<PAGE>
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

                                   (Mark One)

    [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
        Exchange Act of 1934 for the quarterly period ended October 27, 2001.

    [ ] 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 0-26761

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

     MASSACHUSETTS                                      04-2826579
(State of incorporation)                    (I.R.S. Employer Identification No.)

         411 WAVERLEY OAKS RD., BLDG. 227, WALTHAM, MASSACHUSETTS 02452
                     (Address of principal executive office)

                                 (781) 647-1234
                               (Telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                            Yes  X       No
                                ---        ----

Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.

7,093,700 shares of Voting Common Stock, $0.01 par value, as of December 6,
2001; 6,972,700 shares of Non-Voting Common Stock, $0.01 par value, as of
December 6, 2001.


<PAGE>


                                NETSILICON, INC.
                                TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----
PART I.   FINANCIAL INFORMATION

ITEM 1.   Financial Statements

             Condensed Consolidated Balance Sheets
             October 27, 2001 and January 31, 2001..........................  1

             Condensed Consolidated Statements of Operations
             Three Months and Nine Months Ended October 27, 2001 and
             October 28, 2000...............................................  2

             Condensed Consolidated Statements of Cash Flows
             Nine Months Ended October 27, 2001 and October 28, 2000........  3

             Notes to Condensed Consolidated Financial Statements...........  4

ITEM 2.   Management's Discussion and Analysis of Financial Condition
            and Results of Operations.......................................  8

ITEM 3.   Quantitative and Qualitative Disclosure About Market Risk......... 24

PART II.  OTHER INFORMATION

ITEM 1.   Legal Proceedings................................................. 25

ITEM 2.   Changes in Securities and Use of Proceeds......................... 25

ITEM 3.   Defaults Upon Senior Securities................................... 26

ITEM 4.   Submission of Matters to a Vote of Security Holders............... 26

ITEM 5.   Other Information................................................. 26

ITEM 6.   Exhibits and Reports on Form 8-K.................................. 26

Signatures.................................................................. 27


<PAGE>

                    PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

                                NETSILICON, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                   OCTOBER 27, 2001      JANUARY 31, 2001
                                                                   ----------------      ----------------
                                                                      (Unaudited)
<S>                                                                   <C>                  <C>
                               ASSETS
CURRENT ASSETS
      Cash and equivalents                                            $ 8,423,000          $  5,999,200
      Short-term investments                                            2,350,600             6,794,400
      Accounts receivable, net                                          3,355,200             4,660,300
      Inventory, net                                                    4,470,000             6,707,000
      Prepaid expenses and other current assets                         1,283,100             1,628,600
                                                                     -------------         ------------
          TOTAL CURRENT ASSETS                                         19,881,900            25,789,500

PROPERTY AND EQUIPMENT, NET                                             2,072,400             2,335,200

INTANGIBLE ASSETS, NET                                                  1,512,200             1,351,800

OTHER ASSETS                                                            2,618,700             1,924,600
                                                                     -------------         ------------

TOTAL ASSETS                                                         $ 26,085,200          $ 31,401,100
                                                                     =============         ============

                LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
      Accounts payable                                               $  2,612,600          $  2,787,100
      Deferred revenue                                                    418,700               343,000
      Other current liabilities                                         4,285,200             3,557,700
                                                                     ------------          ------------
          TOTAL CURRENT LIABILITIES                                     7,316,500             6,687,800
                                                                     ------------          ------------

STOCKHOLDERS' EQUITY
      Preferred stock, $0.01 par value; 5,000,000 authorized;
         none issued                                                           --                    --

      Common stock, $0.01 par value; 35,000,000 authorized;
         issued and outstanding:
          Voting (7,093,700 and 6,810,100 shares)                          70,900                68,100
          Non- Voting (6,972,700 shares)                                   69,700                69,700
      Additional paid-in capital                                       29,575,400            28,187,400
      Accumulated other comprehensive income                                9,200                26,500
      Accumulated deficit                                             (10,956,500)           (3,638,400)
                                                                     ------------          ------------
          TOTAL STOCKHOLDERS' EQUITY                                   18,768,700            24,713,300
                                                                     ------------          ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                           $ 26,085,200          $ 31,401,100
                                                                     ============          ============
</TABLE>

     See accompanying notes to condensed consolidated financial statements.


                                      1
<PAGE>



                                NETSILICON, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                     THREE MONTHS ENDED                       NINE MONTHS ENDED
                                          ------------------------------------    -------------------------------------
                                          OCTOBER 27, 2001     OCTOBER 28, 2000    OCTOBER 27, 2001    OCTOBER 28, 2000
                                          ----------------     ----------------    ----------------    ----------------
<S>                                          <C>                 <C>                 <C>                 <C>
NET SALES                                   $  7,171,000         $ 10,687,700        $ 21,200,700        $ 29,554,600
COST OF SALES                                  3,305,500            4,429,300           9,686,000          12,069,700
                                            ------------         ------------        ------------        ------------

GROSS MARGIN                                   3,865,500            6,258,400          11,514,700          17,484,900
                                            ------------         ------------        ------------        ------------

OPERATING EXPENSES
   Selling and marketing                       2,290,700            2,819,200           7,659,700           8,151,300
   Engineering, research and development       1,833,900            1,900,100           5,665,900           4,693,500
   General and administrative                  2,642,200            1,085,300           5,346,300           3,124,800
   Amortization of intangibles                   168,600                   --             473,400                  --
                                            ------------         ------------        ------------        ------------
       TOTAL OPERATING EXPENSES                6,935,400            5,804,600          19,145,300          15,969,600
                                            ------------         ------------        ------------        ------------

OPERATING INCOME (LOSS)                       (3,069,900)             453,800          (7,630,600)          1,515,300

   Interest income, net                           79,700              218,200             351,600             683,100
                                            ------------         ------------        ------------        ------------

INCOME (LOSS) BEFORE TAXES
   ON INCOME                                  (2,990,200)             672,000          (7,279,000)          2,198,400

   Taxes on income (benefit)                     (26,100)                  --              39,100                  --
                                            ------------         ------------        ------------        ------------

NET INCOME (LOSS)                           $ (2,964,100)        $    672,000        $ (7,318,100)        $ 2,198,400
                                            ============         ============        ============         ===========

NET INCOME (LOSS) PER COMMON SHARE
       Basic                                     $ (0.21)              $ 0.05             $ (0.52)             $ 0.16
       Diluted                                   $ (0.21)              $ 0.04             $ (0.52)             $ 0.14

SHARES USED IN PER SHARE CALCULATION
       Basic                                  14,054,789           13,719,643          14,020,395          13,636,354
       Diluted                                14,054,789           15,814,393          14,020,395          15,911,922

</TABLE>

     See accompanying notes to condensed consolidated financial statements.


                                      2
<PAGE>

                                NETSILICON, INC.
                    CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                                                   NINE MONTHS ENDED
                                                                          ------------------------------------
                                                                          OCTOBER 27, 2001    OCTOBER 28, 2000
                                                                          ----------------    ----------------
<S>                                                                          <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income (loss)                                                       $(7,318,100)       $ 2,198,400
     Adjustments to reconcile net income (loss) to
     net cash used in operating activities:
         Depreciation and amortization                                         1,731,000         1,179,000
         Other asset impairment charges                                           58,000                --
         Changes in operating assets and liabilities, net of
              effects of acquisition:
            Accounts receivable                                                2,323,000        (3,189,900)
            Inventories                                                        2,291,600        (2,281,700)
            Other current assets                                                (481,100)          (40,200)
            Accounts payable                                                    (743,500)        1,545,000
            Other current liabilities                                            472,500          (257,400)
            Deferred revenue                                                      75,700           268,300
                                                                             -----------       -----------
                NET CASH USED IN OPERATING ACTIVITIES                         (1,590,900)         (578,500)
                                                                             -----------       -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Proceeds from sale of short-term investments                              4,433,300           170,000
     Purchases of property and equipment                                        (671,500)       (1,669,300)
     Cash acquired (paid) in acquisition (net of cash paid and direct
         acquisition costs of $347,800 in 2001)                                  413,600          (439,700)
     Software development costs                                                  (63,000)         (426,900)
     Other assets                                                               (213,000)         (308,700)
                                                                             -----------       -----------
                NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES            3,899,400        (2,674,600)
                                                                             -----------       -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Issuance of notes receivable to officer                                          --          (871,200)
     Repayments of short-term debt                                                    --          (779,700)
     Payments of capital lease obligation                                        (10,900)         (189,000)
     Proceeds from issuance of stock                                             133,000                --
     Proceeds from exercise of stock options                                          --         1,087,700
                                                                             -----------       -----------
                NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES              122,100          (752,200)
                                                                             -----------       -----------
                EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
                          EQUIVALENTS                                             (6,800)               --
                                                                             ------------      -----------

INCREASE (DECREASE) IN CASH AND EQUIVALENTS                                    2,423,800        (4,005,300)

CASH AND EQUIVALENTS - BEGINNING OF PERIOD                                     5,999,200        11,096,500
                                                                             -----------       -----------

CASH AND EQUIVALENTS - END OF PERIOD                                         $ 8,423,000       $ 7,091,200
                                                                             ===========       ===========
</TABLE>



     See accompanying notes to condensed consolidated financial statements.

                                      3
<PAGE>

                                NETSILICON, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                   (Unaudited)


1.       Basis of presentation:

                  In the opinion of management, the accompanying condensed
                  consolidated financial statements include all adjustments
                  necessary for a fair presentation of NetSilicon, Inc.'s (the
                  "Company") financial position, results of operations and cash
                  flows for this interim period. This quarterly information
                  should be read in conjunction with the audited financial
                  statements and accompanying notes included in the Company's
                  2001 Form 10-K as filed with the Securities and Exchange
                  Commission ("SEC") on May 1, 2001.

                  The financial statements are prepared in conformity with
                  generally accepted accounting principles, which require
                  management to make estimates that affect the reported amounts
                  of assets, liabilities, revenues and expenses, and the
                  disclosure of contingent assets and liabilities. Actual
                  results could differ from these estimates.

                  Certain prior period amounts have been reclassified to conform
                  to the current period presentation. These reclassifications
                  had no effect on net income (loss) or stockholders' equity.

                  Operating results for the interim period are not necessarily
                  indicative of results that may be expected for the entire
                  fiscal year.


