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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549
                                    FORM 10-K/A
                                  Amendment No.1
 X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

                    FOR THE YEAR ENDED DECEMBER 31, 2000, 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 January 31, 2001, there were outstanding 22,000,018 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 National Market was
approximately $100,352,000. 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.

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


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                                TABLE OF CONTENTS


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<S>             <C>                                                                                                        <C>
PART I
   ITEM 1       Business...............................................................................................     3
   ITEM 2       Properties.............................................................................................     8
   ITEM 3       Legal Proceedings......................................................................................     8
   ITEM 4       Submission of Matters to a Vote of Security Holders....................................................    10
PART II
   ITEM 5       Market for the Registrant's Common Equity and Related Stockholder Matters..............................    11
   ITEM 6       Selected Financial Data................................................................................    12
   ITEM 7       Management's Discussion and Analysis of Financial Condition and Results of Operations..................    13
   ITEM 7A      Quantitative and Qualitative Disclosures About Market Risk.............................................    23
   ITEM 8       Financial Statements...................................................................................    24
   ITEM 9       Changes in and Disagreements With Accountants on Accounting and Financial Disclosure...................    46
PART III
   ITEM 10      Directors and Executive Officers of the Company........................................................    47
   ITEM 11      Executive Compensation.................................................................................    47
   ITEM 12      Security Ownership of Certain Beneficial Owners and Management.........................................    47
   ITEM 13      Certain Relationships and Related Transactions.........................................................    47
PART IV
   ITEM 14      Exhibits, Financial Statement Schedules and Reports on Form 8-K........................................    48
Signatures.............................................................................................................    51
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Exhibits


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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

OVERVIEW

         We design, develop, manufacture, and market products designed primarily
for wireless systems that provide high-speed access to the Internet for business
and consumers. Our products are designed to remove the bottleneck in the
connection to the end-user, which greatly reduces the time required to access
bandwidth-intensive information on the Internet. Our customers are principally
wireless system operators and national and regional telephone companies. We
offer an alternative to digital subscriber line and cable for high-speed
Internet access for small businesses and residential subscribers.



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



         Our products are used by broadband wireless operators at their base
stations, or head ends, to connect Internet subscribers to the operator's
networks to give the subscribers high-speed Internet access. Our head end
products provide systems that allow the operators to manage their networks.



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



         In 2000, major Hybrid systems are used in 18 markets worldwide
including 11 markets for Sprint Corp. Hybrid systems are now used in more than
70 markets on six continents. We believe the demand for high-speed Internet
access will continue to grow internationally and domestically.



         We were 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

         TECHNOLOGY

         We have a scalable and deployable system with field-tested technology
that continues to evolve. We have developed solutions to multi-path interference
and frequency drift and have incorporated these solutions into our current
products. We continue to evolve and improve our technology through extensive
deployments and are now able to service up to thousands of subscribers in one
cell. We are also continuing to work in conjunction with system operators to
continue to refine our technology in accordance with their needs. Our products
support two-way transmission on either wireless or cable systems as well as
asymmetric telephone return or router return.

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         Our Series 2000 system is expandable from an entry-level system to
large systems that are designed to serve up to 20,000 routers/modems. It has
been successfully deployed by wireless operators in systems that utilize
multiple antennas at the head end to increase capacity. Each of the multiple
return antennas is pointed in a slightly different direction, to increase the
capacity of the available return frequency spectrum.


         Downstream Optimization


         Our patented proprietary sub-channelization technology splits a
standard 6 MHz channel into three 2 MHz sub-channels for downstream
transmission, providing greater service flexibility and minimizing the effects
of multi-path interference in wireless systems. Sub-channels mitigate the
effects of interference between transmitters and allow flexible sectorization in
large installations. They can also be loaded differently to provide different
grades of service. Our patented 2 MHz sub-channelization allows our products to
serve the newer wireless communication services bands, which are 5 and 10MHz
wide.


         Upstream Optimization

         Our technology allows an operator's group of subscribers to share many
160 to 600 kHz bandwidth return channels. This provides redundancy and provides
the resistance to the interference common in large wireless installations,
especially those with multiple return sectors. Narrow channels allow smaller
antennas and lower power transceivers than are needed for conventional 1.6 to 2
MHz TDMA channels.

         Our proprietary software not only allows subscribers to share many
return channels, but also allows some to burst into a continuous transmission
state to transfer or send large amounts of data upstream. The operator can
control the parameters to optimize performance for business users yet still
provide other users access to capacity. It is usual for some operators to set up
two or three groups of return channels, often with different bandwidths so as to
provide different service levels or groups for business and residential
customers.

         Alliances


         Our products are integrated with other telecommunications equipment to
create a complete wireless system. In 2000, Hybrid entered agreements with two
global systems integrators, Andrew Corporation and Thomcast Communications, as
well as with system integrators in targeted markets. Each of these system
integrators offers wireless operators a complete turnkey system that integrates
our products with the associated radio and Internet equipment needed to deploy a
wireless system.


         PRODUCTS

         Head end Equipment

         CYBERMANAGER 2000. The CyberManager 2000 (CMG-2000) is our proprietary
subscriber and network management workstation and allows the operator to set the
service levels or groups, for both business and residential end-users. The
CMG-2000 uses our software to provide the system administrator interface to the
upstream and downstream routers and end-customer equipment. The CMG-2000 has a
10/100BaseT (Ethernet) interface to connect to a fast Ethernet switch in the
head end.


         CYBERMASTER DOWNSTREAM ROUTER. The CyberMaster Downstream Router
(CMD-2000B) is a rack-mounted industrial microcomputer. It supports our
proprietary Serial Interface and Quadrature Amplitude Modulation, or QAM, cards,
which are used for downstream routing and for 64-QAM downstream modulation. The
CMD-2000 has a 10/100BaseT interface to connect to a fast Ethernet switch within
the head end.



         CYBERMASTER UPSTREAM ROUTER QPSK RETURN. The Cybermaster upstream
router is a rack-mounted industrial microcomputer. The product houses dual
Quaternary Phase Shift Keying, or QPSK, receiver cards that demodulate upstream
QPSK signals. The CMU-2000-14CB has a 10/100BaseT interface to connect to a fast
Ethernet switch at the head end.


         Wireless Broadband Router

         The Multi-User Wireless Broadband Router supports 10 Mbps, 64-QAM
downstream data transmission on

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both wireless and cable systems and upstream transmission using a wireless or
cable return, telephone modem or router. The current production router family
includes the WBR-5, WBR-20, and WBR-60 with capacities of 5, 20, and 60
networked devices respectively, with their own distinct IP addresses. These
units have a number of security features including system authentication and
user ID.

         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
and regional telephone companies. A small number of customers have traditionally
accounted for a large portion of our net sales. In 2000, Sprint Corporation
accounted for 54% of our gross sales, while Look Communications, a
Canadian-based service provider, accounted for 23% of our gross sales. We had
two customers that individually accounted for 31% and 28% of gross sales during
1999 and for 25% and 13% of gross sales in 1998.



         In 2000, Sprint purchased our products to support what we believe
constituted the largest number of MMDS deployments in the world during that
year. Look Communications made substantial purchases in connection with their
Canadian deployments. Overall international sales accounted for 24% of total
sales during the year, virtually all of which were to Look Communications, and
included deployments in Canada, Ireland, Nigeria, Korea, Peru, and Argentina.



         Sprint Corporation holds 4,066,466 shares of our common stock and
warrants to purchase $8.4 million principal amount of convertible debentures
which is convertible into 2,946,622 shares of our common stock. 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.


         Prior to 2000, most of our sales were to cable customers. However,
these sales represented only 6% of our total sales in 2000 and they will
continue to represent a small portion of net sales in the future.

SALES AND MARKETING

         Sales in 2000 were made primarily to companies in the United States and
Canada. Sales are made through our field sales force as well as global and
regional system integrators.

         Customer internal procedures related to the completion of the
evaluation and approval of the large capital expenditures that are typically
required to purchase our products can result in purchasing delays. Customers
usually engage in a significant technical evaluation before making a purchase
commitment and 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. As of
December 31, 2000, the total amount of shipments not recognized as revenue due
to acceptance or testing criteria or because they were sales to a distributor
were $5.6 million.

          Our product sales backlog on February 28, 2001 was $2.7 million 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, 2000 was $274,000.


         Our marketing efforts are targeted to broadband wireless system
operators in the U.S. and abroad. Many of our international opportunities are
marketed in tandem with one or more of our system integrators who often provide
in-country support. Concentrated efforts in 2000 and 2001 have been, and will
be, in the areas of South America, Australia, Korea, Malaysia, and China.


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MANUFACTURING

         We configure, test, and perform quality assurance procedures on the
final product at the Hybrid facility. 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 client routers are manufactured by Sharp Corporation
through an agreement we have had since early 1997 with Sharp and its
distributor, Itochu Corporation. We have not developed an alternative
manufacturing source given the quality of the Sharp product and our limited
volumes. We continue cost reduction efforts in response to market pressures to
reduce our prices. Given that Sharp remains our only manufacturing source of our
routers and production rates remain level, our ability to reduce the
manufacturing costs may be limited.

         Our CyberManager 2000 is built on the Ultra 10/Solaris platform by
installing our proprietary network subscriber and network management software.
Our CyberMaster Downstream Router and CyberMaster Upstream Router are built on
Intel's Pentium-based PCI/ISA-based computer cards installed in a standard
rack-mounted chassis from Industrial Computer Source. Our proprietary software,
Hybrid OS, is overlaid on a standard Berkeley Systems operating system for the
CMD and CMU.


         We are dependent upon these and other key suppliers for a number of
components within our Series 2000 products. The WBR series routers use a Texas
Instrument chip set for the 64-QAM demodulator. Hitachi is the sole supplier of
the processors used in our routers. Intel is currently the sole supplier for
certain components used in our products. 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, or our inability
to reduce component costs, could adversely affect our business.


         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

         As of December 31, 2000, our research and development staff consisted
of 20 full-time employees, and eight local consultants. To supplement our
research and development efforts, we have hired a consulting firm in India to
work on various projects. Our total research and development expenses for 2000,
1999, and 1998 were $6,715,000, $4,191,000, and $7,771,000, respectively. Our
research and development during 2000 was directed primarily towards improving
the performance of our 2-way wireless products and reducing the cost of our
routers. We enhanced our return product software and increased the capacity of
the CMG 2000 and the WBR multi user modem.

         In 2001, we are continuing our efforts to reduce the cost of
manufacturing and improve the performance of client routers significantly
through design and engineering changes. Our efforts to improve performance are
focused on increasing coverage, capacity, and ease of installation.

         Coverage: We are working to enhance our patented downstream
sub-channels to enable the use of three modulation schemes. These include QPSK
and 16-QAM, which are more robust and will allow successful operation in
customer locations that may not currently be serviceable. Other features such as
diversity are under development.

         Capacity: Our new capability with multiple modulation schemes
(ThruWAVE) will have multiple downstream interleaving options. This has the
potential to increase the number of users that may share a return channel on the
upstream by 20-40%, improving total number of active users on the system.
Additionally, the use of QPSK and 16-QAM allows our customers the ability to put
multiple cells into a geographic region and reuse frequencies in these cells,
thus improving overall system capacity. We are also working on enhancements to
our MAC layer to further increase the capacity.

         Ease of Installation: Hybrid works continuously to simplify and reduce
the installation of the CPE. Having the ability to use a variety of modulation
schemes will allow the installation to proceed more rapidly. Hybrid is

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investigating, with numerous vendors (RF, wireless LAN, etc.), how to make the
overall CPE installation simpler.

COMPETITION

         We are primarily engaged in the business of manufacturing FBBW
high-speed Internet access equipment. Our market is intensely competitive and we
expect even more competition in the future. Most of our competitors are
substantially larger and have greater financial, technical, marketing,
distribution, customer support, and other resources, as well as greater name
recognition and access to customers than we have.

         The principal competitive factors in this market include:

-        Product performance and features, including downstream and upstream
         capacity, reliability, and operational stability
-        Cost of installation
-        Solutions to line-of-sight limitations
-        Integration with major operator's management and customer care systems
-        Price
-        Sales and distribution capability
-        Technical support
-        Relationships with broadband wireless system operators, affiliates and
         Internet Service Providers (ISPs)


     Our principal competitors in the wireless market include Vyyo, Inc., which
is marketing a technology based on the Data Over Cable Systems Interface
Specification, or DOCSIS, standard, and Cisco Systems, Inc., which is promoting
Vector Orthogonal Frequency Division Multiplex, or VOFDM. Other wireless
competitors include ADC, Com21, IOSpan, Aperto, and Adaptive Broadband.


