================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K

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

                    For the Year Ended December 31, 2001, or

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

           For the transition period from ___________ to ____________.

                         COMMISSION FILE NUMBER: 0-23289

                              HYBRID NETWORKS, INC.
             (Exact name of registrant as specified in its charter)

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

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

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

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

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

     Indicate by check mark  whether the  Registrant:  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Exchange Act during the past
12 months (or for such shorter  period that the  Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes |X| No |_|

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

     As of February 28, 2002,  there were outstanding  22,788,384  shares of the
Registrant's  common  stock,  $0.001 par value per share.  As of that date,  the
aggregate   market  value  of  the  shares  of  voting   common  stock  held  by
non-affiliates  of the  Registrant,  based on the  average bid and ask prices of
such  stock as of such date as  reported  by The  Nasdaq  Small Cap  Market  was
approximately  $1,546,000.   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>

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----

PART I
   ITEM 1    Business......................................................   1
   ITEM 2    Properties....................................................   5
   ITEM 3    Legal Proceedings.............................................   5
   ITEM 4    Submission of Matters to a Vote of Security Holders...........   5
PART II
   ITEM 5    Market for the Registrant's Common Equity and Related
               Stockholder Matters.............................. ..........   6
   ITEM 6    Selected Financial Data.......................................   7
   ITEM 7    Management's Discussion and Analysis of Financial
               Condition and Results of Operations.........................   8
   ITEM 7A   Quantitative and Qualitative Disclosures About Market Risk....  17
   ITEM 8    Financial Statements..........................................  18
   ITEM 9    Changes in and Disagreements With Accountants on Accounting
               and Financial Disclosure....................................  40
PART III
   ITEM 10   Directors and Executive Officers of the Company...............  41
   ITEM 11   Executive Compensation........................................  42
   ITEM 12   Security Ownership of Certain Beneficial Owners
               and Management..............................................  44
   ITEM 13   Certain Relationships and Related Transactions................  46
PART IV
   ITEM 14   Exhibits, Financial Statement Schedules and
                Reports on Form 8-K........................................  48
Signatures.................................................................  51

Exhibits

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

<PAGE>

PART I

         This report on Form 10-K contains  forward-looking  statements relating
to future events or financial results, including such statements indicating that
"we believe," "we expect," "we  anticipate",  or "we intend" that certain events
may occur or  certain  trends may  continue.  Other  forward-looking  statements
include  statements  about the future  development of products or  technologies,
matters relating to our proprietary rights,  facilities needs, our liquidity and
capital  needs,   and  other   statements   about  future  matters.   All  these
forward-looking statements involve risks and uncertainties.  You should not rely
too heavily on these  statements;  although they reflect the good faith judgment
of our management,  they involve future events that might not occur. We can only
base such  statements  on facts and factors that we currently  know.  Our actual
results could differ materially from those in these  forward-looking  statements
as a result of various  factors,  including those set forth under "Risk Factors"
and  elsewhere  in this Form 10-K.  We disclaim any  obligation  to update these
forward-looking statements as a result of subsequent events.

ITEM 1. BUSINESS

Liquidity Concerns

          During  2001,   we  refocused  our  targeted   opportunities   to  the
international  marketplace as we adjusted to the abrupt downturn in the domestic
markets,   in  particular  Sprint   Corporation's  and  certain  other  domestic
operator's  decisions to cease the expansion of their  deployments  and to cease
purchasing  our  products  as a  result.  International  opportunities  have not
developed  as  rapidly  as we  anticipated,  and we believe  that  domestic  and
international  revenues  will be depressed for  substantially  all of 2002. As a
result, we do not foresee sufficient revenues to meet our operating expenses.

          Our current liabilities,  including a $5.5 million debenture due April
30, 2002,  exceeded our cash and cash equivalents by approximately  $4.2 million
at December 31, 2001, and working capital at that date was only $736,000.  If we
cannot  consummate a sale or merger on favorable  terms we may be forced to seek
protection under the federal bankruptcy laws. There is no assurance that we will
be able to  consummate  a sale or  merger  or,  even if we can do so,  that  the
holders of our common  stock or  preferred  stock will  receive any net proceeds
from such sale or merger.

          FOR OTHER IMPORTANT  RISKS  REGARDING OUR FINANCIAL  CONDITION AND OUR
BUSINESS,  SEE RISK  FACTORS  INCLUDED IN ITEM 7 OF THIS  ANNUAL  REPORT ON FORM
10-K.

Overview

         We  are a  fixed  broadband  wireless  access  equipment  company  that
designs,  develops,  manufactures  and markets  wireless  systems  that  provide
high-speed  access to the Internet for  businesses  and  consumers.  Our systems
provide  consumers with a wireless  alternative for high-speed  Internet access.
Our   products   greatly    accelerate   the   response   time   for   accessing
bandwidth-intensive information. Since 1996, our principal product line has been
the Hybrid  Series 2000,  which  consists of base station  routers,  network and
subscriber  management tools and a line of wireless end-user routers or Customer
Premise Equipment (CPE).

         In the past,  the majority of our products have been sold in the United
States and Canada.  Our customers include  broadband  wireless system operators,
national and regional telephone  companies,  and systems  integrators who market
our  product and extend our sales  channel  worldwide.  To date,  we believe our
systems are deployed across more than 85% of the active MMDS  frequencies in the
U.S.  and we continue to market our  products to  operators  worldwide  who have
licensed  frequencies below 6 GHz. Although in the past we have sold most of our
products in the United  States and  Canada,  many of our new  opportunities  are
being pursued  internationally.  However,  international opportunities  have not
developed as rapidly as we anticipated and we believe that  international  sales
will be depressed for substantially all of 2002.

         The sales cycle for our products is lengthy, and is subject to a number
of significant  risks,  including our customers'  capital budget constraints and
the processing time for an application for the use of licensed radio frequencies
submitted to  governmental  regulatory  agencies.  Any delay or loss of an order
that is expected in a quarter can have a major effect on our sales and operating
results for that  quarter.  The same is true of any failure of a customer to pay
for products on a timely basis.

                                       1

<PAGE>

         The market for high-speed network connectivity products and services is
highly competitive. On-going factors affecting our business include:

          o    A slow adoption rate of fixed  broadband  wireless (FBBW) systems
               by service  providers.  Systems  operators  have been cautious in
               their approach to the fixed  broadband  wireless  market and they
               have been slow to make significant capital investments.

          o    Constant  technology  change and the  development  of new product
               features.  New  competitors  have  entered  the  fixed  broadband
               wireless market with products that they claim will outperform our
               products  due  to  improved  functionality,   new  features,  and
               different technologies.

          o    Evolving  industry   standards.   The  fixed  broadband  wireless
               industry  has yet to  adopt  industry  standards  and this has an
               adverse affect on equipment sales and earnings.  Hybrid maintains
               active  participation in standards committees affecting the fixed
               broadband wireless industry.  If a technology different than ours
               is selected as the industry standard, future sales growth will be
               directly  affected by our ability to modify our existing products
               to comply with that standard.

         Hybrid  systems  are now  deployed  in 77 markets  on five  continents.
Hybrid was  incorporated  in  Delaware  in June 1990.  Our  principal  executive
offices are located at 6409 Guadalupe Mines Road, San Jose,  California,  95120.
Our telephone number is (408) 323-6500.

Technology, Products, and Services

         Our products are an integral part of a system  operator's full wireless
high-speed  Internet access system.  Our Series 2000 product-line  includes base
station routers, network and subscriber management tools, and a line of wireless
end-user routers.

         Our base  station  routers and  management  tools are used by broadband
wireless operators at their base stations to connect Internet subscribers to the
operator's networks in order to give the subscribers high-speed Internet access.
Our base station products provide management systems that allow the operators to
configure and manage their networks,  and establish different levels of services
and charges among  end-users.  This enables the operators to give higher service
to  premium-paying,  high-volume  subscribers  and allocate  unused  capacity to
lower-volume groups.

         Wireless operators typically service single-computer customers or local
area networks used by high-end  residential  customers and the operators use our
end-user products to connect subscribers to the wireless systems networks at the
subscribers' sites.

         Technology

         Our Series  2000  system is  expandable  and is designed to serve up to
100,000  routers.  Each of the multiple return antennas is pointed in a slightly
different direction,  to increase the capacity of the available return frequency
spectrum.  Because most  operators  have only 10MHz of return  channel  capacity
available,  return  sectorization  is necessary to re-use  spectrum  until other
options such as MMDS return are allowed.

         Our  proprietary  software  allows  subscribers  to share  many  return
channels  and  also  allows  a burst  into a  continuous  transmission  state to
transfer or send large  amounts of data  upstream.  The  operator  can  optimize
performance for business users yet still provide other users access to capacity.
Some  operators  set up two or three groups of return  channels  with  different
bandwidths which enables them to provide  different service levels or groups for
business and residential customers.

         Our products are integrated with other telecommunications  equipment to
create a complete wireless system.  In 2001, Hybrid entered  agreements with two
global  systems  integrators,  REMEC and  Thales  Communications.  Each of these
system  integrators  offer  wireless  operators a complete  turnkey  system that
integrates  our  products  with the radio and  Internet  equipment  necessary to
deploy a wireless system.


                                       2
<PAGE>

         Products

         Base Station Equipment

         CYBERMANAGER2000  (CMG).  Proprietary subscriber and network management
software which allows the operator to configure service levels,  or groups,  for
both  business  and  residential  end-users;  the  CMG is an  off-the-shelf  Sun
Workstation.

         CYBERMASTER   DOWNSTREAM   ROUTER   (CMD).    Rack-mounted   industrial
microcomputer capable of covering 12 MHz of bandwidth

         CYBERMASTER    UPSTREAM   ROUTER   (CMU).    Rack-mounted    industrial
microcomputer capable of supporting 28 channels

         Consumer premises Equipment

         Wireless Broadband Router (WBR) The Multi-User (1-60 user) WBR supports
10 Mb/s, with 64-QAM  downstream  data  transmission  and upstream  transmission
using wireless return, telephone modem or router.

         Services

         Our product support services include consulting,  systems  engineering,
systems integration,  installation, training, and technical support. Our network
operations  group also works with the customer during site preparation to aid in
systems engineering,  system integration,  installation,  and acceptance testing
for system start-up.

Customers

          Our customers are principally  wireless system  operators and national
or regional telephone companies.  A small number of customers have traditionally
accounted  for a large  portion of our net sales.  In 2001,  Sprint  Corporation
accounted for 88% of our net sales.  We expect  virtually no revenue from Sprint
in 2002. See Risk Factors - We Are Largely Dependant On Sprint. During 2000, two
customers accounted for 54% and 23% of our net sales and two customers accounted
for 31% and 28% of net sales during 1999.

          During 1999, we issued to Sprint  Corporation  4,066,466 shares of our
common  stock  and  warrants  to  purchase  $8.4  million  principal  amount  of
convertible  debentures that is convertible  into 2,946,622 shares of our common
stock.  Two  positions  on our  Board  of  Directors  are  reserved  for  Sprint
designees,  and we cannot issue any securities (with limited  exceptions) or, in
most cases, take any material corporate action without Sprint's approval. Sprint
has other rights and  privileges  as well,  including  pre-emptive  rights and a
right  of  first  refusal  in  the  case  of  any  proposed  change  of  control
transaction,  which right of first refusal is assignable by Sprint to any third-
party.

         Prior to 2000,  most of our  sales  were to cable  customers.  However,
these sales represented less than 1% of our total sales in 2001.

Sales and Marketing

         Sales in 2001 were made  primarily to  companies in the United  States.
Sales are made  through  our field  sales  force as well as global and  regional
system integrators.

         As of December 31, 2001,  the total amount of shipments not  recognized
as revenue due to acceptance or testing criteria or because they were sales to a
distributor were $154,000.

         Our  product  sales  backlog on  December  31,  2001 was  $336,000  and
consisted of customer  purchase  orders which had been received and accepted and
for which we have a reasonable expectation of shipment within the current fiscal
period. The comparable backlog figure as of February 28, 2001 was $2.7 million.


                                       3
<PAGE>

Manufacturing

         We outsource  manufacturing  of the product  modules to third  parties,
while maintaining a limited in-house manufacturing capability for pre-production
assembly and testing.

         Our Series 2000 wireless  broadband  routers are  manufactured by Sharp
Corporation through an agreement we have had since early 1997 with Sharp and its
distributor, Itochu Corporation.

         We typically provide a 12 to 18 month warranty on our hardware products
that includes  factory repair  service.  We also provide  customer  support as a
purchase option that includes telephone and e-mail support, software maintenance
releases, and technical bulletins.

Research and Development

         At February 20, 2002, our research and  development  staff consisted of
22  full-time  employees,  and one  local  consultant.  Our total  research  and
development expenses for 2001, 2000, and 1999, were $6,986,000,  $6,715,000, and
$4,191,000,  respectively.  Our research and development  effort during 2001 was
directed  primarily towards reducing the cost of manufacturing and improving the
performance of client routers.

Competition

         We  are  primarily  engaged  in  the  business  of  manufacturing  FBBW
high-speed Internet access equipment.  Most of our competitors are substantially
larger and have greater financial, technical, marketing, distribution,  customer
support, and other resources, in addition to having greater name recognition and
access to customers than we have.

         Competitors in the wireless market include Vyyo,  Alvarion,  and Netro,
in  addition  to  new-market  entrants  including,   among  others,  Navini  and
IPWireless.

         Participants in the wireless  broadband  access market have not settled
on a  technology  standard  for  equipment  to  serve  this  market.  Our  major
competitors  have created or joined in consortia to promote the technology  they
are employing as the industry standard,  which are different from our underlying
technology.   While  Hybrid  also  actively  promotes  its  technology,  if  the
marketplace  settles  on a  standard  that  we do not  employ,  our  competitive
position would be seriously impaired.

         Our  customers  compete  with  providers  of other forms of  high-speed
Internet access, including DSL and cable. Telephone companies are deploying DSL,
providing high-speed Internet access over existing phone wires. They are working
with  computer  vendors  to  install  DSL  cards  in PCs  manufactured  by those
companies, thereby reducing the telephone companies' distribution costs. DSL and
cable  pose a  significant  competitive  threat to the  services  offered by our
customers.

Intellectual Property

         We rely  on a  combination  of  patent,  trade  secret,  copyright  and
trademark laws and contractual restrictions to establish and protect proprietary
rights in our  products.  We have  received 15 patents from the U.S.  Patent and
Trademark Office.  These patents are directed to various aspects of wireless and
cable  modems  and base  station  systems.  In  addition,  the U.S.  Patent  and
Trademark  Office has issued  formal  notices of allowances  for pending  patent
applications  which are also  directed  to  wireless  and cable  modems and base
station systems, as well as various modulation and transmission  schemes used in
wireless cable modem systems.  We have a number of patent  applications  pending
before the U.S. Patent and Trademark Office, as well as before patent offices of
foreign  jurisdictions.  It is unknown whether any of these pending applications
will issue to a patent.


                                       4
<PAGE>

Employees

         As of December 31, 2001,  we had 50 full-time  employees and we reduced
our workforce to 40 full time employees in February 2002.  None of our employees
are  represented  by a  collective  bargaining  unit with  respect to his or her
employment,  and we have never  experienced an organized  work stoppage.  We use
consultants, contractors, and temporary workers to supplement our workforce and,
as of February 20, 2002, we had one consultant.

ITEM 2. PROPERTIES

         We  currently  sublease  approximately  55,000  square  feet of office,
research and development and manufacturing  space in San Jose,  California.  The
sublease  expires in April 2004, and we have an option to extend the term of the
lease through October 2009.

ITEM 3. LEGAL PROCEEDINGS

         None

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

         None.


                                       5
<PAGE>

PART II

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

Market Information for Common Stock

         Our common  stock was traded on the Nasdaq  National  Market  under the
symbol HYBR during the period from our initial  public  offering on November 12,
1997 through June 16,  1998.  On June 17, 1998,  trading in our common stock was
suspended  by the  Nasdaq  National  Market,  in  response  to  our  independent
auditors,  PWC, withdrawing their reports to our 1997 financial statements.  The
suspension  continued until December 1, 1998, when our common stock was delisted
by the Nasdaq  National  Market due to  continuing  noncompliance  with  listing
requirements.  From  December 1, 1998 to July 5, 2000,  our stock  traded in the
over-the-counter  market  on the pink  sheets.  On July 6,  2000,  our stock was
re-listed on the Nasdaq National Market.  On August 30, 2001 our stock was moved
from the Nasdaq  National Market to the Nasdaq Small Cap Market due to our stock
price and market capitalization falling below the Nasdaq National Market minimum
requirements.  The table  below  shows the  range of high and low  closing  sale
prices reported.  The table reflects inter-dealer prices without retail mark-up,
mark down or  commission.  On March 13,  2002,  the closing  price of our common
stock on the Nasdaq  Small Cap market  was $0.11.  See Risk  Factors - IF WE ARE
DELISTED  FROM THE NASDAQ SMALL CAP MARKET,  THE PRICE OF OUR COMMON STOCK COULD
DROP AND IT MAY BE MORE DIFFICULT TO TRADE OUR COMMON STOCK.

                                                               High       Low
                                                               ----       ---
First Quarter 2000........................................    $24.50     $8.00
Second Quarter 2000.......................................    $13.50     $4.75
Third Quarter 2000........................................    $20.19     $5.56
Fourth Quarter 2000.......................................    $18.75     $3.13
First Quarter 2001........................................     $6.94     $1.44
Second Quarter 2001.......................................     $2.95     $0.50
Third Quarter 2001........................................     $2.25     $0.52
Fourth Quarter 2001.......................................     $1.11     $0.40

Stockholders

         As of December 31, 2001, there were approximately 646 holders of record
of our common stock

Dividends

         We have not paid any cash  dividends on our capital stock to date.  The
holders of Series K Cumulative  Convertible  Preferred  Stock are entitled to an
annual  dividend at a rate of 6% out of funds  legally  available for payment of
such dividends. As of December 31, 2001, the cumulative preferred stock dividend
was $169,000.  The terms of our  outstanding  debentures  and our agreement with
Sprint  prohibit  us from paying any cash  dividends  without the consent of the
debenture holders and Sprint.


                                       6
<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>
                                                                      Years Ended December 31,
                                                 --------------------------------------------------------------------
                                                   2001           2000           1999           1998          1997(1)
                                                 --------       --------       --------       --------       --------
<S>                                              <C>            <C>            <C>            <C>            <C>
STATEMENT OF OPERATIONS DATA:
Gross sales                                      $ 28,666       $ 29,924       $ 13,423       $ 12,418       $  4,120
Sales discounts                                      (740)        (7,129)          (407)            --             --
                                                 --------       --------       --------       --------       --------
Net sales                                          27,926         22,795         13,016         12,418          4,120
Cost of sales                                      20,706         23,139         13,341         14,046          8,899
                                                 --------       --------       --------       --------       --------
Gross profit (loss)                                 7,220           (344)          (325)        (1,628)        (4,779)
Operating expenses:
  Research and development                          6,986          6,715          4,191          7,771          7,831
  Sales and marketing                               2,800         16,491          1,740          3,642          4,678
  General and administrative                        5,422         11,625          7,660          8,933          2,964
  Asset impairment charge                              --             --             --          1,250             --
  Write off of technology license                      --             --             --          1,283             --
                                                 --------       --------       --------       --------       --------
     Total operating expenses                      15,208         34,831         13,591         22,879         15,473
                                                 --------       --------       --------       --------       --------
        Loss from operations                       (7,988)       (35,175)       (13,916)       (24,507)       (20,252)
Interest income and other expense, net                120           (717)           171            779            316
Interest expense                                   (2,649)        (1,311)        (8,447)          (897)        (1,666)
                                                 --------       --------       --------       --------       --------
Net loss                                         $(10,517)      $(37,203)      $(22,192)      $(24,625)      $(21,602)
                                                 --------       --------       --------       --------       --------
 Preferred stock dividends                           (169)            --             --             --             --
                                                 --------
  Net loss available to common shareholders       (10,686)       (37,203)       (22,192)       (24,625)       (21,602)
                                                 ========       ========       ========       ========       ========
Basic and diluted net loss per share             $  (0.48)      $  (2.03)      $  (2.08)      $  (2.37)      $  (6.10)
                                                 ========       ========       ========       ========       ========
Shares used in basic and diluted
         per share calculation (2)                 22,354         18,309         10,678         10,410          3,541
                                                 ========       ========       ========       ========       ========
</TABLE>

<TABLE>
<CAPTION>
                                                                    December 31,
                                          -------------------------------------------------------------------
                                            2001           2000          1999           1998          1997(1)
                                          --------       --------      --------       --------       --------
<S>                                       <C>            <C>           <C>            <C>            <C>
BALANCE SHEET DATA:
Cash and cash equivalents                 $  4,506       $  1,878      $ 13,394       $  3,966       $ 27,143
Working capital                                736          6,324        11,527           (812)        23,795
Total assets                                11,219         19,664        21,152         15,420         39,065
Long-term debt                                 139          5,632        23,978            419            654
Total liabilities                            8,803         16,707        30,972         12,718         11,762
Total stockholders' equity (deficit)        (5,144)         2,957        (9,820)         2,702         27,303
</TABLE>

(1) All financial  data in the table above as of and for the year ended December
31, 1997, as presented, reflect the restated financial statement.

