<PAGE>

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

                                    FORM 10-K

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
                    For the Year Ended December 31, 1998, or

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
                For the transition period from _____ to_________.

                         COMMISSION FILE NUMBER: 0-23289

                              HYBRID NETWORKS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

          DELAWARE                                     77-0252931
(STATE OF OTHER JURISDICTION OF         (I.R.S. EMPLOYER IDENTIFICATION NO.)
 INCORPORATION OR ORGANIZATION)

              6409 Guadalupe Mines Road San Jose, California, 95120
               (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 323-6500

Securities registered pursuant to Section 12(b) of the Exchange Act: None

Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock, par value $0.001 per share

     Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
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 / / (Such reports are filed concurrently herewith.)

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B 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 / /

     As of May 28, 1999, there were outstanding 10,517,399 shares of the
Registrant's Common Stock, $0.001 par value per share. As of that date, the
aggregate market value of the shares of voting common stock held by
non-affiliates of the Registrant, based on the average bid and ask prices of
such stock as of such date on the pink sheets (although the Registrant disclaims
that such prices accurately reflect the fair market value of such stock), was
approximately $15,770,432. This excludes shares of common stock held by
directors, officers and stockholders whose ownership exceeded ten percent of the
shares outstanding. Exclusion of shares held by any person should not be
construed to indicate that such person possesses power, direct or indirect, to
direct or cause the direction of the management or policies of the Registrant,
or that such person is controlled by or is under common control with the
Registrant.


                                       1

<PAGE>

                              HYBRID NETWORKS, INC.
                           Annual Report on Form 10-K
                   For the fiscal year ended December 31, 1998


                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                                               PAGE
                                                                                               ----
<S>                                                                                            <C>
PART I
  ITEM 1       Business                                                                           4
  ITEM 2       Properties                                                                        12
  ITEM 3       Legal Proceedings                                                                 12
  ITEM 4       Submission of Matters to a Vote of Security Holders                               14

PART II
  ITEM 5       Market for the Registrants Common Equity and Related
                  Stockholder Matters                                                            15
  ITEM 6       Selected Financial Data                                                           17
  ITEM 7       Management's Discussion and Analysis of Financial
                  Condition and Results of Operations                                            18
  ITEM 7A      Quantitative and Qualitative Disclosures About Market Risk                        35
  ITEM 8       Financial Statements and Supplementary Data                                       36
  ITEM 9       Changes in and Disagreements With Accountants on Accounting
                  and Financial Disclosure                                                       62

PART III
  ITEM 10      Directors and Executive Officers of the Company                                   63
  ITEM 11      Executive Compensation                                                            66
  ITEM 12.     Security Ownership of Certain Beneficial Owners and Management                    69
  ITEM 13      Certain Relationships and Related Transactions                                    70
  ITEM 14      Exhibits, Financial Statements Schedules and Reports on
                  Form 8-K                                                                       71

Signatures                                                                                       74
Exhibits
</TABLE>

     As used in this report on Form 10-K, unless the context otherwise requires,
the terms "we," "us," or, "the Company" and "Hybrid" refer to Hybrid Networks,
Inc., a Delaware corporation.


                                       2

<PAGE>

PART I

     THIS REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO
FUTURE EVENTS OR FINANCIAL RESULTS, SUCH STATEMENTS INDICATING THAT "WE
BELIEVE," "WE EXPECT," "WE ANTICIPATE" OR "WE INTEND" THAT CERTAIN EVENTS MAY
OCCUR OR CERTAIN TRENDS MAY CONTINUE. OTHER FORWARD-LOOKING STATEMENTS INCLUDE
STATEMENTS ABOUT THE FUTURE DEVELOPMENT OF PRODUCTS OR TECHNOLOGIES, MATTERS
RELATING TO OUR PROPRIETARY RIGHTS, YEAR 2000 COMPLIANCE, FACILITIES NEEDS, OUR
LIQUIDITY AND CAPITAL NEEDS AND OTHER STATEMENTS ABOUT FUTURE MATTERS. ALL THESE
FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. YOU SHOULD NOT RELY
TOO HEAVILY ON THESE STATEMENTS; ALTHOUGH THEY REFLECT THE GOOD FAITH JUDGMENT
OF OUR MANAGEMENT, THEY INVOLVE FUTURE EVENTS THAT MIGHT NOT OCCUR. WE CAN ONLY
BASE SUCH STATEMENTS ON FACTS AND FACTORS THAT WE CURRENTLY KNOW. OUR ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE IN THESE FORWARD-LOOKING STATEMENTS
AS A RESULT OF VARIOUS FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS"
AND ELSEWHERE IN THIS FORM 10-K.

     RESTATEMENT OF OUR FINANCIAL STATEMENTS

     On May 18, 1998 and June 1, 1998, we were engaged with our independent
accountants, Coopers & Lybrand LLP (which later became PricewaterhouseCoopers
LLP and is referred to herein as "PwC"), in a review of our financial statements
for 1997 and the first quarter of 1998. On June 18, 1998, we announced that PwC
had notified us that its audit reports on our 1997 financial statements should
no longer be relied upon and that we were continuing our review of financial
statements. On July 9, 1998, PwC resigned as our independent accountants,
stating that it believed our 1997 financial statements should be restated but
that, although there had been no disagreements between PwC and us on any matter
of our accounting principles or practices, financial statement disclosure or
auditing procedure, PwC would not continue as our independent accountants to
address the restatement.

     In August 1998, we retained Arthur Andersen LLP ("AA") as our independent
accountants. After extensive work in connection with our 1997 financial
statements, AA resigned as our independent accountants on November 24, 1998. AA
informed us that, in AA's view, material weaknesses existed in our internal
controls of a nature that prevented AA from being able to form an opinion on our
conclusions as to the appropriate timing and amount of revenue recognition for
the purposes of our 1997 financial statements. AA also stated that during the
course of its work, it had reached the conclusion that it needed to expand
significantly the scope of its audit, which it did with our approval and
cooperation, and that, while AA did not complete its audit, it concluded that
our 1997 financial statements were materially misstated. AA confirmed that there
had been no disagreements between AA and us on any matter of our accounting
principles and practices, financial statement disclosure or auditing procedure.

     In December 1998, we engaged Hein + Associates LLP ("Hein") as our
independent accountants. During the review of our financial statements in
conjunction with Hein (and, earlier, with PwC and AA), we became aware of errors
and irregularities that caused our financial statements for 1997 and the first
quarter of 1998 to be misstated, particularly with respect to the timing and
amount of our sales in 1997 and the first quarter of 1998. We also concluded
that the financial effects of warrants issued by us in 1997 had not been
properly reflected in our financial statements. Our financial statements for
1997 and the first quarter of 1998 have been restated to correct these errors.
As indicated in Note 1 to the financial statements in Item 8 of this report, as
a result of the restatement net sales for 1997 were reduced from $14,270,000 to
$4,120,000 (resulting in gross loss of $4,799,000 rather than gross profit of
$2,012,000), net loss increased from $13,590,000 to $21,602,000 and accumulated
deficit increased from $30,932,000 to $38,944,000. Our basic and diluted loss
per share increased from $3.84 to $6.10. For additional information regarding
the restatement, see Note 1 to the financial statements in Item 8 of this
report.

     In June 1999, Hein completed its audit of our 1997 and 1998 financial
statements. Those financial statements, and Hein's audit report on them are
included in this report (The financial statements included in Item 8 of this
report are referred to as the "Financial Statements").


                                       3

<PAGE>

     Our inability to issue audited financial statements during the last 12
months has had serious consequences for our business. As a result, the Nasdaq
National Market suspended trading in our Common Stock from June 18, 1998 to
December 1, 1998, at which time our Common Stock was delisted from the Nasdaq
National Market. Primarily due to our announcements regarding the need to
restate our financial statements, a number of class action litigations were
brought in June, July and August 1998, and the Securities and Exchange
Commission initiated a formal investigation in October 1998. We believe these
actions hurt our business during the latter part of 1998, made it more difficult
for us to attract and retain employees, disrupted our management, sales and
marketing, engineering and research and development staffs, contributed to our
inability to complete the restatement of our financial statements during 1998
and adversely affected the sales of our products and services.

ITEM 1.  BUSINESS

OVERVIEW

     We are a broadband access equipment company that designs, develops,
manufactures and markets wireless and cable systems that provide high-speed
broadband access to the Internet and corporate intranets for both businesses and
consumers. Our products remove the bottleneck over the local connection to the
end-user which causes slow response time for those accessing bandwidth-intensive
information. Customers include broadband wireless system operators, cable system
operators, internet service providers ("ISPs"), resellers and other companies
that provide broadband networking solutions or services to business and
residential users. Our Series 2000 product line consists of headend routers,
wireless or cable modems and management software for use with either cable TV or
wireless transmission facilities. Because a majority of wireless and cable
transmission facilities are not capable of two-way transmissions, the Series
2000 has been designed to utilize a variety of return paths, including the
public switched telephone network. The Series 2000 is capable of supporting a
combination of speeds, media and protocols in a single wireless or cable system,
providing system operators with flexible, scalable and upgradeable solutions
that allow them to offer cost-effective broadband access to their subscribers.

PRODUCTS, TECHNOLOGY AND SERVICES

     Our Series 2000 product line provides broadband wireless system operators,
cable system operators, ISPs and other businesses with a cost-effective, high
speed Internet and intranet access solution. Our products include headend
routers, wireless and cable modems and management software for use with either
wireless transmission facilities or cable TV transmission facilities. Our
headend products are used by broadband wireless system operators, cable system
operators and other customers to transmit and receive data across networks and
to manage networks and modems. Our client modems are used by subscribers of our
customers and can be used as single-user devices or in multi-user local area
networks. Our products incorporate proprietary technology that enables the same
system to be deployed in either broadband wireless or cable systems.
Additionally, our products support both one-way downstream transmission
accompanied by upstream transmission via a telephone modem or return router or
two-way wireless or cable transmission using a wireless channel or cable
channel.


                                       4

<PAGE>

     PRODUCTS

     The following table outlines the primary components of the Company's Series
2000:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
HEADEND EQUIPMENT (1)(2)                                         PRODUCT DESCRIPTION
--------------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>
CyberManager 2000 (CMG-2000)                                     Workstation with proprietary Hybrid software that
                                                                 provides subscriber and network management
--------------------------------------------------------------------------------------------------------------------------
CyberMaster Downstream Router (CMD-2000)                         High speed downstream RF router that supports up to
                                                                 60 Mbps aggregate throughput in 12 MHz of spectrum.
--------------------------------------------------------------------------------------------------------------------------
CyberMaster Upstream Router QPSK Return                          Upstream receiver and demodulator for two-way
(CMU 2000-14C and QDC-030-2)                                     QPSK configuration
--------------------------------------------------------------------------------------------------------------------------
END-USER EQUIPMENT (1)(3)
--------------------------------------------------------------------------------------------------------------------------
Multi-User Modem/Router (CCM-201, CCM-202)                       Client modem and router that can be used in either
                         CCM-231)                                wireless or cable systems. Supports up to 20 users.
--------------------------------------------------------------------------------------------------------------------------
Single-User Modem (N-201, N202)                                  Similar to CCM-201, CCM-202 and CCM-231 but
                   N-231)                                        restricted to a single user.
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  All products are available for use with wireless or cable systems.
(2)  Headend equipment typically ranges in price from $40,000 to $90,000 for a
     single system.
(3)  Modem list prices range from approximately $320 to $480 depending on
     features.

     HEADEND EQUIPMENT

     CYBERMANAGER 2000. The CyberManager 2000 ("CMG-2000") is our proprietary
subscriber and network management workstation built on a Sun Microsystems
Sparc 5. Running Hybrid software, the CMG-2000 operates as the system
administrator interface to the upstream and downstream routers and other
supported third party headend equipment. The CMG-2000 has a 10/100BaseT
(Ethernet) interface to connect to a fast Ethernet switch in the headend.
Currently, the CMG-2000 supports up to 5,000 modems.

     CYBERMASTER DOWNSTREAM ROUTER. The CyberMaster Downstream Router
("CMD-2000") is our rack-mounted, Pentium based, PCI/ISA bus industrial
microcomputer. It supports Hybrid's proprietary SIF and QAM cards, which are
used for downstream routing and for 64-quadrature amplitude modulation
("64-QAM") downstream modulation. The CMD-2000 has a 10/100BaseT interface to
connect to a fast Ethernet switch within the headend. The CMD-2000 supports
up to six independent 10 Mbps downstream channels normally feeding two TV
channels or transmitters. Each 10 Mbps channel occupies 2 MHz of either
wireless or cable spectrum.

     CYBERMASTER UPSTREAM ROUTER QPSK RETURN. The Cybermaster upstream router
is our rack mounted, Pentium based, PCI/ISA bus industrial microcomputer. The
product houses dual quadrature phase-shift keying ("QPSK") receiver cards
which demodulate upstream QPSK signals. The CMU-2000-14C has a 10/100BaseT
interface to connect to a fast Ethernet switch at the headend. The CMU
supports up to 28 upstream ports each with a 256 Kbits per second (Kbps) to 5
Mbits per second (Mbps) data rate. It is usually configured to support up to
2,400 wireless or cable modem subscribers.

                                       5

<PAGE>

     END-USER EQUIPMENT

     MULTI-USER MODEM/ROUTER. The Multi-User Modem/Router supports 10 Mbps,
64-QAM downstream data transmission on both wireless and cable systems and
upstream transmission via phone modem, router or wireless or cable return.
The router includes the CCM-201, a phone return with external modem, the
CCM-202 phone return with internal modem, and the CCM-231, for phone,
wireless or cable. Each CCM-201 includes routing capability to support up to
20 networked devices (PC, Macintosh or workstation). The CCM-201 has a number
of security features including system authentication and user ID.

     SINGLE-USER MODEM. The Single-User Modems are similar to the Multi-User
Modem/Routers (CCM-201, CCM-202 and CCM231, respectively) but support only one
client device which can be a PC, Macintosh or workstation.

     All modems are available in a version which supports DES encryption.

     TECHNOLOGY

     The Series 2000 product line is a proprietary, integrated broadband
access system. The Series 2000 is media independent, allowing the same system
components to be deployed in either wireless or cable systems. It utilizes
proprietary asymmetric networking technology that allows for optimal use of
available frequencies. The Series 2000 supports both asymmetric two-way
transmission on a wireless or cable system and asymmetric telephone- or
router-return on either a broadband wireless or cable system using the same
wireless transmitter or downstream TV channel. Our proprietary
sub-channelization technology splits a standard 6 MHz channel into three 2
MHz slices for downstream transmission, providing greater flexibility and
minimizing the effects of multipath interference in wireless systems. By
providing 2 MHz sub-channelization, our products are also positioned to serve
the new WCS frequencies, which are 5 MHz wide. The Series 2000 provides for
downstream transmission over wired cable in the interference prone "rolloff"
channels that are unsuitable for video broadcast, preserving scarce channels
for the cable system operator. The Series 2000 is expandable from an
entry-level system to large systems that serve more than 5,000 modems.

     SERVICES

     Our product support services include consulting, systems engineering,
systems integration, installation, training and technical support. Network
operations engineers, who combine radio frequency and TCP/IP networking
expertise, provide network consulting to support the sales force, assisting
sales representatives and customers in defining the specifications for the
system to be installed. Our network operations group also works with the
customer during site preparation to aid in systems engineering, system
integration, installation and acceptance testing to ensure a successful system
start-up. Each customer is required to enroll, for a fee, at least one person in
our one-week training course; enrollment for multiple employees from the
customer organization is encouraged and supported with a discounted fee
schedule. These training courses are tailored to specific implementations of our
products and cover the installation, operation and maintenance of our headend
and client modem products in a network operating environment. We typically
provide a one-year warranty on our hardware products that includes factory and
on-site repair service as needed. Customer support also includes telephone
support, maintenance releases and technical bulletins covering all of our
software and firmware products that contain application code. We provide support
after expiration of the warranty period as a purchase option, including on-site
field support.

CUSTOMERS

     Our customers include broadband wireless system operators, cable system
operators, ISPs, resellers and other businesses. A small number of customers has
accounted for a large portion of our net sales. In 1998, RCN Corporation and
Knology Holdings, Inc. accounted for 25% and 13% of our net sales. In 1997, RCN


                                       6

<PAGE>

Corporation and Jones Intercable accounted for 13% and 12% of our net sales.
In 1996, AT&T Corporation and Intel Corporation accounted for 41% and 21% of
our net sales. During 1998, 58% of our net sales were attributable to cable
system applications and the balance to broadband wireless applications.

     A number of cable operators have adopted a standard for products used in
transmitting data over cable systems called Data Over Cable System Interface
Specification ("DOCSIS"). Our products do not meet this standard, and the
adoption of the standard by cable operators has adversely affected our sales to
cable customers and is likely to continue to do so in the future.

SALES, MARKETING AND DISTRIBUTION

     We market and sell our products in the United States through our own field
sales force and sales support organization. We also sell our products through
distributors, VARs and OEMs. We have field sales offices in Atlanta, Georgia and
Tinton Falls, New Jersey.

     The sale of our products typically involves a great deal of time and
expense. Customers usually want to engage in significant technical evaluation
before making a purchase commitment. There are often delays associated with
customers' internal procedures to complete the evaluation and to approve the
large capital expenditures that are typically involved in purchasing our
products. The sales cycle for our products has been lengthy, generally lasting
three to nine months, and is subject to a number of significant risks, including
customers' budgetary constraints and internal acceptance reviews. Because our
sales cycle may be long and uncertain, and because we depend on a relatively few
customers who place relatively large orders, any delay or loss of an order that
is expected to be received in a quarter can have a major effect on our sales and
operating results for that quarter. The same is true of any failure of a
customer to pay for products on a timely basis.

     We have a limited backlog of orders. We believe this is not necessarily an
indication of our future sales, because our customers typically demand prompt
delivery after placing an order and because most of our orders are booked and
shipped in the same quarter.

     Our marketing efforts are targeted at broadband wireless system operators,
cable system operators, local and long-distance telephone service companies
(LECs and IXCs) and existing ISPs. In the past, we devoted considerable time and
effort to educating potential customers on the business opportunity of providing
high speed Internet and intranet access (through white papers, prototype
customer business models, industry speaking engagements, product and system
demonstrations and direct customer presentations). We have tried to maintain an
industry presence by exhibiting at industry tradeshows and speaking at
conferences and seminars. During the latter part of 1998, constraints in our
financial resources have limited our sales and marketing efforts. By the end of
the year, our principal focus has been on supplying and supporting our existing
customers.

     The market for our products has historically experienced significant price
erosion over the life of a product, and we have experienced and expect to
continue to experience pressure on our unit average selling prices. While we
have initiated cost reduction programs to offset pricing pressures on our
products, there can be no assurance that we will keep pace with competitive
price pressures or improve our gross margins. If we are unable to continue to
reduce costs, our profitability will be adversely affected. Our profitability is


                                       7

<PAGE>

also affected by the sales mix of headends and modems. Our single user modems
generally have lower margins than our multi-user modems, both of which have
lower margins than our headend routers. Due to current customer demand, we
anticipate that the sales mix of modems will be weighted toward lower-margin
single-user modems in the foreseeable future. As a result, gross margins, and
our business, could be adversely affected.

     In order to market and sell our products internationally, we had entered
into several distribution relationships. European interest in the DOCSIS
standard has adversely affected our distribution arrangements. We had no
international sales in 1998.

MANUFACTURING

     Our manufacturing strategy is to perform system integration, testing and
quality inspection internally and to outsource the manufacturing of the product
modules to third parties. We maintain a limited in-house manufacturing
capability for performing system integration and testing on headend products and
for manufacturing small quantities of modems at our headquarters in San Jose.
During 1998, we used our in-house manufacturing capability largely for (i) pilot
production of new modem designs, (ii) configuration changes to adjust inventory
to customer volume requirements for various models and (iii) sample testing of
products received from volume modem manufacturers.

     Our Series 2000 client modems are manufactured by Sharp Corporation through
an agreement we have had since early 1997 with Sharp and its distributor, Itochu
Corporation. We have not developed an alternative manufacturing source. Our
inability to develop alternative manufacturing sources has adversely affected
our ability to reduce the manufacturing costs of our modems despite competitive
pressures that have caused us to reduce our selling prices. We expect downward
pressure on the prices of our products to continue. In order for us to compete
effectively in the sale of modems, we will need to reduce our prices, and the
underlying costs, of our modems. As long as Sharp is the only manufacturing
source of our modems, our ability to reduce the manufacturing costs of our
modems may be limited.

     We have subcontractors for the standard components and subassemblies for
our products. Standard components include the Sun Microsystems Sparc 5
workstation and its Sun Operating System (OS); and Intel's Ethernet cards and
Pentium-based PCI processor cards. Our CyberManager 2000 Router is built on the
Sparc 5/Sun OS platform by installing our proprietary network subscriber and
network management software, HybridWare. Our CyberMaster Downstream Router
("CMD") and CyberMaster Upstream Router ("CMU") are built on Intel's
Pentium-based PCI/ISA-based computer cards installed in standard rack-mounted
backplanes from Industrial Computer Source that are configured to our
specifications. Our proprietary software, Hybrid OS, is overlaid on a standard
Berkeley Systems operating system for the CMD and CMU.

     We are dependent upon certain key suppliers for a number of the components
for our 64-QAM products. For example, we have only one vendor, BroadCom
Corporation, for the 64-QAM demodulator semiconductors that are used in our
client modem products, and in past periods these semiconductors have been in
short supply. In 1997, BroadCom announced a program whereby certain of its
technological and product enhancements may be made available to certain of our
competitors before making them available to us, thereby giving us a competitive
disadvantage. Hitachi is the sole supplier of the processors used in certain of
our modems. Stanford Telecom, which is a competitor for at least one of our
broadband wireless products, is currently the sole supplier for certain
components used in our products and has indicated that they might stop supplying
these components to us, although it has not yet done so. There can be no
assurance that these and other single-source components will continue to be
available to us, or that deliveries of them to us will not be interrupted or
delayed (due to shortages or other factors). Having single-source components
also makes it more difficult for us to reduce our costs for these components and
makes us vulnerable to price increases by the component manufacturer. Any
significant interruption or delay in the supply of


                                       8

<PAGE>

components for our products or any increase in our costs for components, or
our inability to reduce component costs, could hurt our business.

    Our products generally carry a one-year warranty for replacement of parts.
Although we have not experienced any significant product liability claims to
date, we could be subjected to such claims in the future.

RESEARCH AND DEVELOPMENT

     As of December 31, 1998, our research and development staff consisted of 22
full-time employees. As of April 30, 1999, our research and development staff
had been reduced to 8 full-time employees, due primarily to a reduction in
workforce that we implemented in the first quarter of 1999. To supplement our
research and development efforts, we have hired a consulting firm in India to
work on various projects. Our agreement with the firm is to provide up to 20
engineers as consultants depending upon the project needs. In addition, we have
hired consultants in California to work on various projects. Our total research
and development expenses for 1998, 1997 and 1996 were $7,771,000, $7,831,000 and
$5,076,000, respectively, but they have declined substantially in 1999 due to
lack of resources. Our research and development during 1998 was directed
primarily towards (i) increasing the performance and improving the scalability
of our broadband systems and (ii) reducing the cost of our modems. We are
currently enhancing our QPSK return product software in cooperation with certain
of our wireless customers to improve performance as the customers introduce
antenna sectorization to increase return path capacity. Developments now being
tested would, if successful, increase the capacity of the manager to 20,000
modems and extend the CCM-231 multi-user modem to serve 60 computers. We are
continuing our efforts to reduce the cost of manufacturing client modems
significantly through design and engineering changes. There can be no assurance
that we will be successful in these efforts.

     The market for high speed Internet access products is characterized by
rapidly changing and competing technologies, evolving industry standards and
frequent new product introductions leading to short product life cycles. There
can be no assurance that we will be able to keep up with these changes.

COMPETITION

     Our market is intensely competitive, and we expect even more competition in
the future. The principal competitive factors in this market include:

          -    product performance and features including both downstream and
               upstream transmission capabilities,

          -    reliability and stability of operation,

          -    breadth of product line,

          -    sales and distribution capability,

          -    technical support and service,

          -    relationships with cable and broadband wireless system operators
               and ISPs,

          -    meeting standards compliance and

          -    general industry and economic conditions.