     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. We are not making material sales into the broadband cable access
market because cable operators adopted the DOCSIS standard, to which our
products do not conform.

     Our Customer's Competition

         Our customers compete with providers of other forms of high-speed
Internet access, including digital subscriber lines, commonly referred to as
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. Although DSL poses a
significant competitive threat to the services offered by our customers, in some
instances, the availability of DSL service may be viewed as complementary to the
use of fixed broadband wireless products. In other words, some operators may
offer DSL service to customers in those locations where line-of-sight access may
not be optimal, while also offering wireless service in areas where
line-of-sight transmission is uninterrupted.


         As our focus has shifted to wireless operators, cable operators may now
be considered as competing with our customers for the end-user.

INTELLECTUAL PROPERTY

         Patents

         We rely on a combination of patent, trade secret, copyright and
trademark laws and contractual restrictions to establish and protect proprietary
rights in our products. We have received 14 patents from the U.S. Patent and
Trademark Office. These patents are directed to various aspects of wireless and
cable modems and head end 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 head end systems, and
various modulation and transmission schemes used in wireless cable modem
systems. We have other patent applications pending before the


                                      7
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U.S. Patent and Trademark Office. We have patent applications pending in a
number of foreign jurisdictions as well. It is unknown whether any pending or
foreign patent applications will result in the issuance of patents.

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

         Software Protection

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

         Infringement

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

         In the future, we may also file lawsuits to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of the proprietary rights of others. Such litigation, whether successful
or not, could result in substantial costs and diversion of resources.
Nonetheless, we may find it necessary to institute further infringement
litigation in the future.

EMPLOYEES

         As of December 31, 2000, we had 62 full-time employees. None of our
employees is represented by a collective bargaining unit with respect to his or
her employment, and we have never experienced an organized work stoppage. We use
consultants, contractors, and temporary workers to supplement our workforce and,
as of December 31, 2000, we had 18 of these in various areas.


ITEM 2.  PROPERTIES

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

ITEM 3.  LEGAL PROCEEDINGS

CLASS ACTION LITIGATION


         In June 1998, five class action lawsuits were filed in San Mateo County
Superior Court, California against us, two of our directors, four former
directors and two former officers. The lawsuits were brought on behalf of
purchasers

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of our common stock during the class period commencing November 12, 1997, the
date of our initial public offering, and ending June 1, 1998. In July 1998, a
sixth class action lawsuit was filed in the same court against the same
defendants, although the class period was extended to June 18, 1998. All six
lawsuits, which we refer to in this section as the state actions, also named as
defendants the underwriters in our initial public offering, but the underwriters
were dismissed from the cases.



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



         In July and August 1998, two class action lawsuits were filed in the
U.S. District Court for the Northern District of California, which we refer to
in this section as the federal actions. Both of the federal actions were brought
against the same defendants as the state actions, except that the second federal
action also named as a defendant PricewaterhouseCoopers LLP, or PWC, our former
independent accountants. The underwriters in our initial public offering were
named as defendants in the first federal action but were subsequently dismissed.
The class period for the first federal action is from November 12, 1997 to June
1, 1998, and the class period in the second Federal Action extends to June 17,
1998. The complaints in both federal actions claimed that we and the other
defendants violated the anti-fraud provisions of the federal securities laws, on
the basis of allegations that are similar to those made by the plaintiffs in the
state class action lawsuits. The other defendants and we denied these charges of
wrongdoing.



         We and the other parties, other than PWC, to the state actions and the
federal actions reached an agreement to settle the lawsuits in March 1999. The
agreement was approved by the U.S. District Court for the Northern District of
California in June 1999. In November 1999, the settlement of the State Actions
and the Federal Actions became final. The time to appeal from the Court's
approval of the settlement has expired. Under the settlement:



-    our  insurers  paid $8.8  million  on our behalf and on behalf of the other
     officer and director defendants; and



-    we issued  3,045,000  shares of common  stock to the  plaintiffs  and their
     counsel,  with 750,000  shares  issued in November  1999 and the balance in
     February 2000.


         As a result of the settlement and a related agreement between us and
our insurers, we have paid, and will not be reimbursed by our insurers for, $1.2
million in attorneys fees and other litigation expenses that would otherwise be
covered by our insurance, and we will not have insurance coverage for the
attorneys fees and expenses relating to the settlement that we incur in the
future.

SEC INVESTIGATION


         In October 1998, the Securities and Exchange Commission, or SEC, began
a formal investigation of us and other individuals with respect to our 1997
financial statements and public disclosures. During 1999, we produced documents
in response to the SEC's subpoena and cooperated with the investigation. A
number of current and former officers and employees and outside directors
testified before the staff of the SEC.


         In November 1999, the SEC staff attorneys informed us in writing that
the staff intended to file a civil injunctive action and seek civil monetary
penalties against us for alleged violations of the federal securities laws.


         On June 29, 2000, the SEC filed, in the United States District Court
for the Northern District of California, a complaint against us and three former
employees. On the same day, the court approved our settlement with the SEC and
entered judgment against us. The court's order enjoins us from violating the
books and records and related provisions of the federal securities laws but does
not include any monetary penalties or an injunction against the violation of the
antifraud provisions of the securities laws. At December 31, 2000, we had
accrued $775,000 in legal fees in connection with this settlement and related
continuing matters.



         We do not believe, based on current information, that the order will
have an adverse impact on our business or financial condition.


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PACIFIC MONOLITHICS LAWSUIT


         In March 1999, Pacific Monolithics, Inc., which has filed a voluntary
petition under Chapter 11 of the U.S. Bankruptcy Code and is suing as
debtor-in-possession, filed a lawsuit in Santa Clara County Superior Court,
California against us, two of our directors, four former directors, one of whom
was subsequently dismissed, a former officer and PWC. The lawsuit concerns an
agreement that we entered into in March 1998 to acquire Pacific Monolithics
through a merger, which was never consummated. The complaint alleged that we
induced Pacific Monolithics to enter into the agreement by providing it with our
financial statements, and by making other representations concerning our
financial condition and results of operations, which were false and misleading,
and further alleged that we wrongfully failed to consummate the acquisition. The
complaint claimed the defendants committed breach of contract and breach of
implied covenant of good faith and fair dealing, as well as fraud and negligent
misrepresentation. The complaint sought compensatory and punitive damages
according to proof, plus attorneys' fees and costs. In July 1999, the court
granted our motion to compel arbitration and to stay the lawsuit pending the
outcome of the arbitration.



         In October 1999, the plaintiff filed a demand for arbitration against
us and the individual defendants with the San Francisco office of the American
Arbitration Association. In the demand, the plaintiff alleged claims for breach
of contract, breach of implied covenant of good faith and fair dealing, fraud
and negligent misrepresentation arising out of the proposed merger between the
two companies. The demand sought unspecified compensatory and punitive damages,
pre-judgment interest and attorneys' fees and costs. In November 1999, the
individual defendants and we answered the demand by denying the claims and
seeking an award of attorneys' fees and costs under the agreement for the
proposed merger. The arbitration hearing was held in September 2000.



         On July 7, 2000, the parties participated in a mediation of the dispute
in San Jose, California before the Honorable (Ret.) Peter Stone of Judicial
Arbitration and Mediation Services. The mediation resulted in a stipulation for
settlement of the litigation. The parties formalized the terms of settlement by
entering a settlement agreement and mutual general release and covenant not to
sue dated August 21, 2000. Our former auditors also joined in this agreement.



         Under the terms of the agreement, in full settlement and compromise of
all of Pacific Monolithics' claims against us and our current and former
officers and directors, and in exchange for Pacific Monolithics full release, we
agreed to deliver to Pacific Monolithics the total sum of 213,333 shares of our
common stock, valued at $2,000,000 as of July 7, 2000.



         We delivered 213,333 shares of its common stock to Pacific Monolithics
on September 14, 2000. On September 19, 2000, we filed, and the Santa Clara
Superior Court entered, a request for dismissal with prejudice of the lawsuit.


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

         None.


                                       10
<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 de-listed
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 Nasdaq. 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 February 28, 2001, the closing price of our
common stock on the Nasdaq was $3.94.


<TABLE>
<CAPTION>
                                                                                            HIGH       LOW
                                                                                            ----       ---
<S>                                                                                          <C>        <C>
First Quarter 1998.....................................................................      $13.00     $4.00
Second Quarter 1998....................................................................       $8.75     $2.13
Third Quarter 1998.....................................................................       Not Traded
Fourth Quarter 1998....................................................................       $0.75     $0.13
First Quarter 1999.....................................................................       $1.25     $0.13
Second Quarter 1999....................................................................       $2.88     $0.38
Third Quarter 1999.....................................................................       $9.03     $2.00
Fourth Quarter 1999....................................................................      $20.00     $4.75
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
</TABLE>

STOCKHOLDERS

         As of December 31, 2000, there were approximately 660 holders of record
of our common stock

DIVIDENDS

         We have not paid any cash dividends on our capital stock to date. We
currently anticipate that we will retain any future earnings for use in our
business and do not anticipate paying any dividends in the foreseeable future.
The terms of our outstanding debentures and our agreement with Sprint prohibit
us from paying any cash dividends without the consent of the debenture holders
and Sprint.


                                       11
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA


         The following selected financial data should be read in conjunction
with our 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,
                                                --------------------------------------------------------
                                                   2000        1999        1998      1997(1)      1996
                                                ----------   --------- ----------   ---------  ---------
<S>                                             <C>          <C>       <C>          <C>        <C>
  STATEMENT OF OPERATIONS DATA:
 Net sales                                         22,795      13,016     12,418       4,120      2,962
 Cost of sales                                     23,139      13,341     14,046       8,899      3,130
                                                ----------   --------- ----------   ---------  ---------

 Gross profit                                        (344)       (325)    (1,628)     (4,779)      (168)

 Operating expenses:
   Research and development                         6,715       4,191      7,771       7,831      5,076
   Sales and marketing                             16,491       1,740      3,642       4,678      1,786
   General and administrative                      11,625       7,660      8,933       2,964      1,714
   Asset impairment charge                                          -      1,250           -          -
   Write off of technology license                      -           -      1,283           -          -
                                                ----------   --------- ----------   ---------  ---------

      Total operating expenses                     34,831      13,591     22,879      15,473      8,576
                                                ----------   --------- ----------   ---------  ---------

         Loss from operations                     (35,175)    (13,916)   (24,507)    (20,252)    (8,744)
 Interest income and other expense, net              (717)        171        779         316        257
 Interest expense                                  (1,311)     (8,447)      (897)     (1,666)       (28)
                                                ----------   --------- ----------   ---------  ---------

 Net loss                                       $ (37,203)   $(22,192) $ (24,625)   $(21,602)  $ (8,515)
                                                ==========   ========= ==========   =========  =========

 Basic and diluted net loss per share             $ (2.03)    $ (2.08)   $ (2.37)    $ (6.10)   $ (3.36)
                                                ==========   ========= ==========   =========  =========
 Shares used in basic and diluted
   per share calculation (2)                       18,309      10,678     10,410       3,541      2,535
                                                ==========   ========= ==========   =========  =========
</TABLE>

<TABLE>
<CAPTION>
                                                                      December 31,
                                         ---------------------------------------------------------------
                                            2000          1999          1998        1997(1)       1996
                                         ----------   -----------   -----------  -----------  ----------
<S>                                          <C>         <C>            <C>         <C>          <C>
   BALANCE SHEET DATA:
 Cash and cash equivalents                   $1,878      $ 13,394       $ 3,966     $ 27,143     $ 3,886
 Working capital                              6,324        11,527          (812)      23,795       6,944
 Total assets                                19,664        21,152        15,420       39,065      10,539
 Long-term debt                               5,632        23,978           419          654         472
 Total stockholders' equity (deficit)         2,957        (9,820)        2,702       27,303       7,709
</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.


                                       12
<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

         GENERAL

         We are a broadband access equipment company that designs, develops,
manufactures and markets wireless systems that provide high-speed access to the
Internet for businesses and consumers. 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 head
end routers, network and subscriber management tools and a line of wireless
end-user routers or modems.

         We currently sell our products primarily in the United States and
Canada, although we are pursuing opportunities in other countries and we think
that international sales may represent an increasingly greater proportion of our
sales in the future. Our customers primarily include broadband wireless system
operators and national and regional telephone companies. A small number of
customers have accounted for a substantial portion of our net sales, and we
expect that trend to continue. As a result, we have experienced, and expect to
continue to experience, significant fluctuations in our results of operations on
a quarterly and an annual basis. The sales cycle for our products has been
lengthy, and is subject to a number of significant risks, including customers'
budgetary constraints and internal acceptance reviews. 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.