2.       Inventories:

                  Inventories are stated at the lower of cost (first-in,
                  first-out) or market. Cost is computed using standard costs,
                  which approximate actual cost on a first-in, first-out basis.
                  Inventories consist of:

                                            October 27, 2001   January 31, 2001
                                            ----------------  -----------------

                 Raw material                  $4,318,300        $6,543,000
                 Work in process                   18,600           118,100
                 Finished Goods                   133,100            45,900
                                               -----------       ----------
                 Total Inventory               $4,470,000        $6,707,000
                                               ===========       ==========


3.       Earnings per share calculation:

                  Basic earnings per share is computed based on the weighted
                  average number of shares outstanding during the period.
                  Diluted earnings per share is computed based on the weighted
                  average number of shares outstanding during the period
                  increased by the effect of dilutive potential common shares
                  which consist of shares issuable under stock benefit plans and
                  warrants.

                                      4
<PAGE>

                  The following is a reconciliation of the numerator and
                  denominators of the basic and diluted per share computations:

<TABLE>
<CAPTION>

                                                      Three months ended               Nine months ended
                                                  ---------------------------    ----------------------------
                                                   October 27,    October 28,     October 27,    October 28,
                                                      2001            2000            2001          2000
                                                  ------------    -----------    ------------   -------------
                <S>                               <C>              <C>           <C>             <C>
                Net income (loss) available to
                common shareholders, basic and
                diluted                           $(2,964,100)    $   672,000    $ (7,318,100)   $ 2,198,400
                                                  ============    ===========    ============    ===========
                Weighted-average number of
                common shares used in basic
                earnings per share                 14,054,789      13,719,643      14,020,395     13,636,354

                Effect of dilutive securities -
                stock options                              --       2,094,750              --      2,275,568
                                                  ------------    -----------    ------------    -----------
                Weighted-average number of
                common shares and dilutive
                potential common stock used in
                dilutive earnings per share        14,054,789     15,814,393      14,020,395      15,911,922
                                                  ============    ===========    ============    ===========
</TABLE>

                  The shares issuable upon exercise of options and warrants
                  represent the shares issuable at exercise net of the shares
                  assumed to have been purchased, at the average market price
                  for the period, with the assumed exercise proceeds.
                  Accordingly, options and warrants with exercise prices in
                  excess of the average market price for the period are excluded
                  because their effect would be anti-dilutive. The Company had a
                  net loss for the three and nine months ended October 27, 2001.
                  The effect of dilutive securities including stock options and
                  warrants to acquire common stock are not included in the
                  calculation of earnings (loss) per share for the periods ended
                  October 27, 2001 because their effect would be anti-dilutive.


4.       Acquisition:

                  On February 16, 2001, the Company purchased all of the equity
                  securities of Dimatech Corporation ("Dimatech") pursuant to a
                  Stock Purchase Agreement, dated as of February 16, 2001, by
                  and among Dimatech, Hiroyuki Kataoka and the Company. Prior to
                  the acquisition, Dimatech was a major distributor of the
                  Company's products in Japan and Asia and Hiroyuki Kataoka was
                  the President and owner of Dimatech. Dimatech, under a new
                  name, continues to operate in Japan and Asia as a distributor
                  of the Company's products and provides technical support and
                  other services to customers in the region. Hiroyuki Kataoka
                  has joined NetSilicon as Vice President of Intelligent Device
                  Markets for Japan.

                  The purchase price was allocated to the tangible and
                  intangible assets acquired and liabilities assumed on the
                  basis of their respective estimated fair values on the
                  acquisition date. The following represents a preliminary
                  allocation of the purchase price:

                  Cash.....................................  $  761,400
                  Accounts receivable......................   1,017,900
                  Other tangible assets....................     161,900
                  Customer list............................     351,400
                  Workforce................................     148,000
                  Goodwill.................................     134,400
                                                             ----------
                  Total purchase price.....................  $2,575,000
                                                             ==========


                                      5
<PAGE>

                  The purchase price consisted of 241,667 shares of the common
                  stock of the Company, valued at $1,239,100, assumed
                  liabilities of $969,400, $250,000 in cash and $116,500 of
                  acquisition related costs, including legal and accounting
                  fees.


5.       Comprehensive Income (Loss):

                  Comprehensive income (loss) is defined as a change in equity
                  of a company during a period from transactions and other
                  events and circumstances excluding transactions resulting from
                  investments by owners and distributions to owners. The
                  difference between net income (loss) and comprehensive income
                  (loss) for NetSilicon results from foreign currency
                  translation adjustments and unrealized gains and losses on
                  available-for-sale securities, net of taxes. Comprehensive
                  income (loss) consisted of the following:

<TABLE>
<CAPTION>

                                                    Three Months Ended             Nine Months Ended
                                                ---------------------------   --------------------------
                                                 October 27,    October 28,    October 27,   October 28,
                                                    2001           2000           2001          2000
                                                ------------    -----------   ------------  ------------
<S>                                             <C>              <C>          <C>            <C>
                 Net Income (Loss)...........   $(2,964,100)     $672,000     $(7,318,100)    $2,198,400
                                                ------------     --------     -----------     ----------
                 Foreign currency
                 translation adjustments.....        61,400            --          (6,800)           --

                 Unrealized gain (loss)
                 on investments..............        16,300        11,100         (10,500)        34,400
                                                -----------      --------     -----------     ----------
                 Other comprehensive income
                 (loss)......................        77,700        11,100         (17,300)        34,400
                                                ------------     --------     -----------     ----------
                 Total comprehensive income
                 (loss)......................   $(2,886,400)     $683,100     $(7,335,400)    $2,232,800
                                                ===========      ========     ===========     ==========
</TABLE>


6.       Contingencies:

                  On or about August 9, 2001, a purported securities class
                  action lawsuit captioned "Ellis Investments, Ltd. v.
                  NetSilicon, Inc., et al." (01-CV-7281) was filed in the United
                  States District Court for the Southern District of New York.
                  Later in August, 2001, two additional, nearly identical
                  complaints were filed in the same Court in lawsuits captioned
                  "Michael Rasner v. NetSilicon, Inc., et al." (01-CV-7651) and
                  "Walter Weitz v. NetSilicon, Inc. et al." (01-CV-8217). The
                  suits name as defendants the Company, certain of its officers
                  and directors, and certain underwriters involved in the
                  Company's initial public offering ("IPO"). The Ellis
                  Investments suit also names Osicom Technologies, Inc. as a
                  defendant. The complaints in these actions are allegedly
                  brought on behalf of purchasers of the Company's common stock
                  during the period from September 15, 1999 to December 6, 2000,
                  and assert, among other things, that the Company's IPO
                  prospectus and registration statement violated federal
                  securities laws because they contained material
                  misrepresentations and/or omissions regarding the conduct of
                  the Company's IPO underwriters in allocating shares in the
                  Company's IPO to the underwriters' customers. The actions seek
                  rescission or rescissory and other damages, fees and costs
                  associated with the litigation, and interest. The Company
                  understands that various plaintiffs have filed substantially
                  similar lawsuits against over a hundred other publicly traded
                  companies in connection with the underwriting of their initial
                  public offerings. The Company and its officers and directors
                  believe that the allegations in the complaints are without
                  merit and intend to contest them vigorously. An unfavorable
                  resolution of the actions could have a material adverse effect
                  on the business, results of operations or financial condition
                  of the Company.

                  Contingent on the Company's merger with Digi International,
                  the Company has agreed to forgive the payment obligations of
                  two promissory notes in the aggregate principal amount of
                  $871,200 plus interest made by its Chairman of the Board and
                  Chief Executive Officer ("Chairman and CEO") and provide
                  additional payments as necessary to cover any taxes owed by
                  the Chairman and CEO as a result of the forgiveness and the
                  additional payment. Also contingent on the merger, the
                  Chairman and CEO will receive a one-time payment of $740,000.


                                      6
<PAGE>
7.       Subsequent Events:

                  Proposed Merger with Digi International - On November 5, 2001,
                  the Company and Digi International Inc. ("Digi"), announced
                  the signing of an Agreement and Plan of Merger dated October
                  30, 2001 (the "Agreement") pursuant to which the Company will
                  effectively become a wholly-owned subsidiary of Digi. Under
                  the terms of the Agreement, each outstanding share of the
                  Company's common stock would be converted into the right to
                  receive either cash, Digi common stock or a combination of
                  cash and Digi common stock at the election of the holder. The
                  Agreement provides that each holder of the Company's common
                  stock may elect to receive 0.6500 of a share of Digi common
                  stock for each share of the Company's common stock, or cash in
                  the amount of 0.6500 multiplied by the average per-share
                  closing price of Digi common stock during the period of ten
                  trading days ending on the third trading day before the date
                  of closing, or a combination of both stock and cash, provided
                  that the maximum amount of cash to be paid by Digi will be $15
                  million. The merger is expected to close in the first calendar
                  quarter of 2002 and is subject to approval by the shareholders
                  of the Company and Digi and by regulators. The details of the
                  proposed transaction are discussed in the Company's Form 8-K
                  filed with the Securities and Exchange Commission on October
                  30, 2001.

                  Websprocket, LLC Legal Claims - On November 2, 2001, the
                  Company and Websprocket, LLC entered into a Settlement
                  Agreement and Mutual Release settling all claims between the
                  companies, including all claims and counterclaims asserted in
                  the litigation captioned Websprocket, LLC v. NetSilicon, Inc.,
                  Civil Action No. C-00-20915 RMV pending in the United States
                  District Court for the Northern District of California. On
                  November 13, 2001, the court approved and entered a
                  Stipulation of Dismissal With Prejudice, in which the Company
                  and Websprocket, LLC dismissed all claims in the litigation
                  and waived all rights to appeal. The Company has paid
                  Websprocket, LLC approximately $162,000 as part of the
                  settlement agreement.

