<PAGE>

                       U.S. SECURITIES AND EXCHANGE COMMISSION
                                WASHINGTON, D.C. 20549
                                      FORM 10-K



(Mark One)

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

                     For the Fiscal Year Ended December 31, 1997

                                          OR

/ /  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

                           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)


                  10161 Bubb Road, Cupertino, California, 95014
                (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:   (408) 725-3250


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

     Check 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   .

     Check 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  /X/

     As of February 27, 1998, there were outstanding 10,345,354 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 closing price ($5.13) for the
common stock) was approximately $39,724,473.  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.

<PAGE>

                                HYBRID NETWORKS, INC.
                              Annual Report on Form 10-K
                     For the fiscal year ended December 31, 1997


                                  TABLE OF CONTENTS


<TABLE>
<CAPTION>
<S>                                                                               <C>
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    1
  ITEM 1.   BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    1
  ITEM 2.   PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    9
  ITEM 3.   LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . .   10
  ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . .   10
  ITEM 4A.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. . . . . . . . . . .   11

PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   13

  ITEM 5.   MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
            STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . . . . . .   13
  ITEM 6.   SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . .   15
  ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
            AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . .   15
  ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . .   32
  ITEM 8.   FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . .   32
  ITEM 9.   CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
            AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . .   32

PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   33
  ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. . . . . . . . . . .   33
  ITEM 11.  EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . .   33
  ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . .   36
  ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . .   37
  ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
            FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   38
</TABLE>

<PAGE>


                                        PART I

ITEM 1.   BUSINESS

THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES.  THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY
FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.  FACTORS THAT MAY
CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN
"FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS."

     Hybrid Networks, Inc. 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 "last mile"
connection to the end-user which causes slow response time for those accessing
bandwidth-intensive information over the Internet or corporate intranets.  The
Company's customers include broadband wireless system operators, cable system
operators, ISPs, resellers and other companies that provide broadband networking
systems or services to business and residential users.  Hybrid's Series 2000
product line consists of secure headend routers, wireless or cable modems and
management software for use with either cable TV or wireless transmission
facilities.  Because the substantial 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 system also features a router to provide
corporate telecommuters and others in remote locations secure access to their
files on the corporate intranet.  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

     Hybrid's 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.  The Company's
products include secure headend routers, wireless and cable modems and
management software for use with either wireless transmission facilities or
cable TV transmission facilities.  The Company's 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.
Hybrid's client modems and routers are used by subscribers of the Company's
customers and can be used as single-user devices or in multi-user local area
networks ("LANs").  The Company's products incorporate proprietary technology
that enables the same system to be deployed in either broadband wireless or
cable systems and supports both one-way downstream transmission accompanied by
upstream transmission via modem and router return or two-way wireless or cable
transmission.

<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.
------------------------------------------------------------------------------------------------------------------------------------
Upstream Router, Telephone Return
(Ascend Max 4048, 4060)                           Performs the functions of an analog modem bank and terminal server in a telephone
                                                  return configuration.  Supports up to 48/60 incoming telephone lines.
------------------------------------------------------------------------------------------------------------------------------------
CyberMaster Upstream Router QPSK Return
(CMU 2000-14C and QDC-030-2)                      Upstream receiver and demodulator for two-way QPSK configuration.
------------------------------------------------------------------------------------------------------------------------------------
SINGLE-USER EQUIPMENT (1)(3)
------------------------------------------------------------------------------------------------------------------------------------
Headend Router (HER-2010)                         Highspeed downstream RF router that supports up to 60 Mbps aggregate throughout in
                                                  12 MHz of spectrum.
------------------------------------------------------------------------------------------------------------------------------------
Multi-User Modem/Router (CCM-201)                 Client modem and router that can be used in either wireless or cable systems.
                                                  Supports up to 20 users.  Client modem that can be used in either wireless or
                                                  cable systems.  Supports 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 $440 to $795 depending on
     features.

HEADEND EQUIPMENT

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

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

     UPSTREAM ROUTER, TELEPHONE RETURN.  The Upstream Router, Telephone Return
is an Ascend modem bank sold by Hybrid for terminating headend telephone lines
in the telephone return configuration.  The Ascend 4048 provides a 71 digital
interface for 48 lines in the United States and the Ascend 4060 provides an E1
digital or a primary rate interface for international applications.  The system
also operates with modem banks and upstream router from US Robotics, Motorola
and other suppliers provided by the customer.

     CYBERMASTER UPSTREAM ROUTER QPSK RETURN.  The Cybermaster upstream router
is a rack mounted, Pentium based, PCI/ISA bus industrial microcomputer.  The
product houses dual QPSK receiver cards which demodulate upstream QPSK signals.
The CMU-2000-14C has a 100 BaseT interface to connect to a fast ethernet switch
at the headend.  The CMU supports up to 28 upstream signals each with 256 to 5
Mbits data rate.


                                          2
<PAGE>

END-USER EQUIPMENT

     HEADEND ROUTER.  The Series 2000 Headend Router (HER-2010) is a
rack-mounted, Pentium based, PCI/ISA bust industrial microcomputer.  The product
supports SIF and QAM cards, which are used for downstream routing and for 64QAM
downstream modulation.  The HER-2010 has a 1000BaseT interface to connect to a
fast Ethernet switch within the headend.  The HER-2010 supports up to six
independent 10 Mbs downstream channels.  Each 10 Mbps channel occupies 2MHz of
either wireless or cable spectrum.  The HER-2010 can be deployed in one-way RF
configurations (cable/wireless downstream and telco/router return).

     MULTI-USER MODEM/ROUTER.  The Multi-User Modem/Router (CCM-201) supports 10
Mbps, 64QAM downstream data transmission on both wireless and cable systems and
upstream transmission via analog modem, router or wireless or cable return.
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, user ID, public and private key management and
optional DES encryption.

     SINGLE-USER MODEM.  The Single-User Modem (N-201) supports 10 Mbps, 64QAM
downstream data transmission on both wireless and cable systems and upstream
transmission via analog modem, router, and wireless or cable return.  Each N-201
supports one client device which can be a PC, Macintosh or workstation.

TECHNOLOGY

     The Series 2000 product line is an 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.  The Company's 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, the Company's products are also positioned to serve the
newly auctioned WCS frequencies, which are only 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 supporting up to 5,000 subscribers to serve more than 20,000
subscribers.  The modular architecture also accommodates changes to the
transport medium, such as upgrades from one-way coaxial cable plant to two-way
hybrid fiber coax ("HFC") plant.

SERVICES

     The Company generally performs all consulting, systems engineering, systems
integration, installation, training and technical support for its products.
Network operations engineers, who combine radio frequency ("RF") 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.  The Company's 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.  Services are provided on a time and materials basis.  Each customer
is required to enroll, for a fee, at least one person in the Company's 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 the Company's
products and cover the installation, operation and maintenance of the Company's
headend and client modem products in a network operating environment.  The
Company typically provides a one-year warranty on its 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 the Company's software and firmware products that contain
application code.  The Company provides support after expiration of the warranty
period as a purchase option, including on-site field support.


                                          3
<PAGE>

CUSTOMERS

     The Company's customers include broadband wireless system operators, cable
system operators, ISPs, resellers and other businesses.  The following table
sets forth certain customers of the Company who have purchased at least $200,000
of products from the Company during 1997.

<TABLE>
<CAPTION>

BROADBAND WIRELESS                  CABLE SYSTEM                                                RESELLERS AND
SYSTEM OPERATORS                    OPERATORS                     ISPs                          OTHERS
-------------------------------     --------------------------    ---------------------------   ------------------------
<S>                                 <C>                           <C>                           <C>
*   American Telecasting, Inc.      *   RCN Corporation           *    AT&T and AT&T WorldNet   *   Alcatel Telecom and
*   CS Wire Systems, Inc            *   Jones Intercable, Inc.    *   DirectNet, Inc.                Alcatel Bell N.V.
*   People's Choice TV                                            *   InterjetNet, Inc.         *   Communications
     Corporation                                                  *   Internet Ventures, Inc.        Resource Company
*   Sioux Valley Rural TV                                                                       *   Nfusion
*   TCM Holdings                                                                                *   Itochu Corporation
*   Wireless CATV Systems                                                                       *   Network Systems
*   World-Wide Wireless, Inc.                                                                        Technologies, Inc.
                                                                                                *   3D Communications
</TABLE>


     To date, a small number of customers has accounted for a substantial
portion of the Company's net sales.  The Company expects that net sales from the
sale of its products to a limited number of customers will continue to account
for a high percentage of its net sales in the foreseeable future.  The Company
expects that its largest customers in future periods could be different from its
largest customers in prior periods due to a variety of factors, including
customers' deployment schedules and budget considerations.  A limited number of
broadband wireless system operators and cable system operators account for a
majority of capital equipment purchases in their respective markets, and the
Company's success will be dependent upon its ability to establish and maintain
relationships with these companies.  In addition, the Company has increased
sales through distributors, with 3D Communications, a subsidiary of IKON
Corporation, becoming the largest distributor customer in 1997, accounting for
13.7% of the Company's net sales.  No other customer accounted for 10% or more
of net sales in 1997.  In 1996, AT&T Corporation ("AT&T") and Intel Corporation
("Intel") accounted for 41.0% and 20.7%, respectively, of the Company's net
sales; and in 1995, Intel and AT&T accounted for 51.6% and 28.2%, respectively,
of the Company's net sales.  During 1994, 1995 and 1996, Intel manufactured
certain products based on the Company's design, and jointly marketed the
Company's products with its own.  Intel no longer purchases products from the
Company, but it remains a stockholder of the Company and maintains certain
licensing and manufacturing rights to certain Hybrid products.  AT&T continued
to purchase products from the Company in 1997, although the volume of those
purchases was less than 10% of the Company's net sales.

     During 1997, approximately one-half of the Company's net sales were
attributable to broadband wireless system customers and the balance to cable
system customers.  The Company anticipates that the trend of increasing sales to
broadband wireless customers will continue during 1998, although changes could
occur in Hybrid's product offerings or other circumstances that might affect
this trend.  The Company's customers, particularly those in the broadband
wireless industry, include companies in the early stage of development or in
need of capital to upgrade or expand their services.  In order to address the
needs and competitive factors facing the emerging broadband access market, the
Company on occasion has provided customers extended payment, promotional pricing
or other terms.  For instance, Internet Ventures, Inc., which accounted for 7.5%
of the Company's net sales in 1997 accounted for 8.7% of the Company's accounts
receivable as of December 31, 1997, was provided extended payment terms.  The
provision of extended payment terms, or the extension of promotional payment,
pricing or other terms can have a material adverse effect on the Company's
business, operating results and financial condition.  See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

SALES, MARKETING AND DISTRIBUTION

     The Company markets and sells its products in the United States through its
domestic field sales force and sales support organization.  The Company also
sells its products through distributors, VARs and OEMs.  The Company's sales and
marketing, senior management and technical staff work closely with existing and
potential customers to help them develop the market potential of high speed
Internet access services and to help them develop relationships with other
companies that have the facilities and expertise necessary to deliver Internet
access services.  Field sales offices are located in San Francisco, Atlanta,
and Tinton Falls, New Jersey.


                                     4
<PAGE>

     The sale of the Company's products typically involves a significant
technical evaluation and commitment of capital and other resources, with the
delays frequently associated with customers' internal procedures to approve
large capital expenditures and to test and accept new technologies that affect
key operations.  For these and other reasons, the sales cycle associated with
the Company's products is typically lengthy, generally lasting three to nine
months, and is subject to a number of significant risks, including customers'
budgetary constraints and internal acceptance reviews, that are beyond the
Company's control.  Because of the lengthy sales cycle and the large size of
customers' orders, if orders forecasted for a specific customer for a particular
quarter are not realized in that quarter, or any significant customer delays
payment or fails to pay, the Company's operating results for that quarter could
be materially adversely affected.  In addition, the Company's customers include
companies in the early stage of development or in need of capital to upgrade or
expand their services.  Accordingly, in order to address the needs and
competitive factors facing the emerging broadband access markets serviced by the
broadband wireless system operators, cable system operators and ISPs, the
Company on occasion has provided customers extended payment, promotional pricing
or other terms which can have a material adverse effect on the Company's
business, operating results and financial condition.

     The timing and volume of customer orders are difficult to forecast because
wireless and cable companies typically require prompt delivery of products and a
substantial majority of the Company's sales are booked and shipped in the same
quarter.  Accordingly, the Company has a limited backlog of orders.  Further,
sales are generally made pursuant to standard purchase orders that can be
rescheduled, reduced or cancelled with little or no penalty.  The Company
believes that its backlog at any given time is not a meaningful indicator of
future sales.

     The Company's marketing efforts are targeted at broadband wireless system
operators, cable system operators and existing ISPs.  The Company devotes
considerable time and effort to educating potential customers on the business
opportunity of providing high speed Internet and intranet access.  It
accomplishes this through white papers, prototype customer business models,
industry speaking engagements and direct customer presentations.  The Company
also attempts to facilitate introductions and strategic relationships between
ISPs and wireless or cable system operators.  These strategic relationships
bring together the capabilities needed to offer high speed access service.  The
Company maintains its industry presence by exhibiting at wireless and cable
tradeshows and speaking at conferences and seminars.

     In order to market and sell the Company's products internationally, the
Company has entered into several distribution relationships and is seeking to
enter into additional distribution relationships as well.  Alcatel Standard
Electrica S.A. has worldwide nonexclusive distribution rights for the Company's
products and is the Company's main distributor in Europe.

MANUFACTURING

     The Company's manufacturing strategy is to perform system integration,
testing and quality inspection internally and to outsource the manufacturing of
the product modules to multiple third parties where it is more cost-effective.
The Company's future success will depend, in significant part, on its ability to
successfully manufacture its products cost-effectively and in sufficient
volumes.  The Company maintains a limited in-house manufacturing capability for
performing system integration and testing on all headend products and for
manufacturing small quantities of modems at its headquarters in Cupertino.  The
Company's in-house manufacturing capability, however, is largely used for pilot
production of new modem designs and sample testing of products received from
volume modem manufacturers, as well as for developing the manufacturing process
and documentation for new products in preparation for outsourcing.

     The Company's future success will depend, in significant part, on its
ability to obtain high volume manufacturing at low costs.  The Company entered
into an agreement pursuant to which Sharp Corporation ("Sharp") has been the
exclusive OEM supplier through Itochu Corporation ("Itochu") of certain of the
Company's client modems, including the substantial majority of those utilized in
the Series 2000.  During the second quarter and a portion of the third quarter
of 1997, the Company did not receive the full shipment of modems anticipated
from Sharp because of technical delays in product integration.  While these
problems have since been resolved, there can be no assurance that the Company
will not experience similar supply problems in the future at Sharp or any other
manufacturer.  The Company has had only limited experience manufacturing its
products to date, and there can be no assurance that the Company, Sharp or any
other manufacturer of the Company's products will be successful in increasing
the volume of its manufacturing efforts.  The Company may need to procure
additional manufacturing facilities and equipment, adopt new inventory controls
and procedures, substantially increase its personnel and revise its quality
assurance and testing practices.  There can be no assurance that any of these
efforts will be


                                          5
<PAGE>

successful.  The Company anticipates the need to reduce the manufacturing costs
of its cable modem and will continue to evaluate the use of low cost third party
suppliers and manufacturers.

     Subcontractors supply both standard components and subassemblies
manufactured to the Company's specifications.  Standard components include the
Sun Microsystems Sparc5 workstation and its Sun Operating System (OS); Intel's
Ethernet cards and Pentium-based PCI processor cards; and NextLevel Systems'
Upconverter.  The CyberManager 2000 and CyberCommuter 2000 Secure Router are
built on the Sparc5/Sun OS platform by installing the Company's proprietary
network subscriber and network management software, HybridWare.  The CyberMaster
Downstream Router (CMD) and CyberMaster Upstream Router, Telephone Return (CMU)
are built on Intel's Pentium-based PCI/ISA-based computer cards installed in
standard rack-mounted backplanes from Industrial Computer Source (ICS) that are
configured to the Company's specification.  The Company's proprietary software,
Hybrid OS, is overlaid on a standard Berkeley Systems operating system for the
CMD and CMU.

     The Company is dependent upon certain key suppliers for a number of the
components for its products.  For example, the Company currently only has one
vendor, BroadCom Corporation, for the 64 QAM demodulator semiconductors that are
used in the Company's server and 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 the Company's competitors before making them
available to the Company.  This could have the effect of putting the Company at
a competitive disadvantage with regard to time to market or cause the Company to
have to redesign its products if competitors influence changes in BroadCom's
products.  Hitachi is the sole supplier of the processors used in certain of the
Company's modems.  In addition, certain other components for products that the
Company has under development are currently only available from a single source.
For example, Stanford Telecom, which is a competitor for at least one of the
Company's broadband wireless products, is currently the sole supplier for
certain components used in the Company's products, although the Company is in
the process of developing one or more alternative sources.  There can be no
assurance that delays in key components or product deliveries will not occur in
the future due to shortages resulting from a limited number of suppliers, the
financial or other difficulties of such suppliers or the possible limitation in
component product capacities due to significant worldwide demand for such
components.  Any significant interruption or delay in the supply of components
for the Company's products or significant increase in the price of components
due to short supply or otherwise could have a material adverse effect on the
Company's ability to manufacture its products and, therefore, could have a
material adverse effect on its business, operating results and financial
condition.

     Products as complex as those offered by the Company frequently contain
undetected errors, defects or failures, especially when first introduced or
when new versions are released.  Such errors have occurred in the past in the
Company's products, and there can be no assurance that, despite testing by
the Company and use by current and potential customers, errors will not be
found in the Company's current and future products.  The occurrence of such
errors, defects or failures could result in product returns and other losses
to the Company or its customers.  Such occurrence could also result in the
loss of or delay in market acceptance of the Company's products, which could
have a material adverse effect on the Company's business, operating results
and financial condition.  The Company's products generally carry a one-year
warranty for replacement of parts.  Due to the relatively recent introduction
of the Series 2000 products, the Company has limited experience with the
problems that could arise with this generation of products.  The Company's
purchase agreements with its customers typically contain provisions designed
to limit the Company's exposure to potential product liability claims.  It is
possible, however, that the limitation of liability provisions contained in
the Company's purchase gareements may not be effective as a result of
federal, state or local laws or ordinances or unfavorable judicial decisions.
Although the Company has not experienced any significant product liability
claims to date, the sale and support of the Company's products may entail the
risk of such claims.  A successful product liability claim brought against
the Company could have a material adverse effect on the Company's business,
operating results and financial condition.

RESEARCH AND DEVELOPMENT

     As of December 31, 1997, the Company's research and development staff
consisted of 36 full-time employees.  The Company's total research and
development expenses for 1997, 1996 and 1995 were $7,108,000, $5,076,000 and
$3,862,000, respectively.  The Company will continue its efforts to increase the
scalability and performance of its current broadband systems, to enhance the
systems for broadband wireless system operators and to migrate toward standards
compliance.  The Company expects to increase scalability by developing an
optional relational database that will handle subscriber bases of up to 20,000
per system and new SNMP-based network management capabilities that will allow


                                          6
<PAGE>

operators to manage their network centrally.  The Company is optimizing its
product's radio frequency (RF) tuners for the currently targeted wireless-cable
and WCS frequency bands, 2-3 GHz and LPTV (400-800 MHz), and expects to add LMDS
products to its offerings.

     The Company is developing a new two-way product utilizing QPSK modulation
in place of the current FSK return product.  This QPSK product will utilize
standards-compliant chipsets and a cost-effective channel sharing algorithm.  It
will support both wireless and cable return.  In addition, the Company is
developing a prototype system targeted for ISP customers consisting of a
broadband downstream router that can be installed in existing ISP networks and
will interoperate with standard ISP equipment and operational procedures.  See
"Factors That May Affect Future Operating Results--Competing Technologies and
Evolving Industry Standards."

     To address competitive and pricing pressures, the Company expects that it
will have to reduce the cost of manufacturing client modems significantly
through design and engineering changes.  Such changes may involve redesigning
the Company's products to utilize more highly integrated components and more
automated manufacturing techniques.  There can be no assurance that the Company
will be successful in these efforts, that a redesign can be made on a timely
basis and without introducing significant errors and product defects or that a
redesign will result in sufficient cost reductions to allow the Company to
reduce the list price of its client cable modems significantly.