         The market for high-speed network connectivity products and services is
intensely competitive and is characterized by rapid technological change, new
product development, product obsolescence, and evolving industry standards. Our
ability to develop and offer competitive products on a timely basis could have a
material effect on our business. The market for our products has historically
experienced significant price erosion over the life of a product, and we have
experienced, and expect to continue to experience, pressure on our unit average
selling prices. While we have initiated cost reduction programs to offset
pricing pressures on our products, there can be no assurance that we will keep
pace with competitive price pressures or improve our gross margins. Further, we
anticipate that in the future the sales mix of our products will be increasingly
weighted toward lower-margin products, thereby adversely affecting our gross
margins.

          At December 31, 2000, we had 62 full-time employees and 18 local
consultants, contractors, and temporary workers.


 REVENUE RECOGNITION


         We normally ship our products based upon a bona fide purchase order and
volume purchase agreement. We


                                       13
<PAGE>

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, 2000, the total amount of shipments not
recognized as revenue due to acceptance or testing criteria or because they
were sold to a distributor was $5.6 million, of which $4.9 million was in
connection with shipments to Sprint. Sprint's purchases of head end equipment
are generally subject to testing and acceptance procedures, and we anticipate
that we will continue to defer recognition of revenue for those shipments
until those procedures have been satisfied and the products have been
accepted by Sprint. In 2000, we recognized $16.1 million as gross revenue
from sales to Sprint Corporation






         The CMG-2000 includes installed software that manages the data
flowing to and from the users of the system and the outside world. Prior to
2000, we generally sold this product with a three-year technical support
contract for which we did not charge separately. Beginning in 2000, we began
offering a separate one-year technical support contract. As required by
Statements of Position 97-2 "Software Revenue Recognition", revenues from the
CMG-2000 are recognized upon customer acceptance and the revenues from the
support contract are recognized over the term of the contract on a
straight-line basis based on vendor-specific objective evidence of fair value.



         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. 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 us were at least $1 million. Thereafter, each additional shipment of
$1 million entitled Sprint to exercise an additional 10% of its warrants, until
all shipments aggregated $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. The amount of such shipments during the year
ended December 31, 2000 reached the $10,000,000 maximum and therefore, the
warrants became fully exercisable. We originally determined that this warrant
had an estimated value, using the Black-Scholes valuation model, of $16.1
million, which was fully applied as $2.5 million of sales discounts and $13.6
million of sales and marketing expense during the nine months ended September
30, 2000. As part of the year-end closing process, we determined that subsequent
events and market conditions necessitated further analysis of the warrants'
estimated value. In particular, the probability of Sprint's near term exercise
of its warrants diminished with our success in raising equity capital in
February 2001, Sprint's November 2000 announcement of its change in focus of its
broadband efforts for consumers and small businesses, and the recent drop in our
stock price. Consequently, we applied the Black-Scholes method using a longer
expected life of the warrants, that is, the full contract term, and arrived at
an estimated warrant value of $20.8 million. We applied the additional $4.7
million arising from this change in estimate as sales discounts in the fourth
quarter of 2000.


         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 on all head end
equipment and CPE equipment that ranges between 12 and 18 months, and we
typically provide a 90-day warranty on software media.

         NET LOSSES


         We incurred net losses for the years ended December 31, 2000, 1999, and
1998 of $37,203,000, $22,192,000, and $24,625,000, respectively. Our accumulated
deficit was $122,964,000 as of December 31, 2000. We expect to incur losses for
the foreseeable future.




RESULTS OF OPERATIONS

         YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998


                                       14
<PAGE>


         NET SALES. After non-cash sales discounts of $7,129,000 in 2000 and
$407,000 in 1999, net sales increased 75% to $22,795,000 in 2000 from
$13,016,000 in 1999 and 5% from $12,418,000 in 1998 to $13,016,000 in 1999.
There were no non-cash sales discounts in 1998. The non-cash sales discounts
recorded in 2000 are discussed above in "Revenue Recognition". Non-cash sales
discounts recorded in 1999 were in connection with the issuance of common stock
purchase warrants issued to two customers. We do not have any plans for issuing
additional warrants with sales agreements in the future. Broadband wireless
system operators accounted for 94% of sales in 2000, 48% in 1999, and 43% of
sales in 1998. The growth in revenues in 2000 compared to 1999 is primarily due
to increased sales of fixed broadband wireless equipment, particularly to Sprint
Corporation and Look Communication. Although Look Communications purchased a
substantial amount of our equipment in 2000, we expect to make limited sales to
them in 2001.


          International sales accounted for 24% of gross sales in 2000, 5% in
1999, and 0% in 1998. In 2000, Hybrid systems were deployed in Canada, Ireland,
Nigeria, Korea, Peru, and Argentina.


         GROSS MARGIN. Gross margin was negative 1.5% in 2000, negative 2.5% in
1999, and negative 13.1% in 1998. The improved gross margins from 1998 to 1999
was primarily due to an increase in sales volume coupled with a decrease in
fixed manufacturing costs. The improvement in gross margins from 1999 to 2000
was primarily due to an increase in the sales volume of higher margin head end
equipment as compared to total sales. We believe that in 2001 our existing
customers are likely to purchase a greater proportion of CPEs relative to head
end equipment as compared to 2000. We earn substantially higher margins on our
head end equipment than on CPEs and, consequently, expect that gross margin for
2001 will decline unless we either make substantial head end sales to new
customers or secure better margins on the CPEs that we sell to our current
customers.



         RESEARCH AND DEVELOPMENT. Research and development expenses include
ongoing head end 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 $6,715,000,
$4,191,000, and $7,771,000 for 2000, 1999, and 1998, respectively. Research and
development expenses included non-cash charges of $470,000, $668,000, and $0 in
2000, 1999, and 1998, respectively for compensation recognized on stock options
granted at exercise prices below fair market value to employees and fair value
for stock options granted to consultants engaged in research and development.
The increase in research and development expenses in 2000 as compared to 1999
was primarily due to an increase in personnel costs ($1,037,000) and consulting
fees ($1,024,000). The decrease in research and development expenses in 1999 as
compared to 1998 was due to reduced staffing and associated personnel costs
($1,780,000).



         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 $16,491,000, $1,740,000, and $3,642,000 during 2000, 1999, and 1998,
respectively and included charges related to the Sprint Warrant in 2000. Sales
and marketing expenses included non-cash charges of $47,000, $88,000, and $0 in
2000, 1999, and 1998, respectively for compensation recognized on stock options
granted at exercise prices below fair market value for employees and fair value
for stock options granted to consultants engaged in sales and marketing. In
2000, we incurred non-cash charges, totaling $13,671,000, due to the recording
of the fair value of the earned, but unexercised Sprint warrants described
above. The increase in sales and marketing expenses in 2000 as compared to 1999
was primarily due to the Sprint warrant charge ($13,671,000) and to an increase
in consulting expenses ($548,000). The decrease in sales and marketing expenses
in 1999 as compared to 1998 was due principally to a decrease in headcount and
related payroll costs ($818,000) and reduced expenses for advertising,
promotion and travel ($566,000). We expect to increase our sales and marketing
expenses as we expand our sales and marketing efforts in future periods.



         GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
mainly of salaries and benefits for administrative officers and support
personnel, travel expenses, legal, accounting, and consulting fees. General and
administrative expenses were $11,625,000, $7,660,000, and $8,933,000 during
2000, 1999, and 1998, respectively. General and administrative expenses included
non-cash charges of $287,000, $219,000, and $0 during 2000, 1999, and 1998,
respectively, for compensation recognized on stock options granted at exercise
prices below fair market value to employees and fair value for stock options
granted to consultants engaged in providing general and administrative services.
In addition, the 2000 general and administrative expenses also included non-cash
charges of $3,176,000 relating to the separation of two of our executives, and
$2,000,000 in connection with the Pacific Monolithics lawsuit (see Item 3 "Legal
Proceedings"). No such charges were recorded to general and administrative


                                       15
<PAGE>


expenses in 1999 and 1998. 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 ($2,624,000) that were
offset in part by increases in personnel related costs ($675,000). The decrease
in general and administrative expenses in 1999 as compared to 1998 was primarily
due to a decrease in legal fees ($1,110,000).



         INTEREST INCOME (EXPENSE) AND OTHER. We incurred net interest expense
of $2,028,000, $8,276,000, and $118,000 in 2000, 1999, and 1998, respectively.
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 the debentures resulting in a beneficial
conversion element valued at $1,170,000. The increase in net interest expense in
1999 compared to 1998 was due to amortization of the deemed discount on the
debentures of $7,400,000, which resulted from the difference between the
conversion price of the convertible debentures and the then market price of our
common stock. This deemed discount was amortized through December 31, 1999 (the
date on which the debentures became convertible). Excluding the $7,400,000
discount in 1999, the increase in interest expense in 1999 compared to 1998 was
due to accrued interest on the convertible debentures. Excluding the $1,170,000
premium paid in 2000 and the $7,400,000 deemed discount in 1999, interest
expense would have been $858,000 and $876,000 in 2000 and 1999, respectively.


         LIQUIDITY AND CAPITAL RESOURCES

         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 (in November
1997) and other debt and equity financing. By September 1999, our cash and cash
equivalents had been virtually exhausted. 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 our request, 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, 2000 into 2,946,622 shares of common stock common stock, on the
same terms as the convertible debentures referred to above. The warrants were
issued in consideration for Sprint's obligation to purchase at least $10 million
of our products. The amount of shipments in 2000 totaled at least $10,000,000.
Assuming that as of December 31, 2000, Sprint exercised all its warrants, it
would own 7,013,000 shares of our common stock, representing approximately 28.2%
of the 24,881,570 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, 2000 all other security holders exercised their options, warrants and
conversion privileges as well as Sprint, Sprint would own approximately 21.6% of
the 32,431,063 fully diluted shares of our common stock that would then be
outstanding. The actual and fully diluted shares at December 31, 2000 do not
include shares of underlying convertible debentures and warrants that we sold in
February 2001.

         In addition to the above financing, 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 will be convertible into shares of our common stock;

         o    a common stock purchase  warrant to purchase 833,333 shares of
              common stock at $9.00 per share (subject to adjustment) which is
              exercisable at the election of the Halifax Fund, or at our
              election at a price per share equal to the lower of $9.00 and 94%
              of the daily volume  weighted  average price; and

                                      16

<PAGE>


         o    an adjustment warrant.

         The adjustment warrant will be exercisable beginning on the 18th day
following the date (referred to in this discussion as the effective date) that
there is declared effective by the Securities and Exchange Commission the
registration statement that we are required to file with respect to the resale
of the shares of common stock underlying the debentures and warrants. The
adjustment warrant will only be exercisable, however, if the volume weighted
average sale price for our common stock is not more than $7.2694 per share. The
aggregate number of shares issuable pursuant to the exercise of the adjustment
warrant will be determined by dividing $8,625,000 by the adjustment price, as
defined below, and then subtracting the sum of the number of shares of common
stock previously issued pursuant to the conversion of the debenture and the
number issued upon any previous exercise of the adjustment warrant. The
adjustment price is the average of the 15 lowest daily volume weighted average
sale prices of our common stock as reported on Nasdaq, not including the three
lowest days, during the 65 trading day period following the effective date. The
adjustment price will not be below $3.50 per share. The adjustment warrant
terminates three months after the end of the 65 trading day adjustment period.
In consideration for such securities, Palladin paid an initial purchase price of
$7,500,000. We granted to Palladin in the purchase agreement rights of first
refusal, preemptive rights and other rights. Pursuant to the purchase agreement,
we also entered into a Registration Rights Agreement with Palladin.

         Net cash used in operating activities was $11,742,000, $8,017,000,
and $19,302,000 during 2000, 1999, and 1998, respectively. The 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 at exercise prices which
were lower than fair market on the date of grant to employees and fair value
for stock options granted to consultants, 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 $9,517,000 increase in current assets was primarily
attributable to an increase in net accounts receivable of $6,561,000, of
which $6,108,000 was accounted for by Sprint Corporation. Inventory increased
during 2000 by $1,067,000 after allowing for amounts related to unrecognized
revenues of $3,339,000 and $858,000 as of December 31, 2000 and 1999,
respectively. This net increase was related to the higher level of sales
activity in 2000. 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 operating activities
in 1998 was primarily due to our net loss of $24,625,000, partially offset by
non-cash charges of $6,336,000 and an increase in net current assets related
to operating activities of $1,013,000.