8.       Recent Accounting Pronouncements:

                  In June 2001, the Financial Accounting Standards Board
                  finalized FASB Statement No. 141, "Business Combinations
                  ("SFAS 141"), and No. 142, Goodwill and Other Intangible
                  Assets ("SFAS 142"). SFAS 141 requires the use of the
                  purchased method of accounting and prohibits the use of the
                  pooling-of-interests method of accounting for business
                  combinations initiated after June 30, 2001. SFAS 141 also
                  requires that the Company recognize acquired intangible assets
                  apart from goodwill if the acquired intangible assets meet
                  certain criteria. SFAS 141 applies to all business
                  combinations initiated after June 30, 2001 and for purchase
                  business combinations completed on or after July 1, 2001. Upon
                  adoption of SFAS 142, it requires that the Company reclassify
                  the carrying amounts of intangible assets and goodwill based
                  on the criteria in SFAS 141.

                  SFAS 142 requires, among other things, that companies no
                  longer amortize goodwill, but instead test goodwill for
                  impairment at least annually. In addition, SFAS 142 requires
                  that the Company identify reporting units for the purposes of
                  assessing potential future impairments of goodwill, reassess
                  the useful lives of other existing recognized intangible
                  assets, and cease amortization of intangible assets with an
                  indefinite useful life. An intangible asset with an indefinite
                  useful life should be tested for impairment in accordance with
                  the guidance in SFAS 142. SFAS 142 is required to be applied
                  in fiscal years beginning after December 15, 2001 to all
                  goodwill and other intangible assets recognized at that date,
                  regardless of when those assets were initially recognized.
                  SFAS 142 requires the Company to complete a transitional
                  goodwill impairment test six months from the date of adoption.
                  The Company is also required to reassess the useful lives of
                  other intangible assets within the first interim quarter after
                  adoption of SFAS 142.

                  The Company's previous business combinations were accounted
                  for using the purchase method. As of October 27, 2001, the net
                  carrying amount of intangible assets is $1.5 million.
                  Amortization expense during the nine month period ended
                  October 27, 2001 was $473,000. Currently, the Company is
                  assessing but has not yet determined how the adoption of SFAS
                  141 and SFAS 142 will impact its financial position and
                  results of operations.


                                      7
<PAGE>


ITEM 2.   Management's Discussion and Analysis of Financial Condition and
          Results of Operations

                  Some of the information in this discussion and analysis
                  contains forward-looking statements within the meaning of the
                  federal securities laws. These statements include, among
                  others, statements regarding our financial performance,
                  expected future revenue, product development plans, projected
                  capital expenditures, liquidity and business strategy.
                  Forward-looking statements typically are identified by use of
                  terms such as may, will, expect, anticipate, estimate and
                  similar words, although some forward-looking statements are
                  expressed differently. You should be aware that our actual
                  results could differ materially from those contained in the
                  forward-looking statements due to a number of factors,
                  including delays in product introductions, interruptions in
                  supply and competitive product introductions. You should also
                  consider carefully the "Business" and "Risk Factors" sections
                  contained in the Company's 2001 Form 10-K as filed with the
                  SEC and the "Risk Factors" section contained herein, which
                  address additional factors that could cause our actual results
                  to differ from those set forth in the forward-looking
                  statements.

                  You should read this discussion together with the unaudited
                  financial statements and other information included in this
                  document.


                  OVERVIEW

                  We develop and market embedded Ethernet networking solutions,
                  which combine advanced microprocessors and software, to
                  manufacturers building intelligent, network-enabled devices.
                  We commenced our operations in 1984 as Digital Products, Inc.
                  From our inception, we have developed and marketed networking
                  products for embedded systems that enable the connection of
                  electronic devices to networks.

                  In September 1996, Sorrento Networks Corporation, formerly
                  Osicom Technologies, Inc. ("Sorrento"), acquired all of our
                  outstanding capital stock from our stockholders. We were a
                  wholly-owned subsidiary of Sorrento from the date of the
                  acquisition through our initial public offering in September
                  of 1999.


                  RESULTS OF OPERATIONS

                  The following table sets forth information derived from our
                  Statements of Operations expressed as a percentage of net
                  sales for the three and nine month periods ended October 27,
                  2001 and October 28, 2000.

<TABLE>
<CAPTION>

                                                       Three Months Ended                Nine Months Ended
                                                -----------------------------       ----------------------------
                                                 October 27,      October 28,        October 27,     October 28,
                                                    2001              2000              2001             2000
                                                ------------      -----------       ------------     -----------
<S>                                                <C>               <C>               <C>              <C>
                 Net sales                         100.0%            100.0%            100.0%           100.0%
                 Cost of sales                      46.1              41.4              45.7             40.8
                                                   -----             -----             -----            -----
                 Gross margin                       53.9              58.6              54.3             59.2
                                                   -----             -----             -----            -----
                 Operating expenses:
                   Selling and marketing            31.9              26.4              36.1             27.6
                   Engineering, research
                    and development                 25.6              17.8              26.7             15.9
                   General and administrative       36.8              10.2              25.2             10.6
                   Amortization of intangibles       2.4                --               2.2               --
                                                   -----             -----             -----            -----
                 Total operating expenses           96.7              54.4              90.2             54.1
                                                   -----             -----             -----            -----
</TABLE>


                                      8
<PAGE>

<TABLE>
<CAPTION>

<S>                                                <C>                 <C>             <C>                <C>
                 Operating income (loss)           (42.8)              4.2             (35.9)             5.1

                 Interest income, net                1.1               2.0               1.7              2.3
                                                   -----             -----             -----            -----

                 Income (loss) before taxes
                 on income                         (41.7)              6.2             (34.2)             7.4

                 Taxes on income (benefit)          (0.4)               --               0.2               --
                                                   -----             -----             -----            -----

                 Net income (loss)                 (41.3)%             6.2%            (34.4)%            7.4%
                                                   =====             =====             =====            =====
</TABLE>


                  Three and Nine Months Ended October 27, 2001 compared to Three
                  and Nine Months Ended October 28, 2000:

                  NET SALES. Net sales were $7.2 million for the three months
                  ended October 27, 2001 compared to $10.7 million for the three
                  months ended October 28, 2000, representing a decrease of
                  32.9%. Net sales decreased to $21.2 million for the nine
                  months ended October 27, 2001 from $29.6 million for the nine
                  months ended October 28, 2000, a decrease of 28.3%.

                  The decrease in net sales in the three and nine month periods
                  was due primarily to an economic slowdown that has affected
                  our imaging customers. Revenue from our imaging customers was
                  $5.7 million and $16.9 million for the three and nine month
                  periods, respectively, ended October 27, 2001 compared to $8.5
                  million and $24.1 million for the three and nine month
                  periods, respectively, ended October 28, 2000. Backlog for our
                  products and service was approximately $3.3 and $4.8 million
                  at October 27, 2001 and October 28, 2000, respectively, all of
                  which was scheduled to be shipped within 12 months.

                  Our embedded networking semiconductor and controller products
                  accounted for 88.5% and 89.0% of total net sales for the nine
                  months ended October 27, 2001 and October 28, 2000,
                  respectively. Software development tools and development
                  boards accounted for 4.5% of total net sales for the nine
                  months ended October 27, 2001 and 5.4% of total net sales for
                  the prior year nine month period. Royalty, maintenance and
                  service revenue was 7.0% and 5.6% of total net sales for the
                  nine months ended October 27, 2001 and October 28, 2000,
                  respectively.

                  During the nine months ended October 27, 2001, international
                  sales accounted for 53.6% of net sales compared to 55.0% of
                  net sales for the nine month period ended October 28, 2000.

                  COST OF SALES; GROSS MARGIN. Costs of goods sold consists
                  principally of the cost of raw material components and
                  subcontractor labor assembly from outside manufacturers and
                  suppliers. Cost of sales also includes amortization of
                  software development costs. Gross margin decreased to $3.9
                  million, or 53.9% of net sales, for the three months ended
                  October 27, 2001 from $6.3 million, or 58.6% of net sales, for
                  the three months ended October 28, 2000, representing a
                  decrease of 38.2%. Gross margin decreased 34.1% to $11.5
                  million, or 54.3% of net sales, for the nine months ended
                  October 27, 2001 from $17.5 million, or 59.2% of net sales,
                  for the nine months ended October 28, 2000.

                  The decrease in gross margin percent for the three and nine
                  month periods ended October 27, 2001 from the prior year
                  periods was due primarily to (i) a decrease in high-margin
                  sales of development kits; (ii) a decrease in royalty revenue;
                  and (iii) the overall decrease in sales which were offset in
                  part by increased sales of high-margin software products and
                  decreases in overhead spending, including freight costs.


                                      9
<PAGE>

                  SELLING AND MARKETING EXPENSES. Selling and marketing expenses
                  consist mainly of employee-related expenses, commissions to
                  sales representatives, trade shows, publicity and travel
                  expenses. Selling and marketing expenses decreased from $2.8
                  million, or 26.4% of net sales, for the three months ended
                  October 28, 2000 to $2.3 million, or 31.9% of net sales, for
                  the three months ended October 27, 2001, representing a
                  decrease of 18.7%. Selling and marketing expenses were $7.7
                  million, or 36.1% of net sales, for the nine month period
                  ended October 27, 2001 compared to $8.2 million, or 27.6% of
                  net sales, for the nine month period ended October 28, 2000.

                  The decrease in selling and marketing expenses for the three
                  and nine months ended October 27, 2001 compared to the three
                  and nine months ended October 28, 2000 was the result of (i) a
                  decrease in commission to sales representatives due to the
                  decrease in revenue; (ii) the absence of commission payable to
                  Dimatech Corporation, our former distributor in Japan that we
                  acquired in February 2001; and (iii) decreases in several
                  discretionary costs due to our cost reduction initiatives.
                  These decreased costs were offset in part by (i) additional
                  payroll costs related to the expansion of our direct sales and
                  marketing teams, including those costs related to our
                  acquisition of Dimatech Corporation and certain assets of
                  Pacific Softworks, Inc. and (ii) payroll recruiting and other
                  costs associated with investments made to expand our customer
                  support department.

                  ENGINEERING, RESEARCH AND DEVELOPMENT. Engineering, research
                  and development expenses consist primarily of salaries and the
                  related costs of employees engaged in research, design and
                  development activities. Engineering, research and development
                  expenses decreased to $1.8 million, or 25.6% of net sales, for
                  the three months ended October 27, 2001 from $1.9 million, or
                  17.8% of net sales, for the three months ended October 28,
                  2000, representing a decrease of 3.5%. Engineering, research
                  and development expenses increased 20.7% to $5.7 million, or
                  26.7% of net sales, for the nine months ended October 27, 2001
                  from $4.7 million, or 15.9% of net sales, for the nine months
                  ended October 28, 2000.