     In addition, from time to time, the Company considers collaborative
relationships with other entities to gain access to certain technologies that
could enhance the Company's product offerings, broaden the market for the
Company's products or accelerate time to market.  In connection with such
collaborative relationships, the Company may seek to jointly develop products,
share its technology with other entities and license technology from such
entities.  In November 1997, the Company entered into a Warrant Purchase
Agreement with Alcatel pursuant to which Alcatel agreed to provide the Company
with certain technical information and the parties agreed to use commercially
reasonable efforts to define and carry out a development program regarding
broadband data modulation technology and to cross-license the technology
developed.  As of February 27, 1998, the parties had not defined such a program.
In connection with entering into the Warrant Purchase Agreement, the Company
issued to Alcatel a five-year warrant to purchase 458,295 shares of Common Stock
at an exercise price of $10.91 per share.  The relationship between the Company
and Alcatel is in the early stages, and, accordingly, there can be no assurance
that the relationship will result in the development of commercially viable
products or that the Company will otherwise significantly benefit from its
relationship with Alcatel.

     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.  As
standards evolve in the market, such as the Multimedia Cable Network System
("MCNS") specifications, the Company will work toward complying with such
standards.  There can be no assurance that the Company's engineering and product
design efforts will be successful or that the Company will be successful at
developing new products in the future.  Any failure to release new products or
to fix, upgrade or redesign old products on a timely basis could have a material
adverse effect on the Company's business, operating results and financial
condition.

COMPETITION

     The market for high speed network connectivity products and services is
intensely competitive.  The principal competitive factors in this market include
product performance and features (including speed of transmission and upstream
transmission capabilities), reliability, price, size and stability of
operations, breadth of product line, sales and distribution capability,
technical support and service, relationships with cable and broadband wireless
system operators and ISPs, standards compliance and general industry and
economic conditions.  Certain of these factors are outside of the Company's
control.  The existing conditions in the high speed network connectivity 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 the Company's products or render them obsolete.  Similarly, the
continued emergence or evolution of industry standards or specifications may put
the Company at a disadvantage in relation to its competitors.

     The Company's current and potential competitors include providers of
asymmetric cable modems, other types of cable modems and other broadband access
products.  Most of the Company's 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 the Company.  In addition, many of the Company's competitors are in a
better position to withstand any significant reduction in capital spending by
cable or broadband wireless system operators.


                                          7
<PAGE>

Certain of the Company's competitors have established relationships with cable
system operators and telephone companies ("telcos") and, based on these
relationships, may have more direct access to the decision-makers of such cable
system operators and telcos.  In addition, the Company could face potential
competition from certain of its suppliers, such as Sharp, if it were to develop
or license modems for sale to others.  In addition, suppliers such as Cisco
Systems, which manufactures routers, could become competitors should they decide
to enter the Company's markets directly.  Stanford Telecom, which manufacturers
QPSK components and is the sole supplier for certain components used in the
Company's products, has become a competitor for at least one of the Company's
products in the broadband wireless market.  There can be no assurance that the
Company will be able to compete effectively in its target markets.

     The Company's principal competitors in the wireless modem market, Bay
Networks, Harmonic Lightwaves through its acquisition of New Media
Communications, Motorola, NextLevel Systems and Stanford Telecommunications, are
providing wireless Internet connectivity over wireless cable and LMDS
frequencies.

     The principal competitors in the cable modem market include Bay Networks,
Motorola, NextLevel Systems and 3Com and its subsidiary U.S. Robotics.  Other
cable modem competitors include Cisco Systems, Com21, Hayes Microcomputer
Products, Phasecom, Scientific-Atlanta, Terayon, Toshiba and Zenith Electronics,
as well as a number of smaller, more specialized companies.  Certain competitors
have entered into partnerships with computer networking companies that may give
such competitors greater visibility in this market. For example, CISCO has
announced intentions to develop solutions based on the MCNS standard with
several cable modem vendors and in December 1997 announced an MCNS-compliant
integrated router and cable modem to offer high-speed Internet access. Certain
of the Company's competitors have already introduced or announced high speed
connectivity products that are priced lower than the Company's, and certain
other competitors are more focused on and experienced in selling and marketing
two-way cable transmission products.  There can be no assurance that additional
competitors will not introduce new products that will be priced lower, provide
superior performance or achieve greater market acceptance than the Company's
products.

     To be successful, the Company's Series 2000 products must achieve market
acceptance and the Company must respond promptly and effectively to the
challenges of new competitive products and tactics, alternate technologies,
technological changes and evolving industry standards.  The Company must
continue to develop products with improved performance over two-way cable
transmission facilities and with the ability to perform over two-way wireless
transmission facilities.  There can be no assurance that the Company will meet
these challenges, that it will be able to compete successfully against current
or future competitors, or that the competitive pressures faced by the Company
will not materially and adversely affect the Company's business, operating
results and financial conditions.  Further, as a strategic response to changes
in the competitive environment, the Company may make certain extended payment,
pricing, service, marketing or other promotional decisions or enter into
acquisitions or new ventures that can have a material adverse effect on the
Company's business, operating results or financial conditions.

     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. 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. In the event that any competing architecture or technology were to
limit or halt the deployment of coaxial or HFC systems, the Company's business,
operating results and financial condition could be materially adversely
affected.

INTELLECTUAL PROPERTY

     The Company relies on a combination of patent, trade secret, copyright and
trademark laws and contractual restrictions to establish and protect proprietary
rights in its products.  The Company currently has two patents issued in the
United States as well as pending patent applications in the United States,
Europe and Japan that relate to its network and modem technology as well as
communication processes implemented in those devices.  The Company's two issued
U.S. patents relate to the Company's basic client cable modem device and
methodology and asymmetric system architecture and methodology.  The Company
initially obtained U.S. Patent No. 5,347,304 in September 1994, filed an
application for the reissuance of the patent with the U.S. Patent and Trademark
Office in November 1994 and anticipates that the patent will be reissued in the
near future.  In the future, the Company intends to seek further United States
and foreign patents on its technology.  There can be no assurance that any of
these patents will be issued from any of the Company's pending


                                          8
<PAGE>

applications or applications in preparation or that any claims allowed will be
of sufficient scope or strength, or be issued in sufficient countries where the
Company's products can be sold, to provide meaningful protection or any
commercial advantage to the Company.  Moreover, any patents that have been or
may be issued might be challenged, as is the case with the Company's recently
initiated patent litigation.  (See "Legal Proceedings").  Any such challenge
could result in time consuming and costly litigation and result in the Company's
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.

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

     In the past, the Company has received, and in the future may receive,
notices from third parties claiming that the Company's products or proprietary
rights infringe the proprietary rights of third parties.  The Company expects
that developers of wireless and cable modems will be increasingly subject to
infringement claims as the number of products and competitors in the Company's
industry segment grows.  Any such claim, whether meritorious or not, could be
time consuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or licensing agreements.  Such royalty
or licensing agreements might not be available on terms acceptable to the
Company or at all, which could have a material adverse effect upon the Company's
business, operating results and financial condition.

     The Company has and in the future may license its patents or proprietary
rights for commercial or other reasons to parties who are or may become
competitors of the Company.  Further the Company has recently, and may in the
future, elect to initiate claims or litigation against third parties for
infringement of the Company's patents or proprietary rights or to establish the
validity of the Company's patents or proprietary right.  The Company has sent
notices to certain third parties offering to license the Company's patents for
products which may be infringing the Company's patent rights.  The Company has
recently initiated patent infringement litigation against two parties, who in
response are seeking declarations of invalidity of the Company's patents and
non-infringement of such patents.  The Company has not yet determined if it will
assert claims against additional parties or others.  There can be no assurance
that such notifications will not involve additional potential litigation
initiated by the Company or additional related countersuits by third parties
seeking to challenge the Company's patents or asserting infringement by the
Company.  Patent litigation can be time consuming and costly and therefore have
a material adverse effect on the Company's business, operating results and
financial condition.

EMPLOYEES

     As of December 31, 1997, the Company had 87 full-time employees.  None of
the Company's employees is represented by a collective bargaining unit with
respect to his or her employment with the Company, nor has the Company ever
experienced an organized work stoppage.

ITEM 2.   PROPERTIES

     The Company leases approximately 14,900 square feet of office, research and
development and manufacturing space in Cupertino, California. The Company also
subleases approximately 10,200 square feet and 9,200 square feet in Cupertino
under sublease agreements.  The current leases for the Cupertino facilities
expire between May 1998 and September 1998.  The Company plans to move out of
these three facilities and consolidate into an single facility which the Company
subleased in February 1998. The new subleased facility is for approximately
55,000 square feet of office, research and development and manufacturing space
in San Jose, California.  The sublease expires in April 2004 and the Company has
an option to extend the term of the lease through October 2009.  The Company
also leases approximately 900 square feet of office space in Tinton Falls, New
Jersey, approximately 1,000 square feet of office space in Atlanta, Georgia and
approximately 2,400 square feet of office space in San Francisco, California
under leases expiring in September 1998, March 1999 and March 2002,
respectively.  The Company believes that its facilities are adequate to meet its
needs for the immediate future and that future growth can be accommodated by
leasing additional or alternative space near its current facilities.


                                          9
<PAGE>

ITEM 3.   LEGAL PROCEEDINGS

     The Company initiated a civil action for patent infringement against Com21,
Inc., and Celestica, Inc. on January 23, 1998 in the U.S. District Court for the
Eastern District of Virginia.  In response to the Company's action, Com21, Inc.
initiated a declaratory judgment action on January 29, 1998 against the Company
in the U.S. District Court for the Northern District of California to obtain a
declaration of invalidity of the Company's patents and non-infringement of such
patents.  The action in the Eastern District of Virginia was subsequently
transferred to the Northern District of California on February 23, 1998.  The
litigation is expected to be time consuming and costly, and, although no
monetary claim is asserted against the Company, the action, if resolved
adversely to the Company, could have a material adverse effect on the
Company's business, operating results and financial condition.

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

     Pursuant to a Written Consent of Stockholders effective as of October 3,
1997 in lieu of a Special Meeting of Stockholders, the following items were
approved by the stockholders of the Company:

<TABLE>
<CAPTION>
                                                                                                                           BROKER
                                                               FOR*               AGAINST             ABSTAIN*           NON-VOTE
                                                               ----               -------             --------           --------
<S>                                                         <C>                  <C>                  <C>                <C>
1.  Amendment and Restatement of Certificate                19,103,355               0                 534,583                0
    of Incorporation to Effect a 1 for 2.7
    Reserve Stock Split and to Increase the
    Authorized Number of shares of Common Stock
    from 34,000,000 to 100,000,000.

2.  Amendment and Restatement of Certificate of             19,103,355               0                 534,583                0
    Incorporation to be Effective Following
    Initial Public Offering.

3.  Amendment of Bylaws.                                    19,103,355               0                 534,583                0


4.  Approval of 1997 Equity Incentive Plan                  19,103,355               0                 534,583                0
    and Reservation of 1,750,000 shares
    (post-split) thereunder.

5.  Approval of 1997 Directors Stock Option                 19,103,355               0                 534,583                0
    Plan and Reservation of 100,000 shares
    (post-split) thereunder.

6.  Approval of 1997 Employee Stock Purchase                19,103,355               0                 534,583                0
    Plan and Reservation of 225,000 shares
    (post-split) thereunder.

7.  Amendment of 1993 Equity Incentive Plan                 19,103,355               0                 534,583                0
    to Increase the Number of Shares Reserved
    for Issuance thereunder by 66,112 shares
    (post-split).

8.  Amendment of Executive Officer Incentive                19,103,355               0                 534,583                0
    Plan to Increase the Number of Shares
    Reserved for Issuance thereunder by 170,000
    shares (post-split).

9.  Approval of Director/Officer Indemnity                  19,103,355               0                 534,583                0
    Agreements.
</TABLE>
------------------------
*    Share numbers are before the Company's reverse
     1 for 2.7 stock split.


                                          10
<PAGE>

ITEM 4A.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

     The following table sets forth certain information regarding the executive
officers, directors and key personnel of the Company as of February 28, 1998:

<TABLE>
<CAPTION>

NAME                                                   AGE       POSITION
----                                                   ---       --------
<S>                                                    <C>       <C>
EXECUTIVE OFFICERS
  Carl S. Ledbetter. . . . . . . . . . . . . . . .     48        President, Chief Executive Officer and
                                                                   Chairman of the Board of Directors
  Gustavo (Gus) Ezcurra. . . . . . . . . . . . . .     42        Vice President, Sales
  William H. Fry . . . . . . . . . . . . . . . . .     60        Vice President, Operations
  Dan E. Steimle . . . . . . . . . . . . . . . . .     49        Vice President, Finance and Administration,
                                                                   Chief Financial Officer and Secretary

KEY EMPLOYEES AND OTHER DIRECTORS
  Frederick Enns . . . . . . . . . . . . . . . . .     47        Vice President and Chief Technology Officer
  Vishwas R. (Victor) Godbole. . . . . . . . . . .     51        Vice President, Engineering
  Ernest P. Quinones . . . . . . . . . . . . . . .     38        Corporate Controller
  Jane S. Zeletes. . . . . . . . . . . . . . . . .     42        Vice President, Marketing
  James R. Flach (1)(2). . . . . . . . . . . . . .     50        Director
  Stephen E. Halprin (2) . . . . . . . . . . . . .     59        Director
  Gary M. Lauder . . . . . . . . . . . . . . . . .     35        Director
  Douglas M. Leone (1) . . . . . . . . . . . . . .     40        Director
</TABLE>

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

(1)  Member of the Compensation Committee.

(2)  Member of the Audit Committee.

(3)  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.

     GUSTAVO (GUS) EZCURRA joined the Company in September 1996 as its Vice
President, Sales.  From May 1994 to September 1996, Mr. Ezcurra was Vice
President of Worldwide Sales of the Digital Telephone Systems Division of Harris
Corporation, a broadcast equipment manufacturer.  From November 1988 to May
1994, he was Vice President of Worldwide Sales of the Broadcast Division of
Harris Corporation.  Mr. Ezcurra holds a B.S. in Economics from the California
Polytechnic State University, San Luis Obispo.

     WILLIAM H. FRY joined the Company in August 1995 as its interim Chief
Operating Officer and Acting Vice President, Operations, and in May 1996 he
became Vice President, Operations.  From July 1994 to July 1995, Mr. Fry was a
consultant with Silicon Valley Associates.  From 1991 to June 1994, he served as
President and CEO of Ion Systems, a manufacturer of semiconductor processing
equipment.  Mr. Fry holds a B.S. in Industrial Management from LaSalle College.

     DAN E. STEIMLE joined the Company in July 1997 as its Vice President,
Finance and Administration, Chief Financial Officer and Secretary.  From January
1994 to June 1997, he served as Vice President and Chief Financial Officer of
Advanced Fibre Communications, Inc., a telecommunications equipment manufacturer
and from July 1997 to September 1997 he served part time as its Vice President,
Business Development.  From September 1991 to December 1993, Mr. Steimle served
as Senior Vice President, Operations and Chief Financial Officer of The Santa
Cruz Operation, Inc., an operating system software company.  Mr. Steimle serves
as a director of Mitek Systems, Inc., a software development


                                          11
<PAGE>

company.  Mr. Steimle holds a B.S. in Accounting from Ohio State University and
an M.B.A. from the University of Cincinnati.

     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.

     VISHWAS R. (VICTOR) GODBOLE joined the Company in May 1997 as its Vice
President, Engineering.  From June 1992 to April 1997, he worked for Sierra
Semiconductor Corporation, a provider of networking and telecommunications
components, as Director, Systems Engineering and most recently as Vice
President, Strategic Planning and Systems Engineering.  Mr. Godbole received a
Bachelor of Technology degree in Electrical Engineering from the Indian
Institute of Technology, Bombay, India and his M.S. in Electrical Engineering
from Oklahoma State University.

     ERNEST P. QUINONES joined the Company in July 1997 as its Controller and
was promoted to Corporate Controller in October 1997.  From June 1989 to March
1997, Mr. Quinones served in various positions at Genus, Inc., a semiconductor
equipment manufacturer, including Acting Chief Financial Officer until his
departure.  Mr. Quinones received a B.S. in Accounting from Santa Clara
University and is a Certified Public Accountant in California.

     JANE S. ZELETES joined the Company in March 1997 as its Director, Product
Management, and in September 1997 she was promoted to Vice President, Marketing.
Prior to joining the Company, she served as Director of Business Management of
USWest Wireless.  From 1990 to January 1996, Ms. Zeletes served in various
positions at AT&T, most recently as Group Manager of Cordless Telephones, a
business unit of AT&T's Consumer Products Division.  Ms. Zeletes holds a B.A. in
English from the University of Minnesota.

     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 (the
"Board").  The Company's certificate of incorporation and bylaws provide for a
classified Board.  Accordingly, the terms of the office of the Board of
Directors have been divided into three classes.  Class I will expire at the
annual meeting of the stockholders to be held in 1998; Class


                                          12
<PAGE>

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 1998
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 consists of Mr. Flach and Mr. Halprin.
The Audit Committee reviews the Company's 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 the Company's 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 the Company's officers and employees and administers the
Company's employee benefit plans.

                                       PART II

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

Market Information for Common Stock

     The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "HYBR" since the Company's initial public offering on November
12, 1997.  The high and low closing sales prices indicted below are as reported
on the Nasdaq National Market.

<TABLE>
<CAPTION>
                                                1997
                                                HIGH             LOW
                                                ----             ---
          <S>                                   <C>            <C>
          Fourth Quarter . . . . . . . .        $24 1/4        $9 1/4
</TABLE>

Stockholders

     As of February 27, 1998, there were approximately 183 stockholders of
record.

Dividends

     The Company has not paid any cash dividends on its capital stock to date.
The Company currently anticipates that it will retain any future earnings for
use in its business and does not anticipate paying any cash dividends in the
foreseeable future.  The terms of a $5.5 million senior secured convertible
debenture (the "$5.5 Million Debenture") prohibits the Company from paying any
cash dividends for so long as the $5.5 Million Debenture remains outstanding.
In addition, a $4.0 million credit facility (the "Credit Facility") prohibits
the Company from paying any cash dividends.

Recent Sales of Unregistered Securities

     In October 1997, the Company issued a warrant to purchase 2,659 shares of
Common Stock at an exercise price of $10.91 per share to Venture Bank Group in
consideration for extending a credit facility to the Company in the amount of
$4.0 million.

     In November 1997, the Company issued a warrant to purchase 458,295 shares
of Common Stock at an exercise price of $10.91 per share to Alcatel in
consideration for entering into a technology support and development arrangement
with the Company.


                                          13
<PAGE>

Use of Initial Public Offering Proceeds

     The Form S-1 Registration Statement (SEC File No. 333-36001) related to the
Company's initial public offering of Common Stock, $0.001 par value per share,
was declared effective by the SEC on November 11, 1997.  A total of 3,105,000
shares of the Company's Common Stock was registered with the SEC with an
aggregate registered offering price of $43,470,000, which consisted of 2,836,053
shares registered on behalf of the Company (with an aggregate registered
offering price of $39,704,742) and 268,947 shares registered on behalf of
certain stockholders of the Company (with an aggregate registered offering price
of $3,765,258).  The offering commenced on November 12, 1997 and all 2,836,053
and 268,947 shares of Common Stock being offered by the Company and certain
stockholders of the Company, respectively, were sold for the aggregate
registered offering price through a syndicate of underwriters managed by
NationsBanc Montgomery Securities and UBS Securities.  The offering terminated
on November 12, 1997, immediately after all of the Common Stock was sold.

     The Company and the selling stockholders paid to the underwriters an
underwriting discount totaling $2,779,332 and $263,568, respectively, in
connection with the offering.  In addition the Company reasonably estimates that
it incurred additional expenses of approximately $1,280,000 in connection with
the offering.  Thus the net offering proceeds to the Company and the selling
stockholders were approximately $35,645,410 and $3,501,690, respectively.  The
underwriting discount and the other offering expenses were not made directly or
indirectly to any directors, officers of the Company (or their associates), or
persons owning ten (10) percent or more of any class of equity securities of the
Company or to any other affiliates of the Company.

