engineering and manufacturing management procedures. Com21 
received ISO 9001 certification in December 1998. 


                                      7

Products 

Com21's current product offering is the ComUNITY Access system.

	The ComUNITY Access system. 

	The ComUNITY Access system consists of three primary parts: 
            - the ComCONTROLLER, a channel switch located at the cable 
              operator's headend; 
            - the ComPORT, a cable modem located at the subscriber's site;
              and
            - Network Management Provisioning System, an integrated
              network management software package.

	Com21's ComUNITY Access system has been certified for use in 
@Home service areas. Additionally, Com21 offers the Return Path 
Multiplexer and the Ingress Noise Blocker, devices used in the 
containment of noise in the upstream channel. We have shipped 
approximately 490 ComCONTROLLERs and more than 89,000 ComPORTs 
since commercial shipments began in April 1997. 

	ComCONTROLLER Headend Switch. The ComCONTROLLER controls the 
flow of data communications between the ComPORT modems located at a 
subscriber's site and an external network, such as the Internet or 
a corporate network. The ComCONTROLLER is designed with multiple 
expansion slots that can accommodate multiple Ethernet or Fast 
Ethernet interfaces. The ComCONTROLLER transmits data downstream at 
30 megabits per second (using 64 quadrature amplitude modulation). 
The expansion slots enable the addition of up to twelve 2.56 
megabits per second (using quadrature phase shift keying) upstream 
channel modules, scaling the upstream path to an aggregate 
throughput of 30 megabits per second. The upstream channels can be 
added on an incremental, hot-insertion basis, enabling a cable 
operator to respond rapidly to system faults. A single 
ComCONTROLLER is designed to support up to 2,000 ComPORT modems. 

	ComPORT Cable Modem. The ComPORT cable modem is deployed 
within a subscriber's home or office. In addition to its cable 
connection, the ComPORT is designed with a 10BaseT Ethernet port 
for direct connection to the subscriber's PC Ethernet card or an 
Ethernet hub for interconnecting up to eight PCs. Each ComPORT can 
be used either on a one-way or two-way cable plant and can be 
remotely configured for either plant by our Network Management 
Provisioning System software. Com21 has developed a FastPacket 
engine ASIC which filters and forwards data packets at Ethernet 
wire speed. The ComPORT features an expansion port for the 
insertion of future modules that will support applications such as 
cable telephony and VPNs. 

	Network Management and Provisioning System. Network Management 
Provisioning System is a network management software package that 
facilitates subscriber provisioning, fault isolation, network 
configuration, field inventory, auto-discovery and performance for 
the ComUNITY Access system. Network Management Provisioning System 
enables the cable operator to remotely monitor and manage the 
ComUNITY Access system through a graphical user interface and to 
remotely upgrade ComPORT cable modems. Network Management 
Provisioning System is a simple network management protocol manager 
running on a UNIX workstation connected to the ComCONTROLLER via a 
separate out-of-band 10BaseT Ethernet channel. Com21 believes that 
Network Management Provisioning Systems' ability to manage the 
network elements of the ComUNITY Access system from a remote site 
will further reduce cable operators' long-term cost of ownership by 
reducing the number of visits cable operator technicians will need 
to make to headend and subscriber sites. A standard PC Web browser 
can be used to monitor and manage cable modems via an Internet 
server application on the Network Management Provisioning System 
station. A single Network Management Provisioning System station is 
designed to manage up to 50 ComCONTROLLERs and 100,000 ComPORTs. 

	Return Path Multiplexer. Com21's Return Path Multiplexer is a 
high-speed, multiport analog switching device which allows up to 
eight upstream return paths to be connected to a single 
ComCONTROLLER radio frequency receiver without electrically 
combining the accumulated noise from the return paths. The Return 
Path Multiplexer is designed to solve the problem of accumulated 
noise inherent in HFC cable installations configured with large 
numbers of return paths from distributed fiber nodes. The Return 
Path Multiplexer utilizes a high-speed radio frequency switching 
technology that enables it to pass one upstream return path at a 
time to the ComCONTROLLER. This technology prevents the noise 
accumulation that would otherwise occur if multiple upstream 
returns were combined at the ComCONTROLLER. Since the Return Path 
Multiplexer allows eight upstream connections, Com21 believes that 
the installation of Return Path Multiplexers on a cable operator's 
network will reduce the number of return path receivers required in 
the cable operator's headend equipment and therefore reduce the 
capital costs for a large-scale HFC cable modem deployment. Com21 
has been shipping the Return Path Multiplexer since the third 
quarter of 1998. 

                                      8

	Mini ComCONTROLLER. Com21 has a smaller version of the 
ComCONTROLLER which has three expansion slots for upstream receiver 
and Ethernet modules. Com21 believes that this smaller headend 
product addresses the requirements of smaller cable operators and 
specialized applications (such as cable systems within a hotel) 
that cannot justify the additional expense of the larger 
ComCONTROLLER. Com21 has been shipping the Mini ComCONTROLLER since 
the second quarter of 1998 and, in addition to being installed by 
several cable operators, it has been deployed in certain locations 
within the Marriott hotel chain. 

	The Ingress Noise Blocker. The Ingress Noise Blocker is an 
external noise filter designed to meet the needs of cable operators 
whose cable networks have excessive ingress noise and who want to 
deploy two-way data service prior to solving costly overall system 
noise issues. The Ingress Noise Blocker works with both two-way HFC 
and coaxial-only cable plants and attaches to the cable tap outside 
the subscriber's site. The Ingress Noise Blocker, which is remotely 
controlled by the ComPORT, opens to allow upstream transmission of 
traffic and closes at all other times, which limits the ability of 
noise to enter the system. Because noise passes through the Ingress 
Noise Blocker only when data is being transmitted from a 
subscriber's site, the Ingress Noise Blocker allows Network 
Management Provisioning Systems to rapidly detect and isolate 
sources of noise. Although it is currently necessary for the 
subscriber to have a ComPORT modem to control the Ingress Noise 
Blocker, Com21 plans to license the Ingress Noise Blocker control 
circuitry to other cable equipment vendors. 

	The ComUNITY Access system incorporates the following features: 

	- Multiple Service Levels. The ATM-based architecture provides 
        up to 16 levels of service that can be configured by the cable 
        operator, each with specified upstream and downstream data rates. 
        This feature enables the cable operator to tailor data-over-cable 
        service and pricing to different end-user demands, which increases 
        the ability to capture additional subscriber revenues by matching 
        supply with demand. 

	- Robust, High-Speed Architecture. The ComUNITY Access system 
        transmits downstream traffic at a rate of up to 30 megabits in one 
        6 megahertz channel. Each 1.8 megahertz channel of the upstream 
        spectrum can transmit traffic at a rate of 2.56 megabits per 
        second, and the system enables the cable operator to aggregate up 
        to twelve upstream channels, permitting total upstream throughput 
        of 30 megabits per second. 

	- One-Way and Two-Way Transmission Capability. The ComUNITY 
        Access system can be configured to support both one-way and two-way 
        cable plants. The ComPORT modem works with the subscriber's 
        personal computer and a dial-up Internet access service operated 
        either by the cable operator or an Internet service provider, 
        commonly known as an ISP, to enable a one-way system. The ComPORT 
        can be reconfigured remotely from one-way mode to two-way mode 
        through a software download without replacing a subscriber's modem. 

	- Superior Noise Containment Technology. Com21 has developed 
        noise containment technology which allows the system to tolerate 
        higher levels of noise, thereby enabling cable operators to install 
        the system on noisy cable plants that could not otherwise be used 
        for two-way data transmission. 

	- Multiple Protocols. The ComUNITY Access system supports 
        multiple protocols including IP, IPX, AppleTalk and NETBEUI. 

	- Privacy from Other Subscribers. The ComPORT can be 
        configured by the cable operator to block all non-IP protocols, 
        preventing subscribers on the same cable network from 
        accidentally gaining access to others' files. 

	- Data Security. Data encryption standard encryption and 
        public key management enable secure upstream and downstream data 
        communications  between the ComCONTROLLER and the ComPORT. 

	- High-Value Business Networking. Com21's ComUNITY Access 
        system enables cable operators to establish private, secure sub-
        networks within a ComCONTROLLER while providing dedicated 
        bandwidth. These sub-networks are known as virtual local area 
        networks. Using Network Management Provisioning System, the cable 
        operator can configure secure VPNs for the business connectivity 
        markets by partitioning the transmission channels into several 
        virtual local area network, then assigning cable modems to each 
        virtual local area network. 

                                      9

	- Early Fault Detection. Network Management Provisioning 
        System offers high network visibility and control via a suite of 
        configurable alarms, diagnostic tools and performance monitoring 
        features. 

Products Under Development 

	Secure IP Module. Com21 is developing a hardware-based secure 
IP module to be inserted in the ComPORT's application interface 
module expansion slot, which is designed to enable secure encrypted 
data transmission over the Internet. Com21 believes that the secure 
IP module will increase cable operators' service revenues by 
providing them with an advanced security feature to sell to their 
subscribers, such as VPN services. The secure IP module will be 
commercially available in the first quarter of 1999. 

	Cable Telephony Module. Com21 is leveraging existing 
ComCONTROLLER and ComPORT architecture to develop an application 
interface module for the ComPORT to allow cable operators to 
provide toll-quality voice through a standard RJ11 telephone 
interface on the modem. The integration of this cable telephony 
module will enable PBX-extensions via the ComPORT for the 
telecommuter or small office/home office user. The cable telephony 
module will be an integrated component of Com21's existing ComUNITY 
Access system product line and is expected to be available for 
commercial deployment in mid-1999. In addition, Com21 is developing 
voice-over-IP technology which will be designed to allow access to 
the public switched telephone network via the cable network. 

DOCSIS Products Under Development 

DOCSIS-Compliant Cable Modems. Com21 is leveraging its ComPORT 
architecture, Packet Accelerator ASIC and radio frequency/tuner 
design in conjunction with Broadcom's media access control silicon 
to produce a family of high-performance DOCSIS-compliant cable 
modems for the North American cable market. Initial products are 
intended to comply with the DOCSIS 1.0 specifications and are 
intended to be software-upgradeable. Com21's DOCSIS 1.0 cable modem 
will be designed to support the secure IP module designed for the 
ComPORT. Using the Broadcom chipsets, Com21's DOCSIS cable modem is 
intended to support cable telephony and QoS as well as a USB 
interface which will eliminate the need to install an Ethernet card 
in a subscriber's PC USB port.  We are working with Cisco to ensure 
interoperability of our DOCSIS-compliant cable modems with Cisco's 
universal broadband router. On March 4, 1999, CableLabs announced 
the result of the certification process for the DOCSIS 1.0 cable 
modem that began on January 18, 1999.  Our DOCSIS 1.0 cable modem 
was not certified at this time.  We believe that this will not 
affect our plan to commercially introduce our initial DOCSIS modem 
in the first half of 1999.

	Home Networking Module. Com21 is developing a plug-in module 
for our DOCSIS-compliant cable modems that will connect the modem 
to a home phone network. 

	The market for cable modem systems and products is 
characterized by rapidly changing technologies and short product 
life cycles. Our future success will depend in part upon our 
ability to enhance our existing products and to develop and 
introduce, on a timely basis, new products and features that meet 
changing customer requirements and emerging industry standards. 
Com21's product development efforts are subject to a number of 
risks and we cannot assure you that these efforts will result in 
the introduction of any new products that achieve market 
acceptance. See "Risk Factors -- Our future success will depend in 
part upon our ability to enhance our existing products and to 
develop and introduce, on a timely basis, new products and features 
that meet changing customer requirements and emerging industry 
standards." 

Technology

	The Company invests in technology development to enable 
scalable, reliable broadband data communications that can 
accommodate a wide range of applications. Key technologies include: 

	- ATM architecture and ComUNITY media access control and 
        physical layer protocols, all of which provide the flexibility
        and scalability to allow cable operators to build multi-tiered
        services and VPNs; 

        - ASIC based cable modem design that allows Com21 to provide 
        high-speed, cost-effective, highly functional products; 

	- high performance radio frequency modulators and demodulators 
        which allow the cable operator to use Com21's products in a wider 
        range of cable systems; and 

                                      10

	- noise mitigation technology, which addresses many of the 
        cable plant upstream noise problems and reduces the cable 
        operator's ongoing maintenance and operational costs. 

	ATM Architecture and ComUNITY Protocols. The ComUNITY Access 
system has been designed using a high-performance cell-switching 
broadband data transport architecture. This architecture optimizes 
system performance for multiple simultaneous applications with a 
variety of requirements for data rates and latency, including 
Internet data, toll-quality voice and desktop video. In order to 
transport and manage data flows for latency-sensitive applications 
such as telephony, video conferencing or interactive games, the 
ComUNITY Access system implements an ATM virtual circuit-based data 
transport protocol upon shared broadband downstream and upstream 
channels. 

	The ComUNITY protocols are specifically designed to 
efficiently manage the ATM cell traffic on the broadband cable 
television network, taking into account topological and physical 
constraints of the two-way cable transmission systems. For example, 
the protocol must do the following: 

	- provide secure point-to-point communications in physical 
        media that are inherently insecure broadcast channels; 

	- provide reliable data delivery in a noisy communications 
        channel; 

	- automatically calibrate for variations in phase delay and 
        signal attenuation arising from the condition of the physical
        cable plant; 

	- minimize simultaneous transmission from multiple cable 
        modems to prevent return amplifier saturation and distortion; 

	- efficiently adapt to the traffic load among a large 
        subscriber base so that the system can grow and still provide high 
        service levels with low overhead costs; and 

	- provide stable performance under increasing traffic loads 
        and various traffic types with different quality of service 
        requirements. 

	The protocols also provide flexibility to handle a telephone 
return capability for applications in a one-way system. As a result 
of the work to develop robust low-level protocols, the ComUNITY 
Access system can reliably perform in both coaxial systems as well 
as modern HFC cable plants. 

	In addition, the ComUNITY Access system has been designed so 
that each cable modem can enable multiple virtual circuits for 
separate applications, allowing simultaneous, independent data 
flows with different performance requirements. Specifically, a 
single ComUNITY-based cable modem can simultaneously provide a 
high-speed, latency-insensitive 10 megabits per second IP-based 
Internet connection and a low-speed, short delay, latency-sensitive 
64 kilobits per second link for a toll-quality voice connection, 
with both data and voice applications operating independently. 

	FastPacket ASIC Technology. Com21 has internally developed a 
custom ASIC to implement the major portions of the cable modem 
functionality, including ComUNITY protocol control, data encryption 
standard encryption, ATM segmentation and reassembly, packet 
switching and filtering and multicast control. Because these 
functions are integrated into the ASIC, the cable modem can operate 
at high speeds without requiring an expensive external processor or 
ATM components. FastPacket ASIC technology allows the ComUNITY 
cable modem to filter and forward minimum size packets at Ethernet 
wire speed. As a result, the incremental development costs of high-
speed packet-handling and additional ATM and networking 
functionality have not been significant, and Com21 has been able to 
decrease the size of the electronics design and reduce the 
implementation to a single-sided printed circuit board. 

	High Performance RF Modulator and Demodulator Design. The 
ComUNITY Access system's downstream and upstream channels occupy a 
small portion of the cable plant and must coexist with existing 
signals such as television channels in the 54-750 megahertz band as 
well as other upstream services such as pay-per-view or cable 
telephony in the 5-40 megahertz band. The transmitter must be 
accurate enough to convert multi-bit symbols into a multi-level 
phase/amplitude signal without creating interference into adjacent 
channels and robust enough to perform in noisy upstream channels. 
The receiver must be sensitive enough to detect and process a 
complex quadrature amplitude modulation signal, in cable systems 
that add signal distortions and are susceptible to noise. 
Quadrature amplitude modulation encoding is a digital transmission 
technique, used in a communications channel which trades off 
greater signal to noise rates for higher data rates. Additionally, 
these designs must be cost-effective and self-tuning without the 
need for expensive, precision components or manual parametric 
adjustments during the manufacturing process. 

                                      11

	We have designed our own tuner that is less sensitive to 
operating temperature fluctuations, works well with low signal 
levels, has improved tolerance to adjacent TV signals, and cleanly 
transmits signals with low noise. This technology has enabled us to 
sell our internally developed radio frequency modulator as an 
integrated component of our ComCONTROLLER product family, whereas 
most other commercially available cable modem systems require cable 
operators to purchase a frequency translator from third-party cable 
equipment suppliers. 

	Noise Containment Technology. Reliable system performance in 
the presence of a significant level of noise in the upstream 
channel is a key issue for any cable modem system. There are two 
basic ways to minimize the effect of noise on upstream data 
transmission: 

	- reduce or eliminate noise from the upstream channel; or 

	- compensate for high noise levels using error correction 
        techniques. Com21 utilizes a combination of these techniques. 

	Com21 has developed technology specifically designed to reduce 
upstream noise. The Ingress Noise Blocker is a cable modem-
activated filter attached to the cable tap outside the subscriber's 
house. Using Com21's signal-powered dynamic radio frequency filter 
technology, the Ingress Noise Blocker blocks upstream noise and 
only allows return signals when the ComPORT is sending data 
upstream. An industry source has stated that most of the upstream 
ingress noise on cable plants originates from sources which add 
noise into the cabling system from the cable tap to a subscriber's 
television set. A cable plant with Ingress Noise Blocker filters 
installed will have a lower level of ingress noise in the upstream 
return path. This will result in reduced plant maintenance costs 
related to identifying, minimizing and correcting ingress noise 
problems. 

	Com21 has developed an Return Path Multiplexer, which is a 
high-speed, multiport analog switching device which allows up to 
eight upstream return paths to be connected to a single 
ComCONTROLLER radio frequency receiver without combining the 
accumulated noise from the return paths. Com21 has developed high-
speed radio frequency switching technology in the Return Path 
Multiplexer which will allow a control signal from the 
ComCONTROLLER to switch from one return path to another. This 
enables a specific cable modem using a specific return path to 
transmit to the ComCONTROLLER. Com21 has also developed control 
mechanisms and management protocols to manage traffic switching 
through the Return Path Multiplexer. To illustrate an Return Path 
Multiplexer application, an HFC system serving 100,000 homes would 
require 25 separate return paths (assuming 500 home fiber nodes and 
eight return nodes combined). Without Com21's Return Path 
Multiplexer, the cable operator would have to purchase several 
headend units to enable data service for the entire HFC network. 
Instead, the cable operator will be able to purchase a single 
ComCONTROLLER and several Return Path Multiplexers at a 
significantly lower cost. Com21's product development efforts are 
subject to a number of risks, and there can be no assurance that 
these efforts will result in the successful introduction of any 
other new products, or that such products will achieve market 
acceptance. See "Risk Factors -- Our current products are not 
compatible with products offered by our competitors and are subject 
to evolving industry standards. If our products do not comply with 
any standards that achieve market acceptance, customers may refuse 
to purchase our products." 

	The ComUNITY Access system incorporates an encoding technique 
called forward error correction on upstream, and downstream 
channels. Forward error correction is a technique that inserts 
redundant information into the data stream so that a certain number 
of data errors can be detected and corrected. This technique, 
coupled with Com21's high performance radio frequency modem design, 
allows Com21's cable modems to operate at high data rates with 
nominal bit error rate of 10(-9) in a cable plant with a signal-to-
noise-ratio of 16 decibels. This bit error rate performance is 
substantially better than the MCNS specification of 10(-9) bit 
error rate at 25 decibel signal-to-noise ratio. As a result, 
Com21's products can provide more reliable data service in noisier 
cable plants than a modem built to that specification. More 
specifically, the 9 decibel difference in performance lowers noise 
sensitivity by a factor of eight. 

	Contribution to the DOCSIS Standard. Com21 intends to continue 
to play an integral role in the continuing evolution of the DOCSIS 
standard. In this regard, Com21 has participated in the development 
of the DOCSIS standard, as a core reviewer and content reviewer to 
DOCSIS 1.0 and 1.1, and by contributing its protocol expertise to 
the development of DOCSIS 1.2. 

	Com21 is also a vendor-author to CableLabs' PacketCable 
specification and is a core reviewer and content contributor to the 
IEEE 802.14 standard. 

                                      12

Customers and Markets

	Customers. Com21 began commercial shipments of its cable modem 
products in April 1997. In 1998, Com21 shipped approximately 320 
ComCONTROLLER headends and more than 77,000 ComPORT modems, as 
compared to approximately 170 ComCONTROLLER headends and more than 
12,000 ComPORT modems in 1997. Com21 has shipped its systems for 
use in 67 locations in North America and 87 locations 
internationally. In the U.S., we sell directly to cable operators 
and systems integrators. Internationally, Com21 sells primarily to 
systems integrators, including Philips and Siemens, who in turn 
sell to cable operators. 