                  The decrease in engineering, research and development expenses
                  for the three month period ended October 27, 2001 from the
                  prior year period is attributable to decreases in several
                  discretionary costs due to our cost reduction initiatives. The
                  increase in engineering, research and development expenses for
                  the nine month period ended October 27, 2001 from the prior
                  year period is due to the addition of approximately 10
                  engineers acquired in connection with our purchase of certain
                  assets of Pacific Softworks in August 2000.

                  GENERAL AND ADMINISTRATIVE EXPENSES. General and
                  administrative expenses consist mainly of salaries,
                  employee-related expenses, legal expenses, audit fees and
                  reserves for accounts receivable allowances. General and
                  administrative expenses increased to $2.6 million, or 36.8% of
                  net sales, for the three months ended October 27, 2001 from
                  $1.1 million, or 10.2% of net sales, for the three months
                  ended October 28, 2000, an increase of 143.5%. General and
                  administrative expenses increased 71.1% to $5.3 million, or
                  25.2% of net sales, for the nine months ended October 27, 2001
                  from $3.1 million, or 10.6% of net sales, for the nine months
                  ended October 28, 2000.

                  The increase in general and administrative expenses is
                  attributable to increased legal costs related to the proposed
                  merger with Digi International and the Websprocket, LLC and
                  IPO class action lawsuits. The increase in general and
                  administrative expenses is also due to an increase in rent
                  expense related to our new facilities in California and Japan
                  and vacated space at our headquarters in Massachusetts,
                  increases in accounting and insurance costs, and increases in
                  employee-related expenses including severance costs for
                  terminated employees. These increases were offset in part by
                  decreases in several discretionary costs due to our cost
                  reduction initiatives.


                                      10
<PAGE>

                  AMORTIZATION OF INTANGIBLES. Amortization of intangible assets
                  consists of the amortization of intangible assets acquired in
                  connection with the purchase of certain assets of Pacific
                  Softworks, Inc. in August 2000 and our acquisition of Dimatech
                  Corporation in February 2001. Amortization of intangibles
                  increased to $169,000, or 2.4% of net sales, and $473,000, or
                  2.2% of net sales, for the three and nine months ended October
                  27, 2001, respectively, from $0 for the three and nine months
                  ended October 28, 2000.

                  INTEREST INCOME, NET. Interest income includes interest earned
                  on cash and short-term investment balances. Net interest
                  income was $80,000, or 1.1% of net sales, and $218,000, or
                  2.0% of net sales, for the three months ended October 27, 2001
                  and October 28, 2000, respectively. Net interest income was
                  $352,000, or 1.7% of net sales, and $683,000, or 2.3% of net
                  sales, for the nine months ended October 27, 2001 and October
                  28, 2000, respectively. The decrease in interest income is due
                  to a decrease in cash and short-term investments.

                  Provision for income taxes. The tax benefit for the three
                  months ended October 27, 2001 totaled $26,000, or 0.4% of net
                  sales, and the income tax provision for the nine months ended
                  October 27, 2001 totaled $39,000, or 0.2% of net sales, and
                  both related to foreign taxes for our Japanese subsidiary.
                  There was no net provision for U.S. income taxes for the three
                  and nine months ended October 28, 2000 due to the utilization
                  of available net operating loss carryforwards.


                  Liquidity and Capital Resources

                  Prior to our public offering in September 1999, we financed
                  our operations through advances from Sorrento and borrowings
                  under our short-term bank line of credit. The Company received
                  proceeds, net of offering costs, of approximately $22.2
                  million as a result of the initial public offering and sale of
                  our stock. At October 27, 2001, we had working capital of
                  $12.6 million, cash and cash equivalents of $8.4 million and
                  short-term investments of $2.4 million.

                  Our operating activities used cash of $1.6 million and
                  $579,000 for the nine months ended October 27, 2001 and
                  October 28, 2000, respectively. Cash used by operating
                  activities in the nine month period ended October 27, 2001 was
                  attributable to the net loss and a decrease in accounts
                  payable, offset in part by decreases in accounts receivable
                  and inventory and the non-cash impact of depreciation and
                  amortization. The decrease in accounts receivable is due to
                  the decrease in sales and strong collection efforts and the
                  decrease in inventory is attributable to a decrease in
                  purchasing activity and the consumption of electronic
                  components that were previously purchased in large volumes to
                  decrease the risk to our operations of the sharp fluctuations
                  in market supply of the components. Cash used during the nine
                  months ended October 28, 2000 was attributable to an increase
                  in accounts receivable and inventory, offset in part by net
                  income, an increase in accounts payable and the non-cash
                  impact of depreciation and amortization.

                  Our sales and marketing expenses, engineering, research and
                  development expenses and general and administrative expenses
                  each may increase in the fiscal year ending January 31, 2002
                  and thereafter compared to the amounts of such expenses in the
                  fiscal year ending January 31, 2001. Due in part to an
                  economic slowdown affecting our imaging customers, we
                  anticipate a decline in imaging revenue growth in fiscal year
                  2002, from fiscal year 2001, which will adversely effect our
                  results of operations and financial condition and may result
                  in operating losses for all or part of fiscal year 2002. There
                  can be no assurance that our available cash and cash flow from
                  operations will be sufficient to fund such additional
                  expenses.


                                      11
<PAGE>

                  Our standard payment terms are net 30 days. While we actively
                  pursue collection within that time, receivables have
                  frequently taken longer to collect in part because we sell
                  products to large companies in Asia.

                  Our investing activities provided cash of $3.9 million and
                  used cash of $2.7 million during the nine months ended October
                  27, 2001 and October 28, 2000, respectively. Cash provided by
                  investing activities during the nine months ended October 27,
                  2001 related primarily to proceeds of $4.4 million from
                  short-term investments and net cash acquired in the
                  acquisition of Dimatech Corporation of $414,000, offset in
                  part by purchases of property and equipment of $672,000. Cash
                  used in investing activities during the nine months ended
                  October 28, 2000 related primarily to purchases of $1.7
                  million of property and equipment, software development costs
                  of $427,000, and cash payments of $440,000 related to our
                  acquisition of certain assets of Pacific Softworks.

                  On August 31, 2000, we issued 90,000 shares of common stock,
                  valued at $2.3 million and incurred $570,000 of
                  acquisition-related costs in connection with the acquisition
                  of the strategic network technology assets of Pacific
                  Softworks, Inc. The total purchase price was $2.8 million and
                  was allocated to the tangible and intangible assets acquired.
                  On February 16, 2001, we issued 241,667 shares of common stock
                  valued at $1.2 million, paid cash of $250,000, incurred
                  $116,500 of acquisition-related costs and assumed $969,400 of
                  liabilities in connection with the acquisition of Dimatech
                  Corporation. The total purchase price was $2.6 million and was
                  allocated to the tangible and intangible assets acquired.

                  Cash provided by financing activities was $122,000 and cash
                  used by financing activities was $752,000 during the nine
                  months ended October 27, 2001 and October 28, 2000,
                  respectively. Cash provided by financing during the period
                  ended October 27, 2001 related to proceeds from the issuance
                  of stock. Cash used in financing activities in the period
                  ended October 27, 2000 was attributable to repayments of short
                  term debt of $780,000 and loans to an officer of the Company
                  in the amount of $871,000, offset in part by proceeds from the
                  exercise of stock options of $1.1 million.

                  We anticipate that our available cash resources will be
                  sufficient to meet our presently anticipated capital
                  requirements through the next 12 months. Nonetheless, we may
                  elect to sell additional equity securities or obtain
                  additional credit. Our future capital requirements may vary
                  materially from those now planned and will depend on many
                  factors, including, but not limited to, the levels at which we
                  maintain inventory and accounts receivable; the market
                  acceptance of our products; the levels of promotion and
                  advertising required to launch products or enter markets and
                  attain a competitive position in the marketplace; volume
                  pricing concessions; our business, product, capital
                  expenditure and research and development plans and technology
                  roadmap; capital improvements to new and existing facilities;
                  technological advances; the response of competitors to our
                  products; and our relationships with suppliers and customers.
                  In addition, we may require an increase in the level of
                  working capital to accommodate planned growth, hiring and
                  infrastructure needs. Additional capital may be required for
                  consummation of any acquisitions of businesses, products or
                  technologies. We may need to raise additional funds through
                  public or private financings or borrowings if existing
                  resources and cash generated from operations are insufficient
                  to fund our future activities. No assurance can be given that
                  additional financing will be available or that, if available,
                  such financing can be obtained on terms favorable to our
                  shareholders and us. If additional funds are raised through
                  the issuance of equity securities, the percentage ownership of
                  then current stockholders of us will be reduced and such
                  equity securities may have rights, preferences or privileges
                  senior to those of holders of our common stock. If adequate
                  funds are not available to satisfy short- or long-term capital
                  requirements, we may be required to limit our operations
                  significantly.


                                      12
<PAGE>


                  Impact of Recent Accounting Pronouncements:

                  In June 2001, the Financial Accounting Standards Board
                  finalized FASB Statement No. 141, "Business Combinations
                  ("SFAS 141"), and No. 142, Goodwill and Other Intangible
                  Assets ("SFAS 142"). SFAS 141 requires the use of the
                  purchased method of accounting and prohibits the use of the
                  pooling-of-interests method of accounting for business
                  combinations initiated after June 30, 2001. SFAS 141 also
                  requires that the Company recognize acquired intangible assets
                  apart from goodwill if the acquired intangible assets meet
                  certain criteria. SFAS 141 applies to all business
                  combinations initiated after June 30, 2001 and for purchase
                  business combinations completed on or after July 1, 2001. Upon
                  adoption of SFAS 142, it requires that the Company reclassify
                  the carrying amounts of intangible assets and goodwill based
                  on the criteria in SFAS 141.