     Through December 31, 1997 the net offering proceeds to the Company have
been utilized as follows:

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

Purchase and installation of                                --                                      $   179,000
machinery and equipment

Purchase of real estate                                     --                                          --

Acquisition of other business(es)                           --                                          --

Repayment of indebtedness                               $1,371,319                                    5,627,497

Working capital                                             --                                        1,534,230

Temporary investment (specify)-                             --                                       26,933,364
Alex. Brown Investment Account
and General Bank Account

Other purposes (specify)                                    --                                          --
</TABLE>


                                          14
<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,
                                                         --------------------------------------------------------------------
                                                             1997           1996           1995           1994           1993
                                                             ----           ----           ----           ----           ----
                                                                           (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                      <C>            <C>            <C>            <C>            <C>
STATEMENT OF OPERATIONS DATA:
Net sales. . . . . . . . . . . . . . . . . . . . . . .   $ 14,270       $  2,962       $    630       $    668       $  1,010
Cost of sales. . . . . . . . . . . . . . . . . . . . .     12,258          3,130            761          1,362            746
                                                         --------       --------       --------       --------       --------
    Gross profit (loss). . . . . . . . . . . . . . . .      2,012           (168)          (131)          (694)           264
                                                         --------       --------       --------       --------       --------
Operating expenses:
  Research and development . . . . . . . . . . . . . .      7,108          5,076          3,862          1,251            271
  Sales and marketing. . . . . . . . . . . . . . . . .      4,319          1,786            390            348            133
  General and administrative . . . . . . . . . . . . .      3,606          1,714            748            533            250
                                                         --------       --------       --------       --------       --------
    Total operating expenses . . . . . . . . . . . . .     15,033          8,576          5,000          2,132            654
                                                         --------       --------       --------       --------       --------
      Loss from operations . . . . . . . . . . . . . .    (13,021)        (8,744)        (5,131)        (2,826)          (390)
Interest income and other expense, net . . . . . . . .        399            257            166             30              5
Interest expense . . . . . . . . . . . . . . . . . . .       (968)           (28)          (304)          (101)            --
                                                         --------       --------       --------       --------       --------
      Net loss . . . . . . . . . . . . . . . . . . . .   $(13,590)      $ (8,515)      $ (5,269)      $ (2,897)      $   (385)
                                                         --------       --------       --------       --------       --------
                                                         --------       --------       --------       --------       --------
Basic and diluted net loss per share . . . . . . . . .  $   (3.84)      $  (3.36)      $  (2.37)      $  (1.30)       $ (0.18)
                                                         --------       --------       --------       --------       --------
                                                         --------       --------       --------       --------       --------
Shares used in basic and diluted per share
  calculations(1). . . . . . . . . . . . . . . . . . .      3,541          2,535          2,223          2,226          2,094
                                                         --------       --------       --------       --------       --------
                                                         --------       --------       --------       --------       --------


                                                                                       DECEMBER 31,
                                                         --------------------------------------------------------------------
                                                             1997           1996           1995           1994           1993
                                                             ----           ----           ----           ----           ----
BALANCE SHEET DATA:
Cash, cash equivalent and short term investments . . .   $ 27,148       $  6,886       $  3,353       $  1,426       $  1,031
Working capital. . . . . . . . . . . . . . . . . . . .     35,911          6,944          3,149          1,129            484
Total assets . . . . . . . . . . . . . . . . . . . . .     43,119         10,539          4,586          1,892          1,353
Long-term debt . . . . . . . . . . . . . . . . . . . .      6,118            472            228          2,108            604
Total stockholders' equity (deficit) . . . . . . . . .     33,164          7,709          3,661           (708)             1
</TABLE>

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

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

     The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and related Notes thereto included elsewhere in this Form 10K. This
Form 10K contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that may cause such
a difference include, but are not limited to, those discussed in "Factors That
May Affect Future Operating Results."

OVERVIEW

     Hybrid 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 "last mile"
connection to the end-user which causes slow response time for those accessing
bandwidth-intensive information over the Internet or corporate intranets.
Hybrid's Series 2000 product


                                          15
<PAGE>

line consists of secure headend routers, wireless and cable modems and
management software for use with either wireless transmission or cable TV
facilities.

     From its inception in June 1990 until September 1996, the Company
focused on the design, development, manufacturing and market introduction of
the first two generations of Hybrid's Series 1000 ("Series 1000") product
line. These product generations offered 5 and 10Mbps access speeds for
downstream data. In October 1996, the Company introduced its third generation
product line, the Series 2000, which provides 30Mbps downstream access
speeds. During the three years ended December31, 1997 the Company sold a
limited number of points of presence headend equipment ("PoPs" or "headends")
and cable modems from both product series. The Company expects to generate
substantially all of its future sales from its Series2000 products,
enhancements to these products, new products and related support and
networking services. The Company recognizes revenue upon shipment of products
and accrues for warranty costs at the time of shipment. To date, net sales
include principally product sales and, to a lesser extent, support and
networking services.

     The Company sells its products primarily in the United States, and markets
its products to a variety of customers, including 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 the Company's net sales.  For
example, the Company has increased sales through distributors, with 3D
Communications, a subsidiary of IKON Corporation, becoming the Company's largest
customer for 1997.  Although the Company has expanded its customer base, the
Company expects that a limited number of customers will continue to account for
a substantial portion of the Company's net sales for the foreseeable future.
The Company expects that its largest customers in future periods could be
different from its largest customers in prior periods due to a variety of
factors, including customers' deployment schedules and budget considerations.
As a result, the Company has experienced, and expects to continue to experience,
significant fluctuations in its results of operations on a quarterly and an
annual basis. If orders from significant customers are delayed, cancelled or
otherwise fail to materialize in any particular  period, or any significant
customer delays payment or fails to pay, the Company can experience significant
operating losses in such period.  In addition, historically, a substantial
majority of the Company's net sales in a given quarter have been recorded in the
third month with a concentration in the last two weeks of the quarter.
Accordingly, any delay in the closing of quarter end transactions can have a
significant impact on the Company's operating results for a particular quarter.
Further, the Company's customers include companies in the early stage of
development or in need of capital to upgrade or expand their services.  In order
to address the needs and competitive factors facing the emerging broadband
access market, the Company on occasion has provided customers extended payment,
promotional pricing or other terms. For instance, Internet Ventures, Inc., which
accounted for 7.5% of the Company's net sales for the year ended December 31,
1997, has recently been provided extended payment terms and accounted for 8.7%
of the Company's accounts receivable as of December 31, 1997. The provision of
extended payment terms, or the extension of promotional payment, pricing or
other terms can have a material adverse effect on the Company's business,
operating results and financial condition.  For example, the Company increased
its reserves for doubtful accounts in the fourth quarter of 1997, which
adversely effected operating results.   See "Factors That May Affect Future
Operating Results--Inexperience in Emerging Market," "Factors That May Affect
Future Operating Results--Customer Concentration," "Factors That May Affect
Future Operating Results--Dependence on Broadband Wireless System Operators" and
" Factors That May Affect Future Operating Results--Competition."

     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, evolving industry standards.  The
Company's 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 MCNS, could have a material effect on the Company's business, operating
results and financial condition:  See "Factors That May Affect Future Operating
Results--Competition" and "Factors That May Affect Future Operating
Results--Competing Technologies and Evolving Industry Standards."  In addition
the market for the Company's products has historically experienced significant
price erosion over the life of a product, and the Company has experienced and
expects to continue to experience pressure on its unit average selling prices
("ASPs"). While the Company has initiated cost reduction programs to offset
pricing pressures on its products, there can be no assurance that these cost
reduction efforts will continue to keep pace with competitive price pressures or
lead to improved gross margins. If the Company is unable to continue to reduce
costs, its gross margins and profitability will be adversely affected. The
Company's gross margins are also impacted by the sales mix of PoPs and modems.
The Company's single-user modems generally have lower margins than its
multi-user modems, both of which have lower margins than the Company's headends.
Due to current customer demand, the Company anticipates that the sales mix of
modems will be weighted toward lower-margin single-user modems in the
foreseeable future. As a result, gross margins could be adversely


                                          16
<PAGE>

affected in the near term.  See "Factors That May Affect Future Operating
Results--Need to Reduce Cost of Client Modems," "Factors That May Affect Future
Operating Results--Competition" and "Factors That May Affect Future Operating
Results--Limited Manufacturing Experience; Sole Source Manufacturing."

     The Company has recently initiated patent infringement litigation against
two parties, who in response are seeking declarations of invalidity of the
Company's patents and non-infringement.  Such litigation could be time consuming
and costly and therefore have a material adverse effect on the Company's
business, operating results and financial condition.

     The Company incurred net losses for the years ended December31, 1997, 1996
and 1995 of $13,590,000, $8,515,000 and $5,269,000, respectively. As a result,
the Company had an accumulated deficit of $30,932,000 as of December 31, 1997.
The Company expects to increase its capital expenditures, as well as its
research and development and other operating expenses, in order to support and
expand the Company's operations. As a result, the Company expects to incur
losses for the foreseeable future. See "Factors That May Affect Future Operating
Results--Limited Operating History; History of Losses," "Factors That May Affect
Future Operating Results--Fluctuations in Operating Results; Absence of
Significant Backlog; Continuing Decline of Average Selling Prices" and "Factors
That May Affect Future Operating Results--Lengthy Sales Cycle."

     As of December 31, 1997, the Company had approximately $14,052,000 in gross
deferred tax assets comprised primarily of net operating loss carryforward and
research and development tax credits. The Company believes that, based on a
number of factors, there is uncertainty regarding the realizability of the
deferred tax assets. These factors include the Company's history of net losses
since its inception and the fact that the market in which the Company competes
is intensely competitive and characterized by rapidly changing technology. As a
result, the Company believes that, based on the current available evidence, it
is more likely than not that the Company will not generate sufficient taxable
income to realize its net deferred tax assets. 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. The Company 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.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                       -----------------------------------
                                                        1997           1996           1995
                                                        ----           ----           ----
     <S>                                              <C>            <C>            <C>
     Net sales . . . . . . . . . . . . . . . . . .     100.0%         100.0%         100.0%
     Cost of sales . . . . . . . . . . . . . . .        85.9          105.7          120.8
                                                      ------         ------         ------
         Gross margin. . . . . . . . . . . . . .        14.1           (5.7)         (20.8)
                                                      ------         ------         ------
     Operating expenses:
       Research and development. . . . . . . . . .      49.8          171.4          613.0
       Sales and marketing . . . . . . . . . . . .      30.2           60.3           61.9
       General and administrative. . . . . . . .        25.3           57.8          118.7
                                                      ------         ------         ------
         Total operating expenses. . . . . . . . .     105.3          289.5          793.6
                                                      ------         ------         ------
           Loss from operations. . . . . . . . . .     (91.2)        (295.2)        (814.4)
     Interest income and other expense, net. . . .       2.8            8.7           26.3
     Interest expense. . . . . . . . . . . . . .        (6.8)          (1.0)         (48.2)
                                                      ------         ------         ------
         Net loss. . . . . . . . . . . . . . . . .     (95.2)%       (287.5)%       (836.3)%
                                                      ------         ------         ------
                                                      ------         ------         ------
</TABLE>

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

     NET SALES.  Net sales were $14,270,000 for the year ended December 31,
1997, compared to net sales of $2,962,000 for the same period in 1996. The
significant growth in net sales was primarily due to 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. In 1997, broadband wireless system operators accounted for 50.6% of
net sales, distributors accounted for 20.4% of net sales, cable systems
operators accounted for 19.3% of net sales and ISPs accounted


                                          17
<PAGE>

for 9.7% of net sales. During 1996, cable system operators accounted for 40.6%
of net sales, ISPs accounted for 43.5% of net sales and broadband wireless
system operators accounted for 15.7% of net sales. International sales accounted
for 8.5% and 10.1% of net sales for the years ended 1997 and 1996, respectively.
The Company had one customer that accounted for 13.7% of net sales during 1997.
The Company had two customers that accounted for 41.0% and 20.7%, respectively,
of net sales during 1996.

     GROSS PROFIT.  Gross margin was 14.1% and negative 5.7%, in 1997 and 1996,
respectively. The improvement in gross margin was primarily due to the shift in
sales mix from the lower margin Series1000 products to the higher margin
Series 2000 products, lower per unit manufacturing costs and greater absorption
of overhead.

     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 its existing products. Research and development
expenses were $7,108,000 and $5,076,000 during the years ended December 31, 1997
and 1996, respectively, representing 49.8% 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. The Company intends to continue to increase its
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 $4,319,000 and $1,786,000 during the years ended December 31, 1997 and
1996, respectively, representing 30.2% 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, increased commissions as a
result of higher net sales and increased costs for marketing and promoting the
Company's Series 2000 product line. The Company expects 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 $3,606,000 and $1,714,000 during the years ended
December 31, 1997 and 1996, respectively, representing 25.3% and 57.8% of net
sales, respectively. The increase in absolute dollars was due to increased
charges to the provision for doubtful accounts, increased legal costs to support
the Company's patent program and increased headcount and related payroll costs.

     INTEREST INCOME (EXPENSE) AND OTHER EXPENSE, NET.  The Company incurred net
interest expense during 1997 of $569,000 and earned net interest income of
$229,000 during 1996. Net interest expense incurred during 1997 was the result
of the Company's use of capital lease financing to fund a majority of its
capital expenditures, and interest expense (including noncash expense incurred
in the fourth quarter of 1998 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 the issuance of Preferred
Stock in December 1995 and June 1996, offset in part by the interest expense
incurred on outstanding capital lease obligations.

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

     NET SALES.  Net sales were $2,962,000 and $630,000 in 1996 and 1995,
respectively. The increase in net sales was due primarily to the increase in
unit sales due to the introduction of the Series 2000 product line in October
1996.

     GROSS PROFIT.  Gross margin improved to negative 5.7% in 1996 compared
to negative 20.8% in 1995. The improvement in gross margin was primarily
attributable to the introduction of the Series 2000 product line, which
generally has higher gross margins than the Series 1000 product line, and to
the increase in net sales, which allowed for greater absorption of overhead.

     RESEARCH AND DEVELOPMENT.  Research and development expenses were
$5,076,000 and $3,862,000 for 1996 and 1995, respectively, representing 171.4%
and 613.0% of net sales, respectively. The increase in research and development
expenses in absolute dollars during 1996 was due to increased headcount and
related labor costs, increased cost of


                                          18
<PAGE>

development material to support product development and depreciation expenses
associated with capital purchases for product testing.

     SALES AND MARKETING.  Sales and marketing expenses were $1,786,000 and
$390,000 for 1996 and 1995, respectively, representing 60.3% and 61.9% of net
sales, respectively. The increase in sales and marketing expenses in absolute
dollars during 1996 was principally due to increased headcount for staff level
positions, the hiring of the Company's vice presidents of sales and marketing,
increased commissions as a result of higher net sales and increased costs for
marketing and promoting the Company's products.

     GENERAL AND ADMINISTRATIVE.  General and administrative expenses were
$1,714,000 and $748,000 for 1996 and 1995, respectively, representing 57.8% and
118.7% of net sales, respectively. The increase in general and administrative
expenses in absolute dollars during 1996 was due to increased allowances for
doubtful accounts, higher legal costs to prosecute patents, and increased
headcount and related personnel costs.

     INTEREST INCOME (EXPENSE) AND OTHER EXPENSE, NET.  During 1996, the Company
had net interest income of $229,000 compared to net interest expense of $138,000
in 1995. The increase in 1996 compared to 1995 was primarily due to higher cash
balances as a result of the issuance of Preferred Stock in June1996. The
interest income earned during 1996 was offset in part by interest expense
incurred on outstanding capital lease obligations.

LIQUIDITY AND CAPITAL RESOURCES

     The Company has historically financed its operations primarily through a
combination of debt and equity and equipment lease financing. As of December 31,
1997, the Company had working capital of $35,911,000, including $27,148,000 in
cash, cash equivalents and short-term investments, as compared to working
capital of $6,944,000 and $6,886,000 in cash and cash equivalents as of
December31, 1996.  The $20,262,000 increase in cash, cash equivalents and
short-term investments for the year ended December 31, 1997 resulted from a
number of financings during 1997 which generated net proceeds of $35,645,000
from the sale of common stock through the Company's initial public offering in
November 1997 (the "Initial Public Offering"), net proceeds of $2,000,000 from
the issuance of Preferred Stock in February 1997, net proceeds of $5,000,000
from the issuance of a $5.5 million Convertible Debenture in April 1997 (the
"$5.5 Million Debenture") and proceeds of $6,882,000 from the issuance of
Convertible Subordinated Notes Payable in September 1997 (which notes were
repaid in November 1997 with net proceeds of the Initial Public Offering).  The
increase in cash, cash equivalents and marketable securities was partially
offset by the need to support the growth in accounts receivable and inventory,
as well as, increased operating expenditures.

     Cash used in operating activities during 1997 was $21,435,000, primarily
the result of the net loss of $13,590,000, the increase in accounts
receivable of $8,697,000 as a result of higher net sales made late in the
fourth quarter and extended payment terms given to certain customers, and the
increase in inventories of $2,877,000 to support higher sales volumes and the
delay of sales orders by several customers in the fourth quarter. Cash used
in operating activities during 1997 was offset by $1,175,000 related to the
increase in the provision for doubtful accounts as a result of the Company's
assessment of the risks associated with several slow paying customers, an
increase of $452,000 in the provision for inventory due to the Company's
assessment of excess and obsolete inventory levels, depreciation and
amortization of $760,000, and increases in accounts payable and accrued
liabilities of $609,000 and $648,000, respectively, as a result of increased
inventory purchases and operating expenditures.

     Cash used in investing activities during 1997 was $1,700,000, and resulted
primarily the result of purchases of short term investments of $981,000 and
purchases of property and equipment of $643,000. During 1997, capital
expenditures for property and equipment were primarily for computers, furniture,
fixtures and engineering test equipment. The Company has funded and expects to
continue to fund a substantial portion of its property and equipment
expenditures from a variety of sources including direct vendor leasing programs
and third party commercial leasing arrangements. As of December 31, 1997, the
Company has no material commitments for capital expenditures. The Company
expects capital expenditures for the next twelve months to be between
$4.0 million to $5.0 million.

     Cash provided by financing activities during 1997 was $42,416,000,
attributable primarily to net proceeds of $2,000,000 from the sale of Preferred
Stock, net proceeds of $5,000,000 from the issuance of the $5.5 Million
Debenture and net proceeds of $35,730,000 from the issuance of Common Stock from
the Company's Initial Public Offering in November 1997 and exercise of stock
options.


                                          19
<PAGE>

     The Company's principal source of liquidity at December 31, 1997 was cash,
cash equivalents and short-term investments of $27,148,000 and the Company's
$4.0 million bank credit facility (the "Credit Facility").  The Credit Facility,
which expires in October 1998, bears interest at the bank's prime rate and is
collateralized by certain of the Company's assets. As of December 31, 1997, the
Company has no borrowings outstanding under the Credit Facility.

     The Company believes that cash generated from operations, if any, and
existing credit facilities  will provide the Company with sufficient to finance
its operations for at least the next 12 months. However, the Company may require
additional funds to support its working capital requirements or for other
purposes, and may seek to raise such additional funds through the sale of public
or private equity or debt financing or from other sources. The sale of
additional equity or convertible debt securities may result in additional
dilution to the Company's stockholders. No assurance can be given that
additional financing will be available or that, if available, such financing can
be obtained on terms favorable to the Company or its stockholders.

     Under the $5.5 Million Debenture, the Company is subject to limitations on
the amount of capital expenditures it may incur in any 12 month period and may
not declare dividends, retire any subordinated debt other than in accordance
with its terms, or distribute its assets to any stockholder so long as the
$5.5 Million Debenture remains outstanding. In addition, under the Credit
Facility, the Company may not declare dividends. The $5.5 Million Debenture and
the Credit Facility are collateralized by substantially all of the Company's
assets. See "Factors That May Affect Future Operating Results--Restrictive Debt
Covenants" and Notes 6 and 7 of Notes to Financial Statements.