	The number of households currently passed in service areas 
where Com21's cable modem systems have been commercially deployed 
exceeds 9 million. Com21 considers a sale as a commercial 
deployment if the cable operator to whom the sale was made has 
begun offering data-over-cable services to paying subscribers. The 
following table depicts an example of the geographic diversity of 
commercial deployments of the ComUNITY Access system as of December 
31, 1998. 

<TABLE>
<CAPTION>
                          Com21 Commercial Deployments
        _________________________________________________________________
          Customer                                Location
        ___________________________             _________________________
        <S>                                     <C>
        Prime Cable                             Chicago, Illinois
        Cox Communications                      Las Vegas, Nevada
        TCI                                     Baton Rouge, Louisiana
                                                Denver, Colorado
                                                Pittsburgh, Pennsylvania
        Charter Communications                  Pasadena, California
                                                Newtown, Connecticut
        Fibertel/TCI-International              Buenos Aires, Argentina
        France Telecom                          Bordeaux, France
                                                Marseilles, France
        Brutele/Igretec                         Charleroi, Belgium
        Eneco NV                                Rotterdam, Netherlands
        CTC                                     Barcelona, Spain
        Cablecom                                Zurich, Switzerland
        Tokyo Cable                             Tokyo, Japan
        Destiny Cable                           Manila, Philippines
        Jaixing Cable                           Jaixing, China
        Saturn Communications                   Wellington, New Zealand
</TABLE>

        Com21 did not commence product shipments until April 1997. Our
success will depend on the timely adoption of our products by cable 
operators and end users. The market for our products has only 
recently begun to develop, is rapidly evolving and is characterized 
by an increasing number of market entrants that compete or intend 
to compete with the Company. See "Risk Factors -- We have a short 
operating history, have incurred net losses since our inception and 
expect future losses," "-- Our operating results in one or more 
future periods are likely to fluctuate significantly and may fail 
to meet or exceed the expectations of securities analysts or 
investors," "-- Because our market is new and evolving, we cannot 
accurately predict its future growth rate or its ultimate size, and 
widespread acceptance of our products is uncertain" and "-- The 
market in which we operate is highly competitive and has many more 
established competitors." 

	In 1997, revenues attributable to Philips, 3Com and Siemens 
accounted for 21%, 16% and 12% of total revenues, respectively. In 
1998, revenues attributable to TCI, Philips and Siemens accounted 
for 24%, 15% and 14% of total revenues, respectively. For the year 
ended December 31, 1998, the top five customers accounted for an 
aggregate of 66% of total revenues. See "Risk Factors - Our 
customer base is concentrated and the and the loss of one or more 
of our customers could cause our business to suffer" and 
"Management's Discussion and Analysis of Financial Condition and 
Results of Operations." 

	In 1997 and 1998, revenues attributable to international 
customers constituted 64% and 52% of total revenues, respectively. 
Com21 believes that its ATM-based system has been adopted more 
rapidly in Europe and other international markets because of the 
greater acceptance of the benefits of ATM-based technology as well 
as the more recently upgraded and installed cable plants. See "Risk 
Factors -- We are subject to risks associated with operating in 
international markets" and "Management's Discussion and Analysis of 
Financial Condition and Results of Operations." 

                                      13

	The following customer examples illustrate how certain of 
Com21's customers have deployed its products: 

	Fibertel/TCI-International is a cable operator with 
approximately 800,000 households passed in Buenos Aires, Argentina. 
Fibertel offers a single Internet service priced at $125 per month 
for two-way service. Fibertel is marketing a private corporate 
networking service that uses Com21's virtual local area network 
capability and is selling dedicated line connections for business 
applications using Com21's quality of service capability to 
provision constant-bit-rate service per modem. Fibertel uses 
various features of the ComUNITY Access system to provide different 
service products for different subscribers' needs. 

	Charter, one of the largest cable television operators in the 
U.S. with approximately 1.1 million subscribers, has deployed 
service in several locations including the Pasadena, California 
area, which passes approximately 300,000 households. Charter offers 
Charter Pipeline, its general Internet service, at prices ranging 
from $50 per month to $500 per month with five service tiers, with 
the following service levels (upstream/downstream data rates): 

        - "diamond service" (2 megabits per second/1 megabits per second);
        - "platinum service" (1 megabits per second/512 kilobits per second);
        - "gold service" (768 kilobits per second/384 kilobits per second);
        - "silver service" (512 kilobits per second/128 kilobits per second);
        - "bronze service" (256 kilobits per second/56 kilobits per second).

	In addition to its general Internet access service, Charter 
has established a campus local area network extension on its cable 
network using the ComUNITY Access system's virtual local area 
network capability and provides off-campus connections to the 
students and staff of the California Institute of Technology. 
Charter also plans to use the ComUNITY Access system's telephone 
return feature to provide access for subscribers who are not yet 
two-way enabled. 

	Telia Stofa A/S is the second largest cable operator in 
Denmark with more than 200,000 households passed. Telia Stofa is 
using the ComUNITY Access system to deliver high-speed data-over-
cable service, along with other integrated services, to residential 
and business customers, allocating varying levels of bandwidth to 
address different subscriber requirements. Telia Stofa gives 
residential and business users the option of choosing from three 
different tiers of service: StofaNet Private, StofaNet Study and 
StofaNet Business. This allows Telia Stofa to charge subscribers 
according to the bandwidth used, versus a flat fee, and results in 
increased revenues. Telia Stofa has indicated that one of the 
primary reasons that Telia Stofa selected Com21 was that we offer 
quality of service, virtual local area network and other future 
integrated services. 	

Markets. Com21's products enable cable operators to serve three 
primary end-user markets each of which has widely varying speed, 
service and pricing requirements. The table below divides these 
markets by user segment and outlines their typical access 
requirements and attributes: 



                                      14
<TABLE>
<CAPTION>
                                                          Typical Access
                        Access          Potential            Solution
  User Segment        Requirement      Applications         Used Today
<S>               <C>                <C>                <C>
_________________ __________________ _________________ ____________________

Corporate Tele-   -Remote access to  -Remote local      -Analog Modem
commuter and Re-  corporate local    area network       (28.8-56 Kbps)
mote Office       area networks and  access             -ISDN (128 Kbps)
Users             Intranets          -VPN Provisioning  -T-1 (1.54 Mbps)
                  -High speed Inte-  -File Transfer
                  rnet access        -"Always on" Int-
                                     ernet access
                                     -High Security
                                     -Telephony enhance-
                                     ments, e.g., PBX
                                     extension
                                     -Desktop video
                                     Conferencing
_________________ __________________ _________________ ____________________
Small Office/Home -Remote access to  -"Always on"       -Analog modem 
Office Users      local area         Internet Access    (28.8-56 Kbps)
                  networks           -Connectivity to   -ISDN (128 Kbps)
                  -High speed        several businesses -Fractional T-1
                  Internet access    -Alternate tele-   (384 Kbps)
                                     phone Service
                                     -Desktop video
                                     conferencing
_________________ __________________ _________________ ____________________
Residential       -Low to high speed -Internet access   -Analog modem
Consumer          Internet access    -Web-based multi-  (28.8-56 Kbps)
Internet Users                       media content,e.g. -ISDN (128 Kbps)
(Occasional and                      on-line services
Frequent)                            -E-mail, file
                                     transfer
</TABLE>

        Corporate Telecommuter and Remote Office Users. The needs of
corporate telecommuter and remote office business users include 
high availability, high-speed access to corporate intranets and 
corporate local area networks. These users also must interconnect 
the local area networks among their various offices. Such offices 
may be co-located, as in the case of a large campus, or remotely 
located, as in the case of a sales office or a telecommuter's home. 
A parallel application for this business market is the 
interconnection of remote workers to a central telephone PBX, 
distributing voice traffic to users throughout a campus or to a 
remote office. Security and reliability are of utmost importance 
for corporate users. Other applications which business users may 
require include desktop video conferencing and rapid two-way 
transfer of large data files. Corporate telecommuters and remote 
office users are generally willing to pay a premium for highly 
reliable, high-speed service with advanced features. 

	SOHO Users. Small office/home office businesses increasingly 
find the Internet an efficient and cost-effective means to 
communicate and transact with their customers and suppliers. Com21 
believes these businesses require medium-to-high speed Internet 
access that is reliable and always available. Small office/home 
office users may have a local area network to connect to cable 
modem services and may require routing in order to connect multiple 
terminals. These businesses may also require desktop video 
conferencing capability and connectivity with other businesses. 
Because these requirements may be critical to running their 
business, certain small office/home office users are willing to pay 
more for higher-quality, secure, reliable service than are 
residential consumer Internet users. 

	Residential Consumer Internet Users. Residential consumer 
Internet users generally only require a connection to their ISP, 
without the same level of security and reliability required by 
business users. Frequent users desire medium-to-high speed access 
to the Internet for Web browsing and downloading of multimedia 
applications and files. Occasional users require low-to-medium 
speed access to the Internet on a limited basis for Web browsing, 
e-mail and on-line services. Occasional users generally prefer low-
cost service, whereas more frequent users are generally willing to 
pay a slight premium for higher speed. 

Manufacturing 

	Com21 tests and assembles its ComCONTROLLER headend equipment 
in its facility in Milpitas, California. We outsource ComCONTROLLER 
printed circuit board assemblies on a turnkey basis to Sanmina and 
CMC, and perform final integration and burn-in on-site. Com21 
configures the headend equipment and the network management and 
provisioning software prior to customer shipment. 

                                      15

	Com21 outsources turnkey manufacturing of the ComPORT cable 
modem to Celestica, a contract manufacturer located in Toronto, 
Canada. Together with Celestica, Com21 has developed and 
implemented a series of product test methodologies, quality 
standards and process control parameters. Com21 is working with 
Celestica to set up production in a second Celestica facility 
located in Monterrey, Mexico. We anticipate production at this 
facility will begin in the first quarter of 1999. This move will 
enable us to continue to reduce the cost of our modems and ensure 
continuous supply without disruption if plant problems were to 
occur. We believe that employing a turnkey manufacturer will enable 
it to meet anticipated manufacturing needs and reduce the cost of 
product procurement. 

	Com21's engineering team designs ASICs and performs simulation 
testing. When the fundamental design is stable, Com21's contract 
foundry fabricates the ASIC for prototype testing and upon 
completion of these tests the ASIC is manufactured in volume by 
Atmel. We believe our current manufacturing capabilities can 
accommodate our requirements through the end of 2000. Warranty and 
repair support is performed at our Milpitas facility. Com21 
received ISO 9001 certification in December 1998. 

	Com21 maintains only a limited in-house manufacturing 
capability for final assembly, testing and integration of headend 
products. Our future success will depend, in significant part, on 
our ability to manufacture, or have others manufacture, its 
products cost-effectively and in volumes sufficient to meet 
customer demand. There are a number of risks associated with our 
dependence upon third party manufacturers, including but not 
limited to the following: 

	- reduced control over delivery schedules; 
	- quality assurance; 
	- manufacturing yields and costs; 
	- the potential lack of adequate capacity during periods of 
        excess demand; 
	- limited warranties on products supplied to us; 
	- increases in prices; and 
	- the potential misappropriation of Com21's intellectual 
        property. 

	A manufacturing disruption could impact the production of 
Com21's products for a substantial period of time, which could have 
a material adverse effect on our business, operating results and 
financial condition. Com21 has no long-term contracts or 
arrangements with any of its manufacturers that guarantee the 
availability of product, the continuation of particular payment 
terms or the extension of credit limits. There can be no assurance 
that Com21 will not experience supply problems in the future from 
any of its manufacturers. Any such difficulties could have a 
material adverse effect on our business, operating results and 
financial condition. 

	In addition, Celestica is a foreign corporation, and we may 
increase our use of foreign manufacturers in the future. Any 
foreign or domestic regulations regarding foreign exports and 
imports, trade barriers and tariffs currently in place or imposed 
in the future could materially and adversely affect our ability to 
obtain cable modems. Because lead times for materials needed to 
produce cable modems and headend equipment can be between eight and 
16 weeks, Com21 may not be able to meet the demand for its 
products, which could adversely affect our ability to support cable 
operators' expansion of cable modem service to cable operators' 
customers. We have only limited experience manufacturing and 
arranging for the manufacture of our products, and there can be no 
assurance that we or any manufacturer of our products will be 
successful in increasing its manufacturing volume. We may need to 
procure additional manufacturing facilities and equipment, adopt 
new inventory controls and procedures, substantially increase our 
personnel and revise our quality assurance and testing practices. 
We cannot assure you that any of these efforts will be successful. 
See "Risk Factors -- We may not be able to produce sufficient 
quantities of our products because we depend on third-party 
manufacturers and have limited manufacturing experience" and "-- We 
are subject to risks associated with operating in international 
markets." 

Marketing and Sales 

	Marketing. Domestically, we target our marketing efforts 
primarily at cable operators. A limited number of cable operators 
comprise the domestic cable industry and purchase decisions by each 
cable operator are typically influenced by the cable operator's 
technical experts. Direct marketing activities focus on reaching 
these technical experts and creating product awareness and 
credibility for Com21's systems within the cable operator 
community. Internationally, we focus our marketing efforts on 
supporting our systems integration partners' marketing programs. 

                                      16

	A key factor to building global brand awareness for Com21 
products is promoting the success of Com21's commercial cable modem 
system deployments. Com21 also educates cable operators regarding 
the benefits of providing tiered services to a diverse subscriber 
base, ranging from residential consumers to business users. Com21 
is also building its brand name through continued publicity and 
referral efforts in both media and industry-centered activities. 
Com21 markets its systems through several promotional programs, 
including the following: 

	- direct mail campaigns to the larger cable operators; 
	- editorial presence in various trade magazines; 
	- public speaking opportunities; 
	- national cable trade show participation; 
	- Web site-based communication and promotion; 
	- media sponsorships; and 
	- participation in standards activities. 

	In anticipation of the introduction of our DOCSIS-compliant 
cable modems, we are in the process of establishing alternative 
distribution channels including Internet and retail channels. We 
will also begin consumer marketing activities. 

	Sales. We have a sales force of 19 people in five North 
American locations and four locations internationally. Currently, 
Com21 sells its products in North America primarily through direct 
sales channels to cable operators. Internationally, we sell our 
products primarily to systems integrators, who in turn sell to 
cable operators. Com21's two largest systems integrators are 
Philips and Siemens, both of whom have a strong presence in 
numerous markets. Com21's systems integrators have established 
customer bases and relationships with cable operators. These 
relationships allow Com21 to market and create brand awareness 
within each region by selling locally into their respective 
markets, and the local presence of the systems integrators bridges 
cultural and communication gaps. As of December 31, 1998, Com21 had 
agreements with 26 systems integrators in North America, Europe, 
Asia, Latin America and the Pacific Rim. 

Research and Development 

	Com21 focused its research and development efforts on 
increasing the scalability and performance of its current products, 
reducing the cable operator's cost of ownership, enhancing value-
added services for subscribers, reducing costs and supporting 
emerging cable modem standards. In addition to enhancements of the 
current ComUNITY Access system products, Com21 has also focused 
research and development efforts on new products, including DOCSIS-
compliant cable modems, a secure IP module, an enterprise cable 
telephony module and a home networking module. Other developments 
underway include a 155 megabits per second OC-3 ATM interface to 
provide an integrated connection to the cable operator's fiber 
synchronous optical network distribution network, and next-
generation DOCSIS-compliant cable modems. See "Products -- Products 
under development" and "-- DOCSIS products under development."

	Our research and development expenditures were $12.4 million 
in 1996, $13.5 million in 1997 and $19.9 million in 1998. Research 
and development expenses primarily consist of salaries and related 
costs of employees engaged in ongoing research, design and 
development of our products and technology. 

	As of December 31, 1998, Com21 had a team of 89 engineers with 
expertise in ASIC design and electronics, encryption, radio 
frequency modulation and demodulation, digital electronics design, 
networking, embedded software, and network management. The 
engineering team includes three engineers with Ph.D.s and 42 
engineers with advanced degrees. Com21 is seeking to hire 
additional skilled engineers for research and development. If we 
encounter delays in hiring additional engineers, our business, 
operating results and financial condition could be adversely 
affected. See "Risk Factors -- Competition for qualified personnel 
in the cable networking equipment and telecommunications industries 
is intense, and we may not be successful in attracting and 
retaining these personnel."
                                      17


	Com21's future performance depends on a number of factors, 
including its ability to identify emerging technological trends in 
its target markets, develop and maintain competitive products, 
enhance its products by adding innovative features that 
differentiate its products from those of competitors, bring 
products to market on a timely basis at competitive prices, 
properly identify target markets and respond effectively to new 
technological changes or new product announcements by others. We 
cannot assure you that the design and introduction schedules for 
any additions and enhancements to our existing and future products 
will be met, that these products will achieve market acceptance, or 
that these products will be able to be sold at average selling 
prices that are favorable to us. In evaluating new product 
decisions, we must anticipate well in advance the future demand for 
product features and performance characteristics, as well as 
available supporting technologies, manufacturing capacity, industry 
standards and competitive product offerings. We must also continue 
to make significant investments in research and development in 
order to continually enhance the performance and functionality of 
its products to keep pace with competitive products and customer 
demands for improved performance, features and functionality. The 
technical innovations required for Com21 to remain competitive are 
inherently complex and require long development cycles. Such 
innovations must be completed before developments in networking 
technologies or standards render them obsolete and must be 
sufficiently compelling to induce network equipment vendors to 
favor them over alternative technologies. Moreover, Com21 must 
generally incur substantial research and development costs before 
the technical feasibility and commercial viability of a product 
line can be ascertained. We cannot assure you that revenues from 
future products or product enhancements will be sufficient to 
recover the development costs associated with such products or 
enhancements or that Com21 will be able to secure the financial 
resources necessary to fund future development. The failure to 
successfully develop new products on a timely basis could have a 
material adverse effect on the Company's business, operating 
results and financial condition. See "Risk Factors -- Our future 
success will depend in part upon our ability to enhance our 
existing products and to develop and introduce, on a timely basis, 
new products and features that meet changing customer requirements 
and emerging industry standards." 

Customer Service and Technical Support 

	Com21 believes that successful long-term relations with its 
customers require a service organization committed to customer 
satisfaction. As of December 31, 1998, Com21 had 13 technical 
support employees at its headquarters. Com21 makes available to all 
new customers a five day training course prior to receiving and 
installing a system. Customer personnel are trained in the 
installation, maintenance and operation of the ComUNITY Access 
system. 

	In North America, Com21 provides direct support by telephone 
and at the customers' locations. Com21 supplies support 24 hours a 
day, seven days a week. Internationally, systems integrators 
provide first level support, and Com21 provides second level 
support. Com21 maintains a customer call tracking system that 
captures and monitors service activities. Com21 is able to identify 
problems with a customer's ComUNITY Access system via a dialup 
analog modem connection or a Web-based management interface to 
assist with diagnostics. 

Competition 

	The markets for Com21's products are intensely competitive, 
rapidly evolving and subject to rapid technological change. The 
principal competitive factors in this market include, or are likely 
to include, product performance and features, reliability, 
technical support and service, relationships with cable operators 
and systems integrators, compliance with industry standards, 
compatibility with the products of other suppliers, sales and 
distribution capabilities, strength of brand name, price, long-term 
cost of ownership to cable operators and general industry and 
economic conditions. Many of Com21's current and potential 
competitors have longer operating histories, greater name 
recognition and significantly greater financial, technical, 
marketing and distribution resources than we do. These competitors 
may undertake more extensive marketing campaigns, adopt more 
aggressive pricing policies and devote substantially more resources 
to developing new products than we do. We cannot assure you that we 
will be able to successfully compete against current or future 
competitors or that the competitive pressures we face will not 
materially adversely affect our business, operating results and 
financial condition. In response to changes in the competitive 
environment, we may make certain pricing, service, marketing or 
other strategic decisions that could have a material adverse effect 
on our business, operating results and financial condition. We 
cannot assure you that our competitors will not develop 
enhancements to, or future generations of, products that will offer 
prices or performance superior to that of our products. Com21 
believes that the broad adoption of the DOCSIS standard will cause 
increased competition in the North American market, which is likely 
to negatively affect our gross margin. We cannot assure you that 
competitors will not develop DOCSIS-compliant cable modems more 
quickly than Com21. Current customers that move to the DOCSIS 
platform could choose alternative cable modem suppliers or choose 
to purchase DOCSIS-compliant cable modems from competing suppliers. 
This competition could materially adversely affect our business, 
operating results and financial condition. 