         Net cash used in investing activities was $788,000, $21,000, and
$3,014,000 in 2000, 1999, and 1998, respectively. Aggregate capital expenditures
for property and equipment (primarily computers, leasehold improvements,
furniture, fixtures and engineering test equipment) were $788,000, $21,000, and
$3,907,000 in 2000, 1999, and 1998, respectively. The significant decrease in
capital expenditures in 2000 and 1999 as compared to 1998 was primarily due to
higher expenditures for leasehold improvements in 1998 that were offset by
proceeds from short-term investments of cash reserves. 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, 2000, we did not have any material commitments for capital
expenditures.

         Net cash provided by financing activities of $1,014,000 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 was $17,981,000 in 1999
primarily due from proceeds from 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. Net cash used
in financing activities was $391,000 in 1998 primarily as a result of payment of
$478,000 on capital lease obligations, partially offset by net proceeds of
$87,000 from the exercise of stock options. At December 31, 2000, our liquidity
consisted of cash and cash equivalents of $1,878,000 and working capital of
$6,324,000.

         Other than the agreement with Palladin above, as of December 31, 2000
we have no available line of credit or other source of borrowings or financing.
We believe that, with respect to our current operations, our cash balance, after
giving effect to the financing completed in February 2001, plus revenues from
operations and non-operating cash receipts will be sufficient to meet our
working capital and expenditure needs through 2001. We may seek additional
financing during 2001 through debt, equity or equipment lease financing, or
through a combination of financing vehicles. There is no assurance that
additional financing will be available to us on acceptable terms, or at all,
when we

                                      17

<PAGE>


require it.

         SEASONALITY AND INFLATION


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


         NEW ACCOUNTING PRONOUNCEMENTS


         In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). The new standard requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Under SFAS 133, gains or losses resulting from changes
in the values of derivatives are to be reported in the statement of operations
or as a deferred item, depending on the use of the derivatives and whether they
qualify for hedge accounting. The key criterion for hedge accounting is that the
derivative must be highly effective in achieving offsetting changes in fair
value or cash flows of the hedged items during the term of the hedge. This
statement was amended by SFAS 137, issued in June 1999, and it is effective for
our financial statements for the year ended December 31, 2001. We currently
transact substantially all of our revenues and costs in U.S. dollars and have
not entered into any material amounts of derivative instruments. Accordingly,
management does not currently expect adoption of this new standard to have a
significant impact on us.


         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 EXPECT THAT WE WILL NEED ADDITIONAL CAPITAL TO CONTINUE OUR
         OPERATIONS


         Although we raised over $35 million in net proceeds from our initial
public offering in November 1997, our capital resources were nearly exhausted
by September 1999. In September 1999, we raised $18.1 million through the
issuance and sale of convertible debentures. In February 2001, we entered an
agreement with the Halifax Fund, L.P., under which we have raised $7.5
million and may raise an additional $7.5 million upon the exercise of
warrants issued to Halifax under the agreement. We believe we have sufficient
capital to continue operations through the year 2001. However, we expect that
we will need to raise additional cash in the future to support further growth
in our business. If we engage in research and development under our agreement
with Sprint, we may need additional capital.


         Our ability to raise additional  capital may be limited by a number
of factors, including:


         o    Sprint's veto rights, right of first refusal and other substantial
              rights and privileges,
         o    our dependence upon Sprint's business and, to a lesser extent, the
              business of our other customers,
         o    uncertainties and concerns resulting from our past financial
              reporting difficulties, class action litigation and related
              issues,

         o    our need to increase our work force quickly and effectively and to
              reduce the cost of our existing products and develop new products,

         o    uncertainty about our financial condition and results of
              operations and,
         o    our history of heavy losses,

         We can give no assurance that we will be able to raise the
additional capital we will need in the future. Further, any financing we may
be able to obtain may be on terms that are harmful to our business and our
ability to raise additional capital. We may not have sufficient capital or
other resources necessary to meet the requirements of our equipment purchase
agreement with Sprint or with other large customers in the future.

         WE ARE LARGELY DEPENDENT ON SPRINT FOR OUR FUTURE BUSINESS, AND SPRINT
         HAS A GREAT DEAL OF INFLUENCE OVER OUR CORPORATE GOVERNANCE.


                                      18

<PAGE>


         We expect that a substantial portion of our future business will
primarily come from wireless customers who hold spectrum license rights. Sprint
has acquired a significant portion of the wireless spectrum licenses in the
United States, so our future business will be substantially dependent upon
orders from Sprint. Sprint accounted for 54% of our gross sales in the year
ended December 31, 2000 and 84% of our net sales in the quarter ended March 31,
2001. Sprint uses our products in its initial offering of wireless Internet
access services. We have only a small number of other customers.


         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 March 31, 2001, approximately 27.9% 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 entered into an equipment purchase agreement with Sprint that
imposes substantial requirements on us. We must:


         o    meet Sprint's schedule for the manufacture and shipment of
              products;


         o    satisfy commitments for product development;



         o    satisfy installation and maintenance obligations; and



         o    license our technology to specified third parties.



         Sprint's obligation to purchase our products is subject to extensive
testing and acceptance procedures. If we fail to meet the requirements of the
agreement, we could be subject to heavy penalties, including the obligation
to license our intellectual property rights to Sprint on a royalty-free
basis. Sprint may also gain access to the key source code of our products.



         CHANGES IN PLANS OR CIRCUMSTANCES AT OUR LARGEST CUSTOMERS COULD
         SERIOUSLY HARM OUR SALES.



         In late 2000, Sprint, our largest customer for that year, completed a
reorganization of its operations including the business to which we sell our
products. As part of this reorganization, Sprint announced that it was focusing
its broadband efforts in 13 geographical markets in the residential and small
business areas. In light of these plans, we expect to sell a relatively smaller
amount of our higher margin head end equipment to Sprint as compared to our
earlier plans. This could reduce our sales and gross margins.



         In late 2000, Look Communications, our second largest customer for that
year, encountered difficulties in securing additional financing to support the
continued growth of its operations. We believe that Look Communications is
exploring alternatives to obtain additional financing but cannot be sure that it
will succeed. We did not make any sales to Look in the quarter ended March 31,
2001.



         WE HAVE NOT BEEN PROFITABLE, AND WE MAY NEVER BE PROFITABLE.
         WE EXPECT CONTINUING LOSSES IN THE FUTURE.



         We have not been profitable and we cannot assure you that we will ever
achieve or sustain profitability. We were organized in 1990 and have had
operating losses every year. Our accumulated deficit was $129 million as of
March 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. Our market has an increasing number of competing technologies
and competitors, and several of our competitors are significantly larger than
us. We have experienced pressure to lower the price of our products in the past
and we expect that these pressures will continue. We expect to incur losses in
the future.



         WE MUST BE ABLE TO QUICKLY AND EFFECTIVELY DEVELOP NEW PRODUCTS AND
         ENHANCEMENTS FOR OUR EXISTING PRODUCTS, AND DEPLOY OUR PRODUCTS ON A
         MUCH LARGER SCALE THAN WE HAVE IN THE PAST. WE MIGHT NOT BE


                                      19

<PAGE>

         ABLE TO MEET THESE CHALLENGES.


         To meet the existing and future demands of the broadband wireless
market, we must develop new products and enhance our existing products. Further,
Sprint and other potential large customers will require us to demonstrate that
our system can be successfully deployed on a much larger scale than it has been
in the past. We might be unable to meet these challenges.


         Sprint and other potential customers are also requesting the ability to
deploy equipment that can serve customers in locations that do not have direct
line-of-sight to the wireless operators' antenna. We are developing new products
to serve these subscribers. If another company is successful in deploying a cost
effective non line-of-sight system before we do, our business will be harmed.

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

         Before 2000, over half our sales were to cable customers. The cable
industry has now developed a standard known as the Data Over Cable System
Interface Specification. Our products do not conform to this standard, and we
have experienced substantially reduced sales to cable customers. We are now
focusing our business on the wireless industry, which is new and subject to
uncertainties.


         The wireless industry competes with other technologies, including
cable and digital subscriber lines to provide high-speed Internet access. The
cable and digital subscriber line technologies avoid the principal
disadvantage of wireless, which currently requires direct line-of-sight
between the wireless operator's antenna and the customer's location. Wireless
system operators also face a number of licensing and regulatory restrictions.
Conditions in the wireless market could change rapidly and significantly from
technological changes. Further, the development and market acceptance of
alternative technologies could decrease the demand for our products or make
them obsolete. There can be no assurance that the wireless industry market
will grow or that our products will be accepted in the emerging market. We
expect to face substantial competition in this market, which could limit our
sales and impair our business.


         WE FACE SIGNIFICANT COMPETITION, INCLUDING COMPETITION FROM LARGE
         COMPANIES.


         Our market is intensely competitive, and we expect even more
competition in the future. Several of our competitors are substantially larger
and have greater financial, technical, marketing, distribution, customer
support, greater name recognition and access to customers, than we have. One of
our principal competitors, Cisco, has recently announced that it has a
competitive wireless technology that will offer cost effective performance and
will operate successfully in environments in which it is difficult to obtain a
line-of-sight between the customer's location and the wireless operators'
antennae. Cisco's system may provide benefits superior to ours. We believe that
other companies also have similar products under development. Further, our
product development may be harmed by our lack of engineering resources. There
can be no assurance that we will be able to compete successfully in the future.

         We have agreed with Sprint that in the future we will allow third
parties to license our technology. These third parties may offer products that
compete with ours, using our technology. This could create significant new
competitive challenges for us. Our business depends upon the technical success
and working relationships of companies that produce other parts of our system.
These companies may decide to compete with us in the future, which could limit
our growth and harm our business.

         WE MAY BECOME INVOLVED IN LITIGATION OVER OUR INTELLECTUAL PROPERTY
         WHICH 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 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


                                      20

<PAGE>


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.



         MARKET PRESSURE TO REDUCE THE PRICE OF OUR PRODUCTS HAS HURT OUR
         BUSINESS, AND THE PRESSURE IS LIKELY TO INCREASE.



         We have experienced pressure from our customers, including Sprint, to
lower prices for our products, and we expect that this pressure to lower the
prices of our products will continue and increase. Market acceptance of our
products, and our future success, will depend in part on reductions in the unit
cost of our products. Our ability to reduce our prices has been limited by
several factors, including our reliance on one manufacturer of our modems and on
limited sources for other components of our products. Our research and
development efforts seek to reduce the cost of our products through design and
engineering changes. We have no assurance that we will be able to redesign our
products to achieve substantial cost reductions or that we will otherwise be
able to reduce our manufacturing and other costs. Any reductions in cost may not
be sufficient to improve our gross margins, which must substantially improve for
us to operate profitably.



         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 modem 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 modems, our ability to reduce our
manufacturing costs may be limited.



        We are dependent upon key suppliers for a number of 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.


         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.


         The sale of our products typically takes between six and twelve months.
Customers 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. Over
the last year, our industry has consolidated so that our principal and potential
customers are large service providers, including telecommunications companies.
These larger customers tend to have longer and more exhaustive review and
testing processes, which has increased our selling expenses and lengthened our
sales cycle.


         INTERNATIONAL SALES COULD INVOLVE GREATER RISKS.


         Although we sell our products primarily in the United States and
Canada, we are pursuing opportunities in other countries. We believe that
international sales may represent an increasingly greater proportion of our
sales in the future. In 2000, international sales accounted for 24% of our gross
sales, compared to 5% in 1999. 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, political and economic instability and
reduced intellectual property protection. To increase our international coverage
we rely on value added resellers, commonly known as VARs, or integrators. These
VARs may not remain our exclusive distributors. They also compete with each
other in some areas so it may be difficult for us to protect our international
distribution channels. Further, the frequency spectrum and amount of spectrum
available internationally varies from country to country. We


                                      21
<PAGE>

will depend on our VARs to develop radio equipment that complies with local
licenses, which may slow deployment in some international markets.



         WE DEPEND ON OUR KEY PERSONNEL, AND HIRING AND RETAINING QUALIFIED
         EMPLOYEES IS DIFFICULT.



         Our success depends in significant part upon the continued services of
our key technical, sales and management personnel. Our officers or employees can
terminate their relationships with us at any time. Our future success also
depends on our ability to attract, train, retain and motivate highly qualified
technical, marketing, sales and management personnel. There can be no assurance
that we will be able to attract and retain key personnel. The loss of the
services of one or more of our key personnel or our failure to attract
additional qualified personnel could prevent us from meeting our product
development goals and could significantly impair our business.


         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 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.