IMPACT OF ADOPTION OF NEW ACCOUNTING STANDARDS

     In June 1997, the Financial Accounting Standards Board issued Statement
No.130, "Reporting Comprehensive Income." This Statement establishes standards
for reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements, Such items may include foreign currency translation adjustments,
unrealized gains/losses from investing and hedging activities, and other
transactions.  This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements.  This Statement is required to be adopted for fiscal
years beginning after December 15, 1997. The Company has yet to determine the
affect of adoption of this statement.

     In June 1997, the Financial Accounting Standards Board issued Statement
No.131, "Disclosures about Segments of an Enterprise and Related Information."
This Statement establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to stock holders.  It
also establishes standards for related disclosures about products and services,
geographic areas and major customers.  This Statement is required to be adopted
for fiscal years beginning after December 15, 1997. The Company has yet to
determine the affect of adoption of this statement.

YEAR 2000 COMPLIANCE

     Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field.  Beginning in
the year 2000, these date code fields will need to accept four digit entries
to distinguish 21st century dates.  While uncertainty exists concerning the
potential effects associated with such compliance, the Company does not
believe that year 2000 compliance will result in a material adverse effect on
its financial condition or results of operations.

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

     The following risk factors should be considered carefully in addition to
the other information presented in this report. This report contains forward
looking statements that involve risks and uncertainties.  The Company's
actual results may differ significantly from the results discussed in the
forward looking statements.  Factors that might cause such differences
include, but are not limited to, the following risk factors:

                                          20
<PAGE>

LIMITED OPERATING HISTORY; HISTORY OF LOSSES

     The Company was organized in 1990 and has experienced operating losses each
year since that time. As of December 31, 1997, the Company had an accumulated
deficit of approximately $30.9 million. Because the Company and the market for
broadband access through cable modems is still in an emerging stage, there can
be no assurance that the Company will ever achieve profitability on a quarterly
or an annual basis or will sustain profitability once achieved. The Company
began shipment of its first products, the Series1000 product line in 1994 and
sold only minimal quantities before replacing them with its Series2000 product
line, which was first shipped in October 1996. The revenue and profit potential
of the Company's business and the industry is unproven, and the Company's
limited operating history makes its future operating results difficult to
predict. The Company believes that its growth and future success will be
substantially dependent upon broadband wireless system operators, cable system
operators and ISPs adopting its technologies, purchasing its products and
selling its client modems to cable, wireless and ISP subscribers.  The Company
has had limited experience selling its products to broadband wireless system
operators, cable system operators, ISPs, resellers and other businesses, and
there are many impediments to its being able to do so. See "--Inexperience in
Emerging Market."  The market for the Company's products has only recently begun
to develop, is rapidly changing and is characterized by an increasing number of
competitors and competing technologies.  Certain competitors of the Company
currently offer more price competitive products. In the event that the Company's
current or future competitors release new products or technologies with more
advanced features, better performance or lower prices than the Company's current
and future products, demand for the Company's products would decline. See
"--Competition."  Failure of the Company's products to achieve market acceptance
could have a material adverse effect on the Company's business, operating
results and financial condition.  Although the Company has experienced
significant growth in net sales in recent periods, the Company does not believe
that this growth rate is sustainable or indicative of future operating results.
In addition, the Company has had negative gross margins in past periods, and
there can be no assurance that any continued growth in net sales will result in
positive gross profits or operating profits.  Future operating results will
depend on many factors, including the growth of the wireless and cable modem
system markets, demand for the Series 2000 and future product lines, purchasing
decisions by wireless and cable companies and their subscribers, the level of
product and price competition, market acceptance of competing technologies to
deliver high speed Internet access, evolving industry standards, the ability of
the Company to develop and market new products and control costs, general
economic conditions and other factors. The Company believes that it will
continue to experience net losses for the foreseeable future.

FLUCTUATIONS IN OPERATING RESULTS; ABSENCE OF SIGNIFICANT BACKLOG; CONTINUING
DECLINE OF AVERAGE SELLING PRICES

     The Company has experienced, and expects to continue to experience,
significant fluctuations in its results of operations on a quarterly and an
annual basis. Historically, the Company's quarterly net sales have been
unpredictable due to a number of factors. Factors that have influenced and will
continue to influence the Company's results of operations in a particular period
include: the size and timing of customer orders and subsequent shipments,
particularly with respect to the Company's headend equipment; customer order
deferrals in anticipation of new products or technologies; timing of product
introductions or enhancements by the Company or its competitors; market
acceptance of new products; technological changes in the cable, wireless and
telecommunications industries; competitive pricing pressures; the effects of
extended payment terms, promotional pricing, service, marketing or other terms
offered to customers; accuracy of customer forecasts of end-user demand; changes
in the Company's operating expenses; personnel changes; quality control of
products sold; regulatory changes; customer's capital spending; delays of orders
by customers; customers' delay in or failure to pay accounts receivable; and
general economic conditions. In addition, the inability to obtain components
from suppliers or manufacturers has adversely affected the Company's operating
results in the past and may materially adversely affect the Company's operating
results in the future.  For example, in the second quarter and a portion of the
third quarter of 1997, the Company did not receive the full shipment of modems
anticipated from Sharp, its primary modem manufacturer, because of technical
delays in product integration.  As a result, the Company was unable to fill all
customer orders for the second quarter.  While such problems have since been
resolved, there can be no assurance that the Company will not experience similar
supply problems in the future with respect to Sharp or any other supplier or
manufacturer.

     The timing and volume of customer orders are difficult to forecast because
wireless and cable companies typically require delivery of products within 30
days, thus a substantial majority of the Company's net sales are booked and
shipped in the same quarter. Accordingly, the Company has a limited backlog of
orders, and net sales for any future quarter are difficult to predict. Further,
sales are generally made pursuant to purchase orders, which can be rescheduled,
reduced or cancelled with little or no penalty. Historically, a substantial
majority of the Company's net sales in a given quarter have been recorded in the
third month of the quarter, with a concentration of such net sales in the last
two weeks of the quarter.


                                          21
<PAGE>

Because of the relatively large dollar size of the Company's typical
transaction, any delay in the closing of a transaction can have a significant
impact on the Company's operating results for a particular period. See
"--Lengthy Sales Cycle."

     Historically, average selling prices ("ASPs") in the wireless and cable
systems industry have decreased over the life of individual products and
technologies. In the past, the Company has experienced decreases in unit ASPs of
each of its products. The Company anticipates that unit ASPs of its products
will continue to decrease, which would cause continuing downward pressure on the
gross margins for these products. The Company's gross margins are also impacted
by the sales mix of PoPs and modems.  The Company's single-user modems generally
have lower margins than its multi-user modems, both of which have lower margins
than the Company's headends. Due to current customer demand, the Company
anticipates that the sales mix of modems will continue to be weighted toward
lower-margin single-user modems in the foreseeable future. See "--Need to Reduce
Cost of Client Modems" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

LENGTHY SALES CYCLE

     The sale of the Company's products typically involves a significant
technical evaluation and commitment of capital and other resources, with the
delays frequently associated with customers' internal procedures to approve
large capital expenditures, to engineer deployment of new technologies within
their networks and to test and accept new technologies that affect key
operations. For these and other reasons, the sales cycle associated with the
Company's products is typically lengthy, generally lasting three to nine months
and is subject to a number of significant risks, including customers' budgetary
constraints and internal acceptance reviews, that are beyond the Company's
control. Because of the lengthy sales cycle and the large size of customers'
orders, if orders forecasted for a specific customer for a particular quarter
are not realized in that quarter, the Company's operating results for that
quarter could be materially adversely affected. See "--Fluctuations in Quarterly
Operating Results; Absence of Significant Backlog; and Continuing Decline of
Average Selling Prices".

DEPENDENCE ON RECENTLY INTRODUCED PRODUCTS AND PRODUCTS UNDER DEVELOPMENT; RAPID
TECHNOLOGICAL CHANGE

     The market for high speed Internet access products is characterized by
rapidly changing technologies and short product life cycles. Prior to
October1996, substantially all of the Company's product sales were attributable
to its Series 1000 product line. In October 1996, the Company introduced its
Series 2000 product line (which replaced the Series 1000 product lines). The
Company is currently generating, and expects to continue to generate in the near
term, substantially all of its net sales from its Series 2000 product line and
related support and networking services. To date, substantially all products
sold have been for telephone return based systems and have involved single-user
modems. Since the Series 2000 products have been subject to only limited
single-user testing, the reliability, performance and market acceptance of the
Company's products are uncertain, and there is increased risk that the products
will be affected by problems beyond those that are generally associated with new
products. The failure of the current generation of products to perform
acceptably in certain beta test situations has caused the Company to make
engineering changes to such products, and the Company continues to modify the
designs of its products in an attempt to increase their reliability and
performance. There can be no assurance that the Company's engineering and
product design efforts will be successful. The Company's future success will
depend in part upon its ability to develop, introduce and market new products or
enhancements to existing products in a timely manner and to respond to
competitive pressures, changing industry standards or technological advances.
For example, the Company is currently developing products for two-way cable
transmission using QPSK technology which the Company believes its customers will
require. In addition, the Company is developing products for two-way broadband
wireless transmission.  There can be no assurance that the Company will
successfully develop or introduce new products, or that any new products will
achieve market acceptance. Any failure to release new products or to fix,
upgrade or redesign existing products on a timely basis could have a material
adverse effect on the Company's business, operating results and financial
condition. In addition, as the Company introduces new products that cause
existing products to become obsolete, the Company could experience inventory
writeoffs, which could have a material adverse effect on the Company's business,
operating results and financial condition.  For example, to the extent customers
demand two-way products, demand for the Company's wireless and cable systems
that utilize telephone return could be adversely effected.  See
"Business--Products, Technology and Services" and "Business--Research and
Development."



                                          22
<PAGE>

COMPETING TECHNOLOGIES AND EVOLVING INDUSTRY STANDARDS

     The market for high speed Internet access products is characterized by
competing technologies, evolving industry standards and frequent new product
introductions. Market acceptance of alternative wired technologies, such as
Integrated Services Digital Network ("ISDN") or xDSL, or wireless technologies,
such as DBS, could decrease the demand for the Company's products or render such
products obsolete if such alternatives are viewed as providing faster access,
greater reliability or improved cost-effectiveness. In particular, it is
possible that the perceived high speed access advantage provided by cable and
broadband wireless systems may be undermined by the need to share bandwidth,
which results in the reduction in individual throughput speeds. In addition, the
emergence or evolution of industry standards, through either adoption by
official standards committees or widespread use by cable system operators,
broadband wireless system operators or telcos, could require the Company to
redesign its products, resulting in delays in the introduction of such products.
For instance, the Company's products are not in full compliance with the DAVIC
specifications that are supported in Europe or the recently announced
preliminary versions of the MCNS specifications or IEEE standards.  Recently,
certain cable customers and competitors have been giving increased emphasis to
the value of compliance with MCNS specifications.  If those specifications or
other specifications or standards become widely accepted, and assuming the
Company's products are not in compliance, the Company's customers and potential
customers may refuse to purchase the Company's products, materially adversely
affecting its business, operating results and financial condition. Further, the
Company's products are not compatible with headend equipment and modems of other
suppliers of broadband Internet access products. As a result, potential
customers who wish to purchase broadband Internet access products from multiple
suppliers may be reluctant to purchase the Company's products. The rapid
development of new competing technologies and standards increases the risk that
current or new competitors could develop products that would reduce the
competitiveness of the Company's products. Market acceptance of new technologies
or the failure of the Company to develop and introduce new products or
enhancements directed at new industry standards could have a material adverse
effect on the Company's business, operating results and financial condition. See
"Business--Industry Background" and "Business--Competition."

INEXPERIENCE IN EMERGING MARKET

     Cable system operators, broadband wireless system operators, distributors
and other customers may prefer to purchase products from larger, more
established manufacturing companies, including certain of the Company's
competitors, that can demonstrate the capability to supply large volumes of
products on short notice. In addition, many cable system operators, broadband
wireless system operators and other customers may be reluctant to adopt
technologies that have not gained wide acceptance among their industry peers.
Certain competitors of the Company have already established relationships in the
market, further limiting the Company's ability to sell products to such
potential customers. While the Company has sold products to certain cable system
operators, broadband wireless system operators and other customers, most of
these sales are not based on long-term contracts and such customers may
terminate their relationships with the Company at any time. Further, the
Company's contracts generally do not contain significant minimum purchase
requirements. In addition, in order to address the needs and competitive factors
facing the broadband access market sales the Company has and in the future may
need to offer extended payment, pricing, service, marketing or other promotional
terms which can have a material adverse effect on the Company's business,
operating results and financial condition.  For example, the Company increased
its reserves for doubtful accounts in the fourth quarter of 1997 due to the
assessment of the risk associated with the slow pay of several customers, which
adversely effected operating results.  If the Company is unable to market and
sell its products to a significant number of broadband wireless system
operators, cable system operators and other customers, or if such entities
should cease doing business with the Company, the Company's business, operating
results and financial condition could be materially adversely affected. See
"Business--Customers."

LIMITED PENETRATION OF TWO-WAY CABLE; DEPENDENCE ON CABLE OPERATOR INSTALLATIONS

     Although wired cable systems pass a significant percentage of U.S.
households, very few of those households are currently served by cable plants
that support two-way data access. Further, a limited number of businesses, a
major target market for the Company, currently have cable access. To support
upstream data on existing hybrid fiber coax ("HFC") cable plants, a cable
operator must install two-way amplifiers in the cable network to use the portion
of the cable spectrum allocated for upstream use. There can be no assurance that
cable system operators will choose to upgrade existing cable systems or provide
new cable systems with two-way capability. In particular,  certain large cable
system operators have announced their intention to slow or halt plans to upgrade
existing cable systems. Adding upstream capabilities to new or existing cable
systems is expensive and generally requires portions of existing systems to be
unavailable during the installation process. Cable system operators may decide
to wait for the next generation of wired infrastructure, such as


                                          23
<PAGE>

optical fiber, before deciding whether to provide two-way communication. The
Federal Communications Commission ("FCC") has required cable system operators to
dedicate the frequency spectrum from 5 MHz to 42 MHz for upstream transmissions,
but because this portion of spectrum is small in comparison to the downstream
portion, it is more susceptible to ingress noise and other impairments and it
can support a more limited bandwidth. Due to a scarcity of channels, cable
system operators have been and may continue to be reluctant to dedicate a
portion of their frequency spectrum to new uses such as those for which the
Company's products are designed. Consequently, the Company expects that upstream
data traffic on cable systems will be limited to narrow or congested parts of
the spectrum, thus limiting the number of potential simultaneous users. If cable
system operators do not install two-way capability on their cable systems in a
timely fashion or if such operators do not dedicate sufficient frequency
spectrum for upstream traffic, the use of cable for upstream data traffic will
be limited. Any such limitation could have a material adverse effect on the
Company's business, operating results and financial condition. See
"Business--Industry Background" and "Business--Customers."

DEPENDENCE ON BROADBAND WIRELESS SYSTEM OPERATORS

     The Company depends on broadband wireless system operators and distributors
to purchase its wireless modem products and to sell its client wireless modems
to end-users.  Approximately one-half of the Company's net sales in 1997 were
attributable to customers in the broadband wireless industry.  The Company
anticipates that the trend of increasing sales to broadband wireless customers
will continue in 1998, although changes could occur in Hybrid's product
offerings or other circumstances that might affect this trend.  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. Accordingly, to address
the needs of and competitive factors facing these customers, the Company on
occasion has provided certain broadband wireless system operators extended
payment, promotional pricing or other terms which can have a material adverse
effect on the Company's business, operating results and financial condition. 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. 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. It
is estimated that there are only approximately 1.0million wireless cable
customers in the United States today. In addition, current technical and
legislative restrictions have limited the number of analog channels that
wireless cable companies can offer 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 both digital TV and Internet access
to create new revenue streams. To the extent that such operators choose to
invest in digital TV, such decision will limit the amount of capital available
for investment in deploying other services, such as Internet access. 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. In addition, there can be no assurance that the
broadband wireless system operators' current customer bases have significant
interest in high speed Internet connectivity at a price greater than that
offered by telcos or that broadband wireless system operators  can attract
customers, particularly in the business community, which have not traditionally
subscribed to wireless cable services. While broadband wireless system operators
are currently utilizing telephone return for upstream data transmission, the
Company believes that wireless operators will demand two-way wireless
transmission as more of these entities obtain licenses for additional
frequencies. Currently, the Company is developing its products to satisfy the
two-way transmission needs of the broadband wireless system operators. There can
be no assurance that the Company will be successful in such development efforts,
or if successful, on a timely basis.  The failure of the Company's products to
gain market acceptance could have a material adverse effect on the Company's
business, operating results and financial condition.

DEPENDENCE ON CABLE SYSTEM OPERATORS

     The Company depends on cable system operators to purchase its cable modem
systems and to sell its client cable modems to end-users. 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. Even if cable system operators choose to provide Internet
access, there can be no assurance that they would provide such access over
anything other than that portion of their cable system that has two-way cable
transmission capabilities. In addition, there can be no assurance that if such
cable system operators provide Internet access, they would use the Company's
products. The Company is currently developing a two-way cable transmission
solution utilizing the QPSK technology required by cable system operators, but
there can be no assurance that the Company will be successful in such efforts or
that once introduced such products will gain market acceptance. While many cable
system operators are in the process of upgrading, or have announced their
intention to upgrade, their HFC cable infrastructures to provide increased
quality and speed of


                                          24
<PAGE>

transmission and, in certain cases, two-way transmission capabilities, some
cable operators have delayed their planned upgrades indefinitely. Cable system
operators have limited experience with these upgrades, and investments in
upgrades have placed a significant strain on the financial, managerial,
operational and other resources of the cable system operators, most of which are
already highly leveraged and facing intense competition from telcos, satellite
TV and broadband wireless system operators. Because of the substantial capital
cost of upgrading cable systems for higher quality and two-way data
transmission, it is uncertain whether such cable upgrades and additional
services, such as Internet access, will be offered in the near term, or at all.
For example, to increase television programming capacity to compete with other
modes of multichannel entertainment delivery systems, cable system operators may
choose to roll out digital set-top boxes, which do not support high speed
Internet access. Cable system operators may not have the capital required to
upgrade their infrastructure or to offer new services that require substantial
start-up costs. In addition, the Company is highly dependent on cable system
operators to continue to maintain their cable infrastructure in such a manner
that the Company will be able to provide consistently high performance and
reliable service. Therefore, the success and future growth of the Company's
business is subject to economic and other factors affecting the cable television
industry generally, particularly the industry's ability to finance substantial
capital expenditures. See "Business--Industry Background" and
"Business--Customers."

CUSTOMER CONCENTRATION

     To date, a small number of customers has accounted for a substantial
portion of the Company's net sales. The Company expects that net sales from
the sale of its Series 2000 products to a small number of customers will
continue to account for a substantial portion of its net sales for the
foreseeable future. The Company expects that its largest customers in future
periods could be different from its largest customers in prior periods due to
a variety of factors, including customers' deployment schedules and budget
considerations. As a result, the Company has experienced, and expects to
continue to experience, significant fluctuations in its results of operations
on a quarterly and annual basis. Because limited numbers of cable system
operators and broadband wireless system operators account for a majority of
capital equipment purchases in their respective markets, the Company's future
success will depend upon its ability to establish and maintain relationships
with these companies. Further, the Company has increased sales through
distributors, with 3D Communications, a subsidiary of IKON Corporation,
becoming the largest customer for 1997. In addition, as the market for high
speed Internet and corporate intranet access over cable and broadband
wireless systems continues to evolve, the composition of companies
participating in this market will continue to change. For instance, in 1994,
1995 and 1996, Intel accounted for 59.6%, 51.6% and 20.7%, respectively, of
the Company's net sales. From 1994 to 1996, Intel manufactured certain
products based on the Company's design and jointly marketed the Company's
products with its own. However, in 1996 Intel stopped purchasing products
from the Company as it scaled back its direct participation in the wireless
and cable market, though it continues to be a significant stockholder of the
Company and maintains certain licensing and manufacturing rights to certain
of the Company's products. Intel's purchase or support of designs or products
from competitors of the Company could have a material adverse effect on the
Company's business, operating results and financial condition. The loss of
any one of the Company's major customers could have a material adverse effect
on the Company's business, financial condition and results of operations.
Further, the Company's customers include companies in the early stage of
development or in need of capital to upgrade or expand their services.
Accordingly, in order to address the needs of and competitive factors facing
the emerging broadband access markets, the Company on occasion has provided
customers extended payment, promotional pricing or other terms. For instance,
Internet Ventures, Inc., which accounted for 7.5% of the Company's net sales
for the year ended December 31, 1997, was provided extended payment terms and
accounted for 8.7% of the Company's accounts receivable as of December 31,
1997. The provision of extended payment terms, or the extension of
promotional payment, pricing or other terms can have a material adverse
effect on the Company's business, operating results and financial condition.
For example, the Company increased its reserves for doubtful accounts in the
fourth quarter of 1997 due to the assessment of the risk associated with the
slow pay of several customers which adversely effected operating results. The
Company's future success will depend in significant part upon the decision of
the Company's current and prospective customers to continue to purchase
products from the Company. There can be no assurance that the Company's
current customers will continue to place orders with the Company or that the
Company will be able to obtain orders from new customers. If orders from
current customers are cancelled, decreased or delayed, or the Company fails
to obtain significant orders from new customers, or any significant customer
delays payment or fails to pay, the Company's business, operating results and
financial condition could be materially adversely affected. Further, the
Company's headend equipment does not operate with other companies' modems
and, accordingly, the Company is typically a sole source provider to its
customers. As a result, the Company's operating results could be materially
and adversely affected if a major customer were to implement other
technologies that impact the future utilization of the Company's products.
See "Business-Customers."