                                      18

	Com21's current and potential competitors include 3Com, Cisco 
Systems, General Instrument Corporation, Hybrid, Motorola, Inc., 
Nortel Networks, Samsung Electronics Company, Ltd, Terayon 
Communication Systems and Zenith Electronics Corporation. Some of 
these competitors have existing relationships with many of our 
prospective customers. We cannot assure you that we will be able to 
establish relationships with cable operators who have existing 
relationships with our competitors, and failure to establish these 
relationships could have a material adverse effect on our business, 
operating results and financial condition. In addition, Com21 
anticipates that some large consumer electronics companies, such as 
Matsushita (which markets products under the Panasonic brand name), 
Sony Corp., Thomson and Toshiba America, Inc., will likely 
introduce competitive cable modem products in the future. As the 
DOCSIS standard is adopted in the North American market, the 
distribution of cable modems may move into the retail channel. If 
this occurs, the large consumer electronics companies could gain a 
competitive advantage, due to their well-established retail 
distribution capabilities. There can be no assurance that Com21 
will be able to compete successfully against current or future 
competitors or that competitive pressures faced by us will not have 
a material adverse effect on Com21's business, operating results 
and financial condition. See "Risk Factors-- The market in which we 
operate is highly competitive and has many more established 
competitors." 

	We also expect to face intense competition from wireless and 
telco-related wireline technologies that provide high bandwidth 
access in the local loop. Competing technologies include telco-
related xDSL implementations, such as ADSL and high bit rate 
digital subscriber line, commonly known as HDSL in the 
telecommunications industry, wireless offerings such as LMDS, MMDS 
and DBS. We expect competition from telco-related wireline 
solutions to be intense because of the ubiquity of the telephone 
infrastructure. We cannot assure our cable modem technology will 
compete effectively against wireline and wireless technologies. 
Additionally, we believe that digital set-top boxes that integrate 
cable modems to provide Internet access via the television may 
compete with our cable modems in the lower end consumer Internet 
access market. Equipment suppliers of such products include General 
Instrument, NCI, Nokia, Panasonic, Philips, Scientific Atlanta and 
WebTV (Microsoft). 

Intellectual Property

	Com21 relies on a combination of patent, copyright and 
trademark laws, and on trade secrets, confidentiality provisions 
and other contractual provisions to protect its proprietary rights. 
These measures afford only limited protection. Com21 currently has 
five issued U.S. patents and several pending patent applications. 
See "Risk Factors -- Our failure to adequately protect our 
proprietary rights may adversely affect us." 

Employees

	As of December 31, 1998, Com21 had a total of 176 full-time 
employees and 11 full-time contractors. Of the total number of 
employees, 89 were in research and development, 31 in marketing and 
technical support, 23 in operations, 19 in sales and 14 in 
administration. Com21's employees are not represented by any 
collective bargaining agreement with respect to their employment by 
Com21, and Com21 has never experienced an organized work stoppage. 

	Com21's future success is heavily dependent upon its ability 
to hire and retain qualified technical, marketing and management 
personnel. The competition for personnel is intense, particularly 
for engineering personnel with related networking and integrated 
circuit design expertise and for technical support personnel with 
networking engineering expertise. See "Risk Factors -- Competition 
for qualified personnel in the cable networking equipment and 
telecommunications industries is intense, and we may not be 
successful in attracting and retaining such personnel." 

Risk Factors

        You should carefully consider the risks described below before
making a decision to invest in Com21. You may lose all or part of 
your investment. The risks and uncertainties described below are 
not the only ones facing our company. 

        We have a short operating history, have incurred net losses 
since our inception and expect future losses. We did not commence
product shipments until April 1997. As a result, we have only a
limited operating history upon which you may evaluate us and our
prospects. We have incurred net losses since inception and expect 
to continue to operate at a loss through at least fiscal 1999. As 
of December 31, 1998, we had an accumulated deficit of 
approximately $48.7 million. To achieve profitable operations on a 
continuing basis, we must successfully design, develop, test, 
manufacture, introduce, market and distribute our products on a 
broad commercial basis. 

        Our ability to generate future revenues will depend on a 
number of factors, many of which are beyond our control. These 
factors include the following: 

                                      19

	- the rate at which cable operators upgrade their cable plants; 

	- our ability and the ability of cable operators to coordinate 
        timely and effective marketing campaigns with the availability of 
        upgrades; 

	- cable operators' success in marketing data-over-cable 
        services and our modems to subscribers; 

	- cable operators' success in setting prices for data 
        transmission installation service; and 

	- cable operators' success and timeliness in the installation 
        of subscriber site equipment. 

	Due to these factors, we cannot forecast with any degree of 
accuracy what our revenues will be or how quickly cable operators 
will adopt our systems. Therefore, we may not achieve, or be able 
to sustain, profitability. 

	Our operating results in one or more future periods are likely 
to fluctuate significantly and may fail to meet or exceed the 
expectations of securities analysts or investors. Our operating 
results are likely to fluctuate significantly in the future on a 
quarterly and an annual basis due to a number of factors, many of 
which are outside our control. Factors that could cause our 
revenues to fluctuate include the following: 

	- variations in the timing of orders and shipments of our products; 

	- variations in the size of orders by our customers; 

	- new product introductions by us or by competitors; 

	- delays in introducing cable modems that comply with the new 
        data-over-cable service interface specification; 

	- the timing of upgrades of cable plants; 

	- variations in capital spending budgets of cable operators; 

	- delays in obtaining regulatory approval for commercial 
        deployment of cable modem systems; and 

	- general economic conditions and economic conditions specific 
        to the cable and electronic data transmission industries. 

	The amount and timing of our operating expenses generally will 
vary from quarter to quarter depending on the level of actual and 
anticipated business activities. Research and development expenses 
will vary as we develop new products. 

	We have a limited backlog of orders, and total revenues for 
any future quarter are difficult to predict. Supply, manufacturing 
or testing constraints could result in delays in the delivery of 
our products. Any delay in the product deployment schedule of one 
or more of our cable operator customers would likely materially 
adversely affect our operating results for a particular period. 

        A variety of factors affect our gross margin, including the following:

	- the sales mix between our headend equipment and cable modems; 

        - the volume of products manufactured;

        - the type of distribution channel through which we sell our products;

	- the average selling prices of our products; and 

	- the effectiveness of our cost reduction efforts. 

                                      20

	In the past we have experienced and we anticipate that we will 
continue to experience decreases in the average selling price of 
our cable modems and our other products. In addition, the sales mix 
between our headend equipment and modems also affects our gross 
margin. Sales of our cable modems yield lower gross margins than do 
sales of our headend equipment. In the future, we anticipate that 
our sales mix will be increasingly weighted toward cable modems. As 
a result, we expect to experience continued downward pressures on 
our gross margin. If price declines are not offset by a decline in 
the costs of manufacturing our cable modems, our gross margin will 
be adversely affected. 

	Because of these factors, our operating results in one or more 
future periods are likely to fail to meet or exceed the 
expectations of securities analysts or investors. In that event, 
the trading price of our common stock would likely decline. See 
"Management's Discussion and Analysis of Financial Condition and 
Results of Operations." 

	We depend on cable operators for substantially all of our 
sales. We depend on cable operators to purchase our headend 
equipment and cable modems and to market data transmission service 
to end-users. Cable operators may not have enough programming 
channels over which they can offer these services. Even if a cable 
operator chooses to provide data transmission services, it may not 
choose our products to do so. 

	The future success of services providing data-over-cable 
transmission depends upon the ability of cable systems to support 
two-way communications. While many cable operators are in the 
process of upgrading, or have announced their intention to upgrade, 
their cable plants to hybrid fiber coaxial cable, commonly known as 
HFC in the telecommunications industry, many cable operators have 
delayed these upgrades for financial or regulatory reasons. Cable 
operators have limited experience with cable plant upgrades, and 
investments in upgrades place a significant strain on their 
resources. Most cable operators are already highly leveraged and 
may not have the capital required to upgrade their infrastructure 
or to offer new services such as data-over-cable transmission. 

	Even after installation, we remain highly dependent on cable 
operators to continue to maintain their cable plants so that our 
products will operate at a consistently high performance level. 
Accordingly, the success and future growth of our business will be 
subject to economic and other factors affecting the cable 
television industry, particularly the industry's ability to 
continue to finance the substantial capital expenditures necessary 
to use our products effectively. 

	The market in which we sell our products is characterized by 
many competing technologies, and the technology on which our 
product is based may not compete effectively against other 
technologies. The market for high-speed data transmission services 
has several competing technologies which offer alternative 
solutions. Technologies which compete with our solution are: 

	- telephone company-related wireline technologies such as: 

                - dial-up (analog modems); 

                - integrated services digital network, commonly known as ISDN
                in the telecommunications industry; and 
        
                - digital subscriber line, commonly known as DSL in the
                telecommunications industry. 

	- wireless technologies such as: 

                - local multipoint distribution service, commonly known as
                LMDS in the telecommunications industry; 

                - multi-channel multipoint distribution service, commonly 
                known as MMDS in the telecommunications industry; and 

                - direct broadcast satellite, commonly known as DBS in the 
                telecommunications industry. 

	In particular, because of the widespread reach of telephone 
networks and the financial resources of telephone companies, 
competition from telephone company-related solutions is expected to 
be intense. Cable modem technology may not be able to compete 
effectively against wireline or wireless technologies. 

	In addition, one of our competitors has developed a 
commercially available alternative modulation technology. 
Significant market acceptance of alternative solutions for high-
speed data transmission could decrease the demand for our products 
if these alternatives are viewed as providing faster access, 
greater reliability, increased cost-effectiveness or other 
advantages. 

                                      21

	Our current products are not compatible with products offered 
by our competitors and are subject to evolving industry standards. 
If our products do not comply with any standard that achieves 
market acceptance, customers may refuse to purchase our products. 
Our headend equipment and cable modem products do not interoperate 
with the existing equipment of other cable modem suppliers. 
Therefore, potential customers who wish to purchase broadband 
Internet access products from multiple suppliers may be reluctant 
to purchase our products. 

	The emergence or evolution of industry standards, either 
through adoption by official standards committees or widespread use 
by cable operators or telephone companies, could require us to 
redesign our products. Our current products are not in full 
compliance with the standards and developing specifications as 
proposed by: 

	- data-over-cable service interface specification; 

	- Digital Audio Video Interactive Council and Digital and 
        Video Broadcast Organization; 

	- Institute of Electrical and Electronics Engineers; 

	- Internet Engineering Task Force; and 

	- other relevant standards bodies. 

	We expect the emerging data-over-cable service interface 
specification, commonly referred to as the DOCSIS standard, to 
achieve substantial market acceptance in North America, and we are 
currently developing DOCSIS-compliant cable modems. The continuing 
evolution of the DOCSIS standard may cause us to incur additional 
costs associated with making our cable modems compliant with 
various versions of the standard. We cannot assure you that our 
DOCSIS-compliant cable modems will be introduced on schedule, or 
that they will meet with market acceptance. 

	There is currently no generally accepted standard for data-
over-cable internationally. If any standards achieve market 
acceptance and if our products do not comply with them, customers 
may refuse to purchase our products. Additionally, different 
implementations of the same specification could slow deployment of 
our products if these differences cause our products not to be 
interoperable with other companies' products. The widespread 
adoption of the DOCSIS or other standards would likely cause 
aggressive price competition in the cable modem market and result 
in lower sales of our headend products and lower revenues from 
licensing of our network management software. Any of these events 
would adversely affect our gross margin and our operating results. 

	The development of new competing technologies and standards 
increases the risk that current or new competitors could develop 
products that would reduce the competitiveness of our products. If 
any of these new technologies or standards achieve widespread 
market acceptance, any failure by us to develop new products or 
enhancements, or to address these new technologies or standards, 
would harm our business. 

	Because our market is new and evolving, we cannot accurately 
predict its future growth rate or its ultimate size, and widespread 
acceptance of our product is uncertain.	Our success depends on the 
timely adoption of our products by cable operators and their 
subscribers. The market for our products is rapidly evolving. An 
increasing number of competitors have introduced or developed, or 
are in the process of introducing or developing, cable modem 
systems that compete with our own. Some of the critical issues 
concerning the use of cable modems, including security, 
reliability, cost, ease of deployment and administration, and 
quality of service, remain largely unresolved and may harm our 
business. Because our market is new and evolving, we cannot 
accurately predict its future growth rate or its ultimate size. 

	Prior to purchasing our products, some cable operators may 
require that their internal technical personnel or their Internet 
service provider certify our products to determine if they work 
with their systems. Certification of our products may not occur in 
a timely manner, if at all. In some cases, in order for our 
products to be certified we may have to make significant product 
modifications. Failure to become certified could render us unable 
to deploy our products in a timely manner with one or more cable 
operators. Any of these possibilities could harm our business. The 
market for cable modems may never fully develop, and even if it 
does, we may not be able to compete successfully in that market. If 
our products do not achieve widespread acceptance in their markets, 
our business may be adversely affected. 

                                      22

	If sales forecasted for a particular period are not realized 
in that period due to the lengthy sales cycle of our products, our 
operating results for that period will be harmed. The sales cycle 
of our products is typically lengthy and involves: 

        - a significant technical evaluation;

        - a commitment of capital and other resources by cable operators;

	- delays associated with cable operators' internal procedures 
        to approve large capital expenditures; 

	- time required to engineer the deployment of new technologies 
        within the networks of cable operators; and

        - testing and acceptance of new technologies that affect key
        operations.

	For these and other reasons, our sales cycle generally lasts 
from six to 12 months. Furthermore, the announcement and projected 
product introduction of DOCSIS-compliant cable modems have already 
affected sales cycles, as most domestic cable operators have chosen 
to delay large scale deployment of cable modems until DOCSIS-
compliant cable modems are available. 

	The market in which we operate is highly competitive and has 
many more established competitors. The market for our products is 
intensely competitive, rapidly evolving and subject to rapid 
technological change. 

	Many of our current and potential competitors have been 
operating longer, have better name recognition, better established 
business relationships and significantly greater financial, 
technical, marketing and distribution resources than we do. These 
competitors may undertake more extensive marketing campaigns, adopt 
more aggressive pricing policies and devote substantially more 
resources to developing new or enhanced products than we do. If we 
fail to develop DOCSIS-compliant cable modems in a timely manner, 
our customers may choose another supplier for DOCSIS-compliant 
cable modems, and our business, operating results and financial 
condition could be materially adversely affected. See "Business -- 
Competition." 

	We must reduce the cost of our cable modems to remain 
competitive. Certain of our competitors' cable modems are priced 
lower than our cable modems. As headend equipment becomes more 
widely deployed, the price of cable modems and related equipment 
will continue to decline. In particular, we believe that the 
adoption of industry standards, such as the DOCSIS standard, will 
cause increased price competition for cable modems. 

	We may not be able to continually reduce the costs of 
manufacturing our cable modems sufficiently to enable us to lower 
our modem prices and compete effectively with other cable modem 
suppliers. If we are unable to reduce the manufacturing costs of 
our cable modems, our gross margin and operating results would be 
harmed. 

	Our failure to adequately protect our proprietary rights may 
adversely affect us. We rely on a combination of patent, copyright 
and trademark laws, and on trade secrets and confidentiality 
provisions and other contractual provisions to protect our 
proprietary rights. These measures afford only limited protection. 
We currently have five issued U.S. patents and several pending 
patent applications. Our means of protecting our proprietary rights 
in the U.S. or abroad may not be adequate and competitors may 
independently develop similar technologies. Our future success will 
depend in part on our ability to protect our proprietary rights and 
the technologies used in our principal products. Despite our 
efforts to protect our proprietary rights, unauthorized parties may 
attempt to copy aspects of our products or to obtain and use trade 
secrets or other information that we regard as proprietary. In 
addition, the laws of some foreign countries do not protect our 
proprietary rights as fully as do the laws of the U.S. Issued 
patents may not preserve our proprietary position. Even if they do, 
competitors or others may develop technologies similar to or 
superior to our own. If we do not enforce and protect our 
intellectual property, our business will be harmed. 

	From time to time, third parties, including our competitors, 
have asserted patent, copyright and other intellectual property 
rights to technologies that are important to us. We expect that we 
will increasingly be subject to infringement claims as the number 
of products and competitors in the cable modem market grows and the 
functionality of products overlaps. 

	The results of any litigation matter are inherently uncertain. 
In the event of an adverse result in any litigation with third 
parties that could arise in the future, we could be required to pay 
substantial damages, including treble damages if we are held to 
have willfully infringed, to halt the manufacture, use and sale of 
infringing products, to expend significant resources to develop 
non- infringing technology, or to obtain licenses to the infringing 
technology. Licenses may not be available from any third party that 
asserts intellectual property claims against us, on commercially 
reasonable terms, or at all. In addition, litigation frequently 
involves substantial expenditures and can require significant 
management attention, even if we ultimately prevail. For example, 
in January 1998, Hybrid Networks filed an action against us, 
accusing us of infringing certain of their patents. We settled this 
matter in January 1999 through a patent cross-license agreement 
that will not materially impact our business or results of 
operations. However, there can be no assurance that we would be 
able to successfully resolve similar incidents in the future. 

                                      23

        Our failure to manage growth could adversely affect us. We have
rapidly and significantly expanded our operations and anticipate 
that further significant expansion will be required to address 
potential growth in our customer base and market opportunities. To 
manage the anticipated growth of our operations, we will be 
required to: 

        - improve existing and implement new operational, financial and
        management information controls, reporting systems and procedures; 

	- hire, train and manage additional qualified personnel; 

	- expand and upgrade our core technologies; and 

	- effectively manage multiple relationships with our 
        customers, suppliers and other third parties. 

	We may not be able to install management information and 
control systems in an efficient and timely manner, and our current 
or planned personnel, systems, procedures and controls may not be 
adequate to support our future operations. 

	In the future, we may experience difficulties meeting the 
demand for our products and services. The installation and use of 
our products requires training. If we are unable to provide 
training and support for our products, the implementation process 
will be longer and customer satisfaction may be lower. In addition, 
our management team may not be able to achieve the rapid execution 
necessary to fully exploit the market for our products and 
services. We cannot assure you that our systems, procedures or 
controls will be adequate to support the anticipated growth in our 
operations. Any failure to manage growth effectively could 
materially adversely affect our business, operating results and 
financial condition. 

	Competition for qualified personnel in the cable networking 
equipment and telecommunications industries is intense, and we may 
not be successful in attracting and retaining these personnel. Our 
future success will depend, to a significant extent, on the ability 
of our management to operate effectively, both individually and as 
a group. Given our early stage of development, we are dependent on 
our ability to retain and motivate high caliber personnel, in 
addition to attracting new personnel. Competition for qualified 
personnel in the cable networking equipment and telecommunications 
industries is intense, and we may not be successful in attracting 
and retaining such personnel. During 1998, we hired 45 new 
employees, an increase of approximately 34%, to our total work 
force at December 31, 1997. We expect to add additional personnel 
in the near future, including direct sales and marketing personnel. 
There may be only a limited number of people with the requisite 
skills to serve in those positions and it may become increasingly 
difficult to hire these people. We are actively searching for 
research and development engineers, who are in short supply. Our 
business will suffer if we encounter delays in hiring these 
additional engineers. 

	Competitors and others have in the past and may in the future 
attempt to recruit our employees. We do not have employment 
contracts with any of our key personnel. We do not maintain key 
person life insurance on our key personnel. The loss of the 
services of any of our key personnel, the inability to attract or 
retain qualified personnel in the future or delays in hiring 
required personnel, particularly engineers, could negatively affect 
our business. 

        We depend on strategic relationships. Our business strategy 
relies to a significant extent on our strategic relationships with 
other companies. These relationships include: 

	- software license arrangements for our network management system; 

	- marketing arrangements with Philips and Siemens; and 

	- DOCSIS-compliant cable modem development in conjunction with 
        Cisco to ensure the interoperability of our cable modem with 
        Cisco's universal broadband router. 

                                      24

	These relationships may not be successful because we may not 
be able to continue to maintain, develop or replace them in the 
event any of these relationships are terminated. In addition, any 
failure to renew or extend any licenses between us and any third 
party may adversely affect our business. 

	We may not be able to produce sufficient quantities of our 
products because we depend on third-party manufacturers and have 
limited manufacturing experience. We contract for the manufacture 
of cable modems and integrated circuit boards on a turnkey basis. 
CMC Industries and Sanmina build printed circuit assemblies for our 
headend products and Celestica manufactures our cable modems. Our 
future success will depend, in significant part, on our ability to 
have others manufacture our products cost-effectively and in 
sufficient volumes. There are a number of risks associated with our 
dependence on third-party manufacturers including the following: 

	- reduced control over delivery schedules; 

	- quality assurance; 

	- manufacturing yields and costs; 

	- the potential lack of adequate capacity during periods of 
        excess demand; 

	- limited warranties on products supplied to us; and 

	- increases in prices and the potential misappropriation of 
        our intellectual property. 