(2) See Note 3 of Notes to Financial Statements for an explanation of the number
of shares used to compute basic and diluted net loss per share.


                                       7
<PAGE>

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

         The discussion  below should be read in conjunction  with the financial
statements  and  the  notes  thereto  included  in item 8 of  this  report.  The
discussion  contains  forward-looking  statements  relating to future  events or
financial results, such as statements indicating that "we believe," "we expect,"
"we  anticipate"  or "we intend" that certain events may occur or certain trends
may continue.  Other  forward-looking  statements  include  statements about the
future  development  of  products  or  technologies,  matters  relating  to  our
proprietary rights,  facilities needs, our liquidity and capital needs and other
statements about future matters.  All these  forward-looking  statements involve
risks and  uncertainties.  You should not rely too heavily on these  statements;
although they reflect the good faith  judgment of our  management,  they involve
future  events that might not occur.  We can only base such  statements on facts
and factors that we currently  know. Our actual results could differ  materially
from those in these  forward-looking  statements as a result of various factors,
including  those set forth under "risk  factors" and elsewhere in this report on
form 10-k.

Overview

         Liquidity Concerns

          During  2001,   we  refocused  our  targeted   opportunities   to  the
international  markerplace as we adjusted to the abrupt downturn in the domestic
markets,   in  particular  Sprint   Corporation's  and  certain  other  domestic
operator's  decision to cease the  expansion of their  deployments  and to cease
purchasing  our  products  as a  result.  International  opportunities  have not
developed  as  rapidly  as we  anticipated,  and we believe  that  domestic  and
international  revenues  will be depressed for  substantially  all of 2002. As a
result, we do not foresee sufficient revenues to meet our operating expenses.

          Our current liabilities,  including a $5.5 million debenture due April
30, 2002,  exceeded our cash and cash equivalents by approximately  $4.2 million
at December 31, 2001, and working capital at that date was only $736,000.  If we
cannot  consummate a sale or merger on favorable  terms we may be forced to seek
protection under the federal bankruptcy laws. There is no assurance that we will
be able to  consummate  a sale or  merger  or,  even if we can do so,  that  the
holders of our common  stock or  preferred  stock will  receive any net proceeds
from such sale or merger.

          FOR OTHER IMPORTANT  RISKS  REGARDING OUR FINANCIAL  CONDITION AND OUR
BUSINESS,  SEE RISK  FACTORS  INCLUDED IN ITEM 7 OF THIS  ANNUAL  REPORT ON FORM
10-K.

         Revenue Recognition

         We normally ship our products based upon a bona fide purchase order and
volume  purchase  agreement.  We recognize  revenue at the time a transaction is
shipped  and  collection  of  the  resulting  account  receivable  is  probable.
Shipments on customer orders with acceptance criteria,  installation criteria or
rights of return are recognized as revenue only when the criteria are satisfied.
Revenue related to shipments to distributors is normally recognized upon receipt
of payment for such  transactions.  As of December  31, 2001 the total amount of
shipments not  recognized  as revenue due to  acceptance or testing  criteria or
because they were sold to a distributor was $154,000.

         We  generally  sell our  software  together  with a one-year  technical
support  contract,  for  which  we  charge  separately,   to  provide  upgrades,
maintenance,  system support,  and service. We recognize revenue on the software
sale without reference to the maintenance contract,  and we recognize revenue on
the technical  support  contract over its term on a straight-line  basis.  Other
service revenue,  primarily training and consulting,  is generally recognized at
the time the service is performed.

         Warranty Costs

         We accrue for estimated  warranty  costs when the related sales revenue
is recognized. Our modem manufacturer,  Sharp Corporation,  provides warranty on
all cable  routers  manufactured  by them.  We  provide a warranty  that  ranges
between 12 and 18 months on all base station equipment and CPE equipment, and we
typically provide a 90-day warranty on software media.

         Net Losses

         We incurred net losses for the years ended December 31, 2001, 2000, and
1999,  of  $10,517,000,   $37,203,000,   and  $22,192,000,   respectively.   Our
accumulated deficit was $133,481,000 as of December 31, 2001. We expect to incur
losses for the foreseeable future.

Results of Operations

         Years Ended December 31, 2001, 2000, and 1999

         NET  SALES.  After  non-cash  sales  discounts  of  $740,000  in  2001,
$7,129,000 in 2000, and $407,000 in 1999, net sales increased 23% to $27,926,000
in 2001, from $22,795,000 in 2000, and 115% from  $13,016,000 in 1999.  Non-cash
sales discounts  recorded in 2001 were in connection with the issuance of common
stock purchase warrants


                                       8
<PAGE>

issued to Sprint.  Broadband wireless system operators  accounted for 99% of net
sales in 2001, 94% in 2000, and 48% in 1999.

Gross sales in 2001 declined  approximately 4% from 2000 levels. The increase in
net revenues from 2000 to 2001 is due to the  substantial  reduction in non-cash
sales discounts in 2001 from 2000. In October 2001, Sprint announced that it was
not pursuing any new fixed broadband wireless markets until a  second-generation
product   could  be  evaluated.   We  do  not   currently   have  this  type  of
second-generation  product and in light of our liquidity concerns have suspended
our efforts to develop or acquire this technology. In light of Sprint's decision
and the  delays  we have  encountered  in  developing  international  sales,  we
anticipate  that our  revenue in 2002 will be  dramatically  lower than in 2001.
International  sales  accounted  for less than 1% of net  sales in 2001,  24% in
2000, and 5% in 1999.

         GROSS MARGIN. Gross margin was a positive 26% in 2001, negative 1.5% in
2000,  and negative 2.5% in 1999.  The improved  gross margins from 2000 to 2001
were due to improved  margins for customer  premises  equipment as a result of a
price increase  negotiated  with Sprint.  The  improvement in gross margins from
1999 to 2000 was  primarily  due to an  increase  in the sales  volume of higher
margin, at that time, base station equipment as compared to total sales.

         RESEARCH AND  DEVELOPMENT.  Research and development  expenses  include
ongoing  base  station  and  software  development  expenses  as well as  design
expenditures  associated with new product  development,  new product production,
manufacturing  cost reduction  programs and improvements in the manufacturing of
existing   products.   Research  and  development   expenses  were   $6,986,000,
$6,715,000, and $4,191,000 for 2001, 2000, and 1999, respectively.  Research and
development  expenses  included  non-cash  charges of  $277,000,  $470,000,  and
$668,000 in 2001, 2000, and 1999,  respectively,  for compensation recognized on
stock  options  granted at exercise  prices below fair market value to employees
and consultants  engaged in research and  development.  The increase in research
and  development  expenses in 2001 as compared with 2000 was primarily due to an
increase in personnel costs  ($1,400,000),  which was offset by decreases in the
use of outside  consultants  ($600,000) and decreases in the use of research and
development  materials ($600,000) as development projects moved from engineering
to manufacturing.  The increase in research and development  expenses in 2000 as
compared  to 1999 was  primarily  due to an increase  in  personnel  costs of $1
million and an increase in fees for outside consultants of $1.1 million

         SALES AND MARKETING.  Sales and marketing  expenses  include  primarily
salaries  and  related   payroll  costs  for  sales  and  marketing   personnel,
commissions,  advertising,  promotions and travel.  Sales and marketing expenses
were  $2,800,000,  $16,491,000,  and  $1,740,000,  during 2001,  2000, and 1999,
respectively.  Sales and marketing expenses included non-cash charges of $5,000,
$47,000,  and $88,000, in 2001, 2000, and 1999,  respectively,  for compensation
recognized on stock options  granted at exercise  prices below fair market value
for employees and consultants engaged in sales and marketing.  A non-cash charge
of $13.7  million  was  recorded  in 2000 as a customer  acquisition  expense in
connection with the warrant granted to Sprint.  Excluding this charge, sales and
marketing expenses were essentially unchanged in 2001 as compared with 2000. The
increase  in  sales  and  marketing  expenses  in 2000 as  compared  to 1999 was
primarily due to the Sprint warrant charge ($13.7 million) and to an increase in
consulting expenses ($500,000).

         GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
mainly  of  salaries  and  benefits  for  administrative  officers  and  support
personnel,  travel expenses, and legal, accounting, and consulting fees. General
and administrative expenses were $5,422,000,  $11,625,000, and $7,660,000 during
2001, 2000, and 1999, respectively. General and administrative expenses included
non-cash charges of $63,000, $287,000, and $219,000 during 2001, 2000, and 1999,
respectively,  for compensation  recognized on stock options granted at exercise
prices below fair market value to employees and consultants engaged in providing
general  and  administrative  services.  The  2000  general  and  administrative
expenses also included non-cash charges of $3,176,000 relating to the separation
of two  executives  of the  Company,  and  $2,000,000  in  connection  with  the
settlement  of  a  lawsuit.  No  such  charges  were  recorded  to  general  and
administrative   expenses  in  either  2001  or  1999.  In  2001,   general  and
administrative  expenses,  excluding  non-cash charges and allocated  facilities
expenses,  increased $430,000 compared with 2000. Increases in allowance for bad
debts,  communications  expense,  directors fees,  public  relations and outside
auditors,  were partially offset by decreases in personnel and recruiting costs,
and legal,  consulting,  and  miscellaneous  expenses.  Excluding  the non-cash
charges described above,  general and administrative  expenses in 2000 decreased
$1,279,000  compared to 1999.  This decrease was due to reductions in legal fees
($2,600,000)  that were offset in part by increases in personnel  related  costs
($700,000).


                                       9
<PAGE>

         INTEREST INCOME  (EXPENSE) AND OTHER. The Company incurred net interest
expense of $2,529,000,  $2,028,000,  and  $8,276,000,  in 2001,  2000, and 1999,
respectively.  In 2001,  net interest  expense  includes  interest on debentures
($858,000),  amortization  of loan  fees  ($333,000),  and  amortization  of the
discount  related to  convertible  debentures  ($1,458,000).  In August 1999, we
issued $18.1 million of convertible  debentures  that were converted into common
stock in June 2000. In 2000, net interest expense included a premium paid on the
conversion  of these  debentures  resulting in a beneficial  conversion  element
valued at $1,170,000. In 1999, net interest expense included the amortization of
the deemed discount on these  debentures in the amount of $7.4 million and which
was the result of the difference between the conversion price of the convertible
debentures and the then market price of our common stock.

Liquidity and Capital Resources

         Background Information

         We  have  had  operating  losses  and  negative  cash  flow  since  our
inception.  In light of the anticipated  reduction in revenue in 2002, we expect
to not have sufficient  funds to operate our business through 2002. In addition,
we do not have  sufficient  cash to repay the $5.5  million  debenture  upon its
maturity in April  2002.  These  conditions  raise  substantial  doubt about our
ability  to  continue  as  a  going  concern.  Our  continued  existence  as  an
independent  company is dependent upon receiving  additional  funding to operate
our business and repay debts upon maturity. We have no arrangements with respect
to the receipt of any additional funding and there is no assurance that any such
arrangement will be attained on acceptable terms.

          We are actively  evaluating  our strategic  alternatives,  including a
sale or merger of the  Company.  Should  we be  unable to  consummate  a sale or
merger on favorable terms, we may be forced to seek protection under the federal
bankruptcy laws.

          In order to conserve  cash  reserves,  we have  reduced  our  selling,
general and administrative expenses, research and development expenses and other
operating costs. In addition, we have implemented a focused control over capital
expenditures, which should enable us to selectively deploy assets only in market
areas with the greatest return potential. However, even after such reduction, we
do not  foresee  that our  revenues  will be  sufficient  to meet our  operating
expenses.

         We have  historically  financed  our  operations  primarily  through  a
combination of debt,  equity and equipment lease  financing.  In 1997, we raised
$42.5 million in net proceeds through our initial public offering and other debt
and equity  financing.  In September  1999, we raised $18.1 million  through the
issuance and sale of  convertible  debentures  to Sprint (in the amount of $11.0
million) and certain  venture  capital  sources (in the amount of $7.1 million).
During the  quarter  ended June 30,  2000,  at the request of the  Company,  the
holders  agreed to convert the entire  principal,  amounting  to a face value of
$18.1  million plus  accrued  interest  through June 30, 2000 of $594,000,  into
6,559,310 shares of common stock. Upon the conversion,  we paid a premium, as an
inducement  to the  holder's,  equivalent  to the interest  that would have been
added to the principal of the  debentures  for the third and fourth  quarters of
2000,  amounting  to  $375,750.  The premium was paid in the form of  additional
shares of common stock calculated at the conversion price of $2.85 per share and
was equivalent to 131,842 shares of common stock.

         Additionally,  Sprint acquired  warrants to purchase up to $8.4 million
of additional  convertible  debentures,  which  debentures  were  convertible at
December 31, 2001 into 2,946,622 shares of common stock on the same terms as the
convertible   debentures   referred  to  above.  The  warrants  were  issued  in
consideration  for  Sprint's  obligation  to  accept  shipments  of at least $10
million  of our  products.  The  amount of  shipments  in 2000  totaled at least
$10,000,000.  In accordance with the Statement of Financial Accounting Standards
No. 123 (SFAS 123), "Accounting for Stock-Based  Compensation,"  transactions in
equity  instruments with  non-employees  for goods or services are accounted for
using the fair value method  prescribed  by SFAS 123.  SFAS 123 requires that in
each  period  in which the  warrants  are  earned,  a  non-cash  charge is to be
recorded.  Using the  Black-Scholes  valuation  model,  we  determined  that the
estimated  value of the warrant was $20.8  million.  We applied  $7.2 million of
this amount as sales discounts  during the four quarters of 2000 and the balance
of $13.6 million was charged as an expense of the Sales and Marketing department
over the first three quarters of 2000.

          Effective  July 3, 2001,  Sprint  committed to purchase an  additional
$9.6 million of our products  under terms that were  different from those agreed
to in the master  purchase  agreement dated May 1, 2000. In connection with this
commitment, we issued to Sprint warrants to purchase up to 600,000 shares of our
common stock at $1.20 per share. All of the shipments relating to these purchase
warrants were made during the quarter ending September 30, 2001. These purchases
were not  subject  to  acceptance  criteria.  In  accordance  with  SFAS 123 and
utilizing the  Black-Scholes  valuation  model, we determined that the estimated
value of these  purchase  warrants was $740,000 and this amount has been applied
as a sales discount  during the quarter ending  September 30, 2001.  There is no
further committment from Sprint to purchase any of our products.

         Assuming  that  as of  December  31,  2001,  Sprint  exercised  all its
warrants,  it would own  7,613,068  shares  of our  common  stock,  representing
approximately 29.0% of the 26,290,071 shares of our common stock that would then
be outstanding  (assuming no other  security  holders  exercised  their options,
warrants or conversion  privileges).  On a fully diluted basis, assuming that as
of December  31, 2001,  all other  security  holders  exercised  their  options,
warrants  and  conversion  privileges  as  well  as  Sprint,  Sprint  would  own
approximately  19.4% of the 39,164,930  fully diluted shares of our common stock
that would then be outstanding.

         We have outstanding a senior secured convertible  debenture in the face
amount of $5.5 million due April 30, 2002 and bearing interest at 12% per annum,
payable  quarterly.   The  conversion  price  is  subject  to  weighted  average
antidilution   provisions  whereby,  if  we  issue  shares  in  the  future  for
consideration   below  the  existing   conversion   price,  then  (with  certain
exceptions) the conversion price will  automatically be decreased,  allowing the
holder of the  debenture  to  receive  additional  shares of common  stock  upon
conversion.  Our  obligations  under this  debenture  are  secured by a security
interest granted to the debenture  holder in substantialy all of our assets.  We
do not have  sufficient  cash to repay the debenture  upon its maturity on April
30, 2002.


                                       10
<PAGE>

         Under a securities  purchase agreement between us and the Halifax Fund,
a fund managed by the Palladin  Group, we issued and sold to the Halifax Fund on
February 16, 2001 securities, including:

          o    a $7.5 million  principal  amount 6%  convertible  debenture  due
               2003, which was convertible into shares of our common stock;
          o    a common stock  purchase  warrant to purchase  833,333  shares of
               common stock;
          o    an adjustment warrant.

         In consideration for such securities,  Halifax paid an initial purchase
price of $7.5 million. We granted to Halifax in the purchase  agreement,  rights
of first  refusal,  preemptive  rights and other rights.  We also entered into a
Registration Rights Agreement with Halifax and agreed to register for resale all
shares of common stock  issuable  upon  conversion  of the  debentures  and upon
exercise of the purchase warrant and adjustment warrant.

         In August 2001, we entered into an exchange  agreement  with Halifax by
which we exchanged shares of our new Series K Cumulative  Convertible  Preferred
Stock for the  debenture and  adjustment  warrant,  which were  cancelled in the
exchange. The purchase warrant remained outstanding and was modified,  primarily
affecting  our  ability  to  require  its  exercise.  Halifax  did  not  pay any
additional consideration in this exchange.

         We issued 7,560 shares of newly  established  Series K Preferred Stock.
Each share of the preferred stock has an initial liquidation value of $1,000 and
accretes additional value at the annual rate of 6% on June 30 and December 31 of
each year. If any shares of preferred  stock are still  outstanding  in February
2006,  we are  required  to  redeem  those  shares of  preferred  stock at their
liquidation value in February 2006,  although the holders of the preferred stock
have the right to delay the redemption for up to 12 months. The redemption price
is to be paid in cash or, at our election,  in common stock valued at 95% of its
volume  weighted  average  prices  during  a  pricing  period  centered  on  the
redemption date.

         The preferred stock is convertible into our common stock. The preferred
shares  convert  into a number of shares of common  stock equal to the  accreted
liquidation value divided by the conversion price. For the first 1,875 shares of
preferred  stock,  the  conversion  price is $1.25  per  share,  provided  these
preferred  shares are converted  prior to February 20, 2002.  Thus,  each of the
first 1,875 shares will convert into 800 shares of common  stock,  before giving
effect to the 6% accretion to the  liquidation  value, or a total of 1.5 million
shares.  The  conversion  price  of the  remaining  shares  is equal to the then
applicable  floor price plus one-half of the amount by which the volume weighted
average price of our common stock for the trading day  preceding the  conversion
exceeds  the floor  price.  The floor  price is  initially  equal to $1.25  and,
provided  that if we satisfy  specific  conditions,  which include the continued
listing of our common  stock on an agreed upon  market,  at the end of the first
pricing  period the floor price will adjust to an amount equal to the average of
the daily volume  weighted  average price of our common stock for a period of 15
consecutive  trading days  immediately  following  the end of the first  pricing
period. The floor price cannot be less than $1.25 or greater than $5.00.

         The maximum number of shares of common stock  issuable upon  conversion
of all of the preferred  stock,  before giving effect to the 6% annual accretion
to the  liquidation  value,  is  6,048,000,  which would be the number of shares
issued if the conversion price for all shares is $1.25.  The exchange  documents
do provide for certain penalties, including reduction of the conversion price to
the then current  market value,  if we do not satisfy  covenants and  conditions
contained in the exchange documents.

         The  Emerging  Issues Task Force (EITF)  Topic No. D-98  addresses  the
classification and measurement of redeemable securities. In D-98, the EITF staff
has issued an  opinion  that all of the events  that  could  trigger  redemption
should be evaluated  separately  and that the  possibility  that any  triggering
event that is not solely  within the control of the issuer could occur,  without
regard to  probability,  would  require the  security to be  classified  outside
permanent  equity.  Accordingly,  we have recorded the $7,560,000 of convertible
preferred stock outside permanent equity on the balance sheet as of December 31,
2001

         The Common Stock Purchase Warrant is exercisable by Halifax to purchase
833,333 shares of our common stock. If the closing bid price of our common stock
is at least $3.50 per share,  we may require  Halifax to exercise  the  warrant,
provided that specified  conditions are satisfied,  including that all preferred
shares have either been converted or redeemed. The exercise price of the warrant
would then be the lower of $9.00 per share or 94% of the volume weighted average
price of our common  stock,  during the 20  consecutive  trading days before the
exercise of the warrant.