                                          25
<PAGE>

COMPETITION

     The market for high speed network connectivity products and services is
intensely competitive. The principal competitive factors in this market include
product performance and features (including speed of transmission and upstream
transmission capabilities), reliability, price, size and stability of
operations, breadth of product line, sales and distribution capability,
technical support and service, relationships with cable and broadband wireless
system operators and ISPs, standards compliance and general industry and
economic conditions. Certain of these factors are outside of the Company's
control. The existing conditions in the high speed network connectivity 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 the Company's products or render them obsolete. Similarly, the
continued emergence or evolution of industry standards or specifications may put
the Company at a disadvantage in relation to its competitors.

     The Company's current and potential competitors include providers of
asymmetric cable modems, other types of cable modems and other broadband access
products. Most of the Company's 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 the Company. In addition, many of the Company's competitors are in a better
position to withstand any significant reduction in capital spending by cable or
broadband wireless system operators. Certain of the Company's competitors have
established relationships with cable system operators and telcos and, based on
these relationships, may have more direct access to the decision-makers of such
cable system operators and telcos. In addition, the Company could face potential
competition from certain of its suppliers, such as Sharp if it were to develop
or license modems for sale to others. In addition, suppliers such as Cisco
Systems, which manufactures routers, could become competitors should they decide
to enter the Company's market directly.  Stanford Telecom, which manufacturers
QPSK components and is the sole supplier for certain components used in the
Company's products, has become a competitor for at least one of the Company's
products in the broadband wireless market.  There can be no assurance that the
Company will be able to compete effectively in its target markets.

     The Company's principal competitors in the wireless modem market, Bay
Networks, Harmonic Lightwaves through its acquisition of New Media
Communications, Motorola, NextLevel Systems and Stanford Telecommunications, are
providing wireless Internet connectivity over wireless cable and LMDS
frequencies.

     The principal competitors in the cable modem market include Bay Networks,
Motorola, NextLevel Systems and 3Com and its subsidiary U.S. Robotics. Other
cable modem competitors include Cisco Systems, Com21, Hayes Microcomputer
Products, Phasecom, Scientific-Atlanta, Terayon, Toshiba and Zenith Electronics,
as well as a number of smaller, more specialized companies. Certain competitors
have entered into partnerships with computer networking companies that may give
such competitors greater visibility in this market. For example, CISCO has
announced intentions to develop solutions based on the MCNS standard with
several cable modem vendors and in December 1997 announced a MCNS-compliant
integrated router and cable modem to offer high-speed Internet access. Certain
of the Company's competitors have already introduced or announced high speed
connectivity products that are priced lower than the Company's, and certain
other competitors are more focused on and experienced in selling and marketing
two-way cable transmission products. There can be no assurance that additional
competitors will not introduce new products that will be priced lower, provide
superior performance or achieve greater market acceptance than the Company's
products.

     To be successful, the Company's Series 2000 products must achieve market
acceptance and the Company must respond promptly and effectively to the
challenges of new competitive products and tactics, alternate technologies,
technological changes and evolving industry standards. The Company must continue
to develop products with improved performance over two-way cable transmission
facilities and with the ability to perform over two-way wireless transmission
facilities. There can be no assurance that the Company will meet these
challenges, that it will be able to compete successfully against current or
future competitors, or that the competitive pressures faced by the Company will
not materially and adversely affect the Company's business, operating results
and financial condition. Further, as a strategic response to changes in the
competitive environment, the Company may make certain promotional pricing,
service, marketing or other decisions or enter into acquisitions or new ventures
that can have a material adverse effect on the Company's business, operating
results or financial condition.

     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 compete with satellite
TV providers. In telephony networks, xDSL technology enables digitally
compressed video signals to be transmitted


                                          26
<PAGE>

through existing telephone lines to the home. 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. In the event that any competing architecture or technology were
to limit or halt the deployment of coaxial or HFC systems, the Company's
business, operating results and financial condition would be materially
adversely affected. See "Business--Competition."

NEED TO REDUCE COST OF CLIENT MODEMS

     The list prices for the Series 2000 client modems currently range from
approximately $440 to $795, depending upon features and volume. Customers
wishing to purchase client modems generally must also purchase an Ethernet
adapter for their computer. These prices make the Company's products relatively
expensive for the consumer electronics and the small office or home office
markets. Market acceptance of the Company's products, and the Company's future
success, will depend in significant part on reductions in the unit cost of the
Company's client modems. Certain of the Company's competitors currently offer
products at prices lower than those for the Company's modems. While the Company
has initiated cost reduction programs to offset pricing pressures on its
products, there can be no assurance that these cost reduction efforts will
continue to keep pace with competitive pricing pressures or lead to improved
gross margins. If the Company is unable to continue to obtain cost reductions,
its gross margins and profitability will be adversely affected. To address
continuing competitive and pricing pressures, the Company expects that it will
have to continue to reduce the cost of manufacturing client modems significantly
through design and engineering changes. Such changes may involve redesigning the
Company's products to utilize more highly integrated components and more
automated manufacturing techniques. The Company has entered into high-volume
purchase and supply agreements with Sharp and Itochu and may evaluate the use of
low-cost third party suppliers and manufacturers to further reduce costs. There
can be no assurance that the Company will be successful in redesigning its
products or using more automated manufacturing techniques, that a redesign can
be made on a timely basis and without introducing significant errors and product
defects or that a redesign will result in sufficient cost reductions to allow
the Company to reduce the list price of its client modems. Moreover, there can
be no assurance that additional volume purchase or manufacturing agreements will
be available to the Company on terms that the Company considers acceptable. To
the extent that the Company enters into a high-volume or long-term purchase or
supply agreement and then decides that it cannot use the products or services
provided for in the agreement, the Company's business, operating results and
financial condition could be materially adversely affected.

LIMITED MANUFACTURING EXPERIENCE; SOLE SOURCE MANUFACTURING

     The Company's future success will depend, in significant part, on its
ability to manufacture, or have others manufacture, its products successfully,
cost-effectively and in sufficient volumes. The Company maintains a limited
in-house manufacturing capability at its headquarters in Cupertino for
performing system integration and testing on all headend products and for
manufacturing small quantities of modems. The Company entered into an agreement
pursuant to which Sharp to date has been the exclusive OEM supplier through
Itochu of certain of the Company's client modems, including the substantial
majority of those utilized in the Series 2000. In the second quarter and a
portion of the third quarter of 1997, the Company did not receive the full
shipment of modems anticipated from Sharp because of technical delays in product
integration. While these problems have since been resolved, there can be no
assurance that the Company will not experience similar supply problems in the
future from Sharp or any other manufacturer. The Company is exploring the
possibility of entering into supply arrangements with other manufacturers to
provide additional or alternative sources of supply for certain of the Company's
products, although there can be no assurance that such arrangements will be
entered into or that they will provide for the prompt manufacture of products or
subassemblies in quantities or on terms required to meet the needs of the
Company's customers. The Company has had only limited experience manufacturing
its products to date, and there can be no assurance that the Company or Sharp or
any other manufacturer of the Company's products will be successful in
increasing the volume of its manufacturing efforts. The Company may need to
procure additional manufacturing facilities and equipment, adopt new inventory
controls and procedures, substantially increase its personnel and revise its
quality assurance and testing practices, and there can be no assurance that any
of these efforts will be successful. See "Business--Manufacturing."

DEPENDENCE ON COMPONENT AVAILABILITY AND KEY SUPPLIERS

     The Company is dependent upon certain key suppliers for a number of the
components for its products. For example, the Company currently only has one
vendor, BroadCom Corporation, for the 64 QAM demodulator semiconductors that are
used in the Company's server and client modem products, and in past periods
these semiconductors


                                          27
<PAGE>

have been in short supply. Recently, BroadCom announced a program to develop
with certain of the Company's competitors high-speed cable data modems and
headend equipment based on BroadCom's MCNS compliant semiconductor. As a result
of such program, certain of BroadCom's technological and product enhancements
may be made available to certain of the Company's competitors before making them
available to the Company.  This could have the effect of putting the Company at
a competitive disadvantage with regard to time to market or cause the Company to
have to redesign its products if competitors influence changes in BroadCom's
products. Hitachi is the sole supplier of components used in the processors used
in certain of the Company's modems. In addition, certain other components for
products that the Company has under development are currently only available
from a single source.  For example, Stanford Telecom, which is a competitor for
at least one of the Company's broadband wireless products, is currently the sole
supplier for certain components used in the Company's products, although the
Company is in the process of developing one or more alternative sources.  There
can be no assurance that delays in key components or product deliveries will not
occur in the future due to shortages resulting from a limited number of
suppliers, the financial or other difficulties of such suppliers or the possible
limitation in component product capacities due to significant worldwide demand
for such components.  Any significant interruption or delay in the supply of
components for the Company's products or significant increase in the price of
components due to short supply or otherwise could have a material adverse effect
on the Company's ability to manufacture its products and, therefore, could have
a material adverse effect on its business, operating results and financial
condition. See "Business--Manufacturing."

DEPENDENCE ON THE INTERNET AND INTERNET INFRASTRUCTURE DEVELOPMENT

     The commercial market for products designed for the Internet and the TCP/IP
networking protocol has only recently begun to develop, and the Company's
success will depend in large part on increased use of the Internet. Critical
issues concerning the commercial use of the Internet, including security,
reliability, cost, ease of access and quality of service, remain unresolved and
are likely to affect the development of the market for the Company's products.
The adoption of the Internet for commerce and communications, particularly by
enterprises that have historically relied upon alternative means of commerce and
communications, generally requires the acceptance of a new way of conducting
business and exchanging information. In addition, the Company is dependent on
the growth of the use of the Internet by businesses, particularly for
applications that utilize multimedia content and thus require high bandwidth. If
the Internet as a commercial or business medium fails to develop or develops
more slowly than expected, the Company's business, operating results and
financial condition could be materially adversely affected.  The recent growth
in the use of the Internet has caused frequent periods of performance
degradation, requiring the upgrade of routers, telecommunications links and
other components forming the infrastructure of the Internet by ISPs and other
organizations with links to the Internet.  Any perceived degradation in the
performance of the Internet as a whole could undermine the benefits of the
Company's products. Potentially increased performance provided by the products
of the Company and others is ultimately limited by and reliant upon the speed
and reliability of the Internet backbone itself.  Consequently, the emergence
and growth of the market for the Company's products is dependent on improvements
being made to the entire Internet infrastructure to alleviate overloading and
congestion. See "Business--Industry Background."

DEPENDENCE ON ACCEPTANCE OF ASYMMETRIC NETWORKING

     The Company's products are designed to transmit data from the Internet in
the downstream direction (i.e., to the end-user) much more quickly than data is
transmitted in the upstream direction (i.e., from the end-user). This
"asymmetric" architecture has not been widely used and is relatively unproven in
computer networking. Certain networking protocols and standards, including the
TCP/IP protocol, were designed with the expectation that the network would be
symmetric, and the Company has spent considerable engineering resources to
enable its products to work with such protocols. There can be no assurance that
the Company's current or future products will be compatible with symmetric
standards or that errors will not occur in connecting the symmetric protocols
with the Company's asymmetric design. Because of this asymmetric design, certain
applications do not benefit from the connection to a high bandwidth cable
system. Computer applications that need to transmit data as quickly to the
Internet as from the Internet will not exhibit the performance improvements that
are only available to downstream data traffic, particularly if the upstream
traffic is sent via Plain Old Telephone Service ("POTS"). Certain applications
will not run fast enough in the upstream direction to be acceptable for some
users. As a result, some end-users may not perceive a significant benefit from
the greater downstream performance of the Company's products. There can be no
assurance that potential customers will consider the downstream performance
benefits sufficient to justify the purchase and installation costs of the
Company's asymmetric products. Failure of asymmetric networking to gain market
acceptance, or any delay in such acceptance, could have a material adverse
effect on the Company's business, operating results and financial condition. See
"Business--Industry Background."


                                          28
<PAGE>

POSSIBLE NEED FOR ADDITIONAL FINANCING

     In the past, the Company has required substantial amounts of capital to
design, develop, market and manufacture its products. The Company's future
capital requirements will depend on many factors, including, but not limited to,
the evolution of the market for broadband access systems, the market acceptance
of the Company's products, competitive pressure on the price of the Company's
products, the levels at which the Company maintains inventory, the levels of
promotion and marketing required to launch such products and attain a
competitive position in the marketplace, the extent to which the Company invests
in new technology and improvements on its existing technology, and the response
of competitors to the Company's products. While the Company believes that the
available bank borrowings, existing cash balances and funds generated from
operations, if any, will provide the Company with sufficient funds to finance
its operations for at least the next 12 months, to the extent that existing
resources are insufficient to fund the Company's activities over the long-term,
the Company may need to raise additional funds through public or private equity
or debt financing or from other sources. The sale of additional equity or
convertible debt may result in additional dilution to the Company's stockholders
and such securities may have rights, preferences or privileges senior to those
of the Common Stock. To the extent that the Company relies upon debt financing,
the Company will incur the obligation to repay the funds borrowed with interest
and may become subject to covenants and restrictions that restrict operating
flexibility. No assurance can be given that additional equity or debt financing
will be available or that, if available, it can be obtained on terms favorable
to the Company or its stockholders.

RISKS OF PRODUCT DEFECTS, PRODUCT RETURNS AND PRODUCT LIABILITY

     Products as complex as those offered by the Company 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 the
Company's products and there can be no assurance that errors will not be
found in the Company's current and future products. The occurrence of such
errors, defects or failures could result in product returns and other losses
to the Company or its customers. Such occurrence could also result in the
loss of or delay in market acceptance of the Company's products, which could
have a material adverse effect on the Company's business, operating results
and financial condition. The Company's products generally carry a one year
warranty which includes factory and on-site repair services as needed for
replacement of parts. In addition, 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. Due to the relatively recent introduction of the Series 2000
products, the Company has limited experience with the problems that could
arise with this generation of products. In addition, the Company's purchase
agreements with its customers typically contain provisions designed to limit
the Company's exposure to potential product liability claims. It is possible,
however, that the limitation of liability provisions contained in the
Company's purchase agreements may not be effective as a result of federal,
state or local laws or ordinances or unfavorable judicial decisions. Although
the Company has not experienced any product liability claims to date, the
sale and support of the Company's products entails the risk of such claims. A
successful product liability claim brought against the Company could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--Manufacturing."

DEPENDENCE ON KEY PERSONNEL

     The Company's success depends in significant part upon the continued
services of its key technical, sales and senior management personnel,
including the Company's President and Chief Executive Officer, Carl S.
Ledbetter. Mr.Ledbetter is a party to an employment agreement with the
Company, and the Company carries a $1.5 million "key man" life insurance
policy on him as required under the terms of the $5.5 Million Debenture.  Any
officer or employee of the Company can terminate his or her relationship with
the Company at any time. The Company's future success will also depend on its
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 the Company will be able to
attract and retain key personnel. The loss of the services of one or more of
the Company's executive officers or key employees or the Company's failure to
attract additional qualified personnel could have a material adverse effect
on the Company's business, operating results and financial condition. See
"Business--Employees" and "Management."

MANAGEMENT OF GROWTH

     The Company is currently experiencing a period of rapid growth in net
sales. This growth has placed, and if it continues is expected to continue to
place, a significant strain on the Company's financial, management, operational
and other resources. There can be no assurance that the Company's management,
personnel, systems, procedures and controls will be adequate to support the
Company's existing and future operations. The Company's ability to manage its
growth


                                          29
<PAGE>

effectively will require it to continue to expand its operating, manufacturing
and financial procedures and controls, to replace or upgrade its operational,
financial and management information systems and to attract, train, motivate,
manage and retain key employees. The Company has hired many key employees and
officers during the last twelve months, including its Chief Financial Officer,
Vice President, Engineering and Controller, and as a result, the Company's
entire management team has worked together for only a brief time. If the
Company's executives are unable to manage growth effectively, the Company's
business, operating results and financial condition could be materially
adversely affected. See "Management."

REGULATION OF THE COMMUNICATIONS INDUSTRY

     The Company and its customers are subject to varying degrees of federal,
state and local regulation. For instance, the jurisdiction of the FCC extends to
high speed Internet access products such as those of the Company. The FCC has
promulgated regulations that, among other things, set installation and equipment
standards for communications systems. Further, regulation of the Company's
customers may adversely impact the Company's business, operating results and
financial condition. For example, FCC regulatory policies affecting the awarding
and availability of cable, wireless and telco licenses, services, and other
terms on which cable, wireless and telco companies conduct their business, may
impede the Company's penetration of certain markets. Changes in current or
future laws or regulations which negatively impact the Company's products and
technologies, in the United States or elsewhere, could materially and adversely
affect the Company's business, operating results and financial condition.

PROTECTION AND ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS

     The Company relies on a combination of patent, trade secret, copyright and
trademark laws and contractual restrictions to establish and protect proprietary
rights in its products. The Company currently has two patents issued in the
United States, as well as pending patent applications in the United States,
Europe and Japan that relate to its network and modem technology and the
communication processes implemented in those devices. In the future, the Company
intends to seek additional United States and foreign patents on its technology.
There can be no assurance any of these patents will issue from any of the
Company's pending applications or applications in preparation or that any claims
allowed will be of sufficient scope or strength, or issue in sufficient
countries where the Company's products can be sold, to provide meaningful
protection or any commercial advantage to the Company. Moreover, any patents
that have been or may be issued might be challenged, as is the case with the
recently initiated Company's patent litigation discussed below. Any such
challenge could result in time consuming and costly litigation and result in the
Company's patents being held invalid or unenforceable. Furthermore, even if the
patents are not challenged or are upheld, third parties might be able to develop
other technologies or products without infringing any such patents.

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

     In the past, the Company has received, and in the future may receive,
notices from third parties claiming that the Company's products or proprietary
rights infringe the proprietary rights of third parties. The Company expects
that developers of wireless and cable modems will be increasingly subject to
infringement claims as the number of products and competitors in the Company's
industry segment grows. Any such claim, whether meritorious or not, could be
time consuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements might not be available on terms acceptable to the
Company or at all, which could have a material adverse effect upon the Company's
business, operating results and financial condition.

     The Company has and in the future may license its patents or proprietary
rights, for commercial or other reasons, to parties who are or may become
competitors of the Company. Further the Company has recently and may in the
future elect to initiate claims or litigation against third parties for
infringement of the Company's patents or proprietary rights or to establish the
validity of the Company's patents or proprietary rights.  The Company recently
initiated patent infringement litigation against two companies, and in response
those companies are seeking declarations of invalidity of the Company's patents
and non-infringement.  The Company has not yet determined if it will initiate
litigation against other parties as well.


                                          30
<PAGE>

In addition, the Company has sent notices to certain third parties offering to
license the Company's patents for products that may be infringing the Company's
patent rights.  There can be no assurance that such notifications will not lead
to potential additional litigation, including claims by third parties seeking to
challenge the Company's patents or asserting infringement by the Company.  The
current litigation and any additional litigation could be time consuming and
costly and have a material adverse effect on the Company's business, operating
results and financial condition.