                  SFAS 142 requires, among other things, that companies no
                  longer amortize goodwill, but instead test goodwill for
                  impairment at least annually. In addition, SFAS 142 requires
                  that the Company identify reporting units for the purposes of
                  assessing potential future impairments of goodwill, reassess
                  the useful lives of other existing recognized intangible
                  assets, and cease amortization of intangible assets with an
                  indefinite useful life. An intangible asset with an indefinite
                  useful life should be tested for impairment in accordance with
                  the guidance in SFAS 142. SFAS 142 is required to be applied
                  in fiscal years beginning after December 15, 2001 to all
                  goodwill and other intangible assets recognized at that date,
                  regardless of when those assets were initially recognized.
                  SFAS 142 requires the Company to complete a transitional
                  goodwill impairment test six months from the date of adoption.
                  The Company is also required to reassess the useful lives of
                  other intangible assets within the first interim quarter after
                  adoption of SFAS 142.

                  The Company's previous business combinations were accounted
                  for using the purchase method. As of October 27, 2001, the net
                  carrying amount of intangible assets is $1.5 million.
                  Amortization expense during the nine month period ended
                  October 27, 2001 was $473,000. Currently, the Company is
                  assessing but has not yet determined how the adoption of SFAS
                  141 and SFAS 142 will impact its financial position and
                  results of operations.


                                          RISK FACTORS

                  YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS BEFORE
                  INVESTING IN OUR COMMON STOCK. THESE ARE NOT THE ONLY RISKS
                  FACING OUR COMPANY. ADDITIONAL RISKS MAY ALSO IMPAIR OUR
                  BUSINESS OPERATIONS. IF ANY OF THE FOLLOWING RISKS COME TO
                  FRUITION, OUR BUSINESS, RESULTS OF OPERATIONS OR FINANCIAL
                  CONDITION COULD BE MATERIALLY ADVERSELY AFFECTED. IN THAT
                  CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND
                  YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. YOU SHOULD ALSO
                  REFER TO THE OTHER INFORMATION SET FORTH IN THIS DOCUMENT,
                  INCLUDING OUR FINANCIAL STATEMENTS AND THE ACCOMPANYING NOTES.

                  WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT THAT
                  MAKE FUTURE OPERATING RESULTS AND PROFITABILITY DIFFICULT TO
                  PREDICT.

                  We incurred net losses from continuing operations for the
                  fiscal years ended January 31, 1997, 1998, 1999 and 2001. At
                  January 31, 2001, we had an accumulated deficit of $3.6
                  million. There can be no assurance that we will be able to
                  achieve profitability on a quarterly or annual basis in the
                  future. In addition, revenue growth is not necessarily
                  indicative of future operating results and there can be no
                  assurance that we will be able to sustain revenue growth. We
                  continue to invest significant financial resources in product


                                      13
<PAGE>

                  development, marketing and sales, and a failure of such
                  expenditures to result in significant increases in revenue
                  could have a material adverse effect on us. Due to the limited
                  history and undetermined market acceptance of our new
                  products, the rapidly evolving nature of our business and
                  markets, potential changes in product standards that
                  significantly influence many of the markets for our products,
                  the high level of competition in the industries in which we
                  operate and the other factors described elsewhere in these
                  Risk Factors, there can be no assurance that our investment in
                  these areas will result in increases in revenue or that any
                  revenue growth that is achieved can be sustained. Our history
                  of losses, coupled with the factors described below, make
                  future operating results difficult to predict. We and our
                  future prospects must be considered in light of the risks,
                  costs and difficulties frequently encountered by emerging
                  companies. As a result, there can be no assurance that we will
                  be profitable in any future period.

                  THE UNPREDICTABILITY OF OUR QUARTERLY RESULTS MAY ADVERSELY
                  AFFECT THE TRADING PRICE OF OUR COMMON STOCK.

                  Our net sales and operating results have in the past and may
                  in the future fluctuate substantially from quarter to quarter
                  and from year to year. These results have varied significantly
                  due to a number of factors, including:

                         -    market acceptance of and demand for our products
                              and those of our customers;

                         -    unanticipated delays or problems in the
                              introduction of our products;

                         -    the timing of large customer orders;

                         -    the timing and success of our customers'
                              development cycles;

                         -    our ability to introduce new products in
                              accordance with customer design requirements and
                              design cycles;

                         -    new product announcements or product introductions
                              by us and our competitors;

                         -    availability and cost of manufacturing sources
                              for our products;

                         -    the volume of orders that are received and can be
                              filled in a quarter;

                         -    the rescheduling or cancellation of orders by
                              customers;

                         -    changes in product mix;

                         -    timing of "design wins" with our customers and
                              related revenue; and

                         -    changes in currency exchange rates.

                  Our operating results could also be harmed by:

                         -    the growth rate of markets into which we sell
                              our products;

                         -    changes in the mix of sales to customers and
                              sales representatives;

                         -    costs associated with protecting our
                              intellectual property; and


                                      14
<PAGE>

                         -    changes in product costs and pricing by us
                              and our competitors.

                  We budget expenses based in part on future revenue
                  projections. We may be unable to adjust spending in a timely
                  manner in response to any unanticipated declines in revenues.

                  As a result of these and other factors, investors should not
                  rely solely upon period-to-period comparisons of our operating
                  results as an indication of future performance. It is likely
                  that in some future period our operating results or business
                  outlook will be below the expectations of securities analysts
                  or investors, which would likely result in a significant
                  reduction in the market price of the shares of our common
                  stock.

                  OUR FAILURE TO INCREASE SALES TO MANUFACTURERS OF INTELLIGENT,
                  NETWORK-ENABLED DEVICES AND OTHER EMBEDDED SYSTEMS WILL
                  ADVERSELY AFFECT OUR FINANCIAL RESULTS.

                  Our financial performance and future growth is dependent upon
                  our ability to sell our products to manufacturers of
                  intelligent, network-enabled devices and other embedded
                  systems in various markets, including markets in which
                  networking solutions for embedded systems have not
                  historically been sold, such as the industrial automation
                  equipment, data acquisition and test equipment, Internet
                  devices and security equipment markets. A substantial portion
                  of our recent development efforts have been directed toward
                  the development of new products for markets that are new and
                  rapidly evolving. There can be no assurance that:

                         -     the additional intelligent device markets
                               targeted by us for our products and services
                               will develop;

                         -     developers within each market targeted by us
                               will choose our products and services to meet
                               their needs;

                         -     we will successfully develop products to meet the
                               industry-specific requirements of developers in
                               our targeted markets or that design wins will
                               result in significant sales; or

                         -     developers in our targeted markets will gain
                               market acceptance for their devices which
                               incorporate our products.

                  We have limited experience in designing our products to meet
                  the requirements of developers in these industries. Moreover,
                  our products and services have, to date, achieved limited
                  acceptance in these industries.

                  WE ARE DEPENDENT ON THE IMAGING MARKET FOR A LARGE PORTION OF
                  OUR REVENUES.

                  The imaging market has historically accounted for
                  substantially all of our revenues. In the fiscal years ended
                  January 31, 2001, 2000 and 1999, 79%, 95% and 95%,
                  respectively, of our revenues were generated from customers in
                  the imaging market. Our success has been and continues to be
                  dependent on the continued success of the imaging market. Many
                  of our customers face competition from larger, more
                  established companies which may exert competitive or other
                  pressures on them. Any decline in sales to the imaging market
                  would have a material adverse effect on our business, results
                  of operations and financial condition.

                  Due in part to an economic slowdown affecting our imaging
                  customers, we anticipate a decline in imaging revenue growth
                  in fiscal year 2002, from fiscal year 2001, which will
                  adversely affect our results of operations and financial
                  condition.


                                      15
<PAGE>

                  The imaging market is characterized by declining prices of
                  existing products and a transition from higher priced network
                  interface cards to semiconductor devices. Therefore, continual
                  improvements in manufacturing efficiencies and the
                  introduction of new products and enhancements to existing
                  products are required for us to maintain our gross margins. In
                  response to customer demands or competitive pressures, or to
                  pursue new product or market opportunities, we may take
                  certain pricing or marketing actions, such as price reductions
                  or volume discounts. These actions could have a material
                  adverse effect on us.

                  A significant amount of our customers in the imaging market
                  are headquartered in Japan. Our customers are subject to
                  declines in their local economies, which have affected them
                  from time to time in the past and may affect them in the
                  future. The success of our customers affects their purchases
                  from us.

                  OUR HIGHLY CONCENTRATED CUSTOMER BASE INCREASES THE POTENTIAL
                  ADVERSE EFFECT ON US FROM THE LOSS OF ONE OR MORE CUSTOMERS.

                  Our products have historically been sold into the imaging
                  markets for use in products such as printers, scanners, fax
                  machines, copiers and multi-function peripherals. This market
                  is highly concentrated. Accordingly, our sales are derived
                  from a limited number of customers, with our top five OEM
                  customers accounting for 55%, 72% and 52% of total revenues
                  for the fiscal years ended 2001, 2000 and 1999, respectively.
                  In particular, sales to Dimatech, which we acquired in
                  February 2001, and Ricoh accounted for 23% and 20% of total
                  revenues, respectively, for the fiscal year ended January 31,
                  2001. We expect that a small number of customers will continue
                  to account for a substantial portion of our total revenues for
                  the foreseeable future. All of our sales are made on the basis
                  of purchase orders rather than under long-term agreements, and
                  therefore, any customer could cease purchasing our products at
                  any time without penalty. The decision of any key customer to
                  cease using our products or a material decline in the number
                  of units purchased by a significant customer would have a
                  material adverse effect on us.

                  THE LONG AND VARIABLE SALES CYCLE FOR OUR PRODUCTS MAKES IT
                  MORE DIFFICULT FOR US TO PREDICT OUR OPERATING RESULTS AND
                  MANAGE OUR BUSINESS.

                  The sale of our products typically involves a significant
                  technical evaluation and commitment of capital and other
                  resources by potential customers, as well as delays frequently
                  associated with customers' internal procedures to deploy new
                  technologies within their products and to test and accept new
                  technologies. For these and other reasons, the sales cycle
                  associated with our products is typically lengthy, lasting
                  nine months or longer, and is subject to a number of
                  significant risks, including customers' internal acceptance
                  reviews, that are beyond our control. Because of the lengthy
                  sales cycle and the large size of customer orders, if orders
                  forecasted for a specific customer for a particular quarter
                  are not realized in that quarter, our operating results for
                  that quarter could be materially adversely affected.

                  OUR RELATIVELY LOW LEVEL OF BACKLOG INCREASES THE POTENTIAL
                  VARIABILITY OF OUR QUARTERLY OPERATING RESULTS.