	Any manufacturing disruption could impair our ability to 
fulfill orders. We have no long-term contracts or arrangements with 
any of our vendors that guarantee product availability, the 
continuation of particular payment terms or the extension of credit 
limits. We may experience manufacturing or supply problems in the 
future. We are dependent on our manufacturers to secure components 
at favorable prices, but we may not be able to obtain additional 
volume purchase or manufacturing arrangements on terms that we 
consider acceptable, if at all. If we enter into a high-volume or 
long-term supply arrangement and subsequently decide that we cannot 
use the products or services provided for in the agreement, our 
business will be harmed. Any such difficulties could harm our 
relationships with customers. See "Business -- Manufacturing." 

	We may not be able to produce sufficient quantities of our 
products because we obtain certain components from, and depend on, 
certain key sole suppliers. Certain parts, components and equipment 
used in our products are obtained from sole sources of supply. For 
example, our headend equipment incorporates a radio frequency 
modulation chip from one specific vendor, transmitter/receiver 
components from another, and an Asynchronous Transfer Mode switch, 
commonly known as an ATM in the telecommunications industry, from 
yet another. Additional sole-sourced components may be incorporated 
into our equipment in the future. 

	We do not have any long term supply contracts to ensure 
sources of supply. If we fail to obtain components in sufficient 
quantities when required, our business could be harmed. Our 
suppliers may enter into exclusive arrangements with our 
competitors, stop selling their products or components to us at 
commercially reasonable prices or refuse to sell their products or 
components to us at any price. Our inability to obtain sufficient 
quantities of sole-sourced components, or to develop alternative 
sources for components and/or products would materially adversely 
affect our business. We rely on several companies including: 

	- Broadcom Corp. and Stanford Telecommunications, Inc., 
        suppliers of modulation and demodulation components; 

	- Atmel Corporation, the fabricator of our semiconductor devices; 

	- Virata Limited, formerly Advanced Telecommunications Modules 
        Limited, a supplier of ATM switches; 

        - Hewlett-Packard Company, the supplier of HP Openview software;

        - Wind River Systems, Inc., a supplier of embedded software; and

	- Objectivity, Inc., a supplier of object-oriented database software. 

                                      25

	If any of these manufacturers delay or halt production of any 
of their components, our business, operating results and financial 
condition could be materially adversely affected. 

	Our customer base is concentrated and the loss of one or more 
of our customers could cause our business to suffer. A relatively 
small number of customers have accounted for a large part of our 
revenues to date, and we expect that this trend will continue. 
During the year ended December 31, 1998, revenues attributable to 
our top three customers, TCI, Philips and Siemens, accounted for 
24%, 15% and 14% of total revenues, respectively. For the same 
period, our top five customers accounted for an aggregate of 66% of 
total revenues. We expect that our largest customers in the future 
could be different from our largest customers today due to a 
variety of factors, including customers' deployment schedules and 
budget considerations. Because a limited number of cable operators 
account for a majority of our prospective customers, our future 
success will depend upon our ability to establish and maintain 
relationships with these companies. We may not be able to retain 
our current accounts or to obtain additional accounts. Both in the 
U.S. and internationally, a substantial majority of households 
passed are controlled by a relatively small number of cable 
operators. The loss of one or more of our customers or our 
inability to successfully develop relationships with other 
significant cable operators could cause our business to suffer. 

	Our future success will depend in part upon our ability to 
enhance our existing products and to develop and introduce, on a 
timely basis, new products and features that meet changing customer 
requirements and emerging industry standards. The market for cable 
modem systems and products is characterized by rapidly changing 
technologies and short product life cycles. Our future success will 
depend in large part upon our ability to: 

	- identify and respond to emerging technological trends in the market; 

        - develop and maintain competitive products;

        - enhance our products by adding innovative features that
        differentiate our products from those of our competitors;

        - bring products to market on a timely basis at competitive
        prices; and

	- respond effectively to new technological changes or new 
        product announcements by others. 

	If our product development and enhancements take longer than 
planned, the availability of products would be delayed. Our future 
success will depend in part upon our ability to enhance our 
existing products and to develop and introduce, on a timely basis, 
new products and features that meet changing customer requirements 
and emerging industry standards, such as the DOCSIS standard. 

	On March 4, 1999, CableLabs announced the result of the 
certification process for the DOCSIS 1.0 cable modem that began on 
January 18, 1999.  Our DOCSIS 1.0 cable modem was not certified at 
this time.  We believe that this will not affect our plan to 
commercially introduce our initial DOCSIS modem in the first half 
of 1999. 

	The technical innovations required for us to remain 
competitive are inherently complex, require long development cycles 
and are dependent in some cases on sole source suppliers. We will 
be required to continue to invest in research and development in 
order to attempt to maintain and enhance our existing technologies 
and products, but we may not have the funds available to do so. 
Even if we have sufficient funds, these investments may not serve 
the needs of customers or be compatible with changing technological 
requirements or standards. Most of the expenses must be incurred 
before the technical feasibility or commercial viability can be 
ascertained. Revenues from future products or product enhancements 
may not be sufficient to recover the development costs associated 
with the products or enhancements. 
 
	We rely on indirect distribution channels for our products and 
need to develop additional distribution channels. Today, cable 
operators and systems integrators purchase cable modems from 
vendors through direct and indirect sales channels. In North 
America, if the DOCSIS standard achieves widespread market 
acceptance, we anticipate that the North American cable modem 
market will shift to a consumer purchase model. If this occurs, we 
will sell more of our cable modems directly through consumer sales 
channels. Consequently, we have begun to establish new distribution 
channels for our cable modems. We may not have the capital required 
or the necessary personnel to develop these distribution channels, 
which could materially adversely affect our business, operating 
results and financial condition. To the extent that large consumer 
electronics companies enter the cable modem market, their well-
established retail distribution capabilities would provide them 
with a significant competitive advantage. See "Business -- 
Competition." 

                                      26

	We are subject to risks associated with operating in 
international markets. During the fiscal year ended December 31, 
1998, revenues attributable to international customers accounted 
for 52% of total revenues. We expect that a significant portion of 
our sales will continue to be concentrated in international markets 
for the foreseeable future. We intend to expand operations in our 
existing international markets and to enter new international 
markets, which will demand management attention and financial 
commitment. In addition, a successful expansion of our 
international operations and sales in certain markets will require 
us to develop relationships with international systems integrators 
and distributors. We may not be able to identify, attract or retain 
suitable international systems integrators or distributors. We may 
not be able to successfully expand our international operations. 

	Furthermore, to increase revenues in international markets, we 
will need to continue to establish foreign operations, to hire 
additional personnel to run these operations and to maintain good 
relations with our foreign systems integrators and distributors. To 
the extent that we are unable to successfully do so, our growth in 
international sales will be limited and our operating results could 
be adversely affected. 

	Our international sales to date have been denominated in U.S. 
dollars. We do not currently engage in any foreign currency hedging 
transactions. A decrease in the value of foreign currencies 
relative to the U.S. dollar could make our products more expensive 
in international markets. 

	In addition to currency fluctuation risks, international 
operations involve a number of risks not typically present in 
domestic operations, including: 

	- changes in regulatory requirements; 

	- costs and risks of deploying systems in foreign countries; 

	- licenses, tariffs and other trade barriers; 

	- political and economic instability; 

	- difficulties in staffing and managing foreign operations; 

        - potentially adverse tax consequences;

        - difficulties in obtaining governmental approvals for products;

	- the burden of complying with a wide variety of complex 
        foreign laws and treaties; and

        - the possibility of difficult accounts receivable collections.

	We are also subject to the risks associated with the 
imposition of legislation and regulations relating to the import or 
export of high technology products. We cannot predict whether 
charges or restrictions upon the importation or exportation of our 
products will be implemented by the U.S. or other countries. Future 
international activity may result in sales dominated by foreign 
currencies. Gains and losses on the conversion to U.S. dollars of 
accounts receivable, accounts payable and other monetary assets and 
liabilities arising from international operations may contribute to 
fluctuations in our operating results. Any of these factors could 
materially and adversely affect our business, operating results and 
financial condition. 

        We may be subject to risks associated with acquisitions. We 
continually evaluate strategic acquisitions of other businesses and 
subscriber accounts. If we were to consummate an acquisition, we 
would be subject to a number of risks, including:

        - difficulty in assimilating the acquired operations and personnel;

	- limits on our ability to retain the acquired subscribers; 

	- disruption of our ongoing business; and 

	- limits on our ability to successfully incorporate acquired 
        technology and rights into our service offerings and maintain 
        uniform standards, controls, procedures, and policies. 

                                      27

	We may not be able to successfully overcome problems 
encountered in connection with potential acquisitions. In addition, 
an acquisition could materially adversely affect our operating 
results by diluting our stockholders' equity, causing us to incur 
additional debt, or requiring us to amortize acquisition expenses 
and acquired assets. 

	We are subject to risks associated with the regulation of 
information security products. Our products make use of encryption, 
and are therefore subject to export restrictions administered by 
the U.S. Department of Commerce, which permit the export of 
encryption products only with the required level of export license. 
We may therefore be at a disadvantage in competing for 
international sales compared to companies located outside the U.S. 
that are not subject to these restrictions. International customers 
may be unwilling to purchase our products that are eligible for 
export due to perceptions that these products are inferior to those 
marketed within the U.S., may contain undocumented features which 
undermine the products' security architecture, or are required to 
incorporate security features which are unacceptable to the 
customer. Although we have been granted all currently required U.S. 
export licenses, we may not be able to continue to secure any 
required licenses in a timely manner in the future. In certain 
foreign countries, our distributors are required to secure licenses 
or formal permission before products that incorporate encryption 
features can be imported. Our distributors may not make the effort, 
or be successful in the effort, to obtain the necessary licenses or 
permission to import our products into certain countries. The 
uncertainty involved in the interpretation and application of 
import and export regulations may unduly delay or prevent the 
export of our products, which may lead to a loss of revenues and 
market position. 

	Recent legislative proposals have indicated the possibility 
that our products sold for use within the U.S. may be required to 
incorporate certain features to assist law enforcement agencies in 
recovering suspect communications. If these proposals are enacted 
into law, we may be obligated to incur significant expense in 
complying with these regulations. In addition, the market 
opportunities and customer acceptance of our products could be 
materially adversely affected by our compliance with these laws, 
leading to a loss of revenues and market share. 

	Our failure and the failure of our key suppliers and customers 
to be year 2000 compliant would negatively impact our business. The 
Year 2000 issue is the result of computer programs written using 
two digits rather than four to define the applicable year. Computer 
programs that have this date-sensitive software may recognize a 
date using "00" as the year 1900 rather than the year 2000. This 
could result in a system failure or miscalculations causing 
disruptions of operations, including, among other things, a 
temporary inability to process transactions, send invoices or 
engage in similar normal business activities. 

	We are heavily dependent upon the proper functioning of our 
own computer or data-dependent systems. This includes, but is not 
limited to, our systems in information, business, finance, 
operations, manufacturing and service. Any failure or 
malfunctioning on the part of these or other systems could 
adversely affect our business in ways that are not currently known, 
quantifiable or otherwise anticipated by us. 

	We currently have only limited information on the Year 2000 
compliance of key suppliers and customers. The operations of our 
key suppliers and customers could be adversely affected in the 
event they do not successfully and timely achieve Year 2000 
compliance. Our business and results of operations could experience 
material adverse effects if our key suppliers were to experience 
Year 2000 issues that caused them to delay manufacturing or 
shipment of key components to us. In addition, our results of 
operations could be materially adversely affected if any of our key 
customers encounter Year 2000 issues that cause them to delay or 
cancel substantial purchase orders or delivery of our products. 

	While we have developed a plan to address Year 2000 issues, we 
may be unable to complete all phases of the plan in a timely manner 
or to upgrade any or all of our major systems in accordance with 
our plan. Even if we make upgrades, they may not effectively 
address the Year 2000 issue. If required upgrades are not completed 
in a timely manner or are not successful, we may be unable to 
conduct our business or manufacture our products. The systems of 
other companies on which our systems rely may not be converted in a 
timely manner. The failure to convert by another company, or the 
occurrence of a conversion that is incompatible with our systems 
would have a material adverse effect on our business. We intend to 
establish, but have not yet established a contingency plan 
detailing actions that will be taken in the event that the 
assessment of the Year 2000 issue is not successfully completed on 
a timely basis. See "Management's Discussion and Analysis of 
Financial Condition and Results of Operations -- Year 2000 
Readiness." 

	We may be subject to product returns and product liability 
claims due to defects in our products. Our products are complex and 
may contain undetected defects, errors or failures. These errors 
have occurred in our products in the past and additional errors may 
be expected to occur in our products in the future. The occurrence 
of any defects, errors, or failures could result in delays in 
installation, product returns and other losses to us or to our 
cable operators or end-users. Any of these occurrences could also 
result in the loss of or delay in market acceptance of our 
products, which could have a material adverse effect on our 
business, operating results and financial condition. We would have 
limited experience with the problems that could arise with any new 
products that we introduce. 

                                      28

	Although we have not experienced any product liability claims 
to date, the sale and support of our products entail the risk of 
these claims. A successful product liability claim brought against 
us could have a material adverse effect on our business, operating 
results and financial condition. 

	Our products are subject to government regulations, and 
changes in current or future laws or regulations that negatively 
impact our products and technologies, in the U.S. or elsewhere, 
could adversely affect our business. Our products are subject to 
the regulations of the Federal Communications Commission and other 
federal and state communications regulatory agencies. Changes in 
the regulatory environment relating to the Internet connectivity 
market, including regulatory changes that, directly or indirectly, 
affect telecommunications costs, limit usage of subscriber-related 
information or increase the likelihood or scope of competition from 
telecommunications companies, could affect the prices at which 
cable operators sell their services and thus indirectly impact our 
business. In addition, we cannot predict the impact, if any, that 
future regulation or regulatory changes might have on our business. 
Regulation of cable television rates may affect the speed at which 
the cable operators upgrade their cable infrastructures to two-way 
HFC. Changes in current or future laws or regulations that 
negatively impact our products and technologies, in the U.S. or 
elsewhere, could adversely affect our business. 

	Our success is dependent on the successful deployment of IP-
based networks. Our products will depend in part upon the increased 
use of the Internet and other networks based on the Internet 
protocol by corporate telecommuters, small offices/home offices and 
residential consumer users. Businesses are increasingly using the 
Internet, intranets and extranets, not only for communication 
within and outside the firm, but also to create cost-effective, 
secure data connections known as virtual private networks, commonly 
referred to as VPNs, between corporate sites or remote locations. 
Critical issues concerning the commercial use of the Internet, such 
as ease of access, security, reliability, and cost and quality of 
service, remain unresolved and may affect the growth of Internet 
use, especially in the business and consumer markets that we 
target. 

	Despite growing interest in commercial applications for the 
Internet and other IP-based networks, many businesses have been 
deterred from adopting IP-based data communications systems for a 
number of reasons, including: 

	- inconsistent quality of service; 

	- lack of availability of cost-effective, high-speed service; 

	- a limited number of local access points for corporate users; 

	- inability to integrate business applications on the Internet; 

	- the need to deal with multiple and frequently incompatible vendors; 

	- inadequate security; and 

	- lack of tools to simplify Internet access and use. 

	These issues and concerns may not be resolved or alleviated. 
Failure of the Internet community to address and resolve these 
issues, to develop or to develop as rapidly as expected could 
materially adversely affect our business, operating results and 
financial condition. 

	We may need additional capital in the future and may not be 
able to secure adequate funds in terms acceptable to us. We 
currently anticipate our existing cash balances and available line 
of credit and cash flow expected to be generated from future 
operations, will be sufficient to meet our liquidity needs for at 
least the next twelve months. However, we may need to raise 
additional funds if our estimates of revenues, working capital 
and/or capital expenditure requirements change or prove inaccurate 
or in order for us to respond to unforeseen technological or 
marketing hurdles or to take advantage of unanticipated 
opportunities. 

                                      29

	In addition, we expect to review potential acquisitions that 
would complement our existing product offerings or enhance our 
technical capabilities. While we have no current agreements or 
negotiations underway with respect to any potential acquisition, 
any future transaction of this nature could require potentially 
significant amounts of capital. Funds may not be available at the 
time or times needed, or available on terms acceptable to us. If 
adequate funds are not available, or are not available on 
acceptable terms, we may not be able to take advantage of market 
opportunities, to develop new products or to otherwise respond to 
competitive pressures. This inability could materially adversely 
affect our business, operating results and financial condition. See 
"Management's Discussion and Analysis of Financial Condition and 
Results of Operations." 

	Our stock price is highly volatile and broad market 
fluctuations may adversely affect the market price of our common 
stock. The trading price of our common stock has fluctuated 
significantly since our initial public offering in May 1998. In 
addition, the trading price of our common stock could be subject to 
wide fluctuations in response to quarterly variations in operating 
results, announcements of technological innovations or new products 
by us or our competitors, developments with respect to patents or 
proprietary rights, changes in financial estimates by securities 
analysts and other events or factors. In addition, the stock market 
has experienced volatility that has particularly affected the 
market prices of equity securities of many high technology 
companies and that often has been unrelated or disproportionate to 
the operating performance of these companies. These broad market 
fluctuations may adversely affect the market price of our common 
stock. 

	The adoption of the Euro presents uncertainties for our 
company. In January 1999, the new "Euro" currency was introduced in 
certain European countries that are part of the European Monetary 
Union ("EMU"). During 2002, all EMU countries are expected to be 
operating with the Euro as their single currency. A significant 
amount of uncertainty exists as to the effect the Euro will have on 
the marketplace generally and, additionally, all of the rules and 
regulations have not yet been defined and finalized by the European 
Commission with regard to the Euro currency. We are currently 
assessing the effect the introduction of the Euro will have on our 
internal accounting systems and the sales of our products. We are 
not aware of any material operational issues or costs associated 
with preparing our internal systems for the Euro. However, we do 
utilize third party vendor equipment and software products that may 
or may not be EMU-compliant. Although we are currently taking steps 
to address the impact, if any, of EMU compliance for these third 
party products, the failure of any critical components to operate 
properly post-Euro may have an adverse effect on our business or 
results of operations or may require us to incur expenses to remedy 
these problems. 

	This Form 10-K contains forward-looking statements.  These 
statements are not guarantees of future performance and are subject 
to certain risks, uncertainties and other factors, some of which 
are beyond our control, are difficult to predict and could cause 
actual results to differ materially from those expressed or 
forecasted in the forward-looking statements. This prospectus Form 
10-K contains forward-looking statements that have been made under 
the provisions of the Private Securities Litigation Reform Act of 
1995. These forward-looking statements are not historical facts but 
rather are based on current expectations, estimates and projections 
about our industry, our beliefs, and assumptions. Words such as 
"anticipates," "expects," "intends," "plans," "believes," "seeks," 
"estimates" and variations of these words and similar expressions 
are intended to identify forward-looking statements. These 
statements are not guarantees of future performance and are subject 
to certain risks, uncertainties and other factors, some of which 
are beyond our control, are difficult to predict and could cause 
actual results to differ materially from those expressed or 
forecasted in the forward-looking statements. These risks and 
uncertainties include those described in "Risk Factors" and 
elsewhere in this Form 10-K. Readers are cautioned not to place 
undue reliance on these forward-looking statements, which reflect 
our management's view only as of the date of this Form 10-K. We 
undertake no obligation to update these statements or publicly 
release the result of any revisions to the forward-looking 
statements that we may make to reflect events or circumstances 
after the date of this Form 10-K or to reflect the occurrence of 
unanticipated events. 

Item 2. Properties

	Com21 leases approximately 44,600 square feet of 
administrative, research and development, and manufacturing 
facilities in Milpitas, California and intends to lease an 
additional 26,000 square feet of space in Milpitas. Com21 believes 
that after entering into the lease for the additional space, its 
current facilities will be sufficient to handle our operations for 
at least the next 12 months. We believe that future growth can be 
accommodated by obtaining the necessary additional space. Com21 
also leases three sales offices, in Denver, Colorado, Atlanta, 
Georgia, and Toronto, Canada. 

Item 3. Legal Proceedings

	In January 1998, Hybrid Networks filed an action against us, 
accusing us of infringing certain of their patents.  We settled 
this matter in January 1999 through a patent cross-license 
agreement. 

                                      30

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  

        The Company's common stock is traded on the Nasdaq National
Market under the symbol "CMTO".

        The following table sets forth the high and low bid quotations of
the Company's common stock for the periods indicated as reported by 
The Nasdaq National Market or NASD electronic bulletin board. 
Prices shown in the table represent inter-dealer quotations, 
without adjustment for retail markup, markdown, or commission, and 
do not necessarily represent actual transactions. 

<TABLE>
<CAPTION>
                                        High            Low
                                        ------          ------
<S>                                     <C>             <C>
Year ended December 31, 1998            $24.87          $ 8.37
        Second quarter                  $23.75          $12.87
        Third quarter                   $24.87          $ 8.37
        Fourth quarter                  $22.75          $11.50
</TABLE>
        The number of stockholders of record of common stock, $.001 par 
value, of the Company was 223 at December 31, 1998.