     While we believe our products and services are competitive with or superior
to those of our competitors, we have been hampered by a lack of resources, by
disruptions resulting from management and personnel changes, uncertainties
caused by our financial reporting difficulties referred to at the beginning of
this report and by our competitors having established relationships with
principal cable companies, wireless


                                       9

<PAGE>

operators, and ISPs, including @Home. Although our products have been
particularly well received in the broadband wireless market, financial
difficulties among our wireless customers have limited our sales to and
collections from these customers. In addition, conditions in our market could
change rapidly and significantly as a result of technological changes, and
the development and market acceptance of alternative technologies could
decrease the demand for our products or render them obsolete. Similarly, the
continued emergence or evolution of industry standards or specifications may
put us at a disadvantage in relation to our competitors. There can be no
assurance that we will be able to compete successfully in the future.

     In general, our competitors are producers of asymmetric cable modems and
other types of cable modems and other broadband access products. Most of our
competitors are substantially larger and have greater financial, technical,
marketing, distribution, customer support and other resources, as well as
greater name recognition and access to customers, than we have. Many of our
competitors are in a better position to withstand any significant reduction in
capital spending by cable or broadband wireless system operators.

     CABLE MODEM COMPETITORS

     Our competitors in the cable modem market include Cisco Systems, Com21,
Terayon, GI, Nortel Networks, Motorola, General Instrument and 3Com and its
subsidiary U.S. Robotics. Other cable modem competitors include Phasecom,
Scientific-Atlanta, Toshiba and Zenith Electronics, as well as a number of
smaller, more specialized companies. Certain competitors have established
relationships in the cable industry and with @Home, which is the ISP for a
number of major cable operators, and have more experience than we have in
selling two-way cable transmission products. Some of these competitors have
entered into partnerships with computer networking companies and with @Home that
may give such competitors greater visibility in this market. A number of
competitors have already introduced or announced high speed connectivity
products that are priced lower than ours, and certain other competitors are more
focused on and experienced in selling and marketing two-way cable transmission
products.

     Certain of our competitors have established relationships with cable system
operators and telephone companies ("telcos"), and ISPs, including @Home, and,
based on these relationships, may have more direct access to the decision-makers
of such cable system operators and telcos. In addition, we could face potential
competition from certain of our suppliers, such as Sharp, if it were to launch
or license competitive modems for sale to others.

     The adoption of the DOCSIS cable standard by large cable operators has
adversely affected our ability to sell to cable customers, particularly new
customers. Further, our products are not compatible with headend equipment and
modems of other suppliers of broadband Internet access products, including
DOCSIS products, and, as a result, potential customers who wish to purchase
broadband Internet access products from multiple suppliers may be reluctant to
purchase our products.

     WIRELESS CABLE COMPETITIORS

     Our principal competitors in the wireless MMDS market include Nortel
Networks (which is active in Canada), Cisco Systems (which has proprietary
products under development due to its acquisition of Clarity Wireless, Inc.),
COM21 (which is attempting to adapt its proprietary cable systems for wireless),
Phasecom and other vendors that may be attracted by recent investments by MCI
Worldcom and Sprint in wireless operations. Stanford Telecommunications (which
manufactures QPSK products) is providing wireless Internet connectivity over
LMDS frequencies and has added telephone service, which is potentially
attractive to new operators. Stanford Telecom is the sole supplier for certain
components used in our products and has indicated that they might stop shipping
these components to us. Our products have been more widely accepted in the
broadband wireless market than in the cable market partly because the adoption
of the DOCSIS standard has not had a significant effect on wireless customers.
We believe that products meeting the present DOCSIS standard will not perform
well over wireless. This belief is based in part on the performance of the
adaptive equalizer in the modem in the presence of multiple signals, the


                                     10

<PAGE>

power required from the transceiver in the return path and the probable
disruption of the TDMA return path in the presence of noise or multi-path
propagation. However, there can be no assurance that improvements in
integrated circuit technology, transceiver output power levels or changes in
the DOCSIS TDMA protocol will not allow systems developed for cable to
perform effectively over wireless. One of the DOCSIS compliant vendors might
also modify the DOCSIS equipment to a proprietary non-standard form to work
over wireless.

    OTHER COMPETITION

     Broadband wireless and cable system operators face competition from
providers of alternative high speed connectivity systems. In the wireless high
speed access market, broadband wireless system operators are in competition with
satellite TV providers. In telephony networks, Digital Subscriber Line ("xDSL")
technology enables digitally compressed video signals to be transmitted through
existing telephone lines to the home. Market acceptance of xDSL, or other wired
technologies such as Integrated Services Digital Network ("ISDN"), or satellite
technologies such as DBS, could decrease the demand for our products. Recently,
several companies, including Compaq, Intel, Microsoft, 3Com, Alcatel, Lucent,
several RBOCs, MCI and others announced the formation of a group focused on
accelerating the pace of ADSL ( a form of xDSL) service. Further, if any
competing architecture or technology were to limit or halt the deployment of
coaxial or hybrid fiber-coax ("HFC") systems, our business could be materially
adversely affected.

     To be successful, we must respond promptly and effectively to the
challenges of new competitive products and tactics, alternate technologies,
technological changes and evolving industry standards. We must continue to
develop products with improved performance over two-way wireless transmission
facilities. There can be no assurance that we will meet these challenges.

INTELLECTUAL PROPERTY

     PATENTS

     We rely on a combination of patent, trade secret, copyright and
trademark laws and contractual restrictions to establish and protect
proprietary rights in our products. We have received five patents from the
U.S. Patent and Trademark Office: 5,586,121; 5,818,845; 5,828,655; 5,859,852;
and RE 35,774, which is a re-issuance of our earlier U.S. Pat. 5,374,304.
These patents are directed to various aspects of cable and wireless modems
and headend systems. In addition, the U.S. Patent and Trademark Office has
issued formal notices of allowances for nine pending patent applications
which are also directed to cable and wireless modems and headend systems, as
well as various modulation and transmission schemes used in cable modem
systems. We have other patent applications pending before the U.S. Patent and
Trademark Office. We have patent applications pending in a number of foreign
jurisdictions as well. We do not know whether any pending or foreign patent
applications will result in the issuance of patents.

     We cannot assure you that our patents will not be challenged or
invalidated, or that the claims allowed in our patents will be of sufficient
scope or strength to provide meaningful protection or commercial advantage to
us. We have initiated one patent infringement litigation to enforce our patent
rights, and it resulted in a settlement in which we granted licenses to the
defendants containing certain terms that are in some respects favorable for
them, including a right of first refusal to purchase our patents that we granted
to one defendant (Com21, Inc.) in the event that in the future we propose to
sell our patents (separately or together with our other assets) to any third
party (See Item 3 "Legal Proceedings"). We do not know whether we will bring
litigation in the future in an effort to assert our patent rights, or whether
other companies will bring litigation challenging our patents. Any such
litigation could be time consuming and costly for us and could result in our
patents being held invalid or unenforceable. Furthermore, even if the patents
are upheld or are not challenged, third parties might be able to develop other
technologies or products without infringing any such patents.


                                      11


<PAGE>

     SOFTWARE PROTECTION

     We have entered into confidentiality and invention assignment agreements
with our employees, and we enter into non-disclosure agreements with certain of
our suppliers, distributors and customers, in order to limit access to and
disclosure of our proprietary information. There can be no assurance that these
contractual arrangements or the other steps we take to protect our intellectual
property will prove sufficient to prevent misappropriation of our technology or
deter independent third-party development of similar technologies. The laws of
certain foreign countries may not protect our products or intellectual property
rights to the same extent as do the laws of the United States.

     INFRINGEMENT

     We have in the past, received, and may in the future receive, notices from
third parties claiming that our products, software or asserted proprietary
rights infringe the proprietary rights of third parties. We expect that
developers of wireless and cable modems will be increasingly subject to
infringement claims as the number of products and competitors in our market
grows. While we are not currently subject to any such claim, any future claim,
with or without merit, could be time consuming, result in costly litigation,
cause product shipment delays or require us to enter into royalty or licensing
agreements. Such royalty or licensing agreements might not be available on terms
acceptable to us or at all.

     In the future, we may also file lawsuits to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of the proprietary rights of others. Such litigation, whether successful
or not, could result in substantial costs and diversion of resources. As
indicated above, we were engaged during 1998 in an infringement lawsuit that we
brought against two third parties. In 1999, in order to stop the diversion of
resources caused by the litigation, we entered into a settlement pursuant to
which the defendants obtained licenses to our products on terms that in certain
respects were favorable to the defendants (See "--Patents" above and Item 3
"Legal Proceedings" below). Nonetheless, we may find it necessary to institute
further infringement litigation in the future.

EMPLOYEES

     As of December 31, 1998, we had 87 full-time employees. None of our
employees is represented by a collective bargaining unit with respect to his or
her employment, and we have never experienced an organized work stoppage. As of
April 30, 1999, the number of full- time employees had been reduced to 32, due
primarily to the reduction in workforce we implemented during the first quarter
of 1999. We used consultants heavily to supplement our workforce and as of April
30, 1999 we had 14 consultants in various areas.

ITEM 2.  PROPERTIES

     We currently sublease approximately 55,000 square feet of office, research
and development and manufacturing space in San Jose, California. The sublease
expires in April 2004, and we have an option to extend the term of the lease
through October 2009. We also lease approximately 900 square feet of office
space in Tinton Falls, New Jersey and approximately 1,000 square feet of office
space in Atlanta, Georgia. Both leases expire in 1999. We believe our facilities
are in excess of our needs. As of May 1999, our San Jose facility was
significantly underutilized, and attempts to sublease the excess space have been
unsuccessful.

ITEM 3.  LEGAL PROCEEDINGS

     CLASS ACTION LITIGATION

     In June 1998, five class action lawsuits were filed in San Mateo County
Superior Court, California against us, our five directors (one of whom is an
officer), two former officers and one former director. The


                                      12

<PAGE>

lawsuits were brought on behalf of purchasers of our Common Stock during the
class period commencing November 12, 1997 (the date of our initial public
offering) and ending June 1, 1998. In July 1998, a sixth class action lawsuit
was filed in the same court against the same defendants, although the class
period was extended to June 18, 1998. All six lawsuits also named as
defendants the underwriters in our initial public offering, but the
underwriters have since been dismissed from the cases.

     The complaints in these lawsuits claim that we and the other defendants
violated the anti-fraud provisions of the California securities laws, alleging
that the financial statements we used in connection with our initial public
offering and the financial statements we issued subsequently during the class
period, as well as related statements made on our behalf during the initial
public offering and subsequently regarding our past and prospective financial
condition and results of operations, were false and misleading. The complaints
also allege that we and the other defendants caused these misrepresentations to
be made in order to inflate the price of our stock for the initial public
offering and during the class period. We and the other defendants denied the
charges of wrongdoing.

     In March 1999, the parties entered into an agreement in principle to settle
these lawsuits, as indicated below.

     In July and August 1998, two class action lawsuits were filed in the U.S.
District Court for the Northern District of California. Both of these federal
class action lawsuits were brought against the same defendants as the six state
court class actions referred to above, except that the second federal class
action lawsuit also named as a defendant PwC, our former independent auditors.
(The underwriters in our initial public offering were named as defendants in the
first federal class action lawsuit but were subsequently dismissed.) The class
period for the first federal class action lawsuit is from November 12, 1997 to
June 1, 1998, and the class period in the second class action lawsuit extends to
June 17, 1998. The complaints in both federal class action lawsuits claim that
we and the other defendants violated the anti-fraud provisions of the federal
securities laws, on the basis of allegations that are similar to those made by
the plaintiffs in the state class action lawsuits. We and the other defendants
denied these charges of wrongdoing.

     We believe that the state and federal class action lawsuits hurt our
business during the latter part of 1998, made it more difficult for us to
attract and retain employees, disrupted our management, sales and marketing,
engineering and research and development staffs, contributed to our inability
during the year to complete the restatement of our financial statements and
adversely affected the sales of our products and services.

     In March 1999, we and the other parties to the state class action lawsuits
and the federal class action lawsuits (other than PwC) reached an agreement in
principle to settle the lawsuits. The agreement is subject to the parties'
entering into a binding stipulation of settlement and approval by the U.S.
District Court for the Northern District of California. Under the agreement in
principle, (i) our insurers would pay $8.8 million on our behalf (and on behalf
of the other officer and director defendants), (ii) we would issue 3.0 million
shares of our Common Stock to the plaintiffs (the number of shares would be
increased proportionately to the extent that there are more than 10.5 million
shares of our Common Stock outstanding on the date of distribution so that, as
of such date, the plaintiffs would hold approximately 22.6% of all of the shares
of our Common Stock that are then outstanding), (iii) if we are acquired within
nine months after March 9, 1999, the date of the agreement in principle, then,
in addition to the consideration referred to in (i) and (ii), we would pay to
the plaintiffs an amount equal to 10% of the consideration received by our
stockholders in the acquisition. As a result of the agreement in principle and a
related agreement between us and our insurers, we have paid, and will not be
reimbursed by our insurers for, $1.2 million in attorney's fees and other
litigation expenses that would otherwise be covered by our insurance, and we
will not have insurance coverage for the attorney's fees and expenses relating
to the settlement that we incur in the future.


                                      13

<PAGE>

     SEC INVESTIGATION

     In October 1998, the Securities and Exchange Commission began a formal
investigation of us and unidentified individuals with respect to our financial
statements and public disclosures. We have been producing documents in response
to the Securities and Exchange Commission's subpoena and are cooperating with
the investigation. A number of current and former officers and employees and
outside directors have testified or may testify before the Securities and
Exchange Commission's staff.

     PATENT LITIGATION

     In January 1998, we brought a lawsuit in the U.S. District Court for the
Eastern District of Virginia against Com21, Inc. and Celestica, Inc. in which we
alleged that the defendants infringed our patents. In response to our lawsuit,
Com21 initiated a declaratory judgment action six days later in the U.S.
District Court for the Northern District of California to obtain a declaration
that our patents are invalid and unenforceable and that in any event Com21 did
not infringe them. In February 1998, the action in the Eastern District of
Virginia was transferred to the Northern District of California, and the two
actions were consolidated. Pre-trial discovery continued in the consolidated
action until September 1998 when the parties agreed to stay the proceedings
while they attempted to reach a settlement. In January 1999, the parties entered
into a settlement agreement and the actions were dismissed. Pursuant to the
settlement, we granted Com21 and Celestica a nonexclusive license on our patents
under which they may be required to pay royalties in the event that they sell
certain products in the future, subject to certain contingencies, and we granted
Com21 a right of first refusal to purchase our patents in the event that we
propose in the future to sell our patents (whether separately or together with
our other assets) to any third party. The Company has agreed to pay its legal
counsel in this action, as a partial contingency fee (in return for such
counsel's acceptance of reduced current legal fees), an amount equal to 50% of
any royalties that the Company receives from its license with the defendants in
the litigation (but not in excess of $3,000,000). To date the Company has
received virtually no royalties from the license.

SUBSEQUENT LAWSUIT:  FILED BY PACIFIC MONOLITHICS

     In March 1999, Pacific Monolithics, Inc. (which had filed a voluntary
petition under Chapter 11 of the U.S. Bankruptcy Code and is suing as
debtor-in-possession) filed a lawsuit in Santa Clara County Superior Court,
California against us, our five directors (one of whom is an officer), a former
director (who was subsequently dismissed), a former officer and PwC. The lawsuit
concerns an agreement which we entered into in March 1998 to acquire Pacific
Monolithics through a merger, which acquisition was never consummated. The
complaint alleges that we induced Pacific Monolithics to enter into the
agreement by providing it with our financial statements, and by making other
representations concerning our financial condition and results of operations,
which were false and misleading, and further alleges that we wrongfully failed
to consummate the acquisition. The complaint claims the defendants committed
breach of contract and breach of the implied covenant of good faith and fair
dealing, as well as fraud and negligent misrepresentation. The complaint seeks
compensatory and punitive damages according to proof, plus attorneys' fees and
costs. The plaintiff has attempted to initiate discovery, which defendants have
opposed on the basis that the plaintiff and the Company had agreed that any
disputes would be submitted to arbitration. The defendants have filed a motion
to compel arbitration and to stay the court action. The Company does not
believe, based on current information (which is only preliminary, since
discovery has not commenced in the litigation), that the outcome of this
litigation will have a material adverse impact on the Company's financial
statements.

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

There were no matters submitted to a vote of our security holders during 1998.


                                      14

<PAGE>

PART II

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

MARKET INFORMATION FOR COMMON STOCK

     Our Common Stock was traded on the Nasdaq National Market under the symbol
"HYBR" during the period from our initial public offering on November 12, 1997
through June 16, 1998. The high and low closing sales prices indicted below are
as reported on the Nasdaq National Market.

<TABLE>
<CAPTION>
                                                         HIGH                LOW
                                                       --------            -------
          <S>                                          <C>                 <C>
          Fourth Quarter 1997                          $24 1/4             $9 1/4
          First Quarter 1998                           $13                 $4 1/8
          Second Quarter 1998
             (through June 16, 1998)                   $ 8                 $2 3/16
</TABLE>

     On June 17, 1998, trading in our Common Stock was suspended by the Nasdaq
National Market in response to our independent auditors, PwC, withdrawing their
reports on our 1997 financial statements. The suspension continued until
December 1, 1998, when our Common Stock was delisted by the Nasdaq National
Market due to continuing noncompliance with listing requirements. Since December
1, 1998, our stock has been traded, without our consent or approval, in the
over-the-counter market on the Pink Sheets. During December 1998, the high and
low closing prices of our Common Stock on the Pink Sheets was $3/4 and $1/8,
respectively. On June 1, 1999, the closing price of our Common Stock on the Pink
Sheets was $2 1/8.

STOCKHOLDERS

     As of February 27, 1998, there were approximately 183 holders of record of
our Common Stock

DIVIDENDS

     We have not paid any cash dividends on our capital stock to date. We
currently anticipate that we will retain any future earnings for use in our
business and do not anticipate paying any dividends in the foreseeable future.
The terms of a $5.5 million senior secured convertible debenture (the "$5.5
Million Debenture") prohibit us from paying any cash dividends for so long as
the $5.5 Million Debenture remains outstanding.

RECENT SALES OF UNREGISTERED SECURITIES

     We did not sell any of our securities within 1998 which were not registered
under the Securities Act, except for the following issuances of shares of our
Common Stock upon the exercise of stock options that were made under exemptions
provided under Rule 701 under the Securities Act: A total of 94,968 shares of
Common Stock were issued, 43,000 to former officers.

USE OF INITIAL PUBLIC OFFERING PROCEEDS

     The Form S-1 Registration Statement (SEC File No. 333-36001) related to our
initial public offering of Common Stock was declared effective by the SEC on
November 11, 1997. A total of 3,105,000 shares of


                                      15

<PAGE>

Common Stock was registered with the SEC, which consisted of 2,836,053 shares
registered on our behalf (with an aggregate offering price of $39,705,000)
and 268,947 shares registered on behalf of certain of our stockholders (with
an aggregate offering price of $3,765,000). The offering took place on
November 12, 1997, and all 2,836,053 and 268,947 shares of Common Stock being
offered by us and certain stockholders of ours, respectively, were sold at
the offering price through a syndicate of underwriters managed by NationsBanc
Montgomery Securities and UBS Securities.

     We and the selling stockholders paid to the underwriters an underwriting
discount totaling $2,779,000 and $264,000, respectively, in connection with the
offering. We estimate that we incurred additional expenses of approximately
$1,184,000 in connection with the offering. Thus the net offering proceeds to us
and the selling stockholders were approximately $35,737,000 and $3,502,000,
respectively. The underwriting discount and the other offering expenses were not
made directly or indirectly to any of our directors or officers (or their
associates), or to persons owning 10% or more of any class of equity securities
or to any other affiliates of ours.

     Through December 31, 1998 the net offering proceeds to us have been
utilized as follows:

<TABLE>
<CAPTION>
                                     Direct or indirect payments to
                                      directors, officers or their
                                      associates; to persons owning
                                       ten percent or more of any
                                     class of our equity securities;         Direct or indirect
          Use                             and to our affiliates              payments to others
-------------------------            ------------------------------          -------------------
<S>                                  <C>                                     <C>
Construction of plant,                              --                                    --
building and facilities

Purchase and installation of                        --                           $ 3,817,000
machinery and equipment

Purchase of real estate                             --                                    --

Acquisition of other business(es)                   --                                    --

Repayment of indebtedness                  $ 1,371,000                           $ 5,627,000

Working capital                                     --                           $20,960,000

Temporary investment in                             --                           $ 3,962,000
Alex. Brown Investment Account
and General Bank Account

Other purposes                                      --                                    --
</TABLE>


                                      16

<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

     The following selected financial data should be read in conjunction with
the Company's financial statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Form 10-K.

<TABLE>
<CAPTION>
                                                                       Year Ended December 31,

                                                --------------------------------------------------------------------
                                                     1998        1997(1)        1996          1995          1994
                                                ------------  ------------  ------------  ------------  ------------
 <S>                                            <C>           <C>           <C>          <C>           <C>
 STATEMENT OF OPERATIONS DATA:
Net sales                                         $ 12,418      $  4,120      $  2,962     $    630      $    668
Cost of sales                                       14,046         8,899         3,130          761         1,362
                                                  --------      --------      --------     --------      --------
Gross profit                                        (1,628)       (4,779)         (168)        (131)         (694)
                                                  --------      --------      --------     --------      --------
Operating expenses:
  Research and development                           7,771         7,831         5,076        3,862         1,251
  Sales and marketing                                3,642         4,678         1,786          390           348
  General and administrative                         8,933         2,964         1,714          748           533
  Asset impairment charge                            1,250             -             -            -             -
  Write off of technology license                    1,283             -             -            -             -
                                                  --------      --------      --------     --------      --------
     Total operating expenses                       22,879        15,473         8,576        5,000         2,132
                                                  --------      --------      --------     --------      --------
        Loss from operations                       (24,507)      (20,252)       (8,744)      (5,131)       (2,826)
Interest income and other expense, net                 779           316           257          166            30
Interest expense                                      (897)       (1,666)          (28)        (304)         (101)
                                                  --------      --------      --------     --------      --------
Net loss                                          $(24,625)     $(21,602)     $ (8,515)    $ (5,269)     $ (2,897)
                                                  --------      --------      --------     --------      --------
                                                  --------      --------      --------     --------      --------

Basic and diluted net loss per share              $  (2.37)     $  (6.10)     $  (3.36)    $  (2.37)     $  (1.30)
                                                  --------      --------      --------     --------      --------
                                                  --------      --------      --------     --------      --------
Shares used in basic and diluted
  per share calculation (2)                         10,410         3,541         2,535        2,223         2,226
                                                  --------      --------      --------     --------      --------
                                                  --------      --------      --------     --------      --------

<CAPTION>
                                                                          December 31,
                                                  ------------------------------------------------------------
                                                     1998      1997(1)       1996        1995         1994
                                                  ----------  ----------  ----------  ----------  ------------
 <S>                                              <C>         <C>         <C>         <C>         <C>
 BALANCE SHEET DATA:
 Cash, cash equivalents and
   short-term investments                          $ 3,966     $ 27,143    $  6,886    $  3,353    $  1,426
 Working capital                                      (812)      23,795       6,944       3,149       1,129
 Total assets                                       15,420       39,065      10,539       4,586       1,892
 Long-term debt                                        419          654         472         228       2,108
 Total stockholders' equity (deficit)                2,702       27,303       7,709       3,661        (708)
</TABLE>


                                      17

<PAGE>

(1)  See Note 1 of Notes to Financial Statements for information concerning
     the restatement of our financial statements. All financial data
     presented in the table above as of and for the year ended December 31,
     1997 reflect such restatement.

(2)  See Note 2 of Notes to Financial Statements for an explanation of the
     number of shares used to compute basic and diluted net loss per share.


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

     THE DISCUSSION IN THIS ITEM 7 SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED IN ITEM 8 OF THIS REPORT ON
FORM 10-K. THE DISCUSSION IN THIS ITEM 7 CONTAINS FORWARD-LOOKING STATEMENTS
RELATING TO FUTURE EVENTS OR FINANCIAL RESULTS, SUCH AS STATEMENTS INDICATING
THAT "WE BELIEVE," "WE EXPECT," "WE ANTICIPATE" OR "WE INTEND" THAT CERTAIN
EVENTS MAY OCCUR OR CERTAIN TRENDS MAY CONTINUE. OTHER FORWARD-LOOKING
STATEMENTS INCLUDE STATEMENTS ABOUT THE FUTURE DEVELOPMENT OF PRODUCTS OR
TECHNOLOGIES, MATTERS RELATING TO OUR PROPRIETARY RIGHTS, YEAR 2000 COMPLIANCE,
FACILITIES NEEDS, OUR LIQUIDITY AND CAPITAL NEEDS AND OTHER STATEMENTS ABOUT
FUTURE MATTERS. ALL THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES. YOU SHOULD NOT RELY TOO HEAVILY ON THESE STATEMENTS; ALTHOUGH
THEY REFLECT THE GOOD FAITH JUDGMENT OF OUR MANAGEMENT, THEY INVOLVE FUTURE
EVENTS THAT MIGHT NOT OCCUR. WE CAN ONLY BASE SUCH STATEMENTS ON FACTS AND
FACTORS THAT WE CURRENTLY KNOW. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS,
INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS REPORT ON
FORM 10-K.