                                       11
<PAGE>

         Sources and Uses of Cash

         Net cash used in operating activities was $4,463,000,  $11,742,000, and
$8,017,000,  during 2001,  2000,  and 1999,  respectively.  The net cash used in
operating  activities in 2001 was primarily due to our net loss of  $10,517,000.
The  decrease in current  assets of  $8,138,000  was matched by the  decrease in
current  liabilities  of  $8,174,000.  Our loss for 2001  included  a variety of
non-cash items,  including  depreciation  of $1,331,000 and  amortization of the
beneficial conversion of convertible debentures of $1,458,000.  Net cash used in
operating  activities  in 2000  was  primarily  the  result  of our net  loss of
$37,203,000  and  an  increase  in  net  current  assets  related  to  operating
activities of  $9,517,000,  offset by the  beneficial  conversion of convertible
debentures  of  $20,800,000,   non-cash   compensation   charges  of  $4,596,000
recognized on the grant of stock and stock options to employees and  consultants
at  exercise  prices  which were  lower  than fair  market on the date of grant,
non-cash  charges  related to the issuance of stock for settlement of litigation
of  $2,000,000,  non-cash  charges  related to the  issuance of common  stock to
induce  conversion  of  debentures  of  $1,170,000,  and an  increase in current
liabilities of $5,698,000. The net cash used in operating activities in 1999 was
primarily  the  result  of our net  loss of  $22,192,000,  partially  offset  by
non-cash  charges  attributable to the  amortization of a deemed discount on the
debentures  amounting to $7,394,000,  depreciation and  amortization  charges of
$1,323,000,  non-cash  compensation  charges of  $1,031,000,  and a reduction in
current operating assets of $3,158,000.

         Net cash used in  investing  activities  was  $699,000,  $788,000,  and
$21,000,  in 2001,  2000,  and 1999,  respectively,  and  consisted of aggregate
capital expenditures for property and equipment (primarily computers,  leasehold
improvements,  furniture, fixtures and engineering test equipment). In the past,
we have funded a substantial portion of our property and equipment  expenditures
from  direct  vendor  leasing   programs  and  third  party   commercial   lease
arrangements. At December 31, 2001, we did not have any material commitments for
capital expenditures.

          Net cash provided by financing activities was $7,790,000,  $1,014,000,
and  $17,981,000  in 2001,  2000, and 1999,  respectively.  Net cash provided by
financing  activities in 2001 was  primarily  due to the $7.5 million  raised in
connection  with the Halifax  transaction  described above plus the net proceeds
due  from the  exercise  of stock  option  of  $319,000.  Net cash  provided  by
financing  activities  in 2000  was  primarily  due  from  the net  proceeds  of
$1,349,000  from the exercise of stock  options.  Net cash provided by financing
activities  in 1999  was  primarily  due from  proceeds  from  the  issuance  of
convertible  debentures  and related  common stock warrants and from issuance of
common stock for $18,446,000,  offset by repayment of capital lease  obligations
amounting to $465,000. At December 31, 2001, our liquidity consisted of cash and
cash  equivalents  of  $4,506,000.  Our  current  liabilities,  including a $5.5
million debenture due April 30, 2002,  exceeded our cash and cash equivalents by
approximately  $4.2 million at December 31,  2001,  and working  capital at that
date was only  $736,000.  Absent  our  receipt  of  financing,  which we  cannot
currently  foresee,  we will not have  sufficient cash to repay the $5.5 million
debenture upon its maturity.  In addition, in light of the anticipated reduction
in revenue in 2002,  we expect that we will consume cash in our  operations at a
greater rate than in 2001, and we believe that we do not have sufficient cash to
support our  operations  throughout  2002,  even  without  giving  effect to the
payment of the debenture.



                                       12
<PAGE>

Seasonality and Inflation

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

New Accounting Pronouncements

         In June 2001, the Financial  Accounting Standards Board ("FASB") issued
Statements of Financial  Accounting  Standards  No. 141 "Business  Combinations"
("SFAS 141") and No. 142 "Goodwill and Other  Intangible  Assets"  ("SFAS 142").
SFAS 141 requires all business combinations  initiated after June 30, 2001 to be
accounted for under the purchase method. For all business combinations for which
the date of  acquisition  is  after  June 30,  2001,  SFAS 141 also  establishes
specific  criteria for the  recognition  of intangible  assets  separately  from
goodwill  and  requires   unallocated   negative  goodwill  to  be  written  off
immediately as an extraordinary  gain, rather than deferred and amortized.  SFAS
142 changes the  accounting  for goodwill and other  intangible  assets after an
acquisition.  The most significant changes made by SFAS 142 are: 1) goodwill and
intangible assets with indefinite lives will no longer be amortized; 2) goodwill
and  intangible  assets with  indefinite  lives must be tested for impairment at
least annually; and 3) the amortization period for intangible assets with finite
lives will no longer be limited to forty  years.  The  Company  does not believe
that the  adoption  of these  statements  will  have a  material  effect  on its
financial position, results of operations, or cash flows.

         In June  2001,  the FASB also  approved  for  issuance  SFAS 143 "Asset
Retirement  Obligations."  SFAS  143  establishes  accounting  requirements  for
retirement obligations associated with tangible long-lived assets, including (1)
the  timing  of  the  liability  recognition,  (2)  initial  measurement  of the
liability,  (3) allocation of asset  retirement cost to expense,  (4) subsequent
measurement of the liability and (5) financial statement  disclosures.  SFAS 143
requires that an asset retirement cost should be capitalized as part of the cost
of the related  long-lived asset and  subsequently  allocated to expense using a
systematic and rational method.  The Company will adopt the statement  effective
no later than January 1, 2003, as required.  The transition adjustment resulting
from the  adoption  of SFAS 143 will be  reported  as a  cumulative  effect of a
change in accounting  principle.  At this time,  the Company  cannot  reasonably
estimate the effect of the adoption of this statement on its financial position,
results of operations, or cash flows.

         In October 2001,  the FASB also approved SFAS 144,  Accounting  for the
Impairment  or  Disposal  of  Long-Lived  Assets.  SFAS 144  replaces  SFAS 121,
Accounting for the Impairment of Long-Lived  Assets and for Long-Lived Assets to
Be Disposed Of. The new accounting model for long-lived assets to be disposed of
by sale applies to all long-lived assets, including discontinued operations, and
replaces  the   provisions  of  APB  Opinion  No.  30,   Reporting   Results  of
Operations-Reporting the Effects of Disposal of a Segment of a Business, for the
disposal of segments of a business. Statement 144 requires that those long-lived
assets be measured  at the lower of  carrying  amount or fair value less cost to
sell, whether reported in continuing  operations or in discontinued  operations.
Therefore,  discontinued operations will no longer be measured at net realizable
value or  include  amounts  for  operating  losses  that have not yet  occurred.
Statement 144 also broadens the reporting of discontinued  operations to include
all components of an entity with operations that can be  distinguished  from the
rest of the entity and that will be  eliminated  from the ongoing  operations of
the  entity in a disposal  transaction.  The  provisions  of  Statement  144 are
effective  for  financial  statements  issued for fiscal years  beginning  after
December 15, 2001 and, generally, are to be applied prospectively. At this time,
the  Company  cannot  estimate  the effect of this  statement  on its  financial
position, results of operations, or cash flows.


                                       13
<PAGE>

Risk Factors

          An investment in our common stock  involves a high degree of risk. You
should carefully consider the risks described below and the other information in
this report on form 10-k before  investing in our common  stock.  In the future,
additional risks that we are not currently aware of or that we currently believe
are immaterial may become important factors that affect our business.  If any of
the following risks occur, or if others occur, our business,  operating  results
and financial  condition  could be seriously  harmed and the price of our common
stock could decline.

          WE DO NOT HAVE SUFFICIENT CASH TO CONTINUE OUR OPERATIONS.

          Our current liabilities,  including a $5.5 million debenture due April
30, 2002,  exceeded our cash and cash equivalents by approximately  $4.2 million
at December 31, 2001, and working capital at that date was only $736,000. Absent
our receipt of financing,  which we cannot currently  foresee,  we will not have
sufficient  cash to repay  the $5.5  million  debenture  upon its  maturity.  In
addition,  in light of the  anticipated  reduction in revenue in 2002, we expect
that we will consume cash in our  operations at a greater rate than in 2001, and
we  believe  that we do not  have  sufficient  cash to  support  our  operations
throughout 2002, even without giving effect to the payment of the debenture.

         We  have  had  operating  losses  and  negative  cash  flow  since  our
inception.  In light of the anticipated  reduction in revenue in 2002, we expect
to not have sufficient  funds to operate our business through 2002. In addition,
we do not have  sufficient  cash to repay the $5.5  million  debenture  upon its
maturity in April  2002.  These  conditions  raise  substantial  doubt about our
ability  to  continue  as  a  going  concern.  Our  continued  existence  as  an
independent  company is dependent upon receiving  additional  funding to operate
our business and repay debts upon maturity. We have no arrangements with respect
to the receipt of any additional funding and there is no assurance that any such
arrangement will be attained on acceptable terms.

         We are actively evaluating our strategic alternatives, including a sale
or merger of the Company.  Should we be unable to consummate a sale or merger on
favorable  terms,  we may  be  forced  to  seek  protection  under  the  federal
bankruptcy laws. There is no assurance that we will be able to consummate a sale
or merger or,  even if we can do so,  that the  holders  of our common  stock or
preferred stock will receive any net proceeds from such sale or merger.

         In order to  conserve  cash  reserves,  we have  reduced  our  selling,
general and administrative expenses, research and development expenses and other
operating costs. In addition, we have implemented a focused control over capital
expenditures, which should enable us to selectively deploy assets only in market
areas with the greatest return potential. However, even after such reduction, we
do not  foresee  that our  revenues  will be  sufficient  to meet our  operating
expenses  and,  therefore,  we may be forced to seek  protection  under  federal
bankruptcy laws.

         OUR OUTSTANDING $5.5 MILLION DEBENTURE MATURES IN APRIL 2002, AND WE DO
         NOT HAVE SUFFICIENT CASH TO REPAY IT.

         We have  outstanding a $5.5 million  debenture that reaches maturity on
April 30, 2002. This obligation is secured by  substantially  all of our assets,
and we do not have sufficient cash to repay it when it becomes due. As a result,
the debenture holder would be able to seek to claim our assets in fulfillment of
this  obligation  and to take other  steps to protect its  position,  including,
potentially, making an involuntary bankruptcy filing against us.

          WE HAVE  DEPENDED  ON SPRINT FOR OUR  BUSINESS  IN RECENT  YEARS,  AND
          SPRINT HAS A GREAT DEAL OF INFLUENCE OVER OUR CORPORATE GOVERNANCE.

          Sprint,  the largest MMDS license holder in the US,  accounted for 88%
of our net sales in the year ended  December 31, 2001. In October  2001,  Sprint
announced  that it has  suspended  any new  deployments  of  broadband  wireless
equipment,  as well as ceasing the  acquisition  of any new  customers,  until a
second-generation  system  could be  evaluated.  We have only a small  number of
other customers. We expect virtually no revenue from Sprint in 2002.

          Sprint also has significant control over our corporate governance. For
example,  Sprint may designate two directors to serve on our board of directors.
Further, we cannot issue any securities,  with limited  exceptions,  or, in most
cases,  take important  corporate action without Sprint's  approval.  Sprint has
other  rights  and  privileges,  including  a right of first  refusal  as to any
proposed  change in our control.  This right of first  refusal is  assignable by
Sprint to any third party.  Further,  if Sprint exercises  warrants it currently
holds,  and  assuming  that no other  warrant  holders  exercise,  Sprint  would
beneficially own as of December 31, 2001, approximately 29% of our common stock.
As a result,  Sprint will have a great deal of influence on us in the future. We
cannot be sure that Sprint will exercise this  influence in our best  interests,
as Sprint's interests are in many respects different than ours.

          WE HAVE NOT BEEN PROFITABLE,  AND WE EXPECT  CONTINUING  LOSSES IN THE
          FUTURE.

          We  have  not  been  profitable  and  may  never  achieve  or  sustain
profitability.  We were  organized in 1990 and have had  operating  losses every
year.  Our  accumulated  deficit was  $133,481,000  as of December 31, 2001. The
potential of our business to produce revenue and profit is unproven.  The market
for our products has only recently begun to develop and is rapidly changing.  In
2001  and  early  2002,   the  market  for   telecommunications   equipment  has
significantly  declined.  The broadband  voice and data  communication  services
market has an increasing number of competing  technologies and competitors,  and
several of our competitors are significantly larger than us.

          WE  DEPEND  ON  THE  BROADBAND  WIRELESS  MARKET,  WHICH  IS  A  NEWLY
          DEVELOPING MARKET THAT IS SUBJECT TO UNCERTAINTIES.

          The wireless  industry  competes  with other  technologies,  including
cable and digital  subscriber lines to provide  high-speed  Internet access. The
cable  modem and  digital  subscriber  line  technologies  avoid  the  principal
disadvantage of wireless, which requires some line-of-sight between the wireless
operator's antenna and the customer's  location.


                                       14
<PAGE>

Wireless  system  operators  also  face a number  of  licensing  and  regulatory
restrictions.  Conditions  in the  wireless  market  could  change  rapidly  and
significantly   because  of  constant   technological   changes.   Further,  the
development and market acceptance of alternative technologies could decrease the
demand for our products.  There can be no assurance  that the wireless  industry
market will grow or that our  products  will be widely  deployed in the emerging
market.  We expect to face substantial  competition in this market,  which could
limit our sales and impair our business.

          In addition, during 2001, the market for telecommunications  equipment
declined    significantly,    which   has   adversely    affected   the   entire
telecommunications  industry,  including service providers, systems integrators,
and equipment providers,  and has reduced the business outlook and visibility of
the industry. As a result, our business is being substantially harmed.

          WE FACE  SIGNIFICANT  COMPETITION,  INCLUDING  COMPETITION  FROM LARGE
          COMPANIES.

          Our market is highly competitive.  In the future, we anticipate that a
small  number  of  large   competitors   will  compete  for  both  domestic  and
international  business.  A number of smaller  competitors  claim that their new
technologies  will overcome  line-of-sight  limitations  associated with current
fixed broadband  wireless  systems.  We cannot assure you that other competitors
will not commercially launch systems or that other commercially launched systems
will not provide benefits superior to ours.

          We have  agreed  with  Sprint  that in the future we will allow  third
parties to license  our  technology  and we  currently  depend  heavily on third
parties to manufacture  components that interface with our products to produce a
full, working system. It is possible that these third parties may offer products
that compete with ours, using our technology.  This could create significant new
competitive challenges for us and could limit our growth and harm our business.

          WE MAY BECOME  INVOLVED IN LITIGATION OVER OUR  INTELLECTUAL  PROPERTY
          THAT COULD RESULT IN SIGNIFICANT  COSTS AND MIGHT DIVERT THE ATTENTION
          OF OUR MANAGEMENT.

          Litigation may be necessary in the future to enforce our  intellectual
property  rights,  to determine  the  validity and scope of our patents,  and to
determine  the  validity  and scope of the  proprietary  rights of others.  This
litigation  might result in substantial  costs and could divert the attention of
our management.  Further, others may claim that our products infringe upon their
proprietary  rights.  These  claims,  with or  without  merit,  could  result in
significant  litigation costs,  diversion of the attention of our management and
serious  harm to our  business.  We may be  required  to enter into  royalty and
license  agreements  that may have  terms  that are  disadvantageous  to us.  If
litigation is successful  against us, it could result in the invalidation of our
proprietary rights and our incurring  liability for damages,  which could have a
harmful  effect  on  our  business.   In  the  past,  we  initiated  one  patent
infringement  litigation to enforce our patent rights.  This litigation resulted
in a settlement in which we granted licenses to the defendants  containing terms
that are in some respects  favorable to them. For example,  we granted to one of
the defendants,  Com21,  Inc., a right of first refusal to purchase our patents.
We may find it necessary to institute further infringement litigation, and third
parties may  institute  litigation  against us  challenging  the validity of our
patents.

          WE RELY ON A SINGLE  MANUFACTURER  FOR OUR  END-USER  PRODUCTS  AND ON
          LIMITED  SOURCES  FOR OUR  COMPONENTS,  SOME  OF  WHICH  ARE  BECOMING
          OBSOLETE

          We outsource manufacturing of our Series 2000 CPE products to a single
manufacturer,  Sharp Corporation, while maintaining only a limited manufacturing
capability  for  pre-production  assembly  and  testing.  Since we have only one
manufacturing   source  for  our  CPE  products,   our  ability  to  reduce  our
manufacturing costs may be limited.

          We are dependent  upon key suppliers for a number of other  components
within our Series 2000  products,  including  Texas  Instruments,  Hitachi,  and
Intel. There can be no assurance that these and other  single-source  components
will  continue  to be  available  to us,  or that  deliveries  to us will not be
interrupted or delayed due to shortages.  Having  single-source  components also
makes it more  difficult  for us to reduce  our costs for these  components  and
makes us  vulnerable  to price  increases  by the  component  manufacturer.  Any
significant  interruption  or delay in the supply of components for our products
or any increase in our costs for components could seriously harm our business.


                                       15
<PAGE>

          OUR LONG SALES CYCLE MAKES IT DIFFICULT  FOR US TO FORECAST  REVENUES,
          REQUIRES US TO INCUR HIGH SALES COSTS AND AGGRAVATES  FLUCTUATIONS  IN
          QUARTERLY OPERATING RESULTS. OUR SALES CYCLE MAY GET LONGER.

          Potential   customers  for  our  equipment  usually  want  to  perform
significant  technical  evaluation  before  making a  purchase.  There are often
delays  resulting from our customers'  internal  procedures to approve the large
capital  expenditures  that are typically  involved in purchasing  our products.
This makes it difficult  for us to predict  revenue.  Since we incur sales costs
before we make a sale or recognize related revenues,  the length and uncertainty
of our sales cycle increases the volatility of our operating  results because we
have high costs without offsetting revenues.

          We have focused on expanding our international  sales. There is a long
cycle  associated  with vendor  selection,  evaluation,  and, in many instances,
trial system  analyses in the  international  market.  In addition,  a number of
small  international  operators have struggled with economic downturns that have
affected their ability to secure capital.  All of these factors indicate that we
will have increased selling expenses and a lengthened sales cycle in the future.

          INTERNATIONAL SALES COULD INVOLVE GREATER RISKS.

         Although  in the past we have sold most of our  products  in the United
States  and  Canada,   many  of  our  new   opportunities   are  being   pursued
internationally.  However,  international  opportunities  have not  developed as
rapidly  as we  anticipated  and we  believe  that  international  sales will be
depressed for substantially all of 2002.  International sales will be subject to
a  number  of  risks,   including  longer  payment  cycles,  export  and  import
restrictions,  foreign regulatory  requirements,  greater difficulty in accounts
receivable collection, potentially adverse tax consequences, greater exposure to
political and economic instability and reduced intellectual property protection.
To increase our international coverage we work closely with systems integrators.
However,  some  of  our  systems  integrators  do  not  represent  our  products
exclusively.  Further,  the frequency  spectrum and amount of spectrum available
internationally  varies from country to country.  We currently depend on some of
our systems integrators and other third party vendors to develop radio equipment
that  complies  with  local   licenses,   which  may  slow  deployment  in  some
international markets.

          WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY.

          We rely on a  combination  of  patent,  trade  secret,  copyright  and
trademark  laws and  contractual  restrictions  to  establish  and  protect  our
intellectual  property rights.  We cannot assure that our patents will cover all
the aspects of our technology that require patent protection or that our patents
will not be challenged or invalidated, or that the claims allowed in our patents
may not be of sufficient scope or strength to provide  meaningful  protection or
commercial  advantage to us. We  initiated  one patent  infringement  lawsuit to
enforce our rights,  which  resulted in a settlement.  We do not know whether we
will need to bring  litigation  in the future to assert our  patent  rights,  or
whether other  companies will bring  litigation  challenging  our patents.  This
litigation  could be time  consuming  and costly and could result in our patents
being held invalid or  unenforceable.  Even if the patents are upheld or are not
challenged,  third  parties  might  be able to  develop  other  technologies  or
products without infringing any of these patents.