                  Our backlog at the beginning of each quarter typically is not
                  sufficient to achieve expected sales for the quarter. To
                  achieve our sales objectives, we are dependent upon obtaining
                  orders during each quarter for shipment during that quarter.
                  Furthermore, our agreements with our customers typically
                  permit them to change delivery schedules.


                                      16
<PAGE>

                  Non-imaging customers may cancel orders within specified time
                  frames (typically 30 days or more prior to the scheduled
                  shipment date under our policies) without significant penalty.
                  Our customers have in the past built, and may in the future
                  build, significant inventory in order to facilitate more rapid
                  deployment of anticipated major products or for other reasons.
                  Decisions by such customers to reduce their inventory levels
                  have led and could lead to reductions in their purchases from
                  us. These reductions, in turn, have caused and could cause
                  adverse fluctuations in our operating results.

                  OUR DEPENDENCE ON NEW PRODUCT DEVELOPMENT AND THE RAPID
                  TECHNOLOGICAL CHANGE THAT CHARACTERIZES OUR INDUSTRY MAKE US
                  SUSCEPTIBLE TO LOSS OF MARKET SHARE RESULTING FROM
                  COMPETITORS' PRODUCT INTRODUCTIONS AND SIMILAR RISKS.

                  The semiconductor and networking industries are characterized
                  by rapidly changing technologies, evolving industry standards,
                  frequent new product introductions, short product life cycles
                  and rapidly changing customer requirements. The introduction
                  of products embodying new technologies and the emergence of
                  new industry standards can render existing products obsolete
                  and unmarketable. Our future success will depend on our
                  ability to enhance our existing products, to introduce new
                  products to meet changing customer requirements and emerging
                  technologies, and to demonstrate the performance advantages
                  and cost-effectiveness of our products over competing
                  products. Any failure by us to modify our products to support
                  new local-area network, or LAN, wide-area network, or WAN, and
                  Internet technologies, or alternative technologies, or any
                  failure to achieve widespread customer acceptance of such
                  modified products could have a material adverse effect on us.

                  We have in the past and may in the future experience delays in
                  developing and marketing product enhancements or new products
                  that respond to technological change, evolving industry
                  standards and changing customer requirements. There can be no
                  assurance that we will not experience difficulties that could
                  delay or prevent the successful development, introduction and
                  marketing of these products or product enhancements, or that
                  our new products and product enhancements will adequately meet
                  the requirements of the marketplace and achieve any
                  significant or sustainable degree of market acceptance in
                  existing or additional markets. Failure by us, for
                  technological or other reasons, to develop and introduce new
                  products and product enhancements in a timely and
                  cost-effective manner would have a material adverse effect on
                  us. In addition, the future introductions or announcements of
                  products by us or one of our competitors embodying new
                  technologies or changes in industry standards or customer
                  requirements could render our then-existing products obsolete
                  or unmarketable. There can be no assurance that the
                  introduction or announcement of new product offerings by us or
                  one or more of our competitors will not cause customers to
                  defer the purchase of our existing products. Such deferment of
                  purchases could have a material adverse effect on us.

                  OUR FAILURE TO EFFECTIVELY MANAGE PRODUCT TRANSITIONS COULD
                  HAVE A MATERIAL ADVERSE EFFECT ON US.

                  From time to time, we or our competitors may announce new
                  products, capabilities or technologies that may replace or
                  shorten the life cycles of our existing products.
                  Announcements of currently planned or other new products may
                  cause customers to defer or stop purchasing our products until
                  new products become available. Furthermore, the introduction
                  of new or enhanced products requires us to manage the
                  transition from older product inventories and ensure that
                  adequate supplies of new products can be delivered to meet
                  customer demand. Our failure to effectively manage transitions
                  from older products could have a material adverse effect on
                  our business, results of operations and financial condition.


                                      17
<PAGE>

                  OUR FAILURE TO COMPETE SUCCESSFULLY IN OUR HIGHLY COMPETITIVE
                  MARKET COULD RESULT IN REDUCED PRICES AND LOSS OF MARKET
                  SHARE.

                  The markets in which we operate are intensely competitive and
                  characterized by rapidly changing technology, evolving
                  industry standards, declining average selling prices and
                  frequent new product introductions. A number of companies
                  offer products that compete with one or more elements of our
                  products. We believe that the competitive factors affecting
                  the market for our products include product performance, price
                  and quality, product functionality and features, the
                  availability of products for existing and future platforms,
                  the ease of integration with other hardware and software
                  components of the customer's products, and the quality of
                  support services, product documentation and training. The
                  relative importance of each of these factors depends upon the
                  specific customer involved. There can be no assurance that we
                  will be able to compete successfully against current and
                  future competitors, or that competitive factors faced by us
                  will not have a material adverse effect on us.

                  We primarily compete with the internal development departments
                  of large manufacturing companies that have developed their own
                  networking solutions, as well as established developers of
                  embedded systems software and chips such as Axis
                  Communications, Echelon, Emulex, Hitachi, Intel, Milan
                  Technology, a division of Digi International, Motorola,
                  Peerless Systems, Samsung and Wind River. In addition, we are
                  aware of certain companies which have recently introduced
                  products that address the markets targeted by us. We have
                  experienced and expect to continue to experience increased
                  competition from current and potential competitors, many of
                  which have substantially greater financial, technical, sales,
                  marketing and other resources, as well as greater name
                  recognition and larger customer bases than ours. In
                  particular, established companies in the networking or
                  semiconductor industries may seek to expand their product
                  offerings by designing and selling products using competitive
                  technology that could render our products obsolete or have a
                  material adverse effect on our sales. Increased competition
                  may result in further price reductions, reduced gross margins
                  and loss of market share.

                  WE DEPEND ON THIRD-PARTY SOFTWARE THAT WE USE UNDER LICENSES
                  THAT MAY EXPIRE.

                  We rely on certain software that we license from third
                  parties, including software that is integrated with internally
                  developed software and used in our products to perform key
                  functions. These software license agreements are with Express
                  Logic, Inc., Allegro Software Development Corporation and Wind
                  River, each of which terminates only if we default under the
                  respective agreement; with Novell, Inc., which is renewable
                  annually at the option of both parties; with InterNiche
                  Technologies, Inc., which renews until terminated by either
                  party; and with Peerless Systems Corporation, which expires in
                  2004 and is subject to year-to-year renewals thereafter at the
                  option of both parties. These third-party software licenses
                  may not continue to be available to us on commercially
                  reasonable terms, and the related software may not continue to
                  be appropriately supported, maintained or enhanced by the
                  licensors. The loss of licenses to use, or the inability of
                  licensors to support, maintain, and enhance any of such
                  software, could result in increased costs, delays or
                  reductions in product shipments until equivalent software is
                  developed or licensed, if at all, and integrated.

                  WE DEPEND ON MANUFACTURING, ASSEMBLING AND PRODUCT TESTING
                  RELATIONSHIPS AND ON LIMITED SOURCE SUPPLIERS, AND ANY
                  DISRUPTIONS IN THESE RELATIONSHIPS MAY CAUSE DAMAGE TO OUR
                  CUSTOMER RELATIONSHIPS.


                                      18
<PAGE>

                  We do not have our own semiconductor fabrication assembly or
                  testing operations or contract manufacturing capabilities.
                  Instead, we rely upon independent contractors to manufacture
                  our components, subassemblies, systems and products.
                  Currently, all of our semiconductor devices are being
                  manufactured, assembled and tested by Atmel Corporation in the
                  United States and Europe, and we expect that we will continue
                  to rely upon Atmel, or a similar manufacturer, to manufacture,
                  assemble and test a significant portion of our semiconductor
                  devices in the future. In the past, we experienced a delay in
                  the introduction of one of our products due to a problem with
                  Atmel's design tools. While we are in the process of
                  qualifying other suppliers, any qualification and
                  pre-production periods could be lengthy and may cause delays
                  in providing products to customers in the event that the sole
                  source supplier of the semiconductor devices fails to meet our
                  requirements. For example, Atmel uses its manufacturing
                  facilities for its own products as well as those it
                  manufactures on a contract basis. There is no assurance that
                  Atmel will have adequate capacity to meet the needs of its
                  contract manufacturing customers. In addition, semiconductor
                  manufacturers generally experience periodic constraints on
                  their manufacturing capacity.

                  We also rely upon limited-source suppliers for a number of
                  other components used in our products. There can be no
                  assurance that these independent contractors and suppliers
                  will be able to meet our future requirements for manufactured
                  products, components and subassemblies in a timely fashion. We
                  generally purchase limited-source components under purchase
                  orders and have no guaranteed supply arrangements with these
                  suppliers. In addition, the availability of many of these
                  components to us is dependent in part on our ability to
                  provide our suppliers with accurate forecasts of our future
                  requirements. Any extended interruption in the supply of any
                  of the key components currently obtained from limited sources
                  would disrupt our operations and have a material adverse
                  effect on our business, results of operations and financial
                  condition.

                  Delays or lost sales have been and could be caused by other
                  factors beyond our control, including late deliveries by
                  vendors of components, changes in implementation priorities or
                  slower than anticipated growth in the market for networking
                  solutions for embedded systems. Operating results in the past
                  have also been adversely affected by delays in receipt of
                  significant purchase orders from customers. In addition, we
                  have experienced delays as a result of the need to modify our
                  products to comply with unique customer specifications. In
                  general, the timing and magnitude of our revenues are highly
                  dependent upon our achievement of design wins, the timing and
                  success of our customers' development cycles, and our
                  customers' product sales. Any of these factors could have a
                  material adverse effect on our business, results of operations
                  and financial condition.

                  THE CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY MAY RESULT IN
                  SUBSTANTIAL PERIOD-TO-PERIOD FLUCTUATIONS.

                  Our semiconductor products provide networking capabilities for
                  intelligent, network-enabled devices and other embedded
                  systems. The semiconductor industry is highly cyclical and
                  subject to rapid technological change and has been subject to
                  significant economic downturns at various times, characterized
                  by diminished product demand, accelerated erosion of average
                  selling prices and production overcapacity. The semiconductor
                  industry also periodically experiences increased demand and
                  production capacity constraints. As a result, we may
                  experience substantial period-to-period fluctuations in future
                  operating results due to general semiconductor industry
                  conditions, overall economic conditions or other factors.