OVERVIEW

     GENERAL

     We are a broadband access equipment company that designs, develops,
manufactures and markets wireless and cable systems that provide high speed
access to the Internet and corporate intranets for both businesses and
consumers. Our products remove the bottleneck over the local connection to the
end-user which causes slow response time for those accessing bandwidth-intensive
information. Our Series 2000 product line consists of secure headend routers,
wireless and cable modems and management software for use with either wireless
transmission or cable TV facilities.

     From our inception in June 1990 until September 1996, we focused on the
design, development, manufacturing and market introduction of the first two
generations of Hybrid's Series 1000 product line. These product generations
offered 5 and 10Mbps access speeds for downstream data. In October 1996, we
introduced our third generation product line, the Series 2000, which provides
30Mbps downstream access speeds. During the three years ended December 31, 1997,
we sold a limited number of points of presence headend equipment ("headends")
and cable modems from both product series. We expect to generate substantially
all of our future sales from our Series 2000 products, enhancements to these
products, new products and related support and networking services. To date, net
sales include principally product sales and, to a lesser extent, support and
networking services.

     We sell our products primarily in the United States. Our customers
include broadband wireless system operators, cable system operators, ISPs,
resellers and certain distributors and communications equipment resellers.
Historically, a small number of customers has accounted for a substantial
portion of our net sales, and we expect the trend to continue. As a result,
we have experienced, and expect to continue to experience, significant
fluctuations in our results of operations on a quarterly and an annual basis.
The sales cycle for our products has been lengthy, generally lasting three to
nine months, and is subject to a number of significant risks, including
customers' budgetary constraints and internal acceptance reviews. Because our

                                      18

<PAGE>

sales cycle may be long and uncertain, and because we depend on relatively
few customers who place relatively large orders, any delay or loss of an
order that is expected to be received in a quarter can have a major effect on
our sales and operating results for that quarter. The same is true of any
failure of a customer to pay for products on a timely basis.

     The market for high speed network connectivity products and services is
intensely competitive and is characterized by rapid technological change, new
product development and product obsolescence, and evolving industry
standards. Our ability to develop and offer competitive products on a timely
basis that satisfy industry demands, such as for two-way QPSK, or industry
standards such as DOCSIS, could have a material effect on our business. In
addition, the market for our products has historically experienced
significant price erosion over the life of a product, and we have experienced
and expect to continue to experience pressure on our unit average selling
prices. While we have initiated cost reduction programs to offset pricing
pressures on our products, there can be no assurance that we will keep pace
with competitive price pressures or improve our gross margins. If we are
unable to continue to reduce costs quickly enough, our profitability will be
adversely affected. Our profitability is also affected by the sales mix of
headends and modems. Our single-user modems generally have lower margins than
our multi-user modems, both of which have lower margins than our headend
routers. Due to current customer demand, we anticipate that the sales mix of
modems will be weighted toward lower-margin single-user modems in the
foreseeable future. As a result, our gross margins, and our business, could
be adversely affected.

     RESTATEMENT OF OUR FINANCIAL STATEMENTS

     In May and June 1998, we and PwC, our independent auditors, engaged in a
review of our financial statements for 1997 and the first quarter of 1998. On
June 18, 1998, we announced that PwC had notified us that its audit reports on
our 1997 financial statements should no longer be relied upon and that we and
they were continuing to review those financial statements. On July 9, 1998, PwC
resigned as our independent auditors, stating that it believed our 1997
financial statements should be restated but that, although there had been no
disagreements between PwC and us on any matter of our accounting principles, or
practices, financial statement disclosure or auditing procedure, PwC would not
continue as our independent auditors to address the restatement.

     In August 1998, we retained AA as our independent auditors. After extensive
work in examining our 1997 financial statements, AA resigned as our independent
auditors on November 24, 1998. AA informed us that, in its view, material
weaknesses existed in our internal controls of a nature that prevented AA from
being able to form an opinion on our conclusions as to the appropriate timing
and amount of revenue recognition for the purposes of our 1997 financial
statements. AA also stated that, during the course of its work, it had reached
the conclusion that it needed to expand significantly the scope of its audit,
which it did with our approval and cooperation, and that, while AA did not
complete its audit, it concluded that our 1997 financial statements were
materially misstated. AA confirmed that there had been no disagreements between
AA and us on any matter of our accounting principles and practices, financial
statement disclosure or auditing procedure.


                                      19

<PAGE>

     In December 1998, we engaged Hein as our independent auditors. During the
review of our financial statements in conjunction with Hein (and earlier with
PwC and AA), we became aware of errors and irregularities that caused our
financial statements for 1997 and the first quarter of 1998 to be misstated,
particularly with respect to the timing and amount of our sales in 1997 and the
first quarter of 1998. We also concluded that the financial effects of warrants
issued by us in 1997 had not been properly reflected in our financial
statements. Our financial statements for 1997 and the first quarter of 1998 have
been restated to correct these errors. As indicated in Note 1 to the Financial
Statements in Item 8 of this report, as a result of the restatement net sales
for 1997 were reduced from $14,270,000 to $4,120,000 (resulting in gross loss of
$4,799,000 rather than gross profit of $2,012,000), net loss increased from
$13,590,000 to $21,602,000 and accumulated deficit increased from $30,932,000 to
$38,944,000. Our basic and diluted loss per share increased from $3.84 to $6.10.
For additional information regarding the restatement, see Note 1 to the
Financial Statements in Item 8 of this report.

     In June 1999, Hein completed its audit of our 1997 and 1998 financial
statements. Those financial statements, and Hein's audit report on them are
included in the Financial Statements and the Notes thereto which appear in Item
8 of this report.

     Our inability to issue audited financial statements during the last 12
months has had serious consequences for our business. As a result, the Nasdaq
National Market suspended trading in our Common Stock from June 18, 1998 to
December 1, 1998, at which time our Common Stock was delisted from the Nasdaq
National Market. Primarily due to our announcements regarding the need to
restate our financial statements, a number of class action litigations were
brought in June, July and August 1998, and the Securities and Exchange
Commission initiated a formal investigation in October 1998. We believe these
actions hurt our business during the latter part of 1998, made it more difficult
for us to attract and retain employees, disrupted our management, sales and
marketing, engineering and research and development staffs, contributed to our
inability to complete the restatement of our financial statements during 1998
and adversely affected the sales of our products and services.

     REVENUE RECOGNITION

     We normally ship our products based upon a bona fide Purchase Order and
Volume Purchase Agreement. The Company generally recognizes its revenue at the
time a transaction is shipped and collection of the resulting account receivable
is probable. Shipments on customer orders with either acceptance criteria,
installation criteria, or rights of return are recognized as revenue only when
the criteria are satisfied according to the contract. Revenue related to
shipments to distributors is normally recognized upon sell through which is
generally signified by receipt of payment for such transactions.

     For the Cybermanager 2000, the hardware and software sales are generally
bundled with upgrades, maintenance and system support and service, and sold for
a period of three years. Revenue attributed to hardware is recognized upon
shipment. Revenue attributed to software is recognized over the three year
maintenance, system support and service period. When a maintenance contract is
sold separately, the revenue is recognized ratably over the term of the
maintenance contract, generally on a straight-line basis. Where maintenance
revenue is not separately invoiced, it is unbundled from hardware and software
license revenue and deferred for revenue recognition purposes. Other service
revenue, primarily training and consulting, is generally recognized at the time
the service is performed.

WARRANTY COSTS

     We accrue for estimated warranty costs when the related sales revenue is
recognized. Our modem manufacturer, Sharp Corporation, provides a 15 month
warranty on all cable modems manufactured by it. The warranty period begins on
the date the modems are completely assembled. We provide a 12 month warranty on
all headend equipment sold. Actual warranty costs incurred have not differed
materially from those provided.


                                      20

<PAGE>

     NET LOSSES

     We incurred net losses for the years ended December 31, 1998, 1997 and 1996
of $24,625,000, $21,602,000 and $8,515,000, respectively. As a result, we had an
accumulated deficit of $63,569,000 as of December 31, 1998. If we are able to
raise additional capital, we would expect to increase in the future our capital
expenditures, as well as our research and development and other operating
expenses, in order to support and expand our operations. There can be no
assurance that we will be able to raise additional capital. Whether or not we
raise such capital, we expect to incur losses for the foreseeable future,
although we may not be able to continue as a going concern without that
additional financing.

     DEFERRED TAXES

     As of December 31, 1998, we had approximately $27.6 million in gross
deferred tax assets comprised primarily of net operating loss carryforwards and
capitalized research expenditures. We believe that we might not be able to
realize our deferred tax assets, due to uncertainties regarding our future, our
history of net losses and our lack of capital resources. In addition, the
utilization of net operating loss carry forwards may be subject to a substantial
annual limitation due to the "change in ownership" provisions of the Internal
Revenue Code of 1986 and similar state provisions. We will continue to assess
the realizability of the deferred tax assets based on actual and forecasted
operating results. See Note 12 of Notes to Financial Statements.


                                      21


<PAGE>

     RESULTS OF OPERATIONS

          The following table sets forth the percentage of net sales represented
by the items in our statements of operations for the periods indicated:

<TABLE>
<CAPTION>
                                                            Year Ended December 31,
                                                  ---------------------------------------
                                                  1998           1997(1)           1996
                                                  ----           -------           ----
<S>                                              <C>              <C>            <C>
Net sales                                          100.0%          100.0%          100.0%
Cost of sales                                      113.1%          216.0%          105.7%
                                                   -----           -----           -----
Gross loss                                         -13.1%         -116.0%           -5.7%
                                                   -----           -----           -----
Operating expenses:
  Research and development                          62.6%          190.1%          171.4%
  Sales and marketing                               29.3%          113.5%           60.3%
  General and administrative                        71.9%           72.0%           57.8%
  Asset impairment charge                           10.1%            -               -
  Write off technology license                      10.3%            -               -
                                                   -----           -----           -----
     Total operating expenses                      184.2%          375.6%          289.5%
                                                   -----           -----           -----
       Loss from operations                       -197.3%         -491.6%         -295.2%
Interest income and other expenses, net              6.2%            7.7%            8.7%
Interest expense                                    -7.2%          -40.4%           -1.0%
                                                   -----           -----           -----
       Net loss                                   -198.3%         -524.3%         -287.5%
                                                   -----           -----           -----
                                                   -----           -----           -----
</TABLE>

(1)  See Note 1 of Notes to Financial Statements for information concerning the
     restatement of our financial statements. All financial data in the table
     above as of and for the year ended December 31, 1997 presented reflect such
     restatement.

     YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997.

     NET SALES. Net sales for 1998 were $12,418,000, compared to net sales of
$4,120,000 for 1997. The growth in net sales was primarily due to increased unit
shipments of the Series 2000 product line offset in part by price declines on
certain products in connection with volume purchases. In 1998, cable systems
operators accounted for approximately 57% of net sales, broadband wireless
systems operators accounted for 38% of net sales, with ISPs accounting for 5% of
net sales. During 1997, broadband wireless system operators accounted for
approximately 59% of net sales, cable system operators accounted for 39% of net
sales, with ISPs accounting for 2% of net sales. There were no international
sales in 1998. International sales accounted for 13.5% of net sales in 1997. We
had two customers that individually accounted for 25% and 13% of net sales
during 1998. We had two customers that individually accounted for 13% and 12% of
net sales during 1997.

     GROSS PROFIT. Gross margin was negative 13.1% and negative 116.0%, in 1998
and 1997, respectively. Gross margin in 1997 reflected an increase in the
inventory provision included in cost of sales by $2.6 million as compared to
1996, largely related to excess inventory levels and to shipments being made
during 1997 in

                                      22
<PAGE>

transactions that were not recognized as sales (due to restatement of our
financial statements). Such a large inventory provision relative to sales was
not made in 1998, and is not anticipated in future periods. Excluding this
nonrecurring inventory charge, gross margin for 1997 would have been a
negative 40%. The remaining increase in gross margin from 1997 was primarily
due to efficiencies resulting from increased unit shipments and to decreased
cost per unit.

     RESEARCH AND DEVELOPMENT. Research and development expenses include ongoing
headend, software and cable modem development expenses, as well as design
expenditures associated with product cost reduction programs and improving
manufacturability of our existing products. Research and development expenses
were $7,771,000 and $7,831,000 during the years ended December 31, 1998 and
1997, respectively, representing 62.6% and 190.1% of net sales, respectively. If
we are able to obtain additional financing (see "--Liquidity and Capital
Resources" below), we would expect to increase our investment in research and
development programs in future periods, focusing on wireless technologies, cost
improvement and software enhancements.

     SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries and related payroll costs of sales and marketing personnel,
commissions, advertising, promotions and travel. Sales and marketing expenses
were $3,642,000 and $4,678,000 during the years ended December 31, 1998 and
1997, respectively, representing 29.3% and 113.5% of net sales, respectively.
The decrease in sales and marketing expenses in absolute dollars was
principally due to decreased headcount and related payroll costs and
marketing and promotion costs incurred in 1997 in connection with our Series
2000 product line. If we are able to obtain additional financing (see
"--Liquidity and Capital Resources" below), we would expect sales and
marketing expenses to increase in the future.

     GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of executive personnel salaries, provision for doubtful accounts,
travel expenses, legal fees and costs of outside services. General and
administrative expenses were $8,933,000 and $2,964,000 during the years ended
December 31, 1998 and 1997, respectively, representing 71.9% and 72.0% of net
sales, respectively. The increase in absolute dollars in 1998 was due to
increased legal costs and reserves in connection with the various litigations in
which we were engaged during 1998, including the accrual of $1,547,000 related
to the class action settlement (see Item 3 "Legal Proceedings"), and to support
our patent program, increased headcount and related payroll costs and increased
expenses for professional and other fees required of a publicly traded company
and to support the aforementioned restatement of our financial statements.

     OTHER CHARGES. Due to the underutilization of our San Jose headquarters,
operating expenses include a fourth quarter charge of $1,250,000 reflecting the
impairment of leasehold improvements and office furniture and fixtures.
Operating expenses also include a nonrecurring charge of $1,283,000 relating to
the write off of the rights to certain technology acquired in November 1997.

     INTEREST INCOME (EXPENSE) AND OTHER EXPENSE, NET. We incurred net interest
expense during 1998 and 1997 of $118,000 and $1,350,000, respectively. Net
interest expense incurred in 1998 decreased in comparison to 1997 due (i) to
interest income on increased average cash and cash equivalents resulting
primarily from our initial public offering of Common Stock in November 1997, and
(ii) to noncash interest expense of $870,000 incurred in the fourth quarter of
1997 related to issuance of warrants with respect to certain loans obtained in
September 1997.

     YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996.

     NET SALES. The restated Net sales for the year ended December 31, 1997,
were $4,120,000, compared to net sales of $2,962,000 for the same period in
1996. The growth in net sales was primarily due to

                                      23
<PAGE>

increased unit shipments as a result of the introduction of the Series 2000
product line in October 1996 offset in part by price declines on certain
products in connection with volume purchases.

     GROSS PROFIT. Gross margin was negative 116.0% and negative 5.7%, in 1997
and 1996, respectively. The inventory provision included in cost of sales
increased by approximately $2.6 million in 1997 compared to 1996, largely
related to excess inventory levels and to shipments being made during 1997 in
transactions that were not recognized as sales (due to restatement of our
financial statements). Excluding this nonrecurring charge, gross margin for 1997
would have approximated a negative 40%. The remaining decrease in gross margin
from 1996 was primarily due to decreases in average selling prices due to volume
purchase arrangements and other promotions.

     RESEARCH AND DEVELOPMENT. Research and development expenses were $7,831,000
and $5,076,000 during the years ended December 31, 1997 and 1996, respectively,
representing 190.1% and 171.4% of net sales, respectively. Research and
development expenses grew in absolute dollars as a result of increased staffing
and associated engineering costs related to new and existing product
development.

     SALES AND MARKETING. Sales and marketing expenses were $4,678,000 and
$1,786,000 during the years ended December 31, 1997 and 1996, respectively,
representing 113.5% and 60.3% of net sales, respectively. The increase in
sales and marketing expenses in absolute dollars was principally due to
increased headcount and related payroll costs and increased costs for
marketing and promoting the Company's Series 2000 product line, as well as
increased product demonstration costs.

     GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$2,964,000 and $1,714,000 during the years ended December 31, 1997 and 1996,
respectively, representing 72.0% and 57.8% of net sales, respectively. The
increase in absolute dollars was due to increased legal costs to support the
Company's patent program and increased headcount and related payroll costs.

     INTEREST INCOME (EXPENSE) AND OTHER EXPENSE, NET. We incurred net interest
expense during 1997 of $1,350,000 and earned net interest income of $229,000
during 1996. Net interest expense incurred during 1997 was the result of (i) our
use of capital lease financing to fund a majority of our capital expenditures
and (ii) interest expense (including non cash expense of $870,000 incurred in
the fourth quarter of 1997 related to issuance of warrants with respect to
certain loans obtained in September 1997) incurred on loans obtained to support
working capital requirements. Net interest income earned during 1996 was
primarily due to higher cash balances as a result of Preferred Stock financings
in December 1995 and June 1996, offset in part by the interest expense incurred
on outstanding capital lease obligations.

LIQUIDITY AND CAPITAL RESOURCES

     We have historically financed our operations primarily through a
combination of debt, equity and equipment lease financing. Despite our initial
public offering in November 1997 and other debt and equity financing during 1997
in which we raised $42,507,000 in net proceeds, by December 31, 1998, our cash,
cash equivalents and short-term investments had been reduced to $3,451,000 (from
$27,148,000 as of December 31, 1997), our working capital was negative $812,000,
and we are in violation of a covenant (not involving payment of interest or
principal) under the terms of the $5.5 Million Debenture pursuant to which the
holder of the debenture has the right to declare a default.

     Net cash used in operating activities was $19,302,000, $21,677,000 and
$8,577,000 during 1998, 1997 and 1996, respectively. The net cash used in
operating activities in 1998 was primarily due to our net loss of $24,625,000,
partially offset by non-cash charges of $6,336,000 and a decrease in net current
assets related to operating activities of $1,013,000. Net cash used in
operations in 1997 was primarily the result of our net loss of $21,602,000 and
an increase of $8,086,000 in inventories to support increased sales, shipments
and

                                      24
<PAGE>

orders expected in the fourth quarter of 1997 that were not received, offset
by non-cash charges of $4,966,000 and by increases in accrued liabilities and
accounts payable of $3,062,000 resulting from increased inventory purchases and
operating expenditures. Net cash used in operating activities during 1996 was
primarily due to our net loss of $8,515,000.

     Net cash used in investing activities was $3,014,000 and $1,559,000 during
1998 and 1997, respectively. Cash provided by investing activities in 1996 was
$143,000. Aggregate capital expenditures for property and equipment, primarily
computers, leasehold improvements, furniture, fixtures and engineering test
equipment were $3,907,000, $629,000 and $321,000 during 1998, 1997 and 1996,
respectively. The significant increase in capital expenditures in 1998 was
primarily due to leasehold improvements. The Company purchased short-term
investments of $893,000 in 1997 and $11,772,000 in 1998. All short-term
investments were liquidated in 1998. We have funded a substantial portion of our
property and equipment expenditures from direct vendor leasing programs and
third party commercial lease arrangements. At December 31, 1998, we had no
material commitments for capital expenditures.

     Net cash used in financing activities of $391,000 in 1998 was primarily
the result of payment of $478,000 on capital lease obligations, partially
offset by net proceeds of $87,000 from issuance of common stock. Net cash
provided by financing activities was $42,508,000 and $12,457,000 during 1997
and 1996, respectively. Net cash provided by financing activities during 1997
was primarily due to our initial public offering and to the debt and
Preferred Stock financings totaling $42,741,000 referred to above and to the
exercise of stock options of $94,000. Cash provided by financing activities
during 1996 resulted from the issuance of convertible debentures and
Preferred Stock.

     At December 31, 1998, our only source of liquidity consisted of cash and
cash equivalents of $3,451,000. We had no available line of credit or other
source of borrowings or financing. As indicated above, we were (and are) not
in compliance with certain of the terms of the $5.5 Million Debenture and, as
a result, the holder of the debenture has the right to declare a default
under the debenture at any time. Our obligations under the $5.5 Million
Debenture are collateralized by a security interest in substantially all our
assets. We will need to raise additional capital promptly in order to offset
our expected future operating losses.

     To fund our operations during 1999 and continue as a going concern, we are
seeking to raise additional capital through debt or equity financing, but there
is no assurance that we will be able to do so. If we do obtain additional
financing, it may be on terms that would be unfavorable to us and may hurt our
ability to raise further capital in the future.

SEASONALITY AND INFLATION

     We do not believe that our business is seasonal or is impacted by
inflation.

RISK FACTORS

     AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND THE OTHER INFORMATION IN
THIS REPORT ON FORM 10-K BEFORE INVESTING IN OUR COMMON STOCK. THE RISKS
DESCRIBED BELOW ARE NOT THE ONLY ONES WE FACE. ADDITIONAL RISKS THAT WE ARE
AWARE OF OR THAT WE CURRENTLY BELIEVE ARE IMMATERIAL MAY BECOME IMPORTANT
FACTORS THAT AFFECT OUR BUSINESS. IF ANY OF THE FOLLOWING RISKS OCCUR, OR IF
OTHERS OCCUR, OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION COULD BE
SERIOUSLY HARMED.

     WE WILL NEED ADDITIONAL CAPITAL SOON TO CONTINUE IN BUSINESS.

     Although we raised over $35 million in net proceeds from our initial public
offering in November 1997, our capital resources are now largely depleted. We
are not in compliance with certain terms of the $5.5 Million Debenture, and, as
a result, the holder of the debenture may declare a default under the debenture
at any time. We currently do not have the capital resources to make such
payment. Should we fail to make payment on demand, the debenture holder may
elect, subject to certain restrictions and limitations, to exercise its security
interest in all our assets, which may involve the seizure and sale of our
assets. In

                                      25
<PAGE>

addition to meeting our obligations under the debenture, we need to raise
additional capital in order to continue in operation. Our ability to raise
additional capital has been limited by a number of factors, including (i) our
noncompliance with certain terms of the $5.5 Million Debenture, (ii) our not
having audited financial statements for 1997 or 1998 or a quarterly report
for the first quarter of 1999, (iii) our Common Stock being delisted from the
Nasdaq National Market and not traded on any other public market (except for
a small number of sales on the Pink Sheets which have occurred without our
consent), (iv) the state and federal class action litigation and the
Securities and Exchange Commission investigation that are pending against us
(although we have agreed in principle to settle the class action litigation,
that agreement is not yet final), (v) uncertainty which the foregoing has
caused regarding our financial condition and results of operations, (vi) the
adverse effect which the foregoing has had on sales to our customers, (vii)
the disruption in our management and our employees caused by the foregoing,
including the substantial reduction in force we implemented in February 1999,
(viii) our history of heavy losses and (ix) the other risk factors referred
to herein. We can give no assurance that, within a short period of time, we
will be able to raise the additional capital we need or that any financing we
may be able to obtain will not be on terms that are detrimental to our
business and our ability to raise additional capital.

     IT IS NOT CLEAR THAT WE WILL BE ABLE TO RECOVER FROM THE ADVERSE EFFECTS OF
     HAVING TO RESTATE OUR FINANCIAL STATEMENTS.

     The adverse effects of having to restate our financial statements have
been severe, and there can be no assurance that we will not suffer additional
adverse consequences in the future. The restatement and related issues have
resulted in the resignation of two successive audit firms that were hired by
us, in our continuing for 12 months as a public company without having
audited financial statements, in the multiple class action lawsuits, the
Securities and Exchange Commission investigation and the Pacific Monolithics
litigation referred to in Item 3 "Legal Proceedings" above and in the other
adverse consequences referred to in the preceding paragraph. We do not know
whether additional litigation will arise in the future, or whether other
adverse developments will result, from the difficulties we have encountered
in connection with our financial statements.

     OUR LIMITED OPERATING HISTORY AND HEAVY LOSSES MAKE OUR BUSINESS DIFFICULT
     TO EVALUATE.

     We were organized in 1990 and have had operating losses each year since
then. Our accumulated deficit was $63,569,000 as of December 31, 1998. The
revenue and profit potential of our business is unproven. The market for our
products has only recently begun to develop, is rapidly changing, has an
increasing number of competing technologies and competitors, and many of the
competitors are significantly larger than we are. We have had negative gross
margins in the past and the price pressures on sales of our products continues.
We expect to incur losses for the foreseeable future.