         GOVERNMENT REGULATION MAY NEGATIVELY IMPACT OUR FUTURE GROWTH



         We are subject to federal, state and local government regulation. For
instance, the regulations of the Federal Communications Commission, or FCC,
extend to high-speed Internet access products such as ours. Further,
governmental regulation of our customers may limit our growth and hurt our
business. Each of our customers has filed applications to operate within a
frequency spectrum regulated by the FCC. Delays in approvals by the FCC may
limit our future growth. If the FCC changes its decision to open the frequency
spectrum for full utilization, the future growth of the wireless industry could
be limited.



                                      22
<PAGE>


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



         The factors referred to in this section tend to cause our operating
results to vary substantially from quarter to quarter. These fluctuations have
caused the prices of our common stock to decline in the past and may reduce
these prices in the future.



         Our common stock trades on the Nasdaq National Market, which imposes
requirements to maintain the continued listing of our common stock on that
market, including that we must maintain a minimum bid price of $5.00 per share
for our common stock and have a market capitalization of at least $50 million.
Our common stock was de-listed from the Nasdaq National Market and did not trade
on Nasdaq between mid-June 1998 and July 6, 2000. We have received notices from
Nasdaq indicating that we failed to meet its requirements and that our common
stock may be de-listed from trading on the Nasdaq National Market. We have until
June 6, 2001, to comply with the $50 million market capitalization requirement,
and we must maintain this for a minimum of 10 consecutive days. Further, we have
until July 2, 2001 to satisfy the $5 minimum bid price per share and we must
maintain this price for 10 consecutive days. After this period, we could appeal
to Nasdaq for a hearing regarding de-listing our common stock from the Nasdaq
National Market. We could also seek to list our common stock on the Nasdaq Small
Cap Market.



         De-listing of our common stock or listing on the Nasdaq Small Cap
Market 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.


                                      23
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                  INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA



<TABLE>
<S>                                                                                                  <C>
Independent Auditor's Report......................................................................... 25
Financial Statements:
Balance Sheets as of December 31, 2000 and 1999...................................................... 26
Statements of Operations for the Years Ended December 31, 2000, 1999, and 1998....................... 27
Statement of Stockholders' Equity (Deficit) for the Years Ended December 31, 2000, 1999, and  1998... 28
Statements of Cash Flows for the Years Ended December 31, 2000, 1999, and 1998....................... 29
Notes to Financial Statements........................................................................ 30
Supplementary Financial Data:
Selected Quarterly Financial Data (Unaudited). Two years ended December 31, 2000..................... 46
</TABLE>



                                       24
<PAGE>

                          INDEPENDENT AUDITOR'S REPORT

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

         We have audited the accompanying balance sheets of Hybrid Networks,
Inc. as of December 31, 2000 and 1999, 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, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Hybrid Networks,
Inc. as of December 31, 2000 and 1999, and the results of its operations and its
cash flows for each of the years in the three year period ended December 31,
2000, in conformity with generally accepted accounting principles.


/s/ HEIN + ASSOCIATES LLP

HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
February 16, 2001


                                      25
<PAGE>

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


<TABLE>
<CAPTION>
                                                                                                   December 31,
                                                                                             2000              1999
                                                                                             -----             ----
<S>                                                                                       <C>                 <C>
                                         ASSETS
Current assets:
     Cash and cash equivalents                                                               $ 1,878            $ 13,394
     Accounts receivable, net of allowance for doubtful accounts
                    of $200 in 2000 and 1999 (Includes related party receivables
                    of $6,164 and $56 at December 31, 2000 and 1999, respectively)             7,699               1,138
     Inventories (Includes inventory subject to acceptance by related party of $2,472 and
             $0 at December 31, 2000 and 1999, respectively)                                   7,303               3,755
     Prepaid expenses and other current assets                                                   519                 234
                                                                                            --------              ------

             Total current assets                                                             17,399              18,521
Property and equipment, net                                                                    2,000               2,244
Intangibles and other assets                                                                     265                 387
                                                                                            --------              ------

             Total assets                                                                   $ 19,664            $ 21,152
                                                                                            ========              ======

                    LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
   Current portion of capital lease obligations                                                   29                 336
   Accounts payable                                                                            4,529               2,035
   Accrued liabilities and other (Includes deferred revenue from a related party of
                    $3,710 and $16 at December 31, 2000 and 1999, respectively)                6,517               4,623
                                                                                            --------              ------
             Total current liabilities                                                        11,075               6,994
Convertible debentures (Includes related party convertible debenture
                    of $1 and $11,139 at December 31, 2000 and 1999, respectively)             5,500              23,827
Capital lease obligations, less current portion                                                    -                  29
Other long-term liabilities                                                                      132                 122
                                                                                            --------              ------
             Total liabilities                                                                16,707              30,972
                                                                                            --------              ------
Commitments and contingencies ( Notes 6,8,9, and 10)

Stockholders' equity (deficit):
     Convertible preferred stock, $.001 par value:
     Authorized: 5,000 shares;
     Issued and outstanding: no shares in 2000 or 1999                                             -                   -
   Common stock, $.001 par value:
     Authorized: 100,000 shares;
     Issued and outstanding: 21,935 shares in 2000 and
       11,481 shares in 1999                                                                      22                  11
   Additional paid-in capital                                                                125,899              75,823
   Unrealized gain on available-for-sale securities                                                -                 107
   Accumulated deficit                                                                      (122,964)            (85,761)
                                                                                            --------            --------

             Total stockholders' equity (deficit)                                              2,957              (9,820)
                                                                                            --------            --------

             Total liabilities and stockholders' equity (deficit)                           $ 19,664            $ 21,152
                                                                                            ========            ========
</TABLE>



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



                                      26
<PAGE>

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


<TABLE>
<CAPTION>
                                                                                                         Years Ended December 31,
                                                                                                        --------------------------
                                                                                                    2000         1999         1998
                                                                                                    -----        -----        ----
<S>                                                                                              <C>          <C>        <C>
 Net sales
           Products (Includes related party sales of $8,911, $99, and $0 for the
                  years ended December 31, 2000, 1999, and 1998, respectively)                     $21,711      $12,499    $ 12,039
           Services and software (Includes related party sales of $263, $28, and $0 for the
                   years ended December 31, 2000, 1999, and 1998, respectively)                      1,084          517         379
                                                                                                 ---------    ---------   ---------
 Total net sales                                                                                    22,795       13,016      12,418
 Cost of sales ( Includes related party cost of goods sold of $10,876,$58, and $0
           for the years ended December 31, 2000, 1999, and 1998, respectively)                     23,139       13,341      14,046
                                                                                                 ---------    ---------   ---------

 Gross loss                                                                                           (344)        (325)     (1,628)
                                                                                                 ---------    ---------   ---------

 Operating expenses:
   Research and development                                                                          6,715        4,191       7,771
   Sales and marketing (Includes expense of $13,671, $0, and $0 to record the fair value
           of warrants issued to a related party during the years ended December 31, 2000,
           1999, and 1998, respectively)                                                            16,491        1,740       3,642
   General and administrative                                                                       11,625        7,660       8,933
   Asset impairment charge                                                                               -            -       1,250
   Write off of technology license                                                                       -            -       1,283
                                                                                                 ---------    ---------   ---------

      Total operating expenses                                                                      34,831       13,591      22,879
                                                                                                 ---------    ---------   ---------

        Loss from operations                                                                       (35,175)     (13,916)    (24,507)
 Interest income and other expense (Includes expense for inducement to convert related
           party convertible debenture of $711, $0, and $0 for the years ended
           December 31, 2000, 1999, and 1998, respectively)                                           (717)         171         779
 Interest expense (Includes related party interest expense of $316, $4,632, and $0
           for the years ended December 31, 2000, 1999, and 1998, respectively)                     (1,311)      (8,447)       (897)
                                                                                                 ---------    ---------   ---------
        Net loss                                                                                 $ (37,203)   $ (22,192)  $ (24,625)
                                                                                                 ---------    ---------   ---------
                                                                                                 ---------    ---------   ---------

 Basic and diluted loss per share                                                                  $ (2.03)     $ (2.08)    $ (2.37)
                                                                                                 ---------    ---------   ---------
                                                                                                 ---------    ---------   ---------

 Shares used in basic and diluted per share calculation                                             18,309       10,678      10,410
                                                                                                 ---------    ---------   ---------
                                                                                                 ---------    ---------   ---------
</TABLE>



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



                                      27

<PAGE>

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


<TABLE>
<CAPTION>

                                              Preferred Stock   Common Stock    Additional   Compre-     Accumu-           Compre-
                                             ----------------  -------------     Paid-in     hensive     lated             hensive
                                             Shares   Amount   Shares   Amount   Capital   Income(loss)  Deficit    Total   loss
                                            -------- -------- -------- -------- --------- ------------- ---------  ------- -------

<S>                                          <C>      <C>       <C>     <C>    <C>           <C>     <C>        <C>        <C>
 Balances,  January 1, 1998                    -      $ -     10,345    $ 10   $ 66,145      $ 92    $ (38,944) $ 27,303
   Exercise of common stock options            -        -        127       -         87         -            -        87
   Grant of stock bonus awards                 -        -          1                  5         -            -         5
   Charge due to acceleration of options       -        -          -       -         24         -            -        24
   Reclassification for gains
     included in net loss                      -        -          -       -          -       (92)           -       (92)  $    (92)
   Net loss                                    -        -          -       -          -         -      (24,625)  (24,625)   (24,625)
                                                                                                                           --------

   Comprehensive loss                          -        -          -       -          -         -            -         -   $(24,717)
                                          -------    ----    -------   -----   ---------     ----   ----------  --------   =========

 Balances,  December 31, 1998                  -        -     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 (Includes related
     party amounts of $4,494)                  -        -          -       -      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 (Includes $12,118 of
     of convertible debentures converted
     by related party)                         -        -      6,691       7     19,930         -            -    19,937
   Stock Bonus                                 -        -          3       -         27         -            -        27
   Sales discount recognized on issuance of
      warrants to related party                -        -          -       -     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 (Includes related party
      amounts of $44)                          -        -          -       -         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
                                          =======    ====    =======   =====   =========     ====   ==========  ========

</TABLE>



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



                                      28
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                        YEARS ENDED DECEMBER 31,
                                                                                                       -------------------------
                                                                                                      2000       1999       1998
                                                                                                      ----       ----       ----

<S>                                                                                                 <C>        <C>        <C>
 Cash flows from operating activities:
   Net loss                                                                                         $ (37,203) $ (22,192) $ (24,625)
   Adjustments to reconcile net loss to net cash used in operating activities:
      Depreciation and amortization                                                                     1,139      1,323      1,883
      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          -          -
      Asset impairment charge                                                                               -          -      1,250
      Provision for doubtful accounts                                                                       -          -        200
      Provision for excess and obsolete inventory                                                        (862)       529      1,691
      Compensation recognized upon issuance of stock and stock options                                  4,596      1,031          -
      Common stock issued to induce conversion of debenture (Includes expense for inducement
          to convert related party convertible debenture)                                               1,170          -          -
      Beneficial conversion of convertible debentures (Includes related party amount of
          $90 for the year ended December 31, 2000)                                                       149          -          -
      Sales discounts recognized on issuance of warrants to customers (Includes discounts for a
          related party of $20,800  and $0 for the year ended December 31, 2000 and 1999,
          respectively)                                                                                20,800        407          -
      Stock bonus                                                                                          27          -          5
      Charge for accelerated vesting of options                                                             -          -         24
      Interest added to principal of convertible debentures (Includes interest to a related party of
          $226 and $138 for the year ended December 31, 2000 and 1999, respectively)                      368        226          -
      Gain on available for sale of securities                                                           (107)       107          -
      Write off technology license                                                                          -          -      1,283
      Change in assets and liabilities:                                                                     -
        Restricted cash                                                                                    -         515       (515)
        Accounts receivable                                                                            (6,561)       295       (505)
        Inventories                                                                                    (2,686)       940       (645)
        Prepaid expenses and other current assets                                                        (270)       630       (502)
        Accounts payable                                                                                2,494        (28)      (222)
        Other long term liabilities                                                                         8         68          -
        Accrued liabilities and other                                                                   3,196        738      1,376
                                                                                                     --------  ---------   --------
        Net cash used in operating activities                                                         (11,742)    (8,017)   (19,302)
                                                                                                     --------  ---------   --------

 Cash flows from investing activities:
   Purchase of property and equipment                                                                    (788)       (21)    (3,907)
   Disposal of property and equipment                                                                       -          -         74
   Change in other assets                                                                                   -          -        (74)
   Purchase of short-term investments                                                                       -          -    (11,772)
   Proceeds from disposal of short-term investments                                                         -          -     12,665
                                                                                                     --------  ---------   --------
        Net cash used in investing activities                                                            (788)       (21)    (3,014)
                                                                                                     --------  ---------   --------