RISKS OF INTERNATIONAL SALES

     To date, sales of the Company's products outside of the United States have
represented an insignificant portion of net sales. While the Company intends to
expand its operations in North America and Europe, this will require significant
management attention and financial resources. In order to gain market acceptance
internationally, the Company's products will have to be designed to meet
industry standards of foreign countries, such as the DAVIC specifications that
are supported in Europe. The Company has committed and continues to commit
resources to developing international sales and support channels. International
sales are subject to a number of risks, including longer payment cycles; export
and import restrictions, including existing United States restrictions on the
export of certain high technology products that could limit the Company's sales
abroad; unexpected changes in regulatory requirements, restrictions and tariffs;
the burden of complying with a variety of foreign laws; greater difficulty in
accounts receivable collection; potentially adverse tax consequences; currency
fluctuations; and political and economic instability. Additionally, the
protection of intellectual property may be more difficult to enforce outside of
the United States. In the event the Company is successful in expanding its
international operations, the imposition of exchange or price controls or other
restrictions on foreign currencies could materially adversely affect the
Company's business, operating results and financial condition. If the Company
increases its international sales, its net sales may also be affected to a
greater extent by seasonal fluctuations resulting from lower sales that
typically occur during the summer months in Europe and other parts of the world.

RESTRICTIVE DEBT COVENANTS

     Under the terms of the outstanding $5.5 Million Debenture, the Company
is subject to certain restrictive covenants which could adversely affect the
Company's operations. Under the $5.5 Million Debenture, the Company is
subject to limitations on the amount of capital expenditures it may incur in
any 12 month period and may 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 $5.5 Million Debenture remains outstanding.  In
October 1997, the Company entered into the $4.0 million Credit Facility,
hwich contains a number of restrictive covenants, including covenants
prohibiting the declaration of dividends.  The $5.5 Million Debenture and the
Credit Facility are collateralized by substantially all of the Company's
assets.  In addition, the $5.5 Million Debenture contains "full ratchet"
antidilution provisions under which the number of shares of the Company's
Common Stock into which the Debenture will be convertible, at the option of
the holder, may be increased if the Company issues any shares (with certain
exceptions for employee stock options and the like) prior to October 1998 for
consideration less than $10.71 per share.  Commencing with October 1998, any
such issuance would be subject to certain "weighted average" antitilution
provisions.  See "Certain Relationships and Related Transactions."

SHARES ELIGIBLE FOR FUTURE SALE

     Sales of substantial amounts of the Company's Common Stock (including
shares issued upon the exercise of outstanding options and warrants and upon the
conversion of its $5.5 million debenture (the "$5.5 Million Debenture")) in the
public market could adversely affect the market price of the Common Stock
prevailing from time to time and could impair the Company's ability to raise
capital through the sale of equity or debt securities.  There are approximately
7,180,307 shares of Common Stock outstanding that are restricted shares
("Restricted Shares") under the Securities Act of 1933, as amended.  Currently,
no Restricted Shares are eligible for sale in the public market.  The 7,180,307
Restricted Shares will be available for sale in the public market following the
expiration of 180-day lock-up agreements beginning in May 1998.  Currently, the
$5.5 Million Debenture can be converted into 513,423 shares of Common Stock at
any time at the option of the holder (subject to certain anti-dilution
adjustments which could result from certain offerings of securities by the
Company at a market price below $10.71 per share, see "--Restrictive Debt
Covenants" above) and the holders of warrants of 1,340,656 shares of Common
Stock can exercise such warrants at any time, but such shares could not be sold
until, the expiration of the 180-day lock-up period in May 1998.  NationsBanc
Montgomery Securities, Inc., the underwriter for the Company's initial public
offering, also may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to lock-up agreements.  If
such holders sell in the public market, such sales could have a material adverse
effect on the market price of the Company's Common Stock.


                                          31
<PAGE>

POSSIBLE VOLATILITY OF STOCK PRICE

     The market price of the shares of Common Stock is likely to be highly
volatile and could be subject to wide fluctuations in response to factors such
as actual or anticipated variations in the Company's results of operations,
announcements of technological innovations, new products introduced by the
Company or its competitors, developments with respect to patents, copyrights or
proprietary rights, changes in financial estimates by securities analysts,
conditions and trends in the Internet and modem systems industries, general
market conditions and other factors. Further, the stock markets, and in
particular the Nasdaq National Market, have experienced extreme price and volume
fluctuations that have particularly affected the market prices of equity
securities of many technology companies and that often have been unrelated or
disproportionate to the operating performance of such companies. The trading
prices of many technology companies' stocks are at or near historical highs and
reflect price earnings ratios substantially above historical levels. There can
be no assurance that these trading prices and price earnings ratios will be
sustained. These broad market factors may adversely affect the market price of
the Company's Common Stock. These market fluctuations, as well as general
economic, political and market conditions such as recessions, interest rates or
international currency fluctuations, may adversely affect the market price of
the Common Stock. In the past, following periods of volatility in the market
price of a company's securities, securities class action litigation has often
been instituted against such company. Such litigation, if instituted, could
result in substantial costs and a diversion of management's attention and
resources, which would have a material adverse effect on the Company's business,
operating results and financial condition.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Not applicable.

ITEM 8.   FINANCIAL STATEMENTS


                            INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
Report of Independent Accountants. . . . . . . . . . . . . . . . . . .      40
Balance Sheets as of December 31, 1997 and 1996. . . . . . . . . . . .      41
Statements of Operations for the Years Ended
  December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . .      42
Statements for Stockholders' Equity for the
  Years Ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . .      43
Statements of Cash Flows for the Years Ended
  December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . .      44
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . .      45
Schedule II - Valuation and Qualifying Accounts. . . . . . . . . . . .     S-1
</TABLE>

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

     Not applicable.


                                          32
<PAGE>

                                       PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.

     The information regarding directors and executive officers of the Company
required by this item is incorporated by reference to Part I, Item 4A of this
Annual Report on Form 10-K.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) of the Exchange Act requires the Company's directors and
executive officers and persons who own more than 10% of the Company's Common
Stock ("10% Stockholders") to file with the SEC initial reports of ownership on
a Form 3 and reports of changes in ownership of Common Stock and other equity
securities of the Company on a Form 4 or Form 5.  Such executive officers,
directors and 10% Stockholders are required by SEC regulations to furnish the
Company 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, the Company believes
that all of the Company's directors, executive officers and 10% stockholders
made all the necessary filings under Section 16(a) during 1997.

ITEM 11.  EXECUTIVE COMPENSATION

     The following table sets forth all compensation awarded to, earned by or
paid for services rendered to the Company in all capacities during the years
ended December 31, 1996 and 1997 by (i) the Company's chief executive officer
and (ii) the three other most highly compensated executive officers other than
the chief executive officer who were serving as executive officers of the
Company at December 31, 1997 (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. . . . . . . . .       1997            $187,500             $36,853           $77,924(1)(2)         170,000
  President and Chief Executive          1996             175,000                  --           61,299 (1)            487,919
    Officer

Gustavo Ezcurra (3). . . . . . . .       1997             126,875           97,154 (4)            1,129(2)             14,815
  Vice President, Sales                  1996              17,625           12,835 (4)                 --              77,876

William H. Fry . . . . . . . . . .       1997             131,250              34,501             2,252(2)                 --
  Vice President, Operations             1996              70,000                  --                  --              89,815

Dan E. Steimle (5) . . . . . . . .       1997              68,750              86,250                  --             111,111
  Vice President, Finance and
  Administration and Chief
  Financial Officer
</TABLE>

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

(1)  Includes temporary living expenses paid by the Company of $72,000 and
     $61,299 to Mr. Ledbetter in 1996 and 1997, respectively.

(2)  Includes value of stock bonuses of $5,924, $1,129 and $2,252 for Messrs.
     Ledbetter, Ezcurra and Fry, respectively.

(3)  Mr. Ezcurra joined the Company in September 1996.

(4)  Includes commissions of $94,904 in 1997 and $12,835 in 1996.

(5)  Mr. Steimle joined the Company in July 1997.


                                          33
<PAGE>

     The following table sets forth further information regarding option grants
pursuant to the Company's Executive Officer Plan and the 1996 Equity Incentive
Plan during 1997 to each of the Named Executive Officers.  In accordance with
the rules of the Securities and Exchange Commission, 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 1997
<TABLE>
<CAPTION>
                                                                                                            RATES OF STOCK
                                         NUMBER OF  PERCENTAGE OF                                         PRICE APPRECIATION
                                        SECURITIES  TOTAL OPTIONS                                      FOR POTENTIAL REALIZABLE
                                        UNDERLYING    GRANTED TO        EXERCISE                           VALUE AT ASSUMED
                                          OPTIONS     EMPLOYEES          PRICE       EXPIRATION         ANNUAL OPTION TERM (2)
NAME                                    GRANTED (1)    IN 1997         PER SHARE        DATE               5%            10%
----                                    ----------  -------------      ---------     ----------          -----          -----
<S>                                     <C>         <C>                <C>           <C>             <C>              <C>
Carl S. Ledbetter. . . . . . . . .       170,000         19.59         $ 11.04       09/16/02        $ 518,526     $1,145,805

Gustavo Ezcurra. . . . . . . . . .        14,815          1.71            1.08       01/28/02            4,421          9,768

William H. Fry . . . . . . . . . .            --            --              --             --               --             --

Dan E. Steimle . . . . . . . . . .       111,111         12.81            5.40       07/16/02          165,769        366,306
</TABLE>

---------------
(1)  Options granted pursuant to the Executive Officer Plan and the 1996 Equity
     Incentive Plan in 1997 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.

     The following table sets forth the number of shares acquired upon the
exercise of stock options during 1997 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, 1997.  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 the Company's
Common Stock as of December 31, 1997 ($11.12) as determined by the Board.


               AGGREGATED OPTION EXERCISES IN 1997 AND YEAR-END VALUES
<TABLE>
<CAPTION>
                                                                        NUMBER OF SECURITIES         VALUE OF UNEXERCISED
                                                                        UNDERLYING EXERCISED         IN-THE-MONEY OPTIONS
                                         SHARES                         OPTIONS AT YEAR-END               AT YEAR-END
                                       ACQUIRED            VALUE     --------------------------    --------------------------
NAME                                ON EXERCISE (#)      REALIZED    EXERCISABLE  UNEXERCISABLE    EXERCISABLE  UNEXERCISABLE
----                                --------------       --------    -----------  -------------    -----------  -------------
<S>                                 <C>                  <C>         <C>          <C>              <C>          <C>
Carl S. Ledbetter                          --               --          219,750        438,168       $2,324,955   $2,850,817

Gustavo Ezcurra                            --               --           27,730         64,961          278,409      652,208

William H. Fry                             --               --           40,219         47,744          425,517      505,132

Dan E. Steimle                             --               --               --        111,111               --      635,555
</TABLE>

EMPLOYMENT AGREEMENTS

     In January 1996, the Company entered into a two year employment agreement
with Mr. Ledbetter in which he agreed to serve as the Company's Chief Executive
Officer during that period.  The agreement provides for Mr. Ledbetter to receive
a base salary of $175,000 per year and to be eligible for up to $75,000 in
bonuses during the first year, based on


                                          34
<PAGE>

achieving certain milestones, as well as regular employee benefits, relocation
costs of up to $97,500 and five year options to purchase up to 353,104 shares of
the Company's Common Stock at $0.54 per share, vesting as to 12.5% six months
after commencement of employment and 2.0833% per month for 42 months thereafter.
The stock option grant provides for accelerated vesting in the event of a
"Change of Control Transaction" (as defined in the Executive Officer Plan).  The
Company is prohibited from terminating Mr. Ledbetter's employment except for
"Cause" (as defined in the employment agreement).

     Pursuant to a July 1997 employment letter, Mr. Steimle received an option
to purchase 111,111 shares of Common Stock, which provides for accelerated
vesting in the event of a "Change of Control Transaction" (as defined in the
Company's Executive Officer Plan), and is entitled to severance equal to three
months of his base salary if he is terminated without cause.

     In January 1998, the Board approved the 12-month acceleration of vesting
for options held by Mr. Fry if the Company hires certain senior management and
Mr. Fry's employment is terminated within 12 months.  In addition, Mr. Fry is
entitled to severance equal to three months of his base salary if he is
terminated by the Company without cause.

INCENTIVE BASED COMPENSATION PROGRAM

     In July 1997, the Company adopted a bonus plan for the Company's officers
and certain managers with respect to the three quarters ending December 31,
1997.  Under the bonus plan, the Compensation Committee has assigned a target
bonus for each participant, expressed as a percentage of the participant's
annual salary (10% to 40% for the 12-month period).  The extent to which
participants receive their target bonuses for any quarter depends upon the
Company's net sales and operating income for the quarter as well as the
Company's results in a third category which varies from participant to
participant.  Actual bonuses may be greater or less than the target amount,
depending on whether the Company's financial results exceed or fall short of
specified goals.  Bonus awards under the bonus plan are to be paid 50% in cash
and 50% in stock for the two quarters ended June 30, 1997 and September 30, 1997
and entirely in cash for the quarter ended December 31, 1997.  For the quarters
ended September 30, 1997 and December 31, 1997, the Company made no cash
payments and issued no shares pursuant to the bonus plan.

DIRECTOR COMPENSATION

     Directors of the Company do not receive cash compensation for their
services as directors but are reimbursed for their reasonable expenses in
attending meetings of the Board.  In September 1997, the Board adopted the 1997
Directors Stock Option Plan (the "Directors Plan") and reserved a total of
100,000 shares of the Company's Common Stock for issuance thereunder.  The
Company's stockholders approved the Directors Plan in October 1997.  Members of
the Board who are not employees of the Company, or any parent, subsidiary or
affiliate of the Company, are eligible to participate in the Directors Plan.
Each eligible director who first becomes a member of the Board on or after the
Company's 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 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 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.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     None of the members of the Compensation Committee of the Board was an
officer or employee of the Company during 1997.  No executive officer of the
Company serves as a member of the board of directors or compensation committee
of any entity that has one or more executive officers serving on the Company's
Board or Compensation Committee.


                                          35
<PAGE>

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock as of
February 27, 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                    11.7%
Strachman Family Revocable Trust (3) . . . .                 916,710                     8.9
James R. Flach
 Accel Partners (4). . . . . . . . . . . . .                 879,562                     8.3
Douglas M. Leone
 Sequoia Capital (5) . . . . . . . . . . . .                 870,691                     8.2
Eduardo J. Moura (6) . . . . . . . . . . . .                 687,532                     6.6
Gary M. Lauder (7) . . . . . . . . . . . . .                 294,570                     2.8
Carl S. Ledbetter (8). . . . . . . . . . . .                 286,298                     2.7
William H. Fry (9) . . . . . . . . . . . . .                  52,594                      *
Dan E. Steimle (10). . . . . . . . . . . . .                  44,166                      *
Gustavo Ezcurra (11) . . . . . . . . . . . .                  35,670                      *
Stephen E. Halprin (12). . . . . . . . . . .                   1,234                      *
All executive officers and directors
 as a group (8 persons) (13) . . . . . . . .               2,464,785                    21.6
</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 February 27, 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)  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 of the Company in February 1998.  Mr. Strachman's
     address is c/o Ultracom Communications, Inc., 21580 Stevens Creek Blvd.,
     Cupertino, CA 95014.

(4)  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 February 27,
     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.

(5)  Represents 541,621 shares and 250,703 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 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


                                          36
<PAGE>

     Sequoia Capital VI.  The address of Mr. Leone and the Sequoia funds is
     3000 Sand Hill Road, Menlo Park, CA 94025.

(6)  Mr. Moura was a co-founder of the Company and served as its Vice President,
     Network Systems from June 1990 until his resignation in November 1996 and
     as a director until his resignation in January 1996.  Mr. Moura's address
     is 3509 Mt. Davidson Court, San Jose, CA 95124.

(7)  Includes 83,018 shares subject to warrants and 18,519 shares subject to
     options exercisable within 60 days of February 27, 1998.  Mr. Lauder is a
     director of the Company.

(8)  Includes 285,201 shares subject to options exercisable within 60 days of
     February 27, 1998.  Mr. Ledbetter is the President, Chief Executive Officer
     and Chairman of the Board of Directors of the Company.

(9)  Includes 47,549 shares subject to options exercisable within 60 days of
     February 27, 1998.  Mr. Fry is Vice President, Operations of the Company.

(10) Represents 20,831 shares subject to options exercisable within 60 days of
     February 27, 1998 and 18,335 shares subject to currently exercisable
     warrants, half of which were issued to Mr. Steimle's spouse.  Mr. Steimle
     is Vice President, Finance and Administration and Chief Financial Officer
     of the Company.

(11) Includes 35,455 shares subject to options exercisable within 60 days of
     February 27, 1998.  Mr. Ezcurra is Vice President, Sales of the Company.

(12) Represents shares subject to options exercisable within 60 days of February
     27, 1998.  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 650,523 shares subject to warrants and 419,490 shares subject to
     options exercisable within 60 days of February 27, 1998 held by executive
     officers and directors of the Company.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Since January 1, 1997, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which the Company was or is
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 the Common Stock of the
Company had or will have a direct or indirect interest other than (i)
compensation arrangements, which are described where required under "Management"
and (ii) the transactions described below.

     In April 1997, London Pacific Life & Annuity Company ("London Pacific") and
the Company entered into a senior secured convertible debenture agreement
pursuant to which London Pacific loaned $5.5 million to the Company in exchange
for a senior secured convertible debenture due 2002.  In connection with the
issuance of the $5.5 Million Debenture, the Company paid a fee of $500,000 to
London Pacific International Limited, a subsidiary of London Pacific.  The loan
accrues interest at a rate of 12% per annum, payable quarterly, and its term
ends in April 2002, at which time the full principal amount is due.  The loan is
secured by certain of the Company's assets, and the Company is subject to
certain restrictive covenants while the $5.5 Million Debenture is outstanding.
In August 1997, the $5.5 Million Debenture was transferred to BG Services
Limited, an affiliate of London Pacific.  The $5.5 Million Debenture is
convertible at any time, at the option of the holder, into 513,423 shares of
Common Stock, subject to certain antidilution adjustments.  The Debenture
contains "full ratchet" antidilution provisions under which the number of shares
of the Company's Common Stock into which the Debenture will be convertible may
be increased if the Company issues any shares (with certain exceptions for
employee stock options and the like) prior to October 1998 for consideration
less than $10.71 per share.  Commencing with October 1998, any such issuance
would be subject to certain "weighted average" antidilution provisions.

     In September 1997, Dan Steimle, the Company's Vice President, Finance and
Administration and Chief Financial Officer and Sequoia Partnerships loaned the
Company $500,000 and $300,000, respectively, under a demand note


                                          37
<PAGE>

exchangeable for Subordinated Notes.  In September 1997, the Company entered
into an agreement to issue the Subordinated Notes at a face value of $6,882,201
and related warrants to acquire 252,381 shares of Common Stock at a price of
$10.91 per share.  The following affiliates of the Company participated in the
Subordinated Notes and related warrant transaction:


<TABLE>
<CAPTION>
                                                           NUMBER OF ISSUES
                                         SUBORDINATED      OF COMMON STOCK
NAME                                        NOTES        SUBJECT TO WARRANTS
----                                     ------------    -------------------
<S>                                      <C>             <C>
Sequoia Partnerships . . . . . . .        $300,000              11,001
Accel Partnerships . . . . . . . .         250,000               9,167
OSCCO. . . . . . . . . . . . . . .         200,000               7,334
Gary M. Lauder . . . . . . . . . .         100,000               3,667
Dan E. Steimle . . . . . . . . . .         500,000              18,335
</TABLE>


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 32 of this Report.

2.   FINANCIAL STATEMENT SCHEDULES -- See Index to Financial Statements and
     Financial Statement Schedule at Item 8 on page 32 of this Report.