     WE FACE LITIGATION RISKS.

     As indicated in Item 3 "Legal Proceedings," there are a number of lawsuits
pending against us. The principal lawsuits are the class action lawsuits
referred to on pages 12 and 13. Although we have reached an agreement in
principle to settle these lawsuits, the agreement is subject to the parties'
entering into a binding stipulation of settlement, which has not yet occurred,
and upon the subsequent approval of the settlement by the court in a hearing at
which any persons opposing the settlement will have an opportunity to be heard.
If the settlement is not consummated, we could be subjected to lengthy,
expensive and potentially damaging class action litigation.

     It is difficult for us to evaluate what the outcome of the Securities and
Exchange Commission investigation (referred to page 14) will be. Responding to
the investigation has been, and probably will be, expensive and time-consuming
for us. We do not know whether the results of the investigation will be damaging
for us.

                                      26
<PAGE>

     The Pacific Monolithics litigation referred to on page 14 is in its early
stages and is difficult for us to evaluate at this point.

     It is possible that we may be exposed to further litigation in the
future, particularly in light of the restatement of our financial statements,
and the adverse developments that have occurred partly as a result of the
restatement (see the two risk factors immediately above). In addition,
litigation may be necessary in the future to enforce our intellectual
property rights or to determine the validity and scope of our patents or of
the proprietary rights of others. Such litigation might result in substantial
costs and diversion of resources and management attention. Furthermore, our
business activities may infringe upon the proprietary rights of others, and
in the past third parties have claimed, and may in the future claim,
infringement by our software or products. Any such claims, with or without
merit, could result in significant litigation costs and diversion of
management attention, and could require us to enter into royalty and license
agreements that may be disadvantageous to us or suffer other harm to our
business. If litigation is successful against us, it could result in
invalidation of our proprietary rights and liability for damages, which could
have a harmful effect on our business. We initiated one patent infringement
litigation to enforce our patent rights, and it resulted in a settlement in
which we granted licenses to the defendants containing terms that are in some
respects favorable to them, including a right of first refusal to purchase
our patents that we granted to one defendant (Com21, Inc.) in the event that
we propose in the future to sell our patents (whether we separately or
together with our other assets) to any third party. (See Item 3 "Legal
Proceedings--Patent Litigation.") Nonetheless, we may find it necessary to
institute further infringement litigation in the future.

     RECENT REDUCTIONS IN OUR EXPENDITURES AND IN THE NUMBER OF OUR EMPLOYEES
     COULD HURT OUR BUSINESS.

     Commencing in the latter part of 1998, we began to reduce our expenditures
on research and development and on other aspects of our business. We also began
to reduce the number of our employees. During the first quarter of 1999 we
implemented a reduction in force that reduced the number of full-time employees
to 32, as compared to 87 full-time employees at December 31, 1998. We used
consultants heavily to supplement our workforce and as of April 30, 1999 we had
14 consultants in various areas. While we believe these reductions were
necessary to conserve our remaining capital resources, they have limited and
delayed the enhancement of our products and our development of new products, and
our sales and marketing efforts have been adversely affected. These limitations
on our activities, (together with the other factors referred to above and
elsewhere herein), have hurt us competitively and may continue to harm our
business in the future. We do not know whether we will be successful in
obtaining sufficient capital resources to expand our business in the future.

     MARKET PRESSURE TO REDUCE PRICES MAY HURT OUR BUSINESS.

     The market has historically demanded increasingly lower prices for our
products, and we expect downward pressure on the prices of our products to
continue. The list prices for our Series 2000 client modems currently range from
approximately $320 to $480, depending upon features and volume. Customers
wishing to purchase client modems generally must also purchase an Ethernet
adapter for their computer. These prices make our products relatively expensive
for the consumer electronics and the small office or home office markets. Market
acceptance of our products, and our future success, will depend in significant
part on reductions in the unit cost of our client modems. In a number of
instances, the prices of our competitors' products are lower than ours. Our
ability to reduce our prices has been limited by a number of factors, including
our reliance on a single manufacturer of our modems and on single-sources for
certain of the components of our products.

     One of the principal objectives of our research and development efforts
has been to reduce the cost of our products through design and engineering
changes, although, as indicated above, we have recently had to reduce the
scope of our research and development efforts due to lack of capital
resources. We have no

                                      27
<PAGE>

assurance that we will be able to redesign our products to achieve substantial
cost reductions or that we will otherwise be able to reduce our manufacturing
and other costs, or that any reductions in cost will be sufficient to improve
our gross margins, which have historically been negative.

     We expect that the market price pressure to reduce the prices on our
products will continue to exert downward pressure on our gross margins. Our
gross margins are also affected by the sales mix of our headends and modems. Our
single-user modems generally have lower margins than our multi-user modems, both
of which have lower margins than our headends. We anticipate that, due to
customer demand, the sales mix of our products will continue to be weighted
toward lower-margin single-user modems.

     WE RELY ON A SINGLE MANUFACTURER FOR OUR MODEMS AND ON SINGLE-SOURCE
     COMPONENTS.

     Our Series 2000 client modems are manufactured by Sharp Corporation through
an agreement we have had since early 1997 with Sharp and its distributor, Itochu
Corporation. We have not developed an alternative manufacturing source. Our
inability to develop alternative manufacturing sources has adversely affected
our ability to reduce the manufacturing costs of our modems despite competitive
pressures that have caused us to reduce our selling prices. We expect downward
pressure on the prices of our products to continue. In order for us to compete
effectively in the sale of modems, we will need to reduce our prices, and the
underlying costs, of our modems. As long as Sharp is the only manufacturing
source of our modems, our ability to reduce the manufacturing costs of our
modems may be limited.

     We are dependent upon certain key suppliers for a number of the
components for our 64QAM products. For example, we have only one vendor,
BroadCom Corporation, for the 64QAM demodulator semiconductors that are used
in our client modem products, and in past periods these semiconductors have
been in short supply. In 1997, BroadCom announced a program whereby certain
of its technological and product enhancements may be made available to
certain of our competitors before making them available to us, thereby giving
us a competitive disadvantage. Hitachi is the sole supplier of the processors
used in certain of our modems. Stanford Telecom, which is a competitor for at
least one of our broadband wireless products, is currently the sole supplier
for certain components used in our products and has indicated that they might
stop supplying these components to us, although it has not yet done so. There
can be no assurance that these and other single-source components will
continue to be available to us, or that deliveries of them to us will not be
interrupted or delayed (due to shortages or other factors). Having
single-source components also makes it more difficult for us to reduce our
cost for these components and makes us vulnerable to price increases by the
component manufacturer. Any significant interruption or delay in the supply
of components for our products or any increase in our costs for components,
or our inability to reduce component costs, could hurt our business.

     WE ARE IN AN INTENSELY COMPETITIVE MARKET, AND WE COMPETE WITH MUCH LARGER
     COMPANIES.

     Our market is intensely competitive, and we expect even more competition in
the future. The principal competitive factors in this market include:

          -    product performance and features including both downstream and
               upstream transmission capabilities,

          -    reliability and stability of operation,

          -    breadth of product line,

          -    sales and distribution capability,

          -    technical support and service,

          -    relationships with cable and broadband wireless system operators
               and ISPs,

                                      28
<PAGE>

          -    meeting standards compliance and

          -    general industry and economic conditions.

     While we believe our products and services are competitive with or superior
to those of our competitors, we have been hampered by a lack of resources, by
disruptions resulting from management and personnel changes, by uncertainties
caused by our financial reporting difficulties referred to at the beginning of
this report, and by our competitors having established relationships with
principal cable companies, wireless operators, and ISPs, including @Home.
Although our products have been particularly well received in the broadband
wireless market, financial difficulties among our wireless customers have
limited our sales to and collections from these customers until recently. In
addition, conditions in our market could change rapidly and significantly as a
result of technological changes, and the development and market acceptance of
alternative technologies could decrease the demand for our products or render
them obsolete. Similarly, the continued emergence or evolution of industry
standards or specifications may put us at a disadvantage in relation to its
competitors. There can be no assurance that we will be able to compete
successfully in the future.

     In general, our competitors are producers of asymmetric cable modems and
other types of cable modems and other broadband access products. Most of our
competitors are substantially larger and have greater financial, technical,
marketing, distribution, customer support and other resources, as well as
greater name recognition and access to customers, than we have. Many of our
competitors are in a better position to withstand any significant reduction in
capital spending by cable or broadband wireless system operators.

     CABLE MODEM COMPETITORS. Our competitors in the cable modem market include
Cisco Systems, Com21, Terayon, Nortel Networks, Motorola, General Instrument and
3Com and its subsidiary U.S. Robotics. Other cable modem competitors include
Phasecom, Scientific-Atlanta, Toshiba and Zenith Electronics, as well as a
number of smaller, more specialized companies. Certain competitors have
established relationships in the cable industry and with @Home, which is the ISP
for a number of major cable operators, and have more experience than we have in
selling two-way cable transmission products. Some of these competitors have
entered into partnerships with computer networking companies and with @Home that
may give such competitors greater visibility in this market. A number of
competitors have already introduced or announced high speed connectivity
products that are priced lower than ours, and certain other competitors are more
focused on and experienced in selling and marketing two-way cable transmission
products.

     Certain of our competitors have established relationships with cable system
operators and telephone companies ("telcos"), and ISPs, including @Home, and,
based on these relationships, may have more direct access to the decision-makers
of such cable system operators and telcos. In addition, we could face potential
competition from certain of our suppliers, such as Sharp, if it were to launch
or license competitive modems for sale to others.

     The adoption of the DOCSIS cable standard by large cable operators has
adversely affected our ability to sell to cable customers, particularly new
customers. Further, our products are not compatible with headend equipment and
modems of other suppliers of broadband Internet access products, including
DOCSIS products, and, as a result, potential customers who wish to purchase
broadband Internet access products from multiple suppliers may be reluctant to
purchase our products.

     WIRELESS CABLE COMPETITORS. Our principal competitors in the wireless
broadband wireless market include Nortel Networks (which is active in Canada),
Cisco Systems (which has proprietary products under development due to its
acquisition of Clarity Wireless, Inc.), COM21 (which is attempting to adapt its
proprietary cable systems for wireless), Phasecom and other vendors that may be
attracted by recent investments by MCI Worldcom and Sprint in wireless
operations. Stanford Telecommunications (which manufactures QPSK products) is
providing wireless Internet connectivity over LMDS frequencies and has

                                      29
<PAGE>

added telephone service, which is potentially attractive to new operators.
Stanford Telecom is the sole supplier for certain components used in our
products and has indicated that they might stop shipping these components to
us. Our products have been more widely accepted in the broadband wireless
market than in the cable market partly because the adoption of the DOCSIS
standard has not had a significant effect on wireless customers. We believe
that products meeting the present DOCSIS standard will not perform well over
wireless. This belief is based on the performance of the adaptive equalizer
in the modem in the presence of multiple signals, the power required from the
transceiver in the return path and the probable disruption of the TDMA return
path in the presence of noise or multi-path propagation. However, there can
be no assurance that improvements in integrated circuit technology,
transceiver output power levels or changes in the DOCSIS TDMA protocol will
not allow systems developed for cable to perform effectively over wireless.
One of the DOCSIS compliant vendors might also modify the DOCSIS equipment to
a proprietary non-standard form to work over wireless.

     OTHER COMPETITION. Broadband wireless and cable system operators face
competition from providers of alternative high speed connectivity systems. In
the wireless high speed access market, broadband wireless system operators are
in competition with satellite TV providers. In telephony networks, xDSL
technology enables digitally compressed video signals to be transmitted through
existing telephone lines to the home. Market acceptance of xDSL, or other wired
technologies such as ISDN, or satellite technologies, such as DBS, could
decrease the demand for our products. Recently, several companies, including
Compaq, Intel, Microsoft, 3Com, Alcatel, Lucent, several RBOCs, MCI and others
announced the formation of a group focused on accelerating the pace of ADSL
service. Further, if any competing architecture or technology were to limit or
halt the deployment of coaxial or HFC systems, our business could be materially
adversely affected.

     To be successful, we must respond promptly and effectively to the
challenges of new competitive products and tactics, alternate technologies,
technological changes and evolving industry standards. We must continue to
develop products with improved performance over two-way wireless transmission
facilities. There can be no assurance that we will meet these challenges.

     EVOLVING INDUSTRY STANDARDS, COMPETING TECHNOLOGIES AND TECHNOLOGICAL
     CHANGES MAY HURT OUR BUSINESS.

     Our products are not in compliance with the DOCSIS standard that has been
adopted by a number of large cable operators, and this has adversely affected
our ability to sell to cable customers, particularly new customers. Further, our
products are not compatible with headend equipment and modems of other suppliers
of broadband Internet access products, including DOCSIS products, and, as a
result, potential customers who wish to purchase broadband Internet access
products from multiple suppliers may be reluctant to purchase our products. Our
products are not in compliance with the DAVIC specifications that are supported
in Europe. The emergence of these standards has hurt our business, and the
adoption of other industry standards in the future could have a further adverse
effect.

     There are a number of competing technologies for providing high speed
internet access. Alternative high speed connectivity technologies include
wired technologies such as xDSL and ISDN. As indicated in "Competition"
above, several large companies have announced the formation of a group to
accelerate the pace of ADSL service. To the extent that customers view these
or other alternative technologies as providing faster access or greater
reliability or cost-effectiveness, sales of our products would be adversely
affected.

     The market for high speed Internet access products is characterized by
rapidly changing technologies and short product life cycles. The rapid
development of new competing technologies increases the risk that the
competitiveness of our products could be adversely affected. Future advances in
technology may not be beneficial to, or compatible with, our business and
products, and we might not be able to respond to the advances, or our response
might not be timely or cost-effective. Market acceptance of new technologies and

                                      30
<PAGE>

our failure to develop and introduce new products and enhancements to keep pace
with technological developments could hurt our business.

     OUR MARKET IS NEW AND DEVELOPING, AND WE MUST DEPEND UPON CABLE AND
     WIRELESS OPERATORS.

     The market for broadband Internet access products has only recently begun
to develop and is characterized by an increasing number of market entrants and
competing technologies. Our success will depend primarily on our ability to sell
our cable and wireless modem systems to cable system operators and broadband
system operators and on their sales of our client modems to end-users.

     In selling to cable system operators, we face a number of difficulties. Our
products are not in compliance with the DOCSIS standard that has been adopted by
a number of large cable operators and which is preferred by @Home, which has
adversely affected our sales. Also, our products are not compatible with the
headend equipment or modems of other suppliers. Many cable system operators and
their customers may be reluctant to adopt and commit to a technology such as
ours which has not gained wide acceptance among their industry peers. Certain of
our competitors have already established relationships in the cable market and
with @Home, further limiting our ability to sell products to penetrate the
market. The cable industry has undergone evolution and reorganization, which has
adversely affected certain of our customer relationships. Moreover, the extent
to which (and the manner in which) cable system operators will commit to
providing broadband Internet access remains uncertain. Cable system operators
have a limited number of programming channels over which they can offer
services, and there can be no assurance that they will choose to provide
Internet access. Cable service operators have little experience in providing
Internet networks or launching, marketing and supporting Internet services, and
providing such services will involve substantial capital expenditures. To the
extent that cable service operators elect to provide Internet access, there is
no assurance that they will choose to do so through our cable modem systems.

     We have become increasingly dependent on sales to broadband wireless system
operators and distributors. Our net sales to customers in the broadband wireless
industry increased from $2.4 million in 1997 to $4.7 million in 1998. The
adoption of the DOCSIS standard, which has adversely affected our sales to cable
system operators, has not had a significant effect on wireless customers. We
believe that products meeting the present DOCSIS standard will not perform well
over wireless, but this could change in the future as a result of modifications
in the DOCSIS TDMA protocol, improvements in technology or other developments.
Many broadband wireless system companies are in the early stage of development
or are in need of capital to upgrade and expand their services in order to
compete effectively with cable system operators, satellite TV and telcos. The
weak financial condition of many wireless customers has adversely affected our
sales to these customers and their ability to pay for the products we have
shipped to them. The principal disadvantage of wireless cable is that it
requires a direct line of sight between the wireless cable system operator's
antenna and the customer's location and the installation of an antenna at the
customer premises. Therefore, despite a typical range of up to 35 miles, a
number of factors, such as buildings, trees or uneven terrain, can interfere
with reception, thus limiting broadband wireless system operators' customer
bases. We estimate that there were only approximately 1.0 million wireless video
cable customers in the United States as of March 1998. In addition, current
technical and legislative restrictions have limited the number of analog
channels that wireless cable companies can offer in the most commonly used
frequency bands to 33. In order to better compete with cable system operators,
satellite TV and telcos, broadband wireless system operators have begun to
examine the implementation of digital TV and/or Internet access to create new
revenue streams. To the extent that such operators choose to invest in digital
TV, such decisions will limit the amount of capital available for investment in
deploying other services, such as Internet access. To the extent wireless
operators choose to provide Internet access, there is no assurance that they
will not select technologies other than our high speed modem system to do so
(such as Internet plus telephony, or new equipment standards such as DOCSIS with
which our products are not compatible). Moreover, broadband wireless system
operators will require substantial capital to introduce and market Internet
access products. There can be no assurance that broadband wireless system
operators will have the capital to supply Internet services in a competitive
environment. While many broadband wireless system operators

                                      31
<PAGE>

are currently utilizing telephone return for upstream data transmission, we
believe that wireless operators will demand two-way wireless transmission as
more of these entities obtain licenses for additional frequencies under the
new FCC two-way authorization for MMDS frequencies released in September
1998. Currently, we are attempting to refine our products so as to satisfy
the two-way transmission needs of broadband wireless system operators, and
our customers have six headend installations in place to do this. But, there
can be no assurance that we or our customers will be successful in our
efforts to make this a commercially viable alternative to two-way cable. The
failure of our products to gain market acceptance would hurt our business.

     WE DEPEND UPON A SMALL NUMBER OF CUSTOMERS.

     A small number of customers has accounted for a large portion of our net
sales, and we expect this trend to continue. Our headend equipment and modems do
not operate with other companies' headend equipment or modems, and, as a result,
we are typically the sole source provider to our customers. The fact that our
customer base is highly concentrated increases our risk of loss as a result of
the loss of any of our principal customers. In 1998, RCN Corporation and Knology
Holdings, Inc. accounted for 25% and 13% of our net sales, respectively. In
1997, RCN Corporation and Jones Intercable accounted for 13% and 12% of our net
sales, respectively In 1998, Jones Intercable was sold to Comcast and ceased
purchasing our products, which adversely affected our business. There is no
assurance that RCN or Knology will continue as our customers. The loss of either
of these customers or any of our other principal customers would hurt our
business.

     THE SALES CYCLE FOR OUR PRODUCTS IS LENGTHY AND UNCERTAIN AND OUR OPERATING
     RESULTS FLUCTUATE WIDELY.

     The sale of our products typically involves a great deal of time and
expense. Customers usually want to engage in significant technical evaluation
before making a purchase commitment. There are often delays associated with
customers' internal procedures to complete the evaluation and to approve the
large capital expenditures that are typically involved in purchasing our
products. The sales cycle for our products has been lengthy, generally lasting
three to nine months, and is subject to a number of significant risks, including
customers' budgetary constraints and internal acceptance reviews. Because our
sales cycle may be long and uncertain, and because we depend on a relatively few
customers who place relatively large orders, any delay or loss of an order that
is expected to be received in a quarter can have a major effect on our sales and
operating results for that quarter. The same is true of any failure of a
customer to pay for products on a timely basis.

     These factors, together with the other factors referred to in this "Risk
Factors" section, tend to cause our operating results to vary substantially from
quarter to quarter. These fluctuations have adversely affected the prices of our
Common Stock in the past and may adversely affect such prices in the future.

                                      32


<PAGE>

     WE DEPEND ON KEY PERSONNEL.

     Our success depends in significant part upon the continued services of our
key technical, sales and management personnel. Any officer or employee can
terminate his or her relationship with us at any time. Our future success will
also depend on our ability to attract, train, retain and motivate highly
qualified technical, marketing, sales and management personnel. Competition for
such personnel is intense, and there can be no assurance that we will be able to
attract and retain key personnel. The loss of the services of one or more of our
key personnel or our failure to attract additional qualified personnel could
have a material adverse effect on our business, operating results and financial
condition. We carry a $1.5 million key-person life insurance policy on Mr.
Ledbetter, our Chief Executive Officer.

     WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY.

     We rely on a combination of patent, trade secret, copyrights and trademark
laws and contractual restrictions to establish and protect our intellectual
property rights. We cannot assure you that our patents will cover all the
aspects of our technology that require patent protection or that our patents
will not be challenged or invalidated, or that the claims allowed in our patents
will be of sufficient scope or strength to provide meaningful protection or
commercial advantage to us. We have initiated one patent infringement lawsuit to
enforce our patent rights, and it resulted in a settlement in which we granted
licenses to the defendants containing certain terms that are in some respects
favorable for them, including a right of first refusal to purchase our patents
that we granted to one defendant (Com21, Inc.) in the event that in the future
we propose to sell our patents (separately or together with our other assets) to
any third party. (See Item 3 "Legal Proceedings.") We do not know whether we
will bring litigation in the future in an effort to assert our patent rights, or
whether other companies will bring litigation challenging our patents. Any such
litigation could be time consuming and costly for us and could result in our
patents being held invalid or unenforceable. Furthermore, even if the patents
are upheld or are not challenged, third parties might be able to develop other
technologies or products without infringing any such patents.

     We have entered into confidentiality and invention assignment agreements
with our employees, and we enter into non-disclosure agreements with certain of
our suppliers, distributors and customers, in order to limit access to and
disclosure of our proprietary information. There can be no assurance that these
contractual arrangements or the other steps we take to protect our intellectual
property will prove sufficient to prevent misappropriation of our technology or
deter independent third-party development of similar technologies. The laws of
certain foreign countries may not protect our products or intellectual property
rights to the same extent as do the laws of the United States.

     We have in the past, received, and may in the future receive, notices from
third parties claiming that our products, software or asserted proprietary
rights infringe the proprietary rights of third parties. We expect that
developers of wireless and cable modems will be increasingly subject to
infringement claims as the number of products and competitors in our market
grows. While we are not currently subject to any such claim, any future claim,
with or without merit, could be time consuming, result in costly litigation,
cause product shipment delays or require us to enter into royalty or licensing
agreements. Such royalty or licensing agreements might not be available on terms
acceptable to us or at all.

     In the future, we may also file lawsuits to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of the proprietary rights of others. Such litigation, whether successful
or not, could result in substantial costs and diversion of resources. As
indicated above we were engaged during 1998 in an infringement lawsuit that we
brought against two third parties. In 1999, in order to stop the diversion of
resources caused by the litigation, we entered into a settlement pursuant to
which the defendants obtained licenses to our products on terms that in certain
respects were favorable to the defendants. (See "Patents" above and Item 3
"Legal Proceedings" below.) Nonetheless, we may find it necessary to institute
further infringement litigation in the future.


                                      33

<PAGE>


     DEFECTS IN OUR PRODUCTS COULD CAUSE PRODUCT RETURNS AND PRODUCT LIABILITY.

     Products as complex as those offered by us frequently contain undetected
errors, defects or failures, especially when first introduced or when new
versions are released. In the past, such errors have occurred in our products
and there can be no assurance that errors will not be found in our current and
future products. The occurrence of such errors, defects or failures could result
in product returns and other losses. They could also result in the loss of or
delay in market acceptance of our products.

     GOVERNMENT REGULATION MAY ADVERSELY AFFECT OUR BUSINESS.

     We are subject to varying degrees of governmental, federal, state and local
regulation. For instance, the jurisdiction of the FCC extends to high speed
Internet access products such as ours. The FCC has promulgated regulations that,
among other things, set installation and equipment standards for communications
systems. Further, regulation of our customers may adversely affect our business.

     VOLATILITY OF OUR STOCK PRICE.

     Our Common Stock has been delisted from the Nasdaq National Market and has
not traded on Nasdaq since mid-June 1998. Until the filing of this report, there
has not been current information regarding our business and financial condition
for over one year, and our previous financial statements have been restated. As
a result, it is difficult to estimate based on current information what the
price for our Common Stock will be if and when our stock is actively traded on a
public market. In addition, the market price of our Common Stock has fluctuated
in the past and is likely to fluctuate in the future.

     INTERNATIONAL SALES COULD INVOLVE GREATER RISKS.