 Cash flows from financing activities:
   Repayment of capital lease obligations                                                                (335)      (465)      (478)
   Net proceeds from issuance of common stock                                                           1,349        345         87
   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 (used in) financing activities                                             1,014     17,981       (391)
                                                                                                     --------  ---------   --------
 Increase (Decrease) in cash and cash equivalents                                                     (11,516)     9,943    (22,707)
 Cash and cash equivalents, beginning of period                                                        13,394      3,451     26,158
                                                                                                     --------  ---------   --------
 Cash and cash equivalents, end of period                                                             $ 1,878   $ 13,394    $ 3,451
                                                                                                     ========  =========   ========

 SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
   Common stock issued to settle class action liability                                               $ 1,303      $ 386        $ -
   Property and equipment acquired under capital leases                                                     -          -        280
   Common stock issued in conversion of convertible debt                                               18,694          -          -
 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Interest paid                                                                                          855        710        802
   Income taxes paid                                                                                        -          -          -

</TABLE>



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



                                      29
<PAGE>

                              HYBRID NETWORKS, INC
                          NOTES TO FINANCIAL STATEMENTS

1.  FORMATION AND BUSINESS OF THE COMPANY

         The Company, which was incorporated in Delaware on June 6, 1990, is a
broadband access equipment company that designs, develops, manufactures and
markets wireless and cable systems that provide high-speed access to the
Internet and corporate intranets for both businesses and consumers. The
Company's products remove the bottleneck over the local connection to the end
user which 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 $122,964,000 as of December 31,
2000, and $85,761,000 as of December 31, 1999. 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, and over $18 million from the
issuance and sale of convertible debentures in September 1999, and in February
2001, the Company entered an agreement with a fund of the Palladin Group that
provided the Company with an initial $7.5 million in cash, and may provide the
Company up to an additional $7.5 million in the future, the Company is losing
money at a rate that will require it to raise additional capital in the future.


          The Company may seek additional financing during 2001 through debt,
equity or equipment lease financing or through a combination of financing
vehicles (including the possible exercise of warrants issued to Sprint
Corporation ("Sprint") as discussed in Note 6). The Company's ability to
continue as a going concern is dependent on obtaining additional financing to
fund its current operations and, ultimately, generating sufficient revenues to
obtain profitable operations. There is no assurance that the Company will be
successful in these efforts.

         At December 31, 2000, the Company's liquidity consisted of cash and
cash equivalents of $1,878,000 and working capital of $6,324,000. The Company's
indebtedness consisted of $5.5 million in convertible debentures.. The Company
believes that its cash balance, plus anticipated revenues from operations, and
non-operating cash receipts will be sufficient to meet the Company's working
capital and expenditure needs through the year 2001.

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.

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 value of
available-for-sale securities is based on market prices for the securities and
is equivalent to its carrying value. The fair values of capital leases and
convertible debentures are based upon borrowing rates that are available to the
Company for obligations with similar terms, collateral, and maturity. At
December 31, 2000, the estimated fair value of these liabilities approximate
their carrying values.


                                       30


<PAGE>

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 77% of its revenue in 2000 from two customers and
this concentration represents a risk to the Company. If there were significant
reductions in sales to these customers and 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 counterparties for all financial
instruments. The Company had accounts receivable from two customers at December
31, 2000 that together represented 98% of total accounts receivable. The
inability to collect receivables from either one of these customers 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 a
maturity at the time of purchase of three months or less. Instruments with a
maturity at the time of purchase of greater than three months but less than one
year from the date of purchase are included in short-term investments.

INVENTORIES

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

PROPERTY AND EQUIPMENT

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

INTANGIBLES AND OTHER ASSETS

         At December 31, 2000 and 1999, intangibles and other assets included
deferred financing costs relating to fees


                                      31
<PAGE>

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, 2000 and 1999 was $320,000 and
$213,000, 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, 2000, the total amount of
shipments not recognized as revenue due to acceptance or testing criteria or
because they were sold to a distributor was $5.6 million, of which $4.9 million
was in connection with shipments to Sprint. Sprint's purchases of head end
equipment are generally subject to testing and acceptance procedures and the
Company anticipates that it will continue to defer recognition of revenue for
those shipments until those procedures have been satisfied and the products have
been accepted by Sprint. In 2000, the Company recognized $16.1 million as gross
revenue from sales to Sprint.


         The CMG-2000 includes installed software that manages the data
flowing to and from the users of the system and the outside world. Prior to
2000, we generally sold this product with a three-year technical support
contract for which we did not charge separately. Beginning in 2000, we began
offering a separate one-year technical support contract. As required by
Statements of Position 97-2 "Software Revenue Recognition", revenues from the
CMG-2000 are recognized upon customer acceptance and the revenues from the
support contract are recognized over the term of the contract on a
straight-line basis based on vendor-specific objective evidence of fair value


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


                                     32
<PAGE>

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 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). The new standard requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Under SFAS 133, gains or losses resulting from changes
in the values of derivatives are to be reported in the statement of operations
or as a deferred item, depending on the use of the derivatives and whether they
qualify for hedge accounting. The key criterion for hedge accounting is that the
derivative must be highly effective in achieving offsetting changes in fair
value or cash flows of the hedged items during the term of the hedge. This
statement was amended by SFAS 137, issued in June 1999, such that it is
effective for the Company's financial statements for the year ended December 31,
2001. The Company currently transacts substantially all of its revenues and
costs in U.S. dollars and to date has not entered into any material amounts of
derivative instruments. Accordingly, management does not currently expect
adoption of this new standard to have a significant impact on the Company.

RECLASSIFICATION

         Certain reclassifications have been made to the 1999 and 1998 financial
statements in order to conform to the 2000 presentation. Such reclassifications
had no effect on the previously reported net loss.


4.  INVENTORIES

         Inventories are comprised of the following (in thousands):

<TABLE>
<CAPTION>
                                                                           2000       1999
                                                                         -------    -------
<S>                                                                      <C>        <C>
       Raw materials                                                     $ 2,633    $ 2,251
       Work in progress                                                    1,144        190
       Finished goods                                                      3,526      1,314
                                                                         -------    -------
                                                                         $ 7,303    $ 3,755
                                                                         =======    =======
</TABLE>


                                      33
<PAGE>

         At December 31, 2000 and 1999, finished goods inventory included
$2,730,000 and $0, 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 was $1,980,219 and
$2,842,000 at December 31, 2000 and 1999, respectively. The provision for excess
and obsolete inventory included in cost of sales was $235,000, $529,000, and
$1,691,000 for the years ended December 31, 2000, 1999, and 1998, respectively.


5.  PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                                                       December 31,
                                                                                  ---------------------
                                                                                     2000         1999
                                                                                  ----------   --------
<S>                                                                               <C>          <C>
       Machinery and equipment                                                    $  3,828     $  3,059
       Office furniture and fixtures                                                   747          747
       Leasehold improvements                                                        1,922        1,914
                                                                                  ----------   --------
                                                                                     6,497        5,720
       Less accumulated depreciation and amortization                               (4,497)      (3,476)
                                                                                  ----------   --------
                                                                                  $  2,000     $  2,244
                                                                                  ==========   ========
</TABLE>

         Furniture and equipment purchased under capital leases included in the
above table total $681,000 and $1,687,000 less accumulated amortization of
$391,000 and $1,422,000 as of December 31, 2000 and 1999, respectively.

         Depreciation and amortization expense related to property and equipment
was $1,139,000, $1,215,000, and $1,233,000 for the years ended December 31,
2000, 1999, and 1998, respectively.

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

6.  CONVERTIBLE DEBENTURES

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

         The debenture is collateralized by substantially all of the Company's
assets. The Company is prohibited from making plant or fixed capital
expenditures in excess of $5,500,000 and $11,000,000 during the 12 months ending
March 31, 2000 and 2001, respectively. Additionally, the Company is prohibited
from, among other things, declaring dividends, retiring any subordinated debt
other than in accordance with the debenture's terms, or distributing its assets
to any stockholder as long as the debenture remains outstanding.

         The Company's capital expenditures exceeded the maximum capital
expenditures allowed for the 12 months ending March 31, 1999. The holder has
waived this condition for the 12 month period ending March 31, 1999.


                                     34
<PAGE>

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 (accrued interest is
automatically added to principal quarterly)(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 (including accrued interest) (subject to adjustment).
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
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.

          Assuming as of December 31, 2000, that Sprint would exercise all of
its purchase warrants, it would own 7,013,068 shares of our common stock,
representing approximately 28.2% of the 24,881,570 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, 2000, all other security holders exercised
their options, warrants and conversion privileges as well as Sprint, Sprint
would own approximately 21.6% of the 32,431,063 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


                                      35
<PAGE>

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.

7.  ACCRUED LIABILITIES AND OTHER

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

<TABLE>
<CAPTION>
                                                                                     2000      1999
                                                                                    ------    ------
<S>                                                                                 <C>       <C>
       Accrued payroll and related accruals                                         $  813    $  173
       Accrued class action settlement and related legal expenses                      775     2,946
       Deferred revenue and customer deposits                                        3,916       797
       Other liabilities                                                             1,013       707
                                                                                    ------    ------
                                                                                    $6,517    $4,623
                                                                                    ======    ======
</TABLE>


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, 2000, the Company has accrued
$775,000 for loss contingencies arising from pending 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. (See Note 9) The amounts accrued
for pending litigation were $775,000, $2,946,000 and $399,000 at December 31,
2000, 1999 and 1998, respectively. The total amounts charged to operations in
connection with litigation expenses were $2,688,000, $3,312,000, and
$4,422,000 for the years ended December 31, 2000, 1999, and 1998,
respectively.


8.  COMMITMENTS

LEASE OBLIGATIONS

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


                                      36
<PAGE>

<TABLE>
<CAPTION>
                                                        Capital   Operating
                                                        Leases     Leases
                                                        -------   ---------
<S>                                                     <C>       <C>
       2001                                             $    30   $     899
       2002                                                             950
       2003                                                             976
       2004                                                             406
                                                        -------   ---------
       Thereafter                                            30   $   3,231
                                                                  =========
       Less amount representing interest                     (1)
                                                        -------
                                                             29
       Less current portion                                 (29)

                                                        -------
                                                        $     -
                                                        =======
</TABLE>

Rent expense for 2000, 1999 and 1998 was approximately $926,000, $1,064,000, and
$955,000, respectively.

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

EMPLOYMENT AGREEMENTS

         The Company has entered into employment agreements with two officers
and retention agreements with two others. The agreements provide for aggregate
annual salaries of $1,240,000 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 $1,240,000.



9.  CONTINGENCIES

CLASS ACTION LITIGATION

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

         The complaints in the State Actions claimed that the Company and the
other defendants violated the anti-fraud provisions of the California securities
laws, alleging that the financial statements used in connection with the
Company's initial public offering and the financial statements issued
subsequently during the class period, as well as related statements made on
behalf of the Company during the initial public offering and subsequently
regarding the Company's past and prospective financial condition and results of
operations, were false and misleading. The complaints also alleged that the
Company and the other defendants made these misrepresentations in order to
inflate the price of the Company's common stock for the initial public offering
and during the class period. The Company and the other defendants denied the
charges of wrongdoing.

         In July and August 1998, two class action lawsuits were filed in the
U.S. District Court for the Northern District of California (the Federal
Actions). Both of the Federal Actions were brought against the same defendants
as the State Actions, except that the second Federal Action also named as a
defendant Price Waterhouse Coopers, LLP (PWC),


                                      37
<PAGE>

the Company's former independent accountants. (The underwriters in the
Company's initial public offering were named as defendants in the first
Federal Action lawsuit but were subsequently dismissed.) The class period for
the first Federal Action is from November 12, 1997 to June 1, 1998, and the
class period in the second Federal Action extends to June 17, 1998. The
complaints in both Federal Actions claimed that the Company and the other
defendants violated the anti-fraud provisions of the federal securities laws,
on the basis of allegations that are similar to those made by the plaintiffs
in the state class action lawsuits. The Company and the other defendants
denied these charges of wrongdoing.