          We  have  entered  into   confidentiality  and  invention   assignment
agreements with our employees, and we enter into non-disclosure  agreements with
some of our  suppliers,  distributors,  and  customers,  to limit  access to and
disclosure of our proprietary information. These contractual arrangements or the
other steps we take to protect our  intellectual  property may not be sufficient
to prevent  misappropriation of our technology or deter independent  third-party
development  of  similar  technologies.  The laws of foreign  countries  may not
protect our products or intellectual  property rights to the same extent, as the
laws of the United States.

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

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

          Products  as complex as ours  frequently  contain  undetected  errors,
defects  or  failures,  especially  when  introduced  or when new  versions  are
released.  In the past, our products have contained these errors,  and there can
be no


                                       16
<PAGE>

assurance that errors will not be found in our current and future products.  The
occurrence of errors,  defects or failures  could result in product  returns and
other  losses.  They  could  also  result  in the  loss of or  delay  in  market
acceptance  of our  products.  These might also subject us to claims for product
liability.

          IF WE ARE DE-LISTED FROM THE NASDAQ SMALL CAP MARKET, THE PRICE OF OUR
          COMMON  STOCK COULD DROP,  AND IT MAY BE MORE  DIFFICULT  TO TRADE OUR
          COMMON STOCK.

           On  August  30,  2001,  the  Nasdaq  Listing   Qualifications   Panel
transferred  the listing of our common stock from the Nasdaq  National Market to
the Nasdaq  Small Cap Market.  In order to maintain  the Nasdaq Small Cap Market
listing,  we must have either:  (1)  stockholder  equity of $2.5 million,  (2) a
market  capitalization  of $35  million , or (3) net income for the last  fiscal
year of  $500,000.  The  Emerging  Issues Task Force (EITF) has issued Topic No.
D-98,  which  addresses  the   classification   and  measurement  of  redeemable
securities.  In compliance with the guidance in Topic No. D-98, we have recorded
the Series K convertible preferred stock as "outside of permanent equity". While
this resulted in our  stockholder  equity as reported on our  unaudited  balance
sheet as of September 30, 2001, to be below the minimum  standard set by Nasdaq,
we were  subsequently  advised by Nasdaq  that we were in  compliance  with this
requirement.  On February 14, 2002, we received a determination  letter from the
staff of Nasdaq  indicating  that we had failed to comply  with the  minimum bid
price  required  for  continued  listing on the Nasdaq  Small Cap Market.  If we
cannot  demonstrate  that we can comply  with this  requirement  for at least 10
consecutive  trading  days prior to August 13,  2002,  the staff of Nasdaq  will
determine  that  either  we  have  another  180  day  grace  period  to  achieve
compliance, or that we will be delisted.

          De-listing of our common stock could reduce our stockholders'  ability
to buy or  sell  shares  as  quickly  and as  inexpensively  as they  have  done
historically.  This reduced  liquidity  would make it more  difficult  for us to
raise capital in the future. The trading price of our common stock could decline
due to the  change in  liquidity  and  reduced  publicity  resulting  from being
de-listed from the Nasdaq National Market.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

          Not applicable.


                                       17
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA

Independent Auditor's Report ...........................................      19
Financial Statements:
Balance Sheets as of December 31,2001 and 2000 .........................      20
Statements of Operations for the Years Ended
  December 31, 2001, 2000, and 1999 ....................................      21
Statement of Stockholders' Equity (Deficit) for the
  Years Ended December 31, 2001, 2000, and 1999 ........................      22
Statements of Cash Flows for the Years Ended
  December 31, 2001, 2000, and 1999 ....................................      23
Notes to Financial Statements ..........................................      24
Supplementary Financial Data:
Selected Quarterly Financial Data (Unaudited). Two years
  ended December 31, 2001 ..............................................      40


                                       18
<PAGE>

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

           We have audited the  accompanying  balance sheets of Hybrid Networks,
Inc. as of December 31, 2001 and 2000, and the related statements of operations,
stockholders'  equity  (deficit),  and cash  flows  for each of the years in the
three year period ended December 31, 2001.  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  auditing  standards
generally accepted in the United States of America. 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 adudit 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, 2001 and 2000, and the results of its operations and its
cash flows for each of the years in the three year  period  ended  December  31,
2001, in conformity with accounting  principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule listed in
Item  14(a)(2)  of this Form 10-K,  when  considered  in  relation  to the basic
financial statements taken as a whole,  presents fairly in all material respects
the information set forth therein.

           The  accompanying  financial  statements have been prepared  assuming
that Hybrid  Networks,  Inc.  will  continue as a going  concern.  As more fully
described in Note 2, the Company has incurred recurring operating losses,  since
its  inception,  has a  stockholder's  deficit,  and has a substantial  need for
working  capital,  including a need to repay a senior secured  debenture of $5.5
due April 2002. Should the Company not be able to generate  sufficient  revenues
or obtain additional financing,  the Company in all likelihood will be forced to
seek protection  under the United States  Bankruptcy Act. These conditions raise
substantial  doubt about the Company's  ability to continue as a going  concern.
Management's  plans in regard to these matters are also described in Note 2. The
financial  statements  do not include any  adjustments  to reflect the  possible
future effects on the recoverability and classification of assets or the amounts
and  classification  of  liabilities  that may result  from the  outcome of this
uncertainty.


/s/ HEIN + ASSOCIATES LLP

HEIN + ASSOCIATES LLP
Certified Public Accountants

Orange, California
January 25, 2002


                                       19
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                                December 31,
                                                                                                         --------------------------
                                                                                                           2001             2000
                                                                                                         ---------        ---------
<S>                                                                                                      <C>              <C>
                                         ASSETS
Current assets:
     Cash and cash equivalents                                                                           $   4,506        $   1,878
     Accounts receivable, net of allowance for doubtful accounts
                    of $881 in 2001 and $200 in 2000 (Includes related party receivables
                    of $5 and $6,164 at December 31, 2001 and 2000, respectively)                              531            7,699
     Inventories (Includes inventory subject to acceptance by related party of $0 and $2,472
             at December 31, 2001 and 2000, respectively)                                                    3,843            7,303
     Prepaid expenses and other current assets                                                                 520              519
                                                                                                         ---------        ---------

             Total current assets                                                                            9,400           17,399
Property and equipment, net                                                                                  1,700            2,000
Intangibles and other assets                                                                                   119              265
                                                                                                         ---------        ---------

             Total assets                                                                                $  11,219        $  19,664
                                                                                                         =========        =========

                    LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
   Accounts payable                                                                                          1,686            4,529
   Convertible debenture                                                                                     5,500               --
   Current portion of capital lease obligations                                                                 --               29
   Accrued liabilities and other (Includes deferred revenue from a related party of
                    $0 and $3,710 at December 31, 2001 and 2000, respectively)                               1,478            6,517
                                                                                                         ---------        ---------
             Total current liabilities                                                                       8,664           11,075
Convertible debentures (Includes related party convertible debenture
                    of $1 and $1 at December 31, 2001 and 2000, respectively)                                    1            5,501
Other long-term liabilities                                                                                    138              131
                                                                                                         ---------        ---------

             Total liabilities                                                                               8,803           16,707
                                                                                                         ---------        ---------
Commitments and contingencies ( Notes 6,8, and 9)
Series K convertible  preferred stock, $.001 par value: 8 shares
       authorized,  issued and outstanding at December 31, 2001,
       no shares at December 31, 2000 (liquidation value $7,729 at December 31, 2001)                        7,560               --
Stockholders' equity (deficit):
   Convertible preferred stock, $.001 par value:
     Authorized: 4,992 shares; issued and outstanding: no shares in 2001 or 2000                                --               --
   Common stock, $.001 par value:
     Authorized: 100,000 shares; issued and outstanding 22,743 shares in 2001
       and 21,935 shares in 2000                                                                                23               22
   Additional paid-in capital                                                                              128,314          125,899
   Accumulated deficit                                                                                    (133,481)        (122,964)
                                                                                                         ---------        ---------

             Total stockholders' equity (deficit)                                                           (5,144)           2,957
                                                                                                         ---------        ---------

             Total liabilities and stockholders' equity (deficit)                                        $  11,219        $  19,664
                                                                                                         =========        =========
</TABLE>

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


                                       20
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                        Years Ended December 31,
                                                                                                     ------------------------------
                                                                                                       2001        2000      1999
                                                                                                     --------   --------   --------
<S>                                                                                                  <C>        <C>        <C>
Net sales
          Products (Includes related party sales of $24,144, $8,910, and $99 for the
                 years ended December 31, 2001, 2000, and 1999, respectively)                        $ 26,419   $ 21,711   $ 12,499
          Services and software (Includes related party sales of $819, $263, and $28 for the
                  years ended December 31, 2001, 2000, and 1999, respectively)                          1,507      1,084        517
                                                                                                     --------   --------   --------
Total net sales                                                                                        27,926     22,795     13,016
Cost of sales
          Products (Includes related party cost of sales of $16,880, $7,410, and $58 for the
                   years ended December 31, 2001, 2000, and 1999, respectively)                        19,383     21,555     11,246
           Services, software, and other cost of sales(Includes related party cost of sales of $0,
                 $3,466, and $0 for the years ended December 31, 2001, 2000, and 1999, respectively)    1,323      1,584      2,095
                                                                                                     --------   --------   --------
Total cost of sales                                                                                    20,706     23,139     13,341
                                                                                                     --------   --------   --------

Gross profit (loss)                                                                                     7,220       (344)      (325)
                                                                                                     --------   --------   --------

Operating expenses:
  Research and development (Includes related party expenses of $120, $0, and $0 for the
          years ended December 31, 2001, 2000, and 1999, respectively)                                  6,986      6,715      4,191
  Sales and marketing (Includes expense of $0, $13,671, and $0 to record the fair value
          of warrants issued to a related party during the years ended December 31, 2001,
          2000, and 1999, respectively)                                                                 2,800     16,491      1,740
  General and administrative                                                                            5,422     11,625      7,660
                                                                                                     --------   --------   --------

     Total operating expenses                                                                          15,208     34,831     13,591
                                                                                                     --------   --------   --------

       Loss from operations                                                                            (7,988)   (35,175)   (13,916)
Interest income and other expense (Includes expense for inducement to convert related
          party convertible debenture of $0, $711, and $0 for the years ended
          December 31, 2001, 2000, and 1999, respectively)                                                120       (717)       171
Interest expense (Includes related party interest expense of $0, $316, and $4,632
          for the years ended December 31, 2001, 2000, and 1999, respectively)                         (2,649)    (1,311)    (8,447)
                                                                                                     --------   --------   --------
       Net loss                                                                                      $(10,517)  $(37,203)  $(22,192)
                                                                                                     ========   ========   ========
 Preferred stock dividends                                                                               (169)        --         --
                                                                                                     --------   --------   --------
 Net loss available to common shareholders                                                            (10,686)   (37,203)   (22,192)
                                                                                                     --------   --------   --------
Basic and diluted loss per share                                                                     $  (0.48)  $  (2.03)  $  (2.08)
                                                                                                     ========   ========   ========

Shares used in basic and diluted per share calculation                                                 22,354     18,309     10,678
                                                                                                     ========   ========   ========
</TABLE>

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


                                       21
<PAGE>

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

<TABLE>
<CAPTION>
                                                                  For the Years Ended December 31, 2001, 2000, and 1999.
                                                                  ------------------------------------------------------

                                                         Common Stock      Additional   Compre-      Accumu-                Compre-
                                                      ------------------     Paid-in    hensive       lated                 hensive
                                                      Shares      Amount     Capital    Income(loss) Deficit      Total      Loss
                                                      ------      ------     -------    ------------ -------      -----      ----
<S>                                                   <C>          <C>     <C>                    <C>         <C>
Balances,  January 1, 1999                            10,473   $      10   $  66,261  $      --   $ (63,569)  $   2,702

  Exercise of common stock options                       251          --         345         --          --         345
  Stock issued for services                                7          --          56         --          --          56
  Sales discount recognized on issuance of
     warrants to customers                                --          --         407         --          --         407
  Compensation recognized on issuance of
     stock options                                        --          --         975         --          --         975
  Class action settlement stock issued                   750           1         385         --          --         386
  Discount related to beneficial conversion
     of notes                                             --          --       7,394         --          --       7,394
  Unrealized gain on investments                          --          --          --        107          --         107   $     107
  Net loss                                                --          --          --         --     (22,192)    (22,192)    (22,192)
                                                                                                                          ---------

  Comprehensive loss                                      --          --          --         --          --          --   $ (22,085)
                                                   ---------   ---------   ---------  ---------   ---------   ---------   =========

Balances,  December 31, 1999                          11,481          11      75,823        107     (85,761)     (9,820)

  Exercise of common stock options                     1,181           1       1,348         --          --       1,349
  Exercise of warrants                                    71           1          --         --          --           1
  Convertible debt conversion                          6,691           7      19,930         --          --      19,937
  Stock Bonus                                              3          --          27         --          --          27
  Sales discount recognized on issuance of
     warrants to customer                                 --          --      20,800         --          --      20,800
  Compensation recognized on issuance of
     stock options                                        --          --       4,596         --          --       4,596
  Class action and other lawsuit
       settlement stock issued                         2,508           2       3,301         --          --       3,303
  Discount related to beneficial conversion
     of notes                                             --          --          74         --          --          74
  Unrealized gain on investments                          --          --          --       (107)         --        (107)  $    (107)
  Net loss                                                --          --          --         --     (37,203)    (37,203)    (37,203)
                                                                                                                          ---------

  Comprehensive loss                                      --          --          --         --          --          --   $ (37,310)
                                                   ---------   ---------   ---------  ---------   ---------   ---------   =========

Balances,  December 31, 2000                          21,935          22     125,899         --    (122,964)      2,957
   Exercise of common stock options                      401           1         273         --          --         274
    Exercise of warrants                                  90          --          45         --          --          45
    Stock bonus                                          317          --         255         --          --         255
    Sale discount recognized on  issuance of
                 warrants to customer                     --          --         740         --          --         740
      Compensation recognized on issuance
                       of stock options                   --          --         400         --          --         400
      Discount related to beneficial conversion
                   of notes                               --          --       5,999         --          --       5,999
      Issuance of Series K preferred stock
                   upon exchange of debenture             --          --      (5,297)                            (5,297)
     Net loss                                             --          --          --         --     (10,517)    (10,517)  $ (10,517)
                                                                                                                          ---------
     Comprehensive loss                                   --          --          --         --          --          --   $ (10,517)
                                                   ---------   ---------   ---------  ---------   ---------   ---------   =========
  Balances, December 31, 2001                         22,743   $      23   $ 128,314  $      --   $(133,481)  $  (5,144)
                                                   =========   =========   =========  =========   =========   =========
</TABLE>


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

                                       22



<PAGE>


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

<TABLE>
<CAPTION>

                                                                                             Years Ended December 31,
                                                                                    ------------------------------------------
                                                                                       2001            2000            1999
                                                                                     --------        --------        --------

<S>                                                                                  <C>             <C>             <C>
Cash flows from operating activities:
  Net loss                                                                           $(10,517)       $(37,203)       $(22,192)
  Adjustments to reconcile net loss to net cash used in
         operating activities:
     Depreciation and amortization                                                      1,331           1,139           1,323
     Amortization of discount related to beneficial conversion
         feature (Includes related party amounts of $4,494 for
         the year ended December 31, 1999)                                                 --              --           7,394
     Issuance of stock for settlement of litigation                                        --           2,000              --
     Warranty allowance                                                                   368             432             108
     Provision for doubtful accounts                                                      681              --              --
     Provision for excess and obsolete inventory                                          866             235             529
     Compensation recognized upon issuance of stock and stock options                     412           4,596           1,031
     Common stock issued to induce conversion of debenture
         (Includes stock issued to a related
          party of $711 for the year ended December 31, 2000)                              --           1,170              --
     Amortization of beneficial conversion of convertible debentures
         (Includes related party amount of $90 for the year ended
          December 31, 2000)                                                            1,458             149              --
     Sales discounts recognized on issuance of warrants to customers
         (Includes discounts for a related party of $740 and $20,800
         for the years ended December 31, 2001 and
         December 31, 2000, respectively)                                                 740          20,800             407
     Stock issued for services                                                            174              27              --
     Interest added to principal of convertible debentures (Includes
         interest for a related party of $226 and $138 for the year
         ended December 31, 2000 and 1999, respectively)                                   60             368             226
     Gain on available for sale of securities                                              --            (107)            107
     Change in assets and liabilities:
       Restricted cash                                                                     --              --             515
       Accounts receivable                                                              6,487          (6,561)            295
       Inventories                                                                      2,594          (3,783)            940
       Prepaid expenses and other current assets                                         (943)           (270)            630
       Accounts payable                                                                (2,844)          2,494             (28)
       Other long term liabilities                                                          8               8              68
       Accrued liabilities and other                                                   (5,338)          2,764             630
                                                                                     --------        --------        --------
       Net cash used in operating activities                                           (4,463)        (11,742)         (8,017)
                                                                                     --------        --------        --------

Cash flows from investing activities:
  Purchase of property and equipment                                                     (699)           (788)            (21)
                                                                                     --------        --------        --------
       Net cash used in investing activities                                             (699)           (788)            (21)
                                                                                     --------        --------        --------

Cash flows from financing activities:
  Repayment of capital lease obligations                                                  (29)           (335)           (465)
  Proceeds from issuance of convertible debenture                                       7,500              --              --
  Net proceeds from issuance of common stock and warrants                                 319           1,349             345
  Proceeds from issuance of convertible debentures and related common
         stock warrants (Includes related party amount of $11,139 for
         the year ended December 31, 1999)                                                 --              --          18,101
                                                                                     --------        --------        --------
       Net cash provided by financing activities                                        7,790           1,014          17,981
                                                                                     --------        --------        --------
Increase (Decrease) in cash and cash equivalents                                        2,628         (11,516)          9,943
Cash and cash equivalents, beginning of period                                          1,878          13,394           3,451
                                                                                     --------        --------        --------
Cash and cash equivalents, end of period                                             $  4,506        $  1,878        $ 13,394
                                                                                     ========        ========        ========

SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
  Common stock issued to settle class action liability                               $     --        $  1,303        $    386
     Common stock issued to settle bonus accrual                                           68              --              --
     Preferred stock issued upon converseion of convertible debentures                  2,263              --              --
  Common stock issued in conversion of convertible debt                                    --          18,694              --
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Interest paid                                                                           841             855             710
  Income taxes paid                                                                        --              --              --

</TABLE>

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


                                       23
<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
fixed broadband access equipment  company that designs,  develops,  manufactures
and markets wireless systems that provide  high-speed access to the Internet and
corporate  intranets for both businesses and consumers.  The Company's  products
remove the bottleneck over the local connection to the end user that causes slow
response time for those accessing bandwidth intensive information.

2. BASIS OF PRESENTATION

         The Company was  organized in 1990 and has had  operating  losses since
then.  The Company's  accumulated  deficit was  $133,481,000  as of December 31,
2001, and $122,964,000 as of December 31, 2000.  Although the Company has raised
large sums of capital in the past,  including  over $35 million in net  proceeds
from its initial  public  offering in November  1997,  over $18 million from the
issuance and sale of convertible  debentures in September 1999, and $7.5 million
from a fund of the Palladin Group in February 2001, its ability to continue as a
going concern is dependent on obtaining additional financing to fund its current
operations  and to meet a short term  obligation  that comes due April 30, 2002.
There is no assurance that the Company will be successful in these efforts.

         At December 31, 2001,  the  Company's  liquidity  consisted of cash and
cash  equivalents of $4,506,000 and working  capital of $736,000.  The Company's
indebtedness  partially consists of $5.5 million in convertible  debentures that
are due April 30, 2002.

         We  have  had  operating  losses  and  negative  cash  flow  since  our
inception.  In light of the anticipated  reduction in revenue in 2002, we expect
to not have sufficient  funds to operate our business through 2002. In addition,
we do not have  sufficient  cash to repay the $5.5  million  debenture  upon its
maturity in April  2002.  These  conditions  raise  substantial  doubt about our
ability  to  continue  as  a  going  concern.  Our  continued  existence  as  an
independent  company is dependent upon receiving  additional  funding to operate
our business and repay debts upon  maturity.  We have no  arrangements  in place
with respect to the receipt of any additional funding.