     To date, sales of our products outside of the United States have
represented an insignificant portion of our net sales. To the extent that we
sell our products internationally, such sales will be subject to a number of
risks, including longer payment cycles, export and import restrictions, foreign
regulatory requirements, greater difficulty in accounts receivable collection,
potentially adverse tax consequences, currency fluctuations and political and
economic instability.

     RISKS RELATED TO THE YEAR 2000 ISSUE.

     BACKGROUND. The "Year 2000 Issue" refers generally to the problems that
some software, including firmware embedded in the Company's products, may have
in determining the correct century for the year. For example, software with
date-sensitive functions that is not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000, which may result in failures or the
creation of erroneous results.

     OUR READINESS PLAN. We have developed a Year 2000 readiness plan for the
current versions of our products. The plan includes development of corporate
awareness, assessment, implementation (including remediation, upgrading and
replacement of certain product versions), validation testing and contingency
planning. We continue to respond to customer concerns about prior versions of
our products on a case-by-case basis because we believe most products that could
be affected have been withdrawn from service.

     We have largely completed our plan, except for contingency planning, with
respect to the current versions of all of our products in an effort to assure
that they are Year 2000 compliant. As a result of our readiness plan,
substantially all of the current versions of each of our products currently
offered for sale are Year 2000 compliant (with the exception of final quality
assurance and customer network testing), when configured and used in accordance
with the related documentation, and provided that the underlying operating
system of the host machine and any other software used with or in the host
machine or our products are also Year


                                      34

<PAGE>

2000 compliant. In some cases, our products require an upgrade which is
either sold as a complete substitute or as a kit for in-service systems to be
Year 2000 Compliant. We consider our products to be Year 2000 compliant if
they have the ability to: (i) correctly handle date information needed for
the December 31, 1999 to January 1, 2000 date change; (ii) function according
to the product documentation provided for this date change without changes in
operation resulting from the advent of a new century, assuming correct
configuration; (iii) where appropriate, respond to two-digit date input in a
way that resolves the ambiguity as to century in a disclosed, defined, and
predetermined manner; and (iv) recognize year 2000 as a leap year.

     RISKS. Despite our testing and testing by our current customers, and any
assurances from developers of products incorporated into our products, our
products may contain undetected errors or defects associated with Year 2000 date
functions. Also, certain prior versions of our products are not fully Year 2000
compliant and may remain in service. Known or unknown errors or defects in our
products could result in delay or loss of revenue, diversion of development
resources, damage to our reputation, or increased service and warranty costs,
any of which could materially adversely affect our business.

     We do not currently have any information concerning the Year 2000
compliance status of our customers. If our customers suspend or defer
investments in system enhancements or new products to address Year 2000
compliance problems, our business could be materially adversely affected.

     Some commentators have predicted significant litigation regarding Year 2000
compliance issues. Because this type of litigation lacks precedent, it is
uncertain whether or to what extent we may be affected by it.

     We have an ongoing program in an effort to prevent any adverse effects
caused by the Year 2000 Issue with regard to our mission critical internal
information systems (including the third-party software for our management
information systems, networks and desktop applications, and our hardware
telecommunications technology). We expect to complete this program before the
end of 1999.

     COSTS. We have funded our Year 2000 efforts from operating cash. While we
do not expect such costs to be material, additional costs will be incurred
related to Year 2000 programs for administrative personnel to manage our
readiness plans, technical support for our product engineering and customer
satisfaction. Although we are not currently aware of any material operational
issues or costs associated with preparing our internal information systems for
the Year 2000, we may experience material unanticipated problems and costs
caused by undetected errors or defects in the technology used in our information
systems. We can give no assurance that other material problems and costs will
not arise in connection with Year 2000 compliance or that these problems and
costs will not adversely affect our business.

     CONTINGENCY PLANNING. We have not developed a comprehensive contingency
plan to address situations that may result if we are unable to achieve Year 2000
readiness of our critical operations. The cost of developing and implementing
such a plan may itself be material. We are also subject to external forces that
might generally affect industry and commerce, such as utility or transportation
company Year 2000 compliance failures and related service interruptions. Were we
to experience an unanticipated Year 2000 interruption, business operations could
be seriously impaired for an indefinite period of time until remedial efforts
could be achieved.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Not applicable.


                                      35

<PAGE>

ITEM 8.   FINANCIAL STATEMENTS


                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S>                                                                    <C>
Independent Auditors Reports                                           37-38
Balance Sheets as of December 31, 1998 and 1997                         39
Statements of Operations for the Years Ended
  December 31, 1998, 1997 and 1996                                      40
Statements for Stockholders' Equity for the
  Years Ended December 31, 1998, 1997 and 1996                          41
Statements of Cash Flows for the Years Ended
  December 31, 1998, 1997 and 1996                                      42
Notes to Financial Statements                                           43
Schedule II - Valuation and Qualifying Accounts                         76

</TABLE>


                                      36

<PAGE>

INDEPENDENT AUDITORS REPORT


The Stockholders and Board of Directors
Hybrid Networks, Inc.
San Jose, California


     We have audited the accompanying balance sheets of Hybrid Networks, Inc.
as of December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity and cash flows for the years then ended. 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 audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Hybrid Networks,
Inc. as of December 31, 1998 and 1997, and the results of its operations and
its cash flows for the years ended December 31, 1998 and 1997, in conformity
with generally accepted accounting principles.

     The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has suffered recurring losses from
operations and has an accumulated deficit of $63,569,000, that raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans with regard to these matters are also described in Note 3.
The financial statements do not include any adjustments relating to the
recoverability and classification of reported asset amounts or the amounts
and classification of liabilities that might result from the outcome of this
uncertainty.

     As discussed in Note 1 to the financial statements, the Company has
restated its 1997 financial statements for the application of revisions to its
revenue recognition policy and for revisions in the valuation of warrants.

/s/ HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Certified Public Accountants

Orange, California
April 23, 1999, except for the last
two paragraphs of Note 16
which are as of May 5, 1999


                                      37

<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders
Hybrid Networks, Inc.:


     We have audited the balance sheet of Hybrid Networks, Inc. as of
December 31, 1996 and the related statements of operations, stockholders'
equity (deficit) and cash flows for the year ended. 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 audit.

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

     In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Hybrid Networks,
Inc. as of December 31, 1996 and the results of its operations and its cash
flows for the year ended, in conformity with generally accepted accounting
principles.

                                           PricewaterhouseCoopers LLP

San Jose, California
August 28, 1997


                                      38

<PAGE>

HYBRID NETWORKS, INC.
BALANCE SHEETS
(in thousands, except per share data)

<TABLE>
<CAPTION>

                                                                                 December 31,
                                                                          ---------------------------
                                                                              1998          1997
                                                                          -----------     -----------
                                                                                          (restated -
                                                                                          See Note 1)
<S>                                                                       <C>             <C>
                                  ASSETS
Current assets:
     Cash and cash equivalents                                            $  3,451           $ 26,158
     Restricted cash                                                           515                  -
     Short-term investments                                                      -                985
     Accounts receivable, net of allowance for doubtful accounts
       of $200 in 1998 and $0 in 1997                                        1,433              1,128
     Inventories                                                             5,224              6,270
     Prepaid expenses and other current assets                                 864                362
                                                                          --------           --------
             Total current assets                                           11,487             34,903
Property and equipment, net                                                  3,438              1,808
Intangibles and other assets                                                   495              2,354
                                                                          --------           --------
             Total assets                                                 $ 15,420           $ 39,065
                                                                          --------           --------
                                                                          --------           --------
                    LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Convertible debenture                                                  $  5,500           $  5,500
   Current portion of capital lease obligations                                465                410
   Accounts payable                                                          2,063              2,285
   Accrued liabilities and other                                             4,271              2,913
                                                                          --------           --------
             Total current liabilities                                      12,299             11,108
Capital lease obligations, less current portion                                365                618
Other long-term liabilities                                                     54                 36
                                                                          --------           --------
             Total liabilities                                              12,718             11,762
                                                                          --------           --------
Commitments and contingencies ( Notes 3,7,9, 10 and 16)

Stockholders' equity:
   Convertible preferred stock, $.001 par value:
     Authorized: 5,000 shares;
     Issued and outstanding: no shares in 1998 or 1997                           -                  -
   Common stock, $.001 par value:
     Authorized: 100,000 shares;
     Issued and outstanding: 10,473 shares in 1998 and
       10,345 shares in 1997                                                    10                 10
   Additional paid-in capital                                               66,261             66,145
   Unrealized gain on available-for-sale securities                              -                 92
   Accumulated deficit                                                     (63,569)           (38,944)
                                                                          --------           --------
             Total stockholders' equity                                      2,702             27,303
                                                                          --------           --------
             Total liabilities and stockholders' equity                   $ 15,420           $ 39,065
                                                                          --------           --------
                                                                          --------           --------
</TABLE>

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


                                      39

<PAGE>

HYBRID NETWORKS, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)

<TABLE>
<CAPTION>

                                                                           Year Ended December 31,
                                                                ----------------------------------------------
                                                                  1998               1997               1996
                                                                --------           --------           --------
                                                                                   (restated -
                                                                                   See Note 1)
<S>                                                             <C>                <C>                <C>
Net sales                                                       $ 12,418           $  4,120           $  2,962
Cost of sales                                                     14,046              8,899              3,130
                                                                --------           --------           --------
Gross loss                                                        (1,628)            (4,779)              (168)
                                                                --------           --------           --------
Operating expenses:
  Research and development                                         7,771              7,831              5,076
  Sales and marketing                                              3,642              4,678              1,786
  General and administrative                                       8,933              2,964              1,714
  Asset impairment charge                                          1,250                  -                  -
  Write off of technology license                                  1,283                  -                  -
                                                                --------           --------           --------
     Total operating expenses                                     22,879             15,473              8,576
                                                                --------           --------           --------
       Loss from operations                                      (24,507)           (20,252)            (8,744)
Interest income and other expenses, net                              779                316                257
Interest expense                                                    (897)            (1,666)               (28)
                                                                --------           --------           --------
       Net loss                                                 $(24,625)          $(21,602)          $ (8,515)
                                                                --------           --------           --------
                                                                --------           --------           --------
Basic and diluted loss per share                                $  (2.37)          $  (6.10)          $  (3.36)
                                                                --------           --------           --------
                                                                --------           --------           --------
Shares used in basic and diluted per share calculation            10,410              3,541              2,535
                                                                --------           --------           --------
                                                                --------           --------           --------
</TABLE>

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


                                      40

<PAGE>

HYBRID NETWORKS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)

<TABLE>
<CAPTION>
                                                   Preferred Stock       Common Stock      Additional
                                                   ----------------    ----------------     Paid-in
                                                   Shares    Amount    Shares    Amount     Capital
                                                   -------   ------    ------    ------    ----------
<S>                                                <C>       <C>       <C>       <C>       <C>
Balances,  January 1, 1996                           8,363   $  8       2,497    $  2      $ 12,478
  Exercise of common stock options                       -      -          65       -            34
  Repurchase of common stock                             -      -         (42)      -            (9)
  Issuance of Series B preferred stock
    upon net exercise of warrants                      248      -           -       -             -
  Issuance of Series G preferred stock
    for cash and conversion of notes payable,
    net of issuance costs of $704                    3,458      4           -       -        12,534
  Net loss                                               -      -           -       -             -

  Comprehensive loss
                                                   -------   ----      ------    ----      --------
Balances,  December 31, 1996                        12,069     12       2,520       2        25,037
  Exercise of common stock options                       -      -         150       -            94
  Repurchase of common stock                             -      -         (12)      -            (7)
  Grant of stock bonus awards                            -      -          13       -            26
  Issuance of common stock for
    services rendered                                    -      -           9       -           181
  Issuance of Series H preferred stock                 494      1                             1,999
  Issuance of warrants in connection
    with convertible subordinated notes                  -      -           -       -           870
  Issuance of warrants in connection
    with technology support and
    development agreement                                -      -           -       -         2,200
  Issuance of common stock, net of
    issuance costs of $1,185                             -      -       2,836       3        35,737
  Conversion of preferred stock
    to common stock                                (12,563)   (13)      4,653       5             8
  Issuance of common stock upon net
    exercise of warrants                                 -      -         176       -             -
  Unrealized gain on investments                         -      -           -       -             -
  Net loss                                               -      -           -       -             -

  Comprehensive loss                                     -      -           -       -             -
                                                   -------   ----      ------    ----      --------
Balances,  December 31, 1997                             -      -      10,345      10        66,145
  Exercise of common stock options                       -      -         127       -            87
  Grant of stock bonus awards                            -      -           1                     5
  Charge due to acceleration of options                  -      -           -       -            24
  Reclassification for gains
    included in net loss                                 -      -           -       -             -
  Net loss                                               -      -           -       -             -

  Comprehensive loss                                     -      -           -       -             -
                                                   -------   ----      ------    ----      --------
Balances,  December 31, 1998                             -   $  -      10,473    $ 10      $ 66,261
                                                   -------   ----      ------    ----      --------
                                                   -------   ----      ------    ----      --------
<CAPTION>
                                                Accumulated
                                                   Other
                                               Comprehensive     Accumulated                 Comprehensive
                                               Income(loss)       Deficit        Total            Loss
                                               --------------    -----------   ---------     -------------
                                                                 (restated - See Note 1)
<S>                                            <C>               <C>           <C>           <C>
Balances,  January 1, 1996                       $   -             $ (8,827)    $  3,661
  Exercise of common stock options                   -                    -           34
  Repurchase of common stock                         -                    -           (9)
  Issuance of Series B preferred stock                                                 -
    upon net exercise of warrants                    -                    -            -
  Issuance of Series G preferred stock                                                 -
    for cash and conversion of notes payable,                                          -
    net of issuance costs of $704                    -                    -       12,538
  Net loss                                           -               (8,515)      (8,515)      $ (8,515)
                                                                                               --------
  Comprehensive loss                                                                           $ (8,515)
                                                 -----             --------     --------       --------
                                                                                               --------
Balances,  December 31, 1996                         -              (17,342)       7,709
  Exercise of common stock options                   -                    -           94
  Repurchase of common stock                         -                    -           (7)
  Grant of stock bonus awards                        -                    -           26
  Issuance of common stock for                                                         -
    services rendered                                -                    -          181
  Issuance of Series H preferred stock               -                    -        2,000
  Issuance of warrants in connection                                                   -
    with convertible subordinated notes              -                    -          870
  Issuance of warrants in connection                                                   -
    with technology support and
    development agreement                            -                    -        2,200
  Issuance of common stock, net of                                                     -
    issuance costs of $1,185                         -                    -       35,740
  Conversion of preferred stock                                                        -
    to common stock                                  -                    -            -
  Issuance of common stock upon net                                                    -
    exercise of warrants                             -                    -            -
  Unrealized gain on investments                    92                    -           92       $     92
  Net loss                                           -              (21,602)     (21,602)       (21,602)
                                                                                               --------
  Comprehensive loss                                 -                    -            -       $(21,510)
                                                 -----             --------     --------       --------
                                                                                               --------
Balances,  December 31, 1997                        92              (38,944)      27,303
  Exercise of common stock options                   -                    -           87
  Grant of stock bonus awards                        -                    -            5
  Charge due to acceleration of options              -                    -           24
  Reclassification for gains
    included in net loss                           (92)                   -          (92)      $    (92)
  Net loss                                           -              (24,625)     (24,625)       (24,625)
                                                                                               --------
  Comprehensive loss                                 -                    -            -       $(24,717)
                                                 -----             --------     --------       --------
                                                                                               --------
Balances,  December 31, 1998                     $   -             $(63,569)    $  2,702
                                                 -----             --------     --------
                                                 -----             --------     --------
</TABLE>

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


                                      41

<PAGE>

HYBRID NETWORKS, INC.
STATEMENTS OF CASH FLOWS
(in thousands)

<TABLE>
<CAPTION>
                                                                                          Year Ended December 31,
                                                                                   -----------------------------------
                                                                                      1998        1997         1996
                                                                                   ----------  ----------   ----------
                                                                                               (restated -
                                                                                               See Note 1)
<S>                                                                                <C>         <C>          <C>
Cash flows from operating activities:
  Net loss                                                                         $(24,625)    $(21,602)    $ (8,515)
  Adjustments to reconcile net loss to net cash used in operating activities:
     Depreciation and amortization                                                    1,883        1,130          322
     Asset impairment charge                                                          1,250            -            -
     Provision for doubtful accounts                                                    200            -            -
     Provision for excess and obsolete inventory                                      1,691        2,759          126
     Common stock issued for services rendered                                            -          181            -
     Stock bonus                                                                          5           26            -
     Charge for accelerated vesting of options                                           24            -            -
     Interest related to issuance of warrant in connection
        with convertible subordinated note                                                -          870            -
     Write off technology license                                                     1,283            -            -
     Change in assets and liabilities:
        Restricted cash                                                                (515)           -            -
        Accounts receivable                                                            (505)         220       (1,061)
        Inventories                                                                    (645)      (8,086)        (873)
        Prepaid expenses and other current assets                                      (502)        (237)        (115)
        Accounts payable                                                               (222)         861        1,144
        Accrued liabilities                                                           1,376        2,201          395
                                                                                   --------     --------     --------
       Net cash used in operating activities                                        (19,302)     (21,677)      (8,577)
                                                                                   --------     --------     --------
Cash flows from investing activities:
  Purchase of property and equipment                                                 (3,907)        (629)        (321)
  Disposal of property and equipment                                                     74            -            -
  Change in other assets                                                                (74)         (37)         (26)
  Purchase of short-term investments                                                (11,772)        (893)           -
  Proceeds from disposal of short-term investments                                   12,665            -          490
                                                                                   --------     --------     --------
       Net cash provided by (used in) investing activities                           (3,014)      (1,559)         143
                                                                                   --------     --------     --------
Cash flows from financing activities:
  Repayment of capital lease obligations                                               (478)        (320)        (106)
  Net proceeds from issuance of preferred stock                                           -        2,000        9,378
  Net proceeds from issuance of common stock                                             87       35,835           34
  Repurchase of common stock                                                              -           (7)          (9)
  Proceeds from issuance of convertible subordinated note payable
    and related common stock warrants                                                     -        6,882            -
  Repayment of convertible subordinated note payable
    and related common stock warrants                                                     -       (6,882)
  Net proceeds from issuance of convertible debenture                                     -        5,000        3,160
                                                                                   --------     --------     --------
       Net cash provided by (used in) financing activities                             (391)      42,508       12,457
                                                                                   --------     --------     --------
Increase (Decrease) in cash and cash equivalents                                    (22,707)      19,272        4,023
Cash and cash equivalents, beginning of period                                       26,158        6,886        2,863
                                                                                   --------     --------     --------
Cash and cash equivalents, end of period                                           $  3,451     $ 26,158     $  6,886
                                                                                   --------     --------     --------
                                                                                   --------     --------     --------
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
  Conversion of notes payable into preferred stock                                 $      -     $      -     $  3,160
  Property and equipment acquired under capital leases                                  280          688          472
  Issuance of warrants in connection with technology
     support and development agreement                                                    -        2,200            -
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Interest paid                                                                         802          718           28
  Income taxes paid                                                                       1            1            1
</TABLE>

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


                                      42


<PAGE>


HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS

1.   RESTATEMENT OF FINANCIAL STATEMENTS

     Subsequent to the filing of its Annual Report on Form 10-K for the year
ended December 31, 1997 with the Securities and Exchange Commission, the Company
became aware of errors and irregularities that ultimately affected the timing
and dollar amount of reported sales from product shipments in 1997 and the first
quarter of 1998.

     The Company undertook and completed extensive procedures related to product
sales in 1997 and the first quarter of 1998. As a result of these findings and
other relevant information now known or disclosed, the Company has determined
that a significant number and dollar amount of product shipments were improperly
reported as sales in the aforementioned periods.

     The Company has determined that revenue is earned and should be recorded
only after any related obligations have been satisfied (i.e. when there are no
longer any significant remaining uncertainties related to the earnings process).
This revenue recognition policy has been followed for all transactions with
customers reflected in these financial statements.

     Additionally, during 1998 the Company became aware that warrants to
purchase common stock issued and outstanding in 1997 had not been properly
valued, resulting in an understatement of operating expenses and interest
expense. These warrants have now been properly valued and reflected in the
financial statements.

                                      43
<PAGE>

    As a result of the above, the statement of operations for the year ended
December 31, 1997 has been restated as follows:

<TABLE>
<CAPTION>
                                                     1997
                                         ------------------------------
                                                            Previously
                                           Restated          Reported
                                         -------------     ------------
<S>                                       <C>                <C>
Net sales                                 $  4,120           $ 14,270
Cost of sales                                8,899             12,258
                                          --------           --------
    Gross profit (loss)                     (4,779)             2,012
                                          --------           --------
Operating expenses:
  Research and development                   7,831              7,108
  Sales and marketing                        4,678              4,319
  General and administrative                 2,964              3,606
                                          --------           --------
    Total operating expenses                15,473             15,033
                                          --------           --------
      Loss from operations                 (20,252)           (13,021)
Interest income and other
  expenses, net                                316                399
Interest expense                            (1,666)              (968)
                                          --------           --------
      Net loss                            $(21,602)          $(13,590)
                                          --------           --------
                                          --------           --------

Basic and diluted loss per share          $  (6.10)          $($3.84)
                                          --------           --------
                                          --------           --------

Shares used in basic and diluted
  per share calculation                      3,541              3,541
                                          --------           --------
                                          --------           --------
</TABLE>

2.  FORMATION AND BUSINESS OF THE COMPANY

     The Company, which was incorporated in Delaware on June 6, 1990, is a
broadband access equipment company that designs, develops, manufactures and
markets wireless and cable systems that provide high speed access to the
Internet and corporate intranets for both businesses and consumers. The
Company's products remove the bottleneck over the local connection to the end
user which causes slow response time for those accessing bandwidth intensive
information.

3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

     The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the

                                      44
<PAGE>

financial statements, during 1998, 1997 and 1996, the Company incurred net
losses of approximately $24,625,000, $21,602,000 and $8,515,000,
respectively. Additionally, the Company had accumulated deficits of
$63,569,000 and $38,944,000 at December 31, 1998 and 1997, respectively, and
is highly dependent on its ability to obtain sufficient additional financing
in order to fund the current and planned operating levels. Additionally, the
Company is subject to a number of lawsuits involving substantial dollar
amounts, and is subject to an official investigation by the Securities and
Exchange Commission regarding its financial reporting practices (See Note
10). These factors among others raise substantial doubt about the ability of
the Company to continue as a going concern for a reasonable period of time.

     The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to obtain additional financing to continue
its product development and marketing plans and to fund other general operating
expenses, achievement of a financially satisfactory resolution to outstanding
litigation and the SEC investigation, and ultimately is dependent upon its
ability to obtain sufficient customer demand to attain profitable operations. No
assurance can be given that the Company will be successful in these efforts.

CHANGE IN FISCAL YEAR

     In 1997, the Company changed its fiscal year end from March 31, to December
31, effective January 1, 1992.

USE OF ESTIMATES

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

     The Company's financial statements are based upon a number of significant
estimates, including the estimated useful lives selected for property and
equipment, accrued liabilities related to product warranties and litigation, and
valuation allowances for accounts receivable, inventory and property and
equipment. Due to uncertainties inherent in the estimation process, it is at
least reasonably possible that these estimates will be further revised in the
near term and such revisions could be material.

FAIR VALUE OF FINANCIAL INSTRUMENTS, BUSINESS RISKS AND CREDIT
CONCENTRATION

     The carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, short-term cash investments, accounts
receivable, accounts payable, capital leases, convertible debenture and other
accrued liabilities' approximate fair value due to their short maturities.

     The Company sells its products primarily to cable system operators,
broadband wireless system operators, Internet Service Providers, third party
distributors and other companies that provide broadband networking systems or
services, principally in North America. The Company performs ongoing credit
evaluations of its customers and does not require collateral. The Company also
maintains allowances for potential losses on collectability of accounts
receivable, as needed, and such losses have been within Management's
expectations.

                                      45
<PAGE>

     The Company operates in the intensely competitive and rapidly changing
communications industry which has been characterized by rapid technological
change, evolving industry standards and federal, state and local regulation
which may impede the Company's penetration of certain markets.

     The Company currently operates with one product line. The Company's future
success depends upon its ability to develop, introduce and market new products,
its ability to obtain components from key suppliers, obtaining sufficient
manufacturing capacity, and the success of the broadband access business. The
Company may experience future fluctuations in operating results and declines in
selling prices.

CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

     Cash equivalents consist of highly liquid investment instruments with a
maturity at the time of purchase of three months or less. Instruments with a
maturity at the time of purchase of greater than three months but less than one
year from the date of purchase are included in short-term investments. The
Company's cash and cash equivalents as of December 31, 1997 included corporate
commercial paper which was classified as available for sale. Accordingly, the
investments were carried at fair value and unrealized holding gains of $92,000
were recorded in stockholders' equity.