                  OUR ABILITY TO COMPETE COULD BE JEOPARDIZED IF WE ARE UNABLE
                  TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS.


                                      19
<PAGE>

                  Our ability to compete depends in part on our proprietary
                  rights and technology. We have one patent and rely on a
                  combination of copyright and trademark laws, trade secrets,
                  confidentiality procedures and contract provisions to protect
                  our proprietary rights.

                  We generally enter into confidentiality agreements with our
                  employees, and sometimes with our customers and potential
                  customers and limit access to the distribution of our
                  software, hardware designs, documentation and other
                  proprietary information. There can be no assurance that the
                  steps taken by us in this regard will be adequate to prevent
                  the misappropriation of our technology. Our patent may be
                  circumvented by our competitors and our current and future
                  patent applications may be denied. Furthermore, there can be
                  no assurance that others will not develop technologies that
                  are superior to ours. Despite our efforts to protect our
                  proprietary rights, unauthorized parties may attempt to copy
                  aspects of our products or to obtain and use information that
                  we regard as proprietary. In addition, the laws of some
                  foreign countries do not protect our proprietary rights as
                  fully as do the laws of the United States. There can be no
                  assurance that our means of protecting our proprietary rights
                  in the United States or abroad will be adequate or that
                  competing companies will not independently develop similar
                  technology. Our failure to adequately protect our proprietary
                  rights could have a material adverse effect on our business,
                  results of operations and financial condition.

                  We exclusively license the right to use the NET+ARM trademark
                  from ARM Limited according to a royalty-free agreement
                  expiring in 2008. We depend on ARM to enforce its rights to
                  the trademark against third-party infringement. There can be
                  no assurance that ARM will promptly and adequately enforce
                  these rights which could have a material adverse effect on our
                  business, results of operations and financial condition.

                  WE COULD BECOME SUBJECT TO CLAIMS AND LITIGATION REGARDING
                  INTELLECTUAL PROPERTY RIGHTS, WHICH COULD SERIOUSLY HARM US
                  AND REQUIRE US TO INCUR SIGNIFICANT COSTS.

                  The semiconductor and networking industries are characterized
                  by frequent litigation regarding patent and other intellectual
                  property rights. Although we have not been notified that our
                  products infringe any third-party intellectual property
                  rights, there can be no assurance that we will not receive
                  such notification in the future. Any litigation to determine
                  the validity of third-party infringement claims, whether or
                  not determined in our favor or settled by us, would at a
                  minimum be costly and divert the efforts and attention of our
                  management and technical personnel from productive tasks,
                  which could have a material adverse effect on our business,
                  results of operations and financial condition. There can be no
                  assurance that any infringement claims by third parties or any
                  claims for indemnification by customers or end users of our
                  products resulting from infringement claims will not be
                  asserted in the future or that such assertions, if proven to
                  have merit, will not materially adversely affect our business,
                  results of operations or financial condition. In the event of
                  an adverse ruling in any such matter, we would be required to
                  pay substantial damages, cease the manufacture, use and sale
                  of infringing products, discontinue the use of certain
                  processes or be required to obtain a license under the
                  intellectual property rights of the third party claiming
                  infringement. There can be no assurance that a license would
                  be available on reasonable terms or at all. Any limitations on
                  our ability to market our products, or delays and costs
                  associated with redesigning our products or payments of
                  license fees to third parties, or any failure by us to develop
                  or license a substitute technology on commercially reasonable
                  terms could have a material adverse effect on our business,
                  results of operations and financial condition.

                  WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS AND
                  EXPANSION THAT COULD IMPAIR OUR ABILITY TO GROW OUR REVENUES
                  ABROAD.


                                      20
<PAGE>

                  In the fiscal years ended January 31, 2001, 2000 and 1999,
                  international sales constituted approximately 55%, 50% and 51%
                  of our net sales and approximately 68%, 77% and 46% of our
                  domestic sales were to customers headquartered in Asia,
                  respectively.

                  We believe that our future growth is dependent in part upon
                  our ability to increase sales in international markets, and
                  particularly to manufacturers located in Japan, which sell
                  their products worldwide. These sales are subject to a variety
                  of risks, including fluctuations in currency exchange rates,
                  tariffs, import restrictions and other trade barriers,
                  unexpected changes in regulatory requirements, longer accounts
                  receivable payment cycles and potentially adverse tax
                  consequences and export license requirements. In addition, we
                  are subject to the risks inherent in conducting business
                  internationally, including political and economic instability
                  and unexpected changes in diplomatic and trade relationships.
                  In particular, the economies of certain countries in the
                  Asia-Pacific region are experiencing considerable economic
                  instability and downturns. Because our sales to date have been
                  denominated in United States dollars, increases in the value
                  of the United States dollar could increase the price in local
                  currencies of our products in non-US markets and make our
                  products more expensive than competitors' products denominated
                  in local currencies. In addition, an integral part of our
                  business strategy is to form strategic alliances for the
                  manufacture and distribution of our products with third
                  parties, including foreign corporations. There can be no
                  assurance that one or more of the factors described above will
                  not have a material adverse effect on our business, results of
                  operations and financial condition.

                  We intend to expand our presence in Europe to address new
                  markets. One change resulting from the formation of a European
                  Economic and Monetary Union ("EMU") required EMU member states
                  to irrevocably fix their respective currencies to a new
                  currency, the euro, as of January 1, 1999. Business in the EMU
                  member states will be conducted in both the existing national
                  currency such as the French franc or the Deutsche mark, and
                  the euro through 2002. As a result, companies operating or
                  conducting business in EMU member states will need to ensure
                  that their financial and other software systems are capable of
                  processing transactions and properly handling these
                  currencies, including the euro. There can be no assurance that
                  the conversion to the euro will not have a material adverse
                  effect on our business, results of operations and financial
                  condition.

                  IF WE LOSE KEY PERSONNEL IT COULD PREVENT US FROM EXECUTING
                  OUR BUSINESS STRATEGY.

                  Our business and prospects depend to a significant degree upon
                  the continuing contributions of our executive officers and our
                  key technical personnel. Competition for such personnel is
                  intense, and there can be no assurance that we will be
                  successful in attracting and retaining qualified personnel.
                  Our stock price and the number of options outstanding with
                  exercise prices in excess of their market price could make it
                  more difficult to attract and retain key personnel. Failure to
                  attract and retain key personnel could result in our failure
                  to execute our business strategy and have a material adverse
                  effect on us. We have employment contracts with our Vice
                  President, Intelligent Device Markets Europe; Vice President,
                  Imaging; Executive Vice President, Finance & Operations, and
                  Chief Financial Officer; and the Chairman and Chief Executive
                  Officer. We do not maintain any key-man life insurance
                  policies.

                  ANY FAILURE TO COMPLY WITH SIGNIFICANT REGULATIONS AND
                  EVOLVING INDUSTRY STANDARDS COULD DELAY INTRODUCTION OF OUR
                  PRODUCTS.

                  The market for our products is subject to a significant number
                  of communications regulations and industry standards, some of
                  which are evolving as new technologies are


                                      21
<PAGE>


                  deployed. In the United States, our products must comply with
                  various regulations defined by the Federal Communications
                  Commission and standards established by Underwriters'
                  Laboratories. Some of our products may not comply with current
                  industry standards, and this noncompliance must be addressed
                  in the design of those products. Standards for networking are
                  still evolving. As the standards evolve, we may be required to
                  modify our products or develop and support new versions of our
                  products. The failure of our products to comply or delays in
                  compliance, with the various existing and evolving industry
                  standards could delay introduction of our products, which
                  could have a material adverse effect on our business, results
                  of operations and financial condition.

                  ANY MATERIAL PRODUCT DEFECTS COULD RESULT IN LOSS OF MARKET
                  SHARE, DELAY OF MARKET ACCEPTANCE OR PRODUCT LIABILITY CLAIMS
                  OR LOSSES.

                  Complex products such as those offered by us may contain
                  undetected or unresolved defects when first introduced or as
                  new versions are released. The occurrence of material errors
                  in the future could, and the failure or inability to correct
                  such errors would, result in the loss of market share, the
                  delay or loss of market acceptance of our products, material
                  warranty expense, diversion of engineering and other resources
                  from our product development efforts, the loss of credibility
                  with our customers or product recall. The use of our products
                  for applications in devices that interact directly with the
                  general public, where the failure of the embedded system could
                  cause property damage or personal injury, could expose us to
                  significant product liability claims. Although we have not
                  experienced any product liability or economic loss claims to
                  date, the sale and support of our products may entail the risk
                  of such claims. Any of such occurrences could have a material
                  adverse effect upon our business, results of operations and
                  financial condition.

                  IF WE DO NOT SUCCESSFULLY MANAGE OUR GROWTH, IT COULD HAVE A
                  MATERIAL ADVERSE EFFECT ON US.

                  We have limited internal infrastructure and any significant
                  growth would place a substantial strain on our financial and
                  management personnel and information systems and controls.
                  Such growth would require us to implement new and enhance
                  existing financial and management information systems and
                  controls and add and train personnel to operate such systems
                  effectively. Our intention to continue to pursue our growth
                  strategy through efforts to increase sales of existing
                  products and new products can be expected to place even
                  greater pressure on our existing personnel and compound the
                  need for increased personnel, expanded information systems,
                  and additional financial and administrative control
                  procedures. There can be no assurance that we will be able to
                  successfully manage expanding operations. Our inability to
                  manage our expanded operations effectively could have a
                  material adverse effect on our business, results of operations
                  and financial condition.

                  A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK COULD BE
                  SOLD INTO THE PUBLIC MARKET, WHICH COULD DEPRESS OUR STOCK
                  PRICE.

                  Sales of a substantial number of shares of common stock in the
                  public market could adversely affect the market price for our
                  common stock and could make it more difficult for us to raise
                  funds through equity offerings in the future.