         We are actively evaluating our strategic alternatives, including a sale
or merger of the Company.  Should we be unable to consummate a sale or merger on
favorable  terms,  we may  be  forced  to  seek  protection  under  the  federal
bankruptcy laws. The accompanying financial statements do not purport to reflect
or  provide  for  the  consequences  of a  possible  bankruptcy  proceeding.  In
particular,  such financial  statements do not porport to show (a) as to assets,
their realizable value on a liquidation  basis or their  availability to satisfy
liabilities; (b) as to liabilities, the amount that may be allowed for claims or
contingencies,  or the  status  and  priority  thereof;  (c)  as to  stockholder
accounts;  the effect of any changes that may be made in the  capitalization  of
the  Comapny;  and (d) as to  operations,  the effect of any changes that may be
made in its business.

         In order to  conserve  cash  reserves,  we have  reduced  our  selling,
general and administrative expenses, research and development expenses and other
operating costs. In addition, we have implemented a focused control over capital
expenditures, which should enable us to selectively deploy assets only in market
areas with the greatest return potential.

3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

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

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


                                       24


<PAGE>



Fair Value of Financial Instruments

         The estimated fair values for financial  instruments under SFAS No. 107
"Disclosures  About Fair Value of  Financial  Instruments,"  are  determined  at
discrete  points in time based on relevant market  information.  These estimates
involve  uncertainties and cannot be determined with precision.  The fair values
of convertible  debentures are based upon borrowing  rates that are available to
the Company for obligations  with similar terms,  collateral,  and maturity.  At
December 31, 2001,  the estimated fair value of these  liabilities  approximates
their carrying values.

Business Risks and Credit Concentration

         The Company sells its products  primarily to broadband  wireless system
operators  principally in North  America.  The Company  performs  ongoing credit
evaluations of its customers and does not require  collateral.  The Company also
maintains   allowances  for  potential  losses  on  collectability  of  accounts
receivable,   as  needed,   and  such  losses  have  been  within   management's
expectations.

         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 in one industry segment 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.

         Credit risk  represents the accounting loss that would be recognized at
the  reporting  date  if  counter  parties  failed   completely  to  perform  as
contracted. Concentrations of credit risk (whether on or off balance sheet) that
arise from  financial  instruments  exist for groups of  customers  or groups of
counter parties when they have similar economic characteristics that would cause
their  ability to meet  contractual  obligations  to be  similarly  effected  by
changes in  economic  or other  conditions.  In  accordance  with SFAS No.  105,
"Disclosure of Information  about Financial  Instruments with  Off-Balance-Sheet
Risk and Financial  Instruments with  Concentrations  of Credit Risk," financial
instruments  that  subject the Company to credit risk  consist of cash  balances
maintained in excess of federal  depository  insurance  limits,  investments  in
commercial  paper  (which are  classified  as cash  equivalents),  and  accounts
receivable, which have no collateral or security.

         The Company  derived 88% of its revenue in 2001 from one  customer  and
this concentration  represents a risk to the Company.  Sales to this customer in
2002 are expected to be negligible. Should the Company be unable to replace this
business with sales to alternative  customers,  there would be a negative impact
on the Company.

         In accordance with SFAS No. 105,  disclosure is required of significant
concentrations of credit risk from one or more counter parties for all financial
instruments.  The Company had accounts  receivable from one customer at December
31, 2001 that  represented  31% of total accounts  receivable.  The inability to
collect receivables from this customer would have a significant  negative impact
on the Company.

Cash and Cash Equivalents and Short-Term Investments

         Cash equivalents  consist of highly liquid investment  instruments with
maturity  at the time of  purchase  of three  months or less.  Instruments  with
maturity at the time of purchase of greater  than three months but less than one
year from the date of purchase are included in short-term investments.

Inventories

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


                                       25

<PAGE>

Property and Equipment

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

Intangibles and Other Assets

         At December 31, 2001 and 2000,  intangibles  and other assets  included
deferred  financing  costs  relating  to fees  incurred in  connection  with the
issuance of a senior convertible debenture in April 1997. The deferred financing
costs are amortized over the five-year life of the debenture (see Note 6). Total
accumulated amortization of deferred financing costs as of December 31, 2001 and
2000 was $427,000 and $320,000,  respectively. At December 31, 1997, intangibles
also  included  the value  assigned  to the  purchase  of  certain  technologies
relating to a technology  support and development  agreement  signed in November
1997. In connection  with entering into the technology  support and  development
agreement,  the Company issued a five-year warrant to purchase 458,295 shares of
common stock at an exercise price of $10.91 per share. The amount  attributed to
the value of the warrants was $2,200,000.  The 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.  The  unamortized  value of the
technologies  of  approximately  $1,283,000 was charged to expense in the second
quarter of 1998 as it was determined to be of no further value to the Company.

Revenue Recognition

         We normally ship our products based upon a bona fide purchase order and
volume  purchase  agreement.  We recognize  revenue at the time a transaction is
shipped  and  collection  of  the  resulting  account  receivable  is  probable.
Shipments on customer orders with acceptance criteria,  installation criteria or
rights of return are recognized as revenue only when the criteria are satisfied.
Revenue related to shipments to distributors is normally recognized upon receipt
of payment for such  transactions.  As of December  31, 2001 the total amount of
shipments not  recognized  as revenue due to  acceptance or testing  criteria or
because they were sold to a distributor was $154,000.

         We  generally  sell our  software  together  with a one-year  technical
support  contract,  for  which  we  charge  separately,   to  provide  upgrades,
maintenance,  system support and service.  We recognize  revenue on the software
sale without reference to the maintenance contract,  and we recognize revenue on
the technical  support  contract over its term on a straight-line  basis.  Other
service revenue,  primarily  training,  is generally  recognized at the time the
service is performed.

         In  September  1999,  Sprint  committed  to purchase $10 million of our
products subject to certain conditions.  In connection with Sprint's commitment,
we issued to Sprint warrants to purchase up to $8,397,873 in debentures that are
convertible  into  2,946,622  shares of our common stock at $2.85 per share.  In
accordance  with the Statement of Financial  Accounting  Standards No. 123 (SFAS
123),  "Accounting  for  Stock-Based   Compensation,"   transactions  in  equity
instruments with non-employees for goods or services are accounted for using the
fair value method  prescribed by SFAS 123. SFAS 123 requires that in each period
in which the warrants are earned, a non-cash charge is to be recorded. Using the
Black-Scholes  valuation  model,  we determined  that the estimated value of the
warrant  was $20.8  million.  We applied  $7.2  million of this  amount as sales
discounts  during the four quarters of 2000 and the balance of $13.6 million was
charged as an expense of the Sales and Marketing department over the first three
quarters of 2000.

         Effective July 3, 2001, Sprint committed to purchase an additional $9.6
million of our products  under terms that were different from those agreed to in
the master  purchase  agreement  dated May 1, 2000. In connection  with this new
commitment, we issued to Sprint warrants to purchase up to 600,000 shares of our
common stock at $1.20 per share. All of the shipments relating to these purchase
warrants were made during the quarter ending September 30, 2001. These purchases
were not  subject to  acceptance  criteria.  In  accordance  with SFAS 123,  and
utilizing the  Black-Scholes  valuation  model, we determined that the estimated
value of these  purchase  warrants was $740,000 and this amount has been applied
as a sales discount during the year ending December 31, 2001.


                                       26

<PAGE>


Product Development Costs

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

Stock-Based Compensation

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

Income Taxes

         The Company accounts for income taxes under the liability method, which
requires  recognition  of deferred tax assets and  liabilities  for the expected
future tax  consequences  of events  that have been  included  in the  financial
statements  or  tax  returns.  Under  this  method,   deferred  tax  assets  and
liabilities  are  determined  based  on the  difference  between  the  financial
statements  and tax bases of assets and  liabilities  using enacted tax rates in
effect for the year in which the difference are expected to reverse.

Computation of Basic and Diluted Loss Per Share

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

Comprehensive Income (Loss)

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

New Accounting Pronouncements

             In June 2001,  the Financial  Accounting  Standards  Board ("FASB")
issued   Statements  of  Financial   Accounting   Standards  No.  141  "Business
Combinations"  ("SFAS 141") and No. 142 "Goodwill and Other  Intangible  Assets"
("SFAS 142"). SFAS 141 requires all business  combinations  initiated after June
30,  2001 to be  accounted  for  under the  purchase  method.  For all  business
combinations  for which the date of acquisition is after June 30, 2001, SFAS 141
also  establishes  specific  criteria for the  recognition of intangible  assets
separately  from  goodwill  and  requires  unallocated  negative  goodwill to be
written off  immediately  as an  extraordinary  gain,  rather than  deferred and
amortized.  SFAS 142 changes the  accounting  for goodwill and other  intangible
assets after an acquisition.  The most significant changes made by SFAS 142 are:
1)  goodwill  and  intangible  assets  with  indefinite  lives will no longer be
amortized;  2) goodwill  and  intangible  assets with  indefinite  lives must be
tested for  impairment at least  annually;  and 3) the  amortization  period for
intangible  assets with finite  lives will no longer be limited to forty  years.
The Company does not believe that the adoption of these  statements  will have a
material effect on its financial position, results of operations, or cash flows.


                                       27

<PAGE>


      In June  2001,  the FASB  also  approved  for  issuance  SFAS  143  "Asset
Retirement  Obligations."  SFAS  143  establishes  accounting  requirements  for
retirement obligations associated with tangible long-lived assets, including (1)
the  timing  of  the  liability  recognition,  (2)  initial  measurement  of the
liability,  (3) allocation of asset  retirement cost to expense,  (4) subsequent
measurement of the liability and (5) financial statement  disclosures.  SFAS 143
requires that an asset retirement cost should be capitalized as part of the cost
of the related  long-lived asset and  subsequently  allocated to expense using a
systematic and rational method.  The Company will adopt the statement  effective
no later than January 1, 2003, as required.  The transition adjustment resulting
from the  adoption  of SFAS 143 will be  reported  as a  cumulative  effect of a
change in accounting  principle.  At this time,  the Company  cannot  reasonably
estimate the effect of the adoption of this statement on its financial position,
results of operations, or cash flows.

            In October 2001, the FASB also approved SFAS 144, Accounting for the
Impairment  or  Disposal  of  Long-Lived  Assets.  SFAS 144  replaces  SFAS 121,
Accounting for the Impairment of Long-Lived  Assets and for Long-Lived Assets to
Be Disposed Of. The new accounting model for long-lived assets to be disposed of
by sale applies to all long-lived assets, including discontinued operations, and
replaces  the   provisions  of  APB  Opinion  No.  30,   Reporting   Results  of
Operations-Reporting the Effects of Disposal of a Segment of a Business, for the
disposal of segments of a business. Statement 144 requires that those long-lived
assets be measured  at the lower of  carrying  amount or fair value less cost to
sell, whether reported in continuing  operations or in discontinued  operations.
Therefore,  discontinued operations will no longer be measured at net realizable
value or  include  amounts  for  operating  losses  that have not yet  occurred.
Statement 144 also broadens the reporting of discontinued  operations to include
all components of an entity with operations that can be  distinguished  from the
rest of the entity and that will be  eliminated  from the ongoing  operations of
the  entity in a disposal  transaction.  The  provisions  of  Statement  144 are
effective  for  financial  statements  issued for fiscal years  beginning  after
December 15, 2001 and, generally, are to be applied prospectively. At this time,
the  Company  cannot  estimate  the effect of this  statement  on its  financial
position, results of operations, or cash flows.

4.  INVENTORIES

         Inventories are comprised of the following (in thousands):


                                               2001       2000
                                            ---------  --------

         Raw materials                       $ 2,860    $ 2,633
         Work in progress                        483      1,144
         Finished goods                          500      3,526
                                            ---------  --------
                                             $ 3,843    $ 7,303
                                            =========  ========


         At  December  31,  2001 and 2000,  finished  goods  inventory  included
$141,000 and  $2,730,000, respectively,  of  equipment  that had been shipped to
customers but for such shipments the related revenue was deferred  pending final
customer acceptance.

         The  allowance  for excess and obsolete  inventory at December 31, 2001
and 2000 was $1,889,000 and $1,980,000,  respectively.  The provision for excess
and obsolete  inventory  included in cost of sales for the years ended  December
31, 2001 and 2000 was $ 866,000 and $235,000, respectively.


                                       28

<PAGE>


5.  PROPERTY AND EQUIPMENT

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


                                                               December 31,
                                                          --------------------
                                                            2001         2000
                                                          --------    --------

       Machinery and equipment                            $ 4,218     $ 3,828
       Office furniture and fixtures                        1,036         747
       Leasehold improvements                               1,934       1,922
                                                          --------    --------

                                                            7,188       6,497
       Less accumulated depreciation and amortization      (5,488)     (4,497)
                                                          --------    --------
                                                          $ 1,700     $ 2,000
                                                          ========    ========


         Depreciation and amortization expense related to property and equipment
for the years ended December 31, 2001, 2000, and 1999 was $999,000,  $1,139,000,
and $1,215,000, respectively.

6.       CONVERTIBLE DEBENTURES AND PREFERRED STOCK

         We have outstanding a senior secured convertible  debenture in the face
amount of $5.5 million due in April 2002 and bearing  interest at 12% per annum,
payable  quarterly.   The  conversion  price  is  subject  to  weighted  average
antidilution   provisions  whereby,  if  we  issue  shares  in  the  future  for
consideration   below  the  existing   conversion   price,  then  (with  certain
exceptions) the conversion price will  automatically be decreased,  allowing the
holder of the  debenture  to  receive  additional  shares of common  stock  upon
conversion.

         Under a securities  purchase agreement between us and the Halifax Fund,
a fund managed by the Palladin  Group, we issued and sold to the Halifax Fund on
February 16, 2001 securities, including:

         o   a $7.5 million principal amount 6% convertible  debenture due 2003,
             which was convertible into shares of our common stock;

         o   a common  stock  purchase  warrant to  purchase  833,333  shares of
             common stock; and

         o   an adjustment warrant.

         In consideration for such securities,  Halifax paid an initial purchase
price of $7.5 million. We granted to Halifax in the purchase  agreement,  rights
of first  refusal,  preemptive  rights and other rights.  We also entered into a
Registration Rights Agreement with Halifax and agreed to register for resale all
shares of common stock  issuable  upon  conversion  of the  debentures  and upon
exercise of the purchase warrant and adjustment warrant.

         In August 2001, we entered into an exchange  agreement  with Halifax by
which we exchanged shares of our new Series K Cumulative  Convertible  Preferred
Stock for the  debenture and  adjustment  warrant,  which were  cancelled in the
exchange. The purchase warrant remained outstanding and was modified,  primarily
affecting  our  ability  to  require  its  exercise.  Halifax  did  not  pay any
additional consideration in this exchange.

         We issued 7,560 shares of newly  established  Series K Preferred Stock.
Each share of the preferred stock has an initial liquidation value of $1,000 and
accretes additional value at the annual rate of 6% on June 30 and December 31 of
each year. If any shares of preferred  stock are still  outstanding  on February
2006,  we are  required  to  redeem  those  shares of  preferred  stock at their
liquidation value in February 2006,  although the holders of the preferred stock
have the right to delay the redemption for up to 12 months. The redemption price
is to be paid in cash or, at our election,  in common stock valued at 95% of its
volume  weighted  average  prices  during  a  pricing  period  centered  on  the
redemption date.


                                       29

<PAGE>


         The preferred stock is convertible into our common stock. The preferred
shares  convert  into a number of shares of common  stock equal to the  accreted
liquidation value divided by the conversion price. For the first 1,875 shares of
preferred  stock,  the  conversion  price is $1.25  per  share,  provided  these
preferred  shares are converted  prior to February 20, 2002.  Thus,  each of the
first 1,875 shares will convert into 800 shares of common  stock,  before giving
effect to the 6% accretion to the  liquidation  value, or a total of 1.5 million
shares.  The  conversion  price  of the  remaining  shares  is equal to the then
applicable  floor price plus one-half of the amount by which the volume weighted
average price of our common stock for the trading day  preceding the  conversion
exceeds  the floor  price.  The floor  price is  initially  equal to $1.25,  and
provided  that if we satisfy  specific  conditions,  which include the continued
listing of our common  stock on an agreed upon  market,  at the end of the first
pricing  period the floor price will adjust to an amount equal to the average of
the daily volume  weighted  average price of our common stock for a period of 15
consecutive  trading days  immediately  following  the end of the first  pricing
period. The floor price cannot be less than $1.25 or greater than $5.00.

         The maximum number of shares of common stock  issuable upon  conversion
of all of the preferred  stock,  before giving effect to the 6% annual accretion
to the  liquidation  value,  is  6,048,000,  which would be the number of shares
issued if the conversion price for all shares is $1.25.  The exchange  documents
do provide for certain penalties, including reduction of the conversion price to
the then current  market value,  if we do not satisfy  covenants and  conditions
contained in the exchange documents.

         Assuming  certain  conditions  are  met,  we have the  right to  compel
conversion of the preferred  shares. If the closing price for our stock is above
$6.3212  per share for at least 20 out of 30 trading  days,  we can  require the
holders to convert  the  preferred  shares,  provided  that the volume  weighted
average  price of our common  stock is equal to or greater  than the  conversion
price on the day that we give notice of the required conversion through the date
of conversion.  Further,  if the closing bid price for our common stock is equal
to or greater than 120% of the  conversion  price on a given day, we can require
the conversion of preferred shares,  up to the forced  conversion limit,  during
the 10  trading  day period  following  the day we give  notice of the  required
conversion.  The forced  conversion  limit is a number of shares of common stock
equal to 10% of the total number of shares of common stock traded  during the 10
day period following our giving this notice, excluding from this total specified
block  trades,   transactions  that  are  not  bona  fide  transactions  between
unaffiliated  parties  and any  shares  traded on a day when  there is a trading
price less then 120% of the conversion price in effect on that day.

         We also have the right to redeem the  preferred  shares  for cash.  The
redemption price is equal to the greater of 120% of the liquidation value of the
preferred  shares,  or 120% of the then current market value of the common stock
into which the  preferred  stock is then  convertible.  If more than 2.5 million
common shares have then been issued upon conversion of the preferred  stock, the
redemption price is equal to the liquidation value.

         The  Emerging  Issues Task Force (EITF)  Topic No. D-98  addresses  the
classification and measurement of redeemable securities. In D-98, the EITF staff
has issued an  opinion  that all of the events  that  could  trigger  redemption
should be evaluated  separately  and that the  possibility  that any  triggering
event that is not solely  within the control of the issuer could occur,  without
regard to  probability,  would  require the  security to be  classified  outside
permanent equity.  Accordingly,  we have recorded  the $7,560,000 of convertible
preferred stock outside permanent equity on the balance sheet as of December 31,
2001.

Issuances of Securities to Sprint Corporation and to Other Investors

         In September 1999, the Company issued to Sprint Corporation  ("Sprint")
a  convertible  debenture  in the face  amount  of $11  million  due in 2009 and
bearing interest at 4% per annum,  compounded monthly (the "Sprint  Debenture").
The Sprint  Debenture was  convertible  at any time after  December 31, 1999, at
Sprint's  option,  into  3,907,775  shares of the  Company's  common  stock at a
conversion price of $2.85 per share (subject to adjustment and including accrued
interest).  At any time on or after December 31, 2000, the Company could require
the conversion of the Sprint  Debenture.  Concurrently  with the issuance of the
foregoing  securities to Sprint,  the Company issued to certain other  investors
for $7.1 million  convertible  debentures in the face amount of $7.1 million due
in 2009 and  bearing  interest  at 4% per  annum,  compounded  monthly  (accrued
interest is automatically  added to principal  quarterly).  These debentures had
substantially the same terms as the Sprint Debenture. Like the Sprint Debenture,
these  debentures were exercisable by the holders at any time after December 31,
1999,  at their option,  into  2,522,291  shares of the  Company's  common stock
(subject to adjustment and including accrued interest).  At any time on or after
December 31, 2000, the Company could require the  conversion of the  debentures.
The conversion price was $2.85. The investors that purchased the debentures were
(i) partnerships associated with a firm of which a director of the Company is an


                                       30

<PAGE>

executive  partner;  (ii) a  partnership  managed  by a firm of  which a  former
director  (who  was a  director  at the  time of the  investment)  is a  general
partner;  and (iii) an individual  who is a director of the Company.  During the
quarter ended June 30, 2000, at the request of the Company,  the holders  agreed
to convert the entire principal  amounting to a face value of $18.1 million plus
accrued  interest  through June 30, 2000, of $594,000,  into 6,559,310 shares of
common  stock.  Upon the  conversion,  we paid a premium as an inducement to the
holders'  equivalent to the interest that would have been added to the principal
of the  debentures  for the third and  fourth  quarters  of 2000,  amounting  to
$375,750.  The premium was paid in the form of additional shares of common stock
calculated  at the  conversion  price of $2.85 per share and was  equivalent  to
131,842 shares of common stock.  The fair value of the stock was $8.87 per share
at the time the premium was paid creating a beneficial conversion element valued
at $1,170,000, which was recorded to interest expense at June 30, 2000.