INVENTORIES

     Inventories are stated at the lower of cost (first-in, first-out basis) or
market.

PROPERTY AND EQUIPMENT

     Property and equipment are recorded at cost. Depreciation is computed on a
straight-line basis over the estimated useful lives of two to five years.
Leasehold improvements are amortized over the lesser of their estimated useful
lives or the lease term. The cost of normal maintenance and repairs is charged
to operations as incurred. Material expenditures which increase the life of an
asset are capitalized and depreciated over the estimated remaining useful life
of the asset. The cost of fixed assets sold, or otherwise disposed of, and the
related accumulated depreciation or amortization is removed from the accounts,
and any gains or losses are reflected in current operations.

INTANGIBLES AND OTHER ASSETS

     Intangibles and other assets include deferred financing costs relating to
fees incurred in connection with the issuance of a senior convertible debenture
in April 1997 and, at December 31, 1997, the value assigned to the purchase of
certain technologies relating to a technology support and development agreement
signed in November 1997. In connection with entering into the technology support
and development agreement, the Company issued a five-year warrant to purchase
458,295 shares of Common Stock at an exercise price of $10.91 per share. The
amount attributed to the value of the warrants was $2,200,000. The deferred
financing costs are amortized over the five year life of the debenture (see Note
7). The unamortized value of the technologies of approximately $1,283,000 was
charged to expense in the second quarter of 1998 as it was determined to be of
no further value to the Company. Total accumulated amortization as of December
31, 1998 and 1997 was $178,000 and $408,000, respectively. The Company
periodically assesses the recoverability of intangible assets by determining
whether the amortization of the asset balance over the remaining life can be
recovered through undiscounted future operating cash flows. The amount of
impairment, if any, is measured based on projected discounted future operating
cash flows and is recognized as a write down of the asset to a net realizable
value.

REVENUE RECOGNITION

     The Company normally ships its products based upon a bona fide Purchase
Order and Volume Purchase Agreement. The Company generally recognizes its
revenue at the time a transaction is shipped and

                                      46
<PAGE>

collection of the resulting account receivable is probable. Shipments on
customer orders with either acceptance criteria, installation criteria, or
rights of return are recognized as revenue only when the criteria are
satisfied according to the contract. Revenue related to shipments to
distributors is normally recognized upon sell-through which is generally
signified by receipt of payment for such transactions.

     For Cybermanager 2000, the hardware and software sales are generally
bundled with upgrade, maintenance and system support and service and sold for a
period of three years. Revenue attributed to hardware is recognized upon
shipment. Revenue attributed to software is recognized over the three year
maintenance, system support and service period. When a maintenance contract is
sold separately, the revenue is recognized ratably over the term of the
maintenance contract, generally on a straight-line basis. Where maintenance
revenue is not separately invoiced, it is unbundled from hardware and software
license revenue and deferred for revenue recognition purposes. Other service
revenue, primarily training and consulting, is generally recognized at the time
the service is performed.

     The Company accrues for estimated warranty costs when the related sales
revenue is recognized. The Company's third party manufacturer provides a fifteen
month warranty period on all cable modems manufactured by them. The warranty
period begins on the date the modems are completely assembled. The Company
provides a twelve month warranty on all headend equipment sold. Actual warranty
costs incurred have not differed materially from those estimated and accrued by
the Company.

PRODUCT DEVELOPMENT COSTS

     Costs related to research, design and development of products are charged
to research and development expenses as incurred. Software development costs are
included in research and development and are expensed as incurred. Statement of
Financial Accounting Standards No. 86 (SFAS 86) requires the capitalization of
certain software development costs from when technological feasibility is
established, which the Company defines as completion of a working model, to when
the software is available for sale to the Company's customers. The capitalized
cost is then amortized on a straight-line basis over the estimated product life,
or on the ratio of current revenues to total projected product revenues,
whichever is greater. To date, the period between achieving technological
feasibility and the general availability of such software has been short and
software development costs qualifying for capitalization have been
insignificant. Accordingly, the Company has not capitalized any software
development costs.

STOCK-BASED COMPENSATION

     The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options. In accordance with
Statement of Financial Accounting Standards No. 123 (SFAS. 123), "Accounting for
Stock-Based Compensation," the Company will disclose the impact of adopting the
fair value accounting of employee stock options. Transactions in equity
instruments with non-employees for goods or services have been accounted for
using the fair value method prescribed by SFAS 123.

COMPUTATION OF BASIC AND DILUTED LOSS PER SHARE

     Basic earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of shares
of common stock outstanding for the period. Diluted earnings per share reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of the entity. All
such securities or other contracts were anti-dilutive for all periods presented
and, therefore, excluded from the computation of earnings per share.

COMPREHENSIVE INCOME  (LOSS)

                                      47
<PAGE>

     Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS No. 130), "Reporting Comprehensive Income."
SFAS No. 130 requires that all items recognized under accounting standards as
comprehensive income be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements.
Comprehensive income (loss) includes all changes in equity (net assets) during a
period from nonowner sources. Examples of items to be included in comprehensive
income, which are excluded from net income (loss), include foreign currency
translation adjustments and unrealized gain/loss on available-for-sale
securities. The Company has presented comprehensive income (loss) for each
period presented within the Statements of Stockholder's Equity.

NEW ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). The new standard requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Under SFAS 133, gains or losses resulting from changes in the values
of derivatives are to be reported in the statement of operations or as a
deferred item, depending on the use of the derivatives and whether they qualify
for hedge accounting. The key criterion for hedge accounting is that the
derivative must be highly effective in achieving offsetting changes in fair
value or cash flows of the hedged items during the term of the hedge. The
Company is required to adopt SFAS 133 in the first quarter of 2000. The Company
currently transacts substantially all of its revenues and costs in U.S. dollars
and to date has not entered into any material amounts of derivative instruments.
Accordingly, management does not currently expect adoption of this new standard
to have a significant impact on the Company.

     Statement of Financial Accounting Standards No. 132, "Employers Disclosures
about Pensions and Other Postretirement Benefits" and Statement of Financial
Accounting Standards No. 134, "Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise" were issued in 1998 and are not expected to impact the
Company's future financial statement disclosures, results of operations or
financial position.

RECLASSIFICATIONS

     Certain reclassifications have been made to the 1997 and 1996 financial
statements in order to conform to the 1998 presentation. Such reclassifications
had no effect on the previously reported net loss.

4.  INVENTORIES

     Inventories are comprised of the following (in thousands):

<TABLE>
<CAPTION>

                                                              December 31,
                                                        ------------------------
                                                            1998        1997
                                                        ----------- -----------
                                                                     (restated)
<S>                                                      <C>         <C>
       Raw materials                                         $1,371       $2,175
       Work in progress                                         386          229
       Finished goods                                         3,467        3,866
                                                             ------       ------
                                                             $5,224       $6,270
                                                             ------       ------
                                                             ------       ------

</TABLE>

                                      48
<PAGE>

     The allowance for excess and obsolete inventory was $3,135,000 and
$3,015,000 at December 31, 1998 and 1997, respectively. The provision for excess
and obsolete inventory included in cost of sales was $1,691,000, $2,759,000 and
$126,000 for the years ended December 31, 1998, 1997 and 1996, respectively.

5.  PROPERTY AND EQUIPMENT

     Property and equipment consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                    December 31,
                                                              ------------------------
                                                                  1998         1997
                                                              -----------  -----------
<S>                                                          <C>          <C>
     Machinery and equipment                                 $ 3,048           $ 2,780
     Office furniture and fixtures                               737               164
     Leasehold improvements                                    1,914               110
                                                             -------           -------
                                                               5,699             3,054
     Less accumulated depreciation and amortization           (2,261)           (1,246)
                                                             -------           -------
                                                             $ 3,438           $ 1,808
                                                             -------           -------
                                                             -------           -------
</TABLE>

     Furniture and equipment under capital leases included in the above table
total $1,691,000 and $920,000, net of accumulated amortization of $1,005,000 and
$541,000 as of December 31, 1998 and 1997, respectively. Depreciation and
amortization expense related to property and equipment was $1,233,000, $687,000
and $162,000 for the years ended December 31, 1998, 1997, and 1996,
respectively.

     Due to the underutilization of the Company's San Jose headquarters, the
1998 financial statements include a fourth quarter charge of $1,250,000
reflecting the impairment of leasehold improvements and office furniture and
fixtures.

6.  CONVERTIBLE SUBORDINATED NOTE PAYABLE

     In September 1997, the Company entered into a Convertible Subordinated
Promissory Note Purchase Agreement to issue $6,882,000 of subordinated notes at
10% interest (increasing to 18% after March 30, 1998 under certain
circumstances).

     The principal amount of the notes was payable at the earlier of September
30, 1998 or the effective date of an initial public offering of the Company's
common stock. In connection with the Convertible Subordinated Note Purchase
Agreement, the Company issued warrants to purchase 252,381 shares of its common
stock at $10.91 per share. The warrant was exercisable at the earlier of 180
days after issuance or the effective date of an initial public stock offering
and expires in five years. The amount attributed to the value of the warrants
was $870,000 which was charged to interest expense upon repayment of the notes.
At December 31, 1997 no amount was outstanding under the convertible
subordinated note payable.

                                      49
<PAGE>

7.  CONVERTIBLE DEBENTURE

     On April 30, 1997, the Company issued a senior convertible secured
debenture in the amount of $5,500,000, bearing interest at 12% per annum,
payable quarterly, and maturing on April 30, 2002. An arrangement fee of
$500,000 was paid by the Company. The debenture is convertible, at the option of
the holder, at any time, into common stock at $10.71 per share. If the Company
issues any shares (with certain exceptions for employee stock options and the
like) for consideration less then $10.71 per share, any such issuance would be
subject to certain "weighted average" antidilution provisions.

     The debenture is collaterized by certain of the Company's assets. The
Company may not make any plant or fixed capital expenditures in excess of
$1,500,000, $2,500,000, $5,500,000 and $11,000,000 during the twelve months
ending March 31, 1998, 1999, 2000 and 2001, respectively. Additionally, the
Company may, among other things, not declare dividends, retire any subordinated
debt other than in accordance with its terms, or distribute its assets to any
stockholder as long as the debenture remains outstanding.

     The Company's capital expenditures have exceeded the maximum capital
expenditures allowed for the twelve months ending March 31, 1999. Consequently,
the debt has been classified as a current liability in the accompanying
financial statements as the holder has the right to declare a default under the
convertible debenture at any time.

8.  ACCRUED LIABILITIES AND OTHER

     Accrued liabilities and other consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                               December 31,
                                                                         ------------------------
                                                                            1998        1997
                                                                         ----------- -----------
                                                                                      (restated)
<S>                                                                      <C>         <C>
     Accrued payroll and related accruals                                $  385          $  954
     Accrued class action settlement and related legal expenses           1,946               -
     Deferred revenue and customer deposits                               1,381           1,448
     Other liabilities                                                      559             511
                                                                         ------          ------
                                                                         $4,271          $2,913
                                                                         ------          ------
                                                                         ------          ------
</TABLE>

                                      50
<PAGE>

9.  LEASE OBLIGATIONS

The Company entered into certain non-cancelable operating and capital lease
commitments which expire at various dates through April 2004. Capital leases
bear interest at rates ranging from 7.6% to 10.1%. Future minimum lease payments
under all non-cancelable leases are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                   Capital     Operating
                                                                    Leases      Leases
                                                                  ---------    ---------
<S>                                                               <C>          <C>
       1999                                                           $ 516      $   839
       2000                                                             352          899
       2001                                                              30          899
       2002                                                               -          950
       2003                                                               -          975
       Thereafter                                                         -          406
                                                                    -------      -------
                                                                        898      $ 4,968
       Less amount representing interest                                (68)     -------
                                                                    -------      -------
                                                                        830
       Less current portion                                            (465)
                                                                    -------
                                                                      $ 365
                                                                    -------
                                                                    -------
</TABLE>

     Rent expense for 1998, 1997 and 1996 was approximately $955,000, $494,000
and $263,000, respectively.

     The Company's only long-term operating lease is for approximately 55,000
square feet of office, research and development and manufacturing space in San
Jose, CA. This sublease expires in April 2004.

10. CONTINGENCIES

CLASS ACTION LITIGATION

     In June 1998, five class action lawsuits were filed in San Mateo County
Superior Court, California against the Company, its five directors (one of whom
is an officer), two former officers and one former director. The lawsuits were
brought on behalf of purchasers of the Company's Common Stock during the class
period commencing November 12, 1997 (the date of the Company's initial public
offering) and ending June 1, 1998. In July 1998, a sixth class action lawsuit
was filed in the same court against the same defendants, although the class
period was extended to June 18, 1998. All six lawsuits also named as defendants
the underwriters in the Company's initial public offering, but the underwriters
have since been dismissed from the cases.

     The complaints in these lawsuits claim that the Company and the other
defendants violated the anti-fraud provisions of the California securities laws,
alleging that the financial statements used in connection with the Company's
initial public offering and the financial statements issued subsequently during
the class period, as well as related statements made on behalf of the Company
during the initial public offering and subsequently regarding the Company's past
and prospective financial condition and results of operations, were false and
misleading. The complaints also allege that the Company and the other defendants
made

                                      51
<PAGE>

these misrepresentations in order to inflate the price of the Company's
Common Stock stock for the initial public offering and during the class
period. The Company and the other defendants denied the charges of wrongdoing.

     In July and August 1998, two class action lawsuits were filed in the U.S.
District Court for the Northern District of California. Both of these federal
class action lawsuits were brought against the same defendants as the six state
court class actions referred to above, except that the second federal class
action lawsuit also named as a defendant PwC, the Company's former independent
accountants. (The underwriters in the Company's initial public offering were
named as defendants in the first federal class action lawsuit but were
subsequently dismissed.) The class period for the first federal class action
lawsuit is from November 12, 1997 to June 1, 1998, and the class period in the
second class action lawsuit extends to June 17, 1998. The complaints in both
federal class action lawsuits claim that the Company and the other defendants
violated the anti-fraud provisions of the federal securities laws, on the basis
of allegations that are similar to those made by the plaintiffs in the state
class action lawsuits. The Company and the other defendants denied these charges
of wrongdoing.

     In March 1999, the Company and the other parties (other than PwC) to the
state class action lawsuits and the federal class action lawsuits reached an
agreement in principle to settle the lawsuits. The agreement is subject to
the parties' entering into a binding stipulation of settlement and approval
by the U.S. District Court for the Northern District of California. Under the
agreement in principle, (i) the Company's insurers would pay $8.8 million on
the Company's behalf (and on behalf of the other officer and director
defendants), (ii) the Company would issue 3.0 million shares of Common Stock
to the plaintiffs (the number of shares would be increased proportionately to
the extent that there are more than 10.5 million shares of Common Stock
outstanding on the date of distribution so that, as of such date, the
plaintiffs would hold approximately 22.6% of all of the shares of the
Company's Common Stock that are then outstanding), (iii) if the Company is
acquired within nine months after March 9, 1999, the date of the agreement in
principle, then, in addition to the consideration referred to in (i) and
(ii), the Company would pay to the plaintiffs an amount equal to 10% of the
consideration received by the Company's stockholders in the acquisition. As a
result of the agreement in principle and a related agreement between the
Company and its insurers, it has paid, and will not be reimbursed by its
insurers for, $1.2 million in attorneys fees and other litigation expenses
that would otherwise be covered by its insurance, and the Company will not
have insurance coverage for the attorneys fees and expenses relating to the
settlement that it incurs in the future. As of December 31, 1998 the Company
has accrued $1,547,000 for the value of the 3,000,000 shares to be issued in
the settlement.

SEC INVESTIGATION

     In October 1998, the Securities and Exchange Commission began a formal
investigation of the Company and unidentified individuals with respect to the
Company's financial statements and public disclosures. The Company has been
producing documents in response to the Securities and Exchange Commission's
subpoena and is cooperating with the investigation. A number of current and
former officers and employees and outside directors have testified or may
testify before the Securities and Exchange Commission's staff. The Company does
not believe, based on current information, that this investigation will have a
material adverse impact on the Company's financial statements.

PATENT LITIGATION

     In January 1998, the Company brought a lawsuit in the U.S. District Court
for the Eastern District of Virginia against Com21, Inc. and Celestica, Inc. in
which the Company alleged that the defendants infringed the Company's patents.
In response to the Company's lawsuit, Com21 initiated a declaratory judgment
action six days later in the U.S. District Court for the Northern District of
California to obtain a declaration that the Company's patents are invalid and
unenforceable and that in any event Com21 did not infringe them. In February
1998, the action in the Eastern District of Virginia was transferred to the
Northern

                                      52

<PAGE>

District of California, and the two actions were consolidated. Pre-trial
discovery continued in the consolidated action until September 1998 when the
parties agreed to stay the proceedings while they attempted to reach a
settlement.

     In January 1999, the Company entered into a settlement agreement with
Com21, Inc. and Celestica, Inc. whereby the patent lawsuits were settled.
Pursuant to the agreements, the Company granted Com21 and Celestica a
nonexclusive license on the Company's patents under which they may be
required to pay royalties in the event that they sell certain products in the
future, subject to certain contingencies, and the Company granted to Com21 a
right of first refusal to purchase the patents in the event that the Company
should propose in the future to sell its patents (whether separately or
together with the Company's other assets to any third party). The Company has
agreed to pay its legal counsel in this action, as a partial contingency fee
(in return for such counsel's acceptance of reduced current legal fees), an
amount equal to 50% of any royalties that the Company receives from its
license with the defendants in the litigation (but not in excess of
$3,000,000). To date the Company has received virtually no royalties from the
license.

11.  STOCKHOLDERS' EQUITY

REVERSE STOCK SPLIT

     In September 1997, the Company's Board of Directors approved a 1-for-2.7
reverse split of the Company's common stock and a corresponding change in the
preferred stock conversion ratios. All common and preferred stock and per share
amounts in these financial statements have been adjusted retroactively to give
effect to the split. In addition, the Company's Board of Directors approved an
Amended and Restated Certificate of Incorporation which eliminated the existing
convertible preferred stock and changed the number of authorized shares of
preferred stock to 5,000,000 shares, $0.001 par value, and increased the shares
of common stock authorized to 100,000,000 shares. In October 1997, the
stockholders of the Company approved the 1- for -2.7 reverse split of the
Company's common stock and a corresponding change in the preferred stock
conversion ratios.

PREFERRED STOCK

     The Board of Directors has authorized the issuance of up to 5,000,000
shares of undesignated preferred stock and the Board has the authority to issue
the undesignated preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof. No preferred stock was
outstanding as of December 31, 1998

INITIAL PUBLIC OFFERING AND CONVERSION OF PREFERRED STOCK

     In November 1997, the Company filed a registration statement with the
Securities and Exchange Commission permitting the Company to sell shares of its
common stock to the public. The offering was completed on November 12, 1997. In
connection with the Initial Public Offering, all outstanding shares of Preferred
Stock were converted into shares of common stock.

WARRANTS

     The Company has historically issued warrants in connection with its various
rounds of financing, equipment lease lines, and transfers of technology.
Warrants have been valued using the Black-Scholes Option Pricing Model.

     In connection with the issuance of Series G preferred stock in July 1996,
and the 1996 equipment lease line, the Company issued warrants to purchase
58,021 and 5,802 shares of common stock, respectively, at $10.34 per share.
These warrants are exercisable at any time and expire in July 2001 and August
2006,


                                      53

<PAGE>

respectively. The Company has reserved 63,823 shares of common stock for
issuance upon exercise of these warrants.

     In connection with the issuance of convertible promissory notes in June
1996, which were later converted into Series G preferred stock, the Company
issued warrants to purchase 167,037 shares of common stock at $4.73 per share.
In connection with the issuance of Series D preferred stock May 1995, the
Company issued warrants, at $.001 per warrant, to purchase 592,593 shares of
common stock at $4.73 per share. In December 1997, a warrant to purchase 132,225
shares was exercised for a net exercise of 99,850 shares of common stock. The
remaining warrants are exercisable at any time and expire in June 2001. The
Company has reserved 627,405 shares of common stock for issuance upon exercise
of these warrants.

     During 1996, the Company issued warrants, at $.001 per warrant, to purchase
76,245 shares of Common stock at $4.73 per share. In connection with technology
transfered and the 1995 equipment lease line, the Company issued warrants to
purchase 169,259 and 8,466 shares of common stock, respectively, at $4.73 per
share. During 1996, a warrant to purchase 169,259 shares was exercised for a net
exercise of 91,921 shares of common stock. The remaining warrants are
exercisable at any time and expire in June 2001 and August 2005, respectively.
The Company has reserved 84,710 shares of common stock for issuance upon
exercise of these warrants.

     In September 1997, the Company issued warrants to purchase 252,381 shares
of common stock in connection with the convertible subordinated notes payable,
at an exercise price of $10.91. In October 1997, the Company issued warrants to
purchase 2,659 shares of common stock in connection with obtaining a bank credit
facility at an exercise price of $10.91. These warrants are exercisable at any
time and expire in September and October 2002. In November 1997, warrants to
purchase 151,267 shares of common stock were exercised for a net exercise of
76,096 shares of common stock.

     In November 1997, the Company issued a five year warrant to purchase
458,295 shares of common stock at an exercise price of $10.91 per share, in
connection with a technology support and development arrangement.

     A summary of outstanding warrants as of December 31, 1998 follows:

<TABLE>
<CAPTION>
     Number          Exercise       Expiration
   Outstanding        Price            Date
   -----------      ---------       ----------
   <S>              <C>            <C>
       703,629         $4.73         June 2001
        58,021         10.34         July 2001
       458,295         10.91       November 2002
       103,764         10.91         July 2002
         8,466          4.73        August 2005
         5,802         10.34        August 2006
     ---------
     1,337,977
     ---------
     ---------
</TABLE>


                                      54

<PAGE>

STOCK OPTION PLANS

     In September 1997, the Company adopted the 1997 Equity Incentive Plan and
reserved a total of 1,750,000 shares for issuance to employees, officers,
directors, consultants, independent contractors, and advisors. The number of
shares outstanding will increase automatically by 5% of the outstanding shares
each year unless waived by the Board of Directors. In addition, any shares that,
upon the effective date of the 1997 plan, were available for the grant of
options under earlier plans were rolled over and are available for issuance
under the 1997 plan; also, any shares that subsequently become available under
the earlier plans, roll over and become available for issuance under the 1997
plan. The 1997 Equity Incentive Plan expires in September 2007. Also in
September 1997, the Company adopted the 1997 Directors' Stock Option Plan under
which 100,000 shares of common stock have been reserved for issuance. The
Directors' Plan provides for the grant of nonstatutory stock options to
non-employee directors of the Company and expires in September 2007.

     In December 1996, the Company adopted the 1996 Equity Incentive Plan and
reserved 185,185 shares of common stock for issuance to employees, officers,
directors, consultants, independent contractors and advisors. In June 1997, the
Company increased the number of shares reserved for issuance under the 1996
Equity Incentive Plan by 222,222. The 1996 Equity Incentive Plan expires in
December 2006.

     In December 1995, the Company adopted the Executive Officer Incentive Plan
and reserved 370,370 shares of common stock for issuance to the Company's chief
executive officer and other senior executive officers. In 1996 and 1997, the
Company increased the number of shares reserved under this plan by 129,630 and
62,963, respectively. In the event of a merger, consolidation, liquidation or
similar change of control transaction as a result of which the participants'
responsibilities and position with the Company are materially diminished,
options granted under this plan become fully exercisable and remain so for one
year thereafter. This plan will expire in December 2005.

     In October 1993, the Company adopted the 1993 Equity Incentive Plan, and
reserved 185,185 shares of common stock for issuance to employees, officers,
directors, consultants and advisors. In 1995, 1996 and 1997, the Company
increased the number of shares reserved for issuance under the 1993 Equity
Incentive Plan by 351,851, 425,925 and 66,340 shares, respectively. The 1993
Equity Incentive Plan expires in October 2003.

     Options, under all of the above plans, may be granted at prices not less
than fair market value at the date of grant, as determined by the Board of
Directors, in case of incentive options (110% in certain instances), and not
less than 85% of fair market value at the date of grant, as determined by the
Board of Directors, in case of nonqualified options, restricted stock awards and
stock bonus awards (100% in certain instances). Options and stock awards
generally vest 12.5% six months from date of grant and 2.0833% per month
thereafter; stock options expire three months after termination of employment
and five years from date of grant.