        Com21 has never declared, or paid, any cash dividends on its
Common Stock.

        Use of Proceeds from Sales of Registered Securities.  On February
23, 1999 the Company completed a public offering of its Common 
Stock, $0.001 par value.  The managing underwriters in the Offering 
were Credit Suisse First Boston Corporation and Dain Rauscher 
Wessels (the "Underwriters"). The shares of Common Stock sold in 
the Offering were registered under the Securities Act of 1933, as 
amended, on a Registration Statement on Form S-1 (the "Registration 
Statement") (Reg. No. 333 79504) that was declared effective by the 
SEC on February 23, 1999.  The Offering commenced on March 1, 1999 
after all 3,000,000 shares (of which 2,480,000 shares were offered 
by the Company and 520,000 shares were offered by certain selling 
shareholders) of Common Stock registered under the Registration 
Statement were sold at a price of $23.50 per share. The aggregate 
price of the Offering amount registered was $70,500,000. In 
connection with the Offering, the Company paid an aggregate of 
$3,690,000 in underwriting discounts and commissions to the 
Underwriters.  In addition, the following table sets forth an 
estimate of all expenses incurred in connection with the Offering, 
other than underwriting discounts and commissions.  All amounts 
shown are estimated except for the registration fees of the SEC and 
the National Association of Securities Dealers, Inc. ("NASD"). 

<TABLE>
        <S>                               <C>
        SEC Registration fee              $     27,038   
        NASD filing fee                         10,226
        Nasdaq National Market listing fee      17,500 
        Printing and engraving expenses        165,000
        Legal fees and expenses                100,000
        Accounting fees and expenses           160,000
        Blue Sky fees and expenses               5,000
        Transfer Agent and Registrar fees       10,000
        Miscellaneous                          105,236
                                          -----------------      
            Total                              600,000
</TABLE>
        After deducting the underwriting discounts and commissions and
the estimated offering expenses described above, the Company received 
net proceeds from the offering of approximately $54,733,600 and the 
selling stockholders received $11,476,400.  As of March 3, 1999, 
Com21 has used the net proceeds from its public offering of Common 
Stock of the Company to invest in short-term and long-term, 
interest bearing, investment grade securities and has used its 
existing cash balances to fund the general operations of the 
Company.  The proceeds will be used for general corporate purposes, 
including working capital and product development.  A portion of 
the net proceeds may also be used to acquire or invest in 
complementary business or products or to obtain the right to use 
complementary technologies.  The Company has no agreements or 
commitments with respect to any such acquisition or investments and 
the Company is not currently engaged in any material negotiations 
with respect to any such transaction.  None of the Company's net 
proceeds of the offering were paid directly or indirectly to any 
director, officer, general partner of the Company or their 
associates, persons owning 10% or more of any class of equity 
securities of the Company, or an affiliate of the Company.

                                      31

Item 6. Selected Financial Data

	The following selected financial data should be read in 
conjunction with our financial statements and related notes to 
financial statements and "Management's Discussion and Analysis of 
Financial Condition and Results of Operations" included in this 
Form 10-K. The statements of operations data for each of the years 
in the three-year period ended December 31, 1998, and the balance 
sheets data at December 31, 1997 and 1998, are derived from 
financial statements which have been audited by Deloitte & Touche 
LLP, independent auditors, and are included in this Form 10-K. The 
historical results are not necessarily indicative of the operating 
results to be expected in the future. 

<TABLE>
<CAPTION>
                                          Years Ended December 31,         			
                               1994      1995      1996      1997      1998
                             --------  --------  --------  --------  --------
                                 (In thousands, except per share data)
Statements of Operations Data:							
<S>                          <C>       <C>       <C>       <C>       <C>
Total revenues               $      -  $      -  $  1,000  $ 15,649  $ 48,114
Cost of total revenues              -         -         -     8,372    29,573
                             --------  --------  --------  --------  --------
  Gross profit                      -         -     1,000     7,277    18,541
Operating expenses:										
  Research and development        545     5,233    12,395    13,481    19,936
  Sales and marketing               -       770     1,970     5,277    10,273
  General and administrative      349       919     1,548     1,782     3,871
                             --------  --------  --------  --------  --------
Total operating expenses          894     6,922    15,913    20,540    34,080
Loss from operations             (894)   (6,922)  (14,913)  (13,263)  (15,539)
Total other income, net            58       257       447       229     2,190
                             --------  --------  --------  --------  --------
Loss before income taxes         (836)   (6,665)  (14,466)  (13,034)  (13,349)
Income taxes                        1         1         5        21        14
                              --------  --------  --------  --------  --------
         Net loss            $   (837) $ (6,666) $(14,471) $(13,055) $(13,363)
                              --------  --------  --------  --------  --------
Net loss per share,
  basic and diluted(1)       $  (0.54) $  (3.53) $  (7.64) $  (6.15) $  (1.10)
                             ========  ========  ========  ========  ========
Shares used in computation,
  basic and diluted(1)          1,562     1,887     1,894     2,124    12,150
                             ========  ========  ========  ========  ========
Pro forma net loss per share,
  basic and diluted(2)       $  (0.31) $  (1.27) $  (1.84) $  (1.27) $   (.83)
                             ========  ========  ========  ========  ========
Shares used in pro forma
  computation, basic and
  diluted(2)                    2,685     5,265     7,851    10,279    16,062
                             ========  ========  ========  ========  ========
</TABLE>
<TABLE>
<CAPTION>
                                               December 31,
                               1994      1995      1996      1997      1998 
                             --------  --------  --------  --------  --------
                                             (In thousands)
<S>                          <C>       <C>       <C>       <C>       <C>
Balance Sheets Data:
Cash, cash equivalents and
short-term investments       $  2,082  $  3,273  $ 12,427  $ 17,950  $ 65,744
Working capital                 2,023     2,328     9,097    19,523    68,084
Total assets                    2,308     4,606    17,036    31,573    82,948
Long-term obligations               -       275     1,292     1,508       936
Total stockholders' equity      2,222     3,288    12,056    23,283    73,366
</TABLE>

(1) The diluted net loss per share computation excludes potential
shares of common stock (convertible preferred stock, warrants to 
purchase convertible preferred stock, options and warrants to 
purchase common stock and common stock subject to our repurchase 
rights), as their effect would be antidilutive. See Notes 1 and 7 
of Notes to Financial Statements for a detailed explanation of the 
determination of the shares used in computing basic and diluted net 
loss per share. 

(2) Includes the weighted average number of shares resulting from 
the assumed conversion of all outstanding shares of convertible 
preferred stock upon the effectiveness of the registration 
statement related to the initial public offering in May 1998. See 
Note 1 of Notes to Financial Statements for a detailed explanation 
of the determination of the shares used in computing pro forma net 
loss per share. The diluted pro forma net loss per share 
computation excludes potential shares of common stock (warrants to 
purchase convertible preferred stock, options and warrants to 
purchase common stock and common stock subject to our repurchase 
rights). 

                                      32

Item 7. Management's Discussion and Analysis of Financial 
        Condition and Results of Operations

	You should read the following discussion in conjunction with 
Com21's financial statements and notes to financial statements. The 
results described below are not necessarily indicative of the 
results to be expected in any future period. Certain statements in 
this discussion and analysis, including statements regarding our 
strategy, financial performance and revenue sources, are forward-
looking statements based on current expectations and entail various 
risks and uncertainties that could cause actual results to differ 
materially from those expressed in the forward-looking statements, 
including those described in "Risk Factors" and elsewhere in this 
Form 10-K. 


Overview 

	Com21, Inc. designs, develops, markets and sells value-added, 
high-speed communications solutions for the broadband access 
market. Com21's system enables cable operators to provide high-
speed, cost-effective Internet access to corporate telecommuter, 
small office/home office and residential end-users in the U.S. and 
internationally. Com21's system also enables cable operators to 
address the distinct price, performance, security and other needs 
of these different end-users. Our product family includes cable 
modems, headend equipment, network management software and noise 
containment technologies. 

	Com21 was incorporated in June 1992. From inception through 
April 1997, our operating activities related primarily to 
establishing a research and development organization, testing 
prototype designs, building application-specific integrated circuit 
design infrastructure, commonly known as an ASIC, commencing the 
staffing of marketing, sales and field service and technical 
support organizations and establishing manufacturing relationships. 
We shipped our first product in April 1997. Since then, Com21 has 
expanded its sales and marketing and customer support activities. 
These activities include commencing trials with our cable operator 
customers, expanding our customer base, developing customer 
relationships, marketing the Com21 brand, hiring field service and 
customer support personnel, building distribution channels, 
developing new products and technologies and enhancing existing 
products. 

	Com21's revenues consist primarily of sales of cable modems, 
headend equipment and, to a lesser extent, the licensing of network 
management software. We recognize revenue upon commercial shipment 
of our products. As the cable operators that purchase our products 
make data-over-cable services broadly available to their customers, 
we expect our product mix to continue to shift more heavily toward 
sales of cable modems. Pursuant to a Technology License and 
Reseller Agreement with 3Com (the "3Com Agreement"), 3Com agreed to 
pay royalties as 3Com shipped products that incorporated our 
licensed technology and agreed to prepay royalties of $1,000,000 in 
1997. 3Com provided us with royalty reports in 1997 showing the 
shipment of royalty-bearing products and, accordingly, $7,000 was 
recognized as license fee revenue in 1997. In addition, we received 
an additional $500,000 in license fee revenue in 1997 from 3Com by 
meeting certain conditions in the 3Com Agreement. Because the 3Com 
Agreement expired as of December 31, 1998, the remaining $993,000 
was recognized in 1998 as royalty revenue. Through December 31, 
1998, a total of approximately $2.5 million of technology licensing 
fees and royalties was included in our revenues. 

	To date, gross margin on sales of headend and related 
equipment and software licenses has been higher than gross margin 
on sales of cable modems. In 1999, we expect the average selling 
prices of our cable modems to decrease due to greater competition, 
particularly as cable modems which meet the DOCSIS standard become 
widely available from multiple vendors. The DOCSIS standard should 
enable interoperability between different manufacturers' cable 
modems and headend equipment. Interoperability of cable networking 
equipment will lead to greater competition as the market for 
interoperable cable modems is opened to multiple vendors and 
greater price competition. 

	Com21 tests and assembles headend equipment in our facility in 
Milpitas, California. We outsource turnkey manufacturing of our 
cable modems to Celestica, a contract manufacturer located in 
Toronto, Canada. We have taken, and continue to take, steps to 
reduce the manufacturing costs of our cable modem products by 
consolidating functionality and component parts into ASICs, making 
them easier to manufacture, using parts we believe will be sold in 
high volume by a number of vendors. We are also working with 
Celestica to facilitate more efficient manufacturing of cable 
modems and to move certain of our manufacturing operations to a 
lower cost Celestica facility, which will enable us to benefit from 
Celestica's volume purchasing capability. We cannot assure you that 
such cost-reduction efforts will be successful. 

	Research and development expenses consist principally of 
salaries and related personnel expenses, consultant fees, prototype 
expenses and development contracts related to the design, 
development, testing and enhancement of headend equipment, cable 
modems and network management software. As of December 31, 1998, 
Com21 expensed all research and development costs as incurred. We 
believe that continued investment in research and development is 
critical to attaining our strategic product and cost reduction 
objectives and, as a result, expect these expenses to increase in 
absolute dollars. 

                                      33

	Sales and marketing expenses consist of salaries and related 
expenses for personnel engaged in direct and indirect selling, 
marketing and field service support functions. These expenses also 
include trade show and promotional expenditures. We intend to 
pursue sales and marketing campaigns aggressively, and therefore 
expect these expenses to increase in absolute dollars. In addition, 
we intend to develop an electronic commerce web site and retail 
sales channels, which is expected to increase sales and marketing 
expenses. 

	General and administrative expenses consist primarily of 
salaries and related expenses for executive, accounting and 
administrative personnel, recruiting expenses, professional fees 
and other general corporate expenses. We expect general and 
administrative expenses to increase in absolute dollars as we add 
personnel and incur additional costs related to the growth of our 
business and operation as a public company. In addition, we compete 
in a very competitive labor market. Therefore, it is necessary for 
us to periodically make salary and other compensation adjustments 
to hire and retain employees. 

Results of Operations - Years Ended December 31, 1996, 1997 and 
1998 

	Total Revenues. Total revenues increased from $1.0 million in 
1996 to $15.6 million in 1997 and to $48.1 million in 1998. Total 
revenues in 1996 consisted entirely of technology licensing fees 
from the 3Com Agreement. Total revenues in 1997 consisted of a 
technology licensing fee and a royalty fee, totaling $507,000 
pursuant to the 3Com Agreement and $15.1 million from the sale of 
products that commenced in April 1997. A majority of revenues 
attributable to product sales during 1997 resulted from sales of 
headend and related equipment, cable modems and network management 
software fees. Revenues attributable to international customers 
were 64% of total revenues in 1997. Total revenues in 1998 
consisted of $47.1 million from product sales and $1.0 million from 
the one-time recognition of deferred revenue resulting from the 
expiration of the 3Com Agreement on December 31, 1998. Revenues 
attributable to product sales during 1998 consisted of sales of 
cable modems, headend and related equipment and network management 
software fees. Revenues attributable to international customers 
were 52% of total revenues in 1998. We expect to continue to derive 
a significant portion of our revenues from international markets 
for the foreseeable future. We intend to expand operations in the 
international markets that we currently serve and to enter new 
international markets, which will demand significant management 
attention and financial commitment. To date, revenues attributable 
to international customers have been denominated in U.S. dollars. 
We do not currently engage in any foreign currency hedging 
transactions. A decrease in the value of foreign currencies 
relative to the U.S. dollar could make our products more expensive 
in international markets. See "Risk Factors -- We are subject to 
risks associated with operating in international markets." 

	Cost of Product Revenues. Cost of product revenues was $8.4 
million in 1997. Cost of product revenues was $29.6 million in 
1998. Com21 commenced product shipments in April 1997 and therefore 
did not incur any costs associated with the sale of products in 
1996. Cost of product revenues in 1997 consisted primarily of 
materials cost and software technology license fees paid to third 
parties. In 1997, our gross margin was 46.5%, and in 1998, our 
gross margin was 38.5%. The decrease in gross margin in 1998 was 
primarily attributable to an increase in sales of cable modems as a 
percentage of total product sales, offset in part by the one-time 
recognition of $1.0 million of deferred revenue resulting from the 
expiration of the 3Com Agreement on December 31, 1998. We expect 
that our gross margin will continue to decline through at least the 
first half of 1999 primarily as a result of decreasing average 
selling prices of cable modems due to competitive market factors 
and, to a lesser extent, product mix because we expect revenues 
from cable modem sales to continue to increase as a percentage of 
total product revenues. 

	Research and Development. Research and development expenses 
increased from $12.4 million in 1996 to $13.5 million in 1997 and 
to $19.9 million in 1998. The increases in 1997 and 1998 were 
primarily the result of increased personnel in our research and 
development organization associated with product development. 

	Sales and Marketing. Sales and marketing expenses increased 
from $2.0 million in 1996 to $5.3 million in 1997 and to $10.3 
million in 1998. The increases in 1997 and 1998 were primarily due 
to higher costs associated with increased personnel in sales and 
marketing organizations. The increases in 1997 and 1998 also 
reflected the significant costs associated with the increased 
selling efforts resulting from the commencement of the commercial 
shipment of our products in April 1997. These costs include travel 
expenses, trade shows, print advertising, public relations and 
other promotional costs. We expect sales and marketing expenses to 
increase in both absolute dollars and as a percentage of sales in 
1999 as we develop more consumer-oriented channels for our future 
DOCSIS-compliant cable modems. In addition, we also compete in a 
very competitive labor market and accordingly periodically make 
salary and other compensation adjustments to hire and retain 
employees. 

                                      34

	General and Administrative. General and administrative 
expenses increased from $1.5 million in 1996 to $1.8 million in 
1997 and to $3.9 million in 1998. The increases in 1997 and 1998 
were primarily attributable to increased personnel in Com21's 
finance and administrative organization, as well as, in 1998, 
increased legal fees associated with our patent litigation, which 
was settled in January 1999, and increased professional fees 
associated with operation as a public company. 

	Total Other Income. Total other income decreased from $447,000 
in 1996 to $229,000 in 1997 and increased to $2.2 million in 1998. 
The decrease in 1997 was primarily attributable to interest expense 
associated with capital leases as well as a charge for the issuance 
of warrants in connection with establishing a line of credit, 
offset in part by higher earnings on increased average cash 
balances. The increase in 1998 was primarily attributable to 
interest earned on higher average balances of cash, cash 
equivalents and short-term investments. 

Liquidity and Capital Resources 

	Since inception, we have financed our operations primarily 
through private sales of preferred stock and common stock and an 
initial public offering of common stock in May 1998 which, through 
December 31, 1998, provided net cash proceeds to us of 
approximately $121.9 million. Net cash used in operating activities 
in 1996 was $11.6 million and was primarily attributable to a net 
loss of $14.5 million, partially offset by $1.0 million in deferred 
revenue from the 3Com Agreement, an increase in accounts payable, 
accrued expenses, and depreciation and amortization expenses. Cash 
used in investing activities in 1996 consisted of $2.3 million in 
capital expenditures related primarily to the support of Com21's 
engineering activities. Cash flows from financing activities were 
$23.1 million in 1996 and consisted primarily of $23.2 million of 
net proceeds from the issuance of Series F Preferred Stock 
partially offset by the net repayment on borrowing arrangements. 

	Net cash used in operating activities in 1997 was $16.1 
million and resulted primarily from a net loss of $13.1 million and 
the increase of $5.0 million and $2.6 million in total accounts 
receivable and inventories, respectively, offset in part by a total 
increase of $2.4 million in accounts payable, accrued expenses and 
other current liabilities and $2.2 million in depreciation and 
amortization expenses. Cash used in investing activities in 1997 
consisted of $2.1 million in capital expenditures primarily to 
support product development and manufacturing activities. Cash 
flows from financing activities in 1997 consisted primarily of net 
proceeds of $23.7 million from the issuance of Series E Preferred 
Stock and Series G Preferred Stock and $530,000 from the sale of 
common stock upon exercise of stock options. 

	Net cash used in operating activities in 1998 was $11.1 
million and resulted primarily from a net loss of $13.4 million and 
the increase of $2.6 million in inventories, offset in part by a 
total increase of $2.7 million in accounts payable, accrued 
expenses and other current liabilities and $3.5 million in 
depreciation and amortization expenses. Cash used in investing 
activities in 1998 of $61.6 million consisted of $3.7 million in 
capital expenditures primarily to support product development and 
manufacturing activities and net purchases of investments of $57.9 
million. Cash flows from financing activities in 1998 consisted 
primarily of net proceeds of $62.8 million from the issuance of 
common stock in our initial public offering and $624,000 from the 
sale of common stock under our 1998 Employee Stock Purchase Plan 
and upon exercise of stock options. 

	In future periods, Com21 anticipates significant increases in 
working capital on a period-to-period basis primarily as a result 
of planned increased product sales resulting in higher levels of 
inventory. We contract for the manufacture of cable modems and 
integrated circuit boards on a turnkey basis. We have a 
manufacturing agreement with Celestica for the manufacture of 
certain of our products. Unless terminated by the parties, the 
agreement will extend for one year periods on December 31 of each 
year. We have no long-term contracts or arrangements with any of 
our manufacturers that guarantee the availability of product, the 
continuation of particular payment terms or the extension of credit 
limits. Our future success will depend, in significant part, on our 
ability to manufacture, or have others manufacture, our products 
successfully, cost- effectively and in volumes sufficient to meet 
customer demand. Our dependence upon third party manufacturers 
involves a number of risks. See "Risk Factors -- We may not be able 
to produce sufficient quantities of our products because we depend 
on third-party manufacturers and have limited manufacturing 
experience" and Note 6 of Notes to Financial Statements. 

	At December 31, 1998, we had $65.7 million of cash, cash 
equivalents and short-term investments. In addition, we had $5.0 
million line of credit subject to borrowing base requirements. To 
date, we have not drawn upon our line of credit. Other than capital 
lease commitments, we have no material commitments for capital 
expenditures. However, we anticipate that we will increase our 
capital expenditures and lease commitments consistent with 
anticipated growth in operations, infrastructure and personnel. We 
may establish sales offices and lease additional space, which will 
require us to commit to additional lease obligations, purchase 
equipment and install leasehold improvements. 

                                      35

	Com21 believes that our current cash, cash equivalents and 
short-term investments, will be sufficient to meet its anticipated 
cash requirements for at least twelve months, although we may seek 
to raise additional capital during that time period. The sale of 
additional equity or convertible debt securities could result in 
additional dilution to our stockholders. There can be no assurance 
that financing will be available in amounts or on terms acceptable 
to us, if at all. See "Risk Factors -- We may need additional 
capital in the future and may not be able to secure adequate funds 
on terms acceptable to us." 