         In September 1999, at the time of Sprint's  purchase of our debentures,
we issued to Sprint,  warrants  to  purchase  up to $8.4  million of  additional
convertible debentures (subject to the shipment of up to $10 million of products
and services  pursuant to purchase  orders) which debentures will be convertible
into up to 2,946,622 shares of our common stock on the same terms and conditions
as the  convertible  debentures  referred to above.  Ten percent of the warrants
became  exercisable on the shipment  dates when aggregate  shipments of products
and services pursuant to purchase orders submitted by Sprint to the Company were
at least $1 million.  With each  additional $1 million of shipments,  Sprint was
entitled to exercise  an  additional  10% of the  warrants  until the  aggregate
shipments  were  $10,000,000.  In  accordance  with the  Statement  of Financial
Accounting   Standards  No.  123  (SFAS  123),   "Accounting   for   Stock-Based
Compensation,"  transactions in equity  instruments with non-employees for goods
or services are  accounted  for using the fair value method  prescribed  by SFAS
123. SFAS 123 requires  that in each period in which the warrants are earned,  a
non-cash charge will be recorded.  The amount of such shipments  during the year
ended  December  31, 2000  reached the  $10,000,000  maximum  and,  based on the
warrants'  conversion  ratio,  this  amount  gave  Sprint  the right to  receive
2,946,622 shares of the Company's common stock under the warrants,  if exercised
in full.  The  final  value of this  purchase  right,  using  the  Black-Scholes
valuation model, was $20,800,000.  Of this amount,  $7,129,000 was recorded as a
direct  sales  discount  to offset  recognized  sales to Sprint.  The balance of
$13,671,000  was  recorded as an  operating  expense of the Sales and  Marketing
department.

         In August 2001,  the Company issued to Sprint  Corporation  warrants to
purchase  600,000 shares of common stock at an exercise price of $1.20 per share
in connection with a volume purchase  agreement.  The fair value of the warrants
of $740,000 was recorded as a discount on sales.

          Assuming as of December  31, 2001,  that Sprint would  exercise all of
its  purchase  warrants,  it would own  7,613,068  shares of our  common  stock,
representing  approximately  29.0% of the 26,290,071  shares of our common stock
that would then be  outstanding  (assuming no other security  holders  exercised
their  options,  warrants or conversion  privileges).  On a fully diluted basis,
assuming  that as of December 31, 2001,  all other  security  holders  exercised
their  options,  warrants and  conversion  privileges as well as Sprint,  Sprint
would own  approximately  19.4% of the  39,164,930  fully diluted  shares of our
common stock that would then be outstanding. In addition, under the terms of our
agreements  with  Sprint,  Sprint has  substantial  rights  with  respect to our
corporate governance.  Two of our directors are Sprint designees,  and we cannot
issue any  securities  (with  limited  exceptions)  or, in most cases,  take any
material corporate action without Sprint's approval. Sprint has other rights and
privileges as well, including pre-emptive rights and a right of first refusal in
the case of any  proposed  change of control  transaction,  which right of first
refusal is assignable by Sprint to any third party.

         The Company also issued to Sprint in September 1999 a $1,000  debenture
due in 2009,  which is  convertible  by Sprint at any time into a newly  created
Series J preferred  stock of the Company.  Under the purchase  agreement for the
debentures and under the terms of the Series J preferred  stock,  Sprint has the
right to elect two  directors to the  Company's  board of directors and Sprint's
approval  will be  required  for many  types of  decisions  involving  corporate
governance  (including veto rights over most material  actions the Company might
take,  see Note 10  below).  In  addition,  Sprint has  certain  rights of first
refusal and preemptive rights in respect of certain  issuance's of securities by
the Company and other rights, including a right of first refusal with respect to
any change of control  agreement (as  defined),  which right of first refusal it
can assign to third parties.


                                       31

<PAGE>


7.  ACCRUED LIABILITIES AND OTHER

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


                                                               2001       2000
                                                             --------   --------

  Accrued payroll and related accruals                       $   405    $   813
  Accrued class action settlement and related legal expenses     100        775
  Deferred revenue and customer deposits                         178      3,916
  Other liabilities                                              795      1,013
                                                             --------   --------
                                                             $ 1,478    $ 6,517
                                                             ========   ========

Loss Contingencies

          As required by SFAS No. 5 "Accounting for Contingencies",  the Company
records liabilities for loss contingencies, including those arising from claims,
assessments,  litigation,  fines and  penalties,  and other  sources  when it is
probable  that a liability has been incurred and the amount of the liability can
be reasonably  estimated.  At December 31, 2001, the Company has accrued $87,000
for loss  contingencies  arising  from  litigation,  which,  in the  opinion  of
management,  are probable and  reasonably  estimable.  This accrual  includes an
estimate  of future  legal  costs  based on  opinions  of legal  counsel and our
experience in related cases. The amounts accrued for pending litigation in prior
periods was $775,000 and $2,946,000 at December 31, 2000 and 1999, respectively.
The amounts charged to operations in connection with actual litigation  expenses
were $22,900, $2,688,000, and $3,312,000, for the years ended December 31, 2001,
2000,  and 1999,  respectively.  In  addition,  and based on  opinions  of legal
counsel,  management  reduced the amounts  accrued for  estimated  future  legal
expenses by $652,000 and $381,300 during 2001 and 2000, respectively.

8.  COMMITMENTS

Lease Obligations

         The  Company's  only  long-term  operating  lease is for  approximately
55,000 square feet of office, research and development,  and manufacturing space
in San Jose,  CA. This  sublease  expires in April 2004.  Future  minimum  lease
payments under all non-cancelable leases are as follows (in thousands):


                          Operating
                           Lease
                          -------

         2002             $   952
         2003                 975
         2004                 406
         Thereafter            --
                          -------
                          $ 2,333
                          =======

Rent expense for 2001, 2000, and 1999 was approximately $962,000,  $926,000, and
$1,064,000, respectively.


                                       32

<PAGE>

Employment Agreements

         The Company has entered into  employment  agreements with two officers,
and a change of control bonus agreement with one officer. The agreements provide
for  aggregate  annual  salaries  of  $475,000  until the  employee  voluntarily
terminates or renegotiates the agreement.  The agreements may be canceled at any
time for cause. If the Company  terminates the agreements for reasons other than
cause,  aggregate  severance  due under the  agreements  would be $355,000.  The
change of control  bonus  agreement  provides  for a payment of  $500,000 to one
officer in the event of a change of control.

9.  STOCKHOLDERS' EQUITY

Preferred Stock

         The Board of Directors has  authorized  the issuance of up to 5,000,000
shares of undesignated  preferred stock and the Board has the authority to issue
the  undesignated  preferred  stock in one or more series and to fix the rights,
preferences,  privileges  and  restrictions  thereof.  In August 2001, the Board
authorized a Series K preferred  stock in the amount of 7,560 shares  designated
Series K Cumulative Convertible Preferred Stock. The Series K preferred stock is
subject to the following terms and provisions:

         o   Dividends  accrue  at the rate of 6% per  annum of the  liquidation
             value of each  share,  payable on June 30 and  December  31 of each
             year and are in  preference  of any  dividends  payable  on  common
             shares.  The  liquidation  value of each  share is $1,000  plus any
             accreted dividends.

         o   Dividends will  automatically be added to the liquidation  value of
             each share unless paid in cash.

         o   Shares are convertible into common stock

Initial Public Offering and Conversion of Preferred Stock

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

Warrants

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

         In  connection  with the  issuance of Series G preferred  stock in July
1996, and the 1996 equipment lease line, the Company issued warrants to purchase
58,021  and 5,802  shares of common  stock,  respectively,  at $10.34 per share.
During  2000,  a warrant  to  purchase  58,021  shares was  exercised  for a net
exercise  of  22,039  shares  of  common  stock.  The  remaining   warrants  are
exercisable at any time and expire in August 2006.

         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 in May 1995,  the
Company issued  warrants,  at $.001 per warrant,  to purchase  592,593 shares of
common stock at $4.73 per share. In December 1997, a warrant to purchase 132,225
shares was exercised for a net exercise of 99,850 shares of common stock. During
2000, a warrant to purchase  53,213  shares was  exercised for a net exercise of
39,682 shares of common stock. The remaining warrants expired in June 2001.

         During 1996,  the Company  issued  warrants,  at $.001 per warrant,  to
purchase  76,245 shares of common stock at $4.73 per share.  In connection  with
technology  transferred  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


                                       33

<PAGE>
warrant to purchase  169,259  shares was  exercised for a net exercise of 91,921
shares of common  stock.  During  2000,  a warrant to purchase  6,005 shares was
exercised for a net exercise of 4,905 shares of common  stock.  Of the remaining
warrants, 70,240 expired in June 2001 and 8,466 expire in August 2005.

         In September  1997,  the Company  issued  warrants to purchase  252,381
shares of common stock in connection  with the  convertible  subordinated  notes
payable,  at an exercise  price of $10.91.  In October 1997,  the Company issued
warrants to purchase 2,659 shares of common stock in connection with obtaining a
bank credit facility at an exercise price of $10.91. In November 1997,  warrants
to purchase  151,267 shares of common stock were exercised for a net exercise of
76,096 shares of common stock.  During 2000, a warrant to purchase 18,599 shares
was exercised for a net exercise of 4,818 shares of common stock. These warrants
are exercisable at any time and 82,515 expire in September 2002 and 2,659 expire
in October 2002.

          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.  The warrants
expire in November 2002.

         In June 1999,  the  Company  issued a  five-year  warrant  to  purchase
210,000  shares of common  stock at an exercise  price of $0.50 per share to two
customers in accordance with their volume purchase agreements. The fair value of
the  warrants of $407,000  was  recorded as a discount on sales.  During 2001, a
warrant to purchase  90,000  shares was  exercised  for a net exercise of 90,000
shares of common stock. The remaining 120,000 warrants expire in June 2005.

         In September 1999, the Company issued to Sprint Corporation warrants to
purchase $8.4 million of convertible  debentures,  as described in Note 6 of the
Notes to Financial  Statements.  These  debentures are  convertible to 2,946,622
shares of common stock at an exercise  price of $2.85 per share.  The fair value
of these  warrants  amounted to  $20,800,000.  Of this  amount,  $7,129,000  was
recorded as a direct sales discount and the balance of $13,671,000  was recorded
as an operating expense of the Sales and Marketing department. Substantially all
of the warrants are subject to net exercise provisions. The Company has reserved
shares for the exercise of all the warrants.

         In August 2001,  the Company issued to Sprint  Corporation  warrants to
purchase  600,000 shares of common stock at an exercise price of $1.20 per share
in connection with a volume purchase  agreement.  The fair value of the warrants
of $740,000 was recorded as a discount on sales.

         In  February  2001,  the  Company  issued to  Halifax  Fund,  L.P.,  in
connection  with a  financing  described  in Note 6 above,  warrants to purchase
833,333 shares of common stock.

A summary of outstanding warrants as of December 31, 2001 follows:


                    Number           Exercise         Expiration
                 Outstanding           Price             Date
                 -----------           -----             ----

                   458,295            10.91         November 2002
                    82,515            10.91        September 2002
                     2,659            10.91          October 2002
                 2,946,622             2.85        September 2004
                   120,000             0.50             June 2005
                     8,466             4.73           August 2005
                   833,333             9.00         February 2006
                     5,802            10.34           August 2006
                   600,000             1.20           August 2006
                 ---------
                 5,057,692
                 =========


Stock Option Plans

         In January 1999,  the Company  adopted a 1999 Officer Stock Option Plan
and  reserved  1,000,000  shares for issuance to officers of the Company or of a
parent or subsidiary  of the Company.  In May 1999,  the Company  adopted a 1999
Stock  Option Plan and, as amended in August  1999 and  October  1999,  reserved
4,000,000 shares for issuance to


                                       34

<PAGE>

employees   (including  officers  and  directors  who  are  also  employees)  or
consultants  of the Company or of a parent or subsidiary of the Company who meet
the suitability  standards set forth by this plan. The 1999 Officer Stock Option
Plan and the 1999 Stock Option Plan will  terminate ten years from the effective
date or, if earlier, the date of stockholder approval of termination.

         In September 1997, the Company  adopted the 1997 Equity  Incentive Plan
and reserved a total of 1,750,000  shares for issuance to  employees,  officers,
directors,  consultants,  independent  contractors,  and advisors. The number of
shares  outstanding will increase  automatically by 5% of the outstanding shares
each  year  unless  waived  by the  Board of  Directors.  In 1999,  the  Company
increased  the number of shares  reserved  for  issuance  under the 1997  Equity
Incentive  Plan by 523,501  shares.  The 1997 Equity  Incentive  Plan expires in
September  2007. Also in September 1997, the Company adopted the 1997 Directors'
Stock Option Plan under which 100,000  shares of common stock have been reserved
for issuance.  The Directors' Plan provides for the grant of non-statutory stock
options to non-employee directors of the Company and expires in September 2007.

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

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

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

         Under all of the plans,  the exercise price of incentive  stock options
may not be less than the fair  market  value of the  shares on the date of grant
(not less than  110% of fair  market  value if the  option is  granted  to a 10%
stockholder).  Under all of the plans  other  than the 1999 Stock  Option  Plan,
nonqualified  stock  options  may not be granted at less than 85% of fair market
value on the date of grant.  Options and stock awards  generally  vest 12.5% six
months  from date of grant and 2.0833% per month  thereafter;  although  certain
options vest over a shorter period of time,  and the vesting of certain  options
accelerates  in certain  circumstances.  Stock  options  generally  expire three
months  after  termination  of  employment  and five  years  from date of grant,
subject to exceptions in certain cases.


                                       35

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                                     Weighted
                                                                                              Value of               Average
                                                        Shares               Options           Options               Exercise
                                                       Available           Outstanding       Outstanding              Price
                                                       ---------           -----------       -----------             ---------
<S>                                                    <C>                 <C>               <C>                  <C>
Balances, January 1, 1999                                1,089                 2,735           $  8,454           $    3.09
          Additional shares reserved                     5,524                  --                 --
          Options granted                               (4,075)                4,075              9,015                2.21
          Options canceled                               1,664                (1,664)            (4,388)               2.64
          Options exercised                               --                    (251)              (357)               1.42
                                                         -----                 -----           --------           ---------
Balances, December 31, 1999                              4,202                 4,895             12,724                2.60
                                                         -----                 -----           --------           ---------
          Additional shares reserved                      --                    --                 --
          Options granted                               (2,442)                2,442             30,319               12.42
          Options canceled                               1,086                (1,085)            (6,365)               5.86
          Options exercised                               --                  (1,181)           (11,842)              10.04
                                                         -----                 -----           --------           ---------
Balances, December 31, 2000                              2,846                 5,071             24,836                4.90
                                                         -----                 -----           --------           ---------
          Additional shares reserved                      --                    --                 --
          Options granted                               (1,786)                1,786              8,229                4.50
          Options cancelled                              2,132                (2,132)           (25,476)              10.78
          Options exercised                               --                    (400)              (274)               2.90
          Stock awards                                    (326)                 --                 --               --
                                                         -----                 -----           --------           ---------
  Balances, December 31, 2001                            2,866                 4,325           $  7,315           $    4.73
                                                         =====                 =====           ========           =========
</TABLE>

         For the years ended  December 31, 2001,  2000,  and 1999,  the weighted
average  fair  value  of  options   granted  was  $4.50,   $12.25,   and  $2.04,
respectively.

         As of December 31, 2001, the stock options  outstanding were as follows
(in thousands, except per share data):


<TABLE>
<CAPTION>
                                             Weighted
                                             Average             Weighted                      Weighted
       Range of                             Remaining            Average                        Average
       Exercise            Number          Contractual          Exercise           Number       Exercise
        Prices          Outstanding        Life (Years)           Price         Exercisable      Price
   ---------------     ---------------  ---------------   ------------------  ------------    ------------
   <S>                 <C>              <C>               <C>                 <C>             <C>
    $0.50 to $0.54        922                 4.90               $ 0.51             758          $ 0.42
    $1.08 to $2.19        466                 2.67                 1.91             257            2.10
    $3.63 to $5.13        792                 2.63                 3.65             481            3.65
    $5.31 to $8.78      1,661                 4.01                 5.61             538            5.95
    $9.00 to $11.25       181                 3.33                 9.97              94           10.10
   $12.19 to 19.75        303                 3.34                16.77             198           17.74
                        -----                 ----               ------           -----          ------
                        4,325                 3.66               $ 4.73           2,326          $ 4.42
                        =====                 ====               ======           =====          ======
</TABLE>

         As of December  31, 2000 and 1999,  options to purchase  1,653,000  and
1,658,000 shares were exercisable at an average weighted exercise price of $5.27
and $1.87 per share, respectively.


                                       36
<PAGE>


         The Company has elected to continue to follow the provisions of APB 25,
"Accounting for Stock Issued to Employees," for financial reporting purposes and
has adopted the  disclosure-only  provisions of SFAS 123.  Compensation cost has
been  recognized for the Company's stock option plans under APB 25 where options
were granted to employees at an exercise  price,  which is below market value at
the date of grant.  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 2000,  1999,  and 1998  consistent  with the  provisions  of SFAS 123, the
Company's  net loss and net loss per share for 2000,  1999,  and 1998 would have
been increased to the pro forma amounts  indicated  below (in thousands,  except
per share amounts):

                                                 Years Ended December 31,
                                            ----------------------------------
                                               2001         2000        1999
                                               ----         ----        ----
Net loss as reported....................... $(10,517)   $ (37,203)  $ (22,192)
Net loss-pro forma......................... $(14,391)   $ (42,857)  $ (23,061)
Net loss per share-as reported............. $  (0.48)   $   (2.03)  $   (2.08)
Net loss per share-pro forma............... $  (0.65)   $   (2.34)  $   (2.16)


         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 123, the fair value of each
option is estimated using the following weighted average  assumptions for grants
during 2001, 2000, and 1999:  dividend yield of 0%, volatility of 0% for options
issued prior to the Company's  Initial Public Offering,  117% in 1999, 124.7% in
2000, and 139.6% in 2001,  risk-free interest rates 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, 2001, no shares
had been purchased and all employees have withdrawn from the plan.

10. INCOME TAXES

         Provision  for income  taxes for each of the years ended  December  31,
2001, 2000, and 1999, was $0.

                                                       For the Years Ended
                                                --------------------------------
                                                  2001        2000         1999
                                                  ----        ----         ----
Total benefit computed by applying the
U.S. statutory rate                             -34.00%     -34.00%      -34.00%
              Permanent differences               4.77%       1.08%       11.40%
              Change in valuation allowance      29.23%      32.92%       22.60%
                                                ------      ------       ------
                                                  0.00%       0.00%        0.00%
                                                 =====       =====        =====


                                       37

<PAGE>


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


                                                       December 31,
                                                 ------------------------
                                                   2001           2000
                                                 --------       --------
Current deferred assets:
     Allowance for doubtful accounts             $    351       $     80
     Inventory reserves                               753            789
     UNICAP                                           310            666
     Unearned revenue                                  43          1,552
     Accrued liabilities                              460          1,022
     Book compensation for stock options            2,017          9,977
                                                 --------       --------
     Total current deferred assets                  3,934         14,086
     Valuation allowance                           (3,934)       (14,086)
                                                 --------       --------
                                                 $     --       $     --
                                                 ========       ========
Long-term deferred assets:
     Net operating loss carryforwards            $ 24,865       $ 21,006
     Capitalized research expenditures              8,728          7,775
     Tax credit carryforwards                       4,302          2,884
     Depreciation and amortization                    951            843
                                                 --------       --------
     Total long-term deferred assets               38,846         32,508
     Valuation allowance                         $(38,846)       (32,508)
                                                 ========       --------
                                                 $     --       $     --
                                                 ========       ========


         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,  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 decreased by $3,814,000 in
2001_and increased by $15,281,000 in 2000. The Company had federal and state net
operating  loss carry forwards of  approximately  $66,664,000  and  $24,873,000,
respectively,  as of December 31, 2001  available to offset  future  regular and
alternative  minimum  taxable  income.  The Company's  net operating  loss carry
forwards expire in 2005 through 2021 if not utilized.