3.   EXHIBITS -- The following exhibits are filed as part of, or incorporated by
     reference into, this Report:



     Exhibit
     Number                           Exhibit Title
     -------                          -------------

      3.01     Registrant's Amended and Restated Certificate of
               Incorporation (1)
     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)
     10.09     Net Lease Agreement between Devcon/Bubb Road Investors and
               Registrant dated May 25, 1995. (3)
     10.10     Sublease between Norian Corporation and Registrant dated October
               24, 1996. (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 2002 transferred to BG Services Limited. (3)
     10.13     Convertible Subordinated Promissory Note Purchase Agreement among
               Registrant and certain investors dated September 18, 1997, form
               of Convertible Subordinated Promissory Note and form of Common
               Stock Purchase Warrant. (3)
     10.14     Commitment Letter between Registrant and Venture Banking Group
               dated September 16, 1997.(3)
     10.15     Collaboration Agreement among Registrant, Sharp Corporation and
               Itochu Corporation dated


                                          38
<PAGE>

               November 25, 1996 and Addendum No. 1 thereto dated November 25,
               1996. (3)
     10.16     Sales and Purchase Agreement between Registrant and Itochu
               Corporation dated January 10, 1997. (3) (5)
     10.17     Value Added Reseller Agreement between Registrant and Internet
               Ventures, Inc. dated July 1, 1996. (3) (5)
     10.18     Value Added Reseller Agreement between Registrant and Network
               System Technologies dated November 25, 1996. (3) (5)
     10.19     Registrant's Incentive Based Compensation Program. (3) (4)
     10.20     Loan and Security Agreement between Venture Banking Group and
               Registrant dated October 16, 1997, Form of Common Stock Purchase
               Warrant and Subordination Agreements among Registrant and certain
               securityholders of Registrant dated October 16, 1997. (3)
     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)
     10.23     Employment Letter between Registrant and William H. Fry dated May
               8, 1996, and Terms of Severance Arrangement with William H. Fry
               dated January 21, 1998. (4)
     23.01     Consent of Coopers & Lybrand L.L.P., independent accountants.
     27.01     Financial Data Schedule.

-----------

(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.

(b)  Reports on Form 8-K.

No current reports on Form 8-K were filed by the Registrant during the fiscal
quarter ended December 31, 1997.

(c)  Exhibits.

The Registrant hereby files as part of this Report, the exhibits listed in Item
14(a)(2), as set forth above.

(d)  Financial Statement Schedules.

          See Item 8.


                                          39
<PAGE>

                          REPORT OF INDEPENDENT ACCOUNTANTS


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

     We have audited the accompanying balance sheets of Hybrid Networks, Inc. as
of December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997.  These financial statements are the responsibility of
the Company's management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the 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, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.

                                             COOPERS & LYBRAND L.L.P.


San Jose, California
January 20, 1998, except for note 16,
for which the date is March 19, 1998


                                          40
<PAGE>


                                HYBRID NETWORKS, INC.
                                    BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                                  DECEMBER 31,
                                                                             -----------------------
                                                                                1997         1996
                                                                                ----         ----
<S>                                                                          <C>            <C>
                                               ASSETS
Current assets:
  Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . .       $ 26,167       $  6,886
  Short-term investments . . . . . . . . . . . . . . . . . . . . . . .            981             --
  Accounts receivable, net of allowance for doubtful accounts of
    $1,175 in 1997 and none in 1996. . . . . . . . . . . . . . . . . .          8,870          1,348
  Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . .          3,368            943
  Prepaid expenses and other current assets. . . . . . . . . . . . . .            362            125
                                                                             --------       --------
    Total current assets . . . . . . . . . . . . . . . . . . . . . . .         39,748          9,302
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . .          1,808          1,178
Intangibles and other assets . . . . . . . . . . . . . . . . . . . . .          1,563             59
                                                                             --------       --------
          Total assets . . . . . . . . . . . . . . . . . . . . . . . .       $ 43,119       $ 10,539
                                                                             --------       --------
                                                                             --------       --------

                                 LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . .       $  2,033       $  1,424
  Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . .          1,394            712
  Current portion of capital lease obligations . . . . . . . . . . . .            410            222
                                                                             --------       --------
    Total current liabilities. . . . . . . . . . . . . . . . . . . . .          3,837          2,358

Convertible debenture. . . . . . . . . . . . . . . . . . . . . . . . .          5,500             --
Capital lease obligations, less current portion. . . . . . . . . . . .            618            438
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . .             --             34
                                                                             --------       --------

    Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . .          9,955          2,830
                                                                             --------       --------

Commitments and contingencies (Note 10)
Stockholders' equity:
  Convertible preferred stock, $.001 par value:
    Authorized: 5,000 shares in 1997 and 18,000 shares in 1996;
    Issued and outstanding: no shares in 1997 and 12,069
    shares in 1996 . . . . . . . . . . . . . . . . . . . . . . . . . .            --              12
  Common stock, $.001 par value:
    Authorized: 100,000 shares;
    Issued and outstanding: 10,342 shares in 1997 and 2,520 shares
    in 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             10              2
    Additional paid-in capital . . . . . . . . . . . . . . . . . . . .         64,086         25,037
    Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . .        (30,932)       (17,342)
                                                                             --------       --------
      Total stockholders' equity . . . . . . . . . . . . . . . . . . .         33,164          7,709
                                                                             --------       --------
          Total liabilities and stockholders' equity . . . . . . . . .       $ 43,119       $ 10,539
                                                                             --------       --------
                                                                             --------       --------
</TABLE>




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


                                          41
<PAGE>

                                HYBRID NETWORKS, INC.
                               STATEMENTS OF OPERATIONS
                        (IN THOUSANDS, EXCEPT PER SHARE DATA)



<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                         ----------------------------------------
                                                           1997           1996            1995
                                                         --------        -------        --------
<S>                                                      <C>             <C>            <C>
Net sales. . . . . . . . . . . . . . . . . . . . .       $ 14,270        $ 2,962        $   630
Cost of sales. . . . . . . . . . . . . . . . . . .         12,258          3,130            761
                                                         --------        -------        -------
    Gross profit (loss). . . . . . . . . . . . . .          2,012           (168)          (131)
                                                         --------        -------        -------

Operating expenses:
  Research and development . . . . . . . . . . . .          7,108          5,076          3,862
  Sales and marketing. . . . . . . . . . . . . . .          4,319          1,786            390
  General and administrative . . . . . . . . . . .          3,606          1,714            748
                                                         --------        -------        -------
    Total operating expenses . . . . . . . . . . .         15,033          8,576          5,000
                                                         --------        -------        -------
      Loss from operations . . . . . . . . . . . .        (13,021)        (8,744)        (5,131)

Interest income and other expenses, net. . . . . .            399            257            166
Interest expense . . . . . . . . . . . . . . . . .           (968)           (28)          (304)
                                                         --------        -------        -------
      Net loss . . . . . . . . . . . . . . . . . .       $(13,590)       $(8,515)       $(5,269)
                                                         --------        -------        -------
                                                         --------        -------        -------

Basic and diluted loss per share . . . . . . . . .       $  (3.84)       $ (3.36)       $ (2.37)
                                                         --------        -------        -------
                                                         --------        -------        -------

Shares used in basic and diluted per
  share calculation. . . . . . . . . . . . . . . .          3,541          2,535          2,223
                                                         --------        -------        -------
                                                         --------        -------        -------
</TABLE>




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


                                          42
<PAGE>

                                HYBRID NETWORKS, INC.
                          STATEMENTS OF STOCKHOLDERS' EQUITY
                                    (IN THOUSANDS)



<TABLE>
<CAPTION>
                                                  PREFERRED STOCK       COMMON STOCK
                                                -------------------- -------------------    ADDITIONAL      ACCUMULATED
                                                 SHARES      AMOUNT   SHARES     AMOUNT   PAID-IN CAPITAL     DEFICIT         TOTAL
                                                --------    -------- --------   --------  ---------------   -----------      -------
<S>                                             <C>         <C>      <C>        <C>       <C>               <C>            <C>
Balances, January 1, 1995. . . . . . . . . .      2,860      $  3     2,176       $ 2        $ 2,845        $ (3,558)     $   (708)
  Exercise of common stock options . . . . .         --        --         9        --              3              --             3
  Exercise of stock purchase rights. . . . .         --        --        44        --             24              --            24
  Grant of stock bonus awards. . . . . . . .         --        --         6        --              3              --             3
  Issuance of common stock for
    technology license . . . . . . . . . . .         --        --       262        --            141              --           141
  Issuance of Series B and Series D
    preferred stock warrants . . . . . . . .         --        --        --        --             18              --            18
  Issuance of Series D preferred
    stock, net of issuance costs
    of $42 . . . . . . . . . . . . . . . . .      3,200         3        --        --          5,555              --         5,558
  Issuance of Series E preferred
    stock upon conversions of
    notes payable. . . . . . . . . . . . . .      1,316         1        --        --          1,999              --         2,000
  Additional paid-in capital in
    connection with accrued
    interest forgiven from conversion
    of notes payable to Series E
    preferred stock. . . . . . . . . . . . .         --        --        --        --            402              --           402
  Issuance of Series F preferred
    stock from conversion of
    prepaid royalties, net of issuance
    costs of $11 . . . . . . . . . . . . . .        987         1        --        --          1,488              --         1,489
  Net loss . . . . . . . . . . . . . . . . .         --        --        --        --             --          (5,269)       (5,269)
                                                -------      ----    ------      ----        -------        --------       --------
Balances, December 31, 1995. . . . . . . . .      8,363         8     2,497         2         12,478          (8,827)        3,661
  Exercise of common stock options . . . . .         --        --        65        --             34              --            34
  Repurchase of common stock . . . . . . . .         --        --       (42)       --             (9)             --            (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              --        12,538
Net loss . . . . . . . . . . . . . . . . . .         --        --        --        --             --          (8,515)       (8,515)
                                                -------      ----    ------      ----        -------        --------       --------
Balances, December 31, 1996. . . . . . . . .     12,069        12     2,520         2         25,037         (17,342)        7,709
  Exercise of common stock options . . . . .         --        --       150        --             85              --            85
  Repurchase of common stock . . . . . . . .         --        --       (12)       --             (7)             --            (7)
  Grant of stock bonus awards. . . . . . . .         --        --        13        --             38              --            38
  Issuance of common stock for
    services rendered. . . . . . . . . . . .         --        --         6        --             34              --            34
  Issuance of Series H preferred stock . . .        494         1        --        --          1,999              --         2,000
  Issuance of warrants in connection
    with convertible subordinated notes. . .         --        --        --        --            250              --           250
  Issuance of warrants in connection
    with technology license agreement. . . .         --        --        --        --          1,000              --         1,000
  Issuance of common stock, net of
    issuance costs of $1,280 . . . . . . . .         --        --     2,836         3         35,642              --        35,645
  Conversion of preferred stock to
    common stock . . . . . . . . . . . . . .    (12,563)      (13)    4,653         5              8              --            --
  Issuance of common stock upon net
    exercise of warrants . . . . . . . . . .         --        --       176        --             --              --            --
  Net loss . . . . . . . . . . . . . . . . .         --        --        --        --             --         (13,590)      (13,590)
                                                -------      ----    ------      ----        -------        --------       --------
Balances, December 31, 1997. . . . . . . . .         --      $ --    10,342       $10        $64,086        $(30,932)     $ 33,164
                                                -------      ----    ------      ----        -------        --------       --------
                                                -------      ----    ------      ----        -------        --------       --------
</TABLE>



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


                                          43
<PAGE>

                                HYBRID NETWORKS, INC.
                               STATEMENTS OF CASH FLOWS
                                    (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                 YEAR ENDED DECEMBER 31,
                                                                        ---------------------------------------
                                                                          1997            1996           1995
                                                                          ----            ----           ----
<S>                                                                     <C>             <C>            <C>
Cash flows from operating activities:
  Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $(13,590)       $(8,515)       $(5,269)
  Adjustments to reconcile net loss to net cash used in
    operating activities:
    Depreciation and amortization. . . . . . . . . . . . . . . . . . .       760            322            162
    Provision for doubtful accounts. . . . . . . . . . . . . . . . . .     1,175             --             --
    Provision for excess and obsolete inventory. . . . . . . . . . . .       452            126            137
    Interest converted to Series E preferred stock . . . . . . . . . .        --             --            402
    Common stock issued for technology license . . . . . . . . . . . .        --             --            141
    Convertible Subordinated Note interest related to the
      issuance of warrants . . . . . . . . . . . . . . . . . . . . . .       250             --             --
    Common Stock issued for services rendered. . . . . . . . . . . . .        72             --              3
  Change in assets and liabilities:
    Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . .    (8,697)        (1,061)          (224)
    Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . .    (2,877)          (873)          (218)
    Prepaid expenses and other current assets. . . . . . . . . . . . .      (237)          (115)             7
    Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . .       609          1,144            102
    Accrued liabilities and other. . . . . . . . . . . . . . . . . . .       648            395          1,418
                                                                        --------        -------        -------
      Net cash used in operating activities. . . . . . . . . . . . . .   (21,435)        (8,577)        (3,339)
                                                                        --------        -------        -------

Cash flows from investing activities:
  Purchase of property and equipment . . . . . . . . . . . . . . . . .      (643)          (321)          (295)
  Change in other assets . . . . . . . . . . . . . . . . . . . . . . .       (76)           (26)           (22)
  Purchase of short-term investments . . . . . . . . . . . . . . . . .      (981)            --           (490)
  Proceeds from maturity of short-term investments . . . . . . . . . .        --            490            199
                                                                        --------        -------        -------
      Net cash provided by (used in) investing activities. . . . . . .    (1,700)           143           (608)
                                                                        --------        -------        -------
Cash flows from financing activities:
  Repayment of capital lease obligations . . . . . . . . . . . . . . .      (307)          (106)           (20)
  Repayment of convertible subordinated note payable . . . . . . . . .    (6,882)            --             --
  Proceeds from issuance of preferred stock warrants . . . . . . . . .        --             --             18
  Proceeds from convertible subordinated note payable. . . . . . . . .     6,882             --             --
  Net proceeds from issuance of convertible debenture. . . . . . . . .     5,000          3,160             --
  Net proceeds from issuance of preferred stock. . . . . . . . . . . .     2,000          9,378          5,558
  Net proceeds from issuance of common stock . . . . . . . . . . . . .    35,730             34             27
  Repurchase of common stock . . . . . . . . . . . . . . . . . . . . .        (7)            (9)            --
                                                                        --------        -------        -------
      Net cash provided by financing activities. . . . . . . . . . . .    42,416         12,457          5,583
                                                                        --------        -------        -------
Increase in cash and cash equivalents. . . . . . . . . . . . . . . . .    19,281          4,023          1,636
Cash and cash equivalents, beginning of period . . . . . . . . . . . .     6,886          2,863          1,227
                                                                        --------        -------        -------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . .  $ 26,167        $ 6,886        $ 2,863
                                                                        --------        -------        -------
                                                                        --------        -------        -------

SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
  Conversion of notes payable into preferred stock . . . . . . . . . .        --        $ 3,160        $ 2,000
  Conversion of prepaid royalties to Series F preferred stock. . . . .        --             --          1,500
  Property and equipment acquired under capital leases . . . . . . . .      $675            472            314
  Capitalization of finance costs. . . . . . . . . . . . . . . . . . .       500             --             --
  Issuance of warrants in connection with subordinated
    notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . .       250             --             --
  Issuance of warrants in connection with technology
    license agreement. . . . . . . . . . . . . . . . . . . . . . . . .     1,000             --             --

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . .  $    718        $    28        $     5
</TABLE>



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


                                          44
<PAGE>

                                HYBRID NETWORKS, INC.
                            NOTES TO FINANCIAL STATEMENTS

1.  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 "last mile" connection to the
end user which causes slow response time for those accessing bandwidth-intensive
information over the Internet and corporate intranets.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CHANGE IN FISCAL YEAR

     In 1997, the Company changed its fiscal year end from March31 to
December31, 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 periods. Actual results could differ from those estimates.

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, subordinated debt 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 collectibility of accounts
receivable and such losses have been within Management's expectations. As of
December 31, 1997, one customer represented 21% of accounts receivable and as of
December 31, 1996, two customers represented 51% and 10% of accounts receivable,
respectively.

     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

     The Company considers all highly liquid instruments with an original or
remaining maturity of three months or less to be cash equivalents. Instruments
with a maturity greater than three months at the date of purchase and maturing
within one year from the balance sheet date are included in short-term
investments. The Company's cash and cash equivalents as of December 31, 1997 are
in three demand accounts with two major banks.  Short-term investments as of
December 31, 1997 are classified as available for sale and are carried at cost
which approximates fair market value, and consists of corporate commercial paper
maturing in April 1998.


                                          45
<PAGE>

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

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 the related assets of
three to five years. Leasehold improvements are amortized over their estimated
useful lives or the remaining lease term, whichever is less.

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 the value of the transfer of certain technologies relating to
a technology support and development agreement signed in November 1997.  The
deferred financing costs are amortized over the five year life of the debenture
(see Note 7) and the value of the technologies will be amortized on a straight
line basis over a four year life.  Total accumulated amortization as of December
31, 1997 was $20,833.  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 recognizes revenue and accrues for estimated warranty costs
upon shipment of products. 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 materially differed from those provided.

PRODUCT DEVELOPMENT COSTS

     Costs related to research, design and development of products are charged
to research and development expenses as incurred.

STOCK-BASED COMPENSATION

     In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," which is effective for the Company's financial
statements for the year ended December 31, 1996. SFAS No. 123 allows
companies to either account for stock-based compensation under the new
provisions of SFAS No. 123 or under the provisions of Accounting Principles
Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees,"
but requires pro forma disclosure in the footnotes to the financial
statements as if the measurement provisions of SFAS No.123 had been adopted.
The Company has continued to account for its stock based compensation in
accordance with the provisions of APB 25 and provides the required pro forma
disclosures (see Note 11).

COMPUTATION OF BASIC AND DILUTED LOSS PER SHARE

     The Company adopted Financial Accounting Standards Board No. 128 "Earnings
Per Share" and accordingly all prior periods have been restated.  Basic and
diluted loss per share are computed using the weighted average number of shares
of common stock outstanding. Common equivalent shares from stock options and
preferred stock are excluded from the computation of diluted loss per share as
their effect is antidilutive.  In February 1998, the Securities and Exchange
Commission issued Staff Accounting  Bulletin (SAB) No. 98, which addresses the
computation of earnings per share in an initial public offering.  The Company
has determined that no incremental shares should be included in the computation
of earnings per share in accordance with the SAB and basic and diluted loss per
share has been restated accordingly.


                                          46
<PAGE>

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

COMPUTATION OF BASIC AND DILUTED LOSS PER SHARE (CONT'D)

     Stock Options to purchase 1,926,000 shares of Common Stock at prices
ranging from $0.27 to $11.05 per share were outstanding at December 31, 1997,
but were not included in the computation of diluted loss per share because they
were antidilutive.  Warrants to purchase 1,340,656 shares of Common Stock at
prices ranging from $0.001 to $10.91 per share were outstanding at December 31,
1997, but were not included in the computation of diluted loss per share because
they were antidilutive.  The aforementioned stock options and Warrants could
potentially dilute earnings per share in the future.

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other events and
circumstances from nonowner sources. The impact of adopting SFAS No. 130, which
is effective for the Company in 1998, has not been determined.

     In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information." SFAS No. 131 requires
publicly-held companies to report financial and other information about key
revenue-producing segments of the entity for which such information is
available and is utilized by the chief operating decision maker. Specific
information to be reported for individual  segments includes profit or loss,
certain revenue and expense items and total assets. A reconciliation of
segment financial information to amounts reported in the financial statements
would be provided. SFAS No. 131 is effective for the Company in 1998 and the
impact of adoption has not been determined.