Year 2000 Readiness 

	Many currently installed computer systems and software 
products are coded to accept only two digit entries in the date 
code field and cannot distinguish 21st century dates from 20th 
century dates. These date code fields will need to distinguish 21st 
century dates from 20th century dates to avoid system failures or 
miscalculations causing disruptions of operations, including, among 
other things, a temporary inability to process transactions, send 
invoices or engage in similar normal business activities. As a 
result, many companies' software and computer systems may need to 
be upgraded or replaced in order to comply with such "Year 2000" 
requirements. 

	Our Year 2000 plan which is currently in progress will 
determine whether our products, internal systems, computers and 
software, and the products and systems of our critical vendors and 
suppliers are Year 2000 compliant. This plan is being implemented 
in the following four consecutive phases: 

	I. Inventory and Data Gathering Phase: cataloguing of products 
        and systems and the products and systems of our critical vendors 
        and suppliers; 

	II. Testing Phase: determining whether cataloged products and 
        systems are Year 2000 compliant; 

	III. Replacement Phase: upgrading and replacement of non-
        compliant products and systems; and 

	IV. Monitoring Phase: ongoing testing of our products and 
        systems for Year 2000 compliance. 

	Our Year 2000 plan has been implemented but not completed. To 
date, results of our Year 2000 plan are the following: 

	- Products. We have developed internal tests to ascertain 
        whether our products are Year 2000 compliant. Based on these tests, 
        we believe our current products are Year 2000 compliant and, to the 
        extent necessary, all previously shipped products can be upgraded 
        to become Year 2000 compliant with currently available software 
        upgrades. 

	- Vendors. We are currently in the process of ascertaining 
        whether or not our vendors and suppliers are Year 2000 compliant. 

	- Manufacturing. Completion of our review of our assembly and 
        test equipment for Year 2000 compliance is expected to occur by 
        mid-1999. 

	- IT Systems. We conducted a preliminary survey of our 
        information technology hardware and software and anticipate that 
        any Year 2000 non-compliant hardware and software will be upgraded 
        or replaced prior to 2000. 

	- Non-IT Systems and Infrastructure. Machinery and equipment 
        used in our operations have been inventoried and are currently 
        being assessed for Year 2000 compliance. 

	Although we believe that our Year 2000 plan will identify all 
of our material Year 2000 issues, we cannot assure you that we will 
be able to identify, evaluate and resolve all these issues. 

	Costs. We do not currently expect that costs associated with 
Year 2000 compliance will materially affect our operations or 
financial position. However, if we discover Year 2000 problems in 
the future, we may not be able to develop, implement, or test 
remediation or contingency plans in a timely or cost-effective 
manner. 

                                      36

	Risks. We believe that the risks of noncompliance could 
accelerate or delay purchases or replacement of our products and 
services. Failure of third party products, such as a breakdown in 
telephone, electric service or other utilities, e-mail, voicemail 
or the World Wide Web could cause a disruption in cable operators' 
service to customers. Disruptions in the services provided by 
banks, telephone companies and the U.S. Postal Service could a 
negatively impact our business. Although our products are 
undergoing Year 2000 specific testing procedures, they may not 
contain the date codes necessary to operate in the year 2000. Any 
failure of these products to perform could result in the delay or 
cancellation of product orders and the diversion of managerial and 
technical resources from product development and other business 
activities to attend to Year 2000 issues. These events could have a 
material adverse effect on our business, operating results and 
financial condition. 

	Contingency Plans. Until the completion of the Year 2000 
compliance evaluation of our suppliers, and the completion of 
internal IT and non-IT systems reviews, we do not believe that it 
is practical to develop comprehensive contingency plans. Even if 
these plans are completed and implemented in a timely manner they 
may be insufficient to address any third party failures. We cannot 
assure you that undetected internal and external Year 2000 issues 
will not materially impact our business, financial condition, 
results of operations and cash flows. See "Risk Factors -- Our 
failure and the failure of our key suppliers and customers to be 
year 2000 compliant could negatively impact our business." 

Recently Issued Accounting Standard 

	In June 1998, the Financial Accounting Standards Board issued 
Statement of Financial Accounting Standards No. 133, "Accounting 
for Derivative Instruments and Hedging Activities." This statement 
requires companies to record derivatives on the balance sheet as 
assets or liabilities, measured at fair value. Gains or losses 
resulting from changes in the values of those derivatives would be 
accounted for depending on the use of the derivative and whether it 
qualifies for hedge accounting. Statement of Financial Accounting 
Standards No. 133 will be effective for Com21's fiscal year ending 
December 31, 2000. Management believes that this statement will not 
have a significant impact on our financial position, results of 
operations or cash flows. 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 
	Interest Rate Sensitivity. Com21 maintains a short-term 
investment portfolio consisting mainly of government and corporate 
bonds purchased with an average maturity of less than one year. 
These available-for-sale securities are subject to interest rate 
risk and will fall in value if market interest rates increase. If 
market interest rates were to increase immediately and uniformly by 
10 percent from levels at December 31, 1998, the fair value of the 
portfolio would decline by an immaterial amount. We generally have 
the ability to hold our fixed income investments until maturity and 
therefore we would not expect our operating results or cash flows 
to be affected to any significant degree by the effect of a sudden 
change in market interest rates on our securities portfolio. 

	Com21 has fixed rate long-term debt of approximately $1.0 
million as of December 31, 1998, and a hypothetical 10 percent 
decrease in interest rates would not have a material impact on the 
fair market value of this debt. We do not hedge any interest rate 
exposures. 

                                      37




Item 8. Financial Statements and Supplementary Data

<TABLE>
                   Index To Financial Statements
<CAPTION>
                                                                      Page
<S>                                                                   <C>
Independent Auditors' Report                                           39
Balance Sheets as of December 31, 1997 and 1998                        40
Statements of Operations and Comprehensive Loss for
    the Years Ended December 31, 1996, 1997 and 1998                   41
Statements of Stockholders' Equity for the Years
    Ended December 31, 1996, 1997 and 1998                             42
Statements of Cash Flows for the Years Ended
    December 31, 1996, 1997 and 1998                                   43
Notes to Financial Statements                                          44
</TABLE>



                                      38


                   INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of 
  Com21, Inc.: 

We have audited the accompanying balance sheets of Com21, Inc. as 
of December 31, 1997 and 1998, and the related statements of 
operations and comprehensive loss, stockholders' equity and cash 
flows for each of the three years in the period ended December 31, 
1998. 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, such financial statements present fairly, in all 
material respects, the financial position of Com21, Inc. as of 
December 31, 1997 and 1998, and the results of its operations and 
its cash flows for each of the three years in the period ended 
December 31, 1998 in conformity with generally accepted accounting 
principles. 

DELOITTE & TOUCHE LLP
San Jose, California 
January 18, 1999 






                                      39

<TABLE>
                                 Com21, Inc.
                               BALANCE SHEETS
             (In thousands, except share and par value amounts)
<CAPTION>
                                                                          December 31, 
                                                                    -------------------------
                                                                        1997         1998 
ASSETS                                                              ------------ ------------
<S>                                                                 <C>          <C>
Current Assets:                             
  Cash and cash equivalents                                         $   17,950   $    7,135
  Short-term investments                                                     -       58,609
  Accounts receivable:                                  
    Trade (net of allowances of $121 and $908 in            
      1997 and 1998, respectively)                                       3,984        3,190
    Related parties                                                      1,052        1,644
  Inventories                                                            2,643        5,282
  Prepaid expenses and other                                               430          586
                                                                    ------------ ------------
         Total current assets                                           26,059       76,446
Property and Equipment - Net                                             5,311        6,247
Other Assets                                                               203          255
                                                                    ------------ ------------
         Total Assets                                               $   31,573   $   82,948
                                                                    ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:				
  Accounts payable                                                  $    2,832   $    4,033
  Accrued compensation and related benefits                              1,009        1,739
  Deferred revenue (principally related party in 1997)                   1,004          238
  Other current liabilities                                                481        1,232
  Current portion of capital lease and debt obligations                  1,210        1,120
                                                                    ------------ ------------
         Total current liabilities                                       6,536        8,362
Deferred Rent                                                              246          284
Capital Lease Obligations                                                1,320          936
Debt Obligations                                                           188            -
                                                                    ------------ ------------  
         Total liabilities                                               8,290        9,582
Commitments and Contingencies (Notes 6 and 13)				
Stockholders' Equity:				
  Convertible preferred stock, none authorized, issued and
    outstanding in 1998:
    Series A; $0.001 par value; 1,805,674 shares authorized, Issued
      and outstanding; liquidation preference $2,853                         2            -
    Series B; $0.001 par value; 250,000 shares authorized, Issued
      and outstanding; liquidation preference $500                           -            -
    Series C; $0.001 par value; 166,667 shares authorized, Issued
      and outstanding; liquidation preference $500                           -            -
    Series D; $0.001 par value; 1,817,655 shares authorized; 1,812,500
      shares Issued and outstanding; liquidation preference $7,250           2            -
    Series E; $0.001 par value; 362,500 shares authorized; 361,908
      shares Issued and outstanding; liquidation preference $1,629           -            -
    Series F; $0.001 par value; 3,125,000 shares authorized; 2,905,730
      shares issued and outstanding; liquidation preference $23,246          3            -
    Series G; $0.001 par value; 3,000,000 shares authorized; 2,655,125
      shares issued and outstanding; liquidation preference $23,100          3            -
  Preferred stock, $0.001 par value; none authorized, issued and
    outstanding in 1997; 5,000,000 shares authorized and undesignated;
    none issued and outstanding in 1998                                      -            -
  Common stock, $0.001 par value; shares authorized: 1997, 35,000,000;
    1998, 40,000,000; shares issued and outstanding: 1997, 2,772,139;
    1998, 18,685,560                                                         3           19
  Additional paid-in capital                                            58,722      122,131
  Deferred stock compensation                                             (116)         (82)
  Accumulated deficit                                                  (35,336)     (48,699)
  Accumulated other comprehensive loss                                       -           (3)
                                                                    ------------ ------------
         Total stockholders' equity                                     23,283       73,366
                                                                    ------------ ------------   
         Total Liabilities and Stockholders' Equity                 $   31,573   $   82,948
                                                                    ============ ============
</TABLE>
See Notes to Financial Statements.

                                      40
<TABLE>
                                 Com21, Inc.
               STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
                  (In thousands, except per share amounts)
<CAPTION>
                                                                Years Ended December 31,
                                                        --------------------------------------
                                                            1996         1997         1998 
Revenues:                                               ------------ ------------ ------------          
<S>                                                     <C>          <C>          <C>
Product ($4,014 and $6,637 in 1997 and 1998,
  respectively, from related parties)                   $        -   $   15,142   $   47,121
  License fees - related party (Note 10)                     1,000          507          993
                                                        ------------ ------------ ------------
          Total revenues                                     1,000       15,649       48,114
Cost of Product Revenues ($2,024 and $4,113 in 1997
  and 1998, respectively, for related parties)                   -        8,372       29,573
                                                        ------------ ------------ ------------
Gross Profit                                                 1,000        7,277       18,541
                                                        ------------ ------------ ------------
Operating Expenses:
  Research and development                                  12,395       13,481       19,936
  Sales and marketing                                        1,970        5,277       10,273
  General and administrative                                 1,548        1,782        3,871
                                                        ------------ ------------ ------------
          Total operating expenses                          15,913       20,540       34,080
                                                        ------------ ------------ ------------
Loss From Operations                                       (14,913)     (13,263)     (15,539)
                                                        ------------ ------------ ------------
Other Income (Expense):
  Interest and other income                                    629          679        2,535
  Interest expense                                            (185)        (396)        (318)
  Other income (expense) - net                                   3          (54)         (27)
                                                        ------------ ------------ ------------
          Total other income, net                              447          229        2,190
                                                        ------------ ------------ ------------        
Loss Before Income Taxes                                   (14,466)     (13,034)     (13,349)
Income Taxes                                                     5           21           14
                                                        ------------ ------------ ------------
Net Loss                                                   (14,471)     (13,055)     (13,363)
Other Comprehensive Loss, Net of Tax:                   	
  Unrealized loss on available-for-sale investments              -            -           (3)
                                                        ------------ ------------ ------------ 
Comprehensive Loss                                      $  (14,471)  $  (13,055)  $  (13,366)
                                                        ============ ============ ============
Net Loss Per Share, Basic and Diluted                   $    (7.64)  $    (6.15)  $    (1.10)
                                                        ============ ============ ============
Shares Used in Computation, Basic and Diluted                1,894        2,124       12,150
                                                        ============ ============ ============
Pro Forma Net Loss Per Share, Basic and Diluted (Note 1)                          $    (0.83)
                                                                                  ============
Shares Used in Pro Forma Computation, Basic and Diluted (Note 1)                      16,062
                                                                                  ============
</TABLE>
See Notes to Financial Statements.

                                      41

<TABLE>
                                                                        Com21, Inc.
                                                             STATEMENTS OF STOCKHOLDERS' EQUITY
                                                            (In thousands, except share amounts)
<CAPTION>                                                                                                           Accumulated
                                         Convertible                        Additional Deferred              Other
                                       Preferred Stock     Common Stock       Paid-     Stock               Compre-     Total
                                      ------------------ -----------------     in      Compen- Accumulated  hensive  Stockholders'
                                        Shares    Amount   Shares   Amount   Capital   sation    Deficit     Loss       Equity
                                      ----------- ------ ---------- ------ ---------- -------- ----------- --------- ------------
<S>                                   <C>         <C>    <C>        <C>    <C>        <C>      <C>         <C>       <C>           
Balances, January 1, 1996               4,034,841  $  4   1,910,042  $  2   $ 11,092   $    -   $ (7,810)   $     -   $    3,288
Exercise of stock options                       -     -     102,639     -         46        -          -          -           46
Repurchase of shares                            -     -     (14,584)    -         (3)       -          -          -           (3)
Sale of Series F convertible preferred
  stock (net of issuance costs of $50)  2,905,730     3           -     -     23,193        -          -          -       23,196
Net loss                                        -     -           -     -          -        -    (14,471)         -      (14,471)
                                      ----------- ------ ---------- ------ ---------- -------- ----------- --------- ------------
Balances, December 31, 1996             6,940,571     7   1,998,097     2     34,328        -    (22,281)         -       12,056
Exercise of stock options                       -     -     774,042     1        529        -          -          -          530
Exercise of Series E preferred warrants   361,908     -           -     -      1,629        -          -          -        1,629
Issuance of Series F preferred warrants         -     -           -     -         72        -          -          -           72
Sale of Series G convertible preferred
  stock (net of issuance costs of
  $1,069)                               2,655,125     3           -     -     22,028        -          -          -       22,031
Deferred stock compensation                     -     -           -     -        136     (136)         -          -            -
Amortization of deferred stock
  compensation                                  -     -           -     -          -       20          -          -           20
Net loss                                        -     -           -     -          -        -    (13,055)         -      (13,055)
                                      ----------- ------ ---------- ------ ---------- -------- ----------- --------- ------------
Balances, December 31, 1997             9,957,604    10   2,772,139     3     58,722     (116)   (35,336)         -       23,283
Exercise of stock options                       -     -     222,187     -        236        -          -          -          236
Issuance of common stock (net of
  issuance costs of $6,209)                     -     -   5,750,000     6     62,785        -          -          -       62,791
Sale of stock under employee stock
  purchase plan                                 -     -      40,403     -        412        -          -          -          412
Conversion of preferred stock          (9,957,604)  (10)  9,957,604    10          -        -          -          -            -
Repurchase of shares                            -     -     (56,773)    -        (24)       -          -          -          (24)
Amortization of deferred stock
  compensation                                  -     -           -     -          -       34          -          -           34
Unrealized loss on available-for-sale
  investments                                   -     -           -     -          -        -          -         (3)          (3)
Net loss                                        -     -           -     -          -        -    (13,363)         -      (13,363)
                                      ----------- ------ ---------- ------ ---------- -------- ----------- --------- ------------
Balances, December 31, 1998                     -  $  -  18,685,560  $ 19   $122,131   $  (82)  $(48,699)   $    (3)  $   73,366
                                      =========== ====== ========== ====== ========== ======== =========== ========= ============
</TABLE>
See Notes to Financial Statements.


                                      42

<TABLE>
                                 Com21, Inc.
                          STATEMENTS OF CASH FLOWS
                               (In thousands)
<CAPTION>
                                                                Years Ended December 31,
                                                        --------------------------------------
                                                            1996         1997         1998 
                                                        ------------ ------------ ------------          
<S>                                                     <C>          <C>          <C>
Cash Flows From Operating Activities:				
  Net loss                                              $  (14,471)  $  (13,055)  $  (13,363)
  Adjustments to reconcile net loss to net cash used
     in operating activities:
     Noncash interest expense (Note 7)                           -           72            -
     Depreciation and amortization                           1,042        2,163        3,517
     Deferred rent                                              77          169           38
     Gain on sales and maturities of investments                 -            -         (755)
     Changes in operating assets and liabilities:
       Accounts receivable - trade                               -       (3,984)         794
       Accounts receivable - related parties                     -       (1,052)        (592)
       Inventories                                               -       (2,643)      (2,639)
       Prepaid expenses and other                             (183)        (149)          59
       Other assets                                            (68)         (98)         (52)
       Accounts payable                                        379        1,612        1,201
       Accrued compensation and related benefits               518          428          730
       Deferred revenue (principally related party)          1,000            4         (766)
       Other current liabilities                                68          388          751
                                                        ------------ ------------ ------------
Net Cash Used in Operating Activities                      (11,638)     (16,145)     (11,077)
                                                        ------------ ------------ ------------
Cash Flows From Investing Activities:		
  Purchases of property and equipment                       (2,345)      (2,085)      (3,744)
  Purchases of investments                                       -            -     (101,886)
  Proceeds from sales and maturities of investments              -            -       44,029
                                                        ------------ ------------ ------------
Net Cash Used in Investing Activities                       (2,345)      (2,085)     (61,601)
                                                        ------------ ------------ ------------
Cash Flows From Financing Activities:		
  Proceeds from issuance of common stock                        43          530       63,415
  Proceeds from issuance of preferred stock                 23,196       23,660            -
  Proceeds from issuance of debt obligations                   250        2,440            -
  Repayments under capital lease obligations                  (232)        (607)      (1,033)
  Repayments on debt obligations                              (120)      (2,270)        (519)
                                                        ------------ ------------ ------------
Net Cash Provided by Financing Activities                   23,137       23,753       61,863
                                                        ------------ ------------ ------------
Net Change in Cash and Cash Equivalents                      9,154        5,523      (10,815)
Cash and Cash Equivalents, Beginning of year                 3,273       12,427       17,950
                                                        ------------ ------------ ------------
Cash and Cash Equivalents, End of year                  $   12,427   $   17,950   $    7,135
                                                        ============ ============ ============
Noncash Investing and Financing Activities:						
  Property and equipment acquired under capital leases  $    1,722   $    1,146   $      675
                                                        ============ ============ ============
  Deferred stock compensation                           $        -   $      136   $        -
                                                        ============ ============ ============
  Issuance of preferred stock warrants in connection
    with debt obligations                               $        -   $       72   $        -
                                                        ============ ============ ============        
  Conversion of preferred stock into common stock       $        -   $        -   $       10
                                                        ============ ============ ============
  Unrealized loss on available-for-sale investments     $        -   $        -   $        3
                                                        ============ ============ ============
  Issuance of debt obligation for other current assets  $        -   $        -   $      215
                                                        ============ ============ ============
Supplemental Cash Flow Information:					
  Cash paid for income taxes                            $        5   $       14   $       14
                                                        ============ ============ ============
  Cash paid for interest                                $      182   $      324   $      335
                                                        ============ ============ ============
</TABLE>
See Notes to Financial Statements.

                                      43

 
                                 Com21, Inc.
                        NOTES TO FINANCIAL STATEMENTS
                Years Ended December 31, 1996, 1997 and 1998

1. Business and Significant Accounting Policies

Business - Com21, Inc. (the "Company") was incorporated in 
Delaware in June 1992. The Company designs, develops, markets 
and sells value-added, high-speed communications solutions for 
the broadband access market. During 1997, the Company exited 
the development stage for financial reporting purposes as it 
completed its initial product development activities and 
commenced shipping product.

Financial Statements 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. Such estimates include allowances for potentially 
uncollectable accounts receivable, lower of cost or market 
inventory valuation reserves, warranty costs, sales returns 
and a valuation allowance for deferred tax assets. Actual 
results could differ from those estimates.

Reclassifications - Certain prior year amounts in the 
accompanying financial statements have been reclassified to 
conform to current year presentation. These reclassifications 
had no effect on the results of operations or financial 
position for any year presented.