         In  addition,  at December  31,  2001,  the  Company had the  following
available credits to offset future tax liabilities (in thousands):

                                                        Tax         Expiration
                                                     Reporting        Dates
                                                     ---------        -----

       Federal research and development credit      $ 2,518          2007-2021
       State research and development credit        $ 1,645      No expiration
       State manufacturing investment credit          $ 140          2004-2011


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



                                       38

<PAGE>

11. 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 2001, 2000, and
1999, the Company made no employer contributions.

12. RELATED PARTY TRANSACTIONS

         See Notes 6, 10, and 14 for transactions with Sprint.

13. BUSINESS SEGMENT AND MAJOR CUSTOMERS

         The Company  operates in a single industry  segment and primarily sells
its  products to customers  in the U.S.  and Canada.  Sales by product  category
during 2001 consist of 99% to wireless  customers and 1% to cable customers.  In
2000, 94% of sales were to wireless customers and 6% were to cable customers. In
1999, 48% of sales were to wireless customers and 52% to cable customers.  Sales
to international  customers  represented less than 1%, 24%, and 5%, of net sales
in 2001, 2000, and 1999, respectively. International sales in any one geographic
area other than Canada were insignificant.

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

                                                2001    2000    1999
                                                ----    ----    ----

        Sprint Corporation                      88%     54%     28%
        RCN Corporation                         --      --      31%
        Look Communications, Inc.               --      23%     --

         At December 31, 2001 and 2000, these customers accounted for $5,000 and
$7,530,000,  respectively,  and 1%,  and 98%,  respectively,  of total  accounts
receivable.


                                       39

<PAGE>


SUPPLEMENTARY FINANCIAL DATA:

HYBRID NETWORKS, INC.
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited, in thousands, except per share data)


<TABLE>
<CAPTION>

                                             Three Months Ended                           Three Months Ended
                                             ------------------                           ------------------
                                 Mar. 31,   June 30,   Sept. 30,   Dec. 31,    Mar. 31,    June 30,    Sept. 30,   Dec. 31,
                                  2001        2001        2001        2001        2000        2000        2000        2000
                                  ----        ----        ----        ----        ----        ----        ----        ----
<S>                             <C>         <C>        <C>         <C>         <C>         <C>         <C>         <C>
Net sales                     $  5,089    $  5,465    $  9,744    $  7,628    $  1,677    $  2,747    $  5,475    $ 12,896
                              --------    --------    --------    --------    --------    --------    --------    --------

Gross profit (loss)             (1,140)      2,015       3,170       3,175        (189)     (1,558)        992         411
                              --------    --------    --------    --------    --------    --------    --------    --------
Income (loss) from
   continuing operations        (6,274)     (3,142)       (922)       (179)     (7,711)     (8,994)    (12,823)     (5,647)
                              --------    --------    --------    --------    --------    --------    --------    --------
          Net (loss)          $ (6,274)   $ (3,142)   $   (922)   $   (179)   $ (7,963)   $(10,667)   $(12,939)   $ (5,634)
                              ========    ========    ========    ========    ========    ========    ========    ========
Preferred stock dividend      $   -       $   -       $   -       $   (169)   $   -       $   -       $   -       $   -
                              --------    --------    --------    --------    ========    ========    ========    ========
 Net loss available to
        common shareholders   $ (6,274)   $ (3,142)   $   (922)   $   (348)   $ (7,963)   $(10,667)   $(12,939)   $ (5,634)
                              ========    ========    ========    ========    ========    ========    ========    ========
Earnings per share:
Basic:                        $  (0.28)   $  (0.14)   $  (0.04)   $  (0.02)   $  (0.57)   $  (0.73)   $  (0.61)   $  (0.26)
                              --------    --------    --------    --------    --------    --------    --------    --------
          Net (loss)          $  (0.28)   $  (0.14)   $  (0.04)   $  (0.02)   $  (0.57)   $  (0.73)   $  (0.61)   $  (0.26)
                              ========    ========    ========    ========    ========    ========    ========    ========
Diluted:                      $  (0.28)   $  (0.14)   $  (0.04)   $  (0.02)   $  (0.57)   $  (0.73)   $  (0.61)   $  (0.26)
                              --------    --------    --------    --------    --------    --------    --------    --------
          Net (loss)          $  (0.28)   $  (0.14)   $  (0.04)   $  (0.02)   $  (0.57)   $  (0.73)   $  (0.61)   $  (0.26)
                              ========    ========    ========    ========    ========    ========    ========    ========
</TABLE>


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

          None


                                       40


<PAGE>

 PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.

         The  following  table  sets forth  certain  information  regarding  our
officers and directors as of March 14, 2002.

<TABLE>
<CAPTION>
Directors and                        Age      Position                                         Director Since
Executive Officers

<S>                                  <C>      <C>                                                  <C>
James R. Flach..................     55       Chairman of the Board                                1995
Michael D. Greenbaum (3)........     59       President, Chief Executive Officer,                  2000
                                              Chief Financial Officer and Director
Anand M. Khokha (2) ............     58       Director                                             2001
Phillip J. Kushner (2)..........     59       Director                                             2000

Gary M. Lauder (1)(2)...........     39       Director                                             1994
Cameron M. Rejali...............     40       Director                                             2001

Thomas E. Bisset (3)............     37       Vice President, Research and Development
</TABLE>

(1) Member of the compensation committee
(2) Member of the audit committee
(3) Executive officer

          James R. Flach has been a director of Hybrid since May 1995 and served
as Hybrid's  acting Chief  Executive  Officer from November 1995 to January 1996
and from October 1999 to January 2000. In January 2000,  Mr. Flach was appointed
Chairman of Hybrid's  board of directors.  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 formerly,  served as 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.

          Michael D. Greenbaum has been a Director and Chief  Executive  Officer
of Hybrid since January 2000 and Chief  Financial  Officer since  February 2002.
Prior to joining the Company, he served as President and Chief Executive Officer
of Continuity Solutions from April 1999 through December 1999. Prior to that, he
was Vice President,  Marketing and Sales for Netcom Online Communications,  Inc.
from October 1998 to March 1999.  He also was Senior Vice  President and General
Manager for Applied  Theory  Communications,  Inc.  from 1997 to 1998,  and Vice
President and General Manager for Borland  International  from 1996 to 1997. Mr.
Greenbaum holds a B.A. in History from Case Western Reserve University.

          Anand M.  Khokha has been a director  since June 2001.  Mr.  Khokha is
President of Durkee/Sharlit  Associates,  a management consulting firm. Prior to
his service with  Durkee/Sharlit,  Mr. Khokha was associated with Theodore Barry
Associates,  a national management consulting firm. Earlier affiliations include
management  positions with Allis Chalmers Co., the Wayerhauser Co., and the UCLA
School of Management  teaching staff.  Mr. Khokha holds a M.B.A.  from U.C.L.A.,
and M.S.I.E.  from Purdue University,  and a B.S.M.E.  from Roorkee  University,
India.

         Phillip J.  Kushner has been a director of the  Company  since  October
2000. Mr.  Kushner is a shareholder  of the law firm of Greenberg  Traurig P.A.,
and has been associated with Greenberg  Truarig P.A. since November 1998.  Prior
to that,  he  practiced  corporate  and  securities  law in Dallas for more than
twenty  years.  Mr.  Kushner  holds a J.D.  cum  laude  from the  University  of
Pittsburgh  School of Law, an M.B.A. in Finance,  with  distinction from Harvard
Business School and an A.B. in Economics and History from Brandeis University.


                                       41

<PAGE>

          Gary M. Lauder has been a director of Hybrid 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.

          Cameron M. Rejali has been a director of the  Company  since  February
2001.  Mr.  Rejali  is  Vice  President,   Fixed  Wireless  Operations,   Sprint
Corporation.  Prior  to his  current  position,  Mr.  Rejali  held a  number  of
positions  within  Sprint.  He was Vice President of  International  Product and
Alliance Management within Long Distance International,  responsible for product
management,  product development and alliance strategy.  Before that, Mr. Rejali
was Assistant Vice President of International responsible for directing Sprint's
international  strategic planning efforts,  and Director of Corporate  Strategy,
responsible  for  strategy  development  at a corporate  level.  Before  joining
Sprint, Mr. Rejali was a consultant with the management  consulting firm at A.T.
Kearney.  Mr. Rejali holds a B.A. in Economics  from Harvard  University  and an
M.A. in Economics from the University of Chicago.

          Thomas E.  Bissett,  Hybrid's  Vice  President  of  Manufacturing  and
Support, joined the company in 1996 and has held the positions of vice president
of  operations  and  director  of  operations.  Before  this,  Bissett  was vice
president  of  operations  and a  member  of  the  founding  team  of  Semaphore
Communications  Corp.,  a Xerox company that designed and  manufactured  network
security products.  He holds a master's degree in business  administration  from
San Jose State  University  and master's and  bachelor's  degrees in  mechanical
engineering  from the  University  of Utah.  Bissett is a licensed  professional
engineer in Texas and California.

Board of Directors Committees

         Standing  committees  of Hybrid's  board of directors  include an audit
committee and a compensation committee.

          Mr. Lauder, Mr. Kushner, and Mr. Khokha are the current members of the
audit committee. Mr. Flach was on the audit committee until February 11, 2001 at
which  time he  resigned  from the  audit  committee.  The audit  committee  met
separately  nine times  during  2001.

         Mr. Lauder is the only current member of the compensation committee. A.
Alan  Kurtze  was the  other  member  of the  compensation  committee  until his
resignation from Hybrid's Board in January 2002. The compensation  committee met
three times during 2001, although the committee conferred  informally on matters
within the  committee's  purview during the year and addressed such matters from
time to time  during  meetings  of the  board  of  directors.  The  compensation
committee makes  recommendations to the board of directors  concerning  salaries
and incentive  compensation for Hybrid's officers and employees.  The full board
of directors administers Hybrid's employee benefit plans.

ITEM 11. EXECUTIVE COMPENSATION

          The following table sets forth all compensation  awarded to, earned by
or paid for  services  rendered to Hybrid in all  capacities  during 2001 by (i)
Hybrid's Chief Executive Officer;  (ii) Hybrid's other executive officers (other
than the Chief  Executive  Officer) who were  serving as  executive  officers at
December  31,  2001 and had salary and bonus for 2001 of  $100,000  or more (two
persons)  and  (iii)  two  individuals  who  were  among  the four  most  highly
compensated  executive  officers  of Hybrid  during  2001  (other than the Chief
Executive  Officer) but who were not serving as  executive  officers on December
31, 2001(collectively, the "Named Executive Officers").


                                       42

<PAGE>


Summary Compensation Table
<TABLE>
<CAPTION>

                                                                             LONG-TERM
                                                                             COMPENSATION
                                                                             ------------
                         ANNUAL COMPENSATION                                 AWARDS
                         -------------------                                 ------
                                                                             SHARES OF COMMON
                                                              OTHER ANNUAL   STOCK UNDERLYING   ALL OTHER
NAME AND PRINCIPLE POSITIONS        YEAR    SALARY   BONUS    COMPENSATION     OPTIONS (#)     COMPENSATION
----------------------------        ----    ------   -----    ------------     -----------     ------------

<S>                                 <C>     <C>      <C>         <C>            <C>             <C>
Michael D. Greenbaum                2001    297,909  126,073                    405,300
President, Chief Executive Officer  2000    248,735  105,027     15,383(1)      666,667         15,383(1)

Thomas E. Bissett                   2001    165,000   67,211         --          77,300
Vice President, Research &          2000    145,925   45,738         --           3,333
Development                         1999    130,497    7,250         --         155,825

Judson W. Goldsmith (2)             2001    225,000   42,328                    125,600
Vice President, Finance             2000    220,833  144,362                         --
Chief Financial Officer             1999    175,841   17,500                    375,000

Deborah Burton (4)                  2001    218,227   51,100                    169,600
Vice President, Sales &             2000    170,665   43,997      2,540(7)      400,000          2,540(6)
Marketing

Nathan Wang (3)                     2001    111,054   38,625                    104,400
Vice President, Research &          2000    193,648   53,552     25,443(6)      400,000         25,443(5)
Development


<FN>
(1) Includes temporary living expenses paid by Hybrid of $15,383 to Mr. Greenbaum.
(2) Mr. Goldsmith left the Company in January 2002.
(3) Mr. Wang left the company in July 2001.
(4) Ms. Burton left the company in November 2001.
(5) Includes moving expenses of $25,443 paid to Mr. Wang.
(6) Includes moving expenses of $2,540 paid to Ms. Burton.
</FN>
</TABLE>

Compensation Committee Interlocks and Insider Participation

         No  member of the  compensation  committee  of the  board of  directors
during 2001 was an officer or employee of Hybrid. No executive officer of Hybrid
serves as a member of the board of  directors or  compensation  committee of any
entity that has one or more  executive  officers  serving on  Hybrid's  board of
directors  or  compensation  committee.  James R.  Flach was not a member of the
compensation  committee  or the audit  committee  while he was an officer of the
Company during the period October 1999 to January 2000.

Director Compensation

     In December  2000, the board of directors  adopted a Director  Compensation
Program.

      All directors are  reimbursed for their  reasonable  expenses in attending
board and board  committee  meetings  and receive fees for  attending  board and
board committee meetings, as follows:

        o        Fee per board meeting attended in person            $2,000
        o        Fee per board meeting attended by telephone         $1,000
        o        Fee per committee meeting attended in person        $1,000
        o        Fee per committee meeting attended by phone           $500

                                       43

<PAGE>

          Each  non-employee  director  who  is not  serving  on  the  board  of
directors  pursuant to  contractual  rights to nominate a member of the board of
directors  will be granted  an option to  purchase  40,000  shares of our common
stock upon  becoming a member of the board of  directors.  Also,  each  eligible
director who became a member of the board of directors  prior to the adoption of
the Director Compensation Policy received an option to purchase 40,000 shares of
our common  stock.  Upon each annual  meeting,  each  eligible  director will be
granted an additional  option to purchase 20,000 shares of our common stock. All
options to be granted to each  eligible  director  will have an  exercise  price
equal to the fair  market  value of our common  stock on the date of grant.  The
options have five-year terms, and will terminate three months following the date
the  director  ceases  to be a  director  or a  consultant  or 12  months if the
termination  is due to death or disability.  All options  granted to an eligible
director will become initially exercisable six months after grant as to 12.5% of
the aggregate number of shares granted and as to 2.0833% of the aggregate number
of shares  granted  on each  succeeding  month  thereafter  so long as he or she
continues as a member of the board of directors or as a consultant. In the event
of our dissolution or liquidation or a "change in control" transaction,  options
granted under the plan will be 100% vested and exercisable in full.

          Furthermore,  each eligible  director shall receive an annual retainer
fee of $20,000, payable in stock pursuant to the Company's 1997 Equity Incentive
Plan at the rate of $5,000 per  quarter on each April 1, July 1,  October 1, and
January 1 if such director served as a director on the last day of, and for more
than one half of, the calendar quarter preceding each such date, with the shares
to have a value,  for the  purpose of  computing  the number of shares to issue,
equal to the closing  price of the common stock on the last  business day of the
calendar quarter immediately preceding the payment date.

         Pursuant to the terms of the  Director  Compensation  Policy  discussed
above,  in June 2001, we granted options to purchase 40,000 shares of our common
stock to Mr.  Khokha at an exercise  price of $0.58 per share.  In May 2001,  we
granted to Messrs. Flach, Kushner, and Lauder, options to purchase 20,000 shares
each of our common stock at an exercise price of $1.02 per share.

         As payment of their retainer fee described  above,  in January 2001, we
granted to Messrs.  Flach,  Kushner and Lauder, 640 shares each of common stock;
in April 2001 we granted to Messrs. Flach, Kushner and Lauder, 2,000 shares each
of common stock; in July 2001 we granted to Messrs.  Flach,  Kushner and Lauder,
8,771 shares each of common stock; in October 2001 we granted to Messrs.  Flach,
Kushner, Lauder and Khokha 4,000 shares each of common stock; in January 2002 we
granted to Messrs. Flach, Kushner, Lauder and Khokha 9,804 shares each of common
stock.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain information,  as of December 31,
2001, with respect to beneficial  ownership of Hybrid's common stock by (i) each
stockholder  Hybrid  believes to be the beneficial  owner of more than 5% of its
common stock, (ii) each of Hybrid's current  directors,  (iii) each of the Named
Executive  Officers  (as that term is defined in Part III,  Item 11,  above) and
(iv) all of Hybrid's current 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>
Sprint Corporation (2)...............        7,613,068                            19.4%
  Cameron M. Rejali
Halifax Fund L.P. (3)................        6,881,333                            17.6%
Accel Partners (4)
  James R. Flach (4).................        2,631,419                             6.7%
Gary M. Lauder (5)...................          533,109                             1.4%
Michael D. Greenbaum (6).............          179,704                             0.5%
Tom Bisset (7)                                 158,434                             0.4%
Phillip J. Kushner (8) ..............           40,632                             0.1%
Anand M. Khokha (9)                             20,471                             0.1%
Judson W. Goldsmith (10)                       477,812                             1.2%
Frederick Enns (11)                            202,374                             0.5%
All current executive officers and
  directors as a group
  (9 persons)(12)....................        4,277,645                            10.9%
</TABLE>


                                       44
<PAGE>


(1)  Unless  otherwise  indicated  below,  Hybrid  believes that 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. Unless otherwise indicated below, the address of the
     named beneficial  owner is that of Hybrid.  Shares of Hybrid's common stock
     subject to options,  warrants or convertible  debentures that are currently
     exercisable or exercisable  within 60 days of December 31, 2001, are deemed
     to be outstanding and to be  beneficially  owned by the person holding such
     options  and/or  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)  Represents  (i)  4,066,446  shares of Hybrid's  common stock issued in June
     2000 upon  conversion of 4% Convertible  Class A Debentures (see Note #6 to
     the financial  statements "Issuance of Securities to Sprint Corporation and
     to Other  Investors"),  (ii)  2,946,622  shares of  Hybrid's  common  stock
     issuable upon  conversion of 4%  Convertible  Class A Debentures  which are
     themselves  issuable  upon  exercise  of  warrants  and (iii)  warrants  to
     purchase 600,000 shares in connection with the purchase of Hybrid products.
     Sprint's  address is 2330  Shawnee  Mission  Parkway,  Westwood,  KA 66205.
     Cameron M. Rejali is the vice president of Broadband  Wireless Products and
     Operations for Sprint's National Consumer organization.

(3)  Represents   6,881,333  shares  of  Hybrid's  common  stock  issuable  upon
     conversion of 7,560 shares of the company's Series K Cumulative Convertible
     Preferred Stock (see Note 6 to the Financial Statements). Halifax's address
     is 195 Maplewood, NJ 07040.

(4)  Represents ownership by entities associated with Accel Partners as follows:
     759,345  outstanding  shares  and  8,399  shares  subject  to  warrants  or
     convertible  debentures,  held by Accel IV, L.P.; 35,575 outstanding shares
     and 394 shares subject to warrants or convertible debentures, held by Accel
     Investors '95 L.P.; 17,975  outstanding  shares and 202 outstanding  shares
     subject to warrants or convertible debentures, held by Ellmore C. Patterson
     Partners;  15,750  outstanding shares and 174 shares subject to warrants or
     convertible debentures,  held by Accel Keiretsu L.P.; 155,001, 309,877, and
     1,239,506  outstanding  shares  held by  Accel  Investors  99  L.P.,  Accel
     Internet  Fund III and  Accel VII L.P.,  respectively.  43,804  outstanding
     shares were held in Mr. Flach's personal account. Mr. Flach is the Chairman
     of the Board of  Directors  of Hybrid  and an  executive  partner  of Accel
     Partners.  He holds no voting or  dispositive  power with respect to any of
     the above shares. The table also includes 45,417 shares that are subject to
     options  exercisable within 60 days of December 31, 2001 held by Mr. Flach,
     granted in connection with services  performed by Mr. Flach for Hybrid. The
     address of Mr. Flach and the Accel  partnerships  is 428  University  Ave.,
     Palo Alto, CA 94301.

(5)  Represents (i) 514,025 outstanding shares and (ii) 19,084 shares subject to
     warrants or options  exercisable  within 60 days of December 31, 2001.  Mr.
     Lauder is a director of Hybrid. His address is 88 Mercedes Lane,  Atherton,
     CA 94027.

(6)  Represents 78,379  outstanding shares and 101,325 shares subject to options
     exercisable  within 60 days of December 31, 2001. Mr.  Greenbaum became the
     Chief Executive Officer and a director of Hybrid in January 2000.