                  Subject to applicable federal and securities laws and the
                  restrictions set forth below, Sorrento Networks Corporation,
                  formerly Osicom Technologies, Inc. ("Sorrento"), a holder of
                  6,972,700 shares of our non-voting common stock, may sell any
                  and all of the shares of common stock beneficially owned by it
                  or distribute any or all such shares of common stock to its
                  stockholders. Sales or distributions by Sorrento of
                  substantial


                                      22
<PAGE>

                  amounts of common stock in the public market or to its
                  stockholders, or the perception that such sales or
                  distribution could occur, could adversely affect the
                  prevailing market prices for the common stock. Sorrento is not
                  subject to any obligation to retain its shares in NetSilicon.
                  As a result, there can be no assurance concerning the period
                  of time during which Sorrento will maintain its beneficial
                  ownership of our common stock. Moreover, there can be no
                  assurance that, in any transfer by Sorrento of a controlling
                  interest in us, any holders of common stock will be able to
                  participate in such transaction or will realize any premium
                  with respect to their shares of common stock.

                  At January 31, 2001, options to purchase an aggregate of
                  5,051,149 shares of our common stock were outstanding. Of
                  these options, 852,394 were exercisable as of January 31,
                  2001, with additional vesting to occur from time to time.

                  ANY ACQUISITIONS WE HAVE MADE OR WILL MAKE COULD DISRUPT OUR
                  BUSINESS AND SERIOUSLY HARM OUR FINANCIAL CONDITION.

                  We continue to consider investments in complementary
                  companies, products or technologies. We may buy businesses,
                  products or technologies in the future. In the event of any
                  future purchases, we could:

                        -    issue stock that would dilute our current
                             stockholders' percentage ownership;

                        -    incur debt;

                        -    assume liabilities;

                        -    incur amortization expenses related to goodwill
                             and other intangible assets; or

                        -    incur large and immediate write-offs.

                  FAILURE TO COMPLETE THE MERGER WITH DIGI INTERNATIONAL, INC.
                  COULD NEGATIVELY IMPACT OUR STOCK PRICE AND FUTURE BUSINESS
                  OPERATIONS.

                  If the proposed merger with Digi International, Inc. is not
                  completed for any reason, we may be subject to the following
                  risks:

                        -    if the merger is terminated and our board of
                             directors determines to seek another business
                             combination, we may not be able to find a partner
                             willing to pay an equivalent or more attractive
                             price than the price to be paid in the proposed
                             merger;

                        -    various costs related to the merger, including
                             legal, accounting, and financial advisory fees,
                             must be paid by us even if the merger is not
                             completed; and

                        -    the price of our common stock may decline to the
                             extent that the current market price reflects an
                             assumption that the merger will be completed.

                  OUR OPERATION OF ANY ACQUIRED BUSINESS WILL ALSO INVOLVE
                  NUMEROUS RISKS, INCLUDING:

                        -    problems combining the purchased operations,
                             technologies or products;

                        -    unanticipated costs;

                        -    diversion of management's attention from our core
                             business;

                        -    difficulties integrating businesses in different
                             countries and cultures;

                        -    adverse effects on existing business relationships
                             with suppliers and customers;

                        -    risks associated with entering markets in which we
                             have no or limited prior experience; and

                        -    potential loss of key employees, particularly those
                             of the purchased organizations.

                  We cannot assure you that we will be able to successfully
                  integrate any businesses, products, technologies or personnel
                  that we have acquired or that we might acquire in the


                                      23
<PAGE>


                  future and any failure to do so could disrupt our business and
                  seriously harm our financial condition.

                  BECAUSE THE NASDAQ NATIONAL MARKET IS LIKELY TO EXPERIENCE
                  EXTREME PRICE AND VOLUME FLUCTUATIONS, THE PRICE OF OUR
                  COMMON STOCK MAY DECLINE.

                  The market price of our shares is likely to be highly volatile
                  and could be subject to wide fluctuations in response to
                  numerous factors, including the following:

                        -    actual or anticipated variations in our quarterly
                             operating results or those of our competitors;

                        -    announcements by us or our competitors of new
                             products or technological innovations;

                        -    introduction and adoption of new industry
                             standards;

                        -    changes in financial estimates or recommendations
                             by securities analysts;

                        -    changes in the market valuations of our
                             competitors;

                        -    announcements by us or our competitors of
                             significant acquisitions or partnerships; and

                        -    sales of our common stock.

                  Many of these factors are beyond our control and may
                  negatively impact the market price of our common stock,
                  regardless of our performance. In addition, the stock market
                  in general, and the market for technology companies in
                  particular, has been highly volatile. Our common stock may not
                  trade at the same levels of shares as that of other technology
                  companies and shares of technology companies, in general, may
                  not sustain their current market prices. In the past,
                  securities class action litigation has often been brought
                  against a company following periods of volatility in the
                  market price of its securities. We may be the target of
                  similar litigation in the future. Securities litigation could
                  result in substantial costs and divert management's attention
                  and resources, which could seriously harm our business and
                  operating results.

                  PROVISIONS OF OUR CHARTER DOCUMENTS, OUR SHAREHOLDER RIGHTS
                  PLAN AND LAW MAY HAVE ANTI-TAKEOVER EFFECTS THAT COULD PREVENT
                  A CHANGE OF CONTROL.

                  Provisions of our amended and restated articles of
                  organization, bylaws, our shareholder rights plan, and of
                  Massachusetts law could make it more difficult for a third
                  party to acquire us, even if doing so would be beneficial to
                  our stockholders. Operating alone or together, the above
                  provisions or statutes may render more difficult or discourage
                  a merger, consolidation or tender offer, the assumption of
                  control by a holder of a large block of our shares, and the
                  removal of incumbent management.


ITEM 3.   Quantitative and Qualitative Disclosure About Market Risk

                  We own financial instruments that are sensitive to market
                  risks as part of our investment portfolio. The investment
                  portfolio is used to preserve our capital until it is required
                  to fund operations, including our research and development
                  activities. None of these


                                      24
<PAGE>


                  market-risk sensitive instruments are held for trading
                  purposes. We do not own derivative financial instruments in
                  our investment portfolio. The investment portfolio contains
                  instruments that are subject to the risk of a decline in
                  interest rates.

                  Investment Rate Risk. Our investment portfolio includes debt
                  instruments that primarily have durations of less than one
                  year. These bonds are subject to interest rate risk, and could
                  decline in value if interest rates fluctuate. Our investment
                  portfolio also at times includes certain commercial paper
                  which is also subject to interest rate risk. Due to the short
                  duration and conservative nature of these instruments, we do
                  not believe that we have a material exposure to interest rate
                  fluctuations.

                  We have foreign operations in Europe and Japan. As a result,
                  we are exposed to fluctuations in foreign exchange rates.
                  However, we do not expect that changes in foreign exchange
                  rates will have a significant impact on our results of
                  operations, financial position or cash flows. We plan to
                  continue to expand our operations globally which may increase
                  our exposure to foreign exchange fluctuations.



                                 PART II. OTHER INFORMATION

ITEM 1.   Legal Proceedings

                  On or about August 9, 2001, a purported securities class
                  action lawsuit captioned "Ellis Investments, Ltd. v.
                  NetSilicon, Inc., et al." (01-CV-7281) was filed in the United
                  States District Court for the Southern District of New York.
                  Later in August, 2001, two additional, nearly identical
                  complaints were filed in the same Court in lawsuits captioned
                  "Michael Rasner v. NetSilicon, Inc., et al." (01-CV-7651) and
                  "Walter Weitz v. NetSilicon, Inc. et al." (01-CV-8217). The
                  suits name as defendants the Company, certain of its officers
                  and directors, and certain underwriters involved in the
                  Company's initial public offering ("IPO"). The Ellis
                  Investments suit also names Osicom Technologies, Inc. as a
                  defendant. The complaints in these actions are allegedly
                  brought on behalf of purchasers of the Company's common stock
                  during the period from September 15, 1999 to December 6, 2000,
                  and assert, among other things, that the Company's IPO
                  prospectus and registration statement violated federal
                  securities laws because they contained material
                  misrepresentations and/or omissions regarding the conduct of
                  the Company's IPO underwriters in allocating shares in the
                  Company's IPO to the underwriters' customers. The actions seek
                  rescission or rescissory and other damages, fees and costs
                  associated with the litigation, and interest. The Company
                  understands that various plaintiffs have filed substantially
                  similar lawsuits against over a hundred other publicly traded
                  companies in connection with the underwriting of their initial
                  public offerings. The Company and its officers and directors
                  believe that the allegations in the complaints are without
                  merit and intend to contest them vigorously. An unfavorable
                  resolution of the actions could have a material adverse effect
                  on the business, results of operations or financial condition
                  of the Company.

                  On November 2, 2001, the Company and Websprocket, LLC entered
                  into a Settlement Agreement and Mutual Release settling all
                  claims between the companies, including all claims and
                  counterclaims asserted in the litigation captioned
                  Websprocket, LLC v. NetSilicon, Inc., Civil Action No.
                  C-00-20915 RMV pending in the United States District Court for
                  the Northern District of California. On November 13, 2001, the
                  court approved and entered a Stipulation of Dismissal With
                  Prejudice, in which the Company and Websprocket, LLC dismissed
                  all claims in the litigation and waived all rights to appeal.
                  The Company has paid Websprocket, LLC approximately $162,000
                  as part of the settlement agreement.

ITEM 2.   Changes in Securities and Use of Proceeds

                  None


                                       25
<PAGE>
ITEM 3.   Defaults Upon Senior Securities

                  None

ITEM 4.   Submission of Matters to a Vote of Security Holders

                  None

ITEM 5.   Other Information

                  None

ITEM 6.   Exhibits and Reports on Form 8-K

                  Reports on 8-K

                  November 5, 2001 - Form 8-K filed relating to the Agreement
                  and Plan of Merger dated as of October 30, 2001 by and among
                  NetSilicon, Inc., Dove Sub, Inc. and Digi International, Inc.
                  and the Second Amendment, dated October 30, 2001, to the
                  Rights Agreement, dated as of September 30, 2000 between
                  NetSilicon, Inc. and American Stock Transfer and Trust
                  Company.


                                      26
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                       NETSILICON, INC.
                                       -----------------------------------------


                                       (Registrant)

December 11, 2001                      By /s/ Cornelius Peterson, VIII
                                         ---------------------------------------
                                         (Cornelius Peterson, VIII, Chairman and
                                         Chief Executive Officer)

December 11, 2001                      By /s/ Daniel J. Sullivan
                                         ---------------------------------------
                                         (Daniel J. Sullivan, Executive Vice
                                         President, Finance and Operations)



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