Fiscal Period - Although for presentation purposes the Company 
has indicated that its year end is December 31, its fiscal 
year actually ends on the last business day of the year. The 
Company's fiscal years for 1996, 1997 and 1998 all ended on 
December 31.

Cash Equivalents - The Company considers all highly liquid 
debt instruments with maturities at the date of purchase of 
three months or less to be cash equivalents.

Short-Term Investments - Short-term investments consist of 
corporate and government bonds and are stated at fair value 
based on quoted market prices. Short-term investments are 
classified as available-for-sale based on the Company's 
intended use. The difference between amortized cost and fair 
value representing unrealized holding gains or losses are 
recorded as a component of stockholders' equity as accumulated 
other comprehensive loss. Gains and losses on sales of 
investments are determined on a specific identification basis.

Inventories - Inventories consist of networking equipment, 
modems and sub-assemblies stated at the lower of cost (first-
in, first-out method) or market.

Property and Equipment - Property and equipment are stated at 
cost. Depreciation is computed using the straight-line method 
over the estimated useful lives of the assets, generally three 
to seven years. Amortization of leasehold improvements and 
assets recorded under capital lease agreements are computed 
using the straight-line method over the shorter of the lease 
term or the estimated useful lives of the related assets.

Long-Lived Assets - The Company evaluates long-lived assets 
for impairment whenever events or changes in circumstances 
indicate that the carrying amount of an asset may not be 
recoverable.

Income Taxes - The Company accounts for income taxes under an 
asset and liability approach. Deferred income taxes reflect 
the net tax effects of temporary differences between the 
carrying amounts of assets and liabilities for financial 
reporting purposes and the amounts used for income tax 
purposes, and operating loss and tax credit carryforwards 
measured by applying currently enacted tax laws. Valuation 
allowances are provided when necessary to reduce net deferred 
tax assets to an amount that is more likely than not to be 
realized.

                                      44

Certain Significant Risks and Uncertainties - Financial 
instruments which potentially subject the Company to 
concentrations of credit risk consist primarily of cash and 
cash equivalents, short-term investments and accounts 
receivable. Cash and cash equivalents are held primarily with 
one financial institution and consist primarily of commercial 
paper and cash in bank accounts. The Company's investment 
policy is to invest in instruments with minimum credit ratings 
of A-1/P-1 (Short-Term) or AA (Long-Term). The Company sells 
its products primarily to cable operators in North America and 
primarily to systems integrators in Europe, Asia and 
South/Central America, and generally does not require its 
customers to provide collateral or other security to support 
accounts receivable. To reduce credit risk, management 
performs ongoing credit evaluations of its customers' 
financial condition. The Company maintains allowances for 
estimated potential bad debt losses. The recorded carrying 
amount of cash and cash equivalents, short-term investments, 
accounts receivable, accounts payable and debt obligations 
approximate fair value.

The Company's customer base is highly concentrated. A 
relatively small number of customers have accounted for a 
significant portion of the Company's revenues, and the Company 
expects that this trend will continue for the foreseeable 
future. For the years ended December 31, 1996, 1997 and 1998, 
the top five customers comprised 100%, 65% and 66%, 
respectively, of the Company's total revenues.

The Company participates in a dynamic high technology industry 
and believes that changes in any of the following areas could 
have a material adverse effect on the Company's future 
financial position, results of operations or cash flows: 
advances and trends in new technologies and industry 
standards; competitive pressures in the form of new products 
or price reductions on current products; changes in product 
mix; changes in the overall demand for products offered by the 
Company; changes in third-party manufacturers; changes in key 
suppliers; changes in certain strategic relationships or 
customer relationships; litigation or claims against the 
Company based on intellectual property (Note 13), patent, 
product, regulatory or other factors; risk associated with 
changes in domestic and international economic and/or 
political conditions or regulations; availability of necessary 
components; risks associated with Year 2000 compliance; and 
the Company's ability to attract and retain employees 
necessary to support its growth.

Revenue Recognition - The Company recognizes product revenue 
upon shipment. Estimated sales returns and warranty costs, 
based on historical experience by product, are recorded at the 
time the product revenue is recognized. Installation and 
training revenue are recognized as services are provided.

In 1998, the Company adopted Statement of Position ("SOP") 97-
2, "Software Revenue Recognition," which requires revenue 
earned on software arrangements involving multiple elements to 
be allocated to each element based on the relative fair values 
of the elements. Revenue for software licenses is recognized 
upon delivery provided that collection is probable. Software 
support and maintenance revenue are deferred and amortized 
over the maintenance period on a straight-line basis. Adoption 
of this statement did not have a material impact on the 
Company's financial position, results of operations and cash 
flows.

Software Development Costs - Development costs incurred in the 
research and development of new software products and 
enhancements to existing software products are expensed as 
incurred until technological feasibility has been established, 
at which time certain development costs required to attain 
general production release would be capitalized. To date, the 
Company's software development has essentially been completed 
concurrent with the establishment of technological 
feasibility, and accordingly, no costs have been capitalized.

Stock-Based Compensation - The Company accounts for stock-
based awards to employees using the intrinsic value method in 
accordance with Accounting Principles Board Opinion ("APB") 
No. 25, "Accounting for Stock Issued to Employees."

Comprehensive Loss - In 1998, the Company adopted Statement of 
Financial Accounting Standards ("SFAS") No. 130, "Reporting 
Comprehensive Income," which requires an enterprise to report, 
by major components and as a single total, the change in net 
assets during the period from nonowner sources. Statements of 
comprehensive loss for the years ended December 31, 1996, 1997 
and 1998 have been included with the statements of operations.

Net Loss Per Share - In 1997, the Company adopted SFAS No. 
128, "Earnings Per Share" which requires a dual presentation 
of basic and diluted earnings per share ("EPS"). Basic EPS 
excludes dilution and is computed by dividing net income 
attributable to common stockholders by the weighted average of 
common shares outstanding for the period. Diluted EPS reflects 
the potential dilution that could occur if securities or other 
contracts to issue common stock (convertible preferred stock, 
warrants to purchase convertible preferred stock and common 
stock options and warrants using the treasury stock method) 
were exercised or converted into common stock. Potential 
common shares in the diluted EPS computation are excluded in 
net loss periods as their effect would be antidilutive. EPS 
for all periods have been computed in accordance with SFAS No. 
128.

                                      45

Pro Forma Net Loss Per Share - Pro forma net loss per share, 
basic and diluted, is computed by dividing net loss 
attributable to common stockholders by the weighted average 
number of common shares outstanding for the period and the 
weighted average number of shares resulting from the assumed 
conversion of outstanding shares of convertible preferred 
stock.

Geographic Operating Information - In 1998, the Company 
adopted SFAS No. 131, "Disclosures about Segments of an 
Enterprise and Related Information," which establishes annual 
and interim reporting standards for an enterprise's business 
segments and related disclosures about its products, services, 
geographic areas and major customers. The Company operates in 
one reportable segment (Note 12).

Recently Issued Accounting Standard - In June 1998, the 
Financial Accounting Standards Board issued SFAS No. 133, 
"Accounting for Derivative Instruments and Hedging 
Activities." This statement requires companies to record 
derivatives on the balance sheet as assets or liabilities, 
measured at fair value. Gains or losses resulting from changes 
in the values of those derivatives would be accounted for 
depending on the use of the derivative and whether it 
qualifies for hedge accounting. SFAS No. 133 will be effective 
for the Company's fiscal year ending December 31, 2000. 
Management believes that this statement will not have a 
significant impact on the Company's financial position, 
results of operations or cash flows.

2. Short-Term Investments

The fair value and the amortized cost of available-for-sale 
securities at December 31, 1998 are presented in the table 
below (in thousands):
<TABLE>
<CAPTION>      
                                        Unrealized
                         Amortized     Holding Gains
                           Cost        and (Losses)      Fair Value
                       -------------   -------------   -------------
<S>                    <C>             <C>             <C> 
Corporate Bonds          $  30,803       $       7       $  30,810
Government Bonds            27,809             (10)         27,799
                       -------------   -------------   -------------
Total                    $  58,612       $      (3)      $  58,609
                       =============   =============   =============
</TABLE>
Fair values are based on quoted market prices obtained from an 
independent broker. Available-for-sale securities are 
classified as current assets and all maturities are within one 
year.

3. Inventories

Inventories consist of: 
<TABLE>
<CAPTION>
                                                December 31,
                                       -----------------------------
                                           1997             1998
                                       -------------   -------------
                                               (In thousands) 
<S>                                    <C>             <C>
Raw materials and sub-assemblies         $     633       $     142
Work-in-process                                980           1,361
Finished goods                               1,030           3,779
                                       -------------   ------------- 
Total                                    $   2,643       $   5,282
                                       =============   =============
</TABLE>

4. Property and Equipment

Property and equipment consists of: 
<TABLE>
<CAPTION>
                                                    December 31,
                                            -----------------------------
                                                1997             1998
                                            -------------   -------------
                                                    (In thousands) 
<S>                                         <C>             <C>
Equipment under capital lease                 $   3,367       $   3,711
Computer equipment and software                   2,904           4,604
Production equipment                              1,931           3,905
Leasehold improvements                              208             393
Furniture and fixtures                              189             302
                                            -------------   -------------
                                                  8,599          12,915
Accumulated depreciation and amortization        (3,288)         (6,668)
                                            -------------   -------------
                                              $   5,311       $   6,247
                                            =============   =============
</TABLE>
Accumulated amortization on capital leases as of December 31,
1997 and 1998 was approximately $1,167,000 and $2,265,000, 
respectively.

                                      46

5. Debt Obligations

Debt obligations consist of the following: 
<TABLE>
<CAPTION>
                                                     December 31,
                                            -----------------------------
                                                1997             1998
                                            -------------   -------------
                                                    (In thousands) 
<S>                                         <C>             <C>
Unsecured borrowings due July 1, 1998         $      84       $       -
Unsecured borrowings due October 1, 1998            119               -
Unsecured borrowings due August 1, 1999             257             168
Unsecured borrowings due November 1, 1999            81              45
Note payable due February 4, 1999                     -              24
                                            -------------   -------------
                                                    541             237
Current portion                                    (353)           (237)
                                            -------------   ------------- 
Long-term portion                             $     188       $       -
                                            =============   =============
</TABLE>
Notes Payable

The unsecured borrowings were obtained from notes payable 
issued to a financing company for the purchase of computer 
software and equipment. Borrowings bear interest at an 
effective interest rate of 16.94% per annum and are payable in 
monthly installments with the remaining unpaid principal and 
interest due upon the maturity date. There are no debt 
covenants associated with the notes payable.

In consideration for the unsecured borrowings due on October 
1, 1998 and August 1, 1999 the Company issued the financing 
company warrants to purchase 4,688 and 2,125 shares of Series 
F convertible preferred stock, respectively, at a price of 
$8.00 per share. The fair values of the warrants were 
insignificant (Note 7).

In June 1998, the Company issued a note payable for $215,000 
to a financing company for the payment of its directors' and 
officers' insurance premiums for which the Company is the 
beneficiary. Borrowings bear interest at an effective interest 
rate of 7.30% per annum and are payable in equal monthly 
installments (principal and interest) through February 4, 
1999.

Revolving Line of Credit

In May 1997, the Company entered into a revolving line of 
credit arrangement for working capital purposes. Under the 
arrangement, the Company may borrow up to the lesser of 
$5,000,000 or 80% of the Company's eligible domestic and 
foreign accounts receivable. Borrowings bear interest at the 
LIBOR rate (5.10% at December 31, 1998) plus 4.875% per annum. 
The arrangement automatically renews for successive one-year 
periods until terminated at the option of either party. 
Dividends may not be declared by the Company without the 
lender's prior consent. As of December 31, 1998, no amounts 
were outstanding under the arrangement.

Concurrent with executing the revolving line of credit 
arrangement, the Company borrowed an additional $2,000,000 on 
a note which was repaid in full in 1997.

In consideration for these financing arrangements, the Company 
issued warrants to purchase 25,000 shares of Series F 
convertible preferred stock at a price of $8.00 per share 
(Note 7). As described in Note 7, the fair value of such 
warrants was $72,000 which was recorded as additional interest 
expense in the accompanying statement of operations and 
comprehensive loss for 1997.


                                      47

6. Commitments

The Company leases its facilities and certain equipment under 
noncancelable capital and operating leases. Future minimum 
lease payments under the Company's capital and operating 
leases and the present value of minimum lease payments under 
capital leases as of December 31, 1998 are as follows:
<TABLE>
        Year Ending                            Capital        Operating
        December 31,                            Leases          Leases     
       --------------                       -------------   -------------
                                                   (In thousands) 
        <S>                                 <C>             <C>
        1999                                  $   1,055       $   1,464
        2000                                        655           1,453
        2001                                        349             853
        2002                                          9             866
        2003                                          -             892
       Thereafter                                     -             303
                                            -------------   ------------- 
Future minimum lease payments                     2,068       $   5,831
Amounts representing interest (12%)                (249) 
                                            -------------   -------------
Present value of future minimum lease
  payments                                    $   1,819
                                            =============
</TABLE>

In consideration for providing capital lease financing in
1996, the Company issued warrants to purchase 2,505 shares and 
6,814 shares of Series F convertible preferred stock at a 
price of $8.00 per share to two financing companies. The fair 
values of the warrants were insignificant (Note 7).

Rent expense incurred under the operating leases was 
approximately $501,000, $843,000 and $867,000 for the years 
ended December 31, 1996, 1997 and 1998, respectively. Rent 
expense under the facilities lease is recognized on a 
straight-line basis over the term of the lease. The difference 
between the amounts paid and the amounts expensed is 
classified as deferred rent in the accompanying balance 
sheets.

In 1998, the Company entered into product development and 
license agreements whereby third parties will develop certain 
technology deliverable in 1999 for an aggregate of $970,000.

As of December 31, 1998, the Company has aggregate purchase 
obligations of approximately $15,200,000 in connection with 
supply and manufacturing agreements.

7. Stockholders' Equity

Stock Split

On May 13, 1998, the Company effected a one-for-two reverse 
split of the outstanding shares of common and convertible 
preferred stock. All share and per share amounts in these 
financial statements have been adjusted to give effect to the 
reverse stock split.

Initial Public Offering

In May 1998, the Company completed its initial public offering 
of 5,750,000 shares (which includes the full exercise of the 
underwriters' overallotment of 750,000 shares) which generated 
net proceeds to the Company of $62,791,000.

Authorized Shares

On March 10, 1998, the Board of Directors adopted a change in 
the authorized number of shares of the common and undesignated 
preferred stock to 40,000,000 and 5,000,000, respectively.

Convertible Preferred Stock

On April 22, 1998, holders of more than 50% of the Series D, 
E, F and G convertible preferred stock, voting as a single 
class, consented to the automatic conversion of all 
outstanding shares of Series D, E, F and G convertible 
preferred stock into common stock upon the completion of the 
initial public offering regardless of the offering price per 
share. Upon completion of the Company's initial public 
offering in May 1998, all shares of Series A, B, and C 
convertible preferred stock were converted to common stock in 
accordance with their existing terms and all shares of Series 
D, E, F and G convertible preferred stock were converted to 
common stock in accordance with the stockholders' consent. All 
shares were converted on a one-to-one basis.

                                      48

Common Stock Warrants

Prior to the Company's initial public offering in May 1998, 
the Company issued warrants to purchase shares of various 
series of convertible preferred stock. Upon completion of the 
Company's initial public offering, the outstanding warrants to 
purchase 46,286 shares of convertible preferred stock were 
automatically converted into warrants to purchase 46,286 
shares of common stock at the same exercise prices. All such 
warrants were outstanding at December 31, 1997 and 1998 and 
were comprised of the following:

  During 1995, in consideration of capital lease 
financing provided by a financing company, the Company 
issued warrants to purchase 5,154 shares of Series D 
convertible preferred stock at a price of $5.82 per share. 
The warrants expire in December 2005.

  During 1996, in consideration of debt and capital 
lease financing provided by two financing companies, the 
Company issued warrants to purchase 14,007 shares of 
Series F convertible preferred stock at a price of $8.00 
per share. The warrants expire in 2006.

  During 1997, in consideration of financing 
arrangements provided, the Company issued warrants to 
purchase 27,125 shares of Series F convertible preferred 
stock at a price of $8.00 per share. The warrants expire 
in May 2002 (25,000 warrants) and February 2007 (2,125 
warrants).

The fair value of the warrants issued in 1995 and 1996, in 
connection with debt financing, were insignificant. The fair 
value of the warrants issued in 1997, in connection with debt 
financing, was approximately $72,000. Accordingly, the fair 
value was recognized as additional interest expense in the 
accompanying statement of operations and comprehensive loss 
for 1997.

Common Stock

At December 31, 1997 and 1998, the Company had the right to 
repurchase 320,311 and 139,640 shares of common stock 
outstanding, respectively. The number of shares subject to 
repurchase is reduced over a two- to four-year vesting period. 
The Company has the right to repurchase these shares at the 
original issuance price.

Net Loss Per Share

The following is a reconciliation of the numerators and 
denominators of the basic and diluted net loss per share 
computations (in thousands, except per share amounts):
<TABLE>
                                                      Years Ended December 31,
                                            ---------------------------------------------
                                                1996            1997            1998
                                            -------------   -------------   -------------
<S>                                         <C>             <C>             <C> 
Net Loss (Numerator):						
Net loss, basic and diluted                  $ (14,471)      $ (13,055)      $ (13,363)
                                            -------------   -------------   -------------
Shares (Denominator):						
Weighted average common shares outstanding       1,910           2,244          12,377
Weighted average common shares outstanding
  subject to repurchase                            (16)           (120)               (227)
                                            -------------   -------------   -------------
Shares used in computation, basic and
  diluted                                        1,894           2,124          12,150
                                            -------------   -------------   -------------
Net Loss Per Share, Basic and Diluted        $   (7.64)      $   (6.15)      $   (1.10)
                                            =============   =============   =============
</TABLE>
During 1996, 1997 and 1998, the Company had securities
outstanding which could potentially dilute basic EPS in the 
future, but were excluded in the computation of diluted EPS in 
such periods, as their effect would have been antidilutive due 
to the net loss reported in such periods. Such outstanding 
securities consist of the following at December 31, 1998: 
warrants to purchase 46,286 shares of common stock; 139,640 
outstanding shares of common stock subject to repurchase; and 
options to purchase 2,369,341 shares of common stock.

Equity Plans

Under the Company's 1995 Stock Option Plan (the "1995 Plan"), 
as restated and amended in January 1998, the Company may grant 
options to purchase up to 3,000,000 shares of common stock to 
employees, directors and consultants at prices not less than 
the fair market value at the date of grant for incentive stock 
options and not less than 85% of fair market value at the date 
of grant for nonstatutory stock options. These options 
generally expire ten years from the date of grant and are 
immediately exercisable. The Company has a right of repurchase 
(at the option exercise price) of common stock issued from 
option exercises for unvested shares. The right of repurchase 
generally expires 25% after the first 12 months from the date 
of grant and then ratably over a 36-month period.

                                      49

In 1998, the Company adopted the 1998 Stock Incentive Plan 
(the "1998 Stock Plan") and the 1998 Employee Stock Purchase 
Plan (the "1998 Purchase Plan").

The 1998 Stock Plan serves as the successor equity incentive 
program to the Company's 1995 Plan. Options outstanding under 
the 1995 Plan on April 1, 1998 (2,023,510 shares) were 
incorporated into the 1998 Stock Plan. Such incorporated 
options continue to be governed by their existing terms. In 
addition, the share reserve was increased by 500,000 shares 
and could be increased up to an additional 271,570 shares for 
repurchases of unvested common shares issued under the 1995 
Plan. As of December 31, 1998, 16,732 shares of such unvested 
common shares were repurchased and added to the share reserve. 
Under the 1998 Stock Plan, the Company is authorized to issue 
shares of common stock to employees, directors and consultants 
under five separate programs: Discretionary Option, Stock 
Issuance, Salary Investment Option Grant, Automatic Option 
Grant and Director Fee Option Grant. The number of shares 
reserved for issuance under the 1998 Stock Plan automatically 
increases at the beginning of each calendar year, beginning in 
1999, by an amount equal to 5% of the total number of shares 
of common stock outstanding at the end of the preceding year 
(934,278 shares on January 4, 1999). The Discretionary Option 
Program of the 1998 Stock Plan provides for the grant of 
options under terms comparable to those provided on options 
granted under the 1995 Plan except that all options are to be 
granted at a price not less than fair market value on the date 
of grant.