                                      55

<PAGE>

     Activity under the Plans is set forth below (in thousands, except per share
data):

<TABLE>
<CAPTION>
                                                                                        Weighted
                                                                        Value of         Average
                                         Shares          Options         Options        Exercise
                                        Available      Outstanding     Outstanding        Price
                                        ---------      -----------     -----------      --------
<S>                                     <C>            <C>             <C>              <C>
Balances, January 1, 1996                    696             309         $   146          $ 0.47
     Additional shares reserved              741               -               -               -
     Options granted                      (1,267)          1,267             865            0.68
     Stock repurchased                        11               -               -               -
     Options canceled                         32             (32)            (14)           0.44
     Options exercised                         -             (65)            (34)           0.65
                                          ------           -----         -------
Balances, December 31, 1996                  213           1,479             963            0.65
     Additional shares reserved            2,409               -               -               -
     Options granted                        (862)            862           5,332            6.19
     Stock bonus awards                      (13)              -               -               -
     Stock repurchased                        12               -               -               -
     Options canceled                        265            (265)           (316)           1.19
     Options exercised                         -            (150)            (94)           0.13
                                          ------           -----         -------
Balances, December 31, 1997                2,024           1,926           5,885            3.06
     Options granted                      (1,445)          1,445           4,527            3.13
     Stock bonus award                        (1)              -               -               -
     Options canceled                        511            (511)         (1,871)           3.66
     Options exercised                                      (125)            (87)           0.70
                                          ------           -----         -------
Balances, December 31, 1998                1,089           2,735         $ 8,454          $ 3.09
                                          ------           -----         -------
                                          ------           -----         -------
</TABLE>

     For the years ended December 31, 1998, 1997 and 1996, the weighted average
fair value of options granted was $2.34, $1.40 and $0.81 per share,
respectively.


                                      56

<PAGE>

     As of December 31, 1998, the stock options outstanding were as follows (in
thousands, except per share data):

<TABLE>
<CAPTION>
                                                      Weighted
                                                       Average             Weighted                              Weighted
         Range of                                     Remaining            Average                                Average
         Exercise                  Number            Contractual           Exercise            Number            Exercise
          Prices                Outstanding          Life (Years)           Price            Exercisable           Price
      ---------------         ---------------      ---------------     ---------------     ---------------    ---------------
      <S>                     <C>                  <C>                 <C>                 <C>                <C>
      $0.27 to $0.54                      790              2.16              $ 0.54                558             $ 0.54
      $1.08 to $2.19                    1,136              4.52                2.08                 72               1.34
      $2.70 to $5.13                      304              4.90                3.98                101               3.76
      $5.31 to $9.75                      283              3.89                7.04                111               6.72
     $11.04 to $11.05                     223              3.73               11.04                 75              11.04
                                  -----------                                                 --------
                                        2,736              3.75              $ 3.09                917             $ 2.56
                                  -----------                                                 --------
                                  -----------                                                 --------
</TABLE>

     As of December 31, 1997 and 1996, options to purchase 539,000 and 294,000
shares were exercisable at an average weighted exercise price of $0.76 and $0.54
per share, respectively.

     The Company has elected to continue to follow the provisions of APB No.25,
"Accounting for Stock Issued to Employees," for financial reporting purposes and
has adopted the disclosure-only provisions of SFAS No.123 ("SFAS No.123").
Accordingly, no compensation cost has been recognized for the Company's stock
option plans. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for awards in years ended
1998, 1997 and 1996 consistent with the provisions of SFAS No.123, the Company's
net loss and net loss per share for 1998, 1997, and 1996 would have been
increased to the pro forma amounts indicated below (in thousands, except per
share amounts):

<TABLE>
<CAPTION>
                                                            Year Ended December 31,
                                             -------------------------------------------------
                                                 1998               1997            1996
                                             ------------       ------------    ------------
<S>                                          <C>                <C>             <C>
   Net loss as reported                        $(24,625)          $(21,602)       $ (8,515)
                                               --------           --------        --------
                                               --------           --------        --------

   Net loss - pro forma                        $(25,109)          $(21,670)       $ (8,548)
                                               --------           --------        --------
                                               --------           --------        --------

   Net loss per share - as reported            $  (2.37)          $  (6.10)       $  (3.36)
                                               --------           --------        --------
                                               --------           --------        --------

   Net loss per share - pro forma              $  (2.41)          $  (6.12)       $  (3.37)
                                               --------           --------        --------
                                               --------           --------        --------
</TABLE>


                                      57

<PAGE>

     The above pro forma disclosures are not necessarily representative of the
effects on reported net income or loss for future years.

     In accordance with the provisions of SFAS No. 123, the fair value of each
option is estimated using the following weighted average assumptions for grants
during 1998, 1997 and 1996: dividend yield of 0%, volatility of 0% for options
issued prior to the Company's Initial Public Offering, 75% thereafter in 1997,
and 113% in 1998, risk-free interest rates of 5.5% to 6.7% at the date of grant
and an expected term of four years.

EMPLOYEE STOCK PURCHASE PLAN

In September 1997, the Company's Board of Directors approved an Employee Stock
Purchase Plan. Under this plan, employees of the Company can purchase Common
Stock through payroll deductions. A total of 225,000 shares have been reserved
for issuance under this plan. As of December 31, 1998, no shares had been
purchased and all employees have withdrawn from the plan.

12.  INCOME TAXES

     Temporary differences which gave rise to significant portions of deferred
tax assets are as follows (in thousands):

<TABLE>
<CAPTION>
                                                            December 31,
                                                      ------------------------
                                                         1998          1997
                                                      ----------    ----------
  <S>                                                 <C>           <C>
  Current deferred assets:
       Inventory reserves                              $  1,307      $  1,260
       Unearned revenue                                     281           108
       Accrued liabilities                                1,355           500
                                                       --------      --------
       Total current deferred assets                      2,943         1,868
       Valuation allowance                               (2,943)       (1,868)
                                                       --------      --------
                                                       $      -      $      -
                                                       --------      --------
                                                       --------      --------
  Long-term deferred assets:
       Net operating loss carryforwards                $ 18,205      $ 10,027
       Capitalized research expenditures                  4,128         4,641
       Tax credit carryforwards                           1,905         1,365
       Depreciation and amortization                        411          (100)
                                                       --------      --------
       Total long-term deferred assets                   24,649        15,933
       Valuation allowance                              (24,649)      (15,933)
                                                       --------      --------
                                                       $      -      $      -
                                                       --------      --------
                                                       --------      --------
</TABLE>

     In accordance with generally accepted accounting principles, a valuation
allowance must be established for a deferred tax asset if it is uncertain that a
tax benefit may be realized from the asset in the future. Management believes
that, based on a number of factors, the available objective evidence creates
sufficient uncertainty regarding the realizability of the deferred tax assets
such that a full valuation allowance has


                                      58

<PAGE>

been recorded. These factors include the Company's history of losses, recent
increases in expense levels, the fact that the market in which the Company
competes is intensely competitive and characterized by rapidly changing
technology, the lack of carry back capacity to realize deferred tax assets,
and the uncertainty regarding market acceptance of the Company's products.
The Company will continue to assess the realizability of the deferred tax
assets in future periods. The valuation allowance increased by $9,790,000,
and $9,285,000 in 1998 and 1997, respectively. The Company had federal and
state net operating loss carry forwards of approximately $47,030,000 and
$25,049,000, respectively, as of December 31, 1998 available to offset future
regular and alternative minimum taxable income. The Company's net operating
loss carry forwards expire in 1999 through 2018, if not utilized.

     The Company has federal and state credit carryovers as follows:

<TABLE>
<CAPTION>
                                                                     Tax           Expiration
                                                                  Reporting           Dates
                                                                  ---------        ----------
     <S>                                                         <C>               <C>
     Research and development credit                             $    1,127          2007-2013
     State research and development credit                              656
</TABLE>

     The Company's net operating loss and tax credit carry forwards may be
subject to limitation as a result of ownership changes, as defined by tax laws.

13.  EMPLOYEE BENEFIT PLAN

     The Company adopted a defined contribution retirement plan (the "Plan"),
which qualifies under Section 401(k) of the Internal Revenue Code of 1986. The
Plan covers essentially all employees. Eligible employees may make voluntary
contributions to the Plan up to 15% of their annual compensation and the
employer is allowed to make discretionary contributions. In 1998, 1997, 1996,
the Company made no employer contributions.

14.  RELATED PARTY TRANSACTIONS

     The Company had net sales to two stockholders of $482,000 and $21,000,
respectively, for the year ended December 31, 1998. The Company had net sales of
$128,000 to one stockholder for the year ended December 31, 1997. The Company
had net sales to two stockholders of $1,163,000 and $568,000, respectively, for
the year ended December 31, 1996.

     In September 1997, an executive officer of the Company contributed $500,000
or 7% of the proceeds received from the issuance of the $6,882,000 convertible
subordinated note payable as referred to at Note 6.

15.  BUSINESS SEGMENT AND MAJOR CUSTOMERS

     The Company operates in a single industry segment and primarily sells its
products to customers in the U.S. There were no international sales in 1998.
International sales accounted for 13.5% and 10.1% of net sales for the years
ended December 31, 1997 and 1996, respectively. International sales in any one
geographic area were insignificant.


                                      59

<PAGE>

     Individual customers that comprise 10% or more of the Company's net sales
are as follows:

<TABLE>
<CAPTION>
                                              Year Ended December 31,
                                         ----------------------------------
                                           1998           1997          1996
                                        ----------     ----------    ----------
           <S>                          <C>            <C>           <C>
           RCN Corporation                  25%            13%           --
           Knology Holdings, Inc.           13%            --            --
           Jones Intercable                 --             12%           --
           AT&T Corporation                 --             --            41%
           Intel Corporation                --             --            21%
</TABLE>

16.  SUBSEQUENT EVENTS

     In March 1999, Pacific Monolithics, Inc. (which had filed a voluntary
petition under Chapter 11 of the U.S. Bankruptcy Code and is suing as
debtor-in-possession) filed a lawsuit in Santa Clara County Superior Court,
California against the Company, its five directors (one of whom is an
officer), a former director (who was subsequently dismissed), a former
officer and PwC. The lawsuit concerns an agreement which the Company entered
into in March 1998 to acquire Pacific Monolithics through a merger, which
acquisition was never consummated. The complaint alleges that the Company
induced Pacific Monolithics to enter into the agreement by providing it with
financial statements, and by making other representations concerning the
Company's financial condition and results of operations, which were false and
misleading, and further alleges that the Company wrongfully failed to
consummate the acquisition. The complaint claims the defendants committed
breach of contract and breach of implied covenant of good faith and fair
dealing, as well as fraud and negligent misrepresentation. The complaint
seeks compensatory and punitive damages according to proof, plus attorneys'
fees and costs. The Company does not believe, based on current information
(which is only preliminary, since discovery has not commenced in the
litigation), that the outcome of this litigation will have a material adverse
impact on the Company's financial statements.

     In January 1999, the Company entered into retention agreements with
three executive officers (each of whom has since left the Company), and with
an officer who has since become an executive officer. Under the agreements,
as subsequently modified, each officer received an increase in salary and the
right to receive a bonus if the Company is sold and the officer continues
with the Company through the closing of such sale and for a short time
thereafter. The bonus would be from $50,000 to $200,000, depending on the
sale price. In addition, the officers received options to purchase 231,279,
262,152, 141,982 and 200,000 shares of Common Stock, respectively. Each
option has an exercise price of $0.50 per share and vests over four years,
except that vesting accelerates in the event of a sale of the Company. The
agreements also provide for three months' severance payment in the event that
an officer's employment is terminated by the Company without cause.

     In March 1999, the Company entered into a severance agreement with an
executive officer whereby the Company paid him three months' severance pay upon
the termination of his employment, and the Company agreed that he would receive
the contingent bonus and accelerated vesting of stock options provided for in
his retention agreement (referred to above) if the Company was acquired prior to
April 1, 2000.

                                      60

<PAGE>

     In January 1999, the Company's Board of Directors adopted the 1999 Officer
Stock Option Plan (the "1999 Officer Plan") under which the Company may grant to
its officers options up to 1,000,000 shares of Common Stock in the aggregate. In
May 1999, the Board of Directors adopted the 1999 Stock Option Plan (the "1999
Employee Plan") under which the Company may grant its employees options to
purchase up to 1,500,000 shares of Common Stock in the aggregate. Options for
929,048 and 931,817 shares have been granted and are outstanding under the 1999
Officer Plan and the 1999 Employee Plan, respectively.

     In May 1999, the Company granted to the executive officers additional
options to purchase 40,000 and 275,000 shares of Common Stock, respectively, at
$0.50 per share and vesting over four years, except that vesting accelerates in
the event of a sale of the Company.





                                      61


<PAGE>

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

     On June 17, 1998, PwC (then Coopers & Lybrand), our independent
accountants, notified us that its reports with respect to our financial
statements as of December 31, 1997 and for the year then ended, and as of
September 30, 1997 and for the nine months then ended, should no longer be
relied upon and that PwC's consent included with our Registration Statement on
Form S-4 filed with the Securities and Exchange Commission on May 7, 1998 in
connection with the pending acquisition by us of Pacific Monolithics, Inc. was
being withdrawn (the "Withdrawn Reports").

     On July 9, 1998, PwC resigned as our independent auditors. PwC stated
that it was not specifying a reason for its resignation but informed us, for
the first time, that PwC was of the view that our 1997 financial statements
(which PwC had audited and reported upon) needed to be restated. PwC
indicated the restatement would relate to revenue recognition but did not
identify the items or quantify the amounts involved. PwC further informed us
that PwC believed it was not in the best interests of PwC or the Company for
PwC to continue to act as our independent auditors and that PwC would not
address any restatement of the Company's financial statements. PwC
acknowledged that we have cooperated fully with PwC in connection with its
review of our financial statements and that there were no disagreements
between PwC and us on any matter of our accounting principles or practices,
financial statement disclosure or auditing scope or procedure during the two
most recent fiscal years and through July 9, 1998. None of the Withdrawn
Reports on our financial statements contained an adverse opinion or a
disclaimer of opinion or was qualified or modified as to uncertainty, audit
scope or accounting principles.

     On August 12, 1998, with the approval of the Board of Directors, we
engaged AA as our independent accountants to audit the financial statements
of the Company as of December 31, 1997 and for the year then ended and to act
as our independent accountants on a continuing basis. On November 24, 1998,
AA resigned as our independent public accountants for the Company. AA
informed us that, in AA's view, material weaknesses existed in our internal
controls of a nature that prevented AA from being able to form an opinion on
our conclusions as to the appropriate timing and amount of revenue
recognition for the purposes of our financial statements for the year ended
December 31, 1997.

     During the course of its work, AA had notified us and discussed with our
audit committee AA's conclusion that (i) AA needed to expand significantly the
scope of its audit, which it did with our approval and cooperation, and (ii)
while AA did not complete an audit of our 1997 financial statements, those
financial statements were materially misstated. There were no disagreements
between AA and us on any matter of our accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.

     On December 22, 1998, with the approval of the Board of Directors, we
engaged Hein as our independent accountants to audit our financial statements
as of December 31, 1997 and for the year then ended and to act as our
independent accountants on a continuing basis, which engagement included
performing an audit of our financial statements as of December 31, 1998 and
for the year then ended.

     Prior to hiring Hein, neither we nor anyone acting on our behalf consulted
Hein during our two most recent fiscal years or the subsequent interim periods.


                                      62

<PAGE>

PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.

     The following table sets forth certain information regarding our
officers and directors as of June 1, 1999:

<TABLE>
<CAPTION>
Name                      Age        Position
---------                -----    --------------
<S>                      <C>       <C>
Carl S. Ledbetter        50        Chief Executive Officer and
                                   Chairman of the Board of
                                   Directors (1)
Judson W. Goldsmith      60        President and Chief Operating Officer
                                   Chief Financial Officer and Secretary (1)
Thara Edson              41        Corporate Controller (1)
Thomas Bissett           48        Vice President, Operations
Frederick Enns           48        Vice President and Chief
                                   Technology Officer
John J. Wong             47        Vice President,
                                   Engineering
James R. Flach (2) (3)   51        Director
Stephen E. Halprin (3)   61        Director
Gary M. Lauder           37        Director
Douglas M. Leone (2)     41        Director
</TABLE>
------------------------------------
(1)   Executive Officers.
(2)   Member of the Compensation Committee.
(3)   Member of the Audit Committee.
(4)   Mr. Strachman ceased being a Director in February 1998.

     Carl S. Ledbetter joined the Company in January 1996 as its President and
Chief Executive Officer, and in August 1996, he became Chairman of the Board.
Prior to joining the Company, he served in various positions at AT&T from April
1993 to January 1996, most recently as President of Consumer Products. From 1991
until April 1993, Mr. Ledbetter was Vice President of Sun Microsystems and
General Manager of SunSelect, Sun's PC networking business. He is also a
director of Software Spectrum, Inc., a software distributor. Mr. Ledbetter holds
a B.S. in Mathematics from University of Redlands, an M.A. in Mathematics from
Brandeis University and a Ph.D. in Mathematics from Clark University.

     Judson W. Goldsmith joined the Company in November 1998 as Vice President,
Finance and Administration, Chief Financial Officer and Secretary. In March
1999, he assumed the additional responsibilities of President and Chief
Operating Officer. Prior to joining the Company, Mr. Goldsmith was a manager and
a management consultant working with troubled technical and non-technical
companies. Mr. Goldsmith holds a B.A. in Economics from Dartmouth College and an
M.B.A. from the University of Washington.

     Thara Edson joined the Company in August 1998 as its Controller and was
promoted to Corporate Controller in September 1998. Prior to joining the
Company, she served as Controller for Connectware LLC (an AMP Company) and
Compressent Corporation. From 1994 to January 1997, Ms. Edson served as Director
of Finance with Streamlogic Corporation, a storage systems company. Ms. Edson
received a


                                      63

<PAGE>

B.Com. in Accounting from Madras University and an M.B.A. in Finance and
Accounting from the University of Nebraska. Ms. Edson is also a Certified
Management Accountant.

     Thomas E. Bissett joined the Company in July 1996 as Director of Operations
and was promoted to Vice President of Operations March of 1999. From May 1991 to
July 1996, Mr. Bissett was Vice President of Operations and member of founding
team of Semaphore Communications Corporation, a company that designed and
manufactured network security products. Mr. Bissett holds a B.S. and M.E. in
Mechanical Engineering from the University of Utah and an M.B.A from San Jose
State University.

     Frederick Enns joined the Company in September 1994 as Senior Architect and
has been Vice President and Chief Technology Officer since August 1996. From
November 1992 to September 1994, he served as Director of Hardware Engineering
of Hughes LAN Systems, a networking equipment manufacturer. Mr. Enns received a
B.S. in Physics from the University of California, San Diego, an M.S. in Physics
from the University of Washington and an M.S. in Electrical Engineering from
Stanford University.

     John J. Wong joined the Company in August 1997 as Director of Hardware
Engineering and was recently promoted to Vice President of Engineering. Prior to
joining the Company, he worked for Mitsui Comtek as Director of Engineering,
where he developed Internet Appliance products. From July 1988 to February 1997,
Mr. Wong worked for the systems group of Macronix, Inc., which later became
Current Logic Systems, an OEM manufacturer of data/fax modem products, as Vice
President of Engineering and most recently as President and CEO. Mr. Wong
received a B.S. in EECS from University of California, Berkeley.

     James R. Flach has been a director of the Company since May 1995, and he
served as acting Chief Executive Officer of the Company from November 1995 to
January 1996. Since September 1992, Mr. Flach has been an executive partner of
Accel Partners, a venture capital firm. Since September 1992, he has also been
the President of Flach & Associates, a Management Services firm, and since March
1997, he has been the Chief Executive Officer of Redback Networks, a network
products company. From May 1990 to August 1992, Mr. Flach was Vice President of
Intel, serving as the General Manager of Intel's Personal Computer Enhancement
Division. He holds a B.S. in Physics from Rensselaer Polytechnic Institute and
an M.S. in Applied Mathematics from The Rochester Institute of Technology.

     Stephen E. Halprin has been a director of the Company since September 1992.
He has been a general partner of OSCCO Management Partners, a venture capital
firm since 1984 and a general partner of OSCCO Management Partners III since
1989. He currently serves as a director of Landec Corporation, a materials
science company. He holds a B.S. in Industrial Management from the Massachusetts
Institute of Technology and an M.B.A. from the Stanford University Graduate
School of Business.

     Gary M. Lauder has been a director of the Company since October 1994. Since
1986 he has been the General Partner of Lauder Partners, a venture capital
partnership formed by Mr. Lauder that focuses on advanced technologies for the
cable TV marketplace. Since May 1995, Mr. Lauder has been Vice-Chairman of ICTV,
Inc., a developer of interactive cable television technology. Mr. Lauder holds a
B.A. in International Relations from the University of Pennsylvania, a B.S. in
Economics from the Wharton School and an M.B.A. from the Stanford University
Graduate School of Business.

     Douglas M. Leone has been a director of the Company since May 1995. He has
been associated with Sequoia Capital, a venture capital firm, since June 1988
and has been a general partner of that firm since April 1993. He currently
serves as a director of Infinity Financial Technology, a client server software
company, and International Network Services, a networking services company. Mr.
Leone holds a B.S. from Cornell University, an M.S. from Columbia University and
an M.S. in Management from the Massachusetts Institute of Technology.

     Each officer serves at the discretion of the Board of Directors. Our
certificate of incorporation and bylaws provide for a classified Board of
Directors. Accordingly, the terms of the office of the Board of Directors have


                                      64

<PAGE>

been divided into three classes. Class I and II will expire at the annual
meeting of the stockholders to be held in 1999; and Class III will expire at the
annual meeting of the stockholders to be held in 2000. At each annual meeting of
the stockholders, beginning with the 1999 annual meeting, the successors to the
directors whose terms will then expire will be elected to serve from the time of
election and qualification until the third annual meeting following election and
until their successors were duly elected and qualified, or until their earlier
resignation or removal, if any. Messrs. Halprin and Leone were designated as
Class I directors; Mr. Flach was designated as a Class II director; and Messrs.
Lauder and Ledbetter were designated as Class III directors. To the extent that
there is an increase in the number of directors, additional directorships
resulting therefrom will be distributed among the three classes so that, as
nearly as possible, each class will consist of an equal number of directors.

BOARD COMMITTEES

     The Audit Committee of the Board of Directors consists of Mr. Flach and Mr.
Halprin. The Audit Committee reviews our financial statements and accounting
practices, makes recommendations to the Board regarding the selection of
independent auditors and reviews the results and scope of the audit and other
services provided by our independent auditors. The Compensation Committee of the
Board consists of Mr. Flach and Mr. Leone. The Compensation Committee makes
recommendations to the Board concerning salaries and incentive compensation for
our officers and employees and administers our employee benefit plans.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) of the Exchange Act requires our directors and executive
officers and persons who own more than 10% of our Common Stock ("10%
Stockholders") to file with the Securities and Exchange Commission initial
reports of ownership on a Form 3 and reports of changes in ownership of our
Common Stock and other equity securities on a Form 4 or Form 5. Such executive
officers, directors and 10% Stockholders are required by SEC regulations to
furnish us with copies of all Section 16(a) forms they file. Based solely on its
reviews of the copies of such forms furnished to the Company and written
representations from the executive officers and directors, we believe that all
of the Company's directors, executive officers and 10% Stockholders made all the
necessary filings under Section 16(a) during 1998, except that Mr. Goldsmith had
a late filing of Form 3.