3.  INVENTORIES

     Inventories are comprised of the following (in thousands):



<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                      ---------------------
                                                       1997            1996
                                                       ----            ----
     <S>                                              <C>              <C>
     Raw materials . . . . . . . . . . . . . . . .    $1,952           $526
     Work in progress. . . . . . . . . . . . . . .       292            267
     Finished goods. . . . . . . . . . . . . . . .     1,124            150
                                                      ------           ----
                                                      $3,368           $943
                                                      ------           ----
                                                      ------           ----
</TABLE>

4.  PROPERTY AND EQUIPMENT

     Property and equipment, including furniture and equipment under capital
leases, (cost of $1,461,000 and $786,000 and accumulated amortization of
$541,000 and $177,000 as of December 31, 1997 and 1996, respectively) consist of
the following (IN THOUSANDS):


<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                     ----------------------
                                                       1997            1996
                                                       ----            ----
     <S>                                             <C>             <C>
     Machinery and equipment . . . . . . . . . . .   $ 2,780         $1,440
     Office furniture and fixtures . . . . . . . .       164            107
     Leasehold improvements. . . . . . . . . . . .       110            189
                                                     -------         ------
                                                       3,054          1,736
     Less accumulated depreciation and
       amortization. . . . . . . . . . . . . . . .    (1,246)          (558)
                                                     -------         ------
                                                     $ 1,808         $1,178
                                                     -------         ------
                                                     -------         ------
</TABLE>

5.  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).


                                          47
<PAGE>

The principal amount of the notes was payable at the earliest 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 becomes exercisable at the earliest 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 is
$250,000 which has been allocated to stockholders' equity and was charged to
interest expense upon repayment of the note.  At December 31, 1997 no amount was
outstanding under the convertible subordinated note payable.

6.  SHORT TERM BORROWINGS

In October 1997,  the Company entered into a credit facility agreement with a
bank which provides for borrowings up to a maximum of $4.0 Million. Borrowings
under the credit facility, which expires in October 1998, bear interest at the
prime rate (8.50% at December 31, 1997) and are collateralized by certain of the
Company's assets. The agreement contains restrictive covenants including
maintenance of certain financial ratios, limitations of quarterly losses and
prohibits the Company from paying any cash dividends. The Company had no
outstanding borrowings under this credit facility at December 31, 1997.

7.  CONVERTIBLE DEBENTURE

     On April 30, 1997, the Company issued a senior convertible debenture in the
amount of $5,500,000, bearing interest at 12% per annum, payable quarterly, and
maturing on April30, 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.  The debenture contains "full ratchet"
antidilution provisions under which the number of shares of the Company's Common
Stock into which the debenture will be convertible may be increased if the
Company issues any shares (with certain exceptions for employee stock options
and the like) prior to October 1998 for consideration less than $10.71 per
share.  Commencing with October 1998, any such issuance would be subject to
certain "weighted average" antidilution provisions.

     The debenture is collateralized by certain of the Company's assets.
Subject to certain upgrade adjustments, the Company may not make 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 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.

8.  ACCRUED LIABILITIES

     Accrued liabilities consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                          DECEMBER 31,
                                                      ----------------------
                                                       1997           1996
                                                      ------         -------
     <S>                                              <C>            <C>
     Accrued payroll and related accruals. . . . .    $  795         $  425
     Other liabilities . . . . . . . . . . . . . .       599            287
                                                      ------         ------
                                                      $1,394         $  712
                                                      ------         ------
                                                      ------         ------
</TABLE>

9.  CAPITAL LEASE OBLIGATIONS

     Capital leases at December 31, 1997 expire at various dates through March
2001 and bear interest at rates ranging from 7.6% to 10.8%.


                                          48

<PAGE>

9.   CAPITAL LEASE OBLIGATIONS (CONT'D)

     Future minimum lease payments under all capital leases are as follows (in
thousands):

<TABLE>
<CAPTION>
     <S>                                                           <C>
     1998                                                          $    474
     1999                                                               407
     2000                                                               244
     2001                                                                10
                                                                   --------
                                                                      1,135
     Less amount representing interest                                 (107)
                                                                   --------
                                                                      1,028
     Less current portion                                              (410)
                                                                   --------
                                                                   $    618
                                                                   --------
                                                                   --------
</TABLE>

10.  COMMITMENTS AND CONTINGENCIES:

     The Company leases its facilities and equipment under operating leases
expiring at various dates from May 1998 through March 2002. Under the terms of
two of the facilities leases, the Company is responsible for its share of common
area expenses.

     Future minimum lease payments are as follows (in thousands):

<TABLE>
<CAPTION>
     <S>                                                           <C>
     1998                                                          $    362
     1999                                                                56
     2000                                                                57
     2001                                                                57
     2002                                                                11
                                                                   --------
                                                                   $    543
                                                                   --------
                                                                   --------
</TABLE>

     Rent expense for 1997, 1996, 1995 was approximately $494,000, $263,000, and
$191,000 respectively.

     The Company is engaged in certain legal and administrative proceedings
incidental to its normal business activities.  While it is not possible to
determine the ultimate outcome of these actions at this time, management
believes that any liabilities resulting from such proceedings, or claims which
are pending or known to be threatened, will not have a material adverse effect
on the Company's financial position or results of operations.

     The Company initiated a civil action for patent infringement against
Com21, Inc,. and Celestica, Inc. on January 23, 1998 in the U.S. District
Court for the Eastern District of Virginia.  In response to the Company's
action, Com21, Inc. initiated a declaratory judgment action on January 29,
1998 against the Company in the U.S. District Court for the Northern District
of California to obtain a declaration of invalidity of the Company's patents
and non-infringement of such patents.  The action in the Eastern District of
Virginia was subsequently transferred to the Northern District of California
of February 23, 1998.  The litigation is expected to be time consuming and
costly, and, although no monetary claim is asserted against the Company, the
action, if resolved adversely to the Company, could have a material adverse
effect on the Company's business, operating results and financial condition.

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.

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.  In connection with the Initial Public Offering, all
outstanding shares of Preferred Stock were converted into shares of common stock
adjusted for the 1-for-2.7 reverse stock split.


                                          49
<PAGE>

11.  STOCKHOLDERS' EQUITY (CONT'D)

WARRANTS

     The Company has historically issued warrants in connection with its various
rounds of financing, equipment lease lines, and transfers of technology. The
value of the warrants has been assessed using the Black-Scholes Model and valued
as appropriate for financial reporting purposes.

     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, 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 a 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 the
technology transfer discussed in Note 14 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 their convertible subordinated note 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.  In November 1997, warrants to purchase
148,617 shares of common stock were exercised for a net exercise of 76,096
shares of common stock. (See Note 5).

     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.

STOCK OPTION PLANS

     In September 1997, the Board of Directors approved 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.  In addition, any shares that, upon the effectiveness of the 1997
plan, were available for the grant of options under earlier plans are rolled
over and are available for issuance under the 1997 plan; also, any shares that
subsequently became available under the earlier plans, roll over and became
available for issuance under the 1997 plan.  The 1997 Equity Incentive Plan
expires in September 2007.  Also in September 1997, the Board of Directors
adopted 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
271,111, respectively. In the event of a merger, consolidation, liquidation or
similar change of control transaction as a result of which the participants'


                                          50
<PAGE>

11.  STOCKHOLDERS' EQUITY (CONT'D)

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.

     Activity under the Plans is set forth below (IN THOUSANDS, EXCEPT PER SHARE
DATA):

<TABLE>
<CAPTION>
                                                                                                     VALUE OF
                                                                     OPTIONS AND                   OPTIONS AND       WEIGHTED
                                                                       PURCHASE        EXERCISE      PURCHASE         AVERAGE
                                                          SHARES        RIGHTS           PRICE        RIGHTS         EXERCISE
                                                        AVAILABLE    OUTSTANDING      PER SHARE    OUTSTANDING         PRICE
                                                        ---------    -----------      ---------    -----------       --------
<S>                                                    <C>           <C>            <C>            <C>               <C>
Balances, January 1, 1995                                     169            173    $0.27-$0.54    $        57          $0.33
     Additional shares reserved                               722              -              -              -              -
     Options granted                                         (235)           235           0.54            127           0.54
     Purchase rights granted                                  (44)            44           0.54             24           0.54
     Purchase rights exercised                                  -            (44)          0.54            (24)          0.54
     Stock bonus awards                                        (6)             -           0.54              -           0.54
     Options canceled                                          90            (90)     0.27-0.54            (35)          0.39
     Options exercised                                          -             (9)     0.27-0.54             (3)          0.33
                                                       ----------     ----------                    ----------

Balances, December 31, 1995                                   696            309      0.27-0.54            146           0.47
     Additional shares reserved                               741              -              -              -              -
     Options granted                                       (1,267)         1,267      0.54-1.08            865           0.68
     Stock repurchased                                         11              -           0.54              -              -
     Options canceled                                          32            (32)     0.27-0.54            (14)          0.44
     Options exercised                                          -            (65)          0.54            (34)          0.65
                                                       ----------     ----------                    ----------

Balances, December 31, 1996                                   213          1,479      0.27-1.08            963           0.65
     Additional shares reserved                             2,409              -              -              -              -
     Options granted                                         (862)           862     1.08-11.05          5,332           6.19
     Stock bonus awards                                       (13)             -      1.08-5.40              -              -
     Stock repurchased                                         12              -           0.54              -              -
     Options canceled                                         265           (265)     0.27-1.08           (316)          1.19
     Options exercised                                          -           (150)     0.27-1.08            (85)          0.57
                                                       ----------     ----------                    ----------

Balances, December 31, 1997                                 2,024          1,926   $0.27-$11.05     $    5,894          $3.06
                                                       ----------     ----------                    ----------
                                                       ----------     ----------                    ----------
</TABLE>

     For the years ended December 31, 1997, 1996 and 1995, the weighted average
fair value of options granted was $5.48, $0.81 and $0.42 per share,
respectively.


                                          51
<PAGE>

11.  STOCKHOLDERS' EQUITY (CONT'D)

STOCK OPTION PLANS

     As of December 31, 1997, the stock options outstanding were as follows (in
thousands, except per share data):

<TABLE>
<CAPTION>
                         OPTIONS OUTSTANDING                                              OPTIONS EXERCISABLE
       --------------------------------------------------------------------         -------------------------------
                                       WEIGHTED AVERAGE
                                          REMAINING             WEIGHTED                                WEIGHED
       EXERCISE            NUMBER        CONTRACTUAL            AVERAGE               NUMBER            AVERAGE
        PRICE           OUTSTANDING      LIFE (YEARS)        EXERCISE PRICE         EXERCISABLE      EXERCISE PRICE
       --------         -----------    ----------------      --------------         -----------      --------------
       <S>              <C>            <C>                   <C>                    <C>              <C>
          $0.27                  42                1.45            $   0.27                  37            $   0.27
           0.54                 887                3.15                0.54                 398                0.54
           1.08                 258                3.81                1.08                  67                1.08
           2.16                  46                4.23                2.16                  11                2.16
           2.70                 153                4.38                2.70                  23                2.70
           5.40                 195                4.54                5.40                   3                5.40
           8.78                 114                4.66                8.78                  --                8.78
          11.04                 170                4.71               11.04                  --               11.04
          11.05                  61                4.80               11.05                  --               11.05
                             ------                                                      ------
                              1,926                                 $  3.06                 539             $  0.76
                             ------                                                      ------
                             ------                                                      ------
</TABLE>

     As of December 31, 1996 and 1995, options to purchase 294,000 and 125,000
shares were exercisable at an average weighted exercise price of $0.54 and $0.46
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
1997, 1996 and 1995 consistent with the provisions of SFAS No.123, the Company's
net loss and net loss per share for 1997, 1996, and 1995 would have been
increased to the pro forma amounts indicated below (IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS):

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                   ----------------------------------------
                                                       1997           1996           1995
                                                      ------         ------         ------
     <S>                                           <C>             <C>            <C>
     Net loss as reported                           $ 13,590       $  8,515       $  5,269
                                                    --------       --------       --------
                                                    --------       --------       --------
     Net loss - pro forma                           $ 13,733       $  8,548       $  5,275
                                                    --------       --------       --------
                                                    --------       --------       --------
     Net loss per share - as reported               $  (3.84)      $  (3.36)      $  (2.37)
                                                    --------       --------       --------
                                                    --------       --------       --------
     Net loss per share - pro forma                 $  (3.88)      $  (3.37)      $  (2.37)
                                                    --------       --------       --------
                                                    --------       --------       --------
</TABLE>

     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 assumptions used for grants during 1997,
1996 and 1995; dividend yield of 0%, volatility of 0% for options issued prior
to the Company's Initial Public Offering and 75% thereafter, risk-free interest
rates of 5.18% to 7.68% 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, 1997, no shares have been
purchased under the Employee Stock Purchase Plan.


                                          52
<PAGE>

12.  INCOME TAXES

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

<TABLE>
<CAPTION>
                                                        1997           1996
                                                        ----           ----
     <S>                                            <C>            <C>
     Net operating loss carry forwards              $  6,279       $  4,119
     Capitalized research expenditures                 5,669          3,553
     Tax credit carry forwards                         1,172            637
     Inventory reserves                                  178            103
     Other accrued liabilities                           754            104
                                                    --------       --------
          Total deferred assets                       14,052          8,516
     Valuation allowance                             (14,052)        (8,516)
                                                    --------       --------
          Net deferred assets                       $     --       $     --
                                                    --------       --------
                                                    --------       --------
</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 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
$5,536,000, and $4,561,000 in 1997 and 1996, respectively. The Company had
federal and state net operating loss carry forwards of approximately $16,589,000
and $10,945,000, respectively, as of December 31, 1997 available to offset
future regular and alternative minimum taxable income. The Company's net
operating loss carry forwards expire in 1997 through 2012, if not utilized.

<TABLE>
<CAPTION>
                                                      TAX        EXPIRATION
                                                   REPORTING       DATES
                                                   ---------     ----------
     <S>                                           <C>           <C>
     Research and development credit                $768,000      2007-2012
     State research and development credit           404,000
</TABLE>

     The Company's net operating loss and tax credit carry forwards are subject
to a limitation of approximately $5,120,000 upon an ownership change, 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 1997, 1996, 1995,
the Company made no employer contributions.

14.  RELATED PARTY TRANSACTIONS

     During 1994, the Company entered into borrowing agreements with two
parties. At the time of each borrowing, the Company was required to issue
warrants to purchase its preferred stock. In December 1994, one of the lenders
applied its outstanding balance of $1,250,000 to the exercise of its warrants.
In December 1995, the second lender used its outstanding balance of $2,000,000
to exercise its warrants. Accrued interest on the note was forgiven. However,
the Company recorded the related accrued interest of $402,000 as an additional
capital contribution related to the issuance of the Series E preferred stock.


                                          53
<PAGE>

14.  RELATED PARTY TRANSACTIONS (CONT'D)

     In connection with these borrowing agreements the Company granted an
exclusive royalty bearing license to certain technology to one of the lenders.
In December 1995, advance royalties in the amount of $1,500,000 were converted
into 365,517 shares of Series F preferred stock at $4.10 per share. At the same
time, the above license became nonexclusive, and the Company received a
nonexclusive license to certain technology, consideration for which was the
issuance of 262,222 shares of the Company's common stock at $.54 per share.

     The Company had net sales to two stockholders of $578,000 and $534,000,
respectively, for the year ending December 31, 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 5.

15.  BUSINESS SEGMENT AND MAJOR CUSTOMERS

     The Company operates in a single industry segment and primarily sells its
products to customers in North America. Products sold to customers in other
geographic regions are insignificant.

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

<TABLE>
<CAPTION>
                                                   1997      1996      1995
                                                   ----      ----      ----
          <S>                                      <C>       <C>       <C>
          A                                          14%        -         -
          B                                           -        21%       52%
          C                                           -        41        28
</TABLE>

16.  SUBSEQUENT EVENTS

     In March 1998, the Company announced its intent to acquire Pacific
Monolithics, Inc., a privately held Company, for approximately $12.5 million of
the Company's common stock.

     In February 1998, the Company entered into a sublease agreement for
approximately 55,000 square feet of office, research and development and
manufacturing space in San Jose, CA.  The new facility will become the Company's
headquarters and principal facility, and will replace the existing facilities
leases that expire in May 1998 through September 1998.  The sublease provides
for initial monthly lease payments of approximately $68,888 and expires in April
2004.


                                          54
<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.


March 27, 1998                     HYBRID NETWORKS, INC.



                                   By:  /s/ Carl S. Ledbetter
                                        ----------------------------------------
                                        Carl S. Ledbetter
                                        President and 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                   President and Chief Executive Officer             March 27, 1998
-----------------------------------
Carl S. Ledbetter



PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:


/s/ Dan E. Steimle                      Vice President, Finance and Administration        March 27, 1998
-----------------------------------       and Chief Financial Officer
Dan E. Steimle



ADDITIONAL DIRECTORS:


/s/ James R. Flach                      Director                                          March 27, 1998
-----------------------------------
James R. Flach

/s/ Stephen E. Halprin                  Director                                          March 27, 1998
-----------------------------------
Stephen E. Halprin

/s/ Gary M. Lauder                      Director                                          March 27, 1998
-----------------------------------
Gary M. Lauder

/s/ Douglas M. Leone                    Director                                          March 27, 1998
-----------------------------------
Douglas M. Leone
</TABLE>


                                          55
<PAGE>


                          REPORT OF INDEPENDENT ACCOUNTANTS



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

     Our report on the financial statements of Hybrid Networks, Inc. is included
on page 40 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 the index on page 32 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.



San Jose, California
January 20, 1998






                                          56
<PAGE>

                                HYBRID NETWORKS, INC.

                   SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                                    (IN THOUSANDS)

<TABLE>
<CAPTION>

ALLOWANCE FOR DOUBTFUL ACCOUNTS

                                                       ADDITIONS
                                   BALANCE AT           CHARGED              CHARGED                              BALANCE AT
For the year ended:                 BEGINNING          TO COSTS              TO OTHER                               THE END
                                    OF PERIOD        AND EXPENSES            ACCOUNTS          DEDUCTIONS          OF PERIOD
                                   ----------        ------------            --------          ----------         -----------
<S>                                <C>               <C>                     <C>               <C>                <C>
December 31, 1997                      --               $1,175                  --                  --              $1,175
December 31, 1996                      --                   10                  --               $  10                  --
December 31, 1995                      --                   --                  --                  --                  --


INVENTORY RESERVES
                                                       ADDITIONS
                                   BALANCE AT           CHARGED              CHARGED                              BALANCE AT
For the year ended:                 BEGINNING          TO COSTS              TO OTHER                               THE END
                                    OF PERIOD        AND EXPENSES            ACCOUNTS          DEDUCTIONS          OF PERIOD
                                   ----------        ------------            --------          ----------         -----------
<S>                                <C>               <C>                     <C>               <C>                <C>
December 31, 1997                $    257             $    452                  --            $   (382)           $    327
December 31, 1996                     137                  126                  --                  (6)                257
December 31, 1995                      --                  137                  --                  --                 137
</TABLE>


                                          S-1
<PAGE>

                                    EXHIBIT INDEX

Exhibit
Number       Exhibit Title
-------      -------------

  3.01       Registrant's Amended and Restated Certificate of Incorporation
             (1)

 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)

 10.09       Net Lease Agreement between Devcon/Bubb Road Investors and
             Registrant dated May 25, 1995. (3)

 10.10       Sublease between Norian Corporation and Registrant dated
             October 24, 1996. (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 2002 transferred to BG Services Limited. (3)

 10.13       Convertible Subordinated Promissory Note Purchase Agreement among
             Registrant and certain investors dated September 18, 1997, form
             of Convertible Subordinated Promissory Note and form of Common
             Stock Purchase Warrant. (3)

 10.14       Commitment Letter between Registrant and Venture Banking Group
             dated September 16, 1997.(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)

 10.16       Sales and Purchase Agreement between Registrant and Itochu
             Corporation dated January 10, 1997. (3) (5)

 10.17       Value Added Reseller Agreement between Registrant and Internet
             Ventures, Inc. dated July 1, 1996. (3) (5)

 10.18       Value Added Reseller Agreement between Registrant and Network
             System Technologies dated November 25, 1996. (3) (5)

 10.19       Registrant's Incentive Based Compensation Program. (3) (4)

 10.20       Loan and Security Agreement between Venture Banking Group and
             Registrant dated October 16, 1997, Form of Common Stock Purchase
             Warrant and Subordination Agreements among Registrant and certain
             security holders of Registrant dated October 16, 1997. (3)

 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)

 10.23       Employment Letter between Registrant and William H. Fry dated
             May 8, 1996, and Terms of Severance Arrangement with William H. Fry
             dated January 21, 1998. (4)

 23.01       Consent of Coopers & Lybrand L.L.P., independent accountants.

 27.01       Financial Data Schedule.

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

(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.