<TABLE>
Stock option activity under the Plans was as follows: 
<CAPTION>
                                                                                 Outstanding Options
                                                           Shares      -----------------------------
                                                          Available      Number     Weighted Average
                                                          for Grant    of Shares     Exercise Price
                                                        -------------  ------------- ---------------
<S>                                                     <C>            <C>           <C>
Balances, January 1, 1996 (3,130 vested at a weighted
  average price of $0.40 per share)                          158,750        566,250       $   0.39
Reserved                                                   1,000,000              -              -
Granted (weighted average fair value of $0.16 per share)  (1,171,315)     1,171,315           0.58
Canceled                                                      44,698        (44,697)          0.62
Exercised                                                          -       (102,639)          0.45
                                                        -------------  -------------   
Balances, December 31, 1996 (205,706 vested at a
  weighted average price of $0.44 per share)                  32,133      1,590,229           0.52
Reserved                                                     500,000              -              -
Granted (weighted average fair value of $1.29 per share)    (587,990)       587,990           3.66
Canceled                                                      75,266        (75,266)          0.64
Exercised                                                          -       (774,042)          0.68
                                                        -------------  -------------   
Balances, December 31, 1997 (286,130 vested at a
  weighted average price of $0.57 per share)                  19,409      1,328,911           1.80
Reserved                                                   1,266,732              -              -
Granted (weighted average fair value of $5.45 per share)  (1,368,615)     1,368,615          11.59
Canceled                                                     105,998       (105,998)          4.05
Exercised                                                          -       (222,187)          1.06
                                                        -------------  -------------
Balances, December 31, 1998                                   23,524      2,369,341           7.42
                                                        =============  =============       
</TABLE>
Additional information regarding options outstanding at
December 31, 1998 is as follows:

<TABLE>
                                    Options Outstanding               Vested Options
                          --------------------------------------   -------------------
                                          Weighted                 
                                          Average       Weighted              Weighted
   Range of                              Remaining      Average               Average
   Exercise                  Number     Contractual     Exercise    Number    Exercise
                          Outstanding   Life (years)     Price      Vested     Price 
                          -----------   ------------   ---------   ---------   --------
  <S>                     <C>           <C>            <C>          <C>       <C>
  $0.20 - $ 0.40             464,855         7.0        $  0.40     275,821    $ 0.40
  $0.80 - $ 0.88             310,999         7.9           0.81     118,333      0.81
  $3.30 - $ 7.10             457,869         8.9           6.46      66,637      6.33
  $9.00 - $24.25           1,135,618         9.5          12.49       3,716      9.00
                          -----------                              ---------
  $0.20 - $24.25           2,369,341         8.7           7.42     464,507      1.42
                          ===========                              =========
</TABLE>
Under the 1998 Purchase Plan, eligible employees are allowed
to have salary withholdings of up to 10% of their base 
compensation to purchase shares of common stock at a price 
equal to 85% of the lower of the market value of the stock at 
the beginning or end of defined purchase periods. The initial 
purchase period commenced upon the initial public offering of 
the Company's common stock in May 1998. In 1998, 40,403 shares 
were purchased by and distributed to employees at a price of 
$10.20 per share. At December 31, 1998, $211,000 had been 
contributed by employees that will be used to purchase shares 
in 1999 at a price determined under the terms of the 1998 
Purchase Plan. At December 31, 1998, the Company had 209,597 
shares of its common stock reserved for future issuance under 
this plan.

                                      50

Deferred Stock Compensation

As discussed in Note 1, the Company accounts for its stock-
based awards to employees using the intrinsic value method in 
accordance with APB No. 25. Accordingly, the Company recorded 
deferred compensation expense equal to the difference between 
the grant price and deemed fair value of the Company's common 
stock for options granted prior to December 31, 1997. Such 
deferred compensation expense aggregated $136,000 and is being 
amortized to expense over the four-year vesting period of the 
options.

Additional Stock Plan Information

Since the Company continues to account for its stock-based 
awards to employees using the intrinsic value method in 
accordance with APB No. 25, SFAS No. 123, "Accounting for 
Stock-Based Compensation," requires the disclosure of pro 
forma net income (loss) and earnings (loss) per share had the 
Company adopted the fair value method as of the beginning of 
1995. Under SFAS 123, the fair value of stock-based awards to 
employees is calculated through the use of option pricing 
models, even though such models were developed to estimate the 
fair value of freely tradable, fully transferable options 
without vesting restrictions, which significantly differ from 
the Company's stock option awards. These models also require 
subjective assumptions, including future stock price 
volatility and expected time to exercise, which greatly affect 
the calculated values. The Company's fair value calculations 
on stock-based awards under the 1995 and 1998 Stock Plans were 
made using the Black-Scholes option pricing model with the 
following weighted average assumptions: expected life, 5 years 
from the date of grant in 1996 and 1997 and 4.5 years from the 
date of grant in 1998; stock volatility, 0% in 1996 and 1997 
and 50% in 1998; risk-free interest rate, 6.75% in 1996 and 
1997 and 5.0% in 1998; and no dividends during the expected 
term. The Company's calculations are based on a single option 
award valuation approach, and forfeitures are recognized as 
they occur. The Company's fair value calculations on stock-
based awards under the 1998 Purchase Plan were also made using 
the Black-Scholes option pricing model with the following 
weighted average assumptions: expected life, six months; stock 
volatility, 50%; risk free interest rate, 5.0%; and no 
dividends during the expected term. If the computed fair 
values of the 1996, 1997 and 1998 awards had been amortized to 
expense over the vesting period of the awards, pro forma net 
loss would have been approximately $(14,522,000) ($(7.67) per 
share, basic and diluted) in 1996, $(13,153,000) ($(6.19) per 
share, basic and diluted) in 1997 and $(14,454,000) ($(1.19) 
per share, basic and diluted) in 1998.

8. Income Taxes

Income tax expense for the years ended December 31, 1996, 1997 
and 1998 consisted solely of state franchise taxes.
<TABLE>
The components of deferred income tax assets are as follows: 
<CAPTION>
                                                         December 31,
                                                -----------------------------
                                                    1997             1998
                                                -------------   -------------
                                                        (In thousands) 
<S>                                             <C>             <C>
Deferred tax assets:
  Accruals and reserves not currently deductible  $     827       $   1,868
  Capitalized start-up costs                            765             472
  Capitalized research and development costs            890           1,864
  Net operating loss carryforwards                   11,272          14,325
  Tax credit carryforwards                            2,998           4,437
  Depreciation                                          500           1,206
                                                -------------   -------------
Total gross deferred tax assets                      17,252          24,172
Valuation allowance                                 (17,252)        (24,172)
                                                -------------   -------------
Total deferred tax assets                         $       -       $       -
                                                =============   =============
</TABLE>
The net change in the total valuation allowance for the year
ended December 31, 1998 was a net increase of $6,920,000. The 
increase in the valuation allowance was primarily a result of 
increased net operating loss and tax credit carryforwards 
increased accruals and reserves not currently deductible and 
capitalized research and development costs generated in 1998 
which the Company provided a full valuation allowance against 
based on the Company's evaluation of the likelihood of 
realization of future tax benefits resulting from the deferred 
tax assets.

                                      51

As of December 31, 1998, the Company had available for 
carryforward net operating losses for federal and state income 
tax purposes of approximately $37,825,000 and $19,305,000, 
respectively. Net operating losses of $564,000 for federal and 
state tax purposes attributable to the tax benefit relating to 
the exercise of nonqualified stock options and disqualifying 
dispositions of incentive stock options are excluded from the 
components of deferred income tax assets. The tax benefit 
associated with this net operating loss will be recorded as an 
adjustment to stockholders' equity when the Company generates 
taxable income. Federal net operating loss carryforwards will 
expire if not utilized beginning in the years 2009 through 
2018. State net operating loss carryforwards will expire if 
not utilized beginning in the years 1999 through 2003.

As of December 31, 1998, the Company had available for 
carryforward research and experimental tax credits for federal 
and state income tax purposes of approximately $2,621,000 and 
$1,509,000, respectively. Federal research and experimentation 
tax credit carryforwards expire from 2009 through 2018. The 
Company also had approximately $307,000 in California 
manufacturers investment credits.

Current Federal and California tax laws include substantial 
restrictions on the utilization of net operating losses and 
tax credits in the event of an "ownership change" of a 
corporation. Accordingly, the Company's ability to utilize net 
operating loss and tax credit carryforwards may be limited as 
a result of such "ownership change" as defined. Such a 
limitation could result in the expiration of carryforwards 
before they are utilized.

9. Major Customers

Revenues for 1996 resulted from license fee revenue from one 
preferred stockholder.

As of December 31, 1997, one unaffiliated customer and one 
preferred stockholder represented 24% and 14%, respectively, 
of total accounts receivable. Sales to these customers in 1997 
represented 21% and 12% of total 1997 revenues, respectively. 
In addition, 1997 sales to another preferred stockholder 
represented 16% of total 1997 revenues.

As of December 31, 1998, three unaffiliated customers 
represented 15%, 10%, and 10% of total accounts receivable, 
and one stockholder represented 34% of total accounts 
receivable. Sales to this stockholder represented 14% of total 
1998 revenues. In addition, sales to two other unaffiliated 
customers represented 24% and 15% of total 1998 revenues.

10. Related Party Transactions

In March 1996, a preferred stockholder entered into a five-
year licensing agreement with the Company to license certain 
technology on a nonexclusive basis. Under the terms of this 
agreement: (i) the Company received a nonrefundable license 
fee of $1,000,000 in 1996 (which accounted for all of 1996 
revenues), and (ii) if the Company met certain conditions in 
1997, it would be entitled to an additional $500,000 of 
nonrefundable license fees. In March 1997, the Company met 
such conditions and received additional nonrefundable license 
fees of $500,000 from this preferred stockholder. Such license 
fees were recognized as revenue in 1997. In addition, the 
Company also received prepaid royalties pursuant to the 
licensing agreement of $1,000,000 in 1997. Upon shipment of 
product incorporating the Company's technology, $7,000 was 
recognized as license fee revenue in 1997; and the remaining 
$993,000 was recognized in 1998 as license fee revenue at the 
expiration of the royalty period on December 31, 1998. In 
April 1998, this preferred stockholder sold its entire 
interest in the Company to three other existing preferred 
stockholders.

In 1996, the Company paid a director $22,000 in consulting 
fees. 

For the year ended December 31, 1997, total revenues included 
sales to three preferred stockholders of approximately 
$2,509,000, $1,889,000 and $123,000 (with related cost of 
revenues of approximately $999,000, $951,000 and $74,000, 
respectively). As of December 31, 1997, accounts receivable 
included amounts due from the same three preferred 
stockholders of approximately $364,000, $688,000, and $0, 
respectively.

For the year ended December 31, 1998, total revenues included 
sales to two stockholders of approximately $6,600,000 and 
$1,030,000 (with related cost of revenues of approximately 
$4,098,000 and $15,000 respectively). As of December 31, 1998, 
accounts receivable included amounts due from one stockholder 
of approximately $1,644,000.

                                      52

11. Employee Benefit Plan

In 1995, the Company adopted a defined contribution retirement 
plan (the "Retirement Plan"), which has been determined by the 
Internal Revenue Service to be qualified under Section 401(k) 
of the Internal Revenue Code of 1986. The Retirement Plan 
covers essentially all full-time employees. Eligible employees 
may make voluntary contributions to the Retirement Plan up to 
15% of their annual compensation. The Company has not made any 
employer contributions to the Retirement Plan.

12. Geographic Operating Information

The Company operates in one reportable segment: the design, 
development, marketing, and sales of value-added, high-speed 
communications solutions for the broadband access market, and 
follows the requirements of SFAS 131, "Disclosures about 
Segments of an Enterprise and Related Information." For the 
year ended December 31, 1998, the Company recorded revenue 
from customers throughout the United States and Canada; 
Switzerland, Germany, the U.K., The Netherlands, France, 
Spain, Denmark, Norway, Sweden, Finland, Belgium, Czech 
Republic, Turkey (collectively referred to as "Europe"); 
Japan, China, Thailand, Taiwan, Indonesia (collectively 
referred to as "Other Asia"), Hong Kong; Argentina, Chile, 
Panama, Venezuela, Colombia (collectively referred to as 
"Other South/Central America"), Brazil; and Australia/New 
Zealand. The following presents total revenues for the years 
ended December 31, 1996, 1997 and 1998 and long-lived assets 
as of December 31, 1997 and 1998 by geographic territory (in 
thousands):

<TABLE>
                                                 1997                  1998
                                         --------------------  --------------------
                                1996                 Long-                 Long-
                                Total      Total     Lived       Total     Lived
                              Revenues*  Revenues*   Assets    Revenues*   Assets
                              ---------  ---------  ---------  ---------  ---------
<S>                           <C>        <C>        <C>        <C>        <C>
United States                 $   1,000  $   5,589  $   5,157  $  23,032  $   6,188
Canada                                -        161        357      1,332        314
Europe                                -      4,672          -     12,521          -
Hong Kong                             -        130          -        255          -
Other Asia                            -      1,597          -      1,624          -
Brazil                                -        106          -        490          -
Other South/Central America           -        565          -      1,537          -
Australia/New Zealand                 -      2,829          -      7,323          -
                              ---------  ---------  ---------  ---------  ---------
Total                         $   1,000  $  15,649  $   5,514  $  48,114  $   6,502
                              =========  =========  =========  =========  =========

</TABLE>
* Net revenues are attributed to countries based on 
invoicing location of customer.

13. Litigation

In January 1998, Hybrid Networks, Inc. filed an action against 
the Company, accusing the Company of infringing certain of 
their patents. The Company settled this matter in January 1999 
through a patent cross-license agreement that has no material 
adverse effect on the Company's financial position, results of 
operations or cash flows.








                                      53

Item 9. Changes In and Disagreements With Accountants On 
        Accounting and Financial Disclosure

Not applicable.

                                  Part III

Pursuant to General Instruction G. to Form 10-K, the 
information required by Items 10, 11, 12, and 13 of Part III 
is incorporated by reference from the Company's definitive 
Proxy Statement with respect to its 1999 annual meeting of 
stockholders, to be filed pursuant to Regulation 14A within 
120 days after December 31, 1998.

                                   Part IV

Item 14. Exhibits, Financial Statement Schedules, and 
        Reports on Form 8-K

(a) Financial Statements and Financial Statement Schedule

1.  Financial Statements.  The financial statements of the 
Company listed in Item 14(a) and the report of Deloitte & 
Touche LLP, Independent Auditors, are filed or incorporated by 
reference as part of this annual report.  See Index to 
Financial Statements on page 38.

2.  Financial Statement Schedule.  The financial statement 
schedule of the Company listed in Item 14(a) is incorporated 
by reference as part of this annual report. The financial 
statement schedule was previously filed as an exhibit to the 
Registrant's Registration Statement on Form S-1 (File No. 333-
70945) declared effective on February 23, 1999.  

All other schedules have been omitted because they are not 
applicable, not required, or the required information is 
included in the Financial Statements or notes thereto.

3.  Exhibits.

The Exhibits listed on the accompanying Index to Exhibits on 
page 55 are filed or incorporated by reference as part of this 
annual report.  

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the last quarter of 
the fiscal year ended December 31, 1998.

(c) Exhibits

The following exhibit list states, in the case of certain 
exhibits, a prior SEC filing which contains the exhibit and 
from which it is incorporated by reference.




                                      54

Index to Exhibits
<TABLE>
Number		Exhibit Title
-------------   ---------------------------------------------------------------
<S>             <C>                                     
3.1(1)          Registrant's Amended and Restated Certificate of Incorporation.
3.2(1)		Registrant's Amended and Restated Bylaws.
4.1(1)		Form of Registrant's Specimen Common Stock Certificate.
4.2(1)		Amended and Restated Information and Registration Rights
                Agreement, among the Registrant and the investors and founders
                named therein, dated July 22, 1997.
10.1(1)		Lease Agreement between the Company, John Arrillaga and
                Richard T. Peery, dated May 10, 1996.
10.2+(1)        Technology License and Reseller Agreement between the Company
                and 3Com Corporation, dated March 22, 1996.
10.3+(1)        Reseller Agreement between the Company and 3Com Corporation,
                dated July 30, 1997.
10.4+(1)        Hardware and Software Technology License Agreement between the
                Company, Advanced Telecommunications Modules, Limited and Advanced 
                Telecommunications Modules, Inc., dated February 1, 1996.
10.5(1)		Registrant's 1995 Stock Option Plan.
10.6(1)		Registrant's 1998 Stock Incentive Plan.
10.7(1)		Registrant's 1998 Employee Stock Purchase Plan.
10.8(1)         Form of Indemnity Agreement entered into by Registrant with each
                of its executive officers and directors.
10.9(1)         Loan and Security Agreement between Registrant and Greyrock
                Business Credit, dated May 30, 1997.
10.10+(1)	International OEM Agreement between the Company, Advanced
                Telecommunications Modules, Inc. and Advanced Telecommunications
                Modules, Limited, dated March 7, 1996.
10.11+(1)	Agreement for Manufacturing Services between the Company and
                Celestica, Inc., dated October 25, 1996.
10.12+(1)       Wind River Systems, Inc. VxWorks License Agreement.
10.13+(1)	Purchase and License Agreement by and between the Company and
                Siemens AG, dated December 2, 1997.
10.14+(1)	Distribution Agreement by and between the Company and Philips
                Public Telecommunication Systems, dated November 26, 1997.
16.1(1)		Letter from KPMG Peat Marwick LLP regarding Change in Certifying
                Accountant.
23.1		Independent Auditors' Consent.
27.1(2)		Financial Data Schedule.
-------------
 +		Confidential treatment has been granted as to a portion of this
                Agreement.
(1)		Previously filed as an Exhibit to the Registrant's Registration
                Statement on Form S-1 (File No. 333-48107) declared effective on
                May 18, 1998.
(2)             Previously filed as an exhibit to the Registrant's Registration
                Statement on Form S-1 (File No. 333-70945) declared effective on
                February 23, 1999.

(d) Financial Statement Schedules

See Item 14(a) and Item 14(b) above.


                                      55

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Annual Report on 
Form 10-K to be signed on its behalf by the undersigned, 
thereunto duly authorized

In accordance with Section 13 or 15(d) of the Exchange Act,
the registrant caused this report to be signed on its behalf 
by the undersigned, thereunto duly authorized.

Date: March 10     , 1999
      _____________

                                    COM21, INC.

                                    By: /s/ Peter D. Fenner
                                       _________________________
                                            Peter D. Fenner
                                 President and Chief Executive Officer


                    POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appear below hereby constitutes and appoints, 
jointly and severally, Peter Fenner and David L. Robertson, 
and each of them acting individual, as his attorney-in-fact, 
each with full power of substitution and resubstitution, for 
him or her in any and all capacities, to sign any and all 
amendments to this Annual Report on Form 10-K (including post-
effective amendments), and to file the same, with exhibits 
thereto and other documents in connection therewith, with the 
Securities and Exchange Commission, granting unto said 
attorneys-in-fact full power and authority to do and perform 
each and every act and thing requisite and necessary to be 
done in connection therewith as fully to all intents and 
purposes as he might or could do in person, hereby ratifying 
and confirming all that said attorneys-in-fact, or their 
substitute or substitutes, may lawfully do or cause to be done 
by virtue hereof. 

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

SIGNATURE                  TITLE                          DATE

/s/ Peter D. Fenner                                       March 10
_________________________  President and Chief Executive  ____________, 1999
Peter D. Fenner            Officer
                           Principal Executive Officer

/s/ David L. Robertson     Vice President, Finance Chief  March 10
_________________________  Financial Officer, (Principal  ____________, 1999
David L. Robertson         Financial and Accounting
                           Officer) and Secretary

/s/ Paul Baran                                            March 10
_________________________                                 ____________, 1999
Paul Baran                 Director                 


/s/ Robert A. Hoff                                        March 10      
_________________________                                 ____________, 1999
Robert A. Hoff             Director        


/s/ C. Richard Kramlich                                   March 10
_________________________                                 ____________, 1999
C. Richard Kramlich        Director       


/s/ Scott J. Loftesness                                   March 10
_________________________                                 ____________, 1999
Scott J. Loftesness        Director   



                                      56



/s/ William R. Hearst, III                                March 10
_________________________                                 ____________, 1999
William R. Hearst, III     Director              


/s/ Robert C. Hawk                                        March 10
_________________________                                 ____________, 1999
Robert C. Hawk             Director       


/s/ Robert W. Wilmot                                      March 10
_________________________                                 ____________, 1999
Robert W. Wilmot           Director      

		


























                                      57


Exhibit 23.1 - Consent of Independent Accountants

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration 
Statement No. 333-57441 of Com21, Inc. on Form S-8 of our 
report dated January 18, 1999 appearing in the Annual Report 
on Form 10-K of Com21, Inc. for the year ended December 31, 
1998. 


DELOITTE & TOUCHE LLP
San Jose, California
March 5, 1999


















                                      58


</TABLE>