         The Company and the other parties (other than PWC) to the State Actions
and the Federal Actions reached an agreement to settle the lawsuits in March
1999, which agreement was approved by the U.S. District Court for the Northern
District of California in June 1999. In November 1999, the settlement of State
Actions and the Federal Actions became final. The time to appeal from the
court's approval of the settlement has expired. Under the settlement, (i) the
Company's insurers paid $8.8 million on the behalf of the Company and the
officer and director defendants, and (ii) the Company issued 3,045,000 shares of
common stock to the plaintiffs and their counsel (750,000 shares were issued in
November 1999, and 2,295,000 shares were issued in February 2000), representing
21.9% of the shares of the Company's common stock that were outstanding at the
end of February 2000. As a result of the settlement and a related agreement
between the Company and its insurers, the Company has paid, and will not be
reimbursed by its insurers for, $1.2 million in attorneys fees and other
litigation expenses that would otherwise be covered by its insurance, and the
Company does not have insurance coverage for the attorneys fees and expenses
relating to the settlement that it incurs in the future.

SEC INVESTIGATION

         In October 1998, the Securities and Exchange Commission began a formal
investigation of the Company and certain individuals with respect to the
Company's 1997 financial statements and public disclosures. The Company produced
documents in response to the Securities and Exchange Commission's subpoena and
cooperated with the investigation. A number of current and former officers and
employees and outside directors testified before the Securities and Exchange
Commission's staff.

         In November 1999, the SEC staff attorneys informed the Company in
writing that the staff intended to file a civil injunctive action and seek civil
monetary penalties against the Company for alleged violations of the federal
securities laws.

         On June 29, 2000, the SEC filed in the United States District Court for
the Northern District of California a complaint against the Company and three
former employees. On the same day, the court approved the Company's settlement
with the SEC and entered judgment against the Company. The court's order enjoins
the Company from violating the books and records and related provisions of the
federal securities laws but does not include any monetary penalties or an
injunction against the violation of the antifraud provisions of the securities
laws. At December 31, 2000, the Company has accrued $775,000 in legal fees in
connection with this settlement and related continuing matters

         The Company does not believe, based on current information, that the
order will have a material adverse impact on the Company's business or financial
condition.

PACIFIC MONOLITHICS LAWSUIT

         In March 1999, Pacific Monolithics, Inc. (which had filed a voluntary
petition under Chapter 11 of the U.S. Bankruptcy Code and is suing as
debtor-in-possession) filed a lawsuit in Santa Clara County Superior Court,
California against the Company, two of its directors, four former directors (one
of whom was subsequently dismissed), a former officer and PWC. The lawsuit
concerns an agreement that the Company entered into in March 1998 to acquire
Pacific Monolithics through a merger, which acquisition was never consummated.
The complaint alleged that the Company induced Pacific Monolithics to enter into
the agreement by providing it with financial statements, and by making other
representations concerning the Company's financial condition and results of
operations, which were false and misleading, and further alleged that the
Company wrongfully failed to consummate the acquisition. The complaint claimed
the defendants committed breach of contract and breach of implied covenant of
good faith and fair dealing, as well as fraud and negligent misrepresentation.
The complaint sought compensatory and punitive damages according to proof, plus
attorneys' fees and costs. In July 1999, the court granted the Company's motion
to compel arbitration and to stay the lawsuit pending the outcome of the
arbitration.


         In October 1999, the plaintiff filed a demand for arbitration against
the Company and the individual defendants with the San Francisco office of the
American Arbitration Association. In the demand, the plaintiff alleged claims
for


                                      38
<PAGE>

breach of contract, breach of implied covenant of good faith and fair
dealing, fraud and negligent misrepresentation arising out of the proposed
merger between the two companies. The demand sought unspecified compensatory
and punitive damages, pre-judgment interest and attorneys' fees and costs. In
November 1999, the Company and the individual defendants answered the demand
by denying the claims and seeking an award of attorneys' fees and costs
pursuant to the agreement for the proposed merger. The arbitration hearing
was scheduled to be held in September 2000.


         On July 7, 2000, the Parties participated in a mediation of the dispute
in San Jose, California before the Honorable (Ret.) Peter Stone of JAMS. The
mediation resulted in a Stipulation for Settlement of the litigation. The
Parties formalized the terms of settlement by entering a Settlement Agreement &
Mutual General Release and Covenant Not to Sue (the "Agreement") dated August
21, 2000. The Company's former auditors also joined in the Agreement.

         Pursuant to the terms of the Agreement, in full settlement and
compromise of all of Pacific Monolithics' claims against the Company and its
current and former officers and directors, and in exchange for Pacific
Monolithics full release thereof, the Company agreed to deliver to Pacific
Monolithics the total sum of 213,333 shares of the Company's common stock,
valued at $2,000,000 as of July 7, 2000.

         The Company delivered 213,333 shares of its common stock to Pacific
Monolithics on September 14, 2000. On September 19, 2000, the Company filed, and
the Santa Clara Superior Court entered, a Request for Dismissal with Prejudice
of the lawsuit.


10.  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 September 1999, the Board
authorized a Series J preferred stock with special voting rights; including the
right to elect two members of the Board and veto rights over the following:

         o    adopting an Annual Business Plan (as defined) or taking any
              actions that materially deviate from such plan;

         o    making any capital expenditures in excess of $2 million in the
              aggregate in any fiscal year, except to the extent contemplated
              in the Annual Business Plan;

         o    making any acquisition or disposition of any interests in any
              other person or business enterprise or any assets, in a single
              transaction or a series of related transactions, in which the
              fair market value of the consideration paid or received by the
              Company exceeds $1 million;

         o    organizing, forming or participating in any joint venture or
              similar entity involving the sharing of profits in which the
              assets or services to be contributed or provided by the Company
              to such joint venture or other entity have a fair market value in
              excess of $1 million;

         o    forming a subsidiary;

         o    issuing any common stock, preferred stock or other capital stock
              or any stock or securities (including options and warrants)
              convertible into or exercisable or exchangeable for common stock,
              preferred stock or other capital stock or amending the terms of
              any such stock or securities or any agreements relating thereto
              (other than employee stock options approved by the Board of
              Directors of the Company and common stock issued upon exercise
              thereof) or effecting any stock split or reverse stock split or
              combination;

         o    entering into any transaction between the Company, on the one
              hand, and any affiliate or associate of the Company (as defined),
              on the other, other than the payment of compensation and other
              benefits to employees and directors in the ordinary course of
              business;

         o    declaring or paying any dividend or other distribution with
              respect to the capital stock of the Company;


                                      39
<PAGE>

         o    incurring any indebtedness for borrowed money or capital lease
              obligations that are not expressly contemplated in the
              then-current Annual Business Plan in excess of $250,000 in the
              aggregate during any fiscal year;

         o    amending the Company's Certificate of Incorporation or Bylaws or
              creating or amending any stockholders' rights plan;

         o    declaring bankruptcy; or

         o    liquidating or dissolving the Company.

         None of the Series J preferred stock was outstanding at December 31,
2000.

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 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 are exercisable at any
time and expire 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 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. The remaining warrants are exercisable at any time and 70,240 expire in
June 2001 and 8,466 expire August of 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.

         In June 1999, the Company issued a five year warrant to purchase
210,000 shares of common stock at an


                                      40
<PAGE>

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.

         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.

A summary of outstanding warrants as of December 31, 2000 follows:

<TABLE>
<CAPTION>
     Number         Exercise     Expiration
  Outstanding        Price          Date
--------------  --------------  ---------------
<S>             <C>             <C>
      644,411     $    4.73        June 2001

      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

      210,000          0.50        June 2005

        8,466          4.73       August 2005

        5,802         10.34       August 2006
-------------

    4,358,770
=============
</TABLE>

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 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.


                                       41
<PAGE>

         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.

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, 1998                            2,024            1,926           5,885            3.06
           Options granted                           (1,445)           1,445           4,527            3.13
           Stock bonus award                             (1)               -               -               -
           Options canceled                             511             (509)         (1,871)           3.66
           Options exercised                                            (127)            (87)           0.70
                                                ------------      ------------    ------------
 Balances, December 31, 1998                          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
                                                ============      ============    ============
</TABLE>


         For the years ended December 31, 2000, 1999, and 1998, the weighted
average fair value of options granted was $12.25, $2.04, and $2.34 per share,
respectively.

         As of December 31, 2000, 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          1,037              5.74       $    0.50         611          $    0.50
 $1.08 to $2.19            397              3.02            2.14         175               2.08
 $3.63 to $5.13          1,111              3.75            3.74         371               3.86
 $5.31 to $8.78            653              5.29            7.35         195               8.31
$9.00 to $11.25            528              4.51            9.99          20              10.61
$12.19 to 19.75          1,345              4.17           16.60         281              17.03
                       ---------                                       -----
                         5,071              4.49       $    7.48       1,653          $    5.27
</TABLE>


                                       42
<PAGE>

         As of December 31, 1999 and 1998, options to purchase 1,658,000 and
917,000 shares were exercisable at an average weighted exercise price of $1.87
and $2.56 per share, respectively.

         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):

<TABLE>
<CAPTION>
                                                  Years Ended December 31,
                                      --------------------------------------------
                                         2000            1999             1998
                                      ---------       ----------       -----------

<S>                                   <C>             <C>              <C>
Net loss as reported                  $ (37,203)      $  (22,192)      $  (24,625)
                                      =========       ==========       ==========
Net loss - pro forma                  $ (42,857)      $  (23,061)      $  (25,109)
                                      =========       ==========       ==========
Net loss per share - as reported      $   (2.03)      $    (2.08)      $    (2.37)
                                      =========       ==========       ==========

Net loss per share - pro forma        $   (2.34)      $    (2.16)      $    (2.41)
                                      =========       ==========       ==========
</TABLE>

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

         In accordance with the provisions of SFAS 123, the fair value of each
option is estimated using the following weighted average assumptions for grants
during 2000, 1999, and 1998: dividend yield of 0%, volatility of 0% for options
issued prior to the Company's Initial Public Offering, 113% in 1998, 117% in
1999, and 124.7% in 2000, 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, 2000, no shares
had been purchased and all employees have withdrawn from the plan.

11. INCOME TAXES

         Provision for income taxes for each of the years ended December 31,
2000, 1999, and 1998 was $0.

     Total income tax benefit differed from the amounts computed by applying the
U.S. federal statutory tax rates to pre-tax income as follows:

<TABLE>
<CAPTION>
                                                                                   FOR THE YEARS ENDED
                                                                            --------------------------------
                                                                               2000        1999         1998
                                                                               ----        ----         ----
<S>                                                                          <C>         <C>          <C>
Total benefit computed by applying the U.S. statutory rate                  -34.00%     -34.00%      -34.00%
              Permanent differences                                           1.08%      11.40%        0.10%
              Change in valuation allowance                                  32.92%      22.60%       33.90%
                                                                            -------     -------      -------
                                                                                 0%          0%           0%
                                                                            =======     =======      =======
</TABLE>


                                       43
<PAGE>

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

<TABLE>
<CAPTION>
                                                                             December 31,
                                                                       ------------------------
                                                                           2000         1999
                                                                       -----------  -----------

<S>                                                                      <C>          <C>
  Current deferred assets:
       Allowance for doubtful accounts                                   $    80      $    80
       Inventory reserves                                                    789        1,132
       UNICAP                                                                666          644
       Unearned revenue                                                    1,552          302
       Accrued liabilities                                                 1,022        1,443
       Book compensation for stock options                                 9,977          417
                                                                       -----------  -----------
       Total current deferred assets                                      14,086        4,018
       Valuation allowance                                               (14,086)      (4,018)
                                                                       -----------  -----------

                                                                         $  -          $    -
                                                                         =======       =======
Long-term deferred assets:
       Net operating loss carryforwards                                  $21,006      $16,946
       Capitalized research expenditures                                   7,775        7,146
       Tax credit carryforwards                                            2,884        2,524
       Depreciation and amortization                                         843          679
                                                                       -----------  -----------
       Total long-term deferred assets                                    32,508       27,295
       Valuation allowance                                               (32,508)     (27,295)
                                                                       -----------  -----------
                                                                         $     -      $     -
                                                                         =======       =======
</TABLE>

         In accordance with generally accepted accounting principles, a
valuation allowance must be established for a deferred tax asset if it is
uncertain that a tax benefit may be realized from the asset in the future.
Management believes that, based on a number of factors, the available objective
evidence creates sufficient uncertainty regarding the realizability of the
deferred tax assets such that a full valuation allowance has been recorded.
These factors include the Company's history of losses, recent increases in
expense levels, the fact that the market in which the Company competes is
intensely competitive and characterized by rapidly changing technology, the lack
of carryback capacity to realize deferred tax assets, and the uncertainty
regarding market acceptance of the Company's products. The Company will continue
to assess the realizability of the deferred tax assets in future periods. The
valuation allowance increased by $15,281,000 and $3,721,000 in 2000 and 1999,
respectively. The Company had federal and state net operating loss carry
forwards of approximately $56,046,000 and $22,060,000, respectively, as of
December 31, 2000 available to offset future regular and alternative minimum
taxable income. The Company's net operating loss carry forwards expire in 2001
through 2020 if not utilized.