                                      65


<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION

     The following table sets forth all compensation awarded to, earned by or
paid for services rendered to us in all capacities during 1998 by (i) our Chief
Executive Officer and (ii) our other executive officers (other than the Chief
Executive Officer) who were serving as executive officers at December 31, 1998
and had salary and bonus for 1998 of $100,000 or more (three persons) and (iii)
two additional individuals who were among the four most highly compensated
executive officers during 1998 (other than the Chief Executive Officer) but who
were not serving as executive officers at December 31, 1998 (collectively, the
"Named Executive Officers"):

                             SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                                                    LONG-TERM
                                                                                                   COMPENSATION
                                                                                                      AWARD
                                                         ANNUAL COMPENSATION                        -----------
                                   ---------------------------------------------------------        SECURITIES
                                                                                OTHER ANNUAL        UNDERLYING
NAME AND PRINCIPAL POSITIONS       YEAR       SALARY             BONUS          COMPENSATION         OPTIONS (#)
----------------------------       ----      --------          ---------        ------------        ----------
<S>                                <C>       <C>               <C>              <C>                 <C>
Carl S Ledbetter                   1998      $209,102                --          $ 59,231(1)               --
  Chief Executive Officer          1997       187,500          $ 36,853          $ 77,924(1)(2)       170,000
                                   1996       175,000                --            61,299(1)          487,919

Jane Zeletes (3 )                  1998       153,333            27,113(4)             --              88,139
  Vice President, Marketing        1997        75,889            41,197(4)            750(5)           53,843

Vishwas Godbole (6)                1998       167,208                --                --             124,186
  Vice President, Engineering      1997        77,798            30,125             5,062(5)          137,976

Daniel E. Steimle (7)              1998        89,204            75,000            68,750(8)            6,250
  Vice President, Finance and      1997        68,750            86,250                --             111,111
  Administration and Chief
  Financial Officer

William Daniher (9 )               1998       105,385            29,300                --             231,279

Gustavo Ezcurra (10)               1998       101,677            57,263(11)            --              20,000
  Vice President, Sales            1997       126,875            97,154(11)         1,129(2)           14,815
                                   1996        17,625            12,835(11)            --              77,876
</TABLE>

--------

(1)  Includes temporary living expenses paid by the Company of $59,231, $72,000
     and $61,299 to Mr. Ledbetter in 1998, 1997 and 1996, respectively.
(2)  Includes value of stock bonuses of $5,924 and $1,129 for Messrs. Ledbetter
     and Ezcurra, respectively.
(3)  Ms. Zeletes joined the Company in March 1997 and left in March 1999.
(4)  Commissions paid in 1998 and 1997.
(5)  Includes value of stock bonuses of $5,062 and $750 for Mr. Godbole and Ms.
     Zeletes, respectively.
(6)  Mr. Godbole joined the Company in May 1997 and left in April 1999.
(7)  Mr. Steimle joined the Company in July 1997 and left in May 1998.
(8)  Severance pay for Mr. Steimle.
(9)  Mr. Daniher joined the Company in May 1998 and left in March 1999.
(10) Mr. Ezcurra joined the Company in September 1996 and left in July 1998.
(11) Includes commissions of $57,268 in 1988,$94,904 in 1997 and $12,835 in
     1996.


                                      66

<PAGE>

     In November 1998, Mr. Goldsmith joined the Company as Vice President,
Finance and Chief Financial Officer. Under the terms of his employment, he
received a salary of $175,000 per annum and options to purchase 275,000 shares
of Common Stock at $2.19 per share and vesting over four years, and he will be
entitled to receive bonuses in 1999 if we meet certain corporate milestones,
including completing the audit of our financial statements, filing with the
Securities and Exchange Commission the annual and quarterly reports required
under the Exchange Act, holding an annual stockholders meeting, resumption of
trading on Nasdaq, resolving the class action lawsuits that have been brought
against us, obtaining certain financing and consummating the sale of the Company
within certain parameters. If all the milestones are met within the time period
specified, the aggregate amount of the bonuses could be approximately $220,000.

     The following table sets forth further information regarding option grants
during 1998 pursuant to our Executive Officer Plan and our 1996 Equity Incentive
Plan to each of the Named Executive Officers. The table sets forth the
hypothetical gains or "option spreads" that would exist for the options at the
end of their respective five or ten year terms. These gains are based on assumed
rates of annual compound stock price appreciation of 5% and 10% from the date
the option was granted to the end of the option term:


                                OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
                                                                                        POTENTIAL REALIZABLE
                        NUMBER OF     PERCENTAGE OF                                      VALUE  AT ASSUMED
                       SECURITIES     TOTAL OPTIONS                                        ANNUAL RATES OF
                       UNDERLYING      GRANTED TO      EXERCISE                        STOCK PRICE APPRECIATION
                        OPTIONS         EMPLOYEES        PRICE          EXPIRATION        FOR OPTION TERM (2)
NAME                   GRANTED (1)      IN 1998        PER SHARE           DATE           5%           10%
----                   -----------    -------------   -----------       ----------     -------      --------
<S>                    <C>            <C>             <C>               <C>            <C>          <C>
Carl S. Ledbetter           --            --              --                --             --           --

Jane Zeletes            10,000            0.67        $   5.00           01/21/03       13,814       30,526
                        78,139            5.24            2.19           09/09/03       47,279      104,473

Vishwas Godbole         20,000            1.34            5.00           01/21/03       27,628       61,051
                       104,186            6.99            2.19           09/09/03       63,038      139,298

Daniel E. Steimle        6,250            0.42            5.00           01/21/03        8,634       19,078

William Daniher         75,000            5.03            6.00           05/07/03      124,326      274,729
                       156,643           10.50            2.19           09/09/03        94778      209,434

Gustavo Ezcurra         20,000            1.34            5.00           01/21/03       27,628       61,051
</TABLE>

-----------------
(1)  Options granted pursuant to the Executive Officer Plan and the 1996 Equity
     Incentive Plan in 1998 generally have been incentive stock options or
     non-qualified stock options that were granted at fair market value and vest
     over a four-year period so long as the individual is employed by the
     Company. Options granted to executive officers generally expire five years
     from the date of grant.
(2)  The 5% and 10% assumed annual rates of stock price appreciation are
     mandated by the rules of the Securities and Exchange Commission and do not
     represent the Company's estimate or projection of future common stock
     prices.


                                      67

<PAGE>

     The following table sets forth the number of shares acquired upon the
exercise of stock options during 1998 and the number of shares covered by both
exercisable and unexercisable stock options held by each of the Named Executive
Officers as of December 31, 1998. Also reported are values of "in-the-money"
options, which represent the positive spread between the respective exercise
prices of outstanding stock options and the fair market value of our Common
Stock as of December 31, 1998 ($0.50) as determined by the Board of Directors.


               AGGREGATED OPTION EXERCISES IN 1998 AND YEAR-END VALUES
<TABLE>
<CAPTION>
                                                            NUMBER OF SECURITIES            VALUE OF UNEXERCISED
                                                           UNDERLYING UNEXERCISED           IN-THE-MONEY OPTIONS
                            SHARES                          OPTIONS AT YEAR-END                AT YEAR-END
                          ACQUIRED ON       VALUE     --------------------------------     --------------------------
NAME                      EXERCISE(#)      REALIZED   EXERCISABLE        UNEXERCISABLE     EXERCISABLE  UNEXERCISABLE
----                      -----------      --------   -----------        -------------     -----------  -------------
<S>                       <C>              <C>        <C>                <C>               <C>           <C>
Carl S. Ledbetter             --             --            394,854             236,064           --             --

Jane Zeletes                  --             --             21,158             120,685           --             --

Vishwas Godbole               --             --             58,823             202,392           --             --

Daniel E. Steimle             --             --             43,285                  --           --             --

William Daniher               --             --             10,938             220,341           --             --

Gustavo Ezcurra             25,000         $27,750            --                  --             --             --
</TABLE>

DIRECTOR COMPENSATION

     Our directors do not receive cash compensation for their services as
directors but are reimbursed for their reasonable expenses in attending meetings
of the Board of Directors. Each director who is not an employee is eligible to
participate in our 1997 Directors Stock Option Plan (the "Directors Plan"). Each
eligible director who first becomes a director on or after our initial public
offering in November 1997 will initially be granted an option for 15,000 shares
(an "Initial Grant") on the later of the effective date of the initial public
offering or the date such director first becomes a director. At each annual
meeting of stockholders thereafter, each eligible director will automatically be
granted an additional option to purchase 5,000 shares if such director has
served continuously as a member of the Board of Directors since the date of such
director's Initial Grant (or since the effective date of the initial public
offering if such director did not receive an Initial Grant). All options issued
under the Directors Plan will vest as to 25% of the shares on each anniversary
of the date of grant, provided the optionee continues as a member of the Board
of Directors or as a consultant to the Company. The exercise price of all
options granted under the Directors Plan will be the fair market value of the
Common Stock on the date of grant. To date, no director has been eligible to
participate under the Director Plan.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     None of the members of the Compensation Committee of the Board of Directors
was an officer or employee of the Company during 1998. None of our executive
officers serves as a member of the board of directors or compensation committee
of any entity that has one or more executive officers serving on our Board of
Directors or Compensation Committee.

                                      68


<PAGE>

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information to the extent known by
us with respect to beneficial ownership of our Common Stock as of December 31,
1998 by (i) each stockholder known by the Company to be the beneficial owner of
more than 5% of the Company's Common Stock, (ii) each director of the Company,
(iii) each of the Named Executive Officers and (iv) all executive officers and
directors as a group.


<TABLE>
<CAPTION>
                                                      NUMBER OF SHARES               PERCENTAGE OF SHARES
NAME OF BENEFICIAL OWNER                              BENEFICIALLY OWNED (1)         BENEFICIALLY OWNED
------------------------                              ----------------------         --------------------
<S>                                                  <C>                            <C>
Intel Corporation (2)                                    1,207,020                            8.0%
James R. Flach
   Accel Partners (3)                                      879,562                            5.8
Douglas M. Leone
 Sequoia Capital (4)                                       870,691                            5.8
Strachman Family Revocable Trust (5)                       834,210                            5.5
Carl S. Ledbetter (6)                                      423,363                            2.8
Gary M. Lauder (7)                                         276,049                            1.8
Vishwas Godbole (8)                                         66,303                             *
Gustavo Ezcurra (9)                                         25,000                             *
Jane Zeletes (10)                                           23,950                             *
William Daniher (11)                                        14,063                             *
Stephen E. Halprin (12)                                      2,160                             *
Danial E. Steimle                                               --                             *
All executive officers and directors
 as a group (10 persons) (13)                            2,580,215                           17.1

</TABLE>

----------------
*    Represents less than 1% of the Company's outstanding Common Stock.

(1)  Unless otherwise indicated below, the persons and entities named in the
     table have sole voting and sole investment power with respect to all shares
     beneficially owned, subject to community property laws where applicable.
     Shares of common stock subject to options or warrants that are currently
     exercisable or exercisable within 60 days of December 31, 1998, are deemed
     to be outstanding and to be beneficially owned by the person holding such
     options warrants for the purpose of computing the percentage ownership of
     such person but are not treated as outstanding for the purpose of computing
     the percentage ownership of any other person.

(2)  Intel's address is 2200 Mission College Boulevard, Santa Clara, CA 95052.

(3)  Represents ownership by the following entities associated with Accel
     Partners: 545,193 shares and 250,677 shares subject to warrants held by
     Accel IV, L.P., 25,594 shares and 11,769 shares subject to warrants held by
     Accel Investors '95 L.P., 13,095 shares and 6,022 shares subject to
     warrants held by Ellmore C. Patterson Partners, 11,309 shares and 5,202
     shares subject to warrants held by Accel Keiretsu L.P. Also includes 10,701
     shares subject to options exercisable within 60 days of December 31, 1998
     held by Mr. Flach granted in connection with services performed by Mr.
     Flach for the Company. Mr. Flach, a director of the Company, is an
     executive partner of Accel Partners and holds no voting or dispositive
     power with respect to any of these shares. The address of Mr. Flach and the
     Accel partnerships is 428 University Ave., Palo Alto, CA 94301.

(4)  Represents 595,191 shares and 275,497 shares subject to warrants held by
     Sequoia Capital VI, 29,761 shares and 13,776 shares subject to warrants
     held by Sequoia Technology Partners VI, ("STP VI"), 16,932 shares and 440
     shares subject to warrants held by Sequoia XXIV and 6,877 shares and 10,581


                                      69

<PAGE>

     shares subject to warrants held by Sequoia 1995. Mr. Leone, a director of
     the Company, is a general partner of STP VI and of the general partner of
     Sequoia Capital VI. The address of Mr. Leone and the Sequoia funds is 3000
     Sand Hill Road, Menlo Park, CA 94025.

(5)  Mr. Strachman, a trustee of the Strachman Family Revocable Trust, was a
     co-founder of the Company and served as its President and Chief Executive
     Officer from June 1990 until his resignation in July 1995. Mr. Strachman
     resigned as a director in February 1998. Mr. Strachman's address is c/o
     Ultracom Communications, Inc., 21580 Stevens Creek Blvd., Cupertino, CA
     95014.

(6)  Includes 422,266 shares subject to options exercisable within 60 days of
     December 31, 1998. Mr. Ledbetter is the Chief Executive Officer and
     Chairman of the Board of Directors of the Company.

(7)  Mr. Lauder is a director of the Company.

(8)  Includes 65,366 shares subject to options exercisable within 60 days of
     December 31, 1998. Mr. Godbole was Vice President, Engineering. He left the
     Company in April, 1999.

(9)  Mr. Ezcurra was Vice President, Sales. He left the Company in July, 1998

(10) Includes 23,812 shares subject to options exercisable within 60 days of
     December 31, 1998. Ms. Zeletes was Vice President, Engineering. She left
     the Company in March, 1999.

(11) Represents shares subject to options exercisable within 60 days of December
     31, 1998.

(12) Does not include 429,852 shares of Common Stock and 66,553 shares subject
     to warrants held by OSCCO III, L.P., an entity which Mr.Halprin is
     affiliated with. Mr. Halprin is a director of the Company.

(13) Includes 573,964 shares subject to warrants and 536,208 shares subject to
     options exercisable within 60 days of December 31, 1998 held by executive
     officers and directors of the Company.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     From January 1, 1998 to the present, there has been no (and there is no
currently proposed) transaction or series of similar transactions to which we
were (or are to be) a party in which the amount involved exceeds $60,000 and
in which any director, executive officer or holder of more than 5% of our
Common Stock (or any member of the immediate family of any of the foregoing
persons) had (or will have) a direct or indirect interest, (i) except for the
compensation arrangements, described in Item 11 and except for the
transactions described below.

     In January 1999, we entered into retention agreements with three executive
officers, William Daniher, Vishwas Godbole and Jane Zeletes (each of whom has
since left the Company), and with Thara Edson, who has since become an executive
officer. Under the agreements, as subsequently modified, each officer received
an increase in salary and the right to receive a bonus if the Company is sold
and the officer continues with the Company through the closing of such sale and
for a short time thereafter. The bonus would be from $50,000 to $200,000,
depending on the sale price. In addition, Mr. Daniher, Mr. Godbole, Ms. Zeletes
and Ms. Edson received options to purchase 231,279, 262,152, 141,982 and 200,000
shares of Common Stock, respectively. Each option has an exercise price of $0.50
per share and vests over four years, except that vesting accelerates in the
event of a sale of the Company. The agreements also provide for three months'
severance payment in the event that an officer's employment is terminated by the
Company without cause.


                                      70

<PAGE>

     In March 1999, we entered into a severance agreement with Mr. Daniher
whereby we paid him three months' severance pay upon the termination of his
employment, and we agreed that he would receive the contingent bonus and
accelerated vesting of stock options provided for in his retention agreement
(referred to above) if we are acquired prior to April 1, 2000.

     In May 1999, we granted to Mr. Goldsmith and Ms. Edson additional options
to purchase 275,000 and 40,000 shares of Common Stock, respectively, at $0.50
per share and vesting over four years, except that vesting accelerates in the
event of a sale of the Company.

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

(a) The following documents are filed as part of this Report:

1.   FINANCIAL STATEMENTS -- See Index to Financial Statements and Financial
     Statement Schedule at Item 8 on page 36 of this Report.

2.   FINANCIAL STATEMENT SCHEDULES -- See Index to Financial Statements and
     Financial Statement Schedule at Item 8 on page 36 of this Report.

3.   EXHIBITS -- The following exhibits are filed as part of, or incorporated by
     reference into, this report on Form 10-K:

<TABLE>
<CAPTION>
     Exhibit
     Number                           Exhibit Title
     -------                          -------------
<S>          <C>
      3.01   Registrant's Amended and Restated Certificate of
             Incorporation.  (1)
      3.02   Registrant's Amended and Restated Bylaws.  (2)
     10.01   Amended and Restated Investors Rights Agreement, dated as of
             September 18, 1997 between Registrant and certain investors, as
             amended October 13, 1997 and as amended November 6, 1997.  (3)
     10.02   Registrant's 1993 Equity Incentive Plan.  (3)(4)
     10.03   Registrant's 1996 Equity Incentive Plan.  (3)(4)
     10.04   Registrant's Executive Officer Incentive Plan.  (3)(4)
     10.05   Registrant's 1997 Equity Incentive Plan.  (3)(4)
     10.06   Registrant's 1997 Directors Stock Option Plan.  (3) (4)
     10.07   Registrant's 1997 Employee Stock Purchase Plan.  (3) (4)
     10.08   Form of Indemnity Agreement entered into by Registrant with each
             of its directors and officers.  (3)
     10.11   Employment Agreement between Registrant and Carl S. Ledbetter
             dated January 15, 1996.  (3)(4)
     10.12   Senior Secured Convertible $5.5 Million Debenture Purchase
             Agreement between Registrant and London Pacific Life & Annuity
             Company dated April 30, 1997 and related Senior Secured
             Convertible $5.5 Million Debenture Due 2002 and Security
             Agreement and Senior Secured Convertible $5.5 Million
             Debenture Due. (3)
     10.15   Collaboration Agreement among Registrant, Sharp Corporation and
             Itochu Corporation dated November 25, 1996 and Addendum No. 1
             thereto dated November 25, 1996.  (3)
</TABLE>


                                      71

<PAGE>

<TABLE>
<S>          <C>
      10.16  Sales and Purchase Agreement between Registrant and Itochu
             Corporation dated January 10, 1997.  (3)(5)
      10.21  Warrant Purchase Agreement by and between Registrant and Alcatel
             dated as of November 3, 1997.  (3)
     10.22   Employment Letter between Registrant and Dan E. Steimle dated
             July 27, 1997.  (4)(6)
      10.24  Separation Agreement and General Release between the Registrant
             and Dan E. Steimle dated May 30, 1994.  (4)
      10.25  Sublease between the Rigistrant and Viking Freight, Inc. dated
             February 9, 1998.  (7)
      10.26  Employment Letter from the Registrant to Judson Goldsmith dated
             November 12, 1998.  (4)
      10.27  Product Purchase Agreement between the Registrant and RCN
             Operating Services, Inc. dated June 30, 1997
      23.01  Consent of Independent Auditors for 1998 and 1997
      23.02  Consent of Independent Accountants for 1996
      27.01  Financial Data Schedule.
      27.02  Restated 1997 Financial Data Schedule.
</TABLE>

-----------
(1)  Incorporated by reference to Exhibit 3.03 to the Registrant's Registration
     Statement on Form S-1, File No. 333-36001, declared effective by the SEC on
     November 11, 1997 (the "Form S-1").
(2)  Incorporated by reference to Exhibit 3.05 to the Form S-1.
(3)  Incorporated by reference to the Exhibit with the same number in the Form
     S-1.
(4)  Represents a management contract or compensatory plan.
(5)  Confidential treatment has been granted with respect to certain portions of
     this agreement. Such portions have been omitted from the filing and have
     been filed separately with the SEC.
(6)  Incorporated by reference to Exhibit 10.21 to the Registrant's Annual
     Report on Form 10-K for the Year Ended December 31, 1997.
(7)  Incorporated by reference to Exhibit 10.24 to the Registrant's Registration
     Statement on Form S-4, File No. 333-52083 (filed on May 7, 1998

(b)  Reports on Form 8-K.

     The following Current Reports on Form 8-K were filed by the Company during
     the last three quarters of 1998:

     1.   On June 19, 1998, the Company reported under Item 5. "Other Events"
          that Coopers & Lybrand, the Company's independent accountants at that
          time, had notified the Company that their reports with respect to the
          financial statements of the Company as of December 31, 1997, and for
          the year then ended, and as of September 30, 1997, and for the nine
          months then ended, should no longer be relied upon.

     2.   On July 16, 1998, the Company reported under Item 4. "Changes In
          Registrant's Certifying Accountant" and Item 7. "Exhibits" that
          PricewaterhouseCoopers LLP (successor entity to Coopers & Lybrand) had
          resigned as the independent accountants of Hybrid Networks, Inc.

     3.   On August 17, 1998, the Company reported under Item 4. "Changes In
          Registrant's Certifying Accountant" that the Company had engaged
          Arthur Andersen LLP as the Company's independent


                                      72

<PAGE>

          accountants to audit the financial statements of the Company as of
          December 31, 1997 and for the year then ended and to act as the
          Company's independent accountants on a continuing basis.

     4.   On November 17, 1998, the Company reported under Item 5. "Other
          Events" that Judson W. Goldsmith had been appointed Vice President,
          Finance and Chief Financial Officer.

     5.   On December 2, 1998, the Company reported under Item 4. "Changes In
          Registrant's Certifying Accountant" and Item 7. "Exhibits" that Arthur
          Andersen LLP had resigned as the independent accountants of Hybrid
          Networks, Inc. Additionally, the Company reported under Item 5. "Other
          Events" that the Company's securities would be delisted from the
          NASDAQ Stock Market effective with the close of business December 1,
          1998.

     6.   On December 23, 1998, the Company reported under Item 4. "Changes In
          Registrant's Certifying Accountant" that the Company had engaged Hein
          + Associates LLP as the Company's independent accountants to audit the
          financial statements of the Company as of December 31, 1997 and for
          the year then ended and to act as the Company's independent
          accountants on a continuing basis.

(c)  Exhibits.  See (a)(3) above.

(d)  Financial Statement Schedules.  See (a)(2) above.



                                      73

<PAGE>

                                  SIGNATURES

     Pursuant to the requirements of 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.


June 8, 1999                             HYBRID NETWORKS, INC.

                                         By:  /s/ Carl S. Ledbetter
                                              --------------------------
                                              Carl S. Ledbetter
                                              Chief Executive Officer

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

<TABLE>
<CAPTION>
NAME                                       TITLE                                DATE
---------                                  ---------                            --------
<S>                                        <C>                                  <C>
PRINCIPAL EXECUTIVE OFFICER:

/s/ Carl S. Ledbetter                      Chief Executive Officer              June 8, 1999
---------------------------
    Carl S. Ledbetter

PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:

/s/Judson W. Goldsmith                     President, Chief Operating           June 8, 1999
--------------------------------           Officer, Chief Financial Officer
   Judson W. Goldsmith                     and Secretary

ADDITIONAL DIRECTORS:

/s/ James R. Flach                         Director                             June 8, 1999
------------------------
    James R. Flach

/s/ Stephen E. Halprin                     Director                             June 8, 1999
------------------------------
    Stephen E. Halprin

/s/ Gary M. Lauder                         Director                             June 8, 1999
-------------------------
    Gary M. Lauder

/s/ Douglas M. Leone                       Director                             June 8, 1999
----------------------------
    Douglas M. Leone
</TABLE>


                                      74
<PAGE>

                          INDEPENDENT AUDITORS REPORT


To the Stockholders and Board of Directors
Hybird Networks, Inc.
San Jose, California

     Our report on the financial statements of Hybrid Networks, Inc. is included
on page 37 of this Form 10-K. In connection with our audits of such financial
statements, we have also audited the related financial statement schedule listed
in Item 14(a)(2) of this Form 10-K.

     In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.


/s/ HEIN + ASSOCIATES LLP
Orange, California
April 23, 1999







                          REPORT OF INDEPENDENT ACCOUNTANTS


To the Stockholders and Board of Directors
Hybird Networks, Inc.

Our audit of the financial statements referred to in our report dated August
28, 1997, appearing on page 38 of this Form 10-K also included an audit of
the financial statement schedule listed in Item 14(a)(2) of this Form 10-K.
In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related financial statements.


                                          PricewaterhouseCoopers LLP

San Jose, California
August 28, 1997


                                      75

<PAGE>


                             HYBRID NETWORKS, INC.

                  SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                                (IN THOUSANDS)

ALLOWANCE FOR DOUBTFUL ACCOUNTS

<TABLE>
<CAPTION>
                                                      Additions           Weighted
                                 Balance at           Charged             Charged                                   Balance
                                  Beginning          to Costs and         to Other                                  at End
 For the year ended:              of Period            Expenses           Accounts           Deductions           of Period
                               ---------------     ---------------     ---------------     ---------------     ---------------
<S>                         <C>                  <C>                 <C>                <C>                  <C>
December 31, 1998                     -               $ 200                  -                    -               $ 200
December 31, 1997                     -                   -                  -                    -                   -
December 31, 1996                     -                   -                  -                    -                   -
</TABLE>

 INVENTORY RESERVES

<TABLE>
<CAPTION>
                                                      Additions           Weighted
                                 Balance at           Charged             Charged                                   Balance
                                  Beginning          to Costs and         to Other                                  at End
 For the year ended:              of Period            Expenses           Accounts           Deductions           of Period
                               ---------------     ---------------     ---------------     ---------------     ---------------
<S>                         <C>                  <C>                 <C>                <C>                  <C>
December 31, 1998                 $3,015              $1,691                  -             $(1,571)              $3,135
December 31, 1997                    256               2,759                  -                    -               3,015
December 31, 1996                    136                 126                  -                  (6)                 256
</TABLE>


                                      76