(7)  Represents 36,648  outstanding shares and 121,786 shares subject to options
     exercisable  within 60 days of December 31, 2001. Mr. Bissett has been Vice
     President, Research and Development since July 2001.

(8)  Represents 25,215  outstanding  shares and 15,417 shares subject to options
     exercisable  within 60 days of December  31, 2001.  Mr.  Kushner has been a
     director of the company since October 2000.

(9)  Represents  13,804  outstanding  shares and 6,667 shares subject to options
     exercisable  within 60 days of December  31,  2001.  Mr.  Khokha has been a
     director of the company since May 2001.

(10) Represents 20,225  outstanding shares and 457,587 shares subject to options
     exercisable  within 60 days of December 31, 2001.  Mr.  Goldsmith  was Vice
     President  of  Finance,  Chief  Financial  Officer.  He left the Company in
     January 2002.

(11) Represents 5,034  outstanding  shares and 197,340 shares subject to options
     exercisable  within  60 days of  December  31,  2001.  Mr.  Enns  was  Vice
     President  and Chief  Technical  Officer of Hybrid.  He left the company in
     February 2002.

(12) Represents (i) 3,283,540  outstanding shares and (ii) 12,836 shares subject
     to warrants or convertible debentures and (iii) 981,269 options exercisable
     within 60 days of December 31, 2001.


                                       45

<PAGE>


         The following  table sets forth further  information  regarding  option
grants during 2001,  pursuant to our 1997 Equity  Incentive Play, to each of the
named Executive officers. The table sets forth the hypothetical gains or "option
spreads" that would exist for the options at the end of their  repective 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.

<TABLE>
<CAPTION>

  OPTION GRANTS IN 2001

                        NUMBER OF     PERCENTAGE OF                                      Potential Realizable Value at
                        SHARES OF         TOTAL                                          Assumed Annual Rates of Stock
                       COMMON STOCK      OPTIONS                                          Price Appreciation for Option
                        UNDERLYING     GRANTED TO                                         Term(2)
                         OPTIONS      EMPLOYEES IN    EXERCISE PRICE                     ---------------------------------
NAME                   GRANTED (1)        2001          PER SHARE      EXPIRATION DATE         5%                10%
----                   ------------   -------------   --------------   ---------------   ---------------   ---------------
<S>                       <C>             <C>            <C>              <C>              <C>                <C>
Michael D. Greenbaum      405,300         22.69%         4.9375           2/20/2006        $2,554,055         $3,222,902

Judson W. Goldsmith       125,600          7.03%         4.9375           2/20/2006        $  791,486         $  998,758

Deborah Burton            169,600          9.49%         4.9375           2/20/2006        $1,068,758         $1,348,641

Nathan Wang               104,400          5.84%         4.9375           2/20/2006        $  657,891         $  830,178

Thomas E. Bissett          77,300          4.33%         4.9375           2/20/2006        $  487,117         $  614,681
</TABLE>

-----------------------
(1)  Options  granted in 2001 have been ISOs or NQSOs that were  granted at fair
     market value and vest over a four-year  period so long as the individual is
     employed  by Hybrid,  subject to  acceleration  in certain  instances.  The
     options  generally  expire  five  years from the date of grant or within 90
     days after termination of employment.

(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 Hybrid'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 2001 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,   2001.   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 Hybrid's common stock as of December 31, 2001 as reported on the Nasdaq
($0.51):

AGGREGATED OPTION EXERCISES IN 2001 AND YEAR-END VALUES
<TABLE>
<CAPTION>


                                                                    NUMBER OF SHARES
                                                                     OF COMMON STOCK            VALUE OF UNEXERCISED
                                                                 UNDERLYING UNEXERCISED             IN-THE-MONEY
                                                                   OPTIONS AT YEAR-END           OPTIONS AT YEAR-END
                            SHARES ACQUIRED                    ---------------------------   ---------------------------
NAME                        ON EXERCISE(#)    VALUE REALIZED   EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
----                        ---------------   --------------   -----------   -------------   -----------   -------------
<S>                            <C>               <C>             <C>            <C>            <C>             <C>
Michael D. Greenbaum               --            $      --        84,437        320,863        $    --         $   --

Judson W. Goldsmith            11,000            $  12,300       425,271        284,329        $ 1,838         $  802

Deborah Burton                     --            $      --       167,077             --        $    --         $   --

Nathan Wang                        --            $      --            --             --        $    --         $   --

Thomas E. Bissett                  --            $      --       116,075         94,548        $   558         $   --

</TABLE>


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Effective  July 3, 2001,  Sprint  committed to purchase an additional  $9.6
million of our products  under terms that were different from those agreed to in
the  master  purchase  agreement  dated May 1,  2000.  In  connection  with this
commitment, we issued to Sprint warrants to purchase up to 600,000 shares of our
common stock at $1.20 per share. All of the shipments relating to these purchase
warrants were made during the quarter ending September 30, 2001. These purchases
were not  subject  to  acceptance  criteria.  In  accordance  with  SFAS 123 and
utilizing the  Black-Scholes  valuation  model, we determined that the estimated
value of these  purchase  warrants was $740,000 and this amount was applied as a
sales discount during the quarter ending September 30, 2001.

     Except  for (i) the  compensation  arrangements  described  in the  section
entitled  "Executive  Compensation"  and (ii) the transactions  described below,
from  January  1,  2001 to the  present,  there  has  been no (and  there is not
currently  proposed),  transaction  or series of similar  transactions  to which
Hybrid 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
Hybrid's  common  stock  (or any  member of the  immediate  family of any of the
foregoing persons) had (or will have) a direct or indirect interest.

                                       46

<PAGE>


Retention Agreements

         In January 2000,  Hybrid's board of directors entered into an agreement
with Michael D. Greenbaum,  the Company's  Chief  Executive  Officer whereby Mr.
Greenbaum  would  receive  a base  salary,  be  eligible  for a bonus,  would be
entitled to severance  pay and would  receive  options to purchase up to 500,000
shares of Hybrid's  common stock with normal  vesting  (except that,  subject to
further  discussion with the Company's legal counsel,  there would be 18 months'
acceleration  on  termination  of employment  by the  Company).  In August 2001,
Hybrid's  board of directors  entered into a Change of Control  Bonus  Agreement
with Mr. Greenbaum whereby in the event of a change of control, as defined,  Mr.
Greenbaum  would be  entitled to a bonus in the amount of  $500,000.  In October
2001, the  board approved an option exchange for Mr. Greenbaum,  whereby options
held by Mr.  Greenbaum  were  cancelled in exchange for a new stock option to be
granted in April 2002.

Separation Agreements

         In November  2001,  Hybrid  entered  into a separation  agreement  with
Deborah Burton, Hybrid's Vice President, Sales and Marketing, which provided for
a severance  payment  equivalent  to  approximately  four months salary plus two
prior quarters of executive bonuses.

         In January 2002, Hybrid entered into a separation agreement with Judson
W.  Goldsmith,  Hybrid's Chief Financial  Officer,  which provided for continued
payment of his full salary during a transition period after the appointment of a
new  Chief  Financial  Officer,  and to be  followed  by a period  of part  time
employment until a final termination date in July 2002. Mr. Goldsmith  continued
to be eligible  for a $125,000  change of control  bonus as provided  for in his
original  offer  letter of  November  1998,  but only if such  change of control
occurred prior to the July 2002 termination date.

         In February  2002,  Hybrid  entered  into a separation  agreement  with
Frederick Enns, Hybrid's Chief Technical Officer, which provided for a severance
payment of three  months  salary.  Mr. Enns  relinquished  the change of control
bonus provisions contained in an earlier retention bonus agreement.

         In February 2002, Hybrid entered into a separation agreement with Scott
D. McDonald,  who had been Hybrid's Chief  Financial  Officer from January 2002.
Under the agreement, Mr. McDonald was allowed to retain a $50,000 signing bonus.

Arrangements Regarding Board of Directors

         Mr. Rejali was appointed as director of Hybrid in February 2001 to fill
the vacancy  created  upon the  resignation  of Timothy  Sutton.  If Mr.  Rejali
resigns  or is  terminated  as a  director,  Hybrid  has  agreed to use its best
efforts to cause Sprint's  nominees to take their place as a member of the board
of directors.  Sprint has the right to appoint one additional director following
the  resignation  of its nominee,  Mr. Kurtze,  in January 2002.  Sprint has not
exercised  its right to nominate a director  for this  position.  Sprint holds a
debenture that is convertible at any time, at Sprint's election,  into shares of
a newly created series of Hybrid  preferred  stock pursuant to which Sprint,  as
the  holder of such  stock,  will have the right to elect two of  Hybrid's  five
directors as well as certain other voting  rights.  Sprint has not yet exercised
that debenture, and no preferred stock is outstanding.

         Under  Hybrid's  agreement  with  Sprint,  Hybrid  has also  granted to
Sprint, certain veto rights and other rights and privileges. For a more detailed
description  of the  securities  issued by Hybrid to Sprint  and the  rights and
privileges granted to Sprint,  please see Note 6 to the financial  statements on
page 30 "Insurance of Securities to Sprint Corporation and to other Investors."

                                       47

<PAGE>

PART IV

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

   (a)  Documents filed as part of the Report:                         Page No.
                                                                       --------
        1.   FINANCIAL STATEMENTS. See the Index to Financial
               Statements at Item 8 of this Report..............         18
        2.   FINANCIAL STATEMENT SCHEDULES.
               Schedules not listed below have been omitted
               because they are not applicable or are not
               required or the information required to be set
               forth in those schedules is included in the
               financial statements or related notes.
             Schedule II-Valuation and qualifying accounts......         52

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

                                                                                           Incorporated by Reference
                                                                                           -------------------------
                                                                                               Date of
Exhibit   Exhibit                                                                              First         Exhibit       Filed
Number    Description                                                   Form      File No.     Filing        Number       Herewith
------    -----------                                                   ----      --------     ------        ------       --------
<S>                                                                     <C>      <C>           <C>           <C>           <C>
3.01      Registrant's Amended and Restated Certificate of               S-1     333-36001     11/11/97      3.03
          Incorporation.
3.02      Certificate of Designations of Series J Non-Convertible        8-K     000-23289     09/24/99       3.1
          Preferred Stock of the Registrant.
3.03      Certificate of Designations of Series K Cumulative            10-Q     000-23289     08/14/01      3.01
          Convertible Preferred Stock of the Registrant.
3.04      Registrant's Amended and Restated Bylaws, as adopted on       10-K     000-23289     03/30/01      3.03
          March 22, 2001.
4.01      Form of Specimen Stock Certificate representing shares of      S-1     333-36001     11/11/97      4.01
          Registrant's Common Stock.
4.02      Securities Purchase Agreement between Halifax Fund, L.P.       8-K     000-23289     02/22/01      4.01
          and the Registrant, dated as of February 16, 2001.
4.03      Form of Common Stock Purchase Warrant, dated as of             8-K     000-23289     02/22/01      4.03
          February 16, 2001.
4.04      Exchange Agreement between Halifax Fund, L.P. and the         10-Q     000-23289     08/14/01      4.01
          Registrant, dated as of August 13, 2001.
4.05      Registration Rights Agreement between Halifax Fund, L.P.      10-Q     000-23289     08/14/01      4.02
          and the Registrant, dated as of August 13, 2001.
10.01     Amended and Restated Investors Rights Agreement dated as       S-1     333-36001     11/11/97     10.01
          of September 18, 1997, between Registrant and certain
          investors, as amended, October 13, 1997, and as amended
          November 6, 1997.
10.02     Registrant's 1993 Equity Incentive Plan. (2)                   S-1     333-36001     11/11/97     10.02
10.03     Registrant's 1996 Equity Incentive Plan. (2)                   S-1     333-36001     11/11/97     10.03

</TABLE>

                                       48

<PAGE>
<TABLE>
<CAPTION>
                                                                                           Incorporated by Reference
                                                                                           -------------------------
                                                                                               Date of
Exhibit   Exhibit                                                                              First         Exhibit       Filed
Number    Description                                                   Form      File No.     Filing        Number       Herewith
------    -----------                                                   ----      --------     ------        ------       --------
<S>                                                                     <C>      <C>           <C>           <C>           <C>
10.04     Registrant's Executive Officer Incentive Plan. (2)             S-1     333-36001      11/11/97    10.04
10.05     Registrant's 1997 Equity Incentive Plan. (2)                   S-1     333-36001      11/11/97    10.05
10.06     Registrant's 1997 Directors Stock Option Plan. (2)             S-1     333-36001      11/11/97    10.06
10.07     Registrant's 1997 Employee Stock Purchase Plan. (2)            S-1     333-36001      11/11/97    10.07
10.08     Registrant's 1999 Stock Option Plan. (2)                      10-K     000-23289      03/24/00    10.08
10.09     Registrant's 1999 Officer Stock Option Plan. (2)              10-K     000-23289      03/24/00    10.09
10.10     Form of Indemnity Agreement entered into by Registrant         S-1     333-36001      11/11/97    10.08
          with each of its directors and executive officers. (2)
10.11     Employment Letter from the Registrant to Michael D.           10-Q     000-23289      05/11/00     10.1
          Greenbaum, Dated January 12, 2000. (2)
10.12     Senior Secured Convertible $5.5 Million Debenture              S-1     333-36001     11/11/97     10.12
          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.
10.15     Collaboration Agreement among Registrant, Sharp                S-1     333-36001     11/11/97     10.15
          Corporation and Itochu Corporation, dated November 25,
          1996 and Addendum No. 1 thereto, dated November 25, 1996.
10.16     Sales and Purchase Agreement between Registrant and            S-1     333-36001     11/11/97     10.16
          Itochu Corporation, Dated January 10, 1997. (1)
10.17     Stipulation of settlement dated March 3, 1999, between        10-K     000-23289     03/24/00     10.17
          the Registrant and lead counsel for the plaintiffs in
          class action litigation against the Registrant.
10.24     Sublease between the Registrant and Viking Freight, Inc.,      S-4     333-52083     05/07/98     10.24
          dat5ed February 9, 1998.
10.26     Employment Letter from the Registrant to Judson W.            10-K     000-23289     06/14/99     10.26
          Goldsmith dated November 12, 1998. (2)
10.27     Product Purchase Agreement between the Registrant and RCN     10-K     000-23289     06/14/99     10.27
          Operating Services, Inc., dated June 30, 1997.
10.28     Securities Purchase Agreement between Sprint Corporation       8-K     000-23289     09/24/99      10.1
          and the Registrant, dated August 30, 1999.
10.29     Warrant Agreement between Sprint Corporation and the           8-K     000-23289     09/24/99      10.2
          Registrant, dated as of September 9, 1999.

</TABLE>

                                       49

<PAGE>
<TABLE>
<CAPTION>

                                                                                           Incorporated by Reference
                                                                                           -------------------------
                                                                                               Date of
Exhibit   Exhibit                                                                              First         Exhibit       Filed
Number    Description                                                   Form      File No.     Filing        Number       Herewith
------    -----------                                                   ----      --------     ------        ------       --------
<S>                                                                     <C>      <C>           <C>           <C>           <C>
10.30     Amendment to Warrant Agreement between Sprint Corporation     10-K     000-23289     03/30/01     10.30
          and the Registrant dated as of April 21, 2000.
10.31     1999 Amended and Restated Investor Rights Agreement            8-K     000-23289     09/24/99      10.3
10.32     Amendment to 1999 Amended and Restated Investor Rights        10-K     000-23289     03/30/01     10.32
          Agreement
10.33     Form of 4% Convertible Class A Debenture due 2009.             8-K     000-23289     09/24/99      10.4
10.34     Form of 4% Convertible Class B Debenture due 2009.             8-K     000-23289     09/24/99      10.5
10.35     Securities Purchase Agreement between the Registrant and       8-K     000-23289     09/24/99      10.6
          certain investors, dated as of August 30, 1999.
10.36     Form of 4% Convertible Debenture due 2009.                     8-K     000-23289     09/24/99      10.7
10.37     Purchase of Equipment and Services Agreement between           8-K     000-23289     05/10/00      10.8
          Sprint/United Management Company and the Registrant,
          dated May 1, 2000.
10.38     Amendment #1 to Purchase of Equipment and Services            10-K     000-23289     03/30/01     10.38
          Agreement between Sprint/United Management Company and the
          Registrant, effective as of December 22, 2000.
10.39     Amendment #2 to Purchase of Equipment and Services            10-K     000-23289     03/30/01     10.39
          Agreement between Sprint/United Management Company and the
          Registrant, effective as of December 22, 2000.                  --            --           --        --           X
10.40     Change of Control Bonus Agreement entered into by                                                                 X
          Registrant and Michael D. Greenbaum dated as of August 30,
          2001. (2)                                                       --            --           --        --           X
10.41     Sprint Amendment #3 and Warrant Agreement of August 2001                                                          X
23.01     Consent of Independent Auditors.                                --            --           --        --           X
</TABLE>

          (1)  Confidential  treatment  has been granted with respect to certain
          portions  of this  agreement.  Such  portions  were  omitted  from the
          respective  filing and were filed  separately  with the Securities and
          Exchange Commission.

          (2) Represents a management agreement or compensatory plan.

(b) Reports on Form 8-K

          We  have  filed  the  following  current  reports  on Form  8-K  since
          September 30, 2001:

         1. On November 6, 2001, we filed a current report on Form 8-K to report
         that our fixed broadband wireless system has been commercially launched
         in Montgomery, Alabama by WorldCom.

         2. On November 7, 2001, we filed a current report on Form 8-K to report
         that our fixed broadband wireless system has been commercially launched
         in Tallahassee, Florida by WorldCom.

         3. On November 8, 2001, we filed a current report on Form 8-K to report
         that Michael D. Greenbaum, the Company's president and CEO, assumed the
         responsibilities  of Deborah L.  Burton,  the former vice  president of
         sales and marketing of the Company.

         4. On December 3, 2001, we filed a current report on Form 8-K to report
         that  the  Nasdaq  Listing  Qualifications  Panel  determined  that the
         Company  has  evidenced  compliance  with the  Nasdaq  Small Cap Market
         continued listing  requirements and that the Company's securities would
         continue to be listed on the Nasdaq Small Cap Market.

                                       50

<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 21, 2002               HYBRID NETWORKS, INC.

                             By:                      /s/ Michael D. Greenbaum
                                                      ------------------------
                                                        Michael D. Greenbaum
                                                        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 AND FINANCIAL OFFICER

 /s/ Michael D. Greenbaum                      Chief Executive Officer, Director           March 21, 2002
--------------------------------
     Michael D. Greenbaum

PRINCIPAL ACCOUNTING OFFICER

 /s/ Burke A. Ferrari                          Controller                                  March 21, 2002
--------------------------------
     Burke A. Ferrari

ADDITIONAL DIRECTORS

 /s/ James R. Flach                            Chairman, Board of Directors                March 21, 2002
--------------------------------
     James R. Flach

 /s/ Anand Khokha                              Director                                    March 21, 2002
--------------------------------
     Anand Khokha

 /s/ Phillip J. Kushner                        Director                                    March 21, 2002
--------------------------------
     Phillip J. Kushner

 /s/ Gary M. Lauder                            Director                                    March 21, 2002
--------------------------------
     Gary M. Lauder

 /s/ Cameron M. Rejali                         Director                                    March 21, 2002
--------------------------------
     Cameron M. Rejali
</TABLE>


                                       51
<PAGE>

HYBRID NETWORKS, INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

<TABLE>
<CAPTION>

ALLOWANCE FOR DOUBTFUL ACCOUNTS

                                           Additions     Additions
                             Balance at     Charged       Charged                      Balance
                              Beginning   to Costs and    to Other                      at End
 For the year ended:          of Period     Expenses      Accounts      Deductions     of Period
                            -----------   ----------     ----------    ------------   ----------
 <S>                         <C>           <C>           <C>           <C>            <C>
December 31, 2001               $  200         $ 681          --             --        $  881
December 31, 2000                  200            --          --             --           200
December 31, 1999                  200            --          --             --           200



 INVENTORY RESERVES

                                           Additions     Additions
                             Balance at     Charged       Charged                      Balance
                              Beginning   to Costs and    to Other                      at End
 For the year ended:          of Period     Expenses      Accounts      Deductions     of Period
                            -----------   ----------     ----------    ------------   ----------

December 31, 2001               $ 1,980        $ 866        $ --         $  (957)      $ 1,889
December 31, 2000                 2,842          235          --          (1,097)        1,980
December 31, 1999                 3,135          529          --            (822)        2,842
</TABLE>


                                       52