         In addition, at December 31, 2000, the Company had the following
available credits to offset future tax liabilities:

<TABLE>
<CAPTION>
                                                                           Tax             Expiration
                                                                        Reporting            Dates
                                                                       -----------        -----------

<S>                                                                    <C>                 <C>
       Federal research and development credit                         $  1,729,000        2007-2015
       State research and development credit                              1,016,000        None
       State manufacturing investment credit                                140,000        2002-2008
</TABLE>

         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.


12. EMPLOYEE BENEFIT PLAN


                                       44
<PAGE>

         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 2000, 1999,
1998, the Company made no employer contributions.

13. RELATED PARTY TRANSACTIONS

         The Company had net sales to stockholders of $482,000 for the year
ended December 31, 1998.

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

14. 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 2000 consist of 6% to cable customers and 94% to wireless customers. In
1999, 52% of sales were to cable customers and 48% to wireless customers. In
1998, 57% of sales were to cable customers and 43% to wireless customers. Sales
to international customers represented 24%, 5%, and 0% of revenues in 2000,
1999, and 1998, 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:

<TABLE>
<CAPTION>
                                                                                    YEARS ENDED  DECEMBER 31,
                                                                                      2000    1999    1998
                                                                                      ----    ----    ----

<CAPTION>
<S>                                                                                    <C>    <C>     <C>
Sprint Corporation.................................................................    54%       28%     -
RCN Corporation....................................................................      -       31%   25%
Look Communications Inc............................................................    23%         -     -
Knology Holdings, Inc..............................................................      -         -   13%
</TABLE>

         At December 31, 2000 and 1999, these customers accounted for $7,530,000
and $423,000, respectively, and 98% and 32%, respectively, of total accounts
receivable.

15. SUBSEQUENT EVENTS

Pursuant to a Securities Purchase Agreement dated February 16, 2001 between the
Halifax Fund, a fund managed by The Palladin Group, the Company issued and sold
to Palladin on February 16, 2001 certain securities. The securities included (i)
a $7.5 million principal amount 6% Convertible Debenture due 2003, which will be
convertible into shares of the Company's common stock; (ii) a common stock
Purchase Warrant to purchase 833,333 shares of common stock at $9.00 per share
(subject to adjustment) which is exercisable at the election of Palladin, or at
the election of the Company at a price which is the lower of (a) $9.00 and (b)
94% of the daily volume weighted average price; and (iii) an Adjustment Warrant.
The Adjustment Warrant will be exercisable beginning on the 18th day following
the date (referred to in this discussion as the Effective Date) that there is
declared effective by the Securities and Exchange Commission the registration
statement that the Company is required to file with respect to the resale of the
shares of common stock underlying the debentures and warrants. The Adjustment
Warrant will only be exercisable, however, if the volume weighted average sale
price for our common stock is not more than $7.2694. The aggregate number of
shares issuable pursuant to the exercise of the Adjustment Warrant will be
determined by dividing $8,625,000 by the Adjustment Price, as defined below, and
then subtracting the sum of the number of shares of common stock previously
issuable pursuant to the conversion of the debenture and the number issued upon
any previous exercise of the Adjustment Warrant. The Adjustment Price is the
average of the 15 lowest daily volume weighted average sale prices of the
Company's common stock as reported on Nasdaq, not including the three lowest
days, during the 65 trading day period following the Effective Date. The
adjustment price will not be below $3.50. The adjustment warrant terminates
three months after the end of the 65 trading day adjustment period. In
consideration for such securities, Palladin paid an initial purchase price of
$7,500,000. The Company granted to Palladin in the purchase agreement certain
rights of first refusal, preemptive rights and other rights. Pursuant to the
purchase agreement, Palladin and the Company also entered into a Registration
Rights Agreement dated as of February 16, 2001.


                                       45
<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,
                             2000        2000        2000         2000        1999       1999       1999       1999
                            -------     -------    --------     -------     -------    -------    -------    -------
<S>                       <C>        <C>         <C>         <C>          <C>        <C>        <C>        <C>
 Net sales                $  1,677   $   2,747   $   5,475   $  12,896    $  4,123   $  3,004   $  3,319   $  2,570
                            -------     -------    --------     -------     -------    -------    -------    -------

 Gross profit (loss)          (189)     (1,558)         992         411       (141)    (1,345)       259        902
                            -------     -------    --------     -------     -------    -------    -------    -------
 Income (loss) from
  continuing operations   $ (7,711)  $  (8,994)  $ (12,823)  $  (5,647)   $ (3,050)  $ (4,282)  $ (2,663)  $ (3,921)
                            -------     -------    --------     -------     -------    -------    -------    -------
           Net (loss)     $ (7,963)  $ (10,667)  $ (12,939)  $  (5,634)   $ (3,253)  $ (4,489)  $ (4,663)  $ (9,787)
                            =======     =======    ========     =======     =======    =======    =======    =======
 Earnings per share:
 Basic:                   $  (0.57)  $   (0.73)  $   (0.61)  $   (0.26)   $  (0.31)  $  (0.43)  $  (0.44)  $  (0.88)
                            -------     -------    --------     -------     -------    -------    -------    -------
           Net (loss)     $  (0.57)  $   (0.73)  $   (0.61)  $   (0.26)   $  (0.31)  $  (0.43)  $  (0.44)  $  (0.88)
                            =======     =======    ========     =======     =======    =======    =======    =======

 Diluted:                 $  (0.57)  $   (0.73)  $   (0.61)  $   (0.26)   $  (0.31)  $  (0.43)  $  (0.44)  $  (0.88)
                            -------     -------    --------     -------     -------    -------    -------    -------
           Net (loss)     $  (0.57)  $   (0.73)  $   (0.61)  $   (0.26)   $  (0.31)  $  (0.43)  $  (0.44)  $  (0.88)
                            =======     =======    ========     =======     =======    =======    =======    =======
</TABLE>


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

         NONE


                                       46
<PAGE>

PART III


ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.


         The information required by Item 10 regarding our directors is
incorporated by reference to the information under "Proposal No. 1-Election of
Directors" in our definitive proxy statement for the annual stockholders'
meeting in 2001 which we filed with the Securities and Exchange Commission on
April 12, 2001.


ITEM 11.          EXECUTIVE COMPENSATION


         The information required by Item 11 of Form 10-K is incorporated by
reference to the section "Executive Compensation" in our definitive proxy
statement.


ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


         The information regarding this item is incorporated by reference to the
section "Security Ownership of Certain Beneficial Owners and Management" in our
definitive proxy statement.


ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


         Information regarding to this item is incorporated by reference to the
section "Certain Relationships and Related Transactions" in our definitive proxy
statement.



                                       47
<PAGE>

PART IV

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


<TABLE>
<CAPTION>
                                                                                                                      PAGE NO.
                                                                                                                      --------
<S>                                                                                                                       <C>
(a)         Documents filed as part of this Report:
      1.    FINANCIAL STATEMENTS. See the Index to Financial Statements at Item 8 of this Report...................       26
      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......................................................       53
      3.    EXHIBITS. The following exhibits are filed as part of, or incorporated by reference into, this
            report on Form 10-K:
</TABLE>



<TABLE>
<CAPTION>
                                                                           INCORPORATED BY REFERENCE
                                                                           -------------------------
EXHIBIT NO.                      EXHIBIT                          FORM       FILE NO.    FILING DATE EXHIBIT NO.     FILED 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               8-K        000-23289    09-24-99      3.1
            Non-Convertible Preferred Stock of the Registrant.
       3.03 Registrant's Amended and Restated Bylaws, as          10-K       000-23289    03-30-01      3.03
            amended on March 22, 2001
      10.01 Amended and Restated Investors Rights Agreement       S-1        333-36001    11-11-97      10.01
            dated as 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
      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           S-1        333-36001    11-11-97      10.08
            Registrant with each of its directors and
            officers. (2)
      10.11 Employment Letter from the Registrant to Michael      10-Q       000-23289    05-11-00      10.1
            D. Greenbaum dated January 12, 2000
      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 and Senior
            Secured Convertible $5.5 Million Debenture Due 2002.
      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       S-1        333-36001    11-11-97      10.16
            and Itochu Corporation dated January 10, 1997. (1)


                                       48
<PAGE>

      10.17 Stipulation of settlement, dated March 3, 1999        10-K       000-23289    03-24-00      10.17
            among the Registrant and lead counsel for the
            plaintiffs in class action litigation against the
            Registrant
      10.24 Sublease between the Registrant and Viking            S-4        333-52083    05-07-98      10.24
            Freight, Inc. dated February 9, 1998.
      10.26 Employment Letter from the Registrant to Judson       10-K       000-23289    06-14-99      10.26
            Goldsmith dated November 12, 1998. (2)
      10.27 Product Purchase Agreement between the Registrant     10-K       000-23289    06-14-99      10.27
            and RCN Operating Services, Inc. dated June 30,
            1997
      10.28 Securities Purchase Agreement between Sprint          8-K        000-23289    09-24-99      10.1
            Corporation and the Registrant dated August 30,
            1999.
      10.29 Warrant Agreement between Sprint Corporation and      8-K        000-23289    09-24-99      10.2
            the Registrant dated as of September 9, 1999.
            Amendment to Warrant Agreement between Sprint
            Corporation and the Registrant dated as of April
            21, 2000.
      10.30 Amendment to Warrant Agreement between Sprint         10-K       000-23289    03-30-01      10.30
            Corporation and the Registrant dated as of
            April 21, 2000.
      10.31 1999 Amended and Restated Investor Rights             8-K        000-23289    09-24-99      10.3
            Agreement dated as of September 9, 1999.
      10.32 Amendment to 1999 Amended and Restated Investor       10-K       000-23289    03-30-01      10.32
            Rights 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 among the               8-K        000-23289    09-24-99      10.6
            Registrant and 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          8-K        000-23289    05-10-00      10.8
            between Sprint/United Management Company and the
            Registrant dated May 1, 2000.
      10.38 Amendment #1 to Purchase of Equipment and             10-K       000-23289    03-30-01      10.38
            Services Agreement between Sprint/United
            Management Company and the Registrant effective
            as of December 22, 2000.
      10.39 Amendment #2 to Purchase of Equipment and             10-K       000-23289    03-30-01      10.39
            Services Agreement between Sprint/United
            Management Company and the Registrant effective
            as of December 22, 2000.
      23.01 Consent of Independent Auditors                                                                             X
</TABLE>

-----------

         (1)      Confidential treatment has been granted with respect to
                  certain portions of this agreement. Such portions have been
                  omitted from the filing and have been filed separately with
                  the SEC.
         (2)      Represents a management agreement or compensatory plan.

(b) Reports on Form 8-K.


                                       49
<PAGE>


         We have filed the following current reports on Form 8-K since September
30, 2000:


  1.     On November 15, 2000, we filed a current report on Form 8-K that we
         expect to record a non-cash charge of approximately $1,275,000 in the
         fourth quarter of 2000 related to the resignation of its former CFO,
         Thara Edson.

  2.     On February 22, 2001, we filed a current report on Form 8-K to report
         the consummation of our financing agreement with The Halifax Fund, a
         fund managed by The Palladin Group. The only exhibits filed with the
         report were the Securities Purchase Agreement, a form of the 6%
         Convertible Debenture, a form of the Common Stock Purchase Warrant, a
         form of the Adjustment Warrant, and the Registration Rights Agreement.

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

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


                                       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.

Date:  June 1, 2001                             HYBRID NETWORKS, INC.
                                                By:  /s/ Michael D. Greenbaum
                                                     ------------------------
                                                     Michael D. Greenbaum
                                                     CHIEF EXECUTIVE OFFICER













                                       51

<PAGE>


                          INDEPENDENT AUDITOR'S REPORT



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


         Our report on the financial statements of Hybrid Networks, Inc. is
included on page 25 of this Form 10-K. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule listed in Item 14 (a) (2) of this Form 10-K.


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

/s/ HEIN + ASSOCIATES LLP


Hein + Associates LLP
Certified Public Accountants
Orange, California
February 16, 2001





                                       52

<PAGE>


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

 ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
                                              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, 2000                $    200       $     -       $     -        $     -      $    200
December 31, 1999                     200             -             -              -           200
December 31, 1998                       -           200             -              -           200


 INVENTORY RESERVES

<CAPTION>
                                              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, 2000               $   2,842      $    235       $     -     $  (1,097)     $   1,980
December 31, 1999                   3,135           529             -          (822)         2,842
December 31, 1998                   3,015         1,691             -        (1,571)         3,135
</TABLE>